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Had this happen on a much smaller scale as an employee. I (foolishly) bought out some of my options when I left the company. Years later they sold it, but struc

Had this happen on a much smaller scale as an employee. I (foolishly) bought out some of my options when I left the company. Years later they sold it, but structured the deal such that the major investors got paid out all the proceeds, leaving zero for the common shares. Yes, I realize preferred shares and payout preferences and so forth. The really galling part is that the exec team (who had themselves acquired, not built, the company) paid themselves massive bonuses. The employees mostly got a token amount and a kick out the door. Common shares got zero. Thanks guys. tl;dr, shares in a non-public company are a lottery ticket at best. Just like options, but more expensive.

javajosh 5y ago
All the horror stories around VC money and shennanigans like this make bootstrapping look not just appealing, but required. It's an iterated game that they play a lot, and you play once, and they have no incentive to play fair. I'm glad some of them were named and shamed in this thread, though. Like, why would anyone take money from someone who has acted in bad faith many times in the past? It reeks of unaccountable power and information asymmetry, two of my least favorite things.
- tomp 5y ago
  You probably could make a good point but this makes no sense: > It's an iterated game that they play a lot, and you play once, and they have no incentive to play fair. The player who plays multiple times ("iterated game") has more of an incentive to play fair. That's basic game theory. If you only play once, noone can "punish" you in the next game if you cheat.
  - javajosh 5y ago
    I didn't mean iterated game in the game theory sense, because that implies both counter-parties play against each other repeatedly. It's like when you get a mortgage - it's a once-in-a-lifetime for you, and a Tuesday for them. They know exactly how to (and have mechanisms in place) enforce every part of a contract they've been using and improving for decades; you barely understand the contract because its the first time you've ever seen anything like it, and you have no machinery in place to understand or enforce your side of it. They have one contract they enforce against 1M counter-parties; meanwhile you have 100 different contracts you're supposed to enforce ...at the same level of care and capability? That's never going to happen, and so all you're left with is heuristics like "surely they'll treat me fairly!" It honestly seems extremely foolish to take VC money under these circumstances.
    - tomp 5y ago
      Yeah, the correct terms for these would probably be "diversification" and "information asymmetry". I think the main reason for these onerous terms is the fact that without them, the founders would cheat (not people like you or me, but rather, they would attract cheaters if they didn't work so hard to prevent them for succeeding)
      - cormacrelf 5y ago
        The thing about iterated games is better known as the "repeat player advantage". They do indeed play the same game over and over, not one game that goes on and on. The information isn't specific to each case either, typically both parties are equally aware of the facts at hand, it usually means the repeat player simply has more experience and a better grasp of the same information and its implications. This doesn't necessarily involve the usual meaning of information asymmetry, which is more about being different from chess, where both players have a full view of the board. If someone gives you a contract with an option to purchase shares, you have as much ability to analyse its risks as they do, and frankly if it is a contract to purchase X shares of a class that is so insufficiently specified that it can later refer to a diluted version of the same, then I don't know why on earth people accept them as good consideration. I don't know what laws apply to disclosures around share dilutions in the US, but it is one of the areas in which commercial law often tries to even out a noticeable information gap, just like takeover offers. But they can't save you from accepting it without knowing what it means and looking into how you can protect yourself from its risks.
