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Definitely not. For some reason there is a persistent myth that investors make money from HR acquisitions, but they don't. Even we don't, and we invest at muc

• davemc500hats 13y ago
  completely agree with PG -- acqui-hires aren't a big source of capital returns at all, especially anything below $10M.
• ChuckMcM 13y ago
  Interesting, do the investors get to keep any IP and/or remaining funds in your experience? Of the two acquisitions where I had good visibility into the terms, in both cases the original Investors were cashed out at approximately 2x their total investment and the rest put into an earnout/retention package for the people that were coming on board. It was a haircut to be sure, but it wasn't actually a loss for anyone with preferred stock. I would have thought with smaller starting chunks that would be easier rather than harder than it was after the dot-com debacle. I certainly defer to your greater experience here as it is much more current than mine. I made the mistake of figuring those were more typical than I guess they actually are.
  • danmaz74 13y ago
    Considering the risk of their investments, would a VC consider a 2x return a way of "making money"?
  • pg 13y ago
    There usually aren't significant remaining funds, and I've never heard of investors keeping IP (there are usually multiple investors, and IP would be hard to split). And a 2x return is unusually rich for an HR acquisition. If you're lucky you get your money back. But after several years, during which you've had operating expenses.
• danielrhodes 13y ago
  Acqui-hires typically do not make investors a profit, but in many cases acquiring companies have made sure investors get their money back. I would think that changes the risk equation significantly when making early-stage investments.
• netcan 13y ago
  Maybe some details would help dispel the myth. At face value, an investors buy shares at price X and the HR acquisition happens at value 2X. A naive conclusion is that (X - legal costs - time)= profits. Do you mean that these acquisitions don't make enough to pay for the failed startups? That the cost associated with investing in that startup are more than the revenue? That something about typical deal terms makes (reported) valuations at buy and sell time meaningless?
  • pmarca 13y ago
    Very relevant question given current events. What happens in practice is that the acquiring company effectively recaps the startup on the fly. This takes a bunch of different forms but a common method is that a big part of the purchase price takes the form of restricted stock grants or signing bonuses to the employees, as opposed to cash or stock that gets processed through the cap table. From the acquiring company's standpoint, this is logical behavior because the acquirer wants the people to be well motivated to work hard at the big company, and doesn't care whether the investors get their money back or not. But this has the effect of putting a startup's founders at cross incentives with their investors. It's very important for everyone to act like adults in that circumstance, which often but not always happens. Of course acquirers can overdo this and burn their relationships with angels and VCs in the process.