One of the biggest challenges in acquisitions for entrepreneurs is making sure the employees are taking care of. What happens to employees after your company gets acquired is one of the areas that negotiations tend to focus with potential acquirers during the M&A process.
Good founders care about what happens to their employees. The earliest recruits have proven their loyalty, worth and often friendship. They have often sacrificed a lot to join and stick the venture, despite having many other options and offers. At least, it is good to know what is likely to happen to them in an M&A deal and how to prepare them for it.
The way you positioned your acquisition memorandum will play a crucial part in how this is handled.
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1. They Get Fired
According to the Harvard Business Review 30% of employees are deemed redundant in an acquisition or merger. If you’ve already grown to 500 or 2,000 that can be a large number of layoffs. Even at a smaller scale, it can be quite impactful.
When thinking about what happens to employees after your company gets acquired It’s best to keep communication open and clear. Not knowing can cause a lot of fear and may cause the wrong people to leave hastily, even if they weren’t in the firing line. The last thing you need is chaos or people leaving in the midst of the transaction.
2. They Get Rich
On the positive side, if you are wondering what happens to employees in acquisitions, during a really sizable exit or IPO, your early hires with options may finally see the big payday they’ve been waiting for. Uber’s first employee became a millionaire after the IPO and has gone on to start his own investment firm from Hawaii. It seems more companies have been talking about making big paydays more common for early employees. Whether their motivation is genuine or to avoid liability may vary, but it’s worth watching.
Stock options can be complicated. A merger can create several different levels of outcomes. It is definitely something that should be discussed carefully in negotiations.
Benefits can also change for employees. Acquirers may not find it wise or financially sound to carry multiple benefit plans. Consider the impact of this. Aside from health benefits and retirement accounts, unless the culture is protected, there can be a big shock in new expectations. Going to work for Yahoo or Amazon, for example, may be a massive change from the startup that offered three months paid time off each year, and 100% remote working on a completely flexible schedule.
3. They Get Promoted
This can be especially true for your cofounders and team leaders. Often they may even be moved up to new executive roles and even replace you as CEO. That can be a great thing for them. Again, a part of the negotiations can be how much money is set aside for compensation of your existing team.
4. They Join New Teams & Divisions
You and your team may be spread out across new teams and divisions. A great example of this is if you are bought by Google or Apple. This can provide great, once in a lifetime learning experiences and the chance to really change the future in a meaningful way. Just like one of my recent guests on the DealMakers Show who was behind what is now Google Drive.
Some founders and team members are cut out for this. Some just aren’t, or at least for long. It’s hard to go back to corporate and work for someone else and give up control and decision making for your baby after all those years and months. Be careful of how long you sign up for, and what the financial penalties may be for failing to stick with it all the way.
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5. They Leave to Launch Their Own Startups
One conversation which has really stuck with me is the founder I interviewed who said one of his top concerns was preparing all of his team members to go one and be great on their own one day. He hopes many will go onto create their own hyper-successful starts and loves helping them learn the process.
6. They Join You on Your Next Venture
I’ve found it is quite common for cofounders to regroup and form new startups together. However, how soon you can do that, what you can start, and who with, will depend a lot on the paperwork and terms. Will you be locked into a non compete agreement? Who will that cover doing business with? How long for? How broad is it? Will there be a no-solicitation clause that prevents you from taking any of your old team to your new venture? Everything is negotiable, but if you aren’t careful you may not be sailing onto the next project with the team you thought.
What happens to employees after your company gets acquired can be a big deal. It certainly will be for them. These are people you really care about. Those relationships and the jobs you have provided them are perhaps one of the best things to have come out of your startup adventure.
These are just some of the factors to negotiate. If you don’t own them, someone else will choose the terms. Those probably won’t be ideal. Above all, it is important to provide clarity to avoid negative impacts, especially when completely unnecessary. Make sure you have a great M&A advisor guiding you through this process.