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.

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Comments (Archived):

  1. kidmercury

    great post boss, thanks for the education. some thoughts:1. i think platforms many will end up acquiring apps built on top of them, and that such acquisitions will largely be HR acquisitions — i.e. getting developers who have already proven their talent and familiarity with a platform to join the platform team, often to facilitate deeper integration between the app built on top and the platform itself (like if the app is going to become native to the platform).2. i think apps built on the same platform (i.e. two facebook apps, two iphone apps) are also likely to acquire one another for the purposes of deeper integration, or app unification.3. i also think blog stars could end up being acquired and serving as part of the sales team for a given business, or acquired by another intermediary in the market looking to expand their sales team.

    1. fredwilson

      platforms acquiring apps is going to happen but it will be tricky

      1. kidmercury

        agreed def will be tricky, the stage has been set for lots of beefs. this is one of the reasons i favor “platforms as funds,” where the platform openly has a policy towards funding, acquiring, and developing apps. if done properly, i think this will inspire developers to embrace a platform, as they will see a greater economic opportunity if it is presented and structured properly.

    2. awaldstein

      #3 is starting to happen now I think. Delicate act but then again becoming a bog rock star is a delicate act in its own right.

      1. brooksjordan

        When I read this post on “Investing in Superstars Pt 2,” thought of your “blog stars” concept, kid, and how the two things might be related.Obviously, the individual is gaining more and more ability to scale their influence in a world where knowledge and relationships matter – and that’s worth something.

        1. ShanaC

          I don’t, it complicates the question of media independene (not that that question wasn’t already complicated). I mean the freemium model + tech + blogging and disclosure rules makes this all very complicated.How do you be “objective” with mass followers? To be really superstar, you need to create trust, and that requires a web of “objectivity” But the web is too interlinked to do that/. If you pay someone -you might de-incentivitize them to give “good” information, or at least information that people who are not paid need to know.Beware of too much money for blogstars my friend. Or at least this definition.

          1. fredwilson

            I make a fortune off this blog. But I get paid in insight, not cash

          2. kidmercury

            yeah but you are leaving cash on the table boss! 😀

          3. ShanaC

            I’m more worried about say the fact in really girly land that say makeup blogs the people are given the makeup. And they almost never say a bad thing. And that is bad, because they have mass followers…so ummm, yeah.If I had the real time (no school) I would only review tech products. Most of the freemium model would allow me to review most of a web product (or all of the product) as an average person. Lets pretned that in 5 years, because I am very kvetchy and honest, I become popular. And people give me the full on products, along with the hardware. I’m de-incentivitzed to be kvetchy and honest. There in lies the problem. But the people who got me to where I am still need me to be kvetchy and honest.So now what happens? I have no idea. I’m a little wary of Blogstars being paid, or payment in kind, because of the problem of objective/subjective opinions being corrupted. If they are going to be paid, or make money off the whole thing it should be in a similar way that Fred here is doing, perhaps: The information is a carrier to some other useful purpose (how to cut a venture deal), so that the information itself is not corrupted (a product, a debate)Just my $0.02 not including inflation. I’ve been watching the makeup blogging/perfume blogging thing with horror and realizing this is clearly not good…

        2. kidmercury

          thanks for sharing that link brooks, i think the author is dead on. although that dude has one crazy last name! 😀

    3. timraleigh

      On # 3 do you mean “Blog stars” could end up being acquired for marketing purposes i.e. increase traffic, brand recognition or do you mean they would shift/focus to actively Selling new Co. to prospective advertisers etc.?

      1. Carl Rahn Griffith

        Can imagine more of this happening also, Tim …Reading “Bessemer Snags a “Designer In Residence” From” on Ensembli:

        1. timraleigh

          Thanks for the link. We both agree with kidmercury. My thoughts after reviewing his bio was that Jason Putorti was brought in to Bessemer because of his experience as an (successful) entrepreneur who happens to be a designer vs. a designer who helped build Mint. The “designer in residence” title seems to be a bit of a misnomer. What I mean to say is the criteria (today’s topic by Fred) for acquiring talent (designers, developers etc.) is the same. To kidmercury’s point their experience, connections and personal brand have real value and currency. I think this is a very creative “acquisition” by Bessemer, it’ll be interesting to see how it turns out.

        2. ShanaC

          That makes total sense to me, I keep complaining here about design. Someone has got to ask those sort of design based questions.

