7 ms·

Every acquisition is different. To the layperson, every acquisition is a success and people think that almost everyone in the company is "set" after an acquisit

Every acquisition is different. To the layperson, every acquisition is a success and people think that almost everyone in the company is "set" after an acquisition. However, the reality is, in many acquisitions, nobody makes money -- not even the founders. A lot of times, the founders even lose their dignity. I had a classmate who had the highest of aspirations. He wanted to build a billion dollar company just like every other founder these days. His company was acqui-hired. He always took it as almost an insult when other "more successful" people in our circle congratulated him on his acqui-hire. In regards to the company being acquired by a larger company, the product sometimes heads in a very positive direction, and many times, the opposite happens as well. This post asks us to answer a question that is so broad that it makes no sense.

charcircuit 4y ago
>in many acquisitions, nobody makes money -- not even the founders So where does that money go? Paying off debts?
- judge2020 4y ago
  Depending on how deep the funding is, a company might be majority owned by their VC firm investors, and if they give out too many board seats an overnight rugpull/takeover (via a majority board vote) is possible. There are other tactics, such as severely reducing the price of shares, typically $0.00000001 per, and issuing (hundreds of) billions of new shares so that the previous private stockholders end up with basically nothing.
  - car_analogy 4y ago
    Can you explain how this issuance of new shares works? Once someone has the power to do that (and I assume assign them to whomever they please), why wouldn't they? Doesn't such power fly in the face of a share representing ownership, if that ownership can be unilaterally diminished?
    - formerkrogemp 4y ago
      > Doesn't such power fly in the face of a share representing ownership, if that ownership can be unilaterally diminished? Yes, that's why phrases such as "corporate raiding" exist. Minority ownership interests in enterprises aren't as well protected generally as majority ownership. Legal cases can drag on for years with no relief.
    - robocat 4y ago
      > Once someone has the power to do that (and I assume assign them to whomever they please), why wouldn't they? Depends on game mechanics. Reputation matters for repeat plays. Someone might display their power to prevent being taken advantage of by other players (current/future). YCombinator might let themselves be taken advantage of because founders fear investors, and stories about historic matters matters.
    - cornel_io 4y ago
      With board approval the majority owners can do pretty much anything. You can re-cap existing shareholders down to basically zero ownership to privilege new ones, you can screw the employee pool in favor of the investors and founders (that's pretty normal, actually, employees should always assume they'll be screwed in an exit), you can even dilute specific previous investors/founders out of the pool like what Zuck did to Saverin. The reason you don't is that you don't want to get a reputation as a shady operator. If you recap a big VC out you're probably never going to raise again. Fuck an angel and word will get around, though it's not as bad as crossing a VC. Screwing employees is not great but news of that doesn't spread as widely so people do it a lot. Re: "share representing ownership", there's a reason that when companies get 409a valuations for employee options they're usually valued at a small fraction of the preferred shares that investors buy. Your interest is not anywhere near as real as the people buying preferred shares until you go public.
      - mywittyname 4y ago
        > If you recap a big VC out you're probably never going to raise again. Is this even possible? With how savvy most VCs are about guarantying a return from the companies they invest in, it's hard to imagine they'd leave this very obvious strategy open to exploitation. I mean, yeah, you might never raise another round if you screw a VC, but if you screw them out of hundreds of millions of dollars, would it matter?
- ZephyrBlu 4y ago
  Liquidation preferences can play a big role here. It doesn't mean nobody makes money, but very few investors may take all of the money.
- blululu 4y ago
  Salaries, rent on office space, equipment... If a company raises $50M in funding, spends $30M in four years before it gets acquired for $80M, then net-net the investors have same amount of money after 4 years of work.
  - benjaminwootton 4y ago
    Eh? If you spend $30m and get $80m back you are in the black to the tune of $50m overall, even though your investors would probably be underwater.
    - forrest2 4y ago
      Investors usually have liquidation preference. If they do, they'll have a first dibs on that $50m up to their invested amount.
- rfrey 4y ago
  The payout is often in a mix of cash and stock, and the stock will vest. Sometimes there are holdbacks for performance. That can result in not-too-much cash being available upfront, and it'll all go to preferred shareholders leaving little for founders and none for employees. Of course, as an employee you'll now have stock in the acquiring company, should you choose to stay and vest. If the acquirer is itself illiquid, though, you've traded one lottery ticket for another.

