Re:How much startup stock options are worth
by tptacek on Tuesday November 23, 2010 @09:17PM
(#1936245)
This all sounds plausible but note that the owners don't even have to intend to screw you out of your equity to screw you out of your equity. All that has to happen is for the company valuation to come in under the value of liquidation preferences, or for the deal to be so tight that much of the return is structured as an earnout for existing employees.
Re:How much startup stock options are worth
by danshapiro on Tuesday November 23, 2010 @09:33PM
(#1936271)
One mistake in the above: the right to participate in future financing rounds has nothing to do with qualified investor status, and everything to do with whether your agreement guarantees it. Good CEOs will often make sure all their investors are given a chance to participate (because it's the right thing to do and reduces the chance of one class of lawsuits) but it's only a guarantee if your documents say it is.
Re:How much startup stock options are worth
by tptacek on Tuesday November 23, 2010 @09:42PM
(#1936294)
I was locked out of an investment round at one company because of qualification status. I'm pretty sure being meeting the accredited investor standard actually does matter, at least if you're not an employee and the round involves an exchange of money for financial instruments.
Re:How much startup stock options are worth
by danshapiro on Wednesday November 24, 2010 @04:26AM
(#1936923)
If your agreement had guaranteed you investment rights you would have had them. Since it didn't, it was at their discretion, and they could have used many different criteria to make that decision. Now as a general rule, when you have an option in the matter, you don't want non-accredited investors in your deal. But assuming that accredited status grants follow-on investment rights (or that lack of them prevents it) as a rule is wrong.
Re:How much startup stock options are worth
by skinnymuch on Tuesday November 23, 2010 @08:12PM
(#1936091)
Did Facebook's Eduardo Saverin get 5% of Facebook back because he was singled out? If more stock holders were pushed out, would Saverin not have gotten 5% back?
You can bet that the founders and VC's (or other institutional investors) own a super-majority of the shares. Therefore, they can simply write the rules to give themselves whatever they want. For even more fun, sub-groups of VC's can team up to force out founders or other VC's.
One way this is typically done is to increase the share count by 10X, then sell these new shares for 10 cents on the dollar to a sub-group of new investors.
As an existing shareholder, you MAY have the right to buy into such a deal, but only if you are a "qualified investor", meaning that you have substantial liquid wealth. Otherwise, you'll be left sitting on the sidelines.
Even in a "normal" acquisition, the current shareholders will have to vote on the deal, so it's not uncommon for the large shareholders to cut lucrative side deals with the buyer that give them much more profit than the average shareholder.