Abhiraj Giritharan, summer associate at Michelman & Robinson, contributed to this report.
An increasingly complex mergers and acquisitions landscape means in-house legal teams at startups are having a defining moment, no longer relegated to the periphery of the deal process. But this change also requires them to keep a keen eye on risk allocation, says Ling Kong of Michelman & Robinson.
Startups must adapt to a more disciplined and capital-efficient market, and M&A has emerged as a strategic lever for expanding talent, capabilities and market presence. Founders and legal teams are navigating increasingly complex deal and consideration structures as a product of increased risk aversion.
In this ecosystem, legal counsel serves not merely as dealmakers but as strategic partners. Executing successful M&A transactions requires business acumen and strategic vision as much as precise legal drafting.
A strategic recalibration for startups
The startup economy of 2025 is vastly different from the high-growth, high-valuation environment of just a few years ago. In 2021, global venture funding hit a record $643 billion, but by 2024, it had dropped by more than 50%. Tighter capital markets, market-corrected valuations and investor focus on sustainable, cash-efficient business models with low burn rates has created a new frontier for founders. For many, especially those who raised capital during the peak in 2021, the realities of the current environment have propelled a new strategic playbook.
While the IPO market in Q1 2025 experienced a 55% year-over-year increase in deal quantity, the rise in IPOs has been driven by mature, capital-efficient and category-defining companies. For most startups, especially those at earlier stages or with limited opportunity for late-stage funding, mergers and acquisitions have emerged as the viable path to scale or exit. Q1 2025 marked a breakout quarter for startup M&A deal volume, totaling $71 billion in global exit value, with a 33% increase in dealmaking for AI-related startups, reflecting sector momentum. M&A has become a proactive tool to scale capabilities, expand product offerings and preserve value. But making these deals work requires a nuanced understanding of multiple legal subject areas, regulatory compliance and strategic integration.
Choosing the right deal structure
One of the most consequential decisions in any startup acquisition is the form the transaction will take. Will the deal be structured as an asset purchase, where the buyer selects specific pieces of the business to acquire? Or will it be an equity acquisition, which brings the entire legal entity and all its obligations into the fold?
Each approach has its advantages and complications. Asset deals can limit liability exposure but often involve added complexity when contracts, licenses or customer relationships need to be reassigned. Equity deals offer smoother continuity but may saddle the acquirer with unforeseen liabilities.
For startups with limited in-house resources, this distinction matters. Time is often limited and the legal budget even more so. Choosing the most efficient and least risky path will often determine the success of a deal. Thus, we may see more asset purchases than equity purchases in this area.
In-house counsel must guide founders through this decision not just as a technical legal matter, but as a strategic inflection point, balancing tax implications, jurisdictional rules and the practicalities of transitioning customers, teams and infrastructure.
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Read moreDetailsCreative consideration in a cash-constrained market
In an ideal world, acquisitions are fueled by strong balance sheets and cash-rich buyers. Yet given buyer interest in preserving working capital and sharing risk with sellers, all-cash deals remain the exception. Increasingly, consideration includes a blend of stock swaps, convertible instruments, rollover equity and earnouts tied to post-acquisition performance.
Each alternative introduces legal nuance. Swapping private stock, for instance, raises securities law questions that must be navigated carefully. Convertible notes and earnouts can help bridge valuation gaps but only if well-structured and clearly governed. Rollover equity, in which founders or early investors retain a stake in the new entity, aligns incentives but complicates the post-closing capitalization table. Even management equity refreshes, essential for retaining key talent, require clarity around vesting terms and dilution.
Legal professionals sit at the center of these negotiations. It is our job to translate creative structuring into enforceable, equitable contracts, avoiding ambiguity that could lead to disputes or regulatory scrutiny down the road.
A fusion of acqui-hires, down rounds and recaps
Few startup M&A deals today fit into a single mold. More often, they combine elements of multiple transaction types. A deal might involve a partial acquisition of assets and talent (an “acqui-hire”), paired with a recapitalization of the buyer, and capped with an earnout to satisfy investors.
