Latest / The Acquisition Talk with Fexingo: Mergers, Buyouts, and Business Sales for Operators / The M&A Non-Solicitation Trap That Wiped Out a Sales Team
Transcript
- Lucas: You see the phrase 'non-solicitation' in a purchase agreement and you think it's about customers — don't call on them after the deal closes, don't try to poach them back. Luna: Right — and that is part of it. But there's a version that targets your employees, and it can gut the business you just sold. Lucas: Exactly. We're looking at a SaaS deal from 2024 — a company called LatticeTech, sold for $45 million to a larger private equity-backed roll-up. Typical earnout structure: seller stays on for two years, gets paid on retention and growth targets. Luna: And the non-solicitation clause in their agreement? It prohibited the seller from 'directly or indirectly soliciting, enticing, or inducing any employee of the company to cease employment.' Lucas: That sounds standard. Most sellers would read it and nod. But here's the trap: the clause didn't define 'solicit.' The buyer later argued that the seller's senior sales director, a guy named Mark Torres, had 'engaged in conduct that induced' another employee to leave — specifically, Mark had posted on LinkedIn that he was hiring for a new startup role. Luna: So a public social media post — not even a direct message — counted as solicitation? Lucas: That was the buyer's claim. And because the clause was 'directly or indirectly,' they argued that even a general post could be inducement. The seller ended up in arbitration, and the arbitrators — this is the key — gave the buyer a broad reading. Luna: How broad? Lucas: They said the seller had a 'duty to avoid any conduct that might reasonably lead to an employee's departure.' That's language from the arbitration award. It essentially means the seller can't do anything that makes it easier for an employee to leave — no reference letters, no introductions, no LinkedIn posts about new opportunities. Luna: What was the damage? Lucas: Mark Torres himself resigned three months later. He was the top regional sales director, responsible for six enterprise accounts worth about $4.2 million in annual recurring revenue. Within six months, four of those accounts churned or downsized. The buyer claimed the earnout — which was structured as a $6 million earnout over two years — had been 'materially impaired.' They withheld the entire second-year payment, about $3 million. Luna: And the seller's argument? That they never actively recruited anyone. Lucas: Right — they said Mark's post was a general 'I'm hiring for a new role, link in bio' — no mention of LatticeTech, no tagging of former colleagues. But the arbitrator bought the buyer's 'indirect solicitation' theory. The award cited that the seller had 'failed to take affirmative steps to discourage employees from leaving,' which is a huge expansion of what non-solicitation normally means. Luna: So the clause effectively turned into a non-compete for the seller's entire network. Lucas: That's exactly what happened. And this is the angle I want to drill into: the non-solicitation clause in an M&A agreement is often treated as a standard, non-negotiable provision. But it can be the most dangerous trap for sellers who plan to stay involved post-close — because your employees are your biggest asset in an earnout. Luna: Give us the mechanics. What should a seller look for? Lucas: First, the definition of solicitation. You want it to be 'active and direct solicitation' — meaning you personally reached out to someone with the intent to hire them away. Passive actions — like a public post or a general announcement — should be explicitly excluded. Luna: So carve out language like: 'Solicitation does not include general advertising or public postings not specifically targeted at employees of the company.' Lucas: Exactly. Second, carve out pre-existing relationships. If an employee reaches out to you — the seller — that should not be considered solicitation. There's a common exception called 'the hiring of unsolicited applicants.' You want that in there. Luna: And time limits? I've seen non-solicitation clauses that last three to five years post-close. Lucas: That's aggressive. For earnouts, you typically see 12 to 24 months. But the real nuance is the interaction with the earnout period. If the buyer can claim that any employee departure — even one you didn't cause — triggers an earnout reduction, you need a 'materiality' qualifier. The clause should say that only departures 'directly and proximately caused by your active solicitation' can affect earnout calculations. Luna: Let's go back to the LatticeTech case. Could they have avoided the trap? Lucas: Absolutely. If the seller had insisted on a 'passive solicitation' exemption, Mark's LinkedIn post would not have been a violation. They also should have had a 'no adverse inference' clause — meaning the buyer cannot assume that any employee departure after the deal is related to the seller's actions. And crucially, they should have required the buyer to provide written notice of any alleged solicitation, with a cure period. Luna: A cure period — that's a chance to fix the issue before it becomes a breach. Lucas: Yes. Some sellers even push for a 'sole and exclusive remedy' clause — meaning if a solicitation occurs, the buyer's only