While the finest firms are performing well, even in this difficult venture capital environment, others are struggling to secure additional money. If they can't raise capital and haven't become self-sustaining firms, their best option is to be acquired, even if it's for a fraction of their previous price. The alternative is to run out of money and close down.
Such acquisitions may come as a tremendous disappointment to founders and senior personnel. They envisioned developing a large, highly valuable corporation that would make them wealthy. Instead, their equity could be valued next to nothing, they may have to take a role at the acquiring firm, and they might even have to commit to working there for a length of time to obtain their full payout.
However, selling in such circumstances is not always a bad thing for founders and key employees.
"Generally, when companies are acquired, it's considered a down move," said Nivas Ravichandran, one of the first workers of Frilp, a startup acquired by Freshworks in 2015. "However, purchases are an excellent financial opportunity. If you join through an acquisition, the compensation and equity are more than if you join as a lateral hire."
Buyers frequently reward top team members for their hard work at startups by offering them significantly better employment and bigger salary packages than they might get elsewhere with the same experience.
"The senior principal engineers usually take a decade or more to get to level six or seven," said Sri Chandrasekar, a partner at P72 Ventures, referring to standard "leveling" at huge tech companies such as Google or Meta. Meanwhile, founders he's seen acquired "go in at level seven or eight. Most of them have four years of professional experience. That's a big jump." P72 Ventures has seen more than 15 of its portfolio businesses depart via M&A.
Because large acquirers are frequently interested in getting access to a startup's talent pool in these deals, which are known as acqui-hires, they structure the deal to encourage the founder and key team members to stay on board for an extended length of time.
While traditional M&A deals frequently involve retention bonuses for management teams, which are paid out 18 to 24 months after the acquisition, acqui-hires are increasingly focusing on incentives for the startup's employees. This means that, in addition to offering such deals to founders, important workers may obtain greater pay and total compensation in exchange for extended equity vesting schedules.
Deals that focus on the founder and the team
Acquirers "are often willing to give more seniority for these people to not have to put as much cash into the deal," Chandrasekar said. "Those are the kinds of things that acquirers are getting increasingly clever about."
A founder who just sold his startup to a publicly traded company told TechCrunch that the buyer arranged the transaction so that he and his co-founders earned a larger stock grant instead of paying more to his startup's investors.
"If they didn't buy my company, I would never work for them," he told me. "After working with startups, I'm not interested in giant public firms. Everything is simply extremely slow."
However, the hefty income package and enormous responsibility he earned at his new employer push him to stay. In other words, the incentives are effective. And sometimes, people like that founder realize over time that they enjoy their businesses.
When Frilp was acquired, for example, its co-founders and other staff promised not to stay long. "They were saying, 'We don't like big companies'," Ravichandran explained, adding that by big, they meant companies with more than 100 people. "However, many of them ended up remaining longer than five years. "I stayed for seven years.
Frilp had four founders, two of whom are currently employed with Freshworks, according to Ravichandran. Today, Freshworks is a public firm with thousands of workers.
Freshworks, which went public in 2021, acquired around a dozen startups during Ravichandran's tenure there. "When you get acquired, you have accelerated career growth," remarked the CEO. "Directorial positions were often offered to founders who came from acquisitions."
Although purchases in which investors do not earn a meaningful return are rarely publicized, they occur regularly. According to the most recent PitchBook-NVCA Venture Monitor, 90% of M&A transactions in Q2 went unannounced. However, not all of these deals were acquisitions. Buyers sometimes prefer technology over people. Sometimes they are competitors who want the customers above the technology or the personnel.
In this industry, being acquired should not be regarded unfavorably; those who have gone through it want other entrepreneurs to know. Founders can be adequately rewarded monetarily. They may uncover excellent long-term employment chances with their new large employer.
And if they still have the entrepreneurial bug when their lock-up is over, they may always start another new business.