This convergence of deal types creates legal complexity. Founders may need to step aside, boards may need to be reshaped, and new equity awards may need to be issued under lower valuations. Anti-dilution provisions in existing charter documents may need to be waived or restructured. Bridge notes or SAFEs must convert or be repaid, sometimes mid-deal. And all the while, lawyers must manage the potential triggering of consent provisions buried in old commercial contracts.
What emerges is a transaction that is equal parts M&A, financing and restructuring. Without skilled legal supervision, such deals are vulnerable to delays, disputes and post-closing regret.
Why startup M&A is often harder than it looks
Despite their smaller size, startup M&A deals can be as difficult, if not more challenging, to execute than traditional middle-market acquisitions. The companies involved often lack robust internal legal or finance functions. Founders are stretched thin, tasked with managing both day-to-day operations and a complex transaction. And with cash often running low, there is limited room for drawn-out diligence or protracted negotiations.
These constraints mean that legal and compliance issues must be identified and addressed early. Ownership of intellectual property must be airtight. Employment agreements need to be enforceable and options may need to be amended. Data privacy practices must comply with applicable regulations. In regulated industries like fintech or healthtech, that might also mean satisfying supervisory agencies and amending agreements before the deal can close.
Moreover, the stakes are often personal. Founders, employees and early investors have deep emotional and financial ties to their companies. Helping them navigate the realities of post-deal integration — new management structures, revised roles, altered incentives — is as much a human exercise as it is a legal one.
AI-enhanced, human-guided: the new due diligence
In this volatile and strategically complex environment, smart legal teams are extending their reach with technology. Artificial intelligence tools allow for the rapid review of contracts, flagging of issues and synthesis of corporate documentation. With human supervision, these platforms accelerate diligence and drafting, keeping deals on track despite lean staffing or budget constraints.
For in-house legal departments, the use of AI is no longer a future ideal; it’s an operational necessity. But its effectiveness depends entirely on thoughtful oversight. The law still requires human interpretation, negotiation and ethical judgment. In the best cases, AI enhances what experienced counsel already do best: ask the right questions, identify patterns and structure and scale deals that are both creative and compliant.
Integration Is everything
The value of a startup M&A deal isn’t measured at signing. It’s proven in the months and years that follow. The hardest part of many transactions comes after the papers are inked: aligning cultures, retaining talent, merging technology and infrastructure and keeping customers happy.
For legal and compliance professionals, that means continued involvement. Are the equity grants being properly issued and honored as promised? Is the new organization complying with labor laws in two or more jurisdictions? Have data privacy practices been harmonized across platforms? In complex sectors, even basic integrations can pose regulatory risk.
Integration is always a governance challenge and key to the long-term success of the transaction. And it works best when legal is part of the conversation from day one.
M&A as momentum
In 2025, startup M&A isn’t simply an exit for founders and investors. For many companies, it’s the smartest way forward, a means to scale talent and resilience. Industry trends underscore the inertia of startup acquisitions.
Technology is advancing at an unprecedented pace. AI and machine learning startups are utilizing M&A dealmaking to stay ahead of the stampede. Similarly, regulatory rollbacks and a more favorable tax landscape have caused over three-quarters of executives in the healthcare and life sciences industries to predict increased M&A activity this year. But success requires sophisticated structuring, rigorous legal drafting and hygiene and the ability to harmonize teams and vision.
In this shifting landscape, in-house legal teams are having a defining moment. They are no longer peripheral to the deal process; they are deal architects and must have an eye toward risk allocation and post-close continuity.
M&A is no longer a backup plan for startups. It is a proactive growth strategy, and the legal function is being redefined. Successful startups and their legal advisers must embrace complexity and build with vision.
Ling Kong is a partner at Michelman & Robinson, a national law firm with offices in New York City, Los Angeles, Irvine, San Francisco, Dallas, Houston and Chicago. He has extensive experience advising emerging growth technology companies and investors, particularly those in life sciences, consumer technology and real estate technology. 
