The HR Acquisition
When most people think of the HR acquisition, they think of a big public company, like Google or Yahoo!, picking up a small team of engineers and product people for a few million dollars of their stock.
But it might surprise you to know that the HR acquisition is alive and well in startup land as well. I just counted and over a quarter of our active portfolio companies have done or are doing HR acquisitions.
Some well known ones in our portfolio are;
- the Twitter acquisition of Summize which brought the company a number of really solid engineers, a leader for the engineering team, and search engineering talent.
- the Zynga acquisition of MyMiniLife which brought the company key members of the Farmville team who created one of Zynga's blockbuster games.
Most of the time HR acquisitions are done for engineering and product talent, as these two were, but I've also seen HR acquisitions of sales talent. Last year our portfolio company Targetspot acquired Ronning Lipset Radio which brought it the leading sales team in the online radio industry.
Building startups is hard and requires the very best talent. You can recruit that talent and that is certainly the way most of it comes into our companies. But in certain situations, you can also acquire the talent and for the most part our companies have had great success with HR acquisitions.
When you do a HR acquisition, you are going to pay a premium over what the team would cost if you hired them. And sometimes that premium can be significant. Here's how I like to think about it:
1) figure out how much equity in options it would cost you to hire the team
2) figure out how much of a premium over that number you will pay to get them in one fell swoop, a pre-built team that has shown it can work well together. I've seen premiums of 100% and I've even seen a few that are higher than that.
3) value that equity at what your company would be able to sell for right now
4) pay off the investors in the company in cash if you can
5) make the stock you are paying the team vest over the same period that your employees stock vests
6) no matter what you do, you must make sure the team is incented to stay for a three or four year period. if you can't do that, you shouldn't do the deal.
Here's an example. Let's say your company is worth $100mm. You've identified a team that can build or has built a technology that is on your roadmap and you don't have the skills on your team to build. Let's say that it would cost you 2.5% of your company to hire a team like that. Then you ought to be able to get comfortable with paying up to 5% of your company to buy the company and get the team. That acquisition is worth $5m on paper. Let's say the team you want owns 70% of their company and angels own the rest. Then here's the deal I would offer:
- a $5mm acquisition offer
- $1.5mm in cash for the angels
- 3.5% of the company in four year options for the team
Usually, you'll have to throw in some cash and accelerate some of the equity for the founders who are coming with the deal but keep that as low as possible. Make sure most of the value going to the team is in equity that they have to earn over time.
But most of all, make sure the team will be a strong cultural fit in your company. Make sure you'll enjoy working with them and they will enjoy working for you. And make sure that they are integrated into the company in a way that will allow them to succeed. The reasons most HR acquisitions fail is the team that is acquired leaves because they don't enjoy working in the company or are not well integrated and are frustrated.
I expect we'll see more and more of these deals in the coming years as some companies break out and become big successes and others struggle and decide to get "tucked into" the winners. It makes sense for everyone.