Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

My company sold for $100M and I got zilch – how can that be?

medium.com

Post reply on HN
Print view View original

21–30 of 391 posts

Re: My company sold for $100M and I got zilch – how can that be?

#21

Post by [deleted] »

ethanjinsen wrote: post #16
cj wrote: post #12

Liquidation Preference. In very simple terms: "Liquidation Preference" is an agreement between a company and an investor that when the company is acquired or IPOs, the company will pay the investor some specific amount of money BEFORE any other shareholders get paid. If the company negotiated the funding well, the liquidation preference might be 1x (basically saying the company promises to pay back, in full, the inve…

So in your example, the investors are basically getting a 300% return if the company sells for 15M or more?

[deleted]

Re: My company sold for $100M and I got zilch – how can that be?

#23

Post by jusben1369 »

ethanjinsen wrote: post #16
cj wrote: post #12

Liquidation Preference. In very simple terms: "Liquidation Preference" is an agreement between a company and an investor that when the company is acquired or IPOs, the company will pay the investor some specific amount of money BEFORE any other shareholders get paid. If the company negotiated the funding well, the liquidation preference might be 1x (basically saying the company promises to pay back, in full, the inve…

So in your example, the investors are basically getting a 300% return if the company sells for 15M or more?

Yep. They're locking in their upside to offset for the risk they see in putting in $5 million. 3x preferred is either a weak founder with a good company or more likely an ok founder desperate for funding and therefore pretty high risk for the investor.

Re: My company sold for $100M and I got zilch – how can that be?

#24

Post by ZiiS »

jld wrote: post #18
cj wrote: post #12

Liquidation Preference. In very simple terms: "Liquidation Preference" is an agreement between a company and an investor that when the company is acquired or IPOs, the company will pay the investor some specific amount of money BEFORE any other shareholders get paid. If the company negotiated the funding well, the liquidation preference might be 1x (basically saying the company promises to pay back, in full, the inve…

Say a company sells 10% of itself to an investor for $10M, with a 2x preference. If the company sells for $100M, the investor gets $20M off the top. My question: Does the investor still own 10% of the shares, and will they recoup $8M of the remaining $80M? Is their $10M investment now worth $20M or $28M?

$20M

Re: My company sold for $100M and I got zilch – how can that be?

#25

Post by wtvanhest »

cj wrote: post #12

Liquidation Preference. In very simple terms: "Liquidation Preference" is an agreement between a company and an investor that when the company is acquired or IPOs, the company will pay the investor some specific amount of money BEFORE any other shareholders get paid. If the company negotiated the funding well, the liquidation preference might be 1x (basically saying the company promises to pay back, in full, the inve…

Founders are protected through carveouts that they can negotiate as part of the acquisition.

Re: My company sold for $100M and I got zilch – how can that be?

#26

Post by x0x0 »

jld wrote: post #18
cj wrote: post #12

Liquidation Preference. In very simple terms: "Liquidation Preference" is an agreement between a company and an investor that when the company is acquired or IPOs, the company will pay the investor some specific amount of money BEFORE any other shareholders get paid. If the company negotiated the funding well, the liquidation preference might be 1x (basically saying the company promises to pay back, in full, the inve…

Say a company sells 10% of itself to an investor for $10M, with a 2x preference. If the company sells for $100M, the investor gets $20M off the top. My question: Does the investor still own 10% of the shares, and will they recoup $8M of the remaining $80M? Is their $10M investment now worth $20M or $28M?

That's called participation and it's negotiated as part of the raise.

Non-participating: at liquidation, an investor chooses. They may either be paid back their investment (or more, if they have a multiple), OR they may choose to convert to common and get that percentage. They will, obviously, choose whichever pays them more =P

Participating is then also obvious: investors get their money (or negotiated multiple) out, and then get their ownership percentage of the remainder.

