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Comment by deanmoriarty | Hacker News Reader

Does anybody know if employees will end up actually making any money from this massive acquisition, or if yet again board and investors found a way through some shenanigans to distribute all the wealth just to themselves?

EDIT: I'm being downvoted, but I've been increasingly hearing a shady Silicon Valley practice where, upon successful acquisition, the board will vote to emit a large number of new shares (think 5-10X the total pool), which will be redistributed just among execs and investors. So, if you are an employee who held on to your 0.1% (which, on 1B, might be worth 1M), you might find out that after the acquisition you are going to be diluted maybe to 0.01%. And this is after all the other "healthy" dilutions that have happened to the company over the years, as part of their financing rounds.

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I was part of a smaller acquisition Splunk made. My existing options at the original company were worthless at the time the deal closed. Instead Splunk and our management agreed to pay us out in cash that was lower than the value of what Splunk paid. In turn Splunk slapped on the golden handcuffs for those they wanted to keep and bumped up our salaries and threw the standard four year vesting RSUs at us with everyone starting at day 0. The rumor was our founder took the lion's share of cash on acquisition. Once I was in Splunk it was, unfortunately, what I feared. Beyond a lot of mediocre mid-level management and everyone calling themselves rockstars I asked about how a specific prior acquisition had gone. Most Splunkers were pretty candid about how poorly that had gone (it was their UBA acquisition, I was part of the SOAR acquisition). I saw the writing on the wall within a few months and left money on the table. It just wasn't worth it to me to stick around as I had been in a similar size Valley security company that was equally as bad.

It's unfortunate this is what the landscape has become. On one hand I'm happy for the SignalFX founders to have made it and hit pay dirt. But everyone else... Yeah, they're all going to get swindled on the deal. Sure you'll make some money but not nearly as much as a select few and even then there's a good chance anyone who tries out Splunk internally runs into the same wall myself and a bunch of my peers did. Splunk, Palo Alto Networks, IBM... They're all are done innovating. These companies buy relevancy and then are proud of their accompliments in changing the world. Or that's what they tell their prospects, customers and themselves. So much great technology and brain power are getting locked up in these non-R&D companies who are at a stage of run rate revenue but still think they're a startup that will continue to pull 50% growth YoY. It's absurd.

Splunk isn't good at acquisitions. I've seen it first hand. I'd never go back there willingly. I hope the SignalFX crew ends up better. But at the end of the day you're working at Splunk.

Well you got RSUs at Splunk + salary bump which is like ok deal?

Granted - your payout at acquisition didn’t work to your expectations - and it’s typical in SV - but after dust settled you been offered something not that bad in a company that is really not a lagger after all...

Umm, I've never worked in a startup, but if I do, a huge motivation would be make money. Risk is startup failing, not it getting acquired for good money. In the end, if all I'm getting is standard RSUs and salary bump, I might as well will join the established company at first place. I understand some people really do love to work for startups, but I think many don't and regardless potential to make money much more than standard job in future is always a motivation.

On average, the problem with being an employee in a startup is that actually it is easy to over-value your shares/options. However, there are still lots of cash-out stories as well, where the employee has made nice bonus on top. But to me it seems that for each cash-out story, there is like 9 or 10 stories where the options/shares have turned out to be worthless.

The risk is to agree to take a risk in a hope of a future payout without having any control over cap table and liquidation preferences.

Lesson learned?

The problem with the "salary bump" is that it is usually a "salary leveling". You were slightly underpaid because you're at a startup so the bump is to a market rate. Or, even if you were at a market rate, you may have been with the startup long enough that you could get that bump just by leaving. So in the end they're not offering you anything you couldn't get by going to many other employers.

So it's not bad per say, but it's not valuable at all. Even though it's being sold to you as such.

RSU's and a salary bump are worthless if you don't like the culture of the company and leave after a few months.

Then you make it worthless I guess

No, that's absolutely not fair.

Someone took a high risk working at a small startup. That risk should be rewarded with something OTHER than a "nice" job offer, which you can get in 1-2 month of interviews anyway.

Someone understood that stock options and promises are not reliable guarantee of compensation in case of an exit in a SV startup scene.

Fairness lesson learned?

> Splunk isn't good at acquisitions. I've seen it first hand. I'd never go back there willingly. I hope the SignalFX crew ends up better. But at the end of the day you're working at Splunk.

Is there some company that is provably good at acquisations? To my understanding they are always very risky and maybe more than 50% end up failing somehow.

For not having founded the company you seem to have had a pretty good deal.

