[eli_gottlieb]

Do you have any clue how much money the likes of the big tech companies spend on recruiting? I get the sense that you have no clue. Most acquihires are peanuts, compared to the aggregate cost of assembling a high caliber team by other means.

I have no clue but I'm quite interested to learn. How much do they spend?

[snprbob86]

I don't have hard numbers, so let's do some math on talent acquisitions.

It's been said that engineers are worth up to $1M in talent acquisitions [1]. We talked to lots of folks while negotiating our deal and that number matches what we learned for the total cost of the acquisition, including retention packages (about 3 years) and the cash portion of the deal.

For the same of argument, let's describe a large and expensive talent acquisition, as a sort of "worse case" for the acquiring company. I'll use roundish numbers to make the math easy: Let's say a $2M raise on a $8M valuation, for a $10M post money valuation in a company that had 10 engineers at the time of acquisition.

Usually, in talent acquisitions, the investors barely break even, but occasionally, they get 2X. So again for our example company, let's say that the acquirer pays $4M cash up front and $16M over 3 years for the 10 employees. That's $2M per engineer! Waaay off the charts. If you assume an even distribution (never the case; the founders and key people get a bigger slice), then that's an average of $533k/year per person.

If the average senior engineer's salary is $150k/yr, then then acquired employees need to be 3.6X more productive than a same-sized team of typical senior engineer to justify the costs of the acquisition. Note that this entirely ignores recruiting: Finding 10 senior engineers is fucking hard. Even if it was dirt cheap (it's not), it costs a lot of time and it's a gamble on creating a team of 10 people who truly gel. If you've ever worked at a big company, you know that there are always teams that outperform others by factors of INFINITY (ie. some teams are incapable of shipping), never mind beating the average by 3.6X.

Again, this is a pretty bad deal for the acquirer. The overwhelming majority of talent acquisitions are muchmuch* smaller. In those smaller deals, the economics make even more sense for the buyer.

I realize that my math is fuzzy here. However, you gotta believe that the people running fortune 500 companies have done the math in far greater detail and decided that it's economical. It would be a worthwhile project for someone to create a more thorough analysis with what-if variables.

[1] http://www.quora.com/Startup-Acquisitions/Does-Facebook-have...

[jyu]

So typically do the investors take all the cash upfront, and then whatever stock/cash over time is given to founders and employees?

[snprbob86]

There are two primarily legal structures for an acquisition. The first is a stock purchase, where the negotiated terms of the various classes of stock all apply. The second, is an asset purchase, sometimes called an intellectual property purchase.

In an talent acquisition structured as an asset deal, the acquirer doesn't actually purchase the company's stock. Instead, the buyer gives the seller money for the purchase of the company's IP and other assets and the seller then lays off it's staff with a somewhat informal agreement that all of the employees will sign negotiated employment contracts with acquirer. The result is that the percentage ownership doesn't come into play directly for the employees.

Generally, the acquiring company has an interest in optimizing their position for the repeated game (ie. they don't want to piss off investors, so they keep getting deals like this). The minimal required to avoid pissing off the investors is to give them their money back, although smart entrepreneurs will push to get return for their investors (often at the founders' expense) to strengthen their own position if they ever plan to raise money for a future venture.

Now, since an asset deal isn't actually purchasing stock, they aren't really establishing a value for the company. There's this indirect valuation, which is somewhat advertised as the "total deal size". So when you hear about a X million dollar talent acquisition, you're often hearing about the total amount of money that the acquirer expects to pay to all parties over the vesting period.

[eli_gottlieb]

Ok, now here's where I take the math apart, starting by attacking every intangible I can find.

First: who says that your start-up team consists of 10 senior (as in, actually experienced) engineers? Who says they actually work well together? Basically, who has determined that the acquihire is a smarter recruiting method than poaching a team off a BigCo somewhere or just hiring a bunch of friends out of university?

I don't even know why we're talking about teams that can't ship; don't they just get hired and then fired again for a much lower cost than $533k/man-year? Even if we have to pay double the nominal salary for an employee's "total cost of employment" each year, Team Suck will simply never match the costs of acquihiring Team Wannabe the Very Best Like No-One Ever Was.

It seems to me like acquihiring involves a huge financial premium paid solely for the "surety" of hiring an "established" and "successful" team. Basically, it looks like some companies are paying big, big door prizes just for having lived the Start-Up Experience, well beyond what they pay for even more experienced employees.

Just another form of business-school capitalist arrogance, I'd call it: the belief that the closer someone has been to business administration, the more they're worth as an employee (even if they were only an employee at "their" previous "company").