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UNC Acqui-hire study

UNC Acqui-hire study

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11/01/2013

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Electronic copy available at: http://ssrn.com/abstract=2040924
 A 
CQUI
-
HIRING
 
 John F. Coyle
& Gregg D. Polsky 
 
Google, Facebook, Zynga, and other prominent technology companies in Silicon Valley arebuying start-up companies at a brisk pace. In many of these transactions, the buyer has littleinterest in acquiring the start-
up’s projects or assets. Instead, the buyer’s
primary motivation
 
is to hire some or all of the start-
up’s software engineers.
 These so-
called “acqui
-
hires”
represent a novel
 — 
and increasingly common
 — 
tool by which the largest and mostsuccessful technology companies in the world satisfy their intense demand for engineering talent. To date, the acqui-hire has attracted no attention in the academic or professional legalliterature. This Article aspires to fill this gap. Drawing on interviews with Silicon Valley entrepreneurs, start-up investors, buyer representatives, and lawyers, we offer the first formaldescription of the acqui-hire. In so doing, we seek to enrich the understanding of thosealready acquainted with the acqui-hire while also providing a comprehensive account of thistransaction structure to the uninitiated. The Article also identifies
 — 
and seeks to solve
 — 
a significant puzzle stemming from theacqui-hire phenomenon. If a large technology company wants to hire a team of softwareengineers, why go to all of the trouble and expense of acquiring the company that currently employs them? Why not simply hire away the individuals that it wants? We argue that thesolution to the puzzle lies primarily in the way that social norms and the threat of informalsanctions shape the behavior of Silicon Valley software engineers. Although California law strongly supports the principle of employee mobility, social norms lead many engineers topursue acqui-hires in lieu of defecting. We buttress this norms-based account with insightsfrom prospect theory and tax law to show that the unique structure of the acqui-hire reducesits perceived and actual costs, which in turn promotes these transactions. The Article then considers the most significant economic issue common to all acqui-hires:how to allocate the
buyer’s aggregate purchase price between the software engineers and the
start-
up’s outside investors.
 We first predict that a money-back-for-the-investors norm willeventually develop and that this norm will drive allocation determinations. We then proposeseveral contractual innovations that could be used in an attempt
to augment the investors’
allocations in acqui-hires.
 
Assistant Professor of Law, University of North Carolina at Chapel Hill.
Willie Person Mangum Professor of Law, University of North Carolina at Chapel Hill. We would like to thank Gleb Arshinov, Joseph Bankman, Al Brophy, Joseph Blocher, Bernie Burk, Victor Fleischer, Charles Tait Graves, Zack Gubler, Jeffrey Hirsch, Brant Hellwig, Darian Ibrahim, Ashish Kelkar, Andrew Lund, Colman Lynch, Dana Remus,Barak Richman, Scott Roades, and participants at the Duke University Summer Workshop series for their helpfulcomments on an earlier draft of this paper. We would like to thank our dean Jack Boger for providing us with a researchgrant from the Thornton H. Brooks Fund that enabled us to travel to Silicon Valley to conduct in-person interviews inconnection with this project. We would like to thank Charlie Davis, Trenton Kool, and Herbert Wang for their ableresearch assistance. Finally, we would like to thank Hank Berry, Andy Bradley, Ivan Gaviria, Charles Tait Graves,
 Ashish Kelkar, Ethan Kurzweil, Colman Lynch, Johnnie Manzari, Anthony McCusker, Bryan O’Sullivan, Ron Star,
 Yokum Taku, and all of the other anonymous individuals who were so generous with their time in talking to us aboutacqui-hiring. All mistakes are, of course, our own.
 
Electronic copy available at: http://ssrn.com/abstract=2040924
C
OYLE
&
 
P
OLSKY
 – 
 
A
CQUI
-
HIRING
 DRAFT
 
 – 
 
DO
 
NOT
 
QUOTE
 
OR
 
CIRCULATE
 
WITHOUT
 
PERMISSION
1
 T
 ABLE OF
C
ONTENTS
 
I
-
P
-
M
L
?
-
I
C
 
Electronic copy available at: http://ssrn.com/abstract=2040924
C
OYLE
&
 
P
OLSKY
 – 
 
A
CQUI
-
HIRING
 DRAFT
 
 – 
 
DO
 
NOT
 
QUOTE
 
OR
 
CIRCULATE
 
WITHOUT
 
PERMISSION
2
[A] lot of acquisitions that we make at Facebook are, you know, we look at great entrepreneurs out 
there who are building things. And often, the acquisitions aren’t even to really buy their company or what they’re doing. It’s to get the really talented people who are out there trying to buildi 
ng something cool and say, you know, if you joined Facebook, you could work on this completely 
different problem. Isn’t this a more important problem? And for the people who answer that question yes, they join. And that’s how we’ve had the most success 
so far.
1
 
