Why does Google/Facebook pay the investor anything at all? If they have no interest in the assets, then they also have the option of just sending over a big envelope of job offers to the founders and having the founders distribute it to the team. The investor's position is pretty weak. Everyone knows it, and the Google's and Facebook's are just reminding the founders what is true.
Probably because it's cheaper than defending yourself against a never ending stream of lawsuits (baseless or not) that would inevitably arise from founders and teams all leaving to one company en masse.
The founders think the company is valuable, they're usually on the board and have both a fiduciary and, hopefully, personal sense of duty to their company.
This is a non-issue because the acquiring company can offer the same or better terms with guaranteed bonuses or restricted stock to the founders and still screw the investors.
I'm wondering why the founders and any other employees can't just be hired away from "their" startup, with a large signing bonus, and no change to the equity structure of their prior company (but, effectively no employees)? Non-competes might prevent this, but I was under the impression that they're not terribly enforceable in California.
Not giving legal advice but here are my two-cents:
1) Possible tax savings: Signing bonuses are taxed as income. If you held your stock long enough, you may qualify for long-term capital gains tax treatment.
2) Silicon Valley is a repeat player business. You don't want to screw over your investors if you want to raise more funds or do anything else here where folks might ask around about you.
3) Non-competes are generally unenforceable in CA except in certain situations, including the acquisition of a company.
> Non-competes might prevent this, but I was under the impression that they're not terribly enforceable in California.
It is enforceable (in California) when the employee holds "significant" equity and the company the employee is leaving for is a competitor. If you're not developing a social networking site, Facebook should be able to hire you AFAIK.
Guess this very much depends on which position the financial investors have put the (technical) founders into.
If they have taken a huge part of the equity for themselves and left the founders with far less than 50% such behavior might become understandable (many founders then might feel that it's not their company anymore).
But if the founders still hold around 60% after financing rounds of >$50million and then leave a large part of their investors "standing in the rain" i.e. they just get parts of their money back this becomes dubious. Nevertheless such cases are very rare and most of the time some investors will still complain even if they are making a very serious profit but less they have been dreaming of.
Best seen recently with Instagram when one early investor was labeled as not very clever even though they were making a few hundred time their investment (a few 10'000 pct profit).
Generally if investors are unhappy, that those who have generated such massive profits for them benefit as well after they themselves have already been rewarded, something else is substantially wrong.
If you're talking about the investor I think you are, remember that he came out and said how he thought everyone saying he wasn't clever was ridiculous because he made a lot of profit and his decisions at the time were the right decisions for the time.
What are the ethics around Facebook walking in the front door of your company saying "anyone who drops what they're doing to come work for us can have this big fat check!"?
They effectively do this all the time; by head-hunting individual and small groups of developers from smaller startups, especially ones where not everyone are A-players. It just is rarely reported on. Twitter and Square have been getting in on this lately too.
The best definition of a startup I've heard is "a temporary organization working together in search of a business model"
With that in mind, investors are investing in a temporary organization in search of a business model. Late state investors may invest after that temporary organization either has a business model or is about to establish one and really early investors may put there money in before any business model has been discovered. Whatever the case may be, it's an exploratory effort that investors are part of.
If the entrepreneurs are fully capable of building a sustainable business, but never discovered a sustainable business model, then the investors, as agents that both advise and help with issues like recruiting talent, are as culpable for any failure to achieve that goal. Founders are putting in their time at below market rates (an opportunity cost whereby they aren't participating in other potentially lucrative ventures) and investors are putting in their money (an opportunity cost where the money invested can't be applied to other lucrative ventures.
Both have a claim to the business model generated. Entrepreneurs pay for their claim with time. Investors do it with the money that enable the entrepreneur to put in that time.
Now, IMHO, where acquit-hires come into play and how they can be split up fairly is to divvy up the grants and benefits by who brought who into the organization.
If investors put dumb money into the organization to find a business model that was never found, they have very little they can claim. If however, you have smart investors with solid connections that contributed highly to the creation of the organization established, they could make a case that they contributed significantly in the value being purchased by the acquirer.
The fair thing to do would be to ascribe a significant portion of the bonuses and grants according to the golden handcuffs applied and to divvy up the rest of the pot among those people most responsible for creating the organization.
If I was responsible for 90% of the recruiting in my organization, I don't think it's fair for any investor to think they have some claim to that value that was largely generated via networking extra-temporary organization. If, however, one or more of my investors contributed a large portion of their social capital to bring talent to my business, they've invested a non-tangible in the business that they deserve to be compensated for.
Money is invested in a business model. If the business model succeeds, you deserve a part of that.
Social capital is invested to build an organization of talent. If you, whether entrepreneur or investor, contributed social capital to the business to attract that talent, you deserve a part of that. The only exception that is just that I can see would be where the startup paid well over the market rate to attract the talent. In this case the recruiting incentive used to grow the company was not the people, opportunity and problem being solved but simply cash exchanged for a mercenary activity. In this case money, and not social capital, contributed to the growth of a valuable organization, and investors could make claim to the returns.
My question is the following: Of all the acqui-hires we've seen in the past few years, how common is it for those teams to stay together as a smaller organization within the larger acquiring organization.
If teams generally don't stay together 6 months to a year after an acqui-hire, then the value created it not in the professional relationships (edges) of the acquired organization, but in the people (nodes). If the value is in the nodes, all the value belongs to the individual employees and not to the organization.
