I'm curious - what happens to the current set of employees in this situation?
Presumably some of them have vested stock, and it just got zeroed out. If there's ever a good time to ragequit, this seems like the appropriate hour.
Presumably some of them have vested stock, and it just got zeroed out. If there's ever a good time to ragequit, this seems like the appropriate hour.
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.
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...
1) info on the share structure and preference structure
2) a somewhat accurate valuation of the company
Whilst it's possible that people value their own shares wrongly due to missing/wrong info about #2:
- (major) Misunderstanding or not knowing #1 almost always creates a larger error or uncertainty in the calculation, than does an error in #2, and
- (minor) With #2, it's impossible to be certain anyway, so everyone has some of level of error
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.
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.
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.
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).
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.