Acqui-Hire

What is an acqui-hire?

Acqui-hire (also spelled acquihire) refers to the acquisition of a company in which the acquirer is primarily interested in the employees. The portmanteau combines the words acquisition and hire. The sought-after asset is usually a well-established team from development, research or product management. The acquired company's product, customer base and revenue are secondary for the acquirer and are often discontinued or folded into its own products after the acquisition.

An acqui-hire typically occurs when a technology company has built a strong team but has not reached a viable product-market fit, that is, there is no sufficiently large group of customers who buy the product on a lasting basis. A second occasion is a lack of follow-on financing before the runway ends, the period for which the available funds will still last. Acquirers are usually larger technology companies or strategic buyers in need of skilled staff. Contractually, besides the purchase or transfer agreement, an acqui-hire consists of new employment contracts, retention agreements with key people and agreements on intellectual property, such as the rights to the source code.

Motives and valuation in an acqui-hire

For the acquirer, the acqui-hire replaces a lengthy recruitment search. It gains specialists who already work together and master a particular technology. The value of the target company therefore does not derive from future cash surpluses or revenue multiples. The yardstick is rather what it would cost, and how long it would take, to build a comparable team itself.

This value is fleeting. It exists only if the key people actually move across and stay. Acquirers therefore tie a considerable part of the consideration to the employees staying. This gives rise to a conflict of interest between shareholders and team: what is paid as purchase price goes to the shareholders under the agreed distribution of proceeds. What is paid as a retention bonus, that is, as a payment received only by those who stay for an agreed period after the acquisition, goes to the employees who move across, including the founders.

Structuring forms of an acqui-hire

Share purchase

In a share purchase, the buyer acquires all of the shares. The employment relationships continue unchanged with the company; there is no change of employer. However, the buyer also indirectly assumes all of the company's liabilities and risks and must examine them before the purchase (due diligence). Under Section 15(3) and (4) of the German Limited Liability Companies Act (GmbHG), the purchase agreement must be notarially recorded. Completion is often conditional on a minimum number of key people having signed new agreements.

Asset deal with takeover of the team

In an asset deal, the buyer acquires individual assets, above all source code, intellectual property rights and domains, and hires the team. Section 613a of the German Civil Code (BGB) must be observed here. In areas that hardly depend on physical assets, even the takeover of a part of the workforce that is essential in number and expertise can constitute a transfer of business. All employment relationships of the business or business unit then pass by operation of law, including those in which the buyer has no interest. The employees must be informed (Section 613a(5) BGB) and can object to the transfer (Section 613a(6) BGB).

New hiring without a company purchase

In a third variant, the acquirer only hires the employees and acquires or licenses the technology. The company remains with its liabilities with the previous shareholders and is often wound up. Section 613a BGB can apply here as well. If the acquirer takes over the essential part of the team and continues the activity with the acquired or licensed technology, this can amount to a transfer of business. A purchase agreement for the business is not required for this. If the company is already in a crisis, the management must observe its duty to file for insolvency (Section 15a of the German Insolvency Code, InsO). Transfers of assets at an undervalue can be challenged in later insolvency proceedings.

Retention of key people

Acquirers usually retain key people through several instruments at once. Retention bonuses are paid on set dates. Selling founders often receive an earn-out tied to continued service, that is, a part of the purchase price that flows only later and only under conditions. New equity stakes in the acquirer are subject to their own vesting, under which the stake is earned only over several years. Founders often negotiate as intensively over titles, areas of responsibility and budgets as over money.

In addition, the acquirer agrees non-compete covenants. For employees, Sections 74 et seq. of the German Commercial Code (HGB) apply, with a maximum duration of two years and compensation for the non-compete period of at least half of the most recent contractual remuneration. For selling founders, the purchase agreement provides for a non-compete clause, the duration of which competition law generally limits to two years, or three years where know-how is transferred. Employees whom the acquirer does not need remain with the company in a share purchase. Any later headcount reduction is governed by general protection against dismissal.

Tax treatment of the purchase price and retention bonuses

Founders who hold their shares as private assets and held an interest of at least 1% at any time in the last five years fall under Section 17 of the German Income Tax Act (EStG). They are taxed on the capital gain under the partial income method (Teileinkünfteverfahren), that is, on 60% of it, as income from a trade or business and not at the flat-rate withholding tax. For shares held by a holding GmbH, 95% of the gain remains tax-exempt under Section 8b of the German Corporate Income Tax Act (KStG). Only private holdings of less than 1% fall under the flat-rate withholding tax.

Retention bonuses, by contrast, are employment income and are subject to wage tax withholding and social security contributions. If the purchase agreement ties part of the purchase price to the founders' continued service, that part may be classified for tax purposes as employment income rather than as sale price. The split also matters for the acquirer: in a share purchase, the purchase price forms the acquisition cost of the shareholding, whereas retention bonuses are generally deductible as business expenses. The tax advisers of both sides therefore review the split before signing.

