We broke the news yesterday on Facebook’s most recent acquisition – social activity service Hot Potato. Like most of Facebook’s acquisitions, this deal looks to be mostly about getting a great team of engineers on board, not about the product.
And like many of these acquisitions, investors in the acquired company don’t stand to make much money. Facebook is paying around $10 million in cash for Hot Potato, we’ve heard from a source with knowledge of the deal. Employees will also be getting stock options which could prove to be very lucrative down the road. But investors aren’t getting any stock in Facebook.
This is very similar to Facebook’s very first acquisition, Parakey, back in 2007. That deal gave shareholders just $4 million or so in cash to split – giving them their initial investment back plus a small return. All the stock went to employees.
Hot Potato raised around $1.4 million in a single round of financing prior to the acquisition.
Most investors won’t balk publicly at deals like this, they’re way too concerned that they’re seen as entrepreneur-friendly so that they can get access to future deals. But privately they gripe (in general, nothing specific to this deal). Putting money to work for only a 1x or 2x return is a great way to go out of business for startup investors, when so many of their deals never pay anything back at all.
In fact some of these deals could theoretically be a violation of various corporate and securities laws that require shareholders of a given class to be treated equally in an acquisition. But without investors actually complaining, it’s unlikely any lawyers will ever get involved.
Also, stock options are clearly being granted for future services of the acquired employees, not for past work done at the acquired startup.
Another way investors can “complain” is by simply scuttling the deal – they usually have veto rights over an acquisition baked into their deal agreements when they invest. But that, again, would be seen as completely anti-entrepreneur and would kill future deal flow.
So for now investors will simply grin and bear it. But as these types of deals become more and more common we may see changes to various state corporate laws in the future that put limits on how much consideration might be given in cash to investors in an acquisition v. how much is given to active employees in stock options on an acquisition.