4 ms·

I'd be curious as to what the difference is between the theory of equity ownership and the reality. The theory, is that you have a certain percentage of the co

I'd be curious as to what the difference is between the theory of equity ownership and the reality. The theory, is that you have a certain percentage of the company (whether that is 10% of whatever), that is somehow "yours". But this is a private company, and you are a minority shareholder who presumably hasn't put much in the way of cash equity. What's to prevent the shareholders, after you leave, simply from dealing you out? There are all sorts of ways of doing this. The existing shareholders can get a liquidation preference in later rounds. The remaining co-founders (who presumably hold common), get paid out with a consulting bonus that acts as a drawdown on the equity, resulting in nothing for any of the minority shareholders after the preferred gets taken care of. If there are employees during a liquidation event, they can be taken care of with "Retention" or "Continuity" bonuses, and not rely on their holding of common. Once you leave a company, I wonder how often (in the real world, versus they way we all want it to be) you simply end up with, completely legally, nada. YC would likely know very well the answer to this - I bet it is north of 98% of the time.

obstinate 9y ago
Can you really deal certain shareholders out because you don't like them? I was under the impression that there is still a fiduciary duty to non-employee shareholders.
- DamonHD 9y ago
  Typically if you are under 10% you can't block the company doing from things that may in the end tend to disadvantage you, ie you can't obstruct legitimate business unreasonably, though shareholders generally have to be treated equitably. YMMV depending on local laws.
- JonFish85 9y ago
  "a fiduciary duty to non-employee shareholders" I believe this is fairly difficult to prove in court. It happens pretty commonly; it's not super hard to dilute someone out if the company wants to. In fact, it's probably seen as a good move by the board and all current employees.
- ghshephard 9y ago
  So, the catch here, is if you can get a significant portion of the common shareholders together, you might have grounds for a lawsuit, which may not be successful, but it will slow things down. What typically happens is that the big ones (in this case, the founders) get a "Consulting Bonus." - leaving the other common shareholders out in the cold as they no longer have enough shares to mount a law suit. I've seen it happen at least once at a company that I worked for that was sold to Oracle for about $100mm - everyone who stuck around for the liquidation event got retention bonus, plus one of the cofounders who had left (but still had a big chunk of equity) got a "Consulting" bonus - and, of course, the CEO (who had been around for about 18 months) got a monster payoff. Preferred shareholders (who actually had put down $$$) got paid off with a liquidation preference. 100% of the common shareholders, including some early employees who had a reasonable chunk of the company - were totally wiped out. Got nothing for their equity.
- siegel 9y ago
  The directors and officers have a fiduciary duty to all shareholders, including non-employee shareholders. The level of difficulty in legally challenging a merger on fiduciary duty grounds depends on other factors, most prominently whether there were non-interested directors approving the transactions. Basically, if the board was all made up of people who got special deals, it becomes much easier to sue.

obstinate 9y ago

Can you really deal certain shareholders out because you don't like them? I was under the impression that there is still a fiduciary duty to non-employee shareholders.

DamonHD 9y ago
Typically if you are under 10% you can't block the company doing from things that may in the end tend to disadvantage you, ie you can't obstruct legitimate business unreasonably, though shareholders generally have to be treated equitably. YMMV depending on local laws.
JonFish85 9y ago
"a fiduciary duty to non-employee shareholders" I believe this is fairly difficult to prove in court. It happens pretty commonly; it's not super hard to dilute someone out if the company wants to. In fact, it's probably seen as a good move by the board and all current employees.
ghshephard 9y ago
So, the catch here, is if you can get a significant portion of the common shareholders together, you might have grounds for a lawsuit, which may not be successful, but it will slow things down. What typically happens is that the big ones (in this case, the founders) get a "Consulting Bonus." - leaving the other common shareholders out in the cold as they no longer have enough shares to mount a law suit. I've seen it happen at least once at a company that I worked for that was sold to Oracle for about $100mm - everyone who stuck around for the liquidation event got retention bonus, plus one of the cofounders who had left (but still had a big chunk of equity) got a "Consulting" bonus - and, of course, the CEO (who had been around for about 18 months) got a monster payoff. Preferred shareholders (who actually had put down $$$) got paid off with a liquidation preference. 100% of the common shareholders, including some early employees who had a reasonable chunk of the company - were totally wiped out. Got nothing for their equity.
siegel 9y ago
The directors and officers have a fiduciary duty to all shareholders, including non-employee shareholders. The level of difficulty in legally challenging a merger on fiduciary duty grounds depends on other factors, most prominently whether there were non-interested directors approving the transactions. Basically, if the board was all made up of people who got special deals, it becomes much easier to sue.