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Comment by cgb223 | Hacker News Reader

> The M&A scenario is where you hear about a startup getting acquired for a billion $ and employees are popping corks only to find out that they get nothing (despite all those options/shares) and are now an employee of some other shop that has them on a short list to be axed to realize “synergies” created by the deal.

Can you explain this point a bit more?

If a company was acquired for billions, and they have a contract entitling them to shares of the company, why wouldn’t they have a nice exit?

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Startup equity is a minefield for employees.

If a startup issues options to you while the valuation is high (2021-2022, for example) and then the valuation falls, your options could have a negative value.

Follow-on investment rounds could come with liquidation preferences, meaning the most recent investors get paid first. This is commonly 1X, meaning most recent investors get 100% of their money back at minimum (if the money is there) before the remaining money can be paid into the rest of the preference stack. I've seen situations where liquidation preference can be 2X or more. It's also common for liquidation preferences to stack, so you as the employee are at the bottom of a stack of guaranteed payoffs for investors. You only get a share of what's left.

Remember the Eero WiFi routers that everyone loved? Amazon bought Eero for $100 million, but most of the employees ended up with worthless shares. Amazon sweetened the deal by giving the founders multi-million dollar acquisition bonuses, but employees got nothing. There are several stories about it if you want to read more: https://mashable.com/article/amazon-eero-wifi-router-sale

> If a company was acquired for billions, and they have a contract entitling them to shares of the company, why wouldn’t they have a nice exit?

Read the Eero article for a real-world example. Employees had shares, but they were issued at prices as high as $3.54 per share. By the time of acquisition and after all the other issues were sorted out, the shares were only worth $0.03. Exercising those options would have negative value. Employees who exercised early could have actually lost a lot of money on their shares.

Preferred shares get paid first.

Most investors get preferred shares that give them a “liquidation preference” which means they can get the money they put into the company back out (or some multiple of that money) off the top of the purchase price.

If the purchase price of the company isn’t greater than the money VCs put into the company, the common shares are typically worthless.

Sometimes preferred shareholders have to choose “exercise this preference” and then the shares go poof (“non-participating preferred”) and sometimes preferred shareholders can get this preference AND then also become common shareholders alongside everyone else and get to share what’s left after the preference is paid (“participating preferred”)

The investors usually have liquidation preferences and/or participating preferred stock, or similar.

Common stockholders (including founders) are only entitled to a share of what's left over after investors are paid, as their equity rights are more junior -though often founders/execs will get large bonuses to make the deal happen even if their stock is worthless.

Preferred shares with liquidation preferences can entitle an investor to recoup a multiple (or at least not lose money) before any common shares shareholders can get paid anything. VC stands for Vulture Capital in some circles.

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