One thing that happens is companies very eager to raise monster rounds agree to shitty terms on all of the above. It's a lever founders and investors can manipulate to raise bigger rounds.

see eg https://medium.com/@CharlesYu/the-ultimate-guide-to-liquidat...

So your answer: $28m. Because if you agreed to 2x preferences, you're raising on shit terms and the investor probably got participation as well.

Generally if you raise on good terms, you can get a 1x non-participating.

But it's good to know the details.

Re: My company sold for $100M and I got zilch – how can that be?

#27

Post by nostrademons »

This matters more now that the current crop of tech companies have taken so much money.

In the old days, when software companies sold software rather than traditional services enhanced by software, it was common to get to profitability around the B round and then never take any more investment after that. Google took $25-35M and then nothing until IPO, running the company from 2001-2004 off cashflow. Microsoft took nothing except a small mezzanine round (to align incentives with the I-bankers) right before IPO. Github took a $50M Series A on a valuation of $500M; VCs owned 10% of the company, and the 3 founders + employees split the remaining 90% of its $7.5B acquisition. Indeed took a Series A and is profitable. Atlassian took a $60M Series A 8 years after starting the company, when it was already profitable. PlentyOfFish, HotOrNot, Reddit, Wufoo all raised either nothing or just angel money before being acquired.

When you're capital efficient, you get to keep the majority of any sale price.

The current crop of unicorns like Uber, Lyft, WeWork, Postmates, DoorDash, Instacart, AirBnB, and Stripe have all taken massive amounts of capital though, sometimes in the multi billions of dollars. That has to be returned to the investors before the common shares (founders & employees) make anything. If they hit on hard times before a liquidity event, there's a good chance that the common will be wiped out, and investors effectively own the company. Why shouldn't they, when they put up all the money that the company's been burning?

Re: My company sold for $100M and I got zilch – how can that be?

#28

Post by paulgb »

jammygit wrote: post #20

I feel like legal manipulation is very bad for the startup ecosystem. Even here, at the YC forums, people assume their startup equity is worth $0 and advise you to go with a FAANG (or day that they broke even with friends at faangs after their exits). How is a legitimate startup supposed to recruit the best people under these conditions?

By being transparent and giving all the numbers needed for the employee to make a good decision.

For what it's worth, I've always valued options at private companies as zero in making career decisions and looking back I don't think that heuristic ever steered me wrong (even at a company that is now a "unicorn")

Re: My company sold for $100M and I got zilch – how can that be?

#29

Post by bdcravens »

ethanjinsen wrote: post #16
cj wrote: post #12

Liquidation Preference. In very simple terms: "Liquidation Preference" is an agreement between a company and an investor that when the company is acquired or IPOs, the company will pay the investor some specific amount of money BEFORE any other shareholders get paid. If the company negotiated the funding well, the liquidation preference might be 1x (basically saying the company promises to pay back, in full, the inve…

So in your example, the investors are basically getting a 300% return if the company sells for 15M or more?

Yes.

Re: My company sold for $100M and I got zilch – how can that be?

#30

Post by rmckayfleming »

jld wrote: post #18
cj wrote: post #12

Liquidation Preference. In very simple terms: "Liquidation Preference" is an agreement between a company and an investor that when the company is acquired or IPOs, the company will pay the investor some specific amount of money BEFORE any other shareholders get paid. If the company negotiated the funding well, the liquidation preference might be 1x (basically saying the company promises to pay back, in full, the inve…

Say a company sells 10% of itself to an investor for $10M, with a 2x preference. If the company sells for $100M, the investor gets $20M off the top. My question: Does the investor still own 10% of the shares, and will they recoup $8M of the remaining $80M? Is their $10M investment now worth $20M or $28M?

That's where the difference between participating and non-participating preferences come in. Participating meaning that they also participate in the remaining surplus (so on your example $28M). Non-participating means they choose whichever is better (in your example they wouldn't since $20M is better than 10% of $100M, but if the company sold for $300M they'd choose $30M instead of the $20M).
Post reply on HN