Liquidation preferences. Large investors can negotiate a liquidation preference with their investment. This means they will receive some multiple (1x, 2x, ...) of their investment from the liquidation proceeds. These investors can also be "participating members" which means after receiving their liquidation preference they can still receive their pro rata share of the liquidation proceeds based on their equity stake.

So if a company was liquidated for an amount at or below the sum of the liquidation preferences there's nothing left for the shareholders to divvy up.

There are tiers of equity. Any money that comes in flows from the top tier downwards like a multi-step waterfall. Employees are usually in the bottom tier. You get what is leftover after everyone else partakes.

https://www.nytimes.com/2015/12/27/technology/when-a-unicorn...

Some tiers also have multiples -- e.g., 2x first money out

All equity is not created equal. Employee equity pool is usually the first to be diluted and the last to be paid out. Read your offer materials closely. You’ll want some anti dilution clause that gives pool refreshers. But 99% of the time investors will get paid out before employees or founders

If you exit under the money taken, exit under the money taken plus any preference multipliers, have founders that foolishly agreed to double-dipping schemes like participating preferences, and so on. There are myriad ways your common shares can go to zero even with an acquisition, even with an acquisition to the tune of hundreds of millions of dollars.

The board can, basically, do whatever it wants, and you have no protection at all, unless you managed to get some kind of agreement into your equity agreement (e.g., Larry Ellison's anti-dilution clause).

> I often talk to startups that claim that their compensation package has a higher expected value than the equivalent package at a place like Facebook, Google, Twitter, or Snapchat. One thing I don’t understand about this claim is, if the claim is true, why shouldn’t the startup go to an investor, sell their options for what they claim their options to be worth, and then pay me in cash?

> So how come startups can’t or won’t take on more investment and pay their employees in cash? Let’s start by looking at some cynical reasons, followed by some less cynical reasons.

> There are a lot of differences between the preferred stock that VCs get and the common stock that employees get; let’s look at a couple of concrete scenarios.

> Let’s say those investors that paid $300M for 30% of the company have a straight (1x) liquidation preference, and the company sells for $500M. The 1x liquidation preference means that the investors will get 1x of their investment back before lowly common stock holders get anything, so the investors will get $300M for their 30% of the company. The other 70% of equity will split $200M: your 0.1% common stock option with a $0 strike price is worth $285k (instead of the $500k you might expect it to be worth if you multiply $500M by 0.001).

> The preferred stock VCs get usually has at least a 1x liquidation preference. Let’s say the investors had a 2x liquidation preference in the above scenario. They would get 2x their investment back before the common stockholders split the rest of the company. Since 2 * $300M is greater than $500M, the investors would get everything and the remaining equity holders would get $0.

> Another difference between your common stock and preferred stock is that preferred stock sometimes comes with an anti-dilution clause, which you have no chance of getting as a normal engineering hire. Let’s look at an actual example of dilution at a real company. Mayhar got 0.4% of a company when it was valued at $5M. By the time the company was worth $1B, Mayhar’s share of the company was diluted by 8x, which made his share of the company worth less than $500k (minus the cost of exercising his options) instead of $4M (minus the cost of exercising his options).

-- https://danluu.com/startup-options/

Preferred stock. Investors get their money first, then founders, then everyone else.

Separately from the pathologies of investing in startups as a mere employee, there are also more transparent mechanisms for public companies to dilute minority shareholders or force minority shareholders to sell their stakes:

1. A company can dilute existing shareholders by issuing more shares to raise capital. That said, if a company is at a high risk of bankruptcy, the value of a minority shareholder's diluted shares may be worth more than the pre-diluted shares if the company's balance sheet is bolstered by the new cash reserves.

Some recent examples:

1.1. Rolls Royce recently performed a rights issue where existing shareholders were granted the right to purchase additional shares in the company for a particular price [RR]. Shareholders who do not want to be diluted need to pony up more cash to exercise the rights or otherwise buy additional shares to compensate for dilution.

1.2. Telsa raised an additional $5b cash by issuing more common stock on the market. [TSLA] If you were a Telsa shareholder with a 'buy and hold' perspective, if you believe that the current market price of Telsa shares under estimates the true value of those shares to you as a shareholder, then this action reduces the value of your shares. Conversely, if you believe the current market price of Telsa shares massively over estimates the true value of those shares to you as a shareholder, then this action might increase the value of your shares (e.g. the value of your claim to future earnings is reduced by dilution, but the tangible assets per share of your diluted shares may increase due to the additional cash reserves).

2. In some cases, a public company can be acquired and minority shareholders can be forced to sell their shares through a squeeze-out [SO], provided a majority shareholder owns at least 90% or 95% of the company (depending on jurisdiction). It might make sense for a majority shareholder / acquirer to do this if they believe their private value of owning the entire business is higher than the current "fair-value" market price per share, and they can force minority shareholders to sell at the current market price. In the worst case this enables majority shareholders to take advantage of temporarily depressed market prices and lock out minority shareholders from participating in future gains if the company's situation improves or is turned around.

One arbitrary current example of an upcoming squeeze-out is the situation with hunter douglas group [HDG].

[RR] https://www.ii.co.uk/analysis-commentary/rolls-royce-rights-...

[TSLA] https://www.sec.gov/Archives/edgar/data/1318605/000119312520...

[SO] https://en.wikipedia.org/wiki/Squeeze-out

[HDG] http://investor.hunterdouglasgroup.com/news-releases/news-re...