It appears that 2027 is shaping up to be a landmark year for mergers and acquisitions (M&A) in software and software-as-a-service (SaaS). The reason is the sheer volume of capital that went into AI startups over the past two years. Venture funding to AI reached $211 billion in 2025, up 85% from $114 billion in 2024, and roughly 4,500 business-to-business (B2B) and enterprise AI startups raised money across those two years. [Sector Snapshot: Venture Funding To Foundational AI Startups In Q1 Was Double All Of 2025]
That capital built hundreds of capable products. It did not build hundreds of durable businesses.
The best assets have already moved
In many categories, the top assets have either traded or raised so much capital that they must stay independent and grow into their valuations. The large strategics moved first and quickly. ServiceNow agreed to acquire Moveworks for $2.85 billion, combining its agentic AI and workflow automation with Moveworks’ AI assistant and enterprise search. Workday announced a definitive agreement to acquire Swedish AI startup Sana Labs for approximately $1.1 billion.
This is the playbook incumbents ran during the dotcom, mobile and cloud revolutions –identify the category leaders early and buy them before competitors can. What’s different this time is the opportunity it leaves behind. Earlier-stage companies and smaller vendors can now run the same play, on terms that were not available to them in previous cycles.
Why the second tier is suddenly for sale
The venture capital (VC) industry is far larger today than it was during the dotcom or cloud eras.[ US venture capital slows down] In earlier cycles, five to ten startups typically won VC support in a given category. In this cycle, most segments funded many competing startups at once. The 2024 and 2025 seed-stage vintage and Series A companies now face three hard facts.
First, the clear winners in their segments have already been acquired. Second, the Series B crunch means new capital is unavailable for most of the companies that remain. Third, private equity (PE) sponsors are largely absent because they are still working through the software and SaaS deals they closed in 2021 and 2022.
Together, these conditions create a strategic buyer’s market. Many sectors will have several good acquisition targets that need to find a home in 2027, and far fewer bidders competing for them.
The case for stock
In this environment, small and mid-size acquirers should structure deals as all-stock or as a mix of cash and stock. Historically, even an acquihire was settled largely in cash, at a steep discount, because selling funds would accept nothing else.
That position is no longer tenable. Sellers at the end of their runway have few good alternatives. Even the large strategics, which once provided a safe landing for interesting technology that never found commercial traction, have slowed on acquihires. Investors who backed AI-native startups at high 2024 and 2025 valuations now face a choice – write off the investment or roll it into the acquirer’s equity and wait for liquidity.
An equity rollover has clear advantages for those investors. It preserves the chance of a return. It also keeps the fund from booking a full loss while it is out raising its next fund. And in the current fundraising market that is a meaningful incentive. Additionally, there is a reputational benefit to supporting founders who are trying to find a home for their technology and team. For a well-positioned acquirer, these pressures turn equity into currency the seller will actually accept.
A worked example
Consider a hypothetical transaction between two companies.
Acquirer: Oscar Logistics Solutions (OLS)
- $25 million in annual recurring revenue (ARR), growing 15% year over year (YoY)
- Breakeven earnings before interest, taxes, depreciation and amortization (EBITDA)
- $150 million post-money valuation at its last raise, 12 months ago
Target: Paisley AI
- $900,000 in ARR and $50,000 in monthly burn before cost synergies
- $12 million raised with a 1x liquidation preference
- $150,000 of cash on hand, no runway left and no investor interest in another round
Structure
OLS acquires 100% of Paisley AI’s outstanding stock. Because the deal price sits below the $12 million preference stack, preferred shareholders receive all of the deal consideration. Key personnel are compensated instead through equity grants or long-term incentive plans (LTIPs) at OLS after closing. All or nearly all Paisley employees join OLS, subject to future cost synergies.
Pricing the target
The price for Paisley AI is negotiated, not formulaic. Market ARR multiples do not apply; Paisley’s failure to raise another round shows the market has already rejected that valuation. Per-engineer acquihire benchmarks (often quoted around $250,000 per engineer) were always informal rules of thumb, never tested in public data. A more defensible approach is the cost to rebuild the technology, or the engineering spend sunk into it to date.
For this example, the parties agree on $10 million. With 20 million Series A preferred shares outstanding, that works out to $0.50 per Paisley share.
Pricing the acquirer
The second negotiation is over what OLS shares are worth. At 15% growth, OLS’s $25 million in ARR implies roughly $21.7 million at the time of its last round. A $150 million valuation on that base is about 7x ARR. Applying the same multiple to current ARR values OLS at $175 million today. With 500 million shares outstanding, that is $0.35 per share.
The exchange
- Exchange ratio: $0.50 ÷ $0.35 = 1.4286 OLS shares per Paisley share
- 20 million Paisley preferred shares × 1.4286 = approximately 28.57 million new OLS shares
- Post-close ownership: existing OLS shareholders hold 94.6% and former Paisley investors hold 5.4%
The 5.4% equals the $10 million deal value divided by the $185 million combined equity value. OLS acquires a product, a team and $900,000 of ARR without spending any of its cash.
Stock versus cash
An all-cash version of this deal looks very different. OLS operates at breakeven EBITDA, so writing a $10 million check would mean borrowing or draining its balance sheet. Any cash offer it could realistically make would come in far below $10 million. Paisley’s investors would recover a small fraction of their $12 million and close the book on a loss.
The stock deal changes the math for both sides. Assume, for illustration, that the combined company keeps growing at 15% and holds a 7x multiple. In three years it would be worth roughly $281 million, and the former Paisley investors’ 5.4% stake would be worth about $15 million. That is more than they originally invested. OLS still needs to absorb Paisley’s $600,000 in annual burn, so cost synergies or a plan to cover the dilution should be identified before signing rather than after. Handled with that discipline, an all-stock deal preserves OLS’s cash, gives the seller real upside and gets the deal done faster than a negotiation over a cash figure neither side finds attractive.
The window will not stay open indefinitely. As sponsors clear their 2021 and 2022 backlog and capital markets reopen, competition for second-tier AI assets will return. Acquirers who use their equity in 2027 can buy capability that would cost far more to build, and far more to buy two years from now.
