Acqui-Hiring

By Coyle, John F.; Polsky, Gregg D. | Duke Law Journal, November 2013 | Go to article overview

Acqui-Hiring


Coyle, John F., Polsky, Gregg D., Duke Law Journal


ABSTRACT

Facebook, Google, and other leading technology companies in Silicon Valley have been buying start-up companies at a brisk pace. In many of these transactions, the buyer has little interest in acquiring the startup's projects or assets. Instead, the buyer's primary motivation is to hire some or all of the startup's software engineers. These so-called "acqui-hires" represent a novel--and increasingly common--tool by which the largest and most successful technology companies in the world satisfy their intense demand for engineering talent.

To date, the acqui-hire has attracted no attention in the academic or professional legal literature. With this Article, we aspire to fill this gap. Drawing on interviews with Silicon Valley entrepreneurs, venture capitalists, buyer representatives, and transactional lawyers, we offer the first formal description of the acqui-hire. In so doing, we seek to enrich the understanding of those already acquainted with the acqui-hire while also providing a comprehensive account of this transaction structure to the uninitiated.

We also discuss an existential puzzle: Why do acqui-hires occur? If a large technology company wants to hire a team of software engineers, why does it go to all of the trouble and expense of acquiring the company that currently employs them? Why not simply hire away the individuals that it wants? We argue that the solution to the puzzle lies primarily in the way that social norms and the threat of informal sanctions shape the behavior of members of the Silicon Valley technology community. Although California law generally allows for easy employee mobility, social norms lead many companies to engage in acqui-hires. We buttress this norms-based explanation with insights from prospect theory and tax law to show that the unique structure of acqui-hires reduces their perceived and actual costs, which in turn also promotes these transactions.

We then consider the most significant negotiation issue in acqui-hires: how the buyer's aggregate purchase price will be allocated between the startup's software engineers and its outside investors. Although our interviews suggested that there is currently no established norm for making this allocation, we predict that a money-back-for-the-investors norm will eventually develop to drive allocation determinations. We then propose several contractual innovations that could be designed to try to augment the investors' share of acqui-hiring proceeds.

TABLE OF CONTENTS

Introduction
  I. The Acqui-hiring Phenomenon
       A. Investment Structure in Silicon Valley Startups
       B. The Insatiable Demand for Engineering Talent in
          Silicon Valley
       C. The Acqui-hire
       D. The Existential Puzzle: Why Acqui-hire?
 II. Acqui-hiring as a Mechanism To Reduce Litigation Risk?
       A. Validity of Legal Claims
       B. Credibility of an Investor's Threat To Sue
III. A Theory of Acqui-hiring
       A. Informal Sanctions and Reputational Harm
          1. Future Dealings
          2. Loyalty
          3. Social Sanctions
       B. Optics and Reputational Benefits
       C. The Buyer's Perspective
       D. The Unique Culture of Silicon Valley and Its Legal
          Community
       E. Prospect Theory
       F. Tax Considerations
 IV. Allocation and Innovation
       A. Allocation of Consideration
       B. Legal Innovation To Protect Investor Interests
Conclusion
Appendix

"[A] lot of the acquisitions that we make at Facebook are, you know, we look at great entrepreneurs out there who are building things. And often, the acquisitions aren't even to really buy their company or what they're doing. It's to get the really talented people who are out there trying to build something cool and say, you know, if you joined Facebook, you could work on this completely different problem. Isn't this a more important problem? And for the people who answer that question yes, they join. …

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