Predictable Exodus: Startup Acquisitions and Employee Departures

51 Pages Posted: 12 Oct 2018 Last revised: 9 Jan 2019

See all articles by J. Daniel Kim

J. Daniel Kim

Massachusetts Institute of Technology, Sloan School of Management

Date Written: September 20, 2018

Abstract

This paper investigates the effectiveness of startup acquisitions as a hiring strategy. Unlike conventional hires who choose to join a new firm on their own volition, most acquired employees do not have a voice in the decision to be acquired, much less by whom to be acquired. Startup acquisitions therefore provide an empirical setting in which non-founding employees – from these individuals’ perspective – are quasi-randomly assigned a new employer. I argue that the lack of worker choice lowers the average match quality between the acquired employees and the acquiring firm, leading to elevated rates of turnover. Using comprehensive employee-employer matched data from the US Census, I document that acquired workers are significantly more likely to leave compared to regular hires. Moreover, I demonstrate that these departures can be largely predicted ex-ante. Leveraging population data on career histories, I construct a measure of “startup affinity” for each target firm based on pre-acquisition employment patterns, and show that this strongly predicts post-acquisition worker retention. Lastly, these departures suggest a deeper strategic cost of competitive spawning: Upon leaving, acquired workers are more likely to found their own companies, many of which appear to later compete against the buyer.

Keywords: Entrepreneurship, Mergers and Acquisitions, Human Capital, Startups

JEL Classification: L26, G34, J63, M50

Suggested Citation

Kim, J. Daniel, Predictable Exodus: Startup Acquisitions and Employee Departures (September 20, 2018). Available at SSRN: https://ssrn.com/abstract=3252784 or http://dx.doi.org/10.2139/ssrn.3252784

J. Daniel Kim (Contact Author)

Massachusetts Institute of Technology, Sloan School of Management ( email )

Cambridge, MA 02139
United States

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