Hi folks,

This is the weekly digest for my blog, Irrational Exuberance. Reach out with thoughts on Twitter at @lethain, or reply to this email.

Posts from this week:

- How the Digg team was acquihired.
- How to navigate and/or survive your acquihire.

How the Digg team was acquihired.

About a year after the catastrophic Digg V4 launch, our last-ditch experiment to salvage the site showed a spark of hope. We’d cajoled our way into a Facebook beta that allowed us to publish each Digg users’s read articles into their Facebook newsfeed, sending every clicking friend directly to Digg’s permalink page, where they might click on our ads and maybe even create an account.

The early statistics were grave. An entrepreneur-in-residence at one of our investors built us a virality model projecting the business’ recovery on the assumption that we had 20,000 daily active users of our Facebook integration. The projections looked really good – get a bridge round of funding good – but it wasn’t quite clear where that 20,000 DAU figure came from, as our starting point was far less: 200 DAU.

One morning as the golden rays of sunlight drifted into the rusting windows of our Potrero office, our fortunes started to change. Facebook activity spiked and for one glorious day we were the top ranking newsfeed application on Facebook. A day later our haggard data pipeline plopped the day’s analytics into Hive, and our two data scientists, Alan and Tara, ran the analysis – what was the nature of our salvation?

Our hero? A piece of malware pretending to be a Justin Bieber-Selena Gomez sex tape.

Our future? Selling the business, the patents, and most valuably the team to the highest bidder.

Once it became clear our runway was measured in not-very-many months, it became clear that our two paths forward were shutting down or getting acquired. Rumor has it that Google almost acquired Digg for some $200m some years before I joined, with that alleged acquisition falling through late in the discussions. When we started this acquisition search, we weren’t looking for $200m, we’d have been more than glad to drop off a zero.

The best acquisition scenarios start with inbound interest from another company, which unfortunately wasn’t the case here. Instead we needed to find an acquirer, and needed to do it in one to two months. So we wrote comprehensive information packets on our business, team, technology and patents, and we started doing the rounds. “We” here mostly meaning our CEO, Matt, and our investors, with members of Digg’s leadership popping in as appropriate.

Each company evaluates acquisitions differently, but there is a general structure shared by most. They’ll start with your CEO talking to an executive or M&A leader at the company. If that goes well, a few senior folks at your company will present pitch decks. If there’s “mutual interest,” then they’ll interview a “representative subset” of your team. If those interviews turn out well, then depending on the size of your team they’ll either interview your entire team or interview a larger sample.

The best case scenario is that you’ll be able to sell the entire company – team and assets – to a single acquirer, but in the case of a distressed acquisition, it’s often the case that you’ll find a higher value if you split the team from the other assets. That is what happened in this case, with us eventually selling the team, the patent portfolio, and the brand/business to three separate entities. The patents and brand were fairly typical negotiations, so I’ll focus on how we sold the team, colloquially known as an acquihire.

I’m not sure how many companies Matt and our investors approached, but my best bet is that they did very light weight reach out to dozens of companies. This is a time to go as broad as possible, talking to any company that might have the assets to acquire. Many of these early reach outs went to technology companies, but given Digg’s focus on media, we also spoke to a number of companies that are easier to categorize as a media company than a technology company. I recall particularly fondly talking to a Fortune 500 company whose internet efforts were, in the year of 2012, still contained within its Emerging Technologies business unit.

Digg’s extended leadership team presented our slide decks to about half a dozen companies, and as best I can remember we had the full engineering team interview with three companies, but it might have been four.

It was always nerve wracking to hear back after the full team interviews – what would they think of us? The interview results were always mixed. Along the lines of typical tech interviews, the folks who enjoyed solving algorithm problems in their spare time consistently did well, and everyone else was hit or miss depending on the day. Sometimes the feedback would make sense, and sometimes it felt capricious. It was particularly demoralizing when one of our most experienced engineers got rejected for programming in Perl, which the interviewer felt was a sign of a poor developer.

The good news is that despite programming interviews being quite arbitrary, they’re learnable and cover a finite set of topics. So we got to work practicing, including bringing in a consultant who specialized in training folks on programming interviews to help the team practice.

