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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?

#201

Post by x0x0 »

badrequest wrote: post #100
x0x0 wrote: post #9

Earlier quoted context omitted.

This doesn't sound like shenanigans. Reading between the lines: > While it hasn’t ended up becoming the unicorn I was hoping for it sounds like the company wasn't a success. It could be the preference overhang, or it could be a difficult acquisition. Fundamentally, if the company isn't a success relative to the funding , employees aren't going to get paid. Employees can get paid quite well on a $100m exit if eg the f…

I don't mean shenanigans as a cutesy word for fraud (and to be completely fair, the author touched on how this is something the industry needs to improve at), but I merely mean that the explanation provided to most workers is "you own X number of shares in the company that are currently valued at Y", and anything missing from that summary that makes it untrue is, well, shenanigans to me.

I totally agree that founders/hiring managers should be very clear on how employees are comped. However, in this specific case, I think a >= 1x preference is so utterly standard that employees of a startup need to do 5 minutes of due diligence and understand how their comp works.

For everyone reading this, there are 3 outcomes:

company failure, company success, middling

In the middling outcomes, people need to know the negotiated rules re: who gets what

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

#202

Post by cnst »

rmckayfleming wrote: post #30
jld wrote: post #18

Earlier quoted context omitted.

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).

Shitz, and here I go thinking I knew everything about these sorts of things by attending a 5-day lunch-time course at Capital Factory on Founders Academy Essentials… So much for those cap tables!

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

#203

Post by charwalker »

harel wrote: post #128

This is why, for me, VC money is a last resort and an admission of defeat of sorts. If my business cannot be a business, i.e., an entity that earn's it's keep and makes profit, then maybe it's not meant to be. VC money might prolong it's life, but at that point, they are the real owners of this "entity".

With that, the founders/core group can deploy VC cash injections to stay paid and in charge vs closing shop. Quitting can be really hard for highly driven people or those thinking their idea is going to work even when the numbers say it isn't making money.

There's an incentive mismatch then for them to pursue VC funding and keep going while employees with stock won't notice their probably worthless options becoming definitely worthless options or at best a bonus when all is sold. Like my own performance/holiday bonus at a stable firm, options are nice and possibly count toward total compensation but aren't hard cash and should not be relied upon as an investment or in your budget. Bird in hand and all that.

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

#204

Post by alecbenzer »

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?

I feel like there's a lot of founder/non-founder equity disparity that doesn't quite make sense. If it ever got to a point where startups genuinely had a hard time recruiting good talent, I would think/hope that one lever available would be to shift the equity balance a bit.

Another might be to just pay engineers in cash closer to their market value. I think (not sure) that people in other fields who work at startups end up having a smaller gap between elsewhere comp and startup comp? Though that also usually comes with even less equity.

All that said, most startups seem to still be able to hire. Maybe people find the experience rewarding enough relative to FAANG to accept the gaps. Maybe people don't quite do the math to understand what the outcomes look like.

Personally, I had left FANNG to go to a startup a few years ago, was recently looking for a new gig, considered going back to FAANG, but decided on another startup that I liked for a lot of reasons, and got myself to a point where I thought the break-even valuation wasn't too crazy. But it's very much not "this will make me rich" and more "this seems like it'll make me happy and I feel like I'm not literally setting money on fire by going there".

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

#205

Post by bbulkow »

We usually called it the liquidation stack.

Because of different trigger points, whether different investors are participating or non participating, you needed a spreadsheet to figure out what common gets, for each potential outcome. There is no way to have a conversation with a potential employee about the liquidation stack, it is usually far too complex.

More insideously, the buyer can change the rules. As long as the sellers vote for it, you can do things like wash out common, recap common, give new grants that are incentive grants with a one year cliff.

Option holders don't vote, so you won't even see what they are voting on.

That kind of stuff invites shareholder lawsuits, but it is ill advised to sue because then you are a trouble maker. Otoh, not suing means you are a pushover.

An example of a shareholder wash out was when jobs took over pixar, so i was told by a friend who had shares.

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

#207

Post by einarvollset »

jacquesm wrote: post #130
mark-r wrote: post #119

Earlier quoted context omitted.

Correct. The founder probably retained 90% or more of the stock, its growth was completely organic. I was very lucky to be part of it.

If there is one way a small shareholder can ensure that they are going to be treated well it is to see to it that they hold the exact same kind of stock as a much larger shareholder. That way a bigger fish will fight for your rights with a lot more power than you ever could do by yourself. There are then still quite a few ways in which you could be screwed but far fewer than without that precaution.

Indeed. This is also why you should make sure any equity you get in the acquirer as part of the deal is as high up the preference stack as possible.

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

#208

Post by charwalker »

nikanj wrote: post #160
notimetorelax wrote: post #52

Earlier quoted context omitted.

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.

Much easier to become a senior programmer at a 3-person startup than a VP at a sizable company.

Which is partially why the VP makes several times more at a stable firm vs options/stock/equity that are a lottery ticket, more or less. The VP won't get paid if the company sells but they can by a new car each year.

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

#209

Post by megaremote »

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.

It is clearly not an article, it is question someone posed. Here is the answer.

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

#210

Post by alecbenzer »

qroshan wrote: post #178
jdjjdflknfjj wrote: post #109

It sounds like an easy way to screw holders of common stock out of their money. Don't they have any protection at all? Like at least, does the agreement for "liquidation preference" have to be reasonable (like, they could go to court and challenge it, and the company would have to prove that it was a necessary deal)?

Employees that are paid common stock didn't put any money. They are also paid decent salary. It is like playing a lottery, but only with opportunity cost. Not sure what needs to be protected here.

> Employees that are paid common stock didn't put any money.

> It is like playing a lottery, but only with opportunity cost.

So, they did put in money. It's "opportunity cost" money as opposed to literal cash, but logically it's still value being invested in the company (the company has $X more in the bank because the employee was willing to take a $X pay cut).

Compared to VCs, engineers are making a lot more of an investment in terms of % of their potential value for a less favorable return.

I think VCs get better terms because A) they control an amount of capital that's rarer and have more leverage, B) they do this professionally and are better at negotiating things. But probably mostly A?

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