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Agreed. The shares sold in the secondary offering were likely shares of common stock, whereas the last round of funding would have been a sale of preferred stoc
by hkhanna 8y ago
Agreed. The shares sold in the secondary offering were likely shares of common stock, whereas the last round of funding would have been a sale of preferred stock.
I would expect there to be a natural discount off the preferred valuation since the common stock doesn’t have the same downside protection. A 20-30% discount would not be at all unusual in my experience.
- DSingularity 8y agoWhat is this "downside risk" that exists for common stock and not preferred stock?
- hartem_ 8y agoLiquidation preference is one. Basically holders of the preferred stock get to cash out first and common stock holders get whatever’s left. In case of an exit at a lower than before valuation, for example, it’s not unusual for common stock to lose most (or all) of its value. The Venture Deals book is really insightful on this (and general startup financing) subject.
- olivermarks 8y agohttps://www.feld.com/archives/2016/10/venture-deals-third-edition.html https://www.feld.com/archives/2016/10/venture-deals-third-ed... This book? Thank you
- hartem_ 8y agoYes.
- olliej 8y agoBasically it’s the “you’re just an employee” risk of startups. A non employee investing 100k in your company is clearly contributing more than a full time employee being paid in RSUs, so when the company gets liquidated (eg statistics happens) they will get paid back, whereas your employees don’t. Alternatively, the company might sell enough preferred stock to VCs to give them majority voting rights, and they can then devalue the common stock and sell the company with none of the proceeds going to common stock. Or your company never goes public, but common stock comes with rules against selling it on private markets, so it can functionally be treated as being worth $0. Or of course (because you can’t sell it) the company can impact clawbacks without you even doing anything wrong. Of course I’m not saying that all startups do that, just that that can happen (and I believe all of the above have happened). That’s part of why I will never work at a startup, though not necessarily by choice: many HN people have claimed told me on many occasions that it is unreasonable for me to expect to get fair compensation from a startup. Shrug. Anyway, for other people who are willing to take the risk of a $0 return from a company selling at a profit, I would strongly recommend having a lawyer look at your contract to verify none of the more egregious failings listed above can happen, and remember that stock compensation is worthless if you cannot sell it.
- aqme28 8y ago> A non employee investing 100k in your company is clearly contributing more than a full time employee being paid in RSUs How do you figure?
- notyouravgdoge 8y agoI think they were being sarcastic
- olliej 8y agocorrect, I had thought in this context at least it was obvious :)
- olliej 8y agoI was being sarcastic, largely because people on HN have vigorously opposed my assessment that time working for a startup at below market rates is fundamentally the investment of money in that startup. So at minimum every "employee" working for a startup is investing (market rate - actual rate) dollars in that startup. That's also not super equivalent because time investments (and standard employment contracts) mean that there is an absolute opportunity cost to working for a startup that does not match a cash investment. Essentially you can invest money in multiple companies at a time, you can't invest time repeatedly.
- sonnyblarney 8y agoIt's not just the type of share - a single bid/buy transaction does not necessarily reflect the value of the rest of the shares. Saudis need to park tons of cash somewhere. They might be willing to pay a premium for the safety of an American company. A hedge fund may not. Valuation of a company by using a small sample transaction is always a roughshod thing.