Even with practice, it was still rough. My opinion is that our biggest enduring challenge was that we lacked star power, with the old Digg crew gone years earlier and few senior leaders choosing to move forward. If the acquirer doesn’t value your business, then acquisitions depend on at least one senior leader on the acquiring side falling in love with the imagined future impact of at least one member of the potential acquisition. Alan, our Chief Scientist, and I were the senior-most members who planned to participate post-acquisition and although we both did well in the various evaluations, neither of us sparkled quite brightly enough in the process for someone to fall into the deep and irrational love that ends in them paying you several million dollars.

We did, however, find a company that was excited to keep our team together and have us jumpstart their San Francisco office. That company, SocialCode, chatted with our leaders, interviewed our full engineering team, and brought us on. This wasn’t a big press event, but a few articles did cover it.

There are quite a few details to finalize as talent acquisitions come together. Some are the fine print around compensation, assets, liabilities and such, but particularly important is finalizing the team to bring forward. Based on interview results, most companies will identify a subset of the team they are excited to bring forward and others they don’t want to bring forward. This will turn into a several rounds of discussion on individuals’ interview performance and whether they should or shouldn’t move forward.

Digg, like many small companies going through acquisition, had never done performance reviews and had no one (still remaining) working in human resources. This meant that I, someone inexperienced and unprepared to decide who should be given an offer, ended up responsible for deciding who would move forward on the engineering team. Although in the end we brought almost everyone forward, I didn’t handle this process well. I’d urge anyone given this responsibility to create a structured framework that minimizes your personal bias and to then abide by your framework’s results.

Once the list of folks moving forward is finalized and the details are finalized, you’ll have a frenzied day of capturing signatures. These contracts are typically constructed such that every designated employee must agree to the contract without modification in a very short time period (one or two days), which means they are not only negotiated in bulk, they are signed with little review and significant peer pressure. If you don’t sign, then no one gets that sweet new compensation package. This threat is overplayed at times, but companies absolutely do walk away from nearly-done acquihires, you only have to refer back to the Google near-acquisition of Digg.

The more leverage the to-be-acquired company has in the negotiation, the sweeter the deal for folks involved. The less leverage, the sourer. That said, these deals can’t be too sour, because you still need folks to sign and the market for engineers is generally a good one.

In our case, we ran around, cajoling and begging folks to sign, got all the signatures, and a day later we were officially the first members of SocialCode’s brand new San Francisco office. They flew out a team of their engineers to help us onboard, a month later we flew out to their DC office to meet the entire team, and the Digg team was something new, different and good.

As the acquisition process ended, I had coffee with one of our board members at Potrero hotspot Farley’s, and he said something to me that I certainly had not considered. He suggested I was a total idiot for not raising $500k to buy Digg.com and fund a small team to restart Digg. Well, yeah, I guess that would have been a pretty good idea, but I was so focused on holding things together day-to-day that I never stepped back to consider whether I should actually move forward, let alone take steps to acquire the domain.

Something I didn’t realize during this process was how trapped I felt as a senior leader who was designated a “must sign” individual for the acquisition to move forward. I’d hired much of the team, was responsible for them, and wanted desperately to land them into new jobs. Because acquihires are “star” oriented, if you’re a senior leaders who doesn’t explicitly refuse to move forward, pressure will converge on you from all sides: investors, the team wanting to return to stable employment, and the non-participating leadership team who all want you to commit so they can move on to new things for themselves.

The stress of the process aside, going through the acquihire process was extremely enlightening for me, and I got the opportunity to work with a group of folks in a business I’d otherwise have probably never considered. As complex as the acquihire process can be, the truly hard work starts post-acquisition, which is a different story.

These days, my predominant feeling for this period of time is gratitude to the folks at SocialCode for keeping our team together – a few folks from the Digg acquisition are still there seven years later – and even more grateful to the team that went forward with me. Thanks.

Thanks to Laurel for reviewing a draft of this post.

How to navigate and/or survive your acquihire.