That's a pretty big jump. In fairness I will say the salary was competitive to the company I left for the startup. That being said I had more RSUs that were already in flight to vest at the company I had left. This is how I negotiated higher options at the startup. The cash payout I was given didn't make up for what was lost moving to the startup and taking a pay cut.

That being said the culture at that startup was the best I've experienced. The people and the product were fantastic. So if I were to do it over again would I have made the same choice? I'm not sure and that caution purely comes from the culture and management of Splunk.

Yup, this is very common.

Exact numbers are pretty confidential. Ballpark numbers from something a few years ago: tech company sold for $400+ million. CEO got $10 million, head of sales $5 million, CTO $1 million, middle managers $20k, and regular employees $5k. VCs got everything else.

Seemed pretty standard from what I could tell.

Not a new practice at all; first heard of this happening to a friend about 15 years ago, his share class was revalued to zero at the same time as the acquisition of the startup he worked for.

And this goes back even further: https://web.archive.org/web/20050208022306/http://www.suck.c...

I worked at a YC startup. I was employee #35-40, the company got bought out, I made about $80k from my options over 4 years, two cofounders probably made at least $50M each.

Overall, it wasn't worth it. To make life changing amount, you need to join a company where the market cap goes to $10B+, but even then a Google employee probably would make more overall and with greater reliability than most startups.

> To make life changing amount, you need to join a company where the market cap goes to $10B+, but even then a Google employee probably would make more overall and with greater reliability than most startups.

Btw, have to take in to account that it is also about where you can actually get in. It can be quite difficult (sometimes) to get a position at Google. Startup jobs are often easy to get if you are in the right place at the right time.

so you're telling me there's a chance ;)

https://www.youtube.com/watch?v=KX5jNnDMfxA

I don’t have any inside information but according to Crunchbase SignalFX took in 178mm in investor money. This sale was approximately 6X that amount, so the investors cleared any liquidation hurdles and the common stock employees should be made whole. At that point it’s just a matter of how generous the founders were, and how diluted the stock got over time. If some owned a tenth of a percent at the start and got diluted halfway in subsequent findings, they walk away with 500K.

We don't know liquidation preferences, multipliers, etc.

That said Splunk is generally deal with nice entities, not the ones who make their way up by screwing people around.

So hopefully these execs are a good bunch too.

There could be shady things but liquidation preferences aren’t ever 6x. More likely that the founders just kept most of the equity themselves.

I have friends at this company. I’ve worked previously with the founders. The employees will do alright.

Thanks, happy for them.

I think you're talking about liquidation preferences: http://stockoptioncounsel.com/blog/negotiating-equity-what-i...

For founders:

There's many reasons why this happens, but one of them is the negotiating power of the founders & drivers of the company. If you're desperate for cash to stay around and nobody will give it to you, you may have to take a worse deal (award preferred shares that guarantee first portion of any future windfall to holders of the shares). To guard against this, as a founder you need to steer the company so they have the right negotiating position (so you can get future investors as close to the same liquidation preferences as you).

For potential employees:

This is trickier, since you almost never have the full picture of the cap table and financial situation of the company you're considering joining. There are probably some telltale signs to look for:

- startup has raised lots of $ quickly but hasn't scaled up revenue nearly as quickly - startup is being very secretive about the size of the options pool ("we're excited to offer you 10,000 shares at 0.00001 price!" .. "How many total shares are there? What's the denominator?" .. "We can't tell you!") - you could always ask the founders (if the startup is small enough) out right about their philosophy & vision for fundraising

This is just based on my limited experience, hearsay, what I've read online, etc. Take it all with a grain of salt!

All you are saying is very much correct, but it is not what I'm talking about. In the situation I'm referring to, the terms were always clean, in other words:

- 1x liquidation preferences for all rounds

- Non-participating preferred stocks

- The company sold at a valuation significantly higher than its last valuation and they still had a boatload of cash in the bank, so they strictly sold from a position of power

Another HN user just commented down below adding more info to the shady practices I'm talking about, giving them the proper names: recapitalization and carve-out.

In SuS, YC recommends disclosing to employees both the number of shares they will receive, and the percent of shares. If a company refused to give the denominator, I'd refuse to accept them and ask for a 5k raise instead.

Does anyone take employee equity seriously anymore? Its expected value is so, so low

Do you receive shares without knowing the total amount of shares at some places? That's insane.

A citation for a decent source about this would be appreciated.

In general, this would be a breach of the board's fiduciary duty to all shareholders.

