The Art of the Exit – What Happens to Startup Culture After a Merger or Acquisition?

This article was originally published at Westlaw.com on April 12, 2021.

Successfully selling your startup to a larger player or succeeding in helping your big tech or big pharma company buy a hot new startup on the cutting edge is a barometer of success in the global Silicon Valley in 2021.  Mergers and acquisitions are a common part of the corporate life cycle, especially in the tech and life sciences industries, where many established companies expand into new markets by buying startups that are innovating in emerging fields.  But integrating a tiny startup into a much larger company can be challenging, typically because the larger company operates with more process and structure, and the startup operates based on deeply held values.  A hallmark of successful combinations is forming a common view on culture and shared values.

What is culture?  In our work on behalf of dozens of startups, emerging growth companies, and large global companies, we see culture from the inside and the outside.  We see brand-new and long-standing, largely implicit, shared values, beliefs, and assumptions that influence behavior, attitudes, and direction. In other words, corporate culture is how employees as a group think and act, and sometimes, cultural differences can become severe enough to derail integration.

As a simple example, a small startup might have Ping-Pong tables in the break room and provide sushi lunches for everyone on Fridays.  These niceties may be less likely to persist at a large company with a stricter culture, so a merger between the two corporations could lead to disagreements between “fun” and “serious.”  While disputes over perks might frustrate employees, cultural differences can be much more serious, such as how leaders make decisions or how managers relate to their subordinates.

The first step to reconciling cultural differences is identifying them.  Sometimes, the most important bridges between cultures are outsiders because they have no stake in whose point of view prevails.  Consider engaging key people from both companies to work on the cultural differences and decide how to reconcile them.  This cultural integration team should hash out the key differences, what can be kept, and what needs to be changed.

Early in the integration process, have the team start identifying how each company operates.  Management style is an important aspect, but you should also consider how employees interact with each other and their managers.  Try to identify the implicit assumptions that both companies have.  Once you have identified these assumptions, determine which ones align with the combined company’s goals and vision.  Keep what will help.  Change what will not.

Throughout the process, make sure that the integration team communicates clearly what is happening and why.  But do not simply dictate what changes will be made.  Genuinely ask for input from employees at both companies and keep them in the loop.  Many people are wary of change, but transparency and being willing to listen will help prevent alienating anyone, which will encourage employees to stay.

When cultural integration is handled well, the combined company benefits from the strengths of the original organizations.  McKinsey points out that “A merger provides a unique opportunity to transform a newly combined organization, to shape its culture in line with strategic priorities, and to ensure its health and performance for years to come.” 

Seize the opportunity and build a new corporate culture that benefits everyone involved. Combining a company with another venture provides a breath of fresh air for both talent and technology. But it’s not easy to fusion two companies.

Ideally, the integration process will begin even before the deal is announced. Once announced, identify things that must be done prior to close and make many of the significant decisions early on so that you can act quickly on the day you close.

New Leaders, New Vision

A new organization should be designed around the deal vision for the combined company and include people from both organizations who are the best athletes for the position. Be aware that once a company announces its intent to merge, top customers and key employees will be actively poached by your competitors. This is why a company going through a merger or acquisition faces a real risk of losing key talent. Mergers introduce a period of instability. Communicating around a new combined leadership team quickly, and filling in joint teams, may help stem the tide of a potential brain drain. Delay can lead key players to depart before the deal is closed.

One Company, One Culture

Successfully combinations take the best elements of two cultures and make them one.  While each buyer and seller will start a process with a distinct culture and set of values that govern how its people interact day today, the combined company should commit to the vision and culture you want to see emerge from the integration.  Once it achieves consensus on these values and culture, then it can aggressively put them into practice. Company leaders should model the desired behaviors and transparently.

Incentivizing New Behaviors

To retain top talent following a merger or acquisition, reconsidering incentives and compensation is critical. Identifying the key contributors, both historically and in the future, and paying them for the very same, has become a science.  This is important not only for leaders but for rank and file.

During a significant acquisition, the company asks a lot from its leaders, while those leaders’ prospects may be uncertain. Pay for performance.  There is a simple formula:  historical contribution gets cash, while future contribution should get equity.  Compensation is a powerful tool in both the pre-close execution phase and post-close integration. Retention awards and transition incentives are typically used to supplement other incentive or severance programs that might already be in place. Retention awards are usually vested at specific milestones, while transition incentives are often vested based on achieving specific objectives. Together they are a powerful combination.

Post-closing considerations may involve a new program altogether for the new business and evaluating whether executives are adequately staked in the new organization. This includes aligning pay levels, bonus plan metrics and design, and long-term incentive vehicles and vesting with the latest business objectives.

It is essential to look at the company’s payment history and approach and whether that reflects the new businesses’ strategic objectives. If pay changes are warranted, time will allow for assessing whether executives can handle the increased responsibilities and help manage the organization’s overall cost impact.

In designing culture and values, rewarding past performance and incentivizing accountability for future performance metrics will govern behaviors going forward.  Designing success is partly a form of art and partly science and execution.