Here's the right way to behave, in two simple steps:
Step 1
Company management (in this case, the founders) have a fiduciary obligation to get as much money for the company as possible. In the sale negotiation, they should discuss the price of the company first. If the buyer tries to talk about their compensation, they simply decline to engage in the conversation, saying that their obligation is first and foremost to the shareholders, so the company price is the first order of business. They should negotiate as hard as they can to maximize the value returned to the shareholders.
Step 2
Once the company price is set, the management/founders should negotiate the best deal possible for the team - both themselves AND the other employees (don't forget the latter). The company's already locked and loaded. There is no reason for the team to hold the screws to the acquirer at this point for maximum value.
There are two classic mistakes that get made. The founder mistake is easy to make, because the company will encourage it: "How about if we lower the price of the company by $X, and add $X to your retention package?" This is wrong and possibly illegal (but it's hard to get caught). Taking this sells out your shareholders and violates your duties as an officer of the company.
The second classic mistake is an investor one: thinking the employee compensation belongs to the company. Employee comp is for future services rendered, not past. There's no reason the shareholders should get a percentage of the founder-cum-employee's stock grant unless they plan to do part of their work for them.
tl;dr: get the best price for your company, then get the best price for yourself and your team.
>""How about if we lower the price of the company by $X, and add $X to your retention package?" This is wrong and possibly illegal"
It would be good to clarify if this in fact illegal. If it is not illegal, than saying that it is wrong is subjective. In the case of talent acquisitions, the acquiring company has an incentive to focus more compensation to the 'founder-cum-employee' for retention and incentive purposes. I feel that it would be very reasonable for an acquiring company to use this as a negotiation tool (unless it is illegal, of course) as they are merely looking out for their own, longer-term interests.
> It would be good to clarify if this in fact illegal.
Well, as Dan mentioned - and I believe (IANAL, etc.) that this is enshrined is US law - the directors of a company have a fiduciary duty to the shareholders.
The excuse here seems to be that the company was going nowhere but my gut feeling is that opening negotiations with a potential acq/hirer is only acceptable if you've had discussions with your investors and, ideally reached some kind of agreement/consensus to recognise that the company isn't going anywhere and the founders should explore whatever options are available.
(Afterthought: Given that negotiations with a view to being acq/hired involve a clear conflict of interest for the founders, they should involve at least one non-exec director or investor to ensure that the shareholders' interests are protected.)
Otherwise, founders run the risk of being perceived as having spent millions of other people's dollars to build up their own reputation in order to get hired on a sweet compensation deal by Google or Facebook.
Definitely illegal in both Australia and the UK, and as far as my legal knowledge extends to the US (directors' fiduciary duties are pretty similar across these countries), illegal there as well.
In the situation described, founders are essentially sacrificing the valuation of the company (an 'asset' of the company and its shareholders) for their own personal gain - a clear violation of their duty to the company.
pyoung - whether the acquiring company is doing anything illegal is probably more open to question (though whether it's unethical is pretty clear in my opinion). It probably comes down to whether their behaviour gets to the point where it could be held liable for inducement to breach a contract, or inducement to breach fiduciary duty.
However, the focus of Dan's comment focuses the question (rightly, I believe) on the obligations and behaviour of the founders, which is where most of the responsibility lies.
Step 1
Company management (in this case, the founders) have a fiduciary obligation to get as much money for the company as possible. In the sale negotiation, they should discuss the price of the company first. If the buyer tries to talk about their compensation, they simply decline to engage in the conversation, saying that their obligation is first and foremost to the shareholders, so the company price is the first order of business. They should negotiate as hard as they can to maximize the value returned to the shareholders.
Step 2
Once the company price is set, the management/founders should negotiate the best deal possible for the team - both themselves AND the other employees (don't forget the latter). The company's already locked and loaded. There is no reason for the team to hold the screws to the acquirer at this point for maximum value.
There are two classic mistakes that get made. The founder mistake is easy to make, because the company will encourage it: "How about if we lower the price of the company by $X, and add $X to your retention package?" This is wrong and possibly illegal (but it's hard to get caught). Taking this sells out your shareholders and violates your duties as an officer of the company.
The second classic mistake is an investor one: thinking the employee compensation belongs to the company. Employee comp is for future services rendered, not past. There's no reason the shareholders should get a percentage of the founder-cum-employee's stock grant unless they plan to do part of their work for them.
tl;dr: get the best price for your company, then get the best price for yourself and your team.