Start-up Technology Companies – Don’t Get Acqui-Poached

Acqui-hire

Written by Rooney Nimmo Partner, Sean Hogle

Consider the following scenario. You’re a technology start-up that has developed a popular app recommendation engine. You’re running low on cash, and further investment is not in the cards. The shareholders decide it’s time to sell.

Excitement ensues as a massive personal technology lifestyle company takes an interest. After completion of due diligence, however, enthusiasm in the start-up wanes. Soon the discussion focuses on a potential “acqui-hire,” a fancy way to say your company is being bought predominantly for the fabulous engineering team you’ve assembled and not for the product/service you were (trying) to bring to market – with a commensurately lower valuation. Too low for the shareholders, so negotiations end.

However, the story doesn’t end there. BigCo turns around and hires away the startup’s top engineering and marketing talent. The startup is now dead in the water and of no interest to any other potential suitors.

These are essentially the facts in Hooked Media Group v. Apple (Cal. Ct. App. 2020). Hooked Media Group sued Apple (BigCo) for interference with contract and prospective economic advantage, misappropriation of trade secrets, and aiding and abetting breach of fiduciary duty, among other claims.

The claims went nowhere at either the lower court or on appeal—despite evidence demonstrating that the hired-away engineers developed a recommendations system substantially like Hooked’s version, down to the source code. The staff was expressly hired to build what Apple refused to buy from Hooked. Still, the courts held that mere possession of a trade secret is insufficient to impose liability unless acquiring that secret was somehow wrongful.

Ultimately, the absence of an enforceable anti-poaching clause in a due diligence NDA or term sheet proved fatal. Such clauses can be tricky due to recent developments casting doubt on the enforceability of employee non-solicit clauses. But proceeding without them in M&A discussions invites disaster for small private companies relying on a handful of talented people to survive.

Sean Hogle and the team at Rooney Nimmo have deep experience guiding companies of all sizes through the acquisition process. If you need help or have any questions, please call us on +1 212 545 8022 or click here to learn more about our capabilities.

Initially published on epic.law.

 

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