In an earlier post, I listed out signs that your employer is about to be acquired. In this one, I want to talk about how the tech acquisition process works from end-to-end, based on my personal experiences.
Background: My acquisition experiences
My first acquisition occurred in 2013, when my employer, MoPub, was acquired by Twitter. I had joined the year before when the company was around 45 employees. Over the course of that year, the company had done really well, and by the time we were acquired we had more than doubled in size.
The second acquisition happened in 2020 (just a few weeks ago!), when Segment was bought by Twilio. As with MoPub, this happened about a year after I started. But, in this case, I had joined the company at a much later stage, when it was around 500 employees, and growth was a bit lower.
Aside: Why acquisitions happen
Running a tech startup is a very expensive endeavor. The vast majority of companies depend on millions (or tens of millions, or hundreds of millions) of dollars from outside investors to hire lots of staff, lease fancy offices, market their products, and do other things to attain the high growth rates expected in the industry.
These investors expect to earn their money back, plus a healthy return, within a relatively quick time frame, typically in under ten years. In addition, employees and other insiders are given equity in the company as a part of their compensation. While the company is still private, however, this equity is highly illiquid, and thus can’t be used to pay off debt, buy a house, or invest in other things.
The end result is that there is strong pressure on startup executives and boards for a “liquidity event” at some point in the company’s first decade of life. Although an IPO is the flashiest way to do this and the one with the highest potential returns, it’s a huge pain to execute. You need to be the right size, have the right financial numbers, time the market, hire lots of expensive bankers, deal with messy compliance issues (e.g., SOX), etc.
Getting acquired is faster and easier, while potentially still being very profitable. Thus, it’s the exit choice taken by a lot of companies.
Types of acquisitions
It’s important to note that there’s a lot of variability in how acquisitions work and, in particular, how they affect employees.
Although the acquisitions I went through happened at different company stages, they were fairly similar in that they both:
- Were successful exits, i.e. the companies were being acquired for significantly more than they had received in funding. This meant that common shareholders, including employees, made money from the deals.
- Were being acquired for both their products and teams. This meant that nearly all employees were given offers and that most people’s day-to-day work didn’t change significantly in the immediate aftermath of closing.
Not all acquisitions are like this, though. Among other examples:
- Your employer is not acquired for a significant amount of money. Thus, employees receive little, if anything, from their common stock. If they acquired this stock by exercising options, they could lose money.
- Your employer is acquired for its team but not its products. The existing products are deprecated and employees are integrated into new organizations that might work on completely different things.
- Your employer is acquired, but not all employees receive offers. Or, employees might be given provisional (contract) offers and be required to re-interview for long-term positions.
I don’t have experience with any of the above, but I think they’re not uncommon, particularly for small companies that haven’t found their footing yet.
I wasn’t an insider in either of my past acquisitions, and I’m not an expert in the process. However, based on what I observed and what I’ve read about other deals, it seems like these acquisitions go through a common set of steps. Here’s the general flow.
1: Initial negotiation
Acquisitions begin with negotiation between the company and the potential acquirer. Movies and TV shows make this process out to be super dramatic, happening in fancy boardrooms crammed with people in expensive clothing yelling and insulting each other. But, the reality is probably more boring- lots of emails, phone calls, and informal chats between the two companies and internally within their boards of directors.
Given the complexity of these deals and the amounts of money involved, lawyers and other external advisors will start getting involved at this stage. However, employees are generally not going to be told anything yet.
2: Formal declaration of intent
The first big milestone is often a “letter of intent” or “term sheet” which lays out the basic outline of the proposed acquisition. The key details here are the amount that the acquirer intends to pay and the general structure of the deal (i.e., whether the acquirer will pay cash or be providing equity). This agreement also explains what needs to happen for the deal to actually be signed, and in particular the due diligence that has to be done first.
The agreement itself it typically non-binding. However, it would be considered poor form for either side to pull out or demand a significant change in terms without good reason, so it serves as a fairly reliable starting point for any final agreement.
As with the initial negotiation, the details are confidential and employees are usually not told anything.
3: Due diligence and agreement drafting
After the initial terms are agreed to, the deal enters an intense, multi-week “due diligence” phase. Just as you wouldn’t buy a house without doing an inspection first, an acquirer is not going to plunk down hundreds of millions of dollars until they’re very certain of what they’re buying.
A big chunk of this due diligence, and the one most likely to affect engineering employees, involves the company’s technology. The acquirer will have many questions about the architecture, tech stack, and other implementation details of the company’s systems. They may review the code manually and also scan it for security vulnerabilities and use of non-permissive open-source licenses.
A lot of these questions involve low-level details which executives are unlikely to know. Thus, at this phase, some lower-level employees might be “let in” on the secret so they can help out with the process. However, the deal is still kept confidential and anything shared inside the company is strictly on a “need to know” basis.
While the due diligence is going on, the two sides also work on crafting the final acquisition agreement. In addition to negotiation on topics not covered by the initial letter of intent, there are a ton of very low-level details that need to be investigated, written up, and included in the final agreement. Many, many lawyer hours are required, and the final agreement can be hundreds of pages long.
