8 ms·

Attack of the Acqui-hires

53 points by quant 14y ago

michael_miller 14y ago
The article raises an interesting question on tax practices regarding aqui-hires. If the IRS does decide that such gains should be treated as ordinary income, will investors still be able to "save face" when, legally speaking, they can't even call it an acquisition?
- elechi 14y ago
  I'm a bit ignorant into corporate law and taxes, but if one legal entity bought another legal entity for reasonable value, how is the sale of the company not capital gains to the previous owners? Unless the buying company vastly overpaid for the acquired company, I'm not sure what the IRS could do about this. #edited to fix grammatical errors.
  - _delirium 14y ago
    I assume that last "unless" would be the key: if the acquirer is overpaying for the company, as a way of transmuting what's really a hiring bonus into a capital gain, that could be problematic. But it seems like it'd require actually showing that there was overpayment, which courts tend to not want to get into except in really egregious cases (like politicians overpaying for houses as a way of funneling money somewhere), because of how difficult it is to objectively determine.
    - ShabbyDoo 14y ago
      This is especially true for software companies where it is difficult to prove what the market value for a company ought to be within an order of magnitude (if not more!). Did Facebook overpay for Instagram?
    - wmf 14y ago
      But if you "overpay" all the investors then it doesn't look like a signing bonus.
  - lifeisstillgood 14y ago
    In the UK there is a IR35 law which basically says if you are a contractor working for BigCo every day, 5 days a week, for 6 months we will treat you as an employee and tax you accordingly. It is frequently got around with pretty slim "contracts" and generally the HRMC keep it in their back pocket for rainy days I suspect the IRS will let an awful lot of acqui-hires go through so that they can pick off the obviously dodgy ones without finding them selves bogged down in masses of law suits with defensible "we really were bought out" and the horror of some bad precendants.
edabobojr 14y ago
How does this work from an employee point of view? Are they compensated in the buyout? Do they get to do any negotiation with their new employer? The cynic in me thinks this could easily be a raw deal for non-owners.
- philwelch 14y ago
  There are stories of them having to interview for their own jobs.
  - diego 14y ago
    That is standard practice with any acquisition. If Company A acquires company B which has 1000 employees, it almost certainly won't want to retain them all. There will be lots of redundancy, employees who wouldn't be needed at Company A for whatever reason, etc.
- georgemcbay 14y ago
  I'm sure it depends greatly on the exact situation. I worked for a company (Company A) where some deal was worked out with another company (Company B) where Company B was free to hire all of Company A's employees and took over Company's A existing office lease and such but didn't outright buy Company A (they didn't want to own or continue working on the same projects, they just wanted all of Company A's employees to work on something new). Company B basically just hired all of Company A's employees for their existing salaries with no individual negotiation for raises or bonuses. Almost all of Company A stayed around to begin with because Company A had a lot of smart people who enjoyed working together, but within 6 months a lot of people (including myself) bounced from Company B for a whole host of reasons. All in all, for me the situation was neutral. Company A was basically dead in the water without Company B anyway, but all that really happened for me is it delayed my having to find a new job for a few months. After deciding to leave Company B I quickly found a new job with a good raise over what I was making so that's cool. Of course, YMMV, I'm sure every deal like this is very different.
- anamax 14y ago
  > How does this work from an employee point of view? Are they compensated in the buyout? It depends on the employee. The employees that the acquirer wants are treated differently than others. Both are paid for their stock and vested options. "The wanted" may get retention bonuses, additional grants, etc. > a raw deal for non-owners. What do you mean by "non-owners"? Are you referring to employees without any options or stock or to folks that don't have much in the way of options/stock? Stock/options owners are compensated per their ownership. Of course, the interesting question is how well the stock/options owners are treated, and there are different classes, hence the whole section about VC liquidation preferences.
vexxt 14y ago
The reason they do acqui-hires is to bail the VC out. The same VC sits on the board of the aquiring company. And we all know what happens when you try to hire away employees due to no-poach collusion, the hirer get's fired after Steve Jobs's email.
- chermanowicz 14y ago
  While I don't think this is systematic, it definitely happens from time to time and nobody says anything about it.
- joshu 14y ago
  This is much rarer than you think. Cite some examples.
  - vexxt 14y ago
    Most of the recent aqui-hires. AOL buying Netscape.
    - joshu 14y ago
      So you don't have any examples or know what you are talking about. Got it.
    - eli 14y ago
      Didn't that happen over a decade ago? Or am I confused?
dm8 14y ago
What is done to IP (code, patents) in most of the acq-hire cases?
- tptacek 14y ago
  They become the property of the acquirer.
pg 14y ago
The article doesn't mention one of the most important reasons companies do HR acquisitions: competition forces them to. If company A offers to acquire a startup and company B merely offers to hire the founders, all other things being equal the founders will take company A's offer.
- nicholassmith 14y ago
  It's quite similar to the patent arms race, disparate companies buying up anything that could become a threat as a preemptive measure.
- autophil 14y ago
  It would seem buying up talent is like buying up land. There is only so much of either to go around, and the price is just going to get higher and higher.
  - pg 14y ago
    Actually there are several efforts to increase the number of programmers, e.g. http://hackerschool.com http://hackerschool.com, http://insightdatascience.com http://insightdatascience.com, etc.
    - beagle3 14y ago
      My impression of hacker school is that it mostly makes talent more visible, not really increases the pool. But maybe this is a distinction without difference.
      - nicholasjbs 14y ago
        We're definitely focused on increasing the pool. We've had a number of students come to Hacker School with minimal (e.g., ~2 months) of programming experience and leave as professional devs. In general, the goal of Hacker School is to help people become dramatically better programmers, regardless of where they start. Some people come in without much programming experience, and some people come in with substantial programming experience. Across the board our students report that Hacker School is one of the most educational and productive periods of their lives (here's what a very experienced student wrote about her time in the current batch: http://news.ycombinator.com/item?id=4335460 http://news.ycombinator.com/item?id=4335460)
krakensden 14y ago
> Not only because suing an entrepreneur can cause major reputational damage, but also because the entrepreneur still has the right (in California) to just up and leave Because clearly the world would be a better place if financial agreements were more like indentured servitude.
- ShabbyDoo 14y ago
  While I am reluctant to suggest that the courts require specific performance (continuing to work) for employment contracts, awarding damages to the other party does not seem terrible. Does California law allow for damages to be awarded in such cases?
  - anamax 14y ago
    > While I am reluctant to suggest that the courts require specific performance (continuing to work) for employment contracts, awarding damages to the other party does not seem terrible. Why are you assuming that "employees" will sign such contracts? Suppose someone shows up to work. How does the court determine whether they're working per contract? (If someone says "I don't have any patentable inventions this month", do you think that they should be penalized?) CA allows non-competes in certain circumstances.
    - skmurphy 14y ago
      in particular CA courts will enforce non-competes against the owners of one company who sell it to another. This means that the acqui-hired can be subject to an enforceable non-compete by the acquiring company.
    - ShabbyDoo 14y ago
      I see your argument. Unless an employment contract stipulates specific work deliverables (even showing up, etc.) , it really is just a non-compete which might require the employee to pay the employer in the case of early termination by the employee.