As I wrote up the story of SocialCode’s acquihire of the Digg team, I had to keep editing out meta-commentary about the process. It’s hard to tell a coherent story when you keep slipping into tips and observations, so I pulled them out and collected them here.

The advice is split into three sections: (1) tips for everyone involved, (2) tips for folks being acquired, (3) tips for acquirers. These tips are built from my personal experience in the Digg acquihire, being involved several times from the acquirer side, as well as chatting with a few other folks who’ve been through the acquihire process. If you're completely unfamiliar with the acquihire process, start with the Digg acquihire story.

This post is focused on talent acquisitions, sometimes called “acquihires”, where an acquiring company wants to acquire another company’s team, typically with a focus on their engineering team. I’ll focus on a typical Silicon Valley acquihire, which focus on acquiring the engineering team and place little to no value on the business itself. These events are also more typical for venture capital funded companies than bootstrapped companies: self-funded companies are more likely to stagnate than collapse when funding is tight, whereas the depletion of external funds often signals collapse for early ventured-fueled companies.

Advice for everyone

This first section covers the advice for everyone involved in the acquisition process.

1. Don’t go alone

A few months ago I had coffee with the indomitable Julia Grace, and she shared with me a quote that had previously been shared with her, “Don’t play team sports alone: you’ll lose.” This is good advice in general, and it is the best advice for the overall acquihire process.

The first time you’re going through an acquihire, particularly the first time you’re orchestrating an acquihire as a company leader, you really will not know what you’re doing, and if you try to figure it out on the fly, you’re going to screw it up. Find a mentor or advisor who can coach you on what’s happening. Ideally this is someone you already know, but if you don’t know someone like that, then start cold emailing folks for advice – don’t do it alone. (If you do cold email folks for advice: ask a clear question, keep it to 2-3 sentences, let it go gracefully if they don’t respond.)

A second aspect of “not going alone” is sticking close with the team that you’re working with. When folks get stressed or overwhelmed with major decisions, they often narrow down the circle of coworkers they’re communicating with, which is the opposite of what you want to do here. Don’t only get advice from your coworkers – their interests may not be perfectly aligned with yours – but absolutely do get their advice.

2. What’s the disproportionate value?

Acquihires are challenging to close and even more challenging to make work afterwards. To objectively consider an acquihire a success, the acquired team needs to – at the lowest minimum – be easier to hire or more productive once hired than investing equivalent resources into traditional hiring. Many, likely most, acquihires don’t meet that threshold.

Often times you’ll get caught up trying to pitch the acquiring company on your team and business, but I think that getting acquired is probably the wrong outcome for both sides if you can’t have a rational, collaborative discussion about why the team will be disproportionately impactful at the acquiring company. This impact also needs to be differentiated: it’s usually easier and faster to hire individuals than companies, what’s the differentiator that makes this hassle worth undertaking? Usually it’ll be the addition of missing domain expertise or otherwise filling critical and hard to fill gaps in the existing team.

If you don’t legitimately exceed this threshold, then it’s likely better for to-be-acquired company to dissolve and for the team to seek employment individually. Similarly, in that case it’s likely better for the to-acquire company to simply hire using their normal mechanisms.

Getting acquired

This second section focuses on advice for folks who are attempting to get acquired, spanning both company leadership steering the process and folks who are along for the (chaotic) ride.

3. Are you the product?

When you’re going through an acquihire, I think the most important question to ask yourself might be “Am I the product?” I don’t mean whether you’re the team building the product, but whether you are personally the thing being sold. If you’re being sold and the leadership isn’t going forward, you should really invest into building a decision framework for deciding if this is the best opportunity for you.

4. Is your signature required?

Many acquihire contracts establish two categories of folks. The first stipulates a specific set of folks who must all individually agree to the acquisition. The second stipulates a volume or percentage of total folks who must accept, say eight of ten engineers must sign the contract for the deal to move forward.

You’ll have considerably more leverage if you’re in the first category rather than the second. You’ll probably know if you’re in the first category because someone in your company will tell you. You’ll probably know you’re in the second category because no one will tell you anything.

