Question about Founder Role Post-Acquisition
I'm currently working at an investment/venture arm of a large business. Our group is looking to acquire a smaller company, primarily for synergies with an existing portco and for its IP. For some reason my manager keeps insisting that the founder becomes an employee of our company post-acquisition, even if his company becomes an operating subsidiary of the portco. Founder is also the one who built the company. Manager is not explaining the rationale / strategy behind this idea. Is there some risk for the founder to be head of his own company, that would be mitigated for him if he is an employee of our company?
Also not seeing why founder would want to be an employee of our company post-acquisition, as he could just spend his time building something in a different market.
Would the rationale be something like: Google / Google Ventures acquires a company like Wavii, which was created by a sole founder. They seemingly acquired this for its tech, IP and other financial benefits etc. and then closed down the website and phone app, but continued to benefit from the Wavii IP/ technology in other internal divisions. This seems to be a fairly common acquisition play in the tech world.
Then Wavii founder became part of the Google staff for 3 years post-acquisition based on his LinkedIn description. I'd imagine this may be some formality as part of a retention/non-compete agreement, but would there be some other rationale?
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There is huge importance of continuity of leadership and having continued context around these businesses, especially smaller ones. Here are a few things I've seen:
1) The founder directly managed relationships with most of the company's largest customers and partners. We were able to hand off most of them with limited friction, but at least one large account refused to engage with anybody else and ultimately churned
2) We spent months building a business plan to enter a certain segment and later found out the founder had already done the same work a couple years ago and concluded it wasn't interesting / strategic
3) We kept around team members from the acquired co that the founders / former management knew were B-players... not end of the world, but opportunity cost to having to figure out strengths and weaknesses on your own from square one
Three years would likely be overkill but not having access to that person in the immediate post-closing time period will lengthen your time to get value from the acquisition (best case) or potentially render the deal worthless (worst case)
So to summarize, retaining founding members may be important because of:
Client Loyalty: Some businesses rely on key personnel or customers. Some customers may have preference to work with founder / certain personnel over others.
Unique product / offering that is difficult to source from elsewhere.
Talent Dynamics: Most people are B players, especially without performance incentives. Unlikely to find a plethora of A players from any LMM-sized business / tech platforms, and many staff share similar characteristics, strengths & weaknesses.
I think it would be prudent to incorporate contracts that have founders commit time to the transition process, typically ranging from a few months to a year to ensure a smoother transition. And agreed, the length in Wavii example above was just based on Wavii founder's Linkedin.
Terrific summary!
Which question are you asking:
(a) Why would an acquirer want to keep the founder of a target company around after completing the transaction?
(b) Is there a difference between that individual being an employee of the parent company versus an employee / CEO / some similar title of the now subsidiary target company?
Right, was mostly was asking question (b): Wouldn't the founder stay on as a member of the portco/subsidiary, rather than acquiror platform? I believe for the Google / Wavii example, they wanted to acquire the company for synergies, tech and IP, so if it closed the mobile app and website afterwards, then I'm assuming the founder would just be part of the Google platform, potentially for retention / non-compete purposes. Unsure why Wavii founder would be incentivized to stay as employee rather than build a business in a different sector instead.
But additional knowledge on question (a) may be helpful as well
Got it.
Very often you're buying a talented operator. Because you paid a lot to do so, you want that expensive purchase to drive equity value for you not just in the company that you now own as a subsidiary, but across your (presumably larger) parent company.
If Scenario 1 is Awesome Operator as CEO of SubCo, then all you're going to get is SubCo continuing to grow, ideally at a faster rate under your ownership thanks to synergies than it would as a standalone business. In a Scenario 2 where Awesome Operator is VP of Business Development at TopCo, every product or business line or geography within TopCo now gets the benefit of Awesome Operator's brain and labor.
Buying someone great to keep them siloed in their own bucket is a little counterintuitive.
Several reasons.
You don't want to hand someone a sack of money and say 'thanks, see ya'. You want them to pay ongoing attention to it for some minimum period of transition to your ownership.
You had innumerable questions during diligence. You crossed some threshold such that you're willing to buy the asset, but you have in no way exhausted everything that would be good to know about the company's operations, the competitor universe, the broader landscape and where opportunities and pitfalls exist, all the psychological or emotional elements within the current team ... I could go on forever.
If you're an acquisitive company, being able to point to good relationships with happy founders or management that sold to you is enormously valuable. It's powerful to be able to show a target six deals you've done in recent years where all of the selling teams are still employed in your company. Bonus points if they're willing to speak about it.
Someone who's been in the trenches for years doing one thing and one thing only (their company and its unique proposition) knows everyone. Everyone knows them. Some people are going to want to deal only with them. You don't want them walking around on the street, you want them inside your house.
Founders tend to want to run their own thing. If you liked this person's business enough to buy it and they were okay enough with you to agree to sell it and step into some kind of earn-out or vesting or other ongoing employment dynamic, chances are that you'd be okay doing another deal together in the future. So when that mechanism expires and they go off to launch another thing, you probably want to invest in it and/or eventually buy it. Or they turn into a referral channel. "These guys are doing something really smart", "I just joined the board of this interesting company", and so on.
This isn't exhaustive, but I hope it's helpful.
Enjoy the weekend.
Large companies do it all the time when acquiring start ups. They usually tie part of the payout (20-30%) of the founder to the founder staying for X years at the acquirer.
Helps with the transition
Ofc founders could refuse/ resign, but they'd leave significant cash on the table...
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Can't founders roll equity to benefit from further upside and this would further incentivize them to continue to grow their company?
There is no equity left once the acquisition has been done (unless eceptional circumstances). What's left is a legal promise to pay the remaining of the transaction in cash or stock ( one way to incentivize the founder on acquirer 's performance).
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