Philz Coffee close to closing deal to sell to private equity firm for $145M | Hacker News Reader

Philz Coffee close to closing deal to sell to private equity firm for $145M

missionlocal.org

62 pointsdanso81 comments

> Dalla worked at Philz for nine years until last year, when he was laid off. He said that many longtime employees left around the same time as the company’s culture shifted to a more profit-driven, corporate culture.

> On his way out, he said that CEO Sadarangani urged him against exercising his stock options — options that will now, barring changes to the current deal, be worth nothing. “I always assumed they would do the right thing,” Dalla said.

Wouldn't the options also be worth nothing now? So by not exercising them at least the exercise money was spared?

correct, not exercising them would have been better.

The tax hit, too, depending on the type and amount of options

There is a bunch of shady and unfair behavior by the acquirers here, but yeah, that line doesn’t make sense. If the options are worthless, then exercising them would have been a waste of money - the CEO was helping this person out!

I think this article was written by someone with lots of outrage and little actual understanding.

Is there any good reason why preferred stock exists? It just seems like another tool to screw people over in favor of investors.

To entice investors? Im not a lawyer, but I assume you're perfectly free to try to raise money by selling common stock to investors?

The reason is to protect investors.

The big answer is "no."

I mean, look at Meta. The stock you can actually buy through your broker is not actually a stock that can control the company, so in a very real sense it's not a "share" in Meta. Zuck controls nearly all the "preferred" shares that have supervoting privileges, so he can operate it as though it's essentially a private firm. The board, which in a conventional public company could exercise control over the CEO, has no ability to remove him.

Voting rights in founder-led public companies, and liquidation preference rights in private investments, are very different things.

If you raise money, sometimes you just want the money. Other times, you are happy to cede some ownership and/or control. If things go pear shaped, investors want some protection. If things go really well, sometimes they band together and kick you out of your own company. At some point rules have to be codified: the systems for doing this are share classes, voting rights, information rights, articles of association, board resolutions, etc. While you can start a totally new system and run your company using a magical talking stick and rubber duckies on the blockchain, the reality is that just makes it unfamiliar and hard for conventional institutional capital to invest in, it also makes it hard for slow-moving conventional institutions such as banks and lenders to grok your operational process and internal structure, which in both cases generally limits your upside.

Because someone who might invest some money, maybe wouldn't invest that money if they didn't get the preferred class protections?

This is similar to how different credit risks get assigned different interest rates.

Companies failing (or close enough to failing that they restructure and wipe out common) is not uncommon in start-ups. If you want a more or less sure thing, you'll have to work at a more or less sure employer, and the risk/reward will be different.

Now, whether those who exercised their Philz options and paid for the shares, were really aware in what they were doing -- I don't know! But there doesn't seem to be anything explicitly sinister about the way this was set up, or went down -- simply, the business didn't do well enough. Which is too bad, because I think their coffee is actually good.

Yes. Preferred shares give investors their investment back first if things go wrong.

If an investor gives you a million dollars for a piece of your company, and you turn around and sell the company for a million dollars, then the investor gets their million dollars back and you get nothing. Obviously. Any other outcome would be shenanigans.

Under standard deal terms investors get 1x, i.e. their money back. That's all.

We have many more good locally owned coffee shops today.

It's only a matter of time until those locally owned coffee shops become popular, expand, over-expand, then get acquired.

Followed by regression towards the mean in quality, leading to under performance and giving way to a new crop of locally owned competition.

Southpark had a great episode on this where they burn down the Walmart and then this happens https://www.youtube.com/watch?v=scTjHvot3Uo

That is overly pessimistic. Plenty of businesses don't ever do what you suggest.

Can any of you name some, in the southbay and peninsula?

That sucks. It sucks that employees’s common stock will be cancelled. It also sucks that the vitality of the company will be drained. Maybe this was its destiny.

With investments they were able to furnish nice locations pretty well. Better than many normal franchises.