There may be terms on past financings that ensure a minimum return for investors before common gets paid, but that's different.

Sorry but that’s horseshit. First of all investors hold priority shares and there are many ways to structure a deal where employees get nothing. I went through one. The deal was classified an asset sale and the proceeds went to only the priority shareholders.

Investors hold preferred shares.

Preferred tends to have a choice called a liquidity preference. If investors put in $5M, they might have their choice of getting the first $5M from a sale, or to convert to common and get their share of the company.

This (is one thing that) prevents the founders from taking $5M in capital and then immediately dissolving the company and taking that share. It also helps mitigate investor risk-- they get their investment back before other people get paid.

(Of course, there are many details to liquidity preferences-- participating vs. nonparticipating, ... 2x liquidity preference where investors are guaranteed double their money back, etc. but 1x, nonparticipating is the usual deal and founders hold a lot of common and want to negotiate for reasonable terms here)

An asset sale usually doesn't pay anyone back. If proceeds are not enough to pay the liquidity preference, common gets nothing.

I've been through a few startups as a founder. I have cut similar 1x nonparticipating deals. Unfortunately, my most recent one, no employees got anything because of liquidity preferences-- there was not enough proceeds to pay investors back. (I only received a fraction of my original investment, and other investors similarly got pennies on the dollar).

>I've been through a few startups as a founder. I have cut similar 1x nonparticipating deals. Unfortunately, my most recent one, no employees got anything because of liquidity preferences

So you had experience with these exact problems, yet still structured your latest startup so that your employees would end up with nothing?

More likely they structured the deal in the only way under which they could get any money at all. 1x non-participating is not a bad deal for the company or employees. It only becomes a bad deal when the company fails to create economic value, at which point are the employees really due anything more than salary for time worked?

Literally GP post says that investors got pennies on the dollar back and you’re grousing that employees got nothing for their (worthless) equity? Without disrespect to the effort of founder(s) and employees, the company created negative economic value. That’s the root issue, not that the investors had fair contractual terms that caused them to lose “only the vast majority of their investment” rather than “all of it”.

>Or they structured the deal in the only way under which they could get any money at all.

Maybe starting a business for which the only way to get funding is by screwing over your employees is exactly the problem here?

I structured the deals all the same-- with the best price I could get each round, and 1x non-participating liquidity preference.

edit: Actually, the last round of my first company was 1.5x non-participating, so a little worse-- it was the best we could do. Didn't matter because it didn't get triggered.

My first couple companies won. My last company lost. Good luck ever getting capital without that liquidity preference-- it doesn't get done.

My employees got nothing for equity; I lost money overall even when you count my salary. Investors got paid back a portion of what they invested, but lost money too. Everyone lost. Investors and founders were negative, employees were 0 on equity but received their salary/bonus comp.

I would have been a hell of a lot better off personally without the liquidity preference, but is that fair? If the company ends up producing less money than was invested in it, it seems to make sense that the investors should get the money.

If a set of people collectively take $1MM of investment and turn it into $200K, how much extra bonus on top of their salary should they be paid for that outcome in order to avoid being screwed over in your opinion?

I guess you wanted to just chuck some insults and move on.

> Without disrespect to the effort of founder(s) and employees, the company created negative economic value.

Haha that sounds rather brutal when you say it that way :(

I genuinely mean no disrespect. Not all business endeavors turn out to be profitable, especially in startups.

Yah, I know what you meant :D And I've had success and net economic contribution.

But it's still a jarring way to think of the primary activity of five years of my life.

If employees have shares, they are shareholders. At any rate, it is neglect of fiduciary duty if you dilute shares without simultaneously producing enough value that the share price will increase proportionally.

You didn't address the fact there are different classes of shares, which the person you're responding to pointed out.

Do you have a legal citation for that?

His statement is an overreach, but the point is: you can't just dilute a given shareholder class for the benefit of others willy-nilly.

You can with lawyers. Just saw it happen first hand. It is amazing what cap table engineering can be done with a few 100K in lawyer fees and a devious board member or two.

The company, any reasonably wealthy executives, and the investors all have lawyers. The rank and file largely do not. That's the only reason this works. It would never fly if challenged, but it never gets challenged.

True. But even experienced execs and investors know that lawsuits require time, arbitration, and often don’t go how you would expect. All the while eating up money that should go to shareholders.

I’m agreeing that employees get screwed more often than not, I’m also saying smaller investors get screwed more often than not.

Overreach with respect to legal conclusions is par for the course at HN, it seems...

