Why So Many Startups Are Being Acqui-Hired

kevin rose

Photo: Flickr / Mari Smith

One of the most interesting trends in startup land is the rise of the “acqui-hire,” which is when a big company buys a smaller company just to get its employees.For instance, Facebook acquired New York-startups Hot Potato and Drop.io just for the companies’ founders. It pretty much killed the product they developed. Or, more recently, Google bought Milk, the app development company from Kevin Rose. It killed all of Milk’s projects and put the team to work on Google+.

Why are Google and Facebook buying the companies instead of just poaching the employees? UNC law professors John Coyle and Gregg Polsky explored the acqui-hire trend and published a paper on it.

Dan Primack at Fortune read the paper and talked to the professors. The results are fascinating.

The key takeaways:

  • It saves face for the entrepreneur to say, “I sold my company to Google.” The professors found that the majority of acqui-hired companies couldn’t have raised another round of funding. Taking a “buy out” offer sounds a lot better than having the company go out of business.
  • It eases the tension of offering people huge salaries to come work at your company. If Facebook tried to hire some of the people at Hot Potato, it would have to make a generous offer. If it led to the new Hot Potato employee making more money than the current Facebook employees, the office culture could be poisoned. But, if Facebook brings in employees through an acqui-hire, and essentially gives them a huge bonus to join, what can it do? It has to tell its people, “We had to buy their equity.”
  • That equity bonus is better for tax purposes. Engineers can treat their bonuses as capital gains, which is more tax-friendly. Though, the UNC professors believe this might not last if the IRS starts paying attention.
  • Acqui-hiring is good for big companies because it keeps VCs happy. If Google had the choice between poaching a startups employees, and robbing a VC of the ability to say it had an exit, or just doing the acqui-hire, the acqui-hire is better in the long run. It might end up costing a little more, but it keeps VCs happy, and down the road the VCs might be able to help out Google.

For more, head over to Fortune >

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.