- repomies69 5y ago
  Though in the business world it is always like that, whatever you do. Whatever kind of deal you are doing you have to be careful and attentive. Bootstrapping is great, but it also has challenged to overcome. Many fail to do it.
  - deleted 5y ago
    [deleted]
- achillesheels 5y ago
  This is what my father informed me of after seeing the reality of a founder CEO being diluted to nothing in the 90's. All that risk-taking and life which can't be recovered just to pay for someone else's Tahoe ski-trips :(
- splitstud 5y ago
  Mostly I believe it happens because 95% of tech founders have no business being anywhere near the c Suite. So they fall prey to venture bandits who will let them call themselves ceo or entrepreneur. If you're actually ceo material, use debt, private or commercial. Figure out the Toronto stock exchange.
  - jacquesm 5y ago
    I like 'venture bandits' as a term. Another I've seen is Vulture Capital.
- jacquesm 5y ago
  It's all about who you do business with. Some VCs are ethical, some aren't. Some are horrible and turn around to become a pest the day after they invest, some go out of their way to help the companies they invest in succeed.
  - javajosh 5y ago
    Yes, but it seems that the terms give the VC the power to do whatever they want, and so you are really just hoping they won't hurt you, and you have no way to protect yourself if they choose to. Why would a VC not strike a deal with a founder, fund 2 years of your blood/sweat/tears and then when they feel like they've got enough value from you, simply take away your equity and fire you? Isn't that just good business? They get to have their cake and eat it too. If the only thing preventing this from happening is the good will of your counterparty, when would it ever be a deal worth making? Even if you like your investor, or they like you, they could always sell their interest to someone who doesn't.
    - jacquesm 5y ago
      Track record is everything. Every VC that is worth their LPs is going to do due diligence (tech, commerce, finance, legal) on the company they are about to invest in. As a company executive, you could do much worse than to return the favor and research them for a bit. Talk to other founders that they have invested in, see how that went, look at past exits, see how the original founders were treated.
jiveturkey 5y ago
What you're describing, though, is normal. The vast majority of deals happen this way. (We only hear about the tiny fraction where rank and file do make a dime or two, like we hear about the 10 heart conditions / COVID complication and suddenly the sky is falling.) Whereas, while the situation described by the GP is not unheard of, it's uncommon. Anyway, your situation is why the common mantra, value your stock options at $0. I think that's a wrong statement though. Stock options should have a binary value. $0 or IPO/exit value. If the company doesn't go all the way to IPO, you won't get a partial payout. So then guesstimate the IPO valuation of your options and factor the risk.
- breischl 5y ago
  It is normal, but a lot of the rank & file don't understand that ahead of time. I also think that fact that management went out of their way to leave the common shares with nothing is scummy, bordering on unethical. Which is not the same as saying it's uncommon. (FWIW, I was not one of the downvotes)
seattle_spring 5y ago
This happened with Premise Data in their last round. Prospective employees beware.

