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In the context of parent and grandparent, what do you look for when doing your due diligence to evaluate the risk of the employees getting screwed on common sha

by gkop 11y ago

In the context of parent and grandparent, what do you look for when doing your due diligence to evaluate the risk of the employees getting screwed on common shares when every other stakeholder makes money?

nostrademons 11y ago
The first two things would be the amount of funding taken, and the preference overhang. If you know that a company has taken $300M in funding and that their last round of $150M had a 3x liquidation preference with a 1x preference on earlier rounds, then you can do the math to figure out that any exit under $600M is going to leave the common stock worthless. If you know your ownership percentage (and every startup employee should), you can then do the math to figure out how big an exit the company would need to have the desired financial outcome, eg. if you own 0.01% of the company, it would need to exit for $10.6B before you become a millionaire. Go judge the size of the market, growth rate, and profitability yourself to see if that's likely. In Good Technology's case, just look at Crunchbase: https://www.crunchbase.com/organization/good-technology#/entity https://www.crunchbase.com/organization/good-technology#/ent... There are red flags galore for startup employees there - the funding history started with a Series E in 2005, with the company supposedly founded in 1996. That's the time to ask about the company history, which the article says started as a startup that bought Motorola Mobility's business. Every funding round since then was either private equity or debt (!!), along with a secondary sale. If I saw just the Crunchbase investment history and heard that it was a startup that purchased a spun-out portion of Motorola, my immediate reaction would be "This isn't a startup, this is a mature private company with a business model that requires large infusions of cash." (I've actually been burned in the public markets by a similar company - mature companies should not need regular cash infusions.) And I'd value the company accordingly - most likely, I wouldn't take the job there at all, but if I did, I'd assume that salary and experience is all I'm going to get.

by gkop 11y ago

nostrademons 11y ago

The first two things would be the amount of funding taken, and the preference overhang. If you know that a company has taken $300M in funding and that their last round of $150M had a 3x liquidation preference with a 1x preference on earlier rounds, then you can do the math to figure out that any exit under $600M is going to leave the common stock worthless. If you know your ownership percentage (and every startup employee should), you can then do the math to figure out how big an exit the company would need to have the desired financial outcome, eg. if you own 0.01% of the company, it would need to exit for $10.6B before you become a millionaire. Go judge the size of the market, growth rate, and profitability yourself to see if that's likely. In Good Technology's case, just look at Crunchbase: https://www.crunchbase.com/organization/good-technology#/entity https://www.crunchbase.com/organization/good-technology#/ent... There are red flags galore for startup employees there - the funding history started with a Series E in 2005, with the company supposedly founded in 1996. That's the time to ask about the company history, which the article says started as a startup that bought Motorola Mobility's business. Every funding round since then was either private equity or debt (!!), along with a secondary sale. If I saw just the Crunchbase investment history and heard that it was a startup that purchased a spun-out portion of Motorola, my immediate reaction would be "This isn't a startup, this is a mature private company with a business model that requires large infusions of cash." (I've actually been burned in the public markets by a similar company - mature companies should not need regular cash infusions.) And I'd value the company accordingly - most likely, I wouldn't take the job there at all, but if I did, I'd assume that salary and experience is all I'm going to get.