If you’re a tech titan with lots of cash and a healthy stock price, one of the best ways to fill your ranks with talented employees in the latest boom has been to acquire small young startups before they become the next big thing.
The founders of targeted startups get an exit on their resume and a retention package that will ensure financial comfort, and investors in the startups get, well, the shaft as most of the money in the deal comes in the form of those employee retention packages.
Such acquihires as they have come to be known are apparently happening enough to get investors riled up. So according to blogger-turned-venture capitalist Michael Arrington, some investors are preparing to fight back.
It won’t be easy. While Arrington suggests that “if deals are specifically being architected to give key employees very large payouts and investors very little, there are probably fraud, breach of fiduciary duty and other causes of action available to shareholders” but that taking legal action would, for obvious reasons, be harmful to an investor’s reputation.
The apparent solution to this quagmire is the addition of acquihire protections to standard term sheets. These protections would, according to Arrington, basically “force all deal consideration around a deal – including stock options and stock grants to employees – to be pooled and distributed pro rata among all shareholders.” This would ensure that investors aren’t forced to sit back and watch as the founders who took their money ride off into the distance carrying bags of Google or Facebook shares that they believe should have belonged, in part, to them.
Naturally, entrepreneurs seeking capital are likely to oppose acquihire protection terms. And in today’s frothy market, they’ll almost certainly continue to find no shortage of capital that comes with no strings attached. But when (not if) the latest boom cycle ends and raising money gets harder, such terms could become commonplace.
The good news for entrepreneurs is that they needn’t worry about the day when this comes to pass. The reality is that when the boom dies, the very forces that have driven the rise of the acquihire will go with it, so acquihire protection clauses or not, the days when you can start a company and sell it based on your technical chops and not the success of the actual business are numbered.