What’s an acquihire? How this type of acquisition works, plus the pros and cons

The term “acquihire” gets thrown around a lot in the startup world. But what does it actually mean?

A combination of the words “acquisition” and “hire,” it describes the process in which a company acquires the employees of another.

Simply put, acquihire means company A brings in-house the people of company B. It’s often used as a form of talent acquisition. Company A may or may not choose to also bring in-house the product that company B was building, depending on their needs and budget.

Companies choose to acquihire for many reasons. Most often, it’s because company A wants to recruit a team of people with a specific skill set or expertise, and it’s easier, faster and more effective to acquire an established team from a smaller company than it is to recruit each person individually.

In other cases, the target company might not be large enough or doesn’t make enough revenue to justify a traditional acquisition, which could be a lengthy and more expensive process than what the target company is worth.

VC-backed companies might have other reasons to agree to be acquihired. For example, a founder who is unable to raise more funding may consider it as an alternative to shutting down the business. Or the investors of a company that hasn’t met projected milestones may suggest the founder look for buyers or even bring forth an acquihire offer for consideration so everyone gets an exit.

Founders who bootstrap their business may agree to an acquihire deal because it’s the best move for their company, or maybe they want to focus on building the product without worrying about their company’s survival.

In practice, there are no set rules for acquihires. The main thing you should know is that their purpose is to acquire a company’s biggest asset: the talent.

Why might you consider selling your company through an acquihire?

If you’re approached about an acquihire, it’s usually because there’s something special about you and your team: a unique expertise in a particularly hot market, unparalleled leadership skills, groundbreaking work in a new field, you name it.

Yet while there are obvious gains for the buyer, it might also present an opportunity for you (the seller) and your business. Maybe the backing and resources of a larger company could help take what you’re working on to new heights. Maybe you’re eager for the security of a steady paycheck, and possibly a net to catch you the next time you fall. Or perhaps you like the idea of providing security for your team, the people who believed in you and took a bet on your company.

Sometimes acquihires provide founders an opportunity to learn and fill skills-gaps before going out and building something new again. You might even find you’re happier in this new environment, especially if it allows you to focus on building rather than all the people management and logistics of running a company.

An acquihire can also be an appealing solution for entrepreneurs who create great products but don’t find product-market fit. The business is likely to fail, but it doesn’t have to be the end of the team you’ve built or the progress you’ve made. Your work is valuable because you’ve proven your ability to build something out of nothing. An acquihire offers you a lifeline, like an extra life in a video game.

You and your team will likely be offered an attractive compensation package, with a sign-on or relocation bonus, depending on the circumstances, and some equity. You will most likely be encouraged to focus on what you do best: creating.

How does an acquihire benefit the buyer?

If you’re considering selling your company through an acquihire, it’s important to understand the motivations of the buyer.

They’re getting a talented group of people who already know how to work with each other and probably have a success record to prove it. They’re bringing in an entire team with the expertise they need in one swift sweep, which sets them up to achieve their goals and saves time.

This type of acquisition might also end up saving the buyer money if it costs less than it would to recruit for each role one by one, or if the company will be able to bring in revenue more quickly because of these new employees.

Not everyone sees it this way, though. Instead of perceiving acquihires as a win-win, some critics view them as participation awards, in the sense that “everyone wins a trophy for showing up.” With this line of thinking, some people believe Silicon Valley’s culture of acquihires is detrimental because it encourages founders to build companies they can flip instead of trying to build a sustainable business.

Venture capitalist Mark Suster called it a “wasteful strategy” for companies hoping to stay competitive by repeatedly acquihiring smaller teams. He says the money used for acquihires could be better spent retaining top existing talent.

What are the pitfalls and risks of acquihires?

Though acquihires are sometimes thought of as a recruiting strategy, they are much more complex than that, and therein lie the risks.

About 33% of acquihires leave the buyer’s company within a year, compared to 12% for new hires with similar skills and experience, according to research from Daniel Kim, an assistant professor at Wharton.

Thinking that acquihires are just another recruitment process is a common misconception, says Shari Yocum, who works at EY as its U.S. people advisory transaction leader and has two decades of experience in the mergers and acquisition space.

Buyers have to keep in mind that the seller’s team did not originally sign up to work at their company, she said. “They signed up for something very different, and now all of a sudden, we’ve changed that on them.”

As a result, buyers shouldn’t make the mistake of onboarding acquihire employees using the same dynamic they use with new hires, she said. “You start eroding the value of an acquihire team by doing that.”

Instead, the buyer has to “almost sell them” on being part of the acquiring company while also helping them adapt to the acquiring company’s culture, Yocum says. She recommends being upfront and transparent to help the transition go smoothly. The buyer needs to let them know what they’ll be working on and how they will add value to the organization, and vice versa. “Don’t pretend like nothing’s going to change. People are smarter than that,” she adds.

Yocum believes cultural fit is the key component of a successful acquihire, and she’s in good company. Calm’s chief technology officer, Will Larson, who’s been through the process himself, agrees. He worked at the news aggregation site Digg when it was stripped and sold for parts in 2012, and he wrote about this experience and insights about acquihires on his blog.

“Failure to acknowledge and address the cultural differences between the acquired and acquiring companies is the source of most post-acquisition friction, and consequently the cause of most failed acquisitions,” Larson writes in a post titled, “How to navigate and/or survive your acquihire.”

That’s why buyers should spend ample time getting to know the team they’re buying and letting them get to know their new company. That includes figuring out the dynamics within the group, and gauging what sort of title or reporting changes would create the least amount of friction for a smooth transition.

And if you lead the team that’s considering agreeing to be acquihired, perhaps the most important thing you can do is to find some way to suss out whether you’ll truly enjoy working with this new partner.

That could determine whether it ends up being a long-term partnership.

Examples of acquihires

Want to see what acquihiring looks like in practice?

Here are a few companies we’ve written about that have gone through acquihires:

• Edge Funder, an AI fintech platform that was acquired just a year after it was founded, before the founders brought it to market
• Our founder Alexis Grant sold her content marketing agency through an acquihire, and she talks about that acquihire on this podcast
• More coming soon!