Hacker News Reader

Comment by paxys | Hacker News Reader

Sold for $5.15B.

Brex last raised $300M in Oct 2021 at a $12.3B valuation.

There's a lot of speculation about how different rounds will get paid out.

Unless someone has insider information and is willing to post, we have absolutely no idea who was made whole, who lost and/or who gained.

At the size of Brex, anything is possible and it depends on how much leverage they had at each priced round. Guaranteed payout, equal, founders multiplier, lead multipier. All possible.

Additionally, what people don't realize is the headline number can get severely inflated IF debt is included in the purchase price. If say their book was 4.3B in debt then the equity part is ~800m and all of a sudden everyone's underwater.

We simply don't know the details.

What is a founder/lead multiplier?

An opaque method of ensuring investors get a huge payout at the expense of employees with ISOs that convert to common stock. Many startups refuse to share this multiplier with candidates, and will instead insist their equity grant is "competitive with the market" and "very generous."

I wouldn't be surprised if, despite the large-sounding acquisition sum of ~5b, many employees are getting their equity zero'd out and replaced with a back-loaded 4 year grant, with vesting starting today and no credit for time already worked.

It's a different form of guaranteed payout where their value is a multiple on the next round or buyout event.

Both guaranteed payout and multiplier are forms lowering your specific allocation of the evaluation so you get a larger payout vs the rest of that group or future groups.

All of these SaaS and Fintech startups from ZIRP were so overvalued.

ZIRP is basically still a major factor. The cancer of ZIRP was with us for literally a whole generation, that is not simply just undone by stopping the consumption of the carcinogen.

Unfortunately for the majority of people, there are effectively zero good outcomes from any of this. Just like none of the previous promises and assurances of how {insert technology} would make things better for everyone, while always turning out to only benefit a few; so will the current lies of the same pattern result in the same output.

That is a 50% discount, which isn't great for those who got into the latest round.

Seems like Capital One is very excited on the deal and announced it earlier while Brex hid the announcement and made it hard to find. (It's on the Brex [0] journal directory, but you cannot see it featured on its front page)

What (really) happened?

[0] https://www.brex.com/journal

Its not great for those who got in later rounds, but I would assume all the investors had at least 1X preferences, so they'll at least get all their money back.

I think this is a pretty decent outcome for Brex. I read they received a total of 1.3 billion in funding, so a 5.15 billion exit isn't bad, especially since the bottom dropped out of the market for so many fintechs that were founded and had big raises between 2015 and 2021.

I'm curious how the employees faired. Seems like they may bet getting nothing out of the deal if the investors get their money back.

We know how the employees did. Same as ever. They got whatever slop was left in the trough after the big pigs ate their share.

Bitter about VCs? Me? Never.

Brex has been around for a long time, so employees will have been issued stock options with vastly different exercise prices.

Early employees' options will have value, but more recent options are likely underwater.

I strongly suspect they shifted to RSUs at those valuations.

It seems unlikely that regular employees would be issued RSUs. Tax is due at vest, and you can't liquidate to fund the tax bill.

The usual move here is "double trigger" RSUs that don't vest until a liquidity event, thus no taxes due until said liquidity event.

Are those common for regular employees?

highly common

Right. Plus often the tax is paid out of RSUs given, you just get less in RSUs, some is subtracted to pay tax.

There's double trigger RSUs and so on that allow you to have reasonable tax treatment, due to the theoretical threat of loss if liquidity isn't available. I worked at a company that had this at least while I was there.

I was a regular SDE at brex for a couple years and my various documents about comp say I have RSUs, and carta says so as well.

I've never bothered to understand the details since none of the private companies I've worked for have had the non-cash portion of their comp be worth anything but $0 before.

Nope, you as a company owner are highly motivated to shift to RSUs once you hit a certain valuation and number of employees. Everyone does it.

Can you expand on why at a certain valuation and size you would shift?

options can only last 7 years, but brex was founded in 2017.

When the options expire do they give new equivalent ones to the employees that hung on? Otherwise what’s the point?

You can exercise the options before that time is up, paying the strike price to convert them to shares

But then you’re potentially stuck with worthless options you can never trade, right? Seems very unfriendly to employees

> Seems very unfriendly to employees

Ding ding ding ding ding!

Most ICs figure this out sooner or later. Unfortunately many only discover it after being screwed hard financially.

You have to exercise the options or let them expire. You normally have 10 years not 7, but if a company comes up on 10 years after they issued their first options, they might try a tender offer to buy some employee shares. If your 10 year old "start up" shares can't be sold anywhere, then they probably aren't worth exercising. A company that can't provide liquidity to employees for 10 years will probably never do it.

Who says options can only last 7 years?

ISO options have to expire within 10 years of when they are granted. Sometimes companies make them expire earlier than that, so OP might be thinking of options they were granted. E.g. I once had options that expired 30 days after ending employment even thought the ISO requirement is up to 90 days.

While I don't think it's the case here, but a lot of time there is more liquidity preference than the deal value so employees can only get what investor want them to pay.

These days, most employees getting nothing out of the deal is par for the course for acquisitions, unfortunately. The acquisition price is almost never exchanged directly for shares in the company as implied, often a chunk of it is kept for key personnel retention, etc. Typically just enough goes towards the share purchase to make investors happy, and the rest is structured as incentives for founders and key execs with milestone payouts. That‘s the set of people with leverage towards making the acquisition happen, so that‘s who gets paid.

