- Match gave Tinder founders Tinder stock options, ~20% of Tinder's total worth.
- Since Tinder is private, Tinder founders could only sell options to Match. Match would then have to pay 20% of Tinder's 'Worth' to the founders.
- The founders could only sell at specific points in time, called "scheduled puts".
- Since Tinder is private, 'Worth' is not easy to objectively determine. They have to bring in an external party, give the party information on how the company is doing, and the external party then gives an estimate of valuation.
Obviously, Match has an incentive for valuation to be as low as possible. Tinder founders have the opposite incentive. thus,
- Valuation was agreed to be supervised by Tinder, to prevent Match interfering.
So Tinder founders alledge:
- Match removed some Tinder higher-ups and replaced them with their own loyal people.
- They then had the loyal higher-ups systematically devalue the company (give pessimistic outlooks, earning forcasts, etc) right before a Scheduled put, to influence the third party into estimating as low a valuation as possible
- Once the third party estimated a value of $3 billion, they merged Tinder into match. Since Tinder didn't exist anymore, the Tinder options transformed into $3 billion's worth of Match options.
At this point, any crazy future growth in Tinder would not directly translate into crazy growth in the payout Match has to give to the Founders if the cash out.
Essentially, beforehand the founders were holding on to X billion dollars of options, set to increase proportionally to Tinder's value. After Match's 'scheming' they found themselves holding on to $3 billion of Match options, no longer set to increase proportionally to Tinder's value, but to Match's value.
The founders argue that X > 3, and Tinder's value is set to increase much more than Match in the future, that Match also knows this and cheated for that purpose.
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Extra details are included, such as the fact that Match stood behind one if it's 'infiltrated' loyalists when he was accused of sexual misconduct, just long enough for him to execute the low valuation, then had him fired with a golden parachute. The defendants claim this is further proof that there was intentional foul play at hand.
I thought it was important to point that out as that's at the core of this lawsuit. The team was given options, but it was majority owned and controlled by Hatch Labs / IAC. When IAC acquired it, they're arguing IAC should've paid more.
What does this mean exactly?
If you have share options and you catch wind of a buyout, exercise (buy) the shares. That’s when you have a stake in the game.
You have to remember that the company that issued the options won’t exist (in the same form) once acquired, the options become worthless. Sometimes they’ll throw you a bone but that’s usually the bare minimum of what they can get away with.
For example, a company can give you options to purchase X amount of shares at a ridiculously cheap price ( like $0.0005 per share ). Many startups do this. Sometime in the future, you can exercise the option and get X amount of shares. If you don't exercise the option, then you don't get to buy shares at the agreed at price.
Wait, they didn't exercise their options into the sale? Did the founders hire a team of squirrels as their bankers? This is M&A 101 when switching to majority control.
EDIT: Ah, Tinder was launched as an internal project at Match. Taking options in a majority-owned entity is...odd. There is no proper way to value a majority-owned entity without discounting for the majority ownership. Issuing options for the parent would have been a better offer and better ask.