Can you elaborate on why your payoff is $0 if you have 1% vested common stock in the company?
For an extreme example, say the VC invested $10M for 10% of the company, and then the company doesn't manage to grow, and gets acquired for the same $10M amount. The initial VC gets the $10M back from the acquisition (they make their money back, no profit). Then there is $0 left, and the common shareholders (early employees and often founders) get nothing.
It's a contrived example, and there are many other complexities to such a deal, but you get the idea.
Also note, you can end up with negative returns since you may have paid taxes on the options.
SEE: https://www.nytimes.com/2015/12/27/technology/when-a-unicorn...
A company can't easily give you preferred shares. Someone has to define what preferred includes: rights to elect someone on the board, right to oversee spending decisions from the CEO, etc... It costs money to structure preferred shares. You also can't piggy-back on a preferred class that already exists, unless the investors that "own" that class are happy to dilute their privileges with you (highly unlikely).
Common stock always exists, by definition, in a corporation. So it's easy to give it to you.
Usually, the founders and VC have the preferred shares, while someone writing unit tests at 3am does not.
>Usually, the founders and VC have the preferred shares, while someone writing unit tests at 3am does not.
This. I moved into a VP Eng role at a startup and had options for common stock worth about 0.7% of the company. When we were acquired, those were worth zero, though I was decently compensated by the acquiring company with cash and stock. The money I made was due to my role/position rather than my equity.
Of course, the acquiring company can always opt to pay large signing/retention bonuses to founders if the acquirer believes they're valuable.
My understanding is that you're perfectly correct, however — I'm just trying to demonstrate how I don't really "get" it. I presume there's some other number involved in the "liquidation preference" that is visible to those involved that make it more than a mere n% of company calculation.
Edit: Googling this, it seems like these special investors get to recoup their investment if the company is selling for less than what they valued it at at their time of investment. (And since it seems like this generally applies to VC firms, I gotta say, this is really lame. It was a bad investment, but you know the actual employees took a lot more risk in it, and yet the VCs get a better return — albeit a loss.)
This can (and often does) eat into the common stockholders' (e.g. employees) liquidation amounts.
1. https://www.businessinsider.com/how-liquidation-preferences-...
Agreed that more than a 1x liquidation preference these days would generally be surprising, but in a low end scenario or with a few big rounds, all it takes is a 1x to wipe out any upside for founders and employees, but if you're deemed worth it, the acquiring company can offer you a worthwhile incentive to stick around.
Most of the employees are not given access to those terms. For example, in my last job in start-up , senior only celebrated each investment rounds but never detailed any of its terms. So, I had no idea whatsoever of the actual reward I should expect and that seems to be the norm from what I hear.
This is why a lot of folks from Good Technology got screwed. Valued at 1.1 billion .. sold for 425 million. Preference stack was skewed to investors + mgmt.
This means that on an acquisition the original investor gets a minimum of 2x their original investment. In the case the start up is acquired for anything less than $10 million the original investor gets everything.
When joining the company, you might be granted a set of options which are described as comparable to 1% of total shares, but the number is almost always effectively lower than that.
If the company does well, future funding rounds will lead to dilution of your ownership.
If the company does poorly, VC's will have liquidation preferences meaning that they get paid back first. This can easily bring your ownership down to 0%.