        3. fredwilson

          A designer in residence. Seems smart. I’d like an anthropologist in residence

      2. kidmercury

        i think both are possible; acquired for greater traffic or to sell a different product. the latter might not be possible if it requires the blogger losing their street cred. ultimately i think a niche intermediary (like a portal, a news site, a blog network, a niche social network, etc) may benefit most from acquiring blog stars, so as to expand/defend their turf as niche intermediary.

    4. Mark Essel

      I think #3 can only happen as sponsorships. Like the blog star keeps doing what they do, but there’s a recognition that support for that blog star is coming from the King of France or Rackspace ;).

      1. awaldstein

        I’m just not sure (I”m saying this a lot lately). But my gut tells me that just as I couldn’t have imagined having this discussion at all a few years ago, there is a business model hidden in here that we haven’t imagined yet.But under a bright light like Mark’s logic, yes, sponsorship or some mutation of a affiliate of setting up a separate topic channel that the traffic can self direct are all possible.

  2. loupaglia

    How does the assets and the revenues of the company you are acquiring factor in? I would suspect the normal way but how to deal with multiples on revenues and the like become interesting particularly if you don’t plan on continuing to leverage their existing line of business?

    1. fredwilson

      These businesses rarely have revenues and assets. If they do, they are usually not valued in an HOUR deal. The only asset that sometimes matters is cash balance and you can often use that to pay off the angels

  3. Rohit

    Would “- 3.5% of the company in four year options for the team” and no upfront cash excite the entrepreneur?

    1. loupaglia

      It would seem this really works in two scenarios. First, where you have a good team but the business is not going to go. Second, and related, when 3.5% of the other company is going to be bigger than the total of your own.

      1. Rohit

        Yes… both are sub-optimal cases… why don’t investors get options too?

    2. fredwilson

      It has worked out very well for the summize and myminilife teams.The terms of those deals are confidential and the 3.5pcnt number is a theoretical dealBut in any case, taking a small piece of a breakout company is often a way better outcome than what some teams can make happen on their own

      1. Aaron Klein

        On the Summize team, I’d have to imagine there was a thought of “we either become twitter search or they will build it themselves.” That would be a tough deal to turn down no matter what.

        1. Glenn Gutierrez

          I definitely agree with the deal being tough to turn down; however, I hope that the reason for the Summize team wasn’t that they felt that they were going to be assimilated by Twitter in a Borg like fashion. Instead, I’d like to believe that they we’re doing it in large part to help drive a really kick azz application that they knew would change the way people communicate. In that sense, they’d be great innovators in their own right.

          1. fredwilson

            That’s how they felt. And that’s what happened

        2. fredwilson

          I guess so but one riot is doing fine

          1. Aaron Klein

            I didn’t mean it negatively. I was just trying to put myself in their shoes. Had to be a factor. Still exhilarating to be the one chosen.

      2. Mark Essel

        I see great value in team building this way. I also see the need for the premium.If you’re buying a strong team (you want them, they must be good), they have a good chance of succeeding without you. When you make an offer of 5% you’re limiting what they can contribute to your team over the time period.As an entrepreneur, I’d want the option of being able to earn much more.If a company acquires a startup I’m running, I’d like that business to increase tremendously with my contribution. That means if I can push a business to grow X% I should be able to get more than 1/20th of that growth. Keep those incentives high, and let acquired teams put every fiber of their passion into fueling the new merged entity.

        1. fredwilson

          You are talking about addt’l equity incentives. I’ve seen them in HR deals but not often

  4. phineasb

    The point about fit and integration are the keys for me. Without this, I would explore a partnership or outsource dev. deal. Sometimes people assume that a great team that knows how to work together will also know how to work with others, but it can actually make real integration more difficult when the acquired entity has a strong culture etc.On the existing investors, do you think considering fit also makes sense in terms of the balance of cash vs. equity and their on-going involvement?

    1. fredwilson

      Yes. I think it makes sense to cash them out if you can

  5. Charlotte Kim

    Such a great and timely post! In thinking of exit strategies, I have been listing two flavors of acquisition: 1) Big company acquisition (where I can site comparable examples), and 2) Complimentary smaller acquisitions (young but successful companies) – these examples are harder to find and site. In this environment, I think it’s essential that CEOs/Founders of small companies think of HR acquisitions both from the perspective of being the acquirer and the acquiree. The goal should always be to increase shareholder value in the most efficient way possible and make a positive difference to the market you look to serve. Thanks Fred. This post is TOTALLY bookmarked for me.

