It's unfortunate this is what the landscape has become. On one hand I'm happy for the SignalFX founders to have made it and hit pay dirt. But everyone else... Yeah, they're all going to get swindled on the deal. Sure you'll make some money but not nearly as much as a select few and even then there's a good chance anyone who tries out Splunk internally runs into the same wall myself and a bunch of my peers did. Splunk, Palo Alto Networks, IBM... They're all are done innovating. These companies buy relevancy and then are proud of their accompliments in changing the world. Or that's what they tell their prospects, customers and themselves. So much great technology and brain power are getting locked up in these non-R&D companies who are at a stage of run rate revenue but still think they're a startup that will continue to pull 50% growth YoY. It's absurd.
Splunk isn't good at acquisitions. I've seen it first hand. I'd never go back there willingly. I hope the SignalFX crew ends up better. But at the end of the day you're working at Splunk.
Granted - your payout at acquisition didn’t work to your expectations - and it’s typical in SV - but after dust settled you been offered something not that bad in a company that is really not a lagger after all...
Lesson learned?
So it's not bad per say, but it's not valuable at all. Even though it's being sold to you as such.
Someone took a high risk working at a small startup. That risk should be rewarded with something OTHER than a "nice" job offer, which you can get in 1-2 month of interviews anyway.
Fairness lesson learned?
Is there some company that is provably good at acquisations? To my understanding they are always very risky and maybe more than 50% end up failing somehow.
That being said the culture at that startup was the best I've experienced. The people and the product were fantastic. So if I were to do it over again would I have made the same choice? I'm not sure and that caution purely comes from the culture and management of Splunk.
Exact numbers are pretty confidential. Ballpark numbers from something a few years ago: tech company sold for $400+ million. CEO got $10 million, head of sales $5 million, CTO $1 million, middle managers $20k, and regular employees $5k. VCs got everything else.
Seemed pretty standard from what I could tell.
Not a new practice at all; first heard of this happening to a friend about 15 years ago, his share class was revalued to zero at the same time as the acquisition of the startup he worked for.
And this goes back even further: https://web.archive.org/web/20050208022306/http://www.suck.c...
Overall, it wasn't worth it. To make life changing amount, you need to join a company where the market cap goes to $10B+, but even then a Google employee probably would make more overall and with greater reliability than most startups.
Btw, have to take in to account that it is also about where you can actually get in. It can be quite difficult (sometimes) to get a position at Google. Startup jobs are often easy to get if you are in the right place at the right time.
That said Splunk is generally deal with nice entities, not the ones who make their way up by screwing people around.
So hopefully these execs are a good bunch too.
For founders:
There's many reasons why this happens, but one of them is the negotiating power of the founders & drivers of the company. If you're desperate for cash to stay around and nobody will give it to you, you may have to take a worse deal (award preferred shares that guarantee first portion of any future windfall to holders of the shares). To guard against this, as a founder you need to steer the company so they have the right negotiating position (so you can get future investors as close to the same liquidation preferences as you).
For potential employees:
This is trickier, since you almost never have the full picture of the cap table and financial situation of the company you're considering joining. There are probably some telltale signs to look for:
- startup has raised lots of $ quickly but hasn't scaled up revenue nearly as quickly - startup is being very secretive about the size of the options pool ("we're excited to offer you 10,000 shares at 0.00001 price!" .. "How many total shares are there? What's the denominator?" .. "We can't tell you!") - you could always ask the founders (if the startup is small enough) out right about their philosophy & vision for fundraising
This is just based on my limited experience, hearsay, what I've read online, etc. Take it all with a grain of salt!
- 1x liquidation preferences for all rounds
- Non-participating preferred stocks
- The company sold at a valuation significantly higher than its last valuation and they still had a boatload of cash in the bank, so they strictly sold from a position of power
Another HN user just commented down below adding more info to the shady practices I'm talking about, giving them the proper names: recapitalization and carve-out.
Does anyone take employee equity seriously anymore? Its expected value is so, so low
In general, this would be a breach of the board's fiduciary duty to all shareholders.
There may be terms on past financings that ensure a minimum return for investors before common gets paid, but that's different.
Preferred tends to have a choice called a liquidity preference. If investors put in $5M, they might have their choice of getting the first $5M from a sale, or to convert to common and get their share of the company.
This (is one thing that) prevents the founders from taking $5M in capital and then immediately dissolving the company and taking that share. It also helps mitigate investor risk-- they get their investment back before other people get paid.
(Of course, there are many details to liquidity preferences-- participating vs. nonparticipating, ... 2x liquidity preference where investors are guaranteed double their money back, etc. but 1x, nonparticipating is the usual deal and founders hold a lot of common and want to negotiate for reasonable terms here)
An asset sale usually doesn't pay anyone back. If proceeds are not enough to pay the liquidity preference, common gets nothing.
I've been through a few startups as a founder. I have cut similar 1x nonparticipating deals. Unfortunately, my most recent one, no employees got anything because of liquidity preferences-- there was not enough proceeds to pay investors back. (I only received a fraction of my original investment, and other investors similarly got pennies on the dollar).
So you had experience with these exact problems, yet still structured your latest startup so that your employees would end up with nothing?
Literally GP post says that investors got pennies on the dollar back and you’re grousing that employees got nothing for their (worthless) equity? Without disrespect to the effort of founder(s) and employees, the company created negative economic value. That’s the root issue, not that the investors had fair contractual terms that caused them to lose “only the vast majority of their investment” rather than “all of it”.
Maybe starting a business for which the only way to get funding is by screwing over your employees is exactly the problem here?
edit: Actually, the last round of my first company was 1.5x non-participating, so a little worse-- it was the best we could do. Didn't matter because it didn't get triggered.
My first couple companies won. My last company lost. Good luck ever getting capital without that liquidity preference-- it doesn't get done.
My employees got nothing for equity; I lost money overall even when you count my salary. Investors got paid back a portion of what they invested, but lost money too. Everyone lost. Investors and founders were negative, employees were 0 on equity but received their salary/bonus comp.
I would have been a hell of a lot better off personally without the liquidity preference, but is that fair? If the company ends up producing less money than was invested in it, it seems to make sense that the investors should get the money.
Haha that sounds rather brutal when you say it that way :(
But it's still a jarring way to think of the primary activity of five years of my life.
I’m agreeing that employees get screwed more often than not, I’m also saying smaller investors get screwed more often than not.
And yes, minimum return for investors is a completely different story, the story I'm telling doesn't have anything to do with liquidation preferences, participating equity, and things like that.
As you said, this is pure and simple breach of the board's fiduciary duty towards the shareholders who happen to be employees.
All I can say is that this practice has been