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Why You Probably Won't Get Rich When Your Startup is Acquired
- mikeyouse 13y agoFor startup employees, it often doesn't matter whether or not the acquiring party pays in shares or in cash. The more important consideration is that in low-price acquisitions, the investors will get the lion's share of the proceeds. If the company in question raised $2mm and was acquired by a company that just raised $11mm, it's probably safe to say that the purchase price was less than $5mm. If you assume that the $2mm investment represented 50% ownership, the math looks like this: * $1mm acquisition - Preferred sees $1mm, common stock sees $0. * $2mm acquisition - Preferred sees $2mm, common stock sees $0. Depending on the cap on the participating preferred, the rest could vary, but if you assume it's at least a 2x; * $3mm acquisition - Preferred sees $2.5mm, common stock sees $500k. * $4mm acquisition - Preferred sees $3mm, common stock sees $1mm. So in a best case scenario, 1% ownership would be worth $10k, and would probably be worth much less than that. Do you care if you get your $10k in stock vs. cash? You're probably not indifferent, but that amount won't move the radar for most of those with equity in the startup world.
- Chikodi 13y agoThanks for your analysis. As you mentioned, it's a best-case scenario, too. If the payout comes in cash, at least you have some extra jingle to buy your mom a nice gift. After that, it's back to the office on Monday.