Acqui-hires in Portugal

This article covers the essential components of acqui-hires in Portugal and provides some guidelines for both sides involved.

 

Hire or acquire in Portugal?

The drivers behind M&A transactions are not often known or disclosed in advance. Not only market entry-driven acquisitions take place. An acqui-hire is still an M&A transaction, but with a more straightforward goal.

In an acqui-hire, a target company is acquired specifically for its employees. Instead of focusing on acquiring the target’s assets to strengthen the position of the acquiring company, the latter is focused on the target company’s workers who hold enough value. Sometimes, other assets can be necessary for the deal, such as a particularly valuable IP or niche market share, but they are not the main transaction drivers.

Acqui-hires allow companies to scale up quickly by the intake of an experienced group of employees already experienced in working together. It is increasingly common for more prominent companies to satisfy their demand for talent that understands the benefits of hiring entire teams of employees to run specific projects.

The rising Portuguese startup scene created stable tech companies and a few unicorns.

Intuitively, with an increasing offer of good talent, this market is prone to more acqui-hires taking place. Acqui-hire also avoids the lengthy process of recruiting individual employees in Portugal, and there is no reason not to carry on with this tried-and-true growth driver.

It is not uncommon for an acqui-hire in Portugal to create a new satellite office of a foreign company.

 

Identifying the underlying issues

Often, there are multiple parties’ interests at play, including the founders, financiers and VCs, the management team, the employees, and strategic clients or suppliers.

The power dynamics in this shuffle are often disregarded, focusing solely on getting the target company’s shares to have access to its employees.

Failure to take proper precautions in relation to matters including employment law, commercial agreements, licensing arrangements, taxation, change of ownership rules, or bank guarantees may create long-lasting problems.

On the other hand, equity holders must protect themselves as not to be cut out of the transaction, particularly when the target company has a small team or when the buyer is mainly focused on a selected few employees.

 

Seller side basics

Power dynamics in negotiating a deal must be curbed as soon as possible not to hijack deal terms. Sellers must put together the mechanisms to avoid poaching in the event of deal fallout, or when the buyer walks away from the transaction with the information (even if confidential) it needs to hire the team.

At the very outset of negotiations, potential sellers should negotiate a binding non-solicitation agreement, regardless of the contents of letters of intent. A seller should also instruct a legal team to review the employment contracts in force.

Communication with the team is vital to avoid losing goodwill and to presenting a unified front. The target’s employees already have a strong working relationship, and in many cases, the morale is impacted if an offer is not disclosed at the proper time.

The seller’s founders must also determine if they are ready to sell, check if there are no preference rights in place, or change ownership clauses that could negatively impact the deal, the company, or equity holders. VC-funded companies often have a third party to negotiate with and must seek the VC’s blessing.

If a company fails to raise more capital after a first-round, an acqui-hire can be considered a soft landing. Many startups find the technical part of the business to be easy, but running a business is hard.

Registering and protecting IP rights is part of a strategically savvy plan. It may prevent the buyer from poaching team members if the employee’s new job relies heavily on the former employer’s trade secrets – making it impossible or difficult to develop those solutions further.

Sellers should also be keen to negotiate future employment terms in advance. After all, an acqui-hire does not guarantee that everyone keeps their job indefinitely. The Buyer may treat the Seller’s employees as regular candidates.

 

Buyer side to do’s

Acqui-hirers are often excessively focused on finally getting the employees they need and disregard possible red flags and pitfalls of this type of transaction.

For some startups, the perception of success comes from a successful fundraising campaign. But is not uncommon for the first round of funding to be deficient and additional rounds are required. This status leads to unattractive balance sheets and high debt ratios that the seller must provide coverage for in the mid-term.

Structuring the acqui-hire should be one of the buyers’ main concerns. In Portugal, there are no rules governing acqui-hire. Rather, such transactions must pay attention to several regulations governing tax, employment, and corporate law matters. Usually, a combination of a share deal and employment agreement is used.

It is ill-advised to rely on the share deal transaction to complete the onboarding process of another team. The Buyer should personalize each deal to the circumstances of the target. Reliance on standard forms is ill-advised. The target must get its team to agree to join the new company.

Foreign acqui-hirers should be knowledgeable of Portuguese law as different employment laws apply. The Buyer must also attend to cultural differences.

Acqui-hirers should carry out a complete due diligence regarding the target’s employment arrangements and policies well in advance of the transaction.

Buyers should be aware (and beware!) that they can’t buy an employee. It must present the perfect mix to acquire the business and keep the staff. Staff retention plans are key, but so are the employment contracts that need to be put together.

Simply put, an employer cannot force an employee to work or stay with the company.

Buyers should also request the Seller’s team to sign non-compete clauses to restrict post-completion activities of the seller seek and ensure business continuity. Alternatively, or in conjunction with this approach, the Buyer can negotiate compensation or equity plans to keep the future staff aligned with its interests and happy to work there.

All contracts need to be carefully drafted to be enforceable. In addition to non-competition agreements, non-solicitation, confidentiality, and invention assignment agreements are in order.

Even though the employment relationship after a share deal is for the most part secured, Portuguese employment law may require employee consent or sign-off in a change of ownership scenario.

Drawbacks of acqui-hires are often hidden and relate to the morale of the existing team and the target’s team. From an employment law standpoint, it is crucial to harmonize job categories and payroll.

 

If you are considering an M&A transaction, talk to us. We are ready to assist you in achieving a successful exit or acquisition.

 

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