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

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

#51

Post by tdumitrescu »

nostrademons wrote: post #27

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 n…

> 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.

They raised another $250M in 2015. Still a lot less funding than they ultimately sold for, but the common pool certainly wasn't 90% of the value at their exit.

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

#52

Post by notimetorelax »

tempsy wrote: post #41

Even as a very early employee (say number 20) of a unicorn probably will not make that much...you'd be lucky to get $2M if it sold for $1B... Most people are better off just working at a big company if they want to build wealth.

That’s what I thought. The OP was hoping to receive 1mm for 4 years of work. VP role will give that easy in any sizable company.

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

#53

Post by GhettoMaestro »

drtillberg wrote: post #39

From a 40,000 foot view, it's odd that employees who are investing their professional effort are relegated to a lower equity tier. I think the person asking the question in the article makes a valid point: why is it fair for human capital to be devalued in this way?

Because that is how investing and capitalism works.

The man who has the capital, wins. Always.

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

#54

Post by bcrosby95 »

nostrademons wrote: post #27

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 n…

All the companies you're talking about have 1 thing in common: they're considered successes. You're going back in time and cherry picking companies that made it out alive. The early 00s/late 90s were full of companies that took Google levels of money that crashed and burned. There were also tons of companies that took little-to-no outside funding that crashed and burned.

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

#55

Post by harryh »

drtillberg wrote: post #39

From a 40,000 foot view, it's odd that employees who are investing their professional effort are relegated to a lower equity tier. I think the person asking the question in the article makes a valid point: why is it fair for human capital to be devalued in this way?

It's not odd at all.

If you start a company and you turn $200 million of investment into an exit of $100 million dollars you haven't done anything valuable. Why would you expect your stock to be worth anything?

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

#56

Post by jammygit »

aetherson wrote: post #37
ethanjinsen wrote: post #16

Earlier quoted context omitted.

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

In my opinion: Liquidation preference of 1x (or lower) is just sensible alignment of investor and founder incentives. The investor wants to make sure that if they buy 20% of the company for $5M, the founders aren't now incented to take advantage of them (in an extreme example: the day after the fundraising, liquidating the company for its assets, taking home $4M themselves and handing the investor back $1M. In a less…

It may be sensible for the founders and investors, but is it sensible for the employees? Many startup employees are paid to a significant extent in stock and do not understand the situation they end up in. They are also powerless and just have to trust that the founders and investors will treat them well.

Rationally, this leads to many of the best people ignoring the startup world

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

#57

Post by harryh »

qaq wrote: post #50

Basically if you are working at startup value your options at 0 and you will be right 99% of the time.

If anyone reading this is working at a startup and values their options at zero please get in contact with me (contact info in my profile) and we'll find a way for you to sell me your equity for $1.

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

#58

Post by Aloha »

This is why I've been saying for years that stock grants/options/RSUs are like playing the lotto, and salary/benefits are more important. Particularly when dealing with privately held firms where you have no ability to sell on the open market.

They're also a tool to keep people in roles they no longer want, because of a promise of a great payoff someday.

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

#59

Post by harryh »

deogeo wrote: post #31

A lot of words to say something very simple - information asymmetry via contractual complexity is being abused to profit those writing the contracts.

What information asymmetry? Liquidation preferences are perfectly fair, and not at all a mystery. Especially in the year 2019 when there has been an enormous amount written about them on the internet.

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

#60

Post by paulddraper »

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…

My tl;dr:

There is preferred stock (full price; i.e. investors) and common stock (incentive plans; i.e. founders/employees).

A liquidation employs one of two methods to distribute payment, depending on which is better for preferred shareholders:

* Method 1. Preferred stock is converted into common stock (usually 1:1). All common stock receives payment.

* Method 2. Preferred stock first receives payment according to liquidation preference which a multiple of the initial purchase value. Then participating preferred stock is converted into common stock (usually 1:1). Finally, all common stock receives the remainder of payment, if any. During preference, carveouts may protect certainly common shareholders.

In good exits, method 1 is used. In bad or mediocre exits method 2 is used.

---

Liquidation preference and participation are not required, but are tools to give founders more money per investor share.

Nowadays, you should be able to get a solid valuation for 1x liquidation preference, non-participating, no carveouts.

IMO this is a sensible compromise; if you can't even keep the initial investment value, you really haven't done well anyway.

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