Worked example: distribution of proceeds in an acqui-hire

A software GmbH with eight developers, including the two founders, receives an acquisition offer with a total volume of EUR 9 million. The investors hold 40% of the shares and have a simple, non-participating liquidation preference on their contributions of EUR 6 million. On a sale they therefore receive first their EUR 6 million back or, if that is more, their 40% share of the proceeds. The founders hold 30% each. The acquirer splits the volume into EUR 6.5 million purchase price for the shares and EUR 2.5 million retention bonuses, payable half after 12 and half after 24 months.

• Investors: the preference of EUR 6 million exceeds the pro rata proceeds of 40% × 6.5 = EUR 2.6 million, so they receive EUR 6 million
• Founders: 6.5 minus 6 = EUR 0.5 million, that is, EUR 0.25 million of sale proceeds each
• Retention bonuses: EUR 0.5 million each for the founders and EUR 0.25 million each for the six other developers, together 0.5 × 2 + 0.25 × 6 = EUR 2.5 million
• Inflow per founder: 0.25 + 0.5 = EUR 0.75 million, of which two thirds as employment income
• Variant: the acquirer shifts EUR 1 million from the purchase price into the founders' retention bonuses. The EUR 5.5 million purchase price flows entirely to the investors, who thus receive EUR 0.5 million less. The founders no longer achieve any sale proceeds. They do, however, receive EUR 0.5 + 0.5 = EUR 1.0 million of retention bonus each, entirely as employment income and only as long as they stay, half after 12 and half after 24 months.

The example shows why the split of the consideration is the real subject of negotiation. Every shift between purchase price and retention bonuses redistributes proceeds between investors and team and at the same time changes the tax treatment. A waterfall analysis before negotiations begin makes these effects visible. Without the team, the sale fails, and depending on the shareholders' agreement the investors must consent to it. The parties therefore often agree to reserve part of the proceeds for the team in advance (management carve-out).

Distinction: acqui-hire, company purchase, restructuring and lift-out

• Company purchase in the usual sense: the price is based on the value of the ongoing business, that is, on earnings, revenue and growth. In an acqui-hire, the value of the team determines the price.
• Transferring restructuring: sale of the business out of insolvency proceedings by the insolvency administrator. An acqui-hire, by contrast, usually takes place outside insolvency proceedings.
• Poaching of a team (lift-out): one company hires an entire team of another without reaching an agreement with it. The limits here are set by contractual non-solicitation covenants and unfair competition law.

Common mistakes

• Distribution of proceeds clarified too late. If the distribution of purchase price and retention bonuses between investors and team is calculated only after agreement with the acquirer, the necessary consents are often missing.
• Rights to the code not held by the company. For employees, the economic rights in software created in the course of employment belong to the employer (Section 69b of the German Copyright Act, UrhG). For freelancers, and for code that founders wrote before the company was founded, an express transfer is required (IP assignment).
• Transfer of business overlooked. Anyone who takes over the core team in an asset deal may unintentionally take over the entire workforce of the business unit.
• Tax consequences of retention ignored. Parts of the purchase price tied to continued service can be treated as employment income and significantly reduce the founders' after-tax proceeds.
• Customers and remaining employees not addressed. If the product is discontinued, a plan is needed for the notice periods of customer contracts, the return of data and the employees who do not move across.

Frequently asked questions

What happens to the product after an acqui-hire?

It is often discontinued or folded into a product of the acquirer. Customer contracts then end in accordance with their termination rules, often with a transition period during which operations are maintained and the return or deletion of customer data is organised.

Do investors get their capital back in an acqui-hire?

Often only in part. The result depends on the amount of the purchase price, on the liquidation preferences and on which part of the consideration is paid as purchase price and which as retention bonus.

Does an acqui-hire have to be notified to the competition authority?

Only if it counts as a concentration and reaches the merger control thresholds. The purchase of all shares regularly constitutes a concentration. If the acquirer only hires the team and licenses the technology, the competition authorities examine whether a business area economically transfers as a result. For target companies with low revenue but very high consideration, the transaction value threshold can apply in Germany (Section 35(1a) of the German Act against Restraints of Competition, GWB).

Do the employees have to consent to the move?

That depends on the structure. In a share purchase, the employer does not change. In a transfer of business, the employment relationships pass by operation of law, but the employees can object. In the case of new hiring, each person decides for themselves whether to sign the new contract.

The Roemer Capital view

An acqui-hire is rarely the starting objective in Roemer Capital's mandates. It can become an option if a financing round does not materialise or if a buyer in a sale process is evidently interested mainly in the team. Roemer Capital then calculates early how an offer is distributed among founders, investors and employees through purchase price, retention bonuses and liquidation preferences, because this distribution decides whether all parties consent.

Before an offer is negotiated for the team alone, Roemer Capital examines with the founders whether follow-on financing or the sale of the entire business are realistic alternatives. The employment and tax law structuring is handled by the client's law firm and tax advisers.