Comment by socratic | Hacker News Reader

Comment by socratic | Hacker News Reader

Could someone experienced breakdown what a transaction like this looks like for everyone involved? I'm super curious. I've never been acquired, so I really have no insight into the process other than what I've read.

Here's the facts as I see them: Crunchbase says Hunch started in September of 2007 and had 23 employees on LinkedIn when they exited. (TechCrunch calls it a 20-person team, so I'm presuming that's all the employees.) They've gotten $19.2m in funding, let's just say $20m. TechCrunch claims the sale was "around" $80m.

So what does the breakdown look like? Who gets what? What are the likely investor terms?

My totally naive guess would be that the investors got at least a 1x liquidation preference, maybe more. I mean, did Hunch have any revenue? So there was at most $40m to go around to the people at the company. Of course, most of that probably went to the founders. Would maybe 20% of that have gone to the 20-ish employees? So naively pretending that each of the 20-ish employees got 1% for four years, did they each end up with an extra $100k/year? What's the likely distribution of shares among employees?

What are the transaction costs (lawyers, taxes, etc.) for this sort of acquisition? How long will the employees have to be at eBay to get their earn-out, and will that earn-out be in addition to their common stock in Hunch? Will they end up being paid less to work for eBay during their earn-out than if they were on the open market?

Of course, their are many other reasons to do a deal like this (passion for improving eBay's recommendations, for example), but let's ignore that for now.

Here's a wild, random-ass guess:

- Let's keep it simple and say that since this is an experienced team, the investors invested $20m at a $60m post, so they have 1/3 of the company. Since it is an experienced team, I'm going to guess no participation or anything else hokey. 1x liquidation preference is likely but won't matter in this scenario b/c preferred will convert to common.

- With a 20 person team, you've probably given away 5-10% of the company to employees. The later employees probably did not get much, but then again, they weren't around for that long. Let's be very generous and call it 10%.

- That leaves the founders with 57% of the company.

- Let's just not count transaction costs, they're probably in the $75-$200k range, and it's not super material to this discussion.

In that scenario, the founders make $11.4 million each pre-tax, or about $8.55m post-tax (assuming all founders are equal, which is probably also unlikely here). The employees make $8m pre-tax total, or ~$350k each pretax, or ~$190k each post-tax, but the distribution is going to be skewed towards earlier employees. Investors make $26.4m, which is a pretty poor return for a 3-year investment -- investors are mostly looking at IRR, which means the longer an exit takes, the higher the outcome needs to be to make it worth it.

This is just a wild ass guess on what a transaction like this might look like, but lots and lots of things are likely way different than I guessed here, and I can guarantee that I've over-estimated the amount of money everybody made, because as a general rule of thumb that always happens.

EDIT: > How long will the employees have to be at eBay to get their earn-out, and will that earn-out be in addition to their common stock in Hunch? Will they end up being paid less to work for eBay during their earn-out than if they were on the open market?

Probably 2-4 years for the earn-out. The employees might get more retention bonuses to stick around, above what they would normally get from the transaction. They will not earn below-market due to the retention package.

you are calculating the tax here at around 25%. Wouldn't this count as long term capital gains tax (if you hold the stock for more than 1 year, which it seems likely since the company was incorporated in 2007) that is currently being taxed at 15%?

State/City long term capital gains in NY are around 11-12%. In California they are the same as the income tax rate of 9.3%. 25% is the blended Federal/State/City rate.

ah forgot about that - thanks for clarifying.

Chances are the options weren't restricted options that employes could exercise ahead of time and that there was a 4 year vesting cliff. Most people don't exercise options at vesting time so I'd bet that most of the options were taxed as short term capital gains (and that would mean that 25% is actually probably a bit low for most employees with where this would get them to).

This sounds about right. I would say that the investors probably own a bit more of the company than you guess because the cash didn't all go in at once but in 3 stages (I think? The crunchbase lists 2 different A rounds which doesn't make sense). Valuations for the earlier stages we almost certainly a good bit less.

I would be surprised if the investors agreed to this acquisition without having a 2x liquidity preference.

This is worthwhile for eBay, since only a 1 or 2% improvement in recommendations could be worth millions of dollars a year.

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