recourse is a specific liquidated damages amount, not the ability to withhold the entire earnout. That caps the risk. Luna: And what about the buyer's perspective? They have a legitimate interest in keeping the team. Lucas: They do. And a well-drafted non-solicitation can protect that. The problem is when the clause is so broad that it chills normal professional behavior. A buyer should be willing to say: 'We're not trying to stop you from having a LinkedIn profile or from helping a former colleague find a job — we just don't want you to actively raid the team.' That's a reasonable line. Luna: We should mention one other tactic: the 'non-solicitation of customers' portion is often paired with a 'non-disparagement' clause. Have you seen those combine to create a trap? Lucas: Yes — in a different deal, a seller said something negative about the buyer's new pricing in a private conversation with a customer — not soliciting, just complaining — and the buyer argued it was both disparagement and indirect solicitation of the customer. Two clauses, one conversation. The seller lost $500,000 in earnout. Luna: Practical takeaway: if you're selling, get your lawyer to define 'solicitation' narrowly, carve out passive conduct and pre-existing relationships, and tie any earnout impact to a materiality and causation standard. Lucas: And don't assume the clause is boilerplate. In M&A, the non-solicitation clause is where the buyer's 'keep the team' interest meets the seller's 'keep your network' reality. If you're not careful, a single LinkedIn post can cost you millions. Luna: Let's take a quick moment to mention something that makes shows like this possible. Lucas: Yeah — you might have noticed we don't run ads. This show is funded by listeners who chip in a few dollars a month at buy me a coffee dot com slash fexingo. It's a small group, maybe a couple hundred people, but it covers the cost of research, editing, and hosting. Luna: If these conversations have moved your work forward — maybe you caught a trap in your own deal because of something we covered — consider joining them. It's a low-commitment way to keep this independent. Lucas: And we mean that — no pressure. We'll keep doing the episodes either way. But the support keeps us ad-free and focused. Okay — back to the non-solicitation trap. There's one more nuance I want to hit: the interaction with the 'no-hire' clause. Luna: We should have brought that up earlier. Some agreements have both a non-solicitation and a separate 'no-hire' clause. Lucas: And the no-hire clause can be even stricter — it may prohibit the seller from hiring ANY current employee for a period, even if the employee approached the seller first. That's a near-total ban on hiring. In the LatticeTech case, the buyer argued that the no-hire clause applied even to unsolicited applications. The contract said 'Seller shall not hire or attempt to hire any employee.' Luna: That's a much bigger trap. The employee quits, applies to the seller's new company, and the seller has to turn them away. Lucas: Exactly. And the seller in LatticeTech had no carve-out for unsolicited applicants. So even if Mark Torres had applied on his own, the seller couldn't have hired him. That's a severe restriction that many sellers don't realize they're signing. Luna: What's the fix? An exception for 'hiring of any person whose employment has been terminated by the buyer or who has voluntarily resigned without any solicitation' — something like that. Lucas: Yes. And time-bound — maybe 12 months post-close for the no-hire, and only for key employees. Also, the definition of 'employee' should be limited to those who were employed at closing, not future hires. Otherwise, the seller can't hire anyone who joins the company after the deal. Luna: So the key is to separate the non-solicitation and no-hire clauses, negotiate each with specific carve-outs, and make sure the earnout is only impacted by proven active solicitation. Lucas: Right. And if you're a seller reading this, or listening, I'd say: look at your draft agreement today. Find the non-solicitation clause. If it uses the word 'indirectly,' that's a red flag. If it doesn't define 'solicit,' that's a red flag. If it doesn't have an unsolicited applicant exception, that's a red flag. Luna: One more thought: the buyer's motivation. They want to preserve value. But a trap clause can actually backfire — if the seller feels handcuffed, they may disengage, and the earnout fails anyway. Lucas: That's a great point. A collaborative earnout is more likely to succeed than one built on restrictive covenants. Smart buyers will draft a non-solicitation that protects their interest without alienating the seller. The best deals I've seen have a 'reasonable efforts' standard — the seller agrees to use reasonable efforts to retain employees, but specific actions are exempted. Luna: Alright — next episode, we'll look at the flip side: how buyers can get burned by a non-solicitation trap when the seller's key team members leave despite a well-drafted clause. Lucas: That's a good one. We'll also cover how enforceability varies by state — California, for instance, has strong policies against non-solicitation clauses that restrict employee mobility. Luna: Until then — read your contracts, define your terms, and don't let a LinkedIn post cost you your earnout.