  6. Laurent

    Fred, totally agree with the HR acquisition and thank you for sharing the way deals are structured. Any company looking to do major development work should consider it as an alternative before jumping into the investment. Even more so for startups! It is a more efficient option when you are working on scarce resources and a startup need to plan for those ahead of time.

  7. Nick Oliva

    If I understand the details correctly, the angels cash out as expected and the people that have worked hard to get on your radar… are not particularly better off than if they were just hired by you today.You could just make offers to the individuals in the team that will reward them personally for the work they’ve done and lets them put some cash in the bank – which will get the monkeys off their backs. You wold save the money you are paying the angels… and you’ve already said you don’t care for the assets or revenues of the company. I’m not sure what the ethics are around these decisions, but I feel for the founders and team trading one uncertainty for another.

    1. Nick Oliva

      I suppose non-competes play a part… and then you probably want the technology they’ve built, so I guess it’s not entirely an “hr” play.

    2. fredwilson

      You can’t screw the angels like that. Its not ethical

      1. Nick Oliva

        No, that’s probably true, but it still seems to put you in a position of saying the investor class is being compensated but the team isn’t. The team you’re acquiring is getting $3.5 million in “options”. How much in options would you expect to have to give them if you just hired them on? The difference is the premium they’re getting for the work they’ve done to date – and considering that some team members are going to own much more stock than others, that premium may not be very significant at all.”…the team that is acquired leaves because they don’t enjoy working in the company or are not well integrated and are frustrated.” … maybe signing up for another four years with nothing in the bank to show for it is what frustrates them…?There’s an attitude in the investor community that unless you have written checks, you don’t have “skin in the game.” That’s unfortunate. Paying off the Angels and recycling the “equity” of the team for “options” in the acquiring company just seems to me like “screwing” the team.

        1. Robert Stewart

          I don’t think you can assume the team is getting “screwed” by exchanging equity for options. If the deal is really an HR motivated deal then it seems likely the company being acquired did not have real revenue, profits or a viable business model on their own. Personally I’ve been through at least one mostly HR motivated deal as part of the engineering team. It did provide quick vesting and profitable exit for the investors and founders, but most of that team is still around in the parent company and doing well. If that deal never happened any options/equity we had in the original company likely would have been worthless.

          1. Nick Oliva

            Thanks, Robert. I think the team is getting screwed “relative” to how the angels are making out – regardless of any other assumptions. It sounds like the investors (so long as they are not founders too???) are getting a decent exit – I’m guessing they invested less than $1.5M. The example company can’t be worthless or Fred wouldn’t want to acquire it. In this example, it’s arguably worth $5 million… or between $1.5 and 5M, depending on how conservative you want to be about it.Obviously, there comes a time when you take what you can get – no argument there. It’s the division of the takings that concerns me. More than that, it’s the explicit effort to keep from giving founders and/or team members anything they can put in the bank: “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.”Why… team members with some cash are less likely to stay on than team members that are still chasing the carrots? I get why the investor wants to spend less cash, but why does he want the cash he spends to be kept out of the hands of the team members? Am I misinterpreting something?I just don’t get why “all” shareholders can’t split the cash in this deal. The options the employees receive are conditional on the “future” work they do. They could just as well have gone somewhere else and gotten the same deals. So, in effect, they’re getting nothing for the work they’ve done… although their future is presumably brighter. Arguably, the team they were a part of didn’t really accomplish what it set out to do… may be time to move on anyway.

          2. fredwilson

            Because cash is cheap and equity is expensive. You don’t want to give equity to the investors. You give them their money back or maybe a tiny profit and you give the team the good stuffThe equity the summize and myminilife teams got is worth 10s of millions and possibly 100s in time

          3. Nick Oliva

            I think I’m getting it… finally… ;-)I was thinking $1.5 was well above what the angels would have paid, since my understanding is that it’s not common to raise $1.5 in angel money. But if the investors are just about breaking even, and the team is getting a second life with a new opportunity, then I understand the motivation.

          4. fredwilson

            Your experience is the goal. It is not about screwing anyone. Its about a win/win for everyone

        2. fredwilson

          Well its the opposite most of the time. The angels don’t get the upside and the acquired team does

      2. Shurtleff

        And any entrepreneur that picks the screw the angels/investors path will never be funded again by angels or professional, this kind of behavior doesn’t go un-noticed. i have seen acquirers try to push it but smart entrepreneurs hold out for a better deal. Would you want to work for an acquirer that has shown their lack of ethics up front?