5. But can you negotiate?

Yes, you can negotiate if you do it at the right time. While acquisition negotiations tend to be done in bulk, there is still opportunity to negotiation if you understand the process. The key thing is that the window of negotiation happens before the contract is extended to the full team. After it’s extended, there is little flexibility.

The lack of flexibility is vexing, but it also means that leadership on both sides will do multiple rounds of negotiation getting to a contract that they believe folks will accept before they extend it. If you’re a key element of the acquisition, then folks will preflight it with you, and you’ll have the opportunity to influence the shape of your offer.

Most folks within a to-be-acquired won’t even be aware the negotiations are happening if they are not core to the deal closing. If you fall into that category, then your best bet is to start funneling your needs to your leadership once you see acquisition interviews start – that may be your only chance to be heard, and it’ll only be available if you’re proactive in finding it.

Ultimately though, the extent that an acquisition offer surpasses a market offer will depend mostly on how the acquirer values the to-be-acquired company.

6. Redux: but can you negotiate?

There is another even less obvious negotiation window during the acquisition process, which is that many folks start negotiating for larger titles, bonuses, introductions, etc at the current company. If you’re heads down and trying to do the right thing to help the team or company, you may get blindsided by your peers’ sudden promotions or be unaware of bonuses being handed out.

Ultimately, this is going to come down to your leadership’s beliefs and ethics, and hopefully you’re in a company where this doesn’t happen. That said, the golden rule of “tit-for-tat” is that cooperation is only optimal in a game with an uncertain duration. Some folks see acquisition as the end of the current game, and it’s optimal to defect in the last round.

That said, getting acquired is never the last round. Even if you don’t both move forward to the acquiring company, you’ll be in the same industry, and industry games run very, very long.

7. Practice what you can

Not every step of getting acquired can be practiced, but most steps can. You can practice presenting the pitch deck. You can practice addressing concerns about your team, your technology or your business. You can practice interviewing.

Practice as much as you can. These are atypical conversations with a major impact on you and your team.

8. Senior non-participation

Something that confused me in my own acquihire experience, was that almost no company leaders decided to move forward. Years later, I now realize that these folks had three good reasons not to move forward.

1. Executive employment contracts usually stipulate an equity double trigger such that acquisitions accelerate their vesting, and they capture any value from the equity whether or not they moved forward.
2. Even the best of the acquihire compensation packages were less than you would have made working as a senior software engineer at Google for the same period of time. That said, salaries have come a long way in the last correction-less decade, whereas today you would make more as a senior engineer at any FANG company, at the time the opportunities for consistent compensation were – or at least felt – far fewer.
3. Event if your career accelerates quickly and it only takes a decade to become a function-leading technology executive at a startup, you still might only have three to five good runs that will define your career (if you’ll accept the somewhat arbitrary average duration of about six years at each of the good ones).

That said, we’re out here trying to play infinite games, and when executives don’t move forward with an acquisition, people notice.

9. Mind the rules of engagement

As you start negotiating details of an acquihire, anything feels possible. Then you’ll run into a complete lack of flexibility by the potential acquirer. While your initial reaction might be walking out of the meeting and yelling “What just happened!?”, the answer is pretty simple: you’ve run into their rules of engagement.

If you’re negotiating with a company that has previously done multiple acquihires, they’re going to have a series of rules that dictate their constraints, and figuring out these invisible rules is a critical part of the negotiations. For example, many companies have a fixed guideline around their maximum payment per engineer (say, $2m per engineer), others will level your engineers against their ladder and fix compensation against the existing compensation bands. Some companies will have a policy against paying money into startup’s cap table, refusing to give “charity for bad investors.”

Each time you run into a rule, get creative to find an alternative path. For example, many companies have distinct budgets for salary and relocation, so getting a large relocation budget can be much easier than a starting bonus. Other companies will have strict caps on base salary but flexibility on equity – keep experimenting with different levers until you find the ones that move.

10. Desperation closes all doors

Your most valuable asset in a negotiation is the willingness to walk away. Acquiring companies define strict rules of engagement and do their best to force to-be-acquired companies to operate within those rules. These rules are asymmetric and operate against your favor if you’re the potential acquisition.