But perhaps that was overshooting and they will be brought back to financial reality by the PE firm —they’ll try to make it turn a profit at the expense of employees and customers but then again maybe it was existing on borrowed time (money).

At least, so far, it’s a slightly better story than the ice cream shop that grew too fast and then had a complete meltdown from the financial burden.

> On his way out, he said that CEO Sadarangani urged him against exercising his stock options

I'm curious about this, as it sets off a little alarm in my head. Is this a legal thing for the CEO to do?

It's not. CEO needs to be put in prison.

they can just cancel stock?

Speaking as a coffee drinker, I saw Philz distribute through retail stores far away from SF, and expect enshittification (figuratively) in the future.

For other Tesora addicts, the house brand Italian roast at Safeway/Von's is very similar and a lot cheaper.

I can't imagine what changes are coming. Probably Son of Philz AItalian Roast.

It was fun and flavorful.

> “All Common Stock will be canceled for no consideration and all Options will be canceled and extinguished for no consideration”

How is this even legal?

"In a liquidation, common stockholders receive whatever assets remain after creditors, bondholders, and preferred stockholders are paid."

Coupled with what sounds like an already bad financial state of the company... I'm not claiming no foul play, but it looks like there is a reasonable avenue for what is happening.

Yet the board and CEO will get paid... So they're not that out of money. Just out of money enough to screw everybody but themselves.

> Philz board members, which include former CEO Phil Jaber and his son, Jacob Jaber; representatives from investment firms Summit Partners and TPG Growth; and CEO Mahesh Sadarangani will receive payouts or bonuses from the deal.

Salary takes preference over equity and debt in all liquidations.

Investing in shares is, like most things in life, a task that requires some skill and understanding. Hence the concept of accredited investors. When you're swimming with the big boys, it pays to know the rules of the game.

Unfortunately employees getting or buying shares from their employer have little to no investment skills. Yes, it's possible for these shares to be worth something, but if the company fails, they're last in line.

It behooves tech staff, who think the road to glory is paved in stock options to get professional financial and legal (not to mention tax) advice.

Or just consider all stock offerings to be worthless. The times it isn't are a rounding error.

The concept of accredited investors is nothing of the sort. It's an arbitrary income / net worth threshold.

It’s a check for ‘can this person handle losing a large chunk of money when they get swindled by management after investing in a private company’, which will almost certainly be the case if you don’t have more money to kick in every round (dilution) or don’t own preferred shares, or any number of other tricks. Google or Meta recently ‘acquired’ a company by offering them salary packages that matched the equity they had in their company and then skipped buying the company so anyone with shares left got screwed over when the husk was sold for 1% of its prior value, since it was almost worthless once all the talent was acquihired.

Which company was that?

Not Abel.ai, so who?

https://news.ycombinator.com/item?id=44640343

Disagree. I exercised some small amount of options long time ago (like 10+ years). Never called, never cared, also thought it's long gone. But recently got a nice check from them out of the blue when they got sold to a larger company. Even though all the people I worked with long gone as well, including CEO. I checked the numbers, all seems correct.

I'm not saying there's never an outcome. I'm saying the percentage of positive outcomes is tiny compared to the number of players.

Congrats on the check. But I think you approached it in the right way. Assume they're worth nothing until proved wrong.

The article implies that it's not a liquidation or bankruptcy, though, just a sale.

I don't know how you can buy a company without buying its stock from the shareholders, given that they are the owners of the company, but there must be some special circumstance that's not mentioned in the article.

There are tricks. I've been through such an acquisition. The purchaser sets up a new "Philz Coffee Co LLC" then purchases assets and operations for the exact amount the preferred stock holders want. They then liquidate the old company. Because the old company was never legally "bought" the common stock holders are SOL because they now own stock in a fictional company. That's not to say they don't have options... but I am not a lawyer and that definitely involves lawyers.