        1. fredwilson

          Exactly. I learn so much about people during exits

  8. awaldstein

    Fred, thnx for this post. It is uniquely the kind of discussion that you only get here.I second the two big points–reason for the team to stay and cultural fit. First can be approached logically and economically, second is always difficult as start-ups quickly create their own gestalt and culture that defines their productivity and value. Hard to mesh. Like a relationship.Your point about this being a trend and companies getting ‘tucked into’ winners is a great metaphor. We work in the era of mash-ups, from how you build your app and discover your market to the mashing and melding of people as a key building block of your success platform.

    1. Mark Essel

      I hear ya Arnold, but I keyed in on the motivation factor above.Startups happen because folks are motivated and passionate about building value in a different or new way. An HR acquisition is going to sap some of the enthusiasm of a startup with no preconceived limits in mind. Now, no matter how much value that team generates, they can never get rewarded for more than 1/20th – 1/30th of the acquiring company.As a founder, I’m relegated back to bonus sized payouts of corporate jobs. Why’d I trade my view to the glorious sky for a new ceiling?

      1. awaldstein

        MarkYup, having to merge or get acquired and change your view of world domination is tough. Start-ups run on the juice of future success, no question and parsing that down is well, a let down usually.But just like equity shrinks as money comes in that is necessary to fulfill the dream, acquirers come in and do the same. A reset reality with a chance at success is better than a huge one that goes up in smoke due to conditions that are beyond control.And I’m not being facetious or making small of your point of view. In my experience on both sides of this picture, it’s often problematic but can work.

        1. Mark Essel

          Yeah, I hear ya. World domination does sound pretty far out, but unbridled ambition is one heckuva motivator for wealth creation 😉

          1. awaldstein

            I”m still with you here Mark. Unbridled ambition is a slogan I can dance to!

          2. ShanaC

            These discussions sound like my paper topics….

          3. awaldstein

            If that is so, school must be fun cause these conversations to me are interesting, often enlightening, always chatty and fun.

          4. ShanaC

            Reverse problem: Dead Boring. I get pushed here because everyone is doing some very high profile things in a variety of different kinds of work. Then I sit down in a class, where the majority of people are very smart, primarily economics student (well known program which likes sending said students into banking and consulting) taking a “History of Business since the 1980s” taught by an alumni who feels like it and who is a consultant for a major firm. Plus I have a couple of people I know actually in banking, so occasionally I’ll sit down and write an email and be like “What is this and why is my very specific question not being answered”So the class has been frustrating, because its gearing towards a totally different audience. Very few people are me. It’s a history for econ students. I’m one of the few non-econ majors in the entire class. I end up bored. This is more challenging. and I am treated on more equal terms. Which is also frustrating. Nice Econ student (and I like a lot of them, they are great people and a lot of them are very smart) are definitely more popular in the job market, with people like the CMEGroup, just north from me (but I would say downtown) particularly from this school, because we are one of the Universities that teach a full year of Econometrics as a requirement for graduation. I realize I have some problems on the math side of Econ (a lot of people do, I am way out of shape and a little scared of math), but is is relatively scary that I can sit down and explain in a few hours flat how media and mediation is impactive on everything from a financial system to religion, because I feel like studying it, and how it will be impactive in terms of interaction in the future. And it is even more frustrating that I can’t get the word out because I’m not quite sure what I’m supposed to be doing with it. I’m ok with that fact (something I realized, long run, I’ll be fine, I’ll sort things out as I go along, and the short run may be terrifying, and that is normal), but I just hate having to hide myself in an essay or work enviorment or something like that. And now I have to do that.I think the class is hilariously funny because I’m a stressed out senior doing other things and I picked up from like the first night (evening class once a week) about the nature of “OPM” “when leverage can pay off” and “supply and demand can really kill you or love you”. The class also doesn’t feel historical at all: I’ve figure out returns in history and how they’ve changed psychology of the market, while the class is sitting there trying to figure this out. He’ll go “net-net junk bonds in history were good because they funded Time Warner and the first cell phones” and I am sitting there thinking “You are not talking about spectrum of credit and its history in depth and its relationship to the next bubbles, the relationship of technology vis a vis fiancial bubbles (they tried with the boom bust), macroeconomic terms, that a credit swap is also an orthogonal view of information about a product, both financial and/or physical, why mark to market matters when it comes to liquidity to illiquidity, and what liquidity means in terms of information flow, the media and its influence in building beliefs about system and product (for the dot com boom/bust they tried this, but if you study closely the actual situation it was not just a media hype) etc. It also disturbed me the entire time the art student is the only one in the class that manages to know what CALpers is and that manages to secretly sneak into a Comscore Call because they emailed said free call to her about q3 spending and sit down and read Mary Meeker’s report because it appeared on Twitter. And right now I see that stocktwits is hosting the CMEGroup’s talk.So in the end with a 10 page final essay between the following choices:Thinking historically, has greed been “good” for American society? or“Economic history looks remarkably static. The dominant themes are market manipulation and greed. The only major advance has been the increased sophistication of the tools to create wealth.” Agree or disagree. or“Over the past three decades, we have seen a migration of power from CEOs and bankers to entrepreneurs and venture capitalists/investors. Large companies are no longer the backbone of American business, innovation, or talent.” Agree or disagree. I end up sort of half laughing, half sighing, particularly with the first and last one. I always feel unsure what I should answer because I have to hold back that I own a textbook on interaction design, that I post here, ect. And I’m somewhat savvy enough to realize that there are a lot more interesting and savvier people than me dropping by (I’m just a college student). My worldview is now more sophisticated because of them. This is very problematic if you need to write a paper that pretends you don’t do this, because in reality I’m just supposed to be a cute art student. I’m not even supposed to be touching what the econ students do…alas.Now what do I do?

