5 ms·

Why is it legally easy for them to do this, but in other high profile examples it was difficult for companies to dilute a now-unwanted partner? For example, Gat

Why is it legally easy for them to do this, but in other high profile examples it was difficult for companies to dilute a now-unwanted partner? For example, Gates and Ballmer pushing out Allen, or Zuckerberg pushing out Saverin.

joshjkim 10y ago
it's not quite apples/apples, and the law tries to protect minority shareholders from unfair actions by majority holders, but if the major stakeholders can say "it's in the best interest of the company" with a straight face and not just so the major stakeholders can enrich themselves at the expense of others, it's usually passable. in general, you'd ask lawyers a lot of questions about this, and you definitely take into account the risk of a shareholder lawsuit. so, it's a lot easier to do this kind of thing when there's a downround and the alternative to these terms is the company shutting down - basically, the new folks diluting old folks can say this is ultimately in the best interest of the company because the alternative is a shutdown. in the context of MS or FB, both companies were on the up and increasing in value, so harder for the big stakeholders to say pushing out another SH was just about "serving the best interest of the company" with a straight face.
mvpu 10y ago
Legally very easy because it's a down road (read up on "VC cram down"). They'd raised $120million prior, and now they're doing a $5-$15million convertible at a $80million valuation (significantly down round). All existing investors will either "play" (invest more at this valuation) or "pay" (suffer significant dilution). When valuation takes a down turn, all rules are off - the board has the fiduciary duty to do whatever it thinks is right for the company, even if it means getting rid of all previous shareholders who are not pitching in to help. VC backed companies are like drugs - feels great as long as you're high but could die in a second.
rhino369 10y ago
It's been a long time since I took business associations, but you aren't allowed to discriminate against any of the shareholders. You can dilute everyone, but you can't dilute just some people. IIRC Zuckerberg and Thiel created a new entity and gave Saverin a difference class of shares/equity then diluted that class. They must have known they'd never get away with it, it was likely just a move to be able to fire him quickly and just cut a check at a later date.

joshjkim 10y ago

it's not quite apples/apples, and the law tries to protect minority shareholders from unfair actions by majority holders, but if the major stakeholders can say "it's in the best interest of the company" with a straight face and not just so the major stakeholders can enrich themselves at the expense of others, it's usually passable. in general, you'd ask lawyers a lot of questions about this, and you definitely take into account the risk of a shareholder lawsuit. so, it's a lot easier to do this kind of thing when there's a downround and the alternative to these terms is the company shutting down - basically, the new folks diluting old folks can say this is ultimately in the best interest of the company because the alternative is a shutdown. in the context of MS or FB, both companies were on the up and increasing in value, so harder for the big stakeholders to say pushing out another SH was just about "serving the best interest of the company" with a straight face.

mvpu 10y ago

Legally very easy because it's a down road (read up on "VC cram down"). They'd raised $120million prior, and now they're doing a $5-$15million convertible at a $80million valuation (significantly down round). All existing investors will either "play" (invest more at this valuation) or "pay" (suffer significant dilution). When valuation takes a down turn, all rules are off - the board has the fiduciary duty to do whatever it thinks is right for the company, even if it means getting rid of all previous shareholders who are not pitching in to help. VC backed companies are like drugs - feels great as long as you're high but could die in a second.

rhino369 10y ago

It's been a long time since I took business associations, but you aren't allowed to discriminate against any of the shareholders. You can dilute everyone, but you can't dilute just some people. IIRC Zuckerberg and Thiel created a new entity and gave Saverin a difference class of shares/equity then diluted that class. They must have known they'd never get away with it, it was likely just a move to be able to fire him quickly and just cut a check at a later date.