3 ms·

Preferred stock. Investors get their money first, then founders, then everyone else.

ska 6y ago
Founders (and early investors) don't necessarily have preference. The thing about founders and possibly key individuals is that they can be taken care of other ways in the earn out, even if their equity ends up hugely devalued. It's one of the ways deals like this can get made, and one way employees can get left holding an empty bag.
- foobiekr 6y ago
  This. Founders, at least critical ones, may be compensated by a payment to help complete an acquisition, especially in the event that the exit was not a good one. Founders and other employees who the acquirer wants to retain and the founders will then be given a retention package that vests over a few years. While the payment to support completing the deal generally goes to all of the founders and the CEO, the retention can, but usually doesn't include the CEO if not a founder or most non-engineering resources...
  - fatnoah 6y ago
    Excellent point. This is what happened in the case where I was the VP Eng. Everyone in Engineering got low to high 5 figure cash payouts depending on seniority, and C-levels and VPs (only a group of 5) got low/mid 6 figure deals. Everyone then got joining RSUs at their level for the acquiring company. So, everyone made some money, but not from the ISOs.
- tomnipotent 6y ago
  > Founders (and early investors) don't necessarily have preference It completely depends on the term sheet, but liquidation preference has been a thing for a loooong time. Also I meant to say "preference stack" instead of "preferred stock". > they can be taken care of other ways in the earn out The OP was asking why employees can make nothing during an acquisition, not if founders or investors are charitable. https://angel.co/blog/liquidation-preference-your-equity-could-be-worth-millions-or-nothing https://angel.co/blog/liquidation-preference-your-equity-cou...
  - ska 6y ago
    > The OP was asking why employees can make nothing during an acquisition, Right, and one of the ways that can happen is that founders do not have preference and their stock goes to nothing with the rest of the common (e.g. an equity group has your debt and 2x preference, they get almost all of the sale price). But to keep the founders on side and "cohesion" through the transfer, they are offered money outside of the equity sale in the earn out terms. If all goes well they still make ok/good money on the deal, but none/little of it is from their equity. If you are engineer #47 you may or may not have a job after the acquisition but your equity value just vanished.

ska 6y ago

Founders (and early investors) don't necessarily have preference. The thing about founders and possibly key individuals is that they can be taken care of other ways in the earn out, even if their equity ends up hugely devalued. It's one of the ways deals like this can get made, and one way employees can get left holding an empty bag.

foobiekr 6y ago
This. Founders, at least critical ones, may be compensated by a payment to help complete an acquisition, especially in the event that the exit was not a good one. Founders and other employees who the acquirer wants to retain and the founders will then be given a retention package that vests over a few years. While the payment to support completing the deal generally goes to all of the founders and the CEO, the retention can, but usually doesn't include the CEO if not a founder or most non-engineering resources...
- fatnoah 6y ago
  Excellent point. This is what happened in the case where I was the VP Eng. Everyone in Engineering got low to high 5 figure cash payouts depending on seniority, and C-levels and VPs (only a group of 5) got low/mid 6 figure deals. Everyone then got joining RSUs at their level for the acquiring company. So, everyone made some money, but not from the ISOs.
tomnipotent 6y ago
> Founders (and early investors) don't necessarily have preference It completely depends on the term sheet, but liquidation preference has been a thing for a loooong time. Also I meant to say "preference stack" instead of "preferred stock". > they can be taken care of other ways in the earn out The OP was asking why employees can make nothing during an acquisition, not if founders or investors are charitable. https://angel.co/blog/liquidation-preference-your-equity-could-be-worth-millions-or-nothing https://angel.co/blog/liquidation-preference-your-equity-cou...
- ska 6y ago
  > The OP was asking why employees can make nothing during an acquisition, Right, and one of the ways that can happen is that founders do not have preference and their stock goes to nothing with the rest of the common (e.g. an equity group has your debt and 2x preference, they get almost all of the sale price). But to keep the founders on side and "cohesion" through the transfer, they are offered money outside of the equity sale in the earn out terms. If all goes well they still make ok/good money on the deal, but none/little of it is from their equity. If you are engineer #47 you may or may not have a job after the acquisition but your equity value just vanished.