This article in The Information highlights the risks of startups negotiating acqui-hire M&A deals against much larger companies.
Intuitively, we know the power dynamic between buyer and seller in M&A plays an important role in deal terms. For example, large buyers request larger escrows and permit fewer qualifications of representations in deals with small sellers as compared with sellers of a similar size.
As this article points out, it is important to consider the power dynamic in the negotiations leading up to the deal - including what is decided in the letter of intent.
Here, Khosla Ventures argues that Lime entered into acqui-hire discussions with Boosted and then terminated those discussions and hired Boosted's key employees -- essentially cutting Boosted's equity holders out of the equation.
This article references two common claims by startups in this situation that are hard to prove: (1) breach of confidentiality, where the startup must prove the larger buyer used the startup's confidential information in the hiring of its key employees and (2) breach of the implied covenant of good faith and fair dealing, where the startup must show that the buyer entered into the discussions with bad faith intentions of acquiring the employees without compensation to the startup.
@Mintz, we believe there are three important steps every startup should take to protect itself early in M&A Transactions:
1. Non-Solicit Provision. Startup sellers should negotiate a binding non-solicitation provision in its letters of intent with buyers. In my experience, buyers will accept reasonable non-solicit provisions and, importantly, buyer's will consider their non-solicitation obligations carefully in situations like Boosted where the buyer walks away from the transaction.
2. Counterparty Intelligence. Startups expect buyers to diligence them, but startups should also diligence the buyer pool. This is an art not a science, so trust your lawyer and other advisors. I negotiate a lot of business deals. If you involve me early in the negotiation, I can usually spot warning signs based on what the buyer is saying and how they approach the negotiation. Also, our Mintz Research Team can easily search litigation and news databases to assess whether the buyer is trustworthy counterparty in the market, in deals and in M&A.
3. Employee Communication Plan. Another typical mistake in acqui-hire transactions is not bringing the team into the conversation. On a small team, word travels fast. If you are not upfront with your team, you could lose goodwill and team unity in the transaction. If you lose the team, they may feel like free agents - and as with any prisoner's dilemma - they may think they will do better alone than as a team.
One final note: It goes without saying that the steps above are in addition to doing everything you can to register and protect your intellectual property. A buyer may not be able to do much with your team if your intellectual property is strong enough to prevent them from operating in your space.
Mintz is unique among the important law firms. We have built and maintained a top flight IP/Patent team. This helps the business lawyers like me work vigilantly with our clients to protect its IP well in advance of the M&A transaction.
If you are considering an M&A transaction, I would love to chat with you about the risks and how we can mitigate them to achieve a successful exit for your company.
“When you go into M&A in a weakened position, you get crushed,” Abdullah said. He regretted that the startup hadn’t forced the proposed acquirer to sign a nonsolicitation agreement so it wouldn’t hire the startup’s employee. “If [the potential acquirer] meets any employees and there’s not something in [the negotiation agreement] that prevents them, they'll steal your guys.” (Such agreements are enforceable in some states, though not in California, where Boosted is based.)