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"Some VCs think they&amp;#8217;re getting cut out of their fair share.\nAcqui-hires, if you aren\u2019t aware, are the acquisitions of startups by large companies (usually Facebook, Google and Twitter) that are made primarily for the teams, not the products.\nEvery few weeks there\u2019s a press report of an acquisition of some startup or another along with a rumored acquisition price that\u2019s quite low, sometimes less than the amount of venture capital invested in the company. Those deals usually, but not always, have equity grants to key founders and employees that are often a multiple of the acquision price. Example \u2013 a recent deal had a rumored acquisition price of around $2 million plus stock grants to a few key employees of $15 million.\nI\u2019ve been fascinated with acqui-hires for years now. The first one in recent history I know about was Parakey, acquired by Facebook in 2007 (I\u00A0talked about that deal here). But they have proliferated fast since then. Google \n\t\t\t\t\n\t\t\t\t\t\n\t\t\t\t\t\tGOOG\n\t\t\t\t\t\t\n\t\t\t\t\t\n\t\t\t\t\n\t\t\t, Twitter and Facebook all have dedicated \u201Ccorporate development\u201D executives who work closely with human resources and exclusively look for these deals.\nHuffington Post has a\u00A0summary\u00A0of some of the acqui-hires over the years. Additional thoughts from me over the years\u00A0here\u00A0and\u00A0here.\nLots of people (me included) think acqui-hires are just fine. It can be a last refuge of a dying startup with a star team, for example. And since these startups have few other options, investors are usually not in a worse position than they\u2019d be if the company simply went out of business.\nOther VCs aren\u2019t as thrilled. Their counter argument (from a previous post):\nInvestors see themselves as being taken advantage of, providing capital for founders to essentially buff up their resume to get their dream job. When a company is acquired, they say, the value of stock grants should be considered acquisition value and divided up among all stockholders. If a founder leaves stockholders behind to take a lucrative side deal, they\u2019re not acting ethically.\nThey haven\u2019t been thrilled for years now, but something\u2019s starting to change. There have been\u00A0Bin 38-like whispers\u00A0of some investors acting to fight back on these deals. A lawyer I spoke with says there are a variety of causes of action in an acqui-hire deal, all centered around the notion that there\u2019s a lot of money going to some shareholders (founders/employees) but not to others (investors). Specifically, the longstanding notion of equal treatment of shareholders codified in California, Delaware and most other state corporations codes.\nIf deals are specifically being architected to give key employees very large payouts and investors very little, there are probably fraud, breach of fiduciary duty and other causes of action available to shareholders.\nThe cause of action is relatively straightforward \u2013 the deal as a whole would be considered fraudulent based on the fact that the team\u2019s value is based largely on the fact that it has become a cohesive whole on the shareholder\u2019s dime, and is worth far more as a group than the aggregate of the individuals.\nNo investor in her right mind would bring such an action, of course, because of the reputational fallout from doing so. I have heard of a couple of threatened and settled lawsuits, though, that never became public.\nWhat\u2019s really pissing off investors are the stories that get back to them. Statements made by high level executives like \u201Cf%$# the investors, there\u2019s nothing they can do\u201D sound fine in a closed door meeting with an entrepreneur. It sounds less defensible in a deposition that becomes public.\nI doubt we\u2019ll see much of that, though, given the reputational issues I brought up above, plus the fact that most investors honestly aren\u2019t angered by these deals.\nBut what I do believe we\u2019ll start to see are clauses being added to investment contracts that are designed to change these deals. Specifically these clauses would force all deal consideration around a deal \u2013 including stock options and stock grants to employees \u2013 to be pooled and distributed pro rata among all shareholders.\nThis would likely kill many of these acqui-hire deals, since the stock grant portion of the deal is a compensation expense to companies. That means the government is paying for a sizable chunk of these acquisitions. Any attempt to pool the consideration and distribute away from employees would not only suck for employees, it would no longer be a tax expense for companies. That would make these deals some 50% more expensive to the buyers. Obviously employees wouldn\u2019t be thrilled to lose most of that compensation to investors, either.\nUltimately the market will decide if these clauses stick, but when there\u2019s a downturn (and there\u2019s always a downturn around the corner) onerous clauses often find their way into deals, and can eventually become \u201Cstandard.\u201D\nWe would never ask for a clause like this at CrunchFund, and would counsel our companies only to consider it as a last resort. Additionally we would often counsel companies we\u2019ve invested to take these types of acqui-hire deals when offered, if it\u2019s in their best interest.\nBut, in the meantime, it would probably be a good idea for the buyers out there \u2013 specifically Facebook, Google and Twitter \u2013 to consider toning down the anti-investor rhetoric in these meetings. They\u2019re injecting a lot of emotion into a difficult issue, and that doesn\u2019t help anyone in the long run.\nMichael Arrington (@arrington) is a partner with venture capital firm CrunchFund, and was the founder of TechCrunch. This post originally appeared on his blog."^^<http://www.w3.org/2001/XMLSchema#string>
<http://fortune.com/2012/04/25/startup-investors-may-request-acqui-hire-protections/>