If you want to operate outside of those rules, you must either find a highly motivated executive sponsor who will bypass the rules on your behalf or walk away when they’re too undesirable. The later is only possible when you have enough reserves to credibly walk away.

Acquiring talent

This final section focuses on folks at the company who are hoping to grow their team through a talent acquisition. Typically this will be someone in M&A, an executive sponsor, and a small deal team to run the evaluation process.

11. Star power

Often times, a senior leader at the acquiring company bonds with a perceived star performer within the potential acquihire, and the belief in the star’s impact becomes the underpinning of the investment thesis to acquire.

My general advice is: avoid doing this. This is true for three reasons. The first is bias, which I’ll address more under the More of the same header below. The second is that performance is contextual, and top performers in small startups have had the opportunity to mold the entire company into the context of their best performance, which won’t be true at the acquiring company. Finally, the third is that productivity at scale is team-driven rather than individual-driven.

I don’t want to discount the existence of exceptional individuals out there, I’ve had the singular pleasure of working with such folks, rather to urge caution that you can identify star performers for your company by briefly observing with an individual operating in theirs.

12. Optimizing not to lose

Acquisitions are typically treated as significant publicity events for both the acquiring and acquired companies. A key rule of publicity events is that you don’t want them to be followed shortly thereafter by negative follow up stories, which means that many acquisitions are at least as focused on not publicly failing as they are on finding deep success.

This also comes out in contract negotiation, particularly in contracts that are heavily backweighted, say a three year contract that pays out little in first two years, and majority in the third and final year. Acquihires are challenging because you’re not buying a functional business, so the typical tool of identifying earn-outs to unlock payment isn’t particularly effective.

I think that this approach of optimizing-not-to-lose rather than optimizing-to-win is ultimately self-defeating. You want to ensure folks – both acquired and who join your company through less extreme means – experience a smooth curve between compensation and frustration, such that they never feel trapped to remain in circumstances that make them unhappy. You should take care of the folks who contribute to your success, and part of that is making it financially safe for them to walk away when you or they no longer feel like they can contribute effectively.

13. More of the same

This risk aversion comes out in the contract negotiation, but it’s also a prominent force in the acquisition decision overall. Acquisition processes tend to be relatively more rushed and ad-hoc than standard hiring processes – this creates room for bias. Acquisition processes require believing that the team will be disproportionately more impactful than your typical hires, which requires rapidly building confidence in the team’s exceptionalism – this creates room for bias. Acquihire prospects are typically introduced to potential acquirers by the venture capitalists who’ve funded the prospects – this creates bias in the companies that get introduced and bias in the companies they are introduced to.

Putting it all together, most companies find that acquihires are one the least or the least diverse component of their talent acquisition pipeline. This isn’t an inevitable outcome, but it’s absolutely the default outcome if you don’t put in place mechanisms to prevent it.

14. Cultural integration

The majority of the work in a successful acquihire starts after the acquisition closes. That’s when you go from seeing only the upside to dealing with the realities, and typically you’ll find that the deal team who pushed to finalize the acquisition quickly disengage to move on to finding their next deal.

The general mechanics of onboarding an acquired team are similar to onboarding other employees. Invest into onboarding classes, finding onboarding buddies, integrating them with their new teams, etc.

However, hiring a large batch of folks with the same cultural values is not business as usual, and requires active attention. Failure to acknowledge and address the cultural differences between the acquired and acquiring companies is the source of most post-acquisition friction, and consequently the cause of most failed acquisition.

Have open conversations with all impacted companies, continue to emphasize that there is going to be an adjustment for everyone involved, use it as an opportunity to refresh your operating principles, and then continue to beat the drumbeat on those principles and how to apply them.

What else?

Those are my tips and observations on the acquihire process, but I’m sure that I missed more than I noticed. What have you seen work? What have you found surprising?

Thanks to David, Sarah and Sveta for suggestions on this piece.

That's all for now! Hope to hear your thoughts on Twitter at @lethain!