>""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.
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.