The best startups thrive in a tough venture capital market, while others struggle to raise new capital. If you can't raise money and aren't a self-sustaining company, your best bet is to get acquired, even if for a fraction of your previous valuation, or you'll run out of money and go out of business.
These acquisitions can be a huge disappointment for founders and senior employees, who dreamed of building a huge, valuable company that would make them wealthy, but in reality, their shares are worth little or nothing and they may have to take on a role in the acquiring company and commit to working there for a period of time to receive their full compensation.
However, a sale in such circumstances is often not as bad an outcome for the founders and key staff as it initially seems.
“Typically, when a company gets acquired, it's considered a downward move,” says Nivas Ravichandran, one of the first employees at Flip, a startup that was acquired by Freshworks in 2015. “But acquisitions are a great opportunity from a financial standpoint. If you join through an acquisition, you get better pay and equity than if you joined side-by.”
Buyers often reward the hard work of top team members at a startup by giving them much better jobs and higher salary packages than they would get at other companies with the same experience.
“It typically takes more than 10 years for a senior principal engineer to get to level 6 or level 7,” said Sri Chandrasekhar, a partner at P72 Ventures, referring to the standard “leveling” at big tech companies like Google and Meta. Meanwhile, founders hired through acquisitions “come in at level 7 or level 8, and many of them have four years of professional experience. That's a big jump.” P72 Ventures has exited more than 15 startups in its portfolio through M&A.
In these deals (often referred to as “hire by acquisition”), large acquirers are often primarily interested in gaining access to the startup's talent pool, so they design agreements that encourage founders and key team members to stay with the company for the long term.
While traditional M&A deals often include retention bonuses for executives paid 18-24 months after the acquisition, acquisition hires are increasingly focused on incentivizing startups' employees: not only do they offer founders such deals, but key employees can receive higher salaries and total compensation tied to an extended vesting schedule for their stock.
Founder and team focused deals
“Acquirers are often willing to give these people more senior status so they don't have to pump a lot of cash into the acquisition,” Chandrasekhar said. “Acquirers are getting smarter about this.”
A founder who recently sold his startup to a public company told TechCrunch that the buyer structured the acquisition so that he and his co-founders would receive larger equity grants rather than paying more to the startup's investors.
“If they hadn't bought my company, I would never have worked for them,” he said. “After working at a startup, big public companies don't appeal to me. Everything is just so slow.”
But the big salary and big responsibility he gets at his new company keeps him there. In other words, the incentives work. And sometimes, over time, a founder like that realizes he likes his company.
For example, when Flip was acquired, Flip's co-founders and other employees vowed not to stay long with the company. “They were like, 'We don't like big companies,'” Ravichandran said, adding that by big companies he meant companies with more than 100 employees. “But a lot of them ended up staying for more than five years. I stayed for seven.”
Ravichandran said Flip had four founders, two of whom still work at Freshworks, which is now a publicly traded company with thousands of employees.
Freshworks, which went public in 2021, acquired about a dozen startups during the tenure of Ravichandran, who is now head of marketing at Spendfo. “When you get acquired, your career growth accelerates,” he said. “Founders who came from an acquisition were often offered board positions.”
Acquisitions that don't yield big returns for investors are often undisclosed, but they happen frequently: 90% of M&A deals in the second quarter were private, according to the latest PitchBook-NVCA Venture Monitor. Of course, not all of these deals were acquisition hires. Sometimes the buyer is looking for technology, not talent. Sometimes the buyer is a competitor looking for customers, not technology or talent.
But a lot of it is through acquisitions, where companies can acquire entire teams of specialized talent in one fell swoop, like Supaglue, a startup made up of four data integration experts that Stripe acquired in March to enable the team to accelerate Stripe's fast-growing revenue and financial automation business, the founders told TechCrunch in March.
AI startups are now becoming acquisition targets, said P72's Chandrasekar. Big tech companies are now looking for pre-ChatGPT AI startups. Many of those companies won't be successful because their products can be easily replicated with the latest law degree, but machine learning and AI talent is invaluable. Last month, Airtable acquired Dopt for its AI-building capabilities.
Those who have been there want other founders to know that in this market, hiring by acquisition shouldn't be viewed negatively: Founders can be well rewarded financially, and they may find a rewarding long-term career opportunity at the new, larger company.
And if you're still entrepreneurial after the lockup period is over, you can always launch a new startup.