4 ms·

Unless they come out of bankruptcy without having to screw creditors, his stake is worth $0. Equity is the first to get wiped out in bankruptcy.

shostack 11y ago
How does that work exactly? Does the value of the equity simply go away, or is ownership of the company literally handed over to the creditors? Just listened to a Planet Money episode on the benefits of bankruptcy, and it seems like while you will have every single document and decision reviewed/approved by creditors and the judge if you try to make a deal and pay it off, you'd still retain ownership. Not familiar enough with the details though to know how that works in various scenarios.
- ChuckMcM 11y ago
  Well in a recapitalization the board votes to issue all new shares in the company, sometimes previous shares are "converted" and sometimes simply new options/grants are handed out. Under the auspices of a bankruptcy proceeding you're basically out of business so it's a matter of everyone agreeing on what the right course of action is to move forward. If you are ever bored and want to see how convoluted these things can get, look at some of the GM filings when they were bailed out by the government :-)
  - shostack 11y ago
    Interesting--thanks for clarifying. And are board seats typically handed over to the creditors during bankruptcy? Ie. do the creditors gain control of the board directly or via the ability to override their decisions? I can only imagine the GM filings...will have to take a look at that sometime.
    - ChuckMcM 11y ago
      Read the docket (posted up thread), but generally shareholders are debtors-in-possesion meaning they are "owed" a fraction of the company if they sold their shares. Everyone who has a share of American Apparel is listed on that docket as a creditor. As for board seats, I can't say. I've watched a couple of large companies restructure fairly closely but don't recall board seats being offered as part of that. Certainly at the point of being in Chapter 11 bankruptcy you're no longer the company you once were, one option is always to liquidate and move to Chapter 7 to disperse the assets. We had a customer company do that (one of the baby telephone companies) in the dot com bust when I was at Tut/FreeGate. As I recall from that transaction we got a check for around $3,000 for what had been something like $1.2M worth of networking gear they had deployed and not yet paid for.
      - shostack 11y ago
        Fascinating. Thanks for sharing your experience on that. Am I right in assuming that creditors are able to write off any such losses (such as your networking gear example)?
        ChuckMcM 11y ago
        Absolutely, (writing off the lost sales).
      - shostack 11y ago
        Fascinating. Thanks for sharing your experience on that. Am I right in assuming that creditors are able to write off any such losses (such as your networking gear example)?

shostack 11y ago

How does that work exactly? Does the value of the equity simply go away, or is ownership of the company literally handed over to the creditors? Just listened to a Planet Money episode on the benefits of bankruptcy, and it seems like while you will have every single document and decision reviewed/approved by creditors and the judge if you try to make a deal and pay it off, you'd still retain ownership. Not familiar enough with the details though to know how that works in various scenarios.

ChuckMcM 11y ago
Well in a recapitalization the board votes to issue all new shares in the company, sometimes previous shares are "converted" and sometimes simply new options/grants are handed out. Under the auspices of a bankruptcy proceeding you're basically out of business so it's a matter of everyone agreeing on what the right course of action is to move forward. If you are ever bored and want to see how convoluted these things can get, look at some of the GM filings when they were bailed out by the government :-)
- shostack 11y ago
  Interesting--thanks for clarifying. And are board seats typically handed over to the creditors during bankruptcy? Ie. do the creditors gain control of the board directly or via the ability to override their decisions? I can only imagine the GM filings...will have to take a look at that sometime.
  - ChuckMcM 11y ago
    Read the docket (posted up thread), but generally shareholders are debtors-in-possesion meaning they are "owed" a fraction of the company if they sold their shares. Everyone who has a share of American Apparel is listed on that docket as a creditor. As for board seats, I can't say. I've watched a couple of large companies restructure fairly closely but don't recall board seats being offered as part of that. Certainly at the point of being in Chapter 11 bankruptcy you're no longer the company you once were, one option is always to liquidate and move to Chapter 7 to disperse the assets. We had a customer company do that (one of the baby telephone companies) in the dot com bust when I was at Tut/FreeGate. As I recall from that transaction we got a check for around $3,000 for what had been something like $1.2M worth of networking gear they had deployed and not yet paid for.
    - shostack 11y ago
      Fascinating. Thanks for sharing your experience on that. Am I right in assuming that creditors are able to write off any such losses (such as your networking gear example)?
      - ChuckMcM 11y ago
        Absolutely, (writing off the lost sales).
    - shostack 11y ago
      Fascinating. Thanks for sharing your experience on that. Am I right in assuming that creditors are able to write off any such losses (such as your networking gear example)?