I
NTRODUCTION
 Facebook, Google, Zynga, and other large technology companies in Silicon Valley are buying start-up companies at a brisk pace.
2
In many of these transactions, the buyer has little interest inacquiring the start-
up’s
projects or assets. Rather,
the buyer’s
primary motivation is to hire some orall of the start-
up’s
software engineers. After the transaction, the buyer redeploys the newly hiredtalent onto its existing projects and jettisons the start-
up’s existing projects
.
3
These types of 
acquisitions are known in the tech world as “acqui
-
hires.”
4
 Given the prominence of the companies that regularly engage in acqui-hiring, it is notsurprising that this phenomenon has been a topic of frequent discussion on blogs and other websites.
5
What is surprising is that, to date, the acqui-hiring phenomenon has attracted noattention in the academic or professional legal literature.
6
This neglect is striking because acqui-hiring represents a novel
 — 
and increasingly common
 — 
tool by which the most successfultechnology companies satisfy their intense demand for engineering talent. It is also striking becauseacqui-hires raise a host of interesting issues across a wide range of topics that are relevant to lawyers
1
Mark Zuckerberg, Interview by Charlie Rose with Mark Zuckerberg, Founder, Facebook, and Sheryl Sandberg, COO,Facebook, in Palo Alto, Cal. (Nov. 7, 2011),
available at 
http://venturebeat.com/2011/11/07/zuckerbergandsandbergoncharlierose/.
2
 
See 
Google Inc., Annual Report (Form 10-K), at 72 (Jan. 26, 2012) (79 total acquisitions for the fiscal year endedDecember 31, 2011); PrivCo Media LLC,
Facebook, Inc. Private Company Financial Report 
37-38 (2012) (11 total acquisitionsfor the fiscal year ended December 31, 2011); Zynga Inc., Annual Report (Form 10-K), at 71-72 (Feb. 28, 2012) (15 totalacquisitions for the fiscal year ended December 31, 2011);
see also
Shayndi Raice,
 New Tech Spenders in Feeding Frenzy 
,
 
 W 
 ALL
S
 TREET
 J
OURNAL
, May 14, 2012 at B1 (describing accelerating acquisition activity by Silicon Valley buyers in 2012).
3
 
See 
Miguel Helft,
For Buyers of Web Start-Ups, Quest to Corral Young Talent 
, N.Y.
 
 T
IMES
,
 
May.
17, 2011 at A1 (“Companies
like Facebook, Google, and Zynga are so hungry for the best talent that they are buying start-ups to get their foundersand engineers
 — 
 
and then jettisoning their products.”).
 
4
 
Some commentators refer to this phenomenon as an “acqhire” or a “talent acquisition.”
See 
Helft,
supra 
note3
(“
Some
technology blogs call it being ‘acqhired.’ The companies doing the buying say it is a talent acquisition.”).
 
5
 
See, e.g.,
Nate C. Hindman,
The Top 15 Tech ‘Acqui 
-Hi 
res,’ 
H
UFF
P
OST
 T
ECH
, May, 7, 2011, athttp://www.huffingtonpost.com/2011/05/29/acqui-hires_n_867865.html#s283726&title=Facebook__Dropio;Michael Arrington,
Some Investors May Request Protection from Acqui-hires 
, U
NCRUNCHED
,
 
 Apr. 24, 2012, athttp://uncrunched.com/2012/04/24/some-investors-may-request-protection-from-aqui-hires; Patricio Robles,
Is the acquihire really a smart strategy? 
E
CONSULTANCY 
, Oct. 28, 2011, at http://econsultancy.com/us/blog/8201-is-the-acquihire-really-a-smart-strategy.
6
A recent search for the term
“acqui
-
hiring” (and several variations in spelling) in law reviews, bar journals, and other
legal periodicals on Lexis and Westlaw generated only two hits. One was a reprint of the New York Times article citedin supra note3,which briefly described the phenomenon. The other was an article co-authored by one of us,
see 
Gregg D. Polsky & Brant J. Hellwig,
 Examining the Tax Advantage of Founders' Stock
, 97 I
OWA
L.
 
EV 
.
 
1085, 1097-99 (2012), which briefly and preliminarily addressed the tax implications of acqui-hiring, which are explored in greater depth in PartIII.E.

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