      2. fredwilson

        Right. If you are a ‘all or nothing’ entrepreneur, these deals are not for you. But many entrepreneurs find out that they really aren’t cut out for the job and need a soft landing

        1. Mark Essel

          The soft landing never crossed my mind, pardon my tunnel vision. Makes perfect sense now.

  9. wearehunted

    Great post Fred. Thanks so much for sharing this. The simplicity and clarity is inspiring.

    1. fredwilson

      That’s one of things I try to do with avc. Simplify and clarify

  10. Digital Seller

    A few other considerations re: sales HR acquisitions:1) There is a good chance that the sales team being acquired doesn’t have an understanding of technology product development, as they have only had to focus on selling in their previous life – this can lead to complications with technology & product teams2) Acquiring a sales team sends a strong message to the existing sales organization and can lead to overlap/confusion in go-forward roles3) Pay careful attention to what type of sales force is being acquired (selling to digital media buyers is very different from selling to traditional media buyers). Make sure the acquired team is aligned with where future dollars will come from

  11. kenberger

    (I’m always stating the obvious on this blog:) big caveat here is that things SUPER-depend on how hot the acquirer is compared to how not hot, or even troubled, the aquiree is.If you give little or no cash to those being acquired, it will feel like they simply got paid w/ a new job. The closer they were to winding their thing down, and the hotter-looking the acquirer is, the more happy they might be w/ that. And the more likely the investors would jump at the offer as well. In the example above, the big Q is how sweet that $1.5M would be to the angels– the answer lies in how much they invested and the current outlook for the company (prospects for the acquiring company would not matter to the investors in this example).Twitter at the time of the Summize acq and now, and Zynga now, are arguably both firey hot enough to pull off 100% vested options deals, if they wanted to.

  12. davidu

    Fred, you forgot to mention that in HR transactions there is a piece more important than the specific deal terms, and that’s for both sides to have very candid heart-to-heart’s about what the both sides expectations are in terms of roles, responsibilities, time commitments, etc.In an HR transaction, by definition, it’s all about the people. 🙂

    1. fredwilson

      Yup. Very important

  13. alexbligh

    I may be missing something here. Take your example. Let us assume (as you don’t say otherwise) that the angels and the team both have ordinary shares. That’s not uncommon in Europe, though I understand it may be less common in the US. The acquisition is for $5m. The angels get their 30% of 5m in good solid cash. The team get 3.5% of the company as options (at what strike price?) which only vest if they stick around (and they might not stick around as the acquirer changes his mind and gets rid of them), in an illiquid stock, which hopefully will increase in price, but we all recognise might not (see several events this decade). The angels get a far better deal than the team you want on board. Why would you offer this deal, and why would any team take it? I’d offer them (say) $1.5m for the Company (all cash) conditional on the team coming over with option incentives for the team ONLY worth the other $3.5m. The team have options worth $3.5m (exactly the same as your example) plus 1.05m in cash. The angels get $0.45m in cash, rather than 1.5m.I’ve picked a slightly extreme rebalance, but in a situation like this the angels are in a corner. You can hire the team away anyway (putting non-competes etc. aside) for half the price, and if the team go they have nothing. If there is no value to the company bar the team (which is your thesis), and if the team believe in the acquirer more than their own company (which is your implication, else why would they accept options), non-competes etc. are the angels’ only defence. And (at least in Europe) they aren’t worth much.I should point out I’m (amongst other things) an angel.

