A company you invested in got acquired. Time to buy that mansion, right? Not so fast.

Most acquisitions in startupland are nothing like Salesforce’s $28 billion purchase of Slack. The more common scenario is what’s called an “acquihire.”

I’ve had this happen a few times in my portfolio. Let me explain how it works…

What Is an Acquihire?

An acquihire is an acquisition of a startup for a modest sum. The acquirer usually just wants to hire the startup’s employees, rather than keep the startup’s business going. Hence the “hire”.

Let’s say ABC Corp. buys a startup. The startup’s founders and employees get job offers at ABC Corp. Meanwhile, ABC Corp. probably shuts down the startup’s product.

How Much Do Investors Make?

Usually, investors just get their money back. That’s been the case with the acquihires I’ve been involved with.

If the acquirer is a public company, you’ll usually get cash or liquid stock. If it’s a private company (usually a late stage startup), you’ll get stock in that company. Once the acquirer goes public, you’ll have liquidity.

Believe it or not, this is an incredible outcome!

Investing at pre-seed and seed, I expect 70-80% of my bets to go to 0. Getting my money back is a well above average outcome.

What Happens to the Founders and Team?

The founders and team usually get little if any cash for their stock. However, the acquirer does offer them jobs.

There are usually offers for the founders and most, if not all, of the employees. The job offers tend to be plum positions. The seniority and pay is often higher than most other people would get with the same experience.

The catch is that the equity portion of that pay usually vests over a couple of years. So, the founders and employees need to stay at the acquirer for 2-4 years to get maximum value.

This works out nicely for stressed out entrepreneurs. They rest and vest for a couple of years at Megacorp, then go start another company.

There can be some other great benefits for the team. One startup I invested in got acquihired and the Latin American team got EU visas in the bargain — a wonderful outcome for them!

Wrap-Up

When a founder starts a company or an investor writes a check, no one is hoping for an acquihire. We want to go all the way to IPO.

But an acquihire is a good outcome for a startup that’s struggling. The founders and team get a good home, and in a couple of years they can try again.

And when they do, I’ll be waiting, checkbook in hand.

What have you seen in acquihires?

More on tech:

Request for Startups

Paying the Cost to be the Boss

When Co-Founders Divorce

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