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When a late-stage investor gets to invest with a liquidation preference, that can ruin the value of the common shareholders (i.e., early employees) if the start
by fsk 11y ago
When a late-stage investor gets to invest with a liquidation preference, that can ruin the value of the common shareholders (i.e., early employees) if the startup is not eventually sold for an even bigger valuation.
I.e., the early employees do a great job. The business has a value of $100M and their non-liquid shares are worth $0.5M. The business raises $100M with a 1x liquidation preference. The startup fails, and eventually sells for $50M. Instead of getting $0.1M-$0.25M, those early employees get nothing.
- andyidsinga 11y agobut aren't the unicorns headed for ipo? ..in that case seems anyone with stock options probably does well if the stock doesnt completely tank ?
- joshjkim 11y agolotsa folks don't think that many unicorns will actually IPO - here's a good read that summarizes the potential issues: http://abovethecrowd.com/2015/02/25/investors-beware/ http://abovethecrowd.com/2015/02/25/investors-beware/
- mycelium 11y agoThat's really solid article and anyone who has their head in the fundraising game right now should go read it. Thanks for posting it man.
- andyidsinga 11y agothanks -- this does provide some clarification.
- andyidsinga 11y agothanks -- this does provide some clarification.
- x0x0 11y agoA lot of the unicorns appear to have problems: they have a high valuation (probably good), but not the underlying revenue to support it (bad). With a few exceptions such as Uber and probably AirBnB, people are still buying on the hope of future growth. Or as Ceglowski would say, investory storytime. Further, never forget that employees are plebes, and your and my shares are subject to a 6 month lockup that, for example, founders aren't necessarily subject to. See Mark Pincus dumping 16.5m shares of stock for $11.64 ($190m) two months before, and for $3.18 more, than regular employees could [1]. Zuckerberg also sold 6% of fb at ipo, though since the price didn't cater investors don't seem to object. Founders often can also take cash off the table. Note that I don't necessarily think that's bad, but as in the cases of Secret and Digg, employees don't walk away from failed companies with millions. edit: actually, Pincus appears to have sold at twice the price available to employees ($12 vs $6.09), not $11.64 vs $8.46. On April 3, 2012, the secondary offering closed at a price of $12.00. Mark Pincus, Zynga’s founder and a director, netted approximately $192 million in proceeds; the other three selling Zynga directors sold several million dollars each in the secondary offering. Zynga’s stock declined significantly following the secondary offering to a closing price of $6.09 on the date that the original lockup restrictions ended, and a closing price of $5.36 and $3.00 per share, respectively, on the two extended lockup periods applicable to the selling Zynga directors. [2] [1] http://www.law360.com/articles/596929/zynga-founder-can-t-slip-class-action-over-stock-sale http://www.law360.com/articles/596929/zynga-founder-can-t-sl... [2] http://www.law360.com/articles/608007/a-closer-look-at-delaware-s-lee-v-pincus-opinion http://www.law360.com/articles/608007/a-closer-look-at-delaw...
- dylanjermiah 11y ago>but as in the cases of Secret and Digg, Did Kevin Rose sell shares in Digg?
- x0x0 11y agoyes https://gigaom.com/2008/09/24/digg-raises-28-million-in-series-c-funding/ https://gigaom.com/2008/09/24/digg-raises-28-million-in-seri...
- bzz01 11y agoFrankly it is a bit weird way to describe it. It is not some quirks of liquidation preferences that "ruined" it. It is ruined by a simple fact that this hypothetical startup earned just 50 cents for every dollar raised -- I don't think anyone should expect a nice payout here.