53 points by quant 14y ago

The article raises an interesting question on tax practices regarding aqui-hires. If the IRS does decide that such gains should be treated as ordinary income, will investors still be able to "save face" when, legally speaking, they can't even call it an acquisition?

elechi 14y ago
I'm a bit ignorant into corporate law and taxes, but if one legal entity bought another legal entity for reasonable value, how is the sale of the company not capital gains to the previous owners? Unless the buying company vastly overpaid for the acquired company, I'm not sure what the IRS could do about this. #edited to fix grammatical errors.
- _delirium 14y ago
  I assume that last "unless" would be the key: if the acquirer is overpaying for the company, as a way of transmuting what's really a hiring bonus into a capital gain, that could be problematic. But it seems like it'd require actually showing that there was overpayment, which courts tend to not want to get into except in really egregious cases (like politicians overpaying for houses as a way of funneling money somewhere), because of how difficult it is to objectively determine.
  - ShabbyDoo 14y ago
    This is especially true for software companies where it is difficult to prove what the market value for a company ought to be within an order of magnitude (if not more!). Did Facebook overpay for Instagram?
  - wmf 14y ago
    But if you "overpay" all the investors then it doesn't look like a signing bonus.
- lifeisstillgood 14y ago
  In the UK there is a IR35 law which basically says if you are a contractor working for BigCo every day, 5 days a week, for 6 months we will treat you as an employee and tax you accordingly. It is frequently got around with pretty slim "contracts" and generally the HRMC keep it in their back pocket for rainy days I suspect the IRS will let an awful lot of acqui-hires go through so that they can pick off the obviously dodgy ones without finding them selves bogged down in masses of law suits with defensible "we really were bought out" and the horror of some bad precendants.

edabobojr 14y ago

How does this work from an employee point of view? Are they compensated in the buyout? Do they get to do any negotiation with their new employer? The cynic in me thinks this could easily be a raw deal for non-owners.

