While the best startups are doing well, even in this tough venture capital market, others are struggling to raise new funding. If they can’t raise funding and don’t become self-sustaining companies, their best bet is to be acquired, even if it’s for a fraction of their recent value. The alternative is to run out of money and close.
Such acquisitions can seem like a huge disappointment to founders and senior employees. They dream of building a huge, highly valued company that will make them rich. Instead, their stock may be worth little or nothing, they may have to take a role in the acquiring company, and they may even have to commit to working there for a period of time to get their full compensation.
But selling under these circumstances is often not as bad an outcome for the founders and key employees as it might seem at first glance.
“Generally, when companies get acquired, it’s seen as a downward spiral,” said Nivas Ravichandran, one of the startup’s early employees. Acquired by Freshworks in 2015“But acquisitions are a great financial opportunity. If you join the company through an acquisition, the pay and stock are better than if you join as a lateral employee.”
Buyers often reward the best team members for their hard work at startups by giving them much better jobs and higher salary packages than they might get elsewhere with the same experience.
“Senior principal engineers typically take a decade or more to reach level six or seven,” said Sri Chandrasekar, a partner at P72 Ventures, referring to the standard “leveling” at large tech companies. Google or MetaMeanwhile, the founders he’s seen being acquired “are entering at level seven or eight. Many of them have four years of professional experience. That’s a big jump.” P72 Ventures has seen more than 15 startups exit its portfolio through mergers and acquisitions.
Since large buyers are often primarily interested in gaining access to the startup’s talent pool in these transactions — often called acquisitions — they design the deal to encourage the founder and key team members to stay on board for the long term.
While traditional M&A deals often include retention bonuses for the management team, which are paid 18 to 24 months after the acquisition, buyouts are increasingly focusing on incentives for the startup’s workforce. This means not only are such deals offered to founders, but key employees can also receive higher salaries and total compensation tied to extended stock-vesting schedules.
Founder and team focused deals
“Buyers are often willing to give more seniority to these people so they don’t have to put as much cash into the deal,” Chandrasekar said. “These are the kinds of things that buyers are becoming increasingly smart about.”
One founder, who recently sold his startup to a publicly traded company, told TechCrunch that the buyer structured the acquisition so that he and his co-founders received a higher equity grant rather than paying more to his startup’s investors.
“If they don’t buy my company, I’ll never work with them again,” he said. “I don’t find big public companies interesting after working at startups. Everything is so slow.”
But the huge compensation package and the big responsibilities he received at his new company compel him to stay. In other words, incentives pay off. And sometimes, people like this founder discover over time that they love their companies.
For example, when Freelance was acquired, the co-founders and other employees vowed not to stay with the company for long. “They said, ‘We don’t like big companies,’” says Ravichandran, adding that by big they meant companies with more than 100 employees. “But a lot of them ended up staying for more than five years. I stayed for seven years.”
Frilb had four founders, two of whom still work at FreshWorks, according to Ravichandran. Today, FreshWorks is a public company with thousands of employees.
Freshworks, which went public in 2021, acquired about a dozen startups while Ravichandran, now head of marketing at Spendfo, was there. “When you get acquired, you accelerate your career growth,” he said. “CEO positions were often offered to founders who came out of acquisitions.”
Although acquisitions in which investors do not receive a meaningful return are often unannounced, they do occur frequently. In the second quarter, 90% of M&A transactions were unannounced, according to the latest report PitchBook-NVCA Venture MonitorOf course, not all of these transactions were acquisitions. Sometimes the buyers want technology, not people. Sometimes they are competitors who want customers, not technology or people.
But many of these companies are acquisitions, allowing companies to acquire an entire team of specialized talent in one go. That was the case for Supaglue, a startup with four data integration experts. Stripe bought the startup in March so the team could bolster Stripe’s fast-growing revenue and finance automation business, the founders told TechCrunch in March.
AI startups are now a target for acquisitions, said P72’s Chandrasekar. Big tech companies are now looking for AI startups that were built before ChatGPT. Many of these companies won’t succeed because their products can be easily replicated with the latest LLM software, but their talent in machine learning and AI is extremely valuable. Last month, Airtable acquired Dopt to leverage its skills in building AI.
In this market, being acquired should not be seen as a negative, and those who have been through it want other founders to know. Founders can be rewarded financially. They may also discover lucrative long-term career opportunities at their new big company.
And if they still have the entrepreneurial spirit when their lockdown period ends, they can always launch another new startup.