Square’s S-1: Ratchets and Unicorn Valuations | Hacker News Reader

Square’s S-1: Ratchets and Unicorn Valuations

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50 pointsprostoalex36 comments

I don't always believe in scare quotes, but we probably ought to use them around "valuations" promoted by companies raising private capital.

I own a tiny bit of common stock in a private company (by way of ESOs), and I have a hunch that virtually all of the rest of the stock is in preferred shares of some sort. And thus I have no idea how much my stake is worth. For all I know, it's zero.

Does anyone have tips as someone with ESOs how you can get a better idea of the value and your position, given preferred shares?

I feel you never have as much diligence/information as an employee as a VC would who is investing in the company.

You don't, and probably for a few reasons. An employee is not seen as being as important to the company as the people with many millions of dollars. "Open up your books or I won't come on board" won't make the company think twice about letting you leave. If a VC with $25m wants to look at the books, the company will at least think about it.

On top of that, the people with millions of dollars can hire much better lawyers and such who can truly analyze a company a lot better than your average employee.

This is so true. What's concerning is that terms are usually confidential and not available to most employees (including the top technical contributors). Given the info on Square on Box, it seems we should expect the last round investors are guaranteed at least 20% return regardless of the exit valuation before everyone else gets a dip.

Yeah. I've asked for the terms and never got them. What are the preferences / rights / caps / etc. of the preferred stock holders? You can never get this information. Common stock holders are last in line.

This information should be available for all stock and option holders, including employees.

By Law, if you already own the stock (not just the option), you can demand to see the financial information of the private company. A few years ago, there was a story about an ex-googler who demanded and received access to Google financial information while Google was still private.

Unfortunately I only have options at the moment. Perhaps I should exercise some of them just to get the financial info?

Exercise 1 share?

Not a lawyer or accountant, but the tax liability for one share should be minimal.

It's a very limited set of documents, like prepared quarterly and annual statements.

I agree the information typically provided by the private companies is limited. But they offer insight into health of the company.

The person reviewing these statements need to know how to analyze and reconcile financial statements. Also, as shareholder, you can ask their finance person to explain/elaborate certain items in the statements.

Shareholders' Equity section of Balance Sheet statement and Cash Flow from Financing Activities section of Cash Flow statement might also give additional insights. Company will be accounting for value of preferred shares, any dividend/interest paid on preferred on these statements.

I am not sure how much an employee can push without jeopardizing the job. IME, most owners and executives of such entities are typically egomaniacs who don't like being questioned unless someone has bigger stick than them. My personal experience is very limited and only as external investor.

As an employee who left a company and purchased one share on the way out, I imagine I have nothing to lose? I wonder if I am entitled to this information.

You never know unless you try. Just send them a request to provide you annual report and invite to annual meeting. All corporations are required to prepare an annual report for shareholders and hold an annual meeting.

I'm willing to give the benefit of the doubt, so long as my position is a significantly smaller version of the founding team's. If there's a difference, I'm going to assume that my share is worth $0 until I can get cash-in-hand.

My company runs about ~1M/yr revenue on Square and this morning I got an email from them: "Own a part of Square". It seems to be some opportunity to buy IPO stock through a company parterning with them called "LOYAL3". Anyone have insight into the bigger picture here?

Full text here: http://pastebin.com/X4EYq610

I've subscribed to IPO notifications in E-Trade and they usually invite me to participate in some unknown IPOs. They've never sent me any invite to participate in any high profile IPO, which to me means whatever they send could not find enough interest. Couple of days ago I received E-Trade email telling me I can participate in Square's IPO. Putting this together and the fact that you got the invite as well, I suspect they are having trouble filling up IPO as there is just not enough interest from high profile investors. Clear sign to stay away.

If you're not going to use your IPO allocation I'd appreciate a PM with your token number.

I used Loyal3 for GoPro's IPO. I wasn't able to get all the IPO shares I asked for but otherwise it was a good experience. They are a legit company.

> Companies get their shiny unicorn valuation (which helps with recruiting, in addition to being the vanity metric du jour)

Only losers appear to be employees in the end.

> Additionally, issuance of participating preferred stock is on the rise, having been issued in 5 percent of deals in the Fenwick & West study.

Lesson: don't join a startup unless you get preferred stock. Value of common stock awarded to an employee = $0.00 x millions of common stock awarded.

> This “double-dip” was common following the dot-com bubble, but had disappeared in the recent bull-run in VC.

