4 ms·

My understanding is that during an acquisition, deals can be made which drastically affect the value of existing stock. Often at this stage the company basicall

by lemming 15y ago

My understanding is that during an acquisition, deals can be made which drastically affect the value of existing stock. Often at this stage the company basically belongs to the investors, so they could decide to (for example) massively dilute the stock by issuing new stock until the existing stock has essentially no value. Then they can allow current employees to retain their value using a buyback, i.e. you allow whoever takes your fancy to buy the new stock back so that their proportion of the company is more or less what it was. Or not, clearly this can also be used to change ownership percentages in the same way (c.f. Eduardo Saverin). Of course, the one group of people who get no protection at all in this case are ex-employees.

chernevik 15y ago
Maybe I'm not understanding you, or the terms of the deal, but this does not sound right to me. "Massive dilution of the stock" amounts to giving the company to someone else. The documentation ought to prevent this sort of thing. I'm not saying it doesn't happen, but if it does I wonder if the persons harmed have fully explored their rights.
- euroclydon 15y ago
  Let's say a company has 1 million shares and actually issues 1,000. You, as an employee may have ten. Hey sweet. You own one percent of the company at that moment, because the company owns the other 999,000 shares. But members of the board, who have a voting majority, decide to issue the remaining 999,000 shares to themselves. They don't incur hardly any capital gains, I imagine, because the overall value of their shares hasn't change much at all, though yours have just lost 99.9% of their value.
  - chernevik 15y ago
    All shares should receive equal treatment -- if the majority-owned shares get a distribution, stock or cash, minority-owned should get the same deal. If minority shareholders don't have protection against this, the company is poorly documented. I'm not saying it didn't / doesn't happen, just that it shouldn't be easily accomplished.
    - tptacek 15y ago
      The fact that all shares in a startup are not equal is VC 101. VC doesn't get common shares. They get preferred shares. It's right there in the name. Jacking non-employee holders of common stock in a private company is easily accomplished, through: * Deal structure (non-employees don't participate in earnouts) * Participating preferred liquidation preferences * Antidilution * Retention grants Your stock purchase agreement is a document carefully crafted to denude you of troublesome rights that will compromise the best interests of the company. That's not conspiracy-theoretic; it's just good business. The structure of any deal that brings liquidity to shares is a negotiation that occurs entirely between the board and the acquiring company. Any vote on the terms of that deal is a formality, since every VC-funded company of them --- every one of them --- is itself structured to ensure the board has control over the company. There is no entity with less power and fewer rights in a startup than a former employee holding shares.
      - chernevik 15y ago
        Further clarifying, thank you.
- lemming 15y ago
  I've never seen this happen myself, my information came from a previous discussion: http://news.ycombinator.com/item?id=1935641 http://news.ycombinator.com/item?id=1935641
  - chernevik 15y ago
    That clarifies things. The thread clarifies what I said: the documentation should have given shareholders the right to participate in otherwise dilutive equity sales, whether they're accredited or not. Anticipation of this sort of thing is why good lawyers are worth the money. But they're expensive, perhaps prohibitively for the amounts we're talking about here. So unless the majority shareholders are responsible, what shouldn't happen, does.
    - tptacek 15y ago
      Startups do not as a rule give their common shareholders the right to participate in future rounds. In part this is because they don't want to, but it's also because they probably can't. Companies can only offer and sell shares to reg-d accredited investors. The shares employees get are as compensation, which is explicitly exempted from SEC reporting regs.

by lemming 15y ago

chernevik 15y ago

Maybe I'm not understanding you, or the terms of the deal, but this does not sound right to me. "Massive dilution of the stock" amounts to giving the company to someone else. The documentation ought to prevent this sort of thing. I'm not saying it doesn't happen, but if it does I wonder if the persons harmed have fully explored their rights.

euroclydon 15y ago
Let's say a company has 1 million shares and actually issues 1,000. You, as an employee may have ten. Hey sweet. You own one percent of the company at that moment, because the company owns the other 999,000 shares. But members of the board, who have a voting majority, decide to issue the remaining 999,000 shares to themselves. They don't incur hardly any capital gains, I imagine, because the overall value of their shares hasn't change much at all, though yours have just lost 99.9% of their value.
- chernevik 15y ago
  All shares should receive equal treatment -- if the majority-owned shares get a distribution, stock or cash, minority-owned should get the same deal. If minority shareholders don't have protection against this, the company is poorly documented. I'm not saying it didn't / doesn't happen, just that it shouldn't be easily accomplished.
  - tptacek 15y ago
    The fact that all shares in a startup are not equal is VC 101. VC doesn't get common shares. They get preferred shares. It's right there in the name. Jacking non-employee holders of common stock in a private company is easily accomplished, through: * Deal structure (non-employees don't participate in earnouts) * Participating preferred liquidation preferences * Antidilution * Retention grants Your stock purchase agreement is a document carefully crafted to denude you of troublesome rights that will compromise the best interests of the company. That's not conspiracy-theoretic; it's just good business. The structure of any deal that brings liquidity to shares is a negotiation that occurs entirely between the board and the acquiring company. Any vote on the terms of that deal is a formality, since every VC-funded company of them --- every one of them --- is itself structured to ensure the board has control over the company. There is no entity with less power and fewer rights in a startup than a former employee holding shares.
    - chernevik 15y ago
      Further clarifying, thank you.
lemming 15y ago
I've never seen this happen myself, my information came from a previous discussion: http://news.ycombinator.com/item?id=1935641 http://news.ycombinator.com/item?id=1935641
- chernevik 15y ago
  That clarifies things. The thread clarifies what I said: the documentation should have given shareholders the right to participate in otherwise dilutive equity sales, whether they're accredited or not. Anticipation of this sort of thing is why good lawyers are worth the money. But they're expensive, perhaps prohibitively for the amounts we're talking about here. So unless the majority shareholders are responsible, what shouldn't happen, does.
  - tptacek 15y ago
    Startups do not as a rule give their common shareholders the right to participate in future rounds. In part this is because they don't want to, but it's also because they probably can't. Companies can only offer and sell shares to reg-d accredited investors. The shares employees get are as compensation, which is explicitly exempted from SEC reporting regs.