5 ms·

Another thing to understand (and this will sound obvious to many of you) is that your options may be worth nothing, even after a multi-million dollar acquisitio

by bluehex 12y ago

Another thing to understand (and this will sound obvious to many of you) is that your options may be worth nothing, even after a multi-million dollar acquisition if there are priority stock holders (the investors) ahead of you in line. As a young and naive engineer I learned of this fact the day the first startup I worked for was acquired. First I read the big number that was to be paid for the company, was ecstatic, and immediately starting doing "x-million times half a percent" in my head followed by a sinking feeling as I read the clause stating that common stock holders would get $0. In retrospect it sounds obvious that if the company sells for less than the money the investors put in, your x percent is worth nothing. But it's easy to get carried away thinking you actually own a percent of the company, and that a sale means a pay day for you. Don't let the first word of acquisition get you too excited, the come down sucks.

sxp 12y ago
The segregation between common and priority stock can be painful. I learned about it the hard way after I left the startup and paid money to exercise the vested options. When the company was acquired, all the common stock was worthless (but the execs with voting power got millions of dollars of bonuses so they didn't care) which meant I had lost the money required to exercise the options. What annoyed me more than the couple $K I lost from the options was the opportunity cost of not leaving the job earlier. Like all startups, the company paid below average wages (since startups pay a significant proportion of compensation in the form of options) so if I left earlier, I would have gotten a large pay bump from having joined a non-startup that paid a normal salary.
- prostoalex 12y ago
  Another trick is hidden dividend accrual for preferred stock. The dividends are triggered at liquidity event, so the cap table you thought you were looking at suddenly gets diluted with a bunch of freshly issued stock which is still senior to common.
  - lawnchair_larry 12y ago
    Pure evil. Which companies have done that?
    - prostoalex 12y ago
      From reading "Venture Deals" I got the impression it's something a big VC firm tries to negotiate on a fairly regular basis. See, for example, the "Dividends" section of Houzz round http://techcrunch.com/2014/06/02/houzz-on-fire/ http://techcrunch.com/2014/06/02/houzz-on-fire/
cylinder 12y ago
How did that happen? The acquirer just purchased a certain class of shares, i.e. preferred stock and didn't care about owning 100% of the company?
- dsjoerg 12y ago
  It's called a "liquidation preference". http://www.investopedia.com/terms/l/liquidation-preference.asp http://www.investopedia.com/terms/l/liquidation-preference.a... The mechanics & technicalities are beyond me, but the consequence is as described above.
- icedchai 12y ago
  Basically, the investors (with preferred stock) get paid out first, sometimes at a multiple of their original investment. The amount "left over" goes to the common stock holders. Sometimes that amount is zero, so they get nothing. I had this happen to me in a previous start up. I wasn't really surprised.
- ChuckMcM 12y ago
  It works as follows, there is a line of people who need to get paid, If the startup took on any debt, at the front of the line is a bank. Their 'note' usually gets paid first. $POOL -= $BANK When people invested in the Series A, B, C, ... their stock came with a 'liquidation preference' (which can have a few variants, but the two most common are, the investor chooses if they want the liquidation preference or the common value, the investor gets their liquidation preference and the common value. Note that these numbers are in $dollars not in $shares, so if VC A puts in $1M dollars with a 2X liquidation preference they get back $2M dollars. $POOL -= $LIQUIDATION Sometimes at the same level, or just behind the investors, are convertible note holders, who gave money or equipment in exchange for shares. They often have the choice of getting either their money back, or the shares. $POOL -= $NOTE. At this point, if there is anything left in the pool it gets distributed to common shares. A nice rule of thumb is that the most common liquidation preference is 2X (these days anyway) so if the price is < 2X the amount of money raised to date, the common stock will not have any money allocated to it. And in those situations it makes no difference if your stock 100% vests on acquisition or not, it is still worth 0.
Florin_Andrei 12y ago
TLDR: If you're an average Joe, the people holding the money bags are actively looking to screw you (while waving their philosophical hands and going "these are not the droids you're looking for").
pjc50 12y ago
I too have been in this situation. It was obvious that we weren't going to be a massive success, but it was still very disappointing to get zero.
trhway 12y ago
>In retrospect it sounds obvious that if the company sells for less than the money the investors put in, your x percent is worth nothing. that is what i've been wondering about. If going into startup i take a $50K/year salary hit wouldn't it mean that i'm actually investing $50K/year and thus should get the same quality and price of shares (not options) what the early investors do?
- pyrrhotech 12y ago
  what should happen and what happens legally are two different things. though it's your choice to take that risk, no one is forcing you to work for sub market rates.