Looks like shenanigans of dot-com bubble are back. Who says current market doesn't look like dot-com bubble? They should quit smoking whatever they are smoking.

>Lesson: don't join a startup unless you get preferred stock.

Who gives out preferred stock to employees? I don't even know that founders get preferred stock, generally. If any employee asked for preferred stock at any company I've ever worked for, you'd immediately end the conversation, whether you were an engineer or C-level.

All stock grants have to be approved by the board, and I don't know of any board that's going to bend on "hey, we really wanted this engineer, we had to give her preferred shares".

The tax implications of preferred stock / preferred RSUs I think would make this worse for employees than options.

This is a double whammy for employees - not only is the IPO valuation lower than the prior round, their stake is being diluted in the process. Definitely not a win for them.

God it would suck to have joined fairly recently, if you were banking on the options being worth anything. You have to wait to vest, your stock options are possibly underwater (depending on the 409a), even your vested options are going to be locked up for quite awhile, and on top of it all you're getting diluted.

After the lockup expires, you'd better hope to your lucky stars that the earnings have been good, because those first few earnings are tough, and can sink the stock price. And then on top of that, there are probably very specific windows that you can sell your stock inside of, so you have to hope to time the ups-and-downs just right.

Lots of ways for that to bite you in the ass. I have friends who had this all line up the wrong way as Twitter employees who joined a year or so before they IPOed, and currently that stock isn't worth exercising.

example: Mark Pincus, who is everything wrong with the valley. He skipped the ipo lockup, selling a ton of shares at $13.96, and a bunch more at $12. If you were one of the suckers who worked for him but wasn't let out of the lockup, the best price you ever saw was $6 or so. That said, lay down with dogs, get up with fleas...

http://www.reuters.com/article/2014/11/17/us-zynga-lawsuit-r...

That's kind of the point though. Options are (at least intended to be) compensation for a lower than market salary and a risk that the company might go bust. At the point that you're raising a Series E round you are going to be paying market salaries and have enough cash that the chance of going out of business is very low. At this point you'd expect options to behave more like RSUs in a public company where the reward is for creating value as opposed to being a payoff for taking risk or investing your time.

I agree that the risk is lower, but the RSU analogy is imperfect because the value of the underlying stock is the same for all holders. In this case, one class of holders - the senior investors - will get more of the value, and this value is taken away from other holders who thought they had more. If Larry's stock value went up when employees and GOOG went down, there would be pitchforks out in M View.

That's a fair point, assuming you hold strong on getting your market salary. Obviously the company is going to hold strong on their "OMG we're giving you gold" stance, but if nothing else there's at least a lot more wiggle-room on salary.

What does "their stake is being diluted in the process" mean specifically in this case? What exactly is getting diluted (does the issuance of extra shares to make up for the lower IPO price constitute dilution, or is it something else)?

This blog post provides decent summary of preferred stock impact on Employee stock.

STARTUP NEGOTIATIONS: HOW PREFERRED STOCK MAKES EMPLOYEE STOCK LESS VALUABLE http://stockoptioncounsel.com/blog/negotiating-equity-what-i...

Yes exactly. You thought you owned 1%, and all of a sudden you realize you owned 0.9%. And now that's 0.9% at a lower valuation, so you got screwed twice.

How does this actually work - are they actually creating more shares to give to the investors that bought in with this stipulation? Or are these shares coming from some pre-existing pool? I'm admittedly quite unfamiliar with this stuff, so I'm curious how the 'dilution' occurs.

20% guaranteed ROI...how does one become a series E pre IPO investor? Seems a bit like insiders filling eachother's coffers.

The public will be filling the coffers: Retail investors are suckers. They'll buy almost anything, just like in the dotbomb days.

The 20% top-up happens at IPO time, while the shareholder is still subject to a lock-up period. Some of those lock-ups can extend to 18 months, so it's still possible to lose money overall.

I've defended private market valuations since we haven't been hearing much about "ratchets" but will need to back-track. Yeah, Square's last round was a "debt" round with decent upside if Square can get back on track.

Back on track BEFORE its IPO. Which it didn't. And now it's employees' ISOs will get diluted. Let's just say I'm glad I didn't join when their strike price was crazy high in the last few years.

Throwaway for obvious reasons, but my current company has a very high public valuation, but they're based on a round where the most recent investor has 4x prefs. The valuation was just marketing.

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