Just want to say thanks for jumping all over this comment thread to explain liquidation topics and scenarios. I'm alarmed how much folks who get into startups don't understand these things, and lament how much I still don't know about it all.
Then again, so much of startup culture actively conspires to make deal structure/cap tables/liquidation preferences opaque, because nobody wants to say "Hey, come work for this startup for 2σ under market salary and x% equity. Never mind that the equity will get crazy diluted and a liquidation event might get cleaned out before it ever gets to your end of the table. That is, if a liquidation event ever happens!" So I don't feel totally ignorant about not understanding it, just yearning.
Why would you 'ragequit' at this time, and not before?
If the value of the company of the company is less than the value of liquidation preferences, then the employees' stock is worth ~zero. Its value doesn't suddenly go to zero at the moment a transaction takes place. The transaction happens at that price because that's the value.
Yes. Very sad that option-holders and shareholders often do not have sufficient information about the rights attached to each share class, to estimate the value of their shares (even if they can perfectly value the enterprise overall).
The options-holders and shareholders may have perfect information about the share structure and preference structure of the company, but unless they're in the room when the deal is being done, they won't know what that means in terms of final value.
The value of anything is the lesser of what someone will pay for it and what the owner will sell it for. The PE team may have raised expectations about the value before the sale, so that everyone thought they would get something despite the preferences. Then they sold it for less...
There is no such thing as an "accurate valuation" though.
I was just involved in the sale of a company that had no assets, an outstanding court case against it that it was losing, and a tax bill of $3.5m against it. The buyer paid $5m for it. That number was literally the fist number that I plucked out of the air during the first conversation we had with the buyer, and somehow it stuck as the deal valuation.
Unless you're in the room during the deal, you have no idea what number is going to be used.
It sounds strange that a company with 'no assets' was bought for a non-negligible sum.
If you had said 'it had no physical assets' or 'book value of its assets was zero' or similar, it would make sense.
But if literally had no assets, what was the buyer buying? The name of the company?
Back on topic: even after the 5MM exit value is known, it's impossible for me to value the shares of an employee who owns 1% of the shares. The value is almost certainly between zero and 50k, but without seeing the share docs, no one knows.
Yes, basically, the name of the company. And that is an intangible asset worth entirely whatever people think it's worth. The only place where you can make any guess as to what it's worth is in the room when the deal is being done.
As you say, if you have 1% of the company, then you could have 1% of $1 (which was a serious offer for the same business made 3 years ago) or 1% of $5m. The big difference is not in the 1%, but in the sale price. To get the same difference from share structure, you'd need a variance in shareholding of 1%-1000%.
Though I'll grant you that share classes and preferences can reduce your value to 0, but it's a lot harder for preferences to raise the value an order of magnitude.
Again, if you're not in the room when the deal is done, you have no idea what anything is worth, or whose interests are really being looked after. There's all sorts of shady deals and backhanders that can go on with bonuses and commissions that mean that everyone except the shareholders come out good.
It's kinda like the old poker saying: there's always a sucker at the table. If you don't know who it is, it's you. Same for acquisitions... if you're not in the room when the deal is being done, then you're the sucker.
but good employees will get retention packages to stick around with the new company
Maybe. Often acquisitions are just for the customer list. Betfair is located in London (and Dublin for tax purposes IIRC), it has no office in Scotland.
I'm not sure TBH. I've heard that startups and comanies in the UK generally don't offer large stock packages to employees. That could just be anecdata, but that's what I've heard.
A 6-7 figure stock-based retention package would seem normal for the 3 acquisitions I've been through. Vesting length is all over though (short as 1 year, long as 4).
I always wonder, though, that (usually) a good percentage of the value in these deals is the institutional knowledge of the company. The purchasing company better know the amount of ill will engendered when connected leaders like the CEO make out like bandits while everyone else gets screwed can have a serious negative effect on the value of the company.
Despite equity being worth nothing, that doesn't mean that employees are all fucked. If the company is actually buying the company for the capability they provide, rather than just customers+brand, there are usually generous offers at the new company for those that the acquiring company wants to ensure stay.
