Dear SaaStr: What Happens to the Founders after Big Tech Acquisitions?

Dear SaaStr: What happens to the founders after big tech acquisitions?

It varies, but generally, the acquirer identifies which founders it really wants to keep … and then places a series of carrots and sticks in front of them to get them to stay.

The carrots often include:

• Additional shares / equity, often as much as 20%+ more, with new vesting. Be it options, RSUs, or other vehicles, if the acquirer wants the founders to stay, they’ll generally come up with retention bonuses equal to at least 20% of the consideration the founders make in the deal. Anything less isn’t enough of an incentive. In some cases, it can be a lot more.
• Conditional shares issued to employees. This is newer, but if the founders are making a lot, the acquirer will sometimes create an extra pool for the employees. E.g., this was $500m (!) in the SAP-Qualtrics deal and a similar amount in Intuit-Mailchimp. But they condition the payouts on the founders staying for say 3 years. If they leave, these amounts / shares stop vesting or aren’t payed out.
• Milestone payments. These can serve as both a carrot and a stick, but additional compensation for milestones hit after closing are not uncommon.
• Promotions. You may not want this, but acquirers often want a top acquired CEO to own even more than the product they are acquiring. Salesforce is particularly good at minting leaders out of its acquisitions.

The sticks are real, too. They generally include:

• Reverse vesting. If the acquirer has leverage, they will often ask for 20%-40% of vested shares to be revested over a period following the acquisition. Leave, and you leave the unvested piece behind.
• Group vesting on retention.  In smaller deals and acqui-hires, sometimes equity is structured such as if they founders leave, everyone loses their vesting.
• Escrows. In private acquisitions, 5%-25% of the deal is generally placed in escrow as contingent payments for issues that come up. But acquirers often are less stringent on trying to dip into it if the founders stay. So that can be a material reason to stay until the escrow period ends (often 24 months).  To some extent, insurance now has mitigated the amounts in escrow, but not entirely. 
• You have to stay 2-4 years to get all the economics.  However it’s structured, most big acquirers want the founders and keep execs to stay 2-4 years to get their full pay-out.  Interestingly, Private Equity firms are often more flexible here. Unliked tech acquirers, they often have CEOs and execs ready to go to replace the founders, if the founders choose not to stay.  More below on how Andy Wilson from Logikcull was able to step back right after his start-up was acquired by PE for almost $300 million: