The Competition for AI’s Scarcest Resource

Transcript

The following transcript of this discussion was edited for clarity.

When only a small number of people have the expertise to push a technology forward, the focus of competition can shift — from products and capital to talent itself.

This is happening in AI (artificial intelligence) and other frontier areas — quantum computing, advanced materials, synthetic biology — and it’s changing how investors structure deals, how companies hire and retain talent, and how value gets created and captured.

I’m Bob Mertz, and I’m here with Goodwin partners Daniel Lang and Daniel Saposnik, authors of a recent article on this topic in our Forces of Law series.

Bob Mertz: Dan, Danny — welcome.

Daniel (Dan) Lang: Hi, happy to be here.

Daniel (Danny) Saposnik: Thanks, Bob.

Dan, let’s get started with you. What does the competition for elite talent look like in AI?

Dan: There’s broad conviction that AI is a transformative technology that is justifying billions of dollars of investment. Finding the right people that have the experience, vision, and skill set to deliver on its promise has become a huge focus for these very large, very well-capitalized players.

Danny: The market for talent right now is extreme. You’re getting a real bifurcation of the talent pool. You’ve got a small number of people who are able to really work at the frontier. And then you’ve got everybody else.

I’ve heard the analogy that some of these people are compensated in the way elite athletes in certain professional sports get compensated. Does that ring true, Danny?

Danny: I think there is an analogy there. Companies that are operating at the frontier have lists. Who are the people who can stand up an AI-compute-oriented data center in next to no time? That’s a very short list. I don’t mean 100 or 200 or 300 people. Are there a dozen people who are capable of working at the scale and speed required to remain at the frontier?

And if you extend the metaphor, I guess you could say the salary cap in sports is analogous to the ability to build these data centers and finance all this growth?

Danny: That’s exactly right. And running with that analogy, the person who missed the draft to get into the NBA is still a phenomenal basketball player. But if you think about who is truly an off-the-bench, in-the-game-worthy player, then you’ve got a really short list of people. And for people who can operate at that level, the rewards are so completely disproportionate.

Your article also talks about two other factors in addition to scarcity of talent. One is conviction — the belief that competition is existential (you have to win in this space). The other is cost (only a few players can really afford this kind of elite talent). How do those two factors play into this?

Dan: The belief is at a magnitude that we haven’t seen before. That’s obvious in the amount of investment in the technologies themselves and in the data infrastructures that can support those technologies. We’re seeing that in the real estate space as data centers are cropping up around the United States and other geographies. Just the sheer amount of capital required to advance AI is extraordinary, and companies need the right people in place to develop and drive this technology forward. Finding the right people has become a paramount existential issue that these large companies must solve.

Danny: Cost figures into it in a number of ways. There’s this extreme competition because you want to be at the forefront. You want to be one of the winners in what looks like a “winner takes all” new frontier.

From the individual side, these talented people now find themselves in a marketplace that is extremely competitive. But it’s also extremely lucrative. In particular, going to some big tech company with the cash flow to stay in the AI race has rewards that are comparable to, if not greater than, building something yourself.

Dan: Given the focus and the quantum of investment in AI technology, we’re seeing the traditional dynamics in the technology space, including the venture capital and growth equity markets, upended.

That’s a great segue. I wanted to ask about acquihires, which have been so important to this dynamic. Could you say something about what acquihires are and how they differ from traditional M&A?

Dan: Acquisitions typically used to focus on things like the business, revenue, and intellectual property. In this area, they have become more focused on people. We are seeing these large companies effectively say to founding teams and management teams, “We want you to come work with us.” They are not as interested in the technology those founders or management teams might be developing at their companies. In many cases they would like to have it, but they don’t need it. They want the team.

It’s created a new set of challenges for venture capital funds and entrepreneurs that are navigating a world in which big companies can offer talented individuals multimillion-dollar signing bonuses. This is a new trend, and it’s creating responses across the ecosystem as different players adjust to it.

How are venture capital firms responding? It sounds like they’re rethinking term sheets and governance structures. What are you seeing?

Dan: To try to protect their investments in these early-stage companies, some venture firms are including terms in term sheets that will help ensure they have a seat at the table if their portfolio company is approached by one of these large technology-company buyers. They want to participate in the consideration paid to the team.

That is not an easy problem to solve. Venture capital funds are considering provisions like information rights. These kinds of terms would require a portfolio company to notify the venture company if a big technology-company buyer approaches its team, giving the board an opportunity to weigh in on how the transaction is structured. Some are including language in their investment documents that requires acquihires and other transactions to be treated as a sale of the business. In those cases, the goal is to ensure that the value of signing bonuses and other incentive payments, which would ordinarily just be compensation paid to the management team, flow through to shareholders.

We are still very much in the early days. Venture capital funds and other investors are just starting to propose protections that give them a seat at the table and hopefully some economic participation in the event of these transactions.

This is also changing how companies structure compensation, including the acquirers that land this talent and want to hold onto it. You hear about extended vesting, performance triggers, and revesting. Could you say something about that?

Danny: If it really is about talent, then what is different in the acquihire scenario is that you’re focused on incentivizing that team to be with you as long as possible. Within the context of this extremely competitive labor market, you want them to be motivated not just for the next two or three years but potentially far beyond that. You’re thinking about far more extended vesting periods and back-end loading of compensation — anything you can consider that would keep someone working at your company for longer.

That brings us to the last question. Do you expect this trend to continue in AI? And do you see it taking hold in other areas?

Danny: It’s hard to say exactly where this is going. It depends on the direction the market takes. It depends on sentiment around AI, which drives so much. If there’s still bullishness about what AI is capable of, then I’m sure we’ll see more of this.

Dan: AI is the most high-profile frontier technology these days, given the amount of news coverage and the amount of investment the sector is receiving. But we are seeing similar patterns emerging in other frontier technology sectors like synthetic biology and advanced materials in which there is a scarcity of capable, talented people with the vision to execute on the promise of those technologies.

Well, all the more reason to be in touch with people who really have their fingers on the pulse. Thank you both for being here.

Dan: Thank you so much for having me.

Danny: Thank you.