by bluehex 12y ago

sxp 12y ago

The segregation between common and priority stock can be painful. I learned about it the hard way after I left the startup and paid money to exercise the vested options. When the company was acquired, all the common stock was worthless (but the execs with voting power got millions of dollars of bonuses so they didn't care) which meant I had lost the money required to exercise the options. What annoyed me more than the couple $K I lost from the options was the opportunity cost of not leaving the job earlier. Like all startups, the company paid below average wages (since startups pay a significant proportion of compensation in the form of options) so if I left earlier, I would have gotten a large pay bump from having joined a non-startup that paid a normal salary.

prostoalex 12y ago
Another trick is hidden dividend accrual for preferred stock. The dividends are triggered at liquidity event, so the cap table you thought you were looking at suddenly gets diluted with a bunch of freshly issued stock which is still senior to common.
- lawnchair_larry 12y ago
  Pure evil. Which companies have done that?
  - prostoalex 12y ago
    From reading "Venture Deals" I got the impression it's something a big VC firm tries to negotiate on a fairly regular basis. See, for example, the "Dividends" section of Houzz round http://techcrunch.com/2014/06/02/houzz-on-fire/ http://techcrunch.com/2014/06/02/houzz-on-fire/

cylinder 12y ago

How did that happen? The acquirer just purchased a certain class of shares, i.e. preferred stock and didn't care about owning 100% of the company?

dsjoerg 12y ago
It's called a "liquidation preference". http://www.investopedia.com/terms/l/liquidation-preference.asp http://www.investopedia.com/terms/l/liquidation-preference.a... The mechanics & technicalities are beyond me, but the consequence is as described above.
icedchai 12y ago
Basically, the investors (with preferred stock) get paid out first, sometimes at a multiple of their original investment. The amount "left over" goes to the common stock holders. Sometimes that amount is zero, so they get nothing. I had this happen to me in a previous start up. I wasn't really surprised.
ChuckMcM 12y ago
It works as follows, there is a line of people who need to get paid, If the startup took on any debt, at the front of the line is a bank. Their 'note' usually gets paid first. $POOL -= $BANK When people invested in the Series A, B, C, ... their stock came with a 'liquidation preference' (which can have a few variants, but the two most common are, the investor chooses if they want the liquidation preference or the common value, the investor gets their liquidation preference and the common value. Note that these numbers are in $dollars not in $shares, so if VC A puts in $1M dollars with a 2X liquidation preference they get back $2M dollars. $POOL -= $LIQUIDATION Sometimes at the same level, or just behind the investors, are convertible note holders, who gave money or equipment in exchange for shares. They often have the choice of getting either their money back, or the shares. $POOL -= $NOTE. At this point, if there is anything left in the pool it gets distributed to common shares. A nice rule of thumb is that the most common liquidation preference is 2X (these days anyway) so if the price is < 2X the amount of money raised to date, the common stock will not have any money allocated to it. And in those situations it makes no difference if your stock 100% vests on acquisition or not, it is still worth 0.

Florin_Andrei 12y ago

TLDR: If you're an average Joe, the people holding the money bags are actively looking to screw you (while waving their philosophical hands and going "these are not the droids you're looking for").

pjc50 12y ago

I too have been in this situation. It was obvious that we weren't going to be a massive success, but it was still very disappointing to get zero.

trhway 12y ago

>In retrospect it sounds obvious that if the company sells for less than the money the investors put in, your x percent is worth nothing. that is what i've been wondering about. If going into startup i take a $50K/year salary hit wouldn't it mean that i'm actually investing $50K/year and thus should get the same quality and price of shares (not options) what the early investors do?

pyrrhotech 12y ago
what should happen and what happens legally are two different things. though it's your choice to take that risk, no one is forcing you to work for sub market rates.