Acquihires Explained: Legal Risks, Investor Protections, and How Startups Should Structure Them
Acquihiring is one of the most frequently misunderstood outcomes in venture-backed companies. It is often described informally as an acquisition, but from a legal and economic perspective, that description is usually wrong.
An acquihire is not primarily about buying a business. It is about moving people.
That difference matters. When companies and investors do not account for acquihires in their governing documents, transactions that look modest on paper can produce outsized conflict, particularly once founders, employees, and investors stop wanting the same thing.
This insights article will explain how acquihires actually work in practice, why they have become so common, where legal risk arises, and how companies and investors can address those risks with targeted drafting rather than overengineering.
Learn more about our Legal500 recognized practices: M&A | Venture & Growth Financing
What an Acquihire Looks Like in Practice
In a conventional acquisition, the buyer wants the operating company. In an acquihire, the buyer is focused on assembling a team.
A typical scenario unfolds as follows:
A startup has raised seed or Series A capital and is struggling to reach product-market fit.
A larger technology company initiates discussions framed as a partnership or strategic relationship.
The economic center of gravity quickly shifts to employment offers for founders and senior engineers, often paired with retention or signing incentives.
The startup receives a payment that is small relative to invested capital, commonly structured as consideration for an IP license, settlement, release, or transition arrangement.
Equity holders receive little or no distribution after expenses and wind-down costs.
After the transaction closes, the buyer does not meaningfully operate the startup. The product is discontinued. The brand is abandoned. The company’s remaining value, if any, is largely residual.
Describing this outcome as an acquisition obscures what actually happened. The economic benefit flowed through compensation arrangements, not through equity.
Why Acquihires Have Become a Common Outcome
Acquihires are not the product of clever structuring. They are the result of market forces.
First, highly specialized engineering and AI talent is often more valuable to acquirers than early-stage products or unproven IP. Hiring a functioning team reduces integration risk and accelerates deployment.
Second, many early-stage companies raise capital ahead of validation. When growth stalls and additional financing is unavailable, acquihiring becomes a pragmatic alternative to shutdown.
Third, full-scale M&A carries operational, regulatory, and integration burdens that are unnecessary when the buyer’s objective is limited to talent and technology access.
Finally, coordinated employee departures carry real leverage. If the individuals responsible for maintaining the product leave together, the company’s negotiating position weakens dramatically unless governance documents constrain that outcome.
Recent Transactions Highlight the Structural Shift
Several well-known technology transactions illustrate how frequently talent and IP access are now separated from ownership.
In 2024, Microsoft hired the founders and key personnel of Inflection AI while entering into a large technology licensing arrangement. The company itself was not acquired, but its operational trajectory changed once leadership and core technical staff departed.
Amazon pursued a similar approach with Adept, hiring its co-founders and senior engineers while structuring the transaction around licensing rather than equity ownership.
Nvidia has also entered into licensing and personnel arrangements with Groq that emphasize collaboration and talent integration rather than outright acquisition.
Whether or not any of these transactions are labeled acquihires is beside the point. They demonstrate a consistent pattern: control over people and technology can shift without a merger, stock sale, or asset purchase. Documents that focus only on ownership mechanics fail to capture that risk.
Where Legal Problems Typically Arise
Most startup charters and investor agreements are drafted with two endpoints in mind: growth or sale. Acquihires sit uncomfortably in between.
Recurring problem areas include:
Founders negotiating future employment terms before the board evaluates the transaction.
Investors being told that liquidation provisions do not apply because there is no formal sale.
Broad IP licenses or releases eliminating any remaining enterprise value.
Board approvals occurring without a documented evaluation of alternatives or conflicts.
Minority holders receiving no distribution and no meaningful explanation.
These outcomes are rarely the result of bad intent. They are the predictable consequence of documents that do not address how value actually moves in acquihires.
Drafting Solutions That Address the Real Risk
The objective is not to prohibit acquihires. It is to ensure they are evaluated and approved as what they functionally are.
Below are three focused drafting tools that address the most common failure points.
Drafting Tool #1: Capture Acquihires in the Deemed Liquidation Event Definition
Risk addressed: Transactions that function like exits but avoid liquidation mechanics.
When a company licenses its core technology to a third party and that party simultaneously hires the company’s key employees, the company’s future has effectively been transferred.
A practical fix is to reflect that reality in the charter.
