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Sorry but that’s horseshit. First of all investors hold priority shares and there are many ways to structure a deal where employees get nothing. I went through

Sorry but that’s horseshit. First of all investors hold priority shares and there are many ways to structure a deal where employees get nothing. I went through one. The deal was classified an asset sale and the proceeds went to only the priority shareholders.

christophilus 7y ago
If employees have shares, they are shareholders. At any rate, it is neglect of fiduciary duty if you dilute shares without simultaneously producing enough value that the share price will increase proportionally.
- otterley 7y ago
  Do you have a legal citation for that?
  - mlyle 7y ago
    His statement is an overreach, but the point is: you can't just dilute a given shareholder class for the benefit of others willy-nilly.
    - otterley 7y ago
      Overreach with respect to legal conclusions is par for the course at HN, it seems...
    - rficcaglia 7y ago
      You can with lawyers. Just saw it happen first hand. It is amazing what cap table engineering can be done with a few 100K in lawyer fees and a devious board member or two.
      - ohazi 7y ago
        The company, any reasonably wealthy executives, and the investors all have lawyers. The rank and file largely do not. That's the only reason this works. It would never fly if challenged, but it never gets challenged.
        rficcaglia 7y ago
        True. But even experienced execs and investors know that lawsuits require time, arbitration, and often don’t go how you would expect. All the while eating up money that should go to shareholders. I’m agreeing that employees get screwed more often than not, I’m also saying smaller investors get screwed more often than not.
- october_sky 7y ago
  You didn't address the fact there are different classes of shares, which the person you're responding to pointed out.
mlyle 7y ago
Investors hold preferred shares. Preferred tends to have a choice called a liquidity preference. If investors put in $5M, they might have their choice of getting the first $5M from a sale, or to convert to common and get their share of the company. This (is one thing that) prevents the founders from taking $5M in capital and then immediately dissolving the company and taking that share. It also helps mitigate investor risk-- they get their investment back before other people get paid. (Of course, there are many details to liquidity preferences-- participating vs. nonparticipating, ... 2x liquidity preference where investors are guaranteed double their money back, etc. but 1x, nonparticipating is the usual deal and founders hold a lot of common and want to negotiate for reasonable terms here) An asset sale usually doesn't pay anyone back. If proceeds are not enough to pay the liquidity preference, common gets nothing. I've been through a few startups as a founder. I have cut similar 1x nonparticipating deals. Unfortunately, my most recent one, no employees got anything because of liquidity preferences-- there was not enough proceeds to pay investors back. (I only received a fraction of my original investment, and other investors similarly got pennies on the dollar).
- deleted 7y ago
  [deleted]
- navigatesol 7y ago
  >I've been through a few startups as a founder. I have cut similar 1x nonparticipating deals. Unfortunately, my most recent one, no employees got anything because of liquidity preferences So you had experience with these exact problems, yet still structured your latest startup so that your employees would end up with nothing?
  - sokoloff 7y ago
    More likely they structured the deal in the only way under which they could get any money at all. 1x non-participating is not a bad deal for the company or employees. It only becomes a bad deal when the company fails to create economic value, at which point are the employees really due anything more than salary for time worked? Literally GP post says that investors got pennies on the dollar back and you’re grousing that employees got nothing for their (worthless) equity? Without disrespect to the effort of founder(s) and employees, the company created negative economic value. That’s the root issue, not that the investors had fair contractual terms that caused them to lose “only the vast majority of their investment” rather than “all of it”.

christophilus 7y ago

If employees have shares, they are shareholders. At any rate, it is neglect of fiduciary duty if you dilute shares without simultaneously producing enough value that the share price will increase proportionally.

otterley 7y ago
Do you have a legal citation for that?
- mlyle 7y ago
  His statement is an overreach, but the point is: you can't just dilute a given shareholder class for the benefit of others willy-nilly.
  - otterley 7y ago
    Overreach with respect to legal conclusions is par for the course at HN, it seems...
  - rficcaglia 7y ago
    You can with lawyers. Just saw it happen first hand. It is amazing what cap table engineering can be done with a few 100K in lawyer fees and a devious board member or two.
    - ohazi 7y ago
      The company, any reasonably wealthy executives, and the investors all have lawyers. The rank and file largely do not. That's the only reason this works. It would never fly if challenged, but it never gets challenged.
      - rficcaglia 7y ago
        True. But even experienced execs and investors know that lawsuits require time, arbitration, and often don’t go how you would expect. All the while eating up money that should go to shareholders. I’m agreeing that employees get screwed more often than not, I’m also saying smaller investors get screwed more often than not.
october_sky 7y ago
You didn't address the fact there are different classes of shares, which the person you're responding to pointed out.

mlyle 7y ago

Investors hold preferred shares. Preferred tends to have a choice called a liquidity preference. If investors put in $5M, they might have their choice of getting the first $5M from a sale, or to convert to common and get their share of the company. This (is one thing that) prevents the founders from taking $5M in capital and then immediately dissolving the company and taking that share. It also helps mitigate investor risk-- they get their investment back before other people get paid. (Of course, there are many details to liquidity preferences-- participating vs. nonparticipating, ... 2x liquidity preference where investors are guaranteed double their money back, etc. but 1x, nonparticipating is the usual deal and founders hold a lot of common and want to negotiate for reasonable terms here) An asset sale usually doesn't pay anyone back. If proceeds are not enough to pay the liquidity preference, common gets nothing. I've been through a few startups as a founder. I have cut similar 1x nonparticipating deals. Unfortunately, my most recent one, no employees got anything because of liquidity preferences-- there was not enough proceeds to pay investors back. (I only received a fraction of my original investment, and other investors similarly got pennies on the dollar).

deleted 7y ago
[deleted]
navigatesol 7y ago
>I've been through a few startups as a founder. I have cut similar 1x nonparticipating deals. Unfortunately, my most recent one, no employees got anything because of liquidity preferences So you had experience with these exact problems, yet still structured your latest startup so that your employees would end up with nothing?
- sokoloff 7y ago
  More likely they structured the deal in the only way under which they could get any money at all. 1x non-participating is not a bad deal for the company or employees. It only becomes a bad deal when the company fails to create economic value, at which point are the employees really due anything more than salary for time worked? Literally GP post says that investors got pennies on the dollar back and you’re grousing that employees got nothing for their (worthless) equity? Without disrespect to the effort of founder(s) and employees, the company created negative economic value. That’s the root issue, not that the investors had fair contractual terms that caused them to lose “only the vast majority of their investment” rather than “all of it”.