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.