Example charter language (adding an Acquihire prong, here (iii) to a standard Deemed Liquidation Event definition):
“Deemed Liquidation Event” means any of the following:
(i) the sale, lease, transfer, exclusive license or other disposition, in a single transaction or series of related transactions, by the Corporation or any subsidiary of the Corporation of all or substantially all of the assets, business, technology or intellectual property of the Corporation and its subsidiaries taken as a whole (including, without limitation, [__________]), or
(ii) the sale, lease, transfer, exclusive license or other disposition (whether by merger, consolidation, statutory conversion, transfer of the Corporation, domestication, continuance or otherwise, and whether in a single transaction or a series of related transactions) of one or more subsidiaries of the Corporation if substantially all of the assets, business, technology or intellectual property of the Corporation and its subsidiaries taken as a whole are held by such subsidiary or subsidiaries, except where such sale, lease, transfer, exclusive license or other disposition is to a wholly owned subsidiary of the Corporation, or
(iii) a single transaction or series of related transactions in which a third party pays the Corporation (or any subsidiary of the Corporation) in exchange for a waiver, license, release, covenant not to sue or similar arrangement with respect to the Corporation’s (or such subsidiary’s) intellectual property or technology and hires or directly engages the services of one or more Material Employees of the Corporation (an “Acquihire”).Notwithstanding anything to the contrary, in no event shall the sale and issuance by the Corporation of Preferred Stock in a bona fide equity financing of the Corporation, in and of itself, constitute a Deemed Liquidation Event.
This approach avoids debates about deal labels and ties approval and distribution mechanics to economic substance.
Drafting Tool #2: Preferred Consent for IP Dispositions and Acquihires
Risk addressed: Value erosion through licensing or release agreements.
Many acquihires are built around IP arrangements that fall outside traditional “asset sale” concepts. Protective provisions should reflect that.
Example protective provision:
While any shares of Preferred Stock remain outstanding, the Corporation shall not, without the consent of the holders of at least [__]% of the Preferred Stock (voting as a single class):
(a) authorize or consummate any Deemed Liquidation Event, including an Acquihire, or
(b) enter into any agreement providing for an exclusive license, assignment, waiver, release, covenant not to sue, or similar arrangement with respect to material intellectual property or technology of the Corporation or any subsidiary, other than in the ordinary course of business.
This ensures that IP value cannot be transferred quietly through contractual workarounds.
Drafting Tool #3: Early Notice and Disclosure Obligations
Risk addressed: Investors learning about transactions after leverage has disappeared.
Timing is often the decisive factor in acquihires. A notice covenant forces conversations to happen before decisions are effectively irreversible.
Example investor rights language:
The Company shall notify the Major Investors within five business days after the Company, any founder, or any executive officer enters into material discussions regarding a transaction reasonably expected to involve (i) a waiver, license, release, or similar arrangement relating to material intellectual property or technology and (ii) the hiring or engagement of one or more Material Employees by a third party.
This does not block transactions. It creates accountability and process.
Governance Still Matters
Even with strong drafting, acquihires raise inherent conflicts. Founders often stand to benefit personally through employment while acting as fiduciaries in approving the transaction.
Boards should expect early disclosure, evaluate alternatives, and ensure approvals align with charter and investor rights. When that process is skipped, disputes follow.
Founder Perspective: A Common Miscalculation
Founders often view acquihires as career decisions. Once outside capital is raised, they are also corporate decisions.
Founders who manage these transactions well involve the board early, separate personal negotiations from company negotiations, and recognize that courts and investors focus on outcomes, not labels.
Founders who do not tend to discover that acquihires carry legal and reputational consequences.
Closing Thoughts
Acquihiring has become a routine outcome for early-stage companies, particularly in technology and AI. The issue is rarely the concept of an acquihire itself. The issue is that most companies and investors are still using documents drafted for classic M&A, and those documents often do not capture the ways value is actually transferred in a hire-plus-license deal.
When a team moves, and core IP is licensed, released, or effectively neutralized, the practical result can resemble a sale even if no stock changes hands. If your charter and investor rights do not address that reality, you are inviting avoidable conflict, misaligned incentives, and last-minute negotiations under pressure.
The fix is not to over-lawyer the company. It is to draft with intent. Targeted provisions that treat acquihire-style transactions as exit equivalents where appropriate, require consent for material IP dispositions and releases, and impose early notice to investors dramatically reduce surprises and create a cleaner decision-making process for the board and founders.
If you are a founder, board member, or investor and your documents do not explicitly address acquihires, now is the time to review them before you are negotiating a transaction from a position of weakness. We routinely help Delaware C-corp startups align NVCA-style charters and investor rights with the way these deals are actually structured in today’s market.
If you want us to sanity-check your current documents, propose a light-touch acquihire module, or pressure-test a live situation, reach out and we will tell you quickly, and directly, what is missing and what matters.
Sources
Delaware General Corporation Law, Sections 251–271
In re Trados Inc. Shareholder Litigation, 73 A.3d 17 (Del. Ch. 2013)
NVCA Model Charter and Investor Rights Provisions
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