I replied with more information (still no citation, sorry) in another comment.

And yes, minimum return for investors is a completely different story, the story I'm telling doesn't have anything to do with liquidation preferences, participating equity, and things like that.

As you said, this is pure and simple breach of the board's fiduciary duty towards the shareholders who happen to be employees.

Any real examples of this practice that you know of? "I have heard XYZ" is pretty much all bullshit.

I understand your concerns, but I can't provide an exact citation, and you are free to not believe a word of what I'm saying.

All I can say is that this practice has been explicitly described to me by several execs and investors in San Francisco (in my previous life I was a heavy startup guy).

One investor, from one of the top 5 VC firms in the valley, told me that this is how they dilute early employees who left the company after vesting significant equity: in many cases the acquiring company would be pissed at having to pay millions of dollars to people who are not going to effectively bring any value to them anymore, so they redistribute the equity among key employees and execs, by voting a new very large emission of common stocks, and redistributing it with grants having very short-lived vesting cycles (typically 12 months), naturally excluding non-key people.

You might be thinking of a recapitalization.

If you have done multiple rounds of investment already, and need to raise more capital... and the cap sheet is "dirty"-- having non-involved investors, major blocks of shares for employees that are no longer there and were involved on past projects, etc... It can become difficult for a new investor to invest, particularly if the company is otherwise troubled.

After all, the investor wants to make sure there's enough upside for A) them, B) key executives, and C) new employees hired/the incentive option pool. They also do not want to be 6th in line, or whatever, for liquidity preferences. So they may demand that the capital structure of the company change.

Management / the board are generally obligated by fiduciary duty to not recapitalize if there's any reasonable option to protect existing shareholders. But if the only way you're getting a fundraise done is with a recap, it happens-- after all it is still looking out for existing common shareholders in getting them something instead of nothing.

This might well be what I'm talking about, thanks for giving it a proper term.

Still, keep in mind that the examples I was explicitly told about were for companies who were going to be acquired in less than 6 months (so there was no new round of investment), and that the recapitalization affected not only the ex-employees (which is terribly dirty and dishonest in itself), but also the existing non-key employees who happened to be there for a long time and got significant equity by joining early (which is a tragedy).

Recapitalization like this would generally not happen before an acquisition-- because it would likely be a breach of fiduciary duty.

There are other things, though, like carve-outs.

If company A is being acquired by company B, and company B needs key people from company A to stay, and the employees do not have enough upside for company B to be assured they'd stay... you might set aside some acquisition proceeds for those people. This tends to hurt both investors and past employees.

To dumb it down, what you’re describing is when a press release says a $1B acquisition price, but officially it’s technically a $500M acquisition, and a coincidental $500M bonus/incentive pool that the acquirer is choosing to award to whoever they want, under whatever terms they want? That’s called a carve-out?

It would be nice if someone maintained a list of all of these “tricks” and what to watch out for in your options agreements. I try to pay attention to this as a layperson, yet I am frequently learning of more lingo and new deal structures that introduce a lot more risk to both founders and employees.

Yes, but that's pretty rare, because it doesn't make much sense.

A much more common carveout would be something like this:

- A $15M acquisition of a distressed company that may very well be insolvent if the deal is not completed

- $10M is owed to investors to repay liquidity preferences

- A founder is gone who would get $1.5M of the remaining

- Any reasonable escrow fund, etc, on the $3.5M that would go to the remaining shareholders is not enough for the acquirer to be sure they retain key talent.

This deal can't be reasonably done with $15M split according to the capitalization table.

So instead, the investors take $9M (10% haircut, since they're first in line for any fall-back plan); $4M goes to existing shareholders (20% haircut)-- including that missing founder who now gets $1.2M; $2M is held in an escrow for people that the acquirer needs to keep.

This isn't a breach of fiduciary duty, because it's mostly being dictated by the acquirer and because no shareholder class ends up worse off than they'd be in any likely alternative.

Thanks for this. What you described is another practice that was described to me by a few execs who I happen to know quite well: they explicitly said it's a way to not only screw employees (especially the ex), but also investors, and basically redistribute the wealth just to a very small subset of very very key employees.

It isn't, though. Any deal has to make sense for everyone who has to agree to it.

E.g. my last time around-- there was a deal that would have paid back investors and even paid a little to employees... but the acquirer would have required key technical staff to stick around.

The only way that deal would have gotten done would be if it was possible to carve out enough funds for those key technical staff. (It wasn't, so instead it was an asset sale that did not pay back investors).

