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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?

#141

Post by 13415 »

tyrust wrote: post #76
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…

It always baffles me when the top comment isn't discussing the article, but provides a response to the headline as if the article doesn't even exist.

I often check the comments first to see if there is one as clear and concise as CJ's. Then I don't need to skim a lengthy article for the information I'm interested in - such as the answer to the question in the headline in this case.

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

#143

Post by rolltiide »

dmix wrote: post #108
testfoobar wrote: post #97

As a former founder, I am often surprised by the incredible spend at some startups I've visited. The biggest is headcount - so many fluff jobs. How many designers does an early stage startup really need? 1, 2, 10, 20, 50? How many SREs do you need when your site is just a handful of AWS instances? How many sales people do you need when your product isn't ready for sale yet? Each employee fully loaded in the bay area…

Instagram had what, 12 employees when it got bought for 1 billion? I worked for a small company that fired half the employees (10->5, mostly marketing/sales execs) and absolutely nothing changed. Our revenue actually increased over the next year, not to mention gross sales not paying those salaries. We were originally going to replace them but decided to wait it out for a full year because we realized we didn't need…

Some founders honestly are using employment numbers are surrogates for friends

It is also convenient for them to feel like they are contributing to the local job numbers

It is convenient to villify people that accumulate value amongst a small number of people

Regardless of your thoughts if you have money and are aiming to make more of it, the leaner operation is the one to do it

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

#144

Post by dgudkov »

OK, what I understood from the article is that the guy owned 1% not of the company's acquisition price (as he thought), but 1% from (price - X) where X was unknown and turned out to be greater or equal to the price.

The fact that he didn't realize it until the very end makes the author's advise very correct - "make sure you understand exactly what you own".

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

#145

Post by Conan_Kudo »

brownkonas wrote: post #126
bitL wrote: post #118

For anyone thinking about working for startups: - don't treat verbal agreements seriously - common stock is 99.9% worthless, you want preferred stock - liquidation preference is important, if company doesn't want to tell you, insist on market-rate salary - if a company tries to switch from an LLC to C-Corp and move you from being a minority owner of LLC (0.1-3%) into a common-stock owner of a C-Corp with the same %,…

It's fine to want preferred stock, but it's pretty rare for employees to ever receive it (unless they put up cash) -- it's reserved for investors to avoid a sandbagging + abscond with the money raised scenario.

And employees deserve to be sandbagged? That seems monumentally unfair...

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

#146

Post by ummonk »

zucker42 wrote: post #73
jammygit wrote: post #56

Earlier quoted context omitted.

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

I have no knowledge of the startup world, but based on the article, if both the founder and employees have common shares then their incentives are aligned (i.e. the founder wouldn't want to sell the company unless the price was well above the preference overhang). Of course, deception can pay a role in making this less fair.

Often, founders get paid money directly as part of the acquisition to make them greenlight it.

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

#147

Post by tptacek »

yitchelle wrote: post #105
beambot wrote: post #45

Earlier quoted context omitted.

Even more insidious: Participating Preferred, which is effectively double-dipping.

For those not so deep in the world of startup, can you give a layman's explanation of what Participating Preferred is?

As I understand it, from memory:

I invest $100 for 20% of your venture. You sell for $200.

Standard preference: I get $100, not $40, as my % would suggest, because I get at least every dollar I invested back.

2x preference: I get all $200, because I'm promised at least 2x my investment back.

Participating preferred: I get $120 (I think?) --- I first get my invested dollars back, and then I still get my % of the venture.

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

#148

Post by tptacek »

ummonk wrote: post #146
zucker42 wrote: post #73

Earlier quoted context omitted.

I have no knowledge of the startup world, but based on the article, if both the founder and employees have common shares then their incentives are aligned (i.e. the founder wouldn't want to sell the company unless the price was well above the preference overhang). Of course, deception can pay a role in making this less fair.

Often, founders get paid money directly as part of the acquisition to make them greenlight it.

How often is often? Can you name 3 such cases?

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

#149

Post by krajzeg »

zucker42 wrote: post #73
jammygit wrote: post #56

Earlier quoted context omitted.

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

I have no knowledge of the startup world, but based on the article, if both the founder and employees have common shares then their incentives are aligned (i.e. the founder wouldn't want to sell the company unless the price was well above the preference overhang). Of course, deception can pay a role in making this less fair.

The article mentions at least one reason why the incentives often aren't aligned: a carve-out agreement that guarantees specific people (often founders) a cut from the "preferred" part of the pie. As I understood it, this cut is completely unrelated to the amount of shares (common or otherwise) those people own and is a separate agreement saying that they get eg. 10% of the money in the event of a sale.

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

#150

Post by tptacek »

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?

Liquidation preferences aren't so much "legal manipulation" as they are an absolutely bog standard component of venture financing.
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