charcircuit 4y ago

>in many acquisitions, nobody makes money -- not even the founders So where does that money go? Paying off debts?

judge2020 4y ago
Depending on how deep the funding is, a company might be majority owned by their VC firm investors, and if they give out too many board seats an overnight rugpull/takeover (via a majority board vote) is possible. There are other tactics, such as severely reducing the price of shares, typically $0.00000001 per, and issuing (hundreds of) billions of new shares so that the previous private stockholders end up with basically nothing.
- car_analogy 4y ago
  Can you explain how this issuance of new shares works? Once someone has the power to do that (and I assume assign them to whomever they please), why wouldn't they? Doesn't such power fly in the face of a share representing ownership, if that ownership can be unilaterally diminished?
  - formerkrogemp 4y ago
    > Doesn't such power fly in the face of a share representing ownership, if that ownership can be unilaterally diminished? Yes, that's why phrases such as "corporate raiding" exist. Minority ownership interests in enterprises aren't as well protected generally as majority ownership. Legal cases can drag on for years with no relief.
  - robocat 4y ago
    > Once someone has the power to do that (and I assume assign them to whomever they please), why wouldn't they? Depends on game mechanics. Reputation matters for repeat plays. Someone might display their power to prevent being taken advantage of by other players (current/future). YCombinator might let themselves be taken advantage of because founders fear investors, and stories about historic matters matters.
  - cornel_io 4y ago
    With board approval the majority owners can do pretty much anything. You can re-cap existing shareholders down to basically zero ownership to privilege new ones, you can screw the employee pool in favor of the investors and founders (that's pretty normal, actually, employees should always assume they'll be screwed in an exit), you can even dilute specific previous investors/founders out of the pool like what Zuck did to Saverin. The reason you don't is that you don't want to get a reputation as a shady operator. If you recap a big VC out you're probably never going to raise again. Fuck an angel and word will get around, though it's not as bad as crossing a VC. Screwing employees is not great but news of that doesn't spread as widely so people do it a lot. Re: "share representing ownership", there's a reason that when companies get 409a valuations for employee options they're usually valued at a small fraction of the preferred shares that investors buy. Your interest is not anywhere near as real as the people buying preferred shares until you go public.
    - mywittyname 4y ago
      > If you recap a big VC out you're probably never going to raise again. Is this even possible? With how savvy most VCs are about guarantying a return from the companies they invest in, it's hard to imagine they'd leave this very obvious strategy open to exploitation. I mean, yeah, you might never raise another round if you screw a VC, but if you screw them out of hundreds of millions of dollars, would it matter?
ZephyrBlu 4y ago
Liquidation preferences can play a big role here. It doesn't mean nobody makes money, but very few investors may take all of the money.
blululu 4y ago
Salaries, rent on office space, equipment... If a company raises $50M in funding, spends $30M in four years before it gets acquired for $80M, then net-net the investors have same amount of money after 4 years of work.
- benjaminwootton 4y ago
  Eh? If you spend $30m and get $80m back you are in the black to the tune of $50m overall, even though your investors would probably be underwater.
  - forrest2 4y ago
    Investors usually have liquidation preference. If they do, they'll have a first dibs on that $50m up to their invested amount.
rfrey 4y ago
The payout is often in a mix of cash and stock, and the stock will vest. Sometimes there are holdbacks for performance. That can result in not-too-much cash being available upfront, and it'll all go to preferred shareholders leaving little for founders and none for employees. Of course, as an employee you'll now have stock in the acquiring company, should you choose to stay and vest. If the acquirer is itself illiquid, though, you've traded one lottery ticket for another.