If you‘re just a regular employee with some options, and the acquirer doesn‘t want to keep you on, you should expect nothing.

> Typically just enough goes towards the share purchase to make investors happy, and the rest is structured as incentives for founders and key execs with milestone payouts.

So they're getting the employees' shares without compensating the employees?

And there's incentives paid to the people who approved the deal, separate from their shares?

(I've heard of liquidation preferences, but never by the person making a job offer with stock options. Bribery also never came up.)

Because “shares” are not all the same. Preferred vs common, so unless you negotiated some kind of preferred share terms, assume your shares are worthless. For a non publicly listed company. For a publicly listed company, the details are all publicly available, so the different types of shares will have their different prices be easily available to see.

If that's true, when a startup is making you an offer for ISOs of common shares, and explaining it... how likely are they to know that, in event of a successful exit for the startup, your shares would be diluted and preferenced to 0 value?

(The two most recent offer equity components I accepted were "2%" and "a million shares". On the latter, an upper exec did a kind of deal-closer meeting for their offer, showing me a spreadsheet, estimating how much the options would be worth if there were an exit in X years at $Y valuation.)

> If that's true, when a startup is making you an offer for ISOs of common shares, and explaining it... how likely are they to know that, in event of a successful exit for the startup, your shares would be diluted and preferenced to 0 value?

If they have any experience, or even just browse a forum like this, they should be 100% likely to know. The person on the opposite side of the negotiating table has a goal of giving you as little as possible in exchange for your work (and vice versa).

Yes, and yes. The sibling comment here about liquidation preferences is correct, and these separate incentives are usually structured as retention incentives — eg, compensation for future work with the acquiring company.

Shareholders are of course free to sue the board for acting outside of the interests of the shareholders overall, but this happens very rarely because typically the company would otherwise be shutting down and it’s very hard to make the argument that the deal undervalues common shareholders’ shares.

This is a weird theory. Brex sent an email to all customers, alongside posting everywhere on social media. You are making your conclusions because they didn't put the announcement on their landing page?

Some people, (eg people who aren't already Brex customers), aren't going to get that email, and aren't following Brex's social media presence. They may not even have a social media account of their own, not even a Linkedin. The only way they would hear about is is via their landing page.

How much you use social media, and are a Brex customer, is going to influence how big you think that group of people is, but it's for sure, non-zero.

It's as easy as some VC bros desperately searching for a bigger fool and finding it. Most likely CapitalOne management consists of friends with the VCs.

It's just another case of the principal/agent problem and normalized white-collar fraud in US tech.

I don't know why the downvotes, that's most probably what happened. These deals are rarely done for some economic reason, it's mostly because somebody knows someone else who can do it and get mutual benefit, a legalized version of fraud.

So you are saying VC bros are defrauding Capital One shareholders?

It's simply an example of the principal/agent problem, finance 101.

CapitalOne shareholders will decide if they want to sue the management over buying a company which primarily focuses on AI-bubble-startups.

We're at a very late stage of the AI bubble which might be the last ZIRP-fueled bubble to pop after which VC as an investment vehicle will be dead for years to come. Rising tide lifts all boats and all, but many of the "genious" VCs already have problems returning capital from their older funds.

Capital One management is friends with VCs, VCs want to cash out from their investments without big losses, some parties, some holidays, as easy as that.

Late round investors at least have liquidation preference. It's the worst outcome for employees.

> 50% discount

There are liquidity preferences, nobody took a haircut, they may not made a lot of money as long as the sale price($5.1B) is greater than funds raised($1.2B) everyone made some money not as much as they thought, but nevertheless some.

The reason may be different than you think, Capital One is known for its aggressive marketing campaigns and physical mail spam, it is more likely they didn't want to upset the customers and end users on what Capital One will mean

It is quite likely Capitial one will mine the data, monetize the brand, sell other products and target high value users the typical Brex user.

Liquidation preferences may have multiples. A 3x liquidation preference would have erased most gains for anyone who didn’t raise in the last round, employees and founders included.

Fair point, but Brex' business would have had to have been incredibly weak to raise on those terms.

> as the sale price($5.1B) is greater than funds raised($1.2B) everyone made some money

Absolutely not true. It means someone made money, but it very much does not mean that "everyone" made some money.

In deals like this, common stock often is valued at $0, and employees are instead given a 4-year grant of RSUs in the new company. In other words, their time at Brex was worthless, and they have to last 4 years to get anything. The schedule is often back loaded (eg $0 in the first 2 years, 50% at year 3 and 4). Since most folks won't make it to 3 years, the company knows they won't be paying out almost any of these grants.

I mean, welcome to literally every tech startup valuation 2021 vs now. 2021 was so amazing for stock valuations.

fintechs are a hard hat area - they make a lot of noise while raising money - but hardly ever mention costs, profitability

hence few fare well in the public markets or when its time for acquisition

Even more notable since 80% of the US’ money supply was created after that.

So that number should be even closer to 12…

Employees got wiped out!

May I ask if you're an insider / some who has first hand information about this?

Reply on news.ycombinator.com