Paul L. Caron

Wednesday, March 27, 2013

Fleischer: The Tax Implications of 'Acqui-Hiring' by Apple and Yahoo

NY Times DealBookNew York Times DealBook:  Yahoo’s ‘Acqui-Hiring’ and Its Tax Implications, by Victor Fleischer (Colorado; moving to San Diego):

On Monday, Yahoo announced that it was buying the mobile news reader app Summly for about $30 million. Summly has a staff of five and no revenue. It was also reported Monday that Apple was buying the indoor-GPS company WifiSLAM for $20 million. That start-up, only two years old, has a handful of employees.

This kind of acquisition, known as acqui-hiring, may seem strange to those not involved with the deal. Why buy the company? If the founders or engineers are fantastic, why not just poach them from the start-up? Why buy the whole company instead of just stripping out its most valuable parts? It’s like buying a house because you like the furniture....

John Coyle and Gregg Polsky, law professors at the University of North Carolina, explain the acqui-hiring phenomenon as driven by Silicon Valley social norms. Engineers don’t want to appear disloyal to the start-up or its investors. And the acquisition allows the founders, employees and investors to claim a successful exit, even if the product gets shut down. ...

There is a tax angle as well. Suppose Max, a software engineer and founder of a social media start-up, has a choice between leaving his start-up to work for TechGiant and receiving a signing bonus of $1 million or selling his start-up to TechGiant and receiving $1 million, half of which will be attributed to the value of his founders' stock in the start-up. The portion of consideration attributed to the sale of his founders’ stock will generate low-taxed capital gains, not ordinary income. Max would save about $100,000 in taxes in this example, depending on his marginal tax rate.

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