javajosh 5y ago

All the horror stories around VC money and shennanigans like this make bootstrapping look not just appealing, but required. It's an iterated game that they play a lot, and you play once, and they have no incentive to play fair. I'm glad some of them were named and shamed in this thread, though. Like, why would anyone take money from someone who has acted in bad faith many times in the past? It reeks of unaccountable power and information asymmetry, two of my least favorite things.

tomp 5y ago
You probably could make a good point but this makes no sense: > It's an iterated game that they play a lot, and you play once, and they have no incentive to play fair. The player who plays multiple times ("iterated game") has more of an incentive to play fair. That's basic game theory. If you only play once, noone can "punish" you in the next game if you cheat.
- javajosh 5y ago
  I didn't mean iterated game in the game theory sense, because that implies both counter-parties play against each other repeatedly. It's like when you get a mortgage - it's a once-in-a-lifetime for you, and a Tuesday for them. They know exactly how to (and have mechanisms in place) enforce every part of a contract they've been using and improving for decades; you barely understand the contract because its the first time you've ever seen anything like it, and you have no machinery in place to understand or enforce your side of it. They have one contract they enforce against 1M counter-parties; meanwhile you have 100 different contracts you're supposed to enforce ...at the same level of care and capability? That's never going to happen, and so all you're left with is heuristics like "surely they'll treat me fairly!" It honestly seems extremely foolish to take VC money under these circumstances.
  - tomp 5y ago
    Yeah, the correct terms for these would probably be "diversification" and "information asymmetry". I think the main reason for these onerous terms is the fact that without them, the founders would cheat (not people like you or me, but rather, they would attract cheaters if they didn't work so hard to prevent them for succeeding)
    - cormacrelf 5y ago
      The thing about iterated games is better known as the "repeat player advantage". They do indeed play the same game over and over, not one game that goes on and on. The information isn't specific to each case either, typically both parties are equally aware of the facts at hand, it usually means the repeat player simply has more experience and a better grasp of the same information and its implications. This doesn't necessarily involve the usual meaning of information asymmetry, which is more about being different from chess, where both players have a full view of the board. If someone gives you a contract with an option to purchase shares, you have as much ability to analyse its risks as they do, and frankly if it is a contract to purchase X shares of a class that is so insufficiently specified that it can later refer to a diluted version of the same, then I don't know why on earth people accept them as good consideration. I don't know what laws apply to disclosures around share dilutions in the US, but it is one of the areas in which commercial law often tries to even out a noticeable information gap, just like takeover offers. But they can't save you from accepting it without knowing what it means and looking into how you can protect yourself from its risks.
repomies69 5y ago
Though in the business world it is always like that, whatever you do. Whatever kind of deal you are doing you have to be careful and attentive. Bootstrapping is great, but it also has challenged to overcome. Many fail to do it.
- deleted 5y ago
  [deleted]
achillesheels 5y ago
This is what my father informed me of after seeing the reality of a founder CEO being diluted to nothing in the 90's. All that risk-taking and life which can't be recovered just to pay for someone else's Tahoe ski-trips :(
splitstud 5y ago
Mostly I believe it happens because 95% of tech founders have no business being anywhere near the c Suite. So they fall prey to venture bandits who will let them call themselves ceo or entrepreneur. If you're actually ceo material, use debt, private or commercial. Figure out the Toronto stock exchange.
- jacquesm 5y ago
  I like 'venture bandits' as a term. Another I've seen is Vulture Capital.
jacquesm 5y ago
It's all about who you do business with. Some VCs are ethical, some aren't. Some are horrible and turn around to become a pest the day after they invest, some go out of their way to help the companies they invest in succeed.
- javajosh 5y ago
  Yes, but it seems that the terms give the VC the power to do whatever they want, and so you are really just hoping they won't hurt you, and you have no way to protect yourself if they choose to. Why would a VC not strike a deal with a founder, fund 2 years of your blood/sweat/tears and then when they feel like they've got enough value from you, simply take away your equity and fire you? Isn't that just good business? They get to have their cake and eat it too. If the only thing preventing this from happening is the good will of your counterparty, when would it ever be a deal worth making? Even if you like your investor, or they like you, they could always sell their interest to someone who doesn't.
  - jacquesm 5y ago
    Track record is everything. Every VC that is worth their LPs is going to do due diligence (tech, commerce, finance, legal) on the company they are about to invest in. As a company executive, you could do much worse than to return the favor and research them for a bit. Talk to other founders that they have invested in, see how that went, look at past exits, see how the original founders were treated.

jiveturkey 5y ago

What you're describing, though, is normal. The vast majority of deals happen this way. (We only hear about the tiny fraction where rank and file do make a dime or two, like we hear about the 10 heart conditions / COVID complication and suddenly the sky is falling.) Whereas, while the situation described by the GP is not unheard of, it's uncommon. Anyway, your situation is why the common mantra, value your stock options at $0. I think that's a wrong statement though. Stock options should have a binary value. $0 or IPO/exit value. If the company doesn't go all the way to IPO, you won't get a partial payout. So then guesstimate the IPO valuation of your options and factor the risk.

breischl 5y ago
It is normal, but a lot of the rank & file don't understand that ahead of time. I also think that fact that management went out of their way to leave the common shares with nothing is scummy, bordering on unethical. Which is not the same as saying it's uncommon. (FWIW, I was not one of the downvotes)

seattle_spring 5y ago

This happened with Premise Data in their last round. Prospective employees beware.