Founders and Venture Capitalists Reveal: Acqui-Hires Prove More Profitable for Startups Than Expected

In the challenging climate of venture capital, while some top startups thrive, others face difficulties securing new investments. For those unable to secure funding or reach self-sufficiency, seeking acquisition becomes a crucial survival strategy, even if it means selling for significantly less than their previous valuation. The alternative, running out of funds, leads to closure.

For founders and senior staff, being acquired under these conditions can seem like a failure, far from the dream of establishing a lucrative, sizeable enterprise. Their shares might become virtually worthless, they might need to accept positions within the acquiring firm, and possibly commit to stay there to receive their complete compensation.

However, for these founders and essential personnel, such a sale can often turn out to be more beneficial than it first appears.

“Acquisitions are typically viewed as a setback,” commented Nivas Ravichandran, an early Frilp employee before its acquisition by Freshworks in 2015. “Yet, they present a fantastic financial opportunity. The compensation and equity offered post-acquisition can surpass what one might receive as a new hire elsewhere.”

Startups’ top talents often receive offers from buyers that include highly competitive roles and salaries, acknowledging their efforts and achievements in their venture.

“Top engineers often spend over a decade reaching levels six or seven in large tech firm hierarchies,” stated Sri Chandrasekar of P72 Ventures, referencing the career levels at companies like Google and Meta. “But acqui-hired founders are positioned at levels seven or eight despite having often only four years of experience. It’s a significant leap.” P72 Ventures has seen more than 15 of its invested startups exit through mergers and acquisitions.

Acquisitions, especially acqui-hires, are designed to retain the startup’s talent, enticing founders and key team members with incentives to stay on after the business is acquired.

While traditional mergers and acquisitions might offer retention bonuses to keep management for 18 to 24 months post-acquisition, the emphasis in acqui-hires is on providing the entire startup team with improved compensation packages and extended equity vesting periods.

Deals Focused on Founders and Their Teams

Acquirers are “often prepared to offer higher positions to these individuals to minimize the cash needed in the deal,” Chandrasekar remarked. “Acquirers are becoming increasingly strategic with such arrangements.”

A founder who recently sold his startup to a major company shared with TechCrunch how the acquisition was structured to provide him and his co-founders with a larger share allocation instead of compensating the startup’s investors more extensively.

“I would never have considered working for them if they hadn’t acquired my company,” he admitted. “After being part of the nimble startup environment, large public companies, which operate much slower, lacked appeal.” However, the considerable compensation and significant role he was given have convinced him to remain.

Such was the case with Frilp’s acquisition, where the co-founders and employees initially resisted the idea of staying long-term. “Their stance was against large corporations,” Ravichandran recalled, specifying companies with over 100 staff. “Yet many stayed beyond five years; I stayed seven.”

According to Ravichandran, two of Frilp’s four founders still work at Freshworks, which has grown into a largescale public company.

Freshworks’ growth included acquiring numerous startups while Ravichandran served there, offering “accelerated career advancement for founders coming through acquisitions,” he noted.

Even though acquisitions that fall short of delivering substantial returns to investors often don’t make the headlines, they are quite common. According to the latest PitchBook-NVCA Venture Monitor, 90% of M&A transactions in Q2 were not disclosed. While not all involve acqui-hires, many do, offering companies the chance to absorb a whole team of specialized talent at once. For instance, Stripe acquired the 4-person team of Supaglue in March to bolster its Revenue and Finance Automation segment, as reported to TechCrunch.

AI startups are now frequently becoming targets for acqui-hires, according to P72’s Chandrasekar. Major tech firms are on the lookout for AI startups from the pre-ChatGPT era, attracted not necessarily by the products, which might be replicable with new Large Language Models (LLMs), but by the talent specialized in machine learning and AI. Recently, Airtable acquired Dopt for its proficiency in AI development.

Being acqui-hired should be seen in a positive light, as experienced individuals advise. Founders can receive satisfactory financial compensation and may uncover valuable long-term career opportunities with their new, larger employers.

And for those still feeling the entrepreneurial spirit post-acquisition, launching a new startup always remains an option.