Just to be explicit:

- I have never been part of a recapitalization or carveout (though I did do diligence on a couple of companies that would have recapitalized as part of a fundraise if funded)-- other than the normal term of stepping up the incentive option pool as part of a capital raise.

- Even so I pretty strongly feel there are times they are necessary tools, and are mostly used in this way.

- Of course, anything can be abused by people with poor ethics.

I link to one specific class of examples here in this comment -- https://news.ycombinator.com/item?id=20763618

This happens well before a company is acquired though (it happens when investors put in money into a company and negotiate their way into getting paid out first).

>Any real examples of this practice that you know of?

Is Facebook real enough for you?

https://en.wikipedia.org/wiki/Eduardo_Saverin

Is there anything an early startup employee can do to safeguard against this? Is the only viable exit for a non-C-suite going public?

Can options be traded / liquidated legally outside of the stock market?

You could try to sell them on a secondary market if your company allows you to (it's clearly written in your stock option agreement). That of course assumes that there is a market in the first place.

You can certainly look for major red flags (e.g. weird clawback clauses in the contract, ...) but at the end of the day, even if the contract is completely clean and the acquisition is a success, the value of your equity will mostly depend on whether the board and investors will decide to screw you or not.

But realistically, can an employee get 2-3% of preferreds to secure his share? Assuming he's valuable enough to negotiate this much.

> Is there anything an early startup employee can do to safeguard against this? Is the only viable exit for a non-C-suite going public?

> Can options be traded / liquidated legally outside of the stock market?

There are secondary markets but many options have provisions forbidding unauthorized trading.

Shareholder lawsuit.

>I'm being downvoted, but I've been increasingly hearing a shady Silicon Valley practice where...

Well, many posters here are too smart too fall for that, and don't like to see people talking ill of their VC overlords (who will make them rich, of course). Can't risk the spigot being closed off!

I, for one, am happy to see tech employees standing up to these companies and money-men, even when I don't agree with the politics.

The favoured few probably will, but it’s all incredibly shady and a big popularity contest. A full recap like you describe would be risky legally, but there are lots of ways to make sure money flows to the right hands. The equity isn’t worth the paper it’s written on.

Yes. Depends on liquidation preferences. If a company is not “crushing it” and sells then investors get back their money before anyone else. Carve outs for execs and some principals may also happen to integrate an acquisition

You are being downvoted because there's no evidence to corroborate what you are saying. Just edit with a link to articles/proof if your statements can be substantiated.

I've heard of this happening in Austin with one firm specifically. For the most part, they have a bad rep around town.

If this actually happens I am surprised to have not come across a lawsuit about it.

Lawsuits are partially prevented by not disclosing the cap table. The majority of startups I've seen will just say "here are 150k options; trust us, they're worth $1 at the close of our last round".

why join a startup that doesn't disclose the cap table based on options when you can join a public company that will typically give you a larger and liquid grant?

I partly agree with you but this is a separate issue. Whether or not the cap table is known is unrelated to the legality of deliberately driving all common holders to (or near) zero in the way described by the parent comment.

A party has to know they were wronged to file a lawsuit, if the cap table isn't presented as information related to the contract then the employee has no basis to understand whether they got their rightful share or not. Many companies don't disclose the total shares outstanding either, so it would be unlikely the employee could check for other forms of dilution.

Without sounding too conspiratorial, as long as the payouts pay everyone with enough information to figure out that the company was restructured prior to the sale then there really isn't anyone with reason or evidence to sue.

I think you're overstating the importance of the cap table in the scenario outlined by the parent poster. If you're asserting that no one could know they got screwed in that situation without having seen the cap table, then I think you're wrong. The cap table has nothing to say about the company suddenly issuing a bunch of new shares, let alone with the exclusive purpose of screwing certain shareholders.

Even if they disclose cap table upon hiring (which i agree likely they won't) - they are not obligated to keep doing that. So 1-2 yrs down the road - the picture will quietly deviate away from employee's rosy dreams and harsh reality will become visible upon (low probability) exit.

Aye this is a fair point, but ultimately it's self defeating for the employer as their comp model is selecting for employees with irrational hope or those whose market value is comparable to salary only comp.

The startups greatest asset in hiring has always been the ability to create outsized reward for employees who will accept higher risk. It doesn't make economic sense for public companies to be capable of matching or exceeding startup equity comp on successful exits.

How can a post be downvoted here in HN? Thought only upvotes were possible.

Yes shady shenanigans happen. First hand experience. You should be upvoted.

Just curious, what are the examples of these deals?

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