Mergers and acquisitions (M&A) in the startup ecosystem are high-stakes ventures. Whether it’s a strategic acquisition, a talent-focused acqui-hire, or a growth-driven merger, a smooth integration depends on thorough due diligence—especially when it comes to Human Resources (HR).
While financials and technology often dominate early diligence conversations, HR-related risks and opportunities can make or break the success of a deal. Below are the key HR due diligence components that should be carefully evaluated during any startup M&A process.
- Organizational Chart
A current and detailed org chart provides a snapshot of the company’s structure, including leadership layers, reporting lines, and departmental design. It reveals:
-
- Span of control for managers
- Team alignment with business goals
- Possible redundancies or gaps
Buyers use this to assess how well the team can integrate into the acquiring organization and where restructuring may be needed.
- Employee & Contractor Agreements
Reviewing employee and contractor contracts is critical to understanding:
-
- Key person clauses and termination provisions
- Intellectual property and confidentiality agreements
- Severance obligations for all employees
It is important to ensure that all individuals have enforceable, signed agreements. Special attention should be given to executives and key talent whose retention may be vital to post-acquisition success.
It is also important to ensure that employees and contractors have been properly classified (ie. you don’t have a contractor who is actually an employee).
- People Data
Accurate, clean employee data, ideally in an HRIS (Human Resources Information System), to ensure a reliable view of:
-
- Employee demographics (location, age, gender, etc.)
- Compensation history
- Leave balances
- Benefits enrollments
It forms the foundation for headcount validation, compensation modeling, and risk assessment.
- Job Descriptions
Comprehensive and up-to-date job descriptions help clarify:
-
- Role responsibilities
- Skills required
- Functional overlaps or gaps
They are particularly helpful when mapping existing roles to those in the acquiring company’s structure.
- Employee Stock Ownership Plan (ESOP)
Startups often utilize an ESOP to attract and retain top talent. During M&A, it’s important to:
-
- Understand the current ESOP structure and outstanding equity grants
- Identify any acceleration clauses triggered by a change of control
- Assess potential dilution or buyout costs
- Understand and review support for the strike price of all issued ESOP
Understanding the company’s ESOP structure will help inform key employee retention plans.
- Team Performance
Understanding individual and team performance is crucial to determining which employees are critical to retain. This includes:
-
- Recent performance reviews
- KPIs and team metrics
- Succession plans and discussions
- Poor performers and active management
High performers and key contributors should be identified early for potential retention agreements.
- HR Programs and Processes
Evaluate the scope and maturity of employee programs and processes, such as:
-
- Onboarding
- Employee and leader development
- Perks, benefits, and engagement strategies
- Most recent employee survey results and action plans
These programs reflect company culture and can impact employee morale during transition.
- Employee Relations, Litigation & Risk
A review of employee relations history and legal exposure includes:
-
- Open or historical claims (e.g., harassment, discrimination)
- Compliance with labour laws and employment regulations
- Union activity or risks (if applicable)
This helps assess reputational risk and potential legal liabilities.
- Headcount Plan
Lastly, a forward-looking headcount plan provides insight into:
-
- Planned hires and attrition forecasts
- Budget alignment and hiring velocity
- Strategic workforce planning
This shows whether the startup is scaling responsibly or if there are future costs the acquirer may need to absorb.
Final Thoughts
In a startup M&A transaction, HR due diligence isn’t just about checking boxes—it’s about understanding the people, culture, and risks that define the target company. By systematically reviewing the components above, acquirers can make informed decisions, mitigate surprises, and set the stage for successful post-deal integration.
Investing time in HR diligence protects the value of the deal and ensures that talent—the real asset in most startups—remains motivated and aligned for the journey ahead.