4: Agreement signed
Once the agreement is finalized and signed by both sides, the deal becomes legally binding. This is when the acquisition is typically announced internally and in the media. Because of the secrecy in the earlier phases, this is also when many employees first find out. It’s a cause for celebration, but also for lots of uncertainty around the effects on pay and day-to-day work (discussed below).
5: Signing to closing
Signing the acquisition deal does not mean that the two companies are immediately merged or even that the acquisition is guaranteed to happen. There are still more prerequisites that have to be satisfied before closing.
The biggest blocker, assuming that the acquisition is large enough, is to get government approval. In the US, the Department of Justice (DOJ) and Federal Trade Commission (FTC) have the right to review the deal to ensure that there are no antitrust or other legal issues (see this page for details). Other jurisdictions, such as the EU, have similar processes.
There are also some legal and financial loose ends to tie up in this period. In the case of MoPub, we had to go through a detailed financial audit and credit some of our customers based on small discrepancies found by our auditors. In the case of Segment, employees who had equity (which was most) had to decide whether to exercise their stock and fill out lots of legal forms based on their decisions.
Until government approval is granted and the deal closes, the two companies are legally not allowed to integrate or even collaborate closely (e.g., on business strategy). Thus, this period can be kind of awkward for employees. Everyone knows that the deal is happening, but it’s not finalized and you can’t get full information about what your potential peers are up to.
This is also the time when employees are given the details about their post-acquisition roles in the company and in particular whether there will be any changes in level, pay, reporting, etc. Assuming that the deal represents a “successful exit”, that the acquirer is keeping the acquiree’s products around, and that the acquirer doesn’t want everyone to suddenly quit, the changes here are generally either neutral (i.e., everything stays “as-is”) or positive (i.e., compensation is increased).
The closing is when the deal actually comes to fruition and the acquisition is executed. After closing, the acquiree no longer exists as an independent company, and its employees are now formally part of the acquiring company.
Once the deal closes, the two companies can formally merge operations and collaborate on future plans. The details vary a lot, but the integration is typically done gradually because of the complexity involved. It may take months or even years for the acquiree to be fully integrated with its new owner.
Effects on pay
In both of the acquisitions I went through, the biggest questions people had were around the impact to their compensation, and in particular to the equity portion. The general answer is that it depends on the terms of the deal and also, potentially, from person to person based on performance and other factors.
In the case of MoPub and Segment, base pay was not significantly adjusted for most people. Future equity (i.e., unvested portions of existing grants) was converted into roughly equivalent grants in the acquiring company (i.e., similar vesting schedule, similar strike prices, etc.).
The treatment of vested equity varied based on whether you were an accredited investor or not. For various legal reasons that I didn’t understand and still don’t, non-accredited investors received cash for their shares, whereas accredited investors had the option of keeping their shares and getting them converted into shares of the acquirer. The nominal dollar amounts were the same in each case, but doing a conversion was potentially better for tax purposes. This distinction caused a lot of confusion, and maybe some resentment too, but I don’t think the companies had much choice because of the legal constraints.
In each case, there was a conversion factor between the two companies’ shares based on the market price of the acquirer and the dollar amount of the deal. So, you could easily figure out the dollar amounts involved (for cash-outs) or the number of new shares you’d be getting (for conversions).
Overall, in both cases, it seemed generally fair and transparent.
In addition to the normal conversions of existing equity, some deals include retention bonuses for employees. These are often structured as new equity grants that vest over several years.
The rationale here is that the acquirer doesn’t want “key” employees to suddenly quit after the deal closes. They’re also used as a way to even out compensation, which might vary a lot between early and later employees.
These retention bonuses were a big part of the MoPub acquisition. I had not gotten a large initial grant when I started because I was a late-joining employee, hadn’t negotiated very hard, and was a relatively risky hire because I was switching careers. The retention bonus that I got was a sizeable chunk of stock, and it was a key factor in keeping me at Twitter for another two years.
While it was great to get extra stock, not everyone got the same amount or an amount that they considered fair. People compared numbers, which caused a lot of drama and resentment in the final weeks before the acquisition closed.
Effects on day-to-day work
As with pay, the general answer is that it really depends.
In the case of MoPub, our office was shut down and we were moved into the Twitter offices within a day of closing. We then went through an abbreviated version of the new employee orientation, sitting through hours of presentations on Twitter’s history, core values, and tech systems. Almost immediately, we began meeting with our new Twitter colleagues to plan out product and technical integrations. These integrations consumed the work of the engineering team for the next 18 months; among other projects, we migrated all of our systems into Twitter’s data centers, which was incredibly complex.
In the case of Segment, the integration process has been much more gradual. The day of closing was almost a non-event; there were no parties, office moves, or new-hire onboarding sessions. Although things could (and probably will) change in the future, so far we’ve been operating as an almost completely independent division of our new parent, Twilio. Aside from the changes to our equity, very little feels different so far.
Being acquired is a common ending for private tech companies. Although the process is complex and secretive, the outcomes can be very good for employees. It’s important to keep an open mind and your options open when you learn that your employer is going to be acquired.