Latest / The Acquisition Talk with Fexingo: Mergers, Buyouts, and Business Sales for Operators / How the Non-Solicit Tail Trap Blocks M&A Sellers
Transcript
- Lucas: There is a clause buried in nearly every asset purchase agreement that sellers barely read, and it has quietly cost founders millions in lost talent and delayed earnouts. It's the non-solicit tail, and it's often more restrictive than the non-compete. Luna: I've seen that. It says you can't hire your own former employees for a period after closing, right? But I've always wondered — how enforceable is that really? Lucas: Very enforceable, especially in a buyer-friendly jurisdiction like Delaware. And the standard ask is 12 months, but we're seeing 18 and even 24 months in competitive processes where the buyer has leverage. The trap is that founders assume they'll be able to rebuild their team in a new venture, but the tail locks them out. Luna: So if you're a serial entrepreneur who wants to start a new company and bring your old lieutenants with you — forget it, at least for a year. Lucas: Exactly. I covered a case last year — a SaaS founder in Denver, let's call the company Aurora Systems. He sold to a private equity firm, Mistral Capital, for $40 million. Standard earnout, two-year structure, management rollover. Everything looked clean. Luna: I'm guessing the non-solicit tail was in there somewhere. Lucas: Right in section 6.4 of the SPA. 'Seller agrees not to, directly or indirectly, solicit, induce, or encourage any employee of the company to leave their employment for a period of twelve months after closing.' He signed it. Six months later, his director of engineering — a guy he'd worked with for eight years — reached out asking if the founder had any opportunities at his new venture. Luna: Oof. And I bet the founder said something like 'let's grab coffee to discuss'. Lucas: Worse. He replied by email: 'Would love to have you when the non-solicit expires. Ping me in six months.' The director forwarded that email to Mistral's HR team to negotiate a retention package. Mistral's lawyers sent a cease and desist, threatened to claw back earnout payments, and the founder had to hire his own counsel at $60,000 to defend against a breach claim. Luna: So the email itself was solicitation? He didn't even make an offer. Lucas: The buyer argued that the phrase 'would love to have you' constituted indirect solicitation. And the SPA defined 'solicit' broadly — including any communication that encourages an employee to leave. The founder eventually settled by extending the tail to 18 months and forfeiting $200,000 of his earnout. He lost a key hire and paid for the privilege. Luna: That's brutal. And I think a lot of founders assume a non-solicit is just about not poaching during the deal process — not a post-close handcuff. Lucas: Exactly. The tail is the post-closing duration. And buyers are getting more creative. Some are now pushing for a 'non-hire' clause, which is even stricter. A non-solicit says you can't actively recruit. A non-hire says you can't hire them even if they approach you unsolicited. Luna: Right — so the employee could knock on the founder's door and the founder would have to turn them away. That seems almost impossible to enforce. Lucas: It is tough to enforce, but buyers include it to create leverage in a dispute. Even if it's unenforceable in court, the threat of litigation and the cost of defense is enough to make most sellers comply. And the tail applies to all employees, not just executives or key personnel. In Aurora's case, it covered everyone — including the receptionist. Luna: Let me guess — the buyer's rationale is that every employee has institutional knowledge. Lucas: That's exactly what Mistral's lawyer told me: 'We paid for the assembled workforce, and we want to protect that asset.' And there's some logic there, but the scope is often disproportionate. A 24-month tail on a receptionist? Come on. Luna: So what's the seller's play? How do you push back without killing the deal? Lucas: First, you limit the scope. Carve out a list of specific employees — maybe your top three or five — that you have written permission to hire after close. That's a 'carve-out list.' Second, you reduce the duration from 24 months to 12, or from 12 to 6. Third, you change it from a non-hire to a non-solicit so unsolicited applications are allowed. Luna: And does that usually fly? I feel like buyers treat this as a standard term. Lucas: It's often presented as non-negotiable, but I've seen sellers win concessions when they have leverage — like if they're the only viable buyer target or if they have a strong management team that's critical to the earnout. The key is to flag it during LOI negotiation, not after. Once the SPA is drafted, the buyer's counsel has more inertia. Luna: So during the LOI, you'd say: 'We want a carve-out for the CFO and two VPs.' Lucas: Exactly. And you tie it to the earnout. 'If I'm supposed to help grow the business for two years, I need the ability to hire talent — including former colleagues.' That reframes the tail as a disincentive to performance. Some buyers will actually relax the restriction if the seller stays on as CEO. Luna: Because then the buyer is essentially restricting their own CEO from hiring good people. Lucas: Right. And there's another nuance: the definition of 'solicit.' Some SPAs include a carve-out for general advertising or hiring through a recruiter — meaning you can't directly approach, but if someone applies through LinkedIn, it's fine. That's a reasonable middle ground. Luna: I want to go back to the non-hire versus non-solicit distinction. Are there any recent data points on how common the non-hire version is? Lucas: A survey from the American Bar Association's M&A Committee last year found that about 35% of middle-market deals include a non-hire clause, up from 20% in 2020. In tech and software, it's closer to 50%. And the average tail length has crept from 12 to 15 months. Luna: So the trend is moving against sellers. But I'm curious — does the non-solicit tail apply to the buyer as well? Is it reciprocal? Lucas: Almost never. The buyer wants the freedom to hire the seller's employees — that's part of the value of the acquisition. But they restrict the seller from hiring anyone from the company. It's a one-way street. I've seen exactly one deal where the seller's counsel got a reciprocal tail that prevented the buyer from soliciting the seller's new venture's employees. That was a very high-value, very contentious negotiation. Luna: That's the kind of detail that makes me think every seller needs an experienced M&A attorney reading every comma. Lucas: Absolutely. And I'll add this: the non-solicit tail is one of those terms that seems minor in a 150-page SPA, but it can blow up a founder's next chapter. If you're planning to start a new company within a year of selling, you need to negotiate that tail down, define 'solicit' narrowly, and get a carve-out for at least a handful of key people. Luna: Look, if today's episode saves one founder from the Aurora Systems situation, it was worth doing. Lucas: Honestly, if today was worth a coffee to you, you can find us at buy me a coffee dot com slash fexingo. That kind of support is what keeps this ad-free and focused on real deal terms. Luna: Yeah, and it's a tiny way to say this stuff matters. We don't have a big production budget — just two people who care about getting it right. Lucas: So back to the non-solicit tail — one more practical takeaway. If you're already in a deal and the tail is 24 months, ask for a reduction to 12 with a six-month rolling trigger. That means the tail resets if you re-solicit, but if you stay clean, it drops off at 12 months. Luna: That's clever. So you're not locked out for the full 24 if you behave. Lucas: Exactly. And if the buyer resists, you can offer to extend the tail only for employees who receive retention bonuses or equity. That aligns interests — the buyer protects the people they've invested in, and you get flexibility on the rest. Luna: So the tail doesn't have to be a binary yes or no. There's room for negotiation if you know the levers. Lucas: That's the whole show, really. Every clause in an SPA is negotiable — but only if you know where to push. The non-solicit tail is one of the easiest to overlook and one of the most painful to get wrong.