    1. Mark Essel

      That’s a twist Alex. How about an equity cash split between angels/team equivalent to their current ownership?The Angels get some cash, and someequity (that the team earns, just as the angels would in another liquidity event).And the team gets some cash and someequity.

    2. fredwilson

      The angels believed in the team, gave them money, and I do not think it is right to screw them. Giving them their cash back or a small profit (its never much) is the right thing to do

  14. Erika

    Fred – such a clear and insightful post. And I LOVED your paragraph about culture and integration (and the excellent comments below about those issues as well). I blogged about that aspect of your post at http://thesimplestthing.typ…(I believe you and I are co-fans of Danny Meyer – USHG has been a client of ours since the early 90s.)Thanks for this —

    1. fredwilson

      Danny is one of my favorite people. He’s awesome

      1. Erika

        Truly awesome. When I was reading Setting the Table, and came to a sentencewhere he referred to me as “his mentor,” I was floored.I’m putting your blog on my blog roll ­ it’s really great..Erika

  15. sachmo

    Facebook has been doing a lot of these talent acquisitions I’ve noticed.Blake Ross and Joe Hewitt (developed Firefox, Firebug) – now working on parakey for facebook.Paul Buchheit (Gmail) – works on friendfeed which was also acquired.I wonder how they will pay off…

    1. fredwilson

      Some work. Others don’t. When you are worth 10bn, you can take that approachWhen you are worth 10mm or 100mm, you have to make them work

  16. ShanaC

    This seems like it could be a disaster or a brilliant idea.A) The stock is being treated like cash. It;s high risk/high rewards.B) depending on the HR buyout, you have to pre-pare that some people may leave anyway, and you have to make sure that they are not the critical people of the team that do mesh with the culture. And I have no idea how to value that vis a vis stock options. And that is also high risk/high rewards. Is it that you need the entire team or just the critical people, how does this work in sum total.. remember, this is a form of M & A, and people also get fired and walk in M & A too because of little things.That’s how we get new stuff as well…

  17. ErikSchwartz

    Any thoughts on the Lala acquisition which is rumored to basically be an HR acquisition (according to Bob Lefsetz) at fire sale prices.If a company has 35M invested and liquidation prefs likely in place can this math work?

    1. fredwilson

      Yup. You can give the investors cash for all the ascribed value and then re-option the team. I don’t like screwing investors but the investors here were music labels. They’ve done their share of screwing. I don’t feel bad for them

      1. ErikSchwartz

        Re-optioning the team if the acquirer is a public company at an all time high seems risky.

  18. Business Money Today

    Great post especially given today’s labor environment where it would seem those with the greatest skills have the greatest power.I think you really hit the key here – “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.”But, I don’t understanding paying the investors in cash – especially if your stock is cheaper than cash – which is usually the case for emerging, private companies.

    1. fredwilson

      I think cash is cheaper than stock for most of our breakout companies which are the ones mostly doing this

  19. theslingster

    Hey Fred, how come I haven’t yet won the name challenge you put out (I think it was you) with the brilliant (LOL) bedrock business moniker!

  20. Prokofy

    Still trying to see what the “HR” stands for. “Human Resources”?

  21. Greg Matthews

    I’m interested in an extension of this concept … This recent article in Fast Company […] describes how PrivateBancorp essentially hired away an entire department of recently acquired LaSalle Bank.It seems to me that, in this age of employment free agency, moves like this are going to become more and more common. I know that as I am hiring the most talented people in the world in their particular fields, I am really only “renting” them … it’s a different way to look at talent, but if you recognize up-front what the rules of the game are, you can make it work for you. Most companies (IMHO) are still in denial about the concept of loyalty vs. an exchange of mutual value between employer and employee.Sorry for the disjointed musings, but this post really got my talent-management creative juices flowing!

  22. davidu

    That’s a called a merger.

  23. fredwilson

    I’ve never seen that work out

  24. davidu

    It happens. Sometimes it works beautifully where skills and weaknesses are complemented perfectly, other times it’s a disaster of emotionally epic proportions.In other words, setting expectations and being very explicit is even more important in an HR transaction. 🙂