philwelch 14y ago
There are stories of them having to interview for their own jobs.
- diego 14y ago
  That is standard practice with any acquisition. If Company A acquires company B which has 1000 employees, it almost certainly won't want to retain them all. There will be lots of redundancy, employees who wouldn't be needed at Company A for whatever reason, etc.
georgemcbay 14y ago
I'm sure it depends greatly on the exact situation. I worked for a company (Company A) where some deal was worked out with another company (Company B) where Company B was free to hire all of Company A's employees and took over Company's A existing office lease and such but didn't outright buy Company A (they didn't want to own or continue working on the same projects, they just wanted all of Company A's employees to work on something new). Company B basically just hired all of Company A's employees for their existing salaries with no individual negotiation for raises or bonuses. Almost all of Company A stayed around to begin with because Company A had a lot of smart people who enjoyed working together, but within 6 months a lot of people (including myself) bounced from Company B for a whole host of reasons. All in all, for me the situation was neutral. Company A was basically dead in the water without Company B anyway, but all that really happened for me is it delayed my having to find a new job for a few months. After deciding to leave Company B I quickly found a new job with a good raise over what I was making so that's cool. Of course, YMMV, I'm sure every deal like this is very different.
anamax 14y ago
> How does this work from an employee point of view? Are they compensated in the buyout? It depends on the employee. The employees that the acquirer wants are treated differently than others. Both are paid for their stock and vested options. "The wanted" may get retention bonuses, additional grants, etc. > a raw deal for non-owners. What do you mean by "non-owners"? Are you referring to employees without any options or stock or to folks that don't have much in the way of options/stock? Stock/options owners are compensated per their ownership. Of course, the interesting question is how well the stock/options owners are treated, and there are different classes, hence the whole section about VC liquidation preferences.

vexxt 14y ago

The reason they do acqui-hires is to bail the VC out. The same VC sits on the board of the aquiring company. And we all know what happens when you try to hire away employees due to no-poach collusion, the hirer get's fired after Steve Jobs's email.

chermanowicz 14y ago
While I don't think this is systematic, it definitely happens from time to time and nobody says anything about it.
joshu 14y ago
This is much rarer than you think. Cite some examples.
- vexxt 14y ago
  Most of the recent aqui-hires. AOL buying Netscape.
  - joshu 14y ago
    So you don't have any examples or know what you are talking about. Got it.
  - eli 14y ago
    Didn't that happen over a decade ago? Or am I confused?

dm8 14y ago

What is done to IP (code, patents) in most of the acq-hire cases?

tptacek 14y ago
They become the property of the acquirer.

pg 14y ago

The article doesn't mention one of the most important reasons companies do HR acquisitions: competition forces them to. If company A offers to acquire a startup and company B merely offers to hire the founders, all other things being equal the founders will take company A's offer.

nicholassmith 14y ago
It's quite similar to the patent arms race, disparate companies buying up anything that could become a threat as a preemptive measure.
autophil 14y ago
It would seem buying up talent is like buying up land. There is only so much of either to go around, and the price is just going to get higher and higher.
- pg 14y ago
  Actually there are several efforts to increase the number of programmers, e.g. http://hackerschool.com http://hackerschool.com, http://insightdatascience.com http://insightdatascience.com, etc.
  - beagle3 14y ago
    My impression of hacker school is that it mostly makes talent more visible, not really increases the pool. But maybe this is a distinction without difference.
    - nicholasjbs 14y ago
      We're definitely focused on increasing the pool. We've had a number of students come to Hacker School with minimal (e.g., ~2 months) of programming experience and leave as professional devs. In general, the goal of Hacker School is to help people become dramatically better programmers, regardless of where they start. Some people come in without much programming experience, and some people come in with substantial programming experience. Across the board our students report that Hacker School is one of the most educational and productive periods of their lives (here's what a very experienced student wrote about her time in the current batch: http://news.ycombinator.com/item?id=4335460 http://news.ycombinator.com/item?id=4335460)

krakensden 14y ago

> Not only because suing an entrepreneur can cause major reputational damage, but also because the entrepreneur still has the right (in California) to just up and leave Because clearly the world would be a better place if financial agreements were more like indentured servitude.

ShabbyDoo 14y ago
While I am reluctant to suggest that the courts require specific performance (continuing to work) for employment contracts, awarding damages to the other party does not seem terrible. Does California law allow for damages to be awarded in such cases?
- anamax 14y ago
  > While I am reluctant to suggest that the courts require specific performance (continuing to work) for employment contracts, awarding damages to the other party does not seem terrible. Why are you assuming that "employees" will sign such contracts? Suppose someone shows up to work. How does the court determine whether they're working per contract? (If someone says "I don't have any patentable inventions this month", do you think that they should be penalized?) CA allows non-competes in certain circumstances.
  - skmurphy 14y ago
    in particular CA courts will enforce non-competes against the owners of one company who sell it to another. This means that the acqui-hired can be subject to an enforceable non-compete by the acquiring company.
  - ShabbyDoo 14y ago
    I see your argument. Unless an employment contract stipulates specific work deliverables (even showing up, etc.) , it really is just a non-compete which might require the employee to pay the employer in the case of early termination by the employee.