Psychology of Acqui-hiring

By | June 30, 2014

An interesting thought experiment came up today.

A company I know acquired another company for 8 figures.  The purpose was Acqui-Hire.  This is the practice of acquiring a company for the talent, not for the product.  There were not alot of people in the company and the acquiring company immediately shut down the product.  The purpose was talent acquisition, nothing else.

This is common practice all over Silicon Valley, dozens of times or more per year.  The amount of money paid out sometimes is pretty stunning.  Sometimes 7-8 figures PER PERSON ACQUIRED.  Of course, the employees usually don’t see that money, but the acquiring company writes the check nonetheless.  This post is focusing on the acquiring company point of view, not the employees.

Now imagine a slightly different scenario.  The company being acquired had a superstar who left 1 month before the acquisition.  Let’s say she was a key engineer, for example.  The acquiring company really wanted her skills/talent.  Let’s also imagine she was available to hire.

Question: How much should they be willing to pay for her?

Using logical accounting, they should be willing to pay the same premium they did for the acquired company employees.  (7+ figures per person)  However, this hardly ever happens.

I think the reason is psychological.  When acquiring a company, there is an abstraction.  It’s not one person so the psychology allows the value to be calculated without anything in the way.  How much value would the company get versus how much money would it cost? Also how much time/energy/money would it cost to hire the equivalent people without the acqui-hire?  Also, what opportunity cost would you lose spending that time?  Pretty straight-forward stuff.  It makes sense to acqui-hire if you find the right fit.

However, when it’s an individual, I think psychology jumps in full-force.  I asked a few people at work of this scenario and everyone thought the individual shouldn’t get that kind of money.  The said, “It feels wrong!”  I think an individual is too easy to personally associate with as if they are thinking “I’m a person, they are a person, I don’t get that kind of money!”

People often have difficultly measure value against cost when it comes to individuals.  Abstraction is needed.

The closest industry to do this correctly may be professional sports.  However, they have statistics that show predictions and historical reference of how much value he/she will generate.  Silicon Valley superstars are harder to evaluate. (Although accuracy of those predictions in sports is notoriously inaccurate)

Silicon Valley superstars come in many departments including sales, marketing, design, engineering, ops and support to name a few.  Superstars provide value of 10X what a normal “good” employee does.  It’s a power curve.

Psychology effects all people, no one is immune.  It’s interesting to think how this works in our everyday lives.  It’s hard to be logical all the time.  I envy Mr. Spock.

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