Introduction
Acquisition and hiring jointly constitute the term “Acquihire”. Acquihire is a business term. When a company takes over or buys another company, it is a “acquisition,”. and when a company recruits employees, it is “hiring.” Acquihire is also hiring talents. In an acquisition, a company primarily buys another company to utilize its skilled employees, all other assets become secondary.
What is an acquihire transaction?
The term “acquihire hire transaction” simply means a transaction when a company takes over another company just to use its labor talents and human capital, not products or services or customer base.
An Acquihire transaction is a structure or model of a merger and acquisition. The current global trend is that tech giants acquihire tech start-ups for their talents. For example, Google acquihired Superpod. Google acquired Superpod to improve Google Assistant’s ability to answer questions. Superpod was a startup started by ex-Google employees that were acquired by Google, and all the members of the startup were transferred to Google.
What are acquihire transactions? How are they different from ordinary investment transactions (SHA, SSA, SPA) or acquisitions?
Acquihire is totally different from ordinary investment. In a typical investment, an investor invests in a business to gain a profit. The investor focuses on the company’s products, services, goodwill, and other assets, while in the acquisition, the purchaser’s primary focus is to utilize the skilled talents or human capital.
Acquihire vs Acquisition
Acquihire is purchasing the company solely for its skilled human resources. Acquisition, on the other hand, means acquiring the entire company, including its products, services, goodwill, customer base, and other assets. Let’s see two instances-
In August 2022, Dutch multinational SHV Energy has taken over the entire stakes at Petromax LPG Ltd and Petromax Cylinders Ltd for more than BTD 1,000 crore to enter the fast-growing liquefied petroleum gas (LPG) market of Bangladesh. This is an acquisition or acquire.
On the other hand, in July 2020, SpiceJet acqui-hired Bengaluru-based airline e-commerce technology company Travenues. This is an acqui-hire.
Acquihire vs SHA
SHA (Share Holder Agreement) is simply a contract containing the rights and obligations of a shareholder of a company. On the other hand, an acquisition transaction is taking over the whole company.
In SHA, a person owns a portion of a company as an investor, while a company buys another company to use its labor talent in acquihire.
Acquihire vs SAA
A Share Subscription Agreement (SSA) is a contract between a company and a party or investor in which the company agrees to sell the share at a predetermined price and the investor agrees to purchase it at the same price. This is a business-friendly approach.
In contrast, in an acquihire transaction, a company purchases another company in order to use its skilled workforce.
Acquihire vs SPA
A SPA (Share Purchase Agreement) is an agreement where one party purchases a share from an existing shareholder. For example, If Mr. X owns 100 shares of Tesla, and Mr. Y entered into an agreement to buy 50 shares of Tesla from Mr. X.
So, it’s also different from an acquihire transaction, because in an acquihire, a company buys the whole share or ownership of another company.
What are the commercial scenarios/considerations behind going for acquihire transactions? When are acquihire transactions preferred vis-a-vis other deal structures?
When a startup’s performance falls short of expectations, acquihire can be used as a safe exit strategy.
There are no hard and fast rules for acquihire. Buyers, on the other hand, must consider a variety of factors before making a purchase.
The buyer must think about the target company’s performance and the presence of a team of qualified individuals with a track record. The buyer must convince the employees to join the new company because the purchase is primarily for using their talents. Buyers can request them to sign an agreement committing to stay for a set time period in order to prevent losing them. The purchasing firm must decide the mode of employee compensation. Is it just a salary or does it also include business stock?
What categories of company shareholders/members/employees can be acqui-hired?
The current global trend is that big tech giant or MNCs acquihire small startups in their early stages of growth, mostly at the stage of seed funding. At this stage, startups are not mature enough, but they have managed to demonstrate their capabilities on niche-based skills, which forecasts their bright future potential. For instance, Blockchain technology, Augmented Reality, Virtual Reality, IoT, Decentralized economy, Cryptocurrency mining, trading, Metaverse, etc.
For instance, the Bangladeshi education startup “Shikho” is still in its early stage, but “10 Minute school” is a mature business. Shikho may be ‘acqui-hired’ by 10 Minute School.
According to NASDAQ, there are five reasons for a startup to acquire, which are as follows:
- When a business’s growth slows in a rapidly expanding market and other new businesses start to expand;
- When a startup develops innovative products and grabs market share;
- When a startup has personnel with talent, and that company have a lower price of purchase,
- Businesses with a distinct product vision or with goods that appeal to a broad range of consumers;
- Startups, which have underutilized assets and have the possibility of improving target companies’ performance.
What are the contracts that are executed in acquihire transactions?
There are different types of contracts that are executed in acquihire transactions, which are discussed below:
Acqui-hire agreement:
The first move is for the buyer and seller to both sign an acquisition agreement. Retention agreements for the employees could be part of an acquihire to safeguard their continued presence during the transition. Based on a 2020 study, 47% of significant employees leave after an acquisition within a year.[1] Without these contracts, some employees could leave with their bonuses, costing the acquiring company a lot of money. Employees who sign contracts and stay for specified periods of time or achieve specified milestones may receive incentive payments. These payments might not be treated the same way as regular income, which would subject them to different tax legislation.
A typical acquihire agreement usually includes the following terms, which are: Transferring Employees; Offer of new employment; Waiver of Liability and Indemnity of Acquirer, Acquisition amount to be paid to the existing employer; Completion (terms that each party agrees to fulfil before an agreed completion date upon which the employees will be acquired).
What happens to the IP and the current business of the team that is acqui-hired?
Intellectual property (IP) at a tech startup typically refers to the company’s domain, website, logo, articles, content, software, products, tech stack, goodwill, etc. In an acquihire transaction, the buyer company buys another small company mainly for its skilled human resources, but other assets are also valuable. The acquired company’s resources and client base are typically utilized by the new company or blended into it. It’s viable that more than two-thirds of the IP will in use. Buyers can also start looking at the processes required for a formal transfer of IP ownership.
Due-diligence, pre-closing and post-closing modalities required in acquihire transactions
There are lots of due-diligence processes that need attention before and after the closing of the deal. Firstly, the buyer needs to focus on what the founder wants. What are the capabilities the company has built? And What is the company’s culture? What are the capabilities of the workforce? Or What are the assets of the company, and what are the liabilities of the company? What about tax compliance? Is there any due tax, and if so, how much is that? How to retain the employees? How can the employee contribute significantly to the new company? What are the legal and financial obligations? If it’s a cross-border transaction, what are the extra-legal obligations for that?
There are lots of pre-closing modalities needs to follow:
The buyer should assess the worth of the business. The purchaser should consider the deal’s structure, the impact of the acquisition on the purchaser’s board of directors, the prospective tax liability, and whether the purchase would guarantee that creditors receive the money the company owes them.
There are some post-closing modalities which also need to be followed:
To better understand the culture of the acquired company, the new company should collaborate with its human resources department. Interviews with the employees should organize by the new business to learn more about them and vice versa. It’s crucial to maintain open communication with the acquired company’s employees. The new business should review its policy to ensure that it is compatible with the new staff. It is necessary to instruct and train the current employee. Transferring IP ownership might come. It can be essential to complete a new tax filing, a new registration, and other legal requirements.
Conclusion
Talent is now the prime asset for many tech companies. Acquihire is a win-win situation for both parties. Startups can save themselves from loss, and big companies can utilize the skilled talent and ideas in a short time. With the emergence of new technological innovation, there is a great chance of increasing acquihire transactions globally, and transactional lawyers can leverage that opportunity.
