Defining Micro Acquisition
Micro acquisition is a term used by Amit Paka, a co-founder at Parable and a contributing writer to Techcrunch, to describe a particular type of acquisition of a small startup, which has the following characteristics:
Acquiree has a small number of specialized employees
In a micro acquisition, the acquiree only has a handful of team members. More often than not, the team is comprised of just the founders. Although the number of people in the company is small, the expertise is great. These individuals are experts in their particular field. A micro acquisition has at its core an acquihire objective (See: What is an Acquihire?) where the acquiror seeks to benefit from the people more so than the product or service of the acquiree. For the acquiror, a micro acquisition is an opportunity to bring great talent in house without the complications that can arise in a larger acquisition involving a greater number of people, such as issues of culture fit, individually negotiated offers and compensation packages.
Acquiree is early stage with few investors
Not only is the team small, but the investor base is few in number for an acquiree in a micro acquisition. The acquiree is usually an early stage startup, with a relatively low valuation compared. This may make negotiations on acquisition consideration easier since there are fewer parties to consider in the liquidation analysis, and the bulk of the consideration can go to retention packages of the employees.
Acquiree’s product or service is rarely stand alone
In a micro acquisition, the product or service of the acquiree is rarely something that can generate high revenue without being integrated into a larger well known product or service. Such product or service is a refinement or a potential solution to a particular issue. This is attractive to acquirors who can save money by simply buying an existing solution rather than trying to develop it in house.
Implications of Micro Acquisitions for Lawyers Representing Startups
The potential rise of micro acquisitions means that lawyers need to be ready to represent their startup clients in an M&A deal sooner rather than later. Traditionally, the path for our clients was incorporation, a few rounds of financing (including a mixture of debt and equity), and finally for the chosen few, the crossroads of M&A or IPO. This process could take several years. If micro acquisitions become more prevalent, it is possible that more startup companies could be acquired within just a few years of their formation. Lawyers should start thinking earlier rather than later about M&A issues, including consent requirements, vesting schedules, and acceleration provisions.