In the world of startups, the odds are not in a founder’s favor. While an obvious goal of forming a startup is to create a business with longevity, the stark reality is that most startups will eventually fail. There are several reasons for this, both within and outside of a founder’s control.
Three reasons for the failure of a startup that are largely outside of a founders control are:
- Market fit. The creation of a product that seems like a great idea in the abstract does not automatically guarantee that there will immediately be an available market for that product.
- The economy. Obviously, if the economy is going through a recession or some other period of depressed activity—say, a pandemic—the result could be an unanticipated decline in demand for the product or services offered by the startup.
- Lack of money. Either of the aforementioned reasons could lead to a third reason for the demise of a startup—it simply runs out of sufficient money to remain operational. (A lack of money could also result from existing investors choosing to no longer fund the venture.)
Common Acquihire Structures
When it becomes clear that a startup is no longer able to operate independently, the opportunity to engage in an acquihire with a more established company can be a way for a startup to avoid the potentially negative optics that come with being forced to simply shut down the company. In an acquihire, the acquiring company is focused primarily on gaining the talent behind the startup, as opposed to the products or the revenue streams produced by the startup. In the event that a more established company does not approach the founder of a fledgling startup to enter into an acquihire, a founder interested in engaging in an acquihire will need to organize an outreach to the startup’s customers, suppliers and strategic partners to ascertain whether there is an interest among those parties in providing a soft landing for the startup’s employees. Additionally, a company seeking to acquihire a startup must be apprised of the startup’s outstanding obligations and understand that those obligations will need to be satisfied.
An acquihire can take on many forms depending on the specific situation, but there are two structures that are commonly used. In the first, the buyer acquires the assets of the startup and hires its employees. Investors in the startup will receive at best a portion of their investment back. The founder will not receive any money for his or her equity in the startup. The second structure is similar to an employee recruiting arrangement. In this structure, the buyer hires the employees of the startup (including the founder) and pays the startup a modest fee prior to the company’s dissolution. The silver lining in each of these scenarios is that a founder is able to truthfully proclaim that he or she was involved in a successful exit.
Maintain Transparency and Manage Relationships
Throughout the life cycle of the startup, it is extremely important that a founder be open and transparent with all of his or her constituencies (i.e., employees and stockholders) before the acquihire process begins and continues to communicate up to the completion of the acquihire. An unfortunate circumstance would be one in which a founder has been relatively uncommunicative and then announces to employees and stockholders that the startup is being acquired. This is not an ideal way to manage relationships. On the other hand, an employee or stockholder who has been informed of discussions as they have progressed will not only appreciate being included in the process, but also will be more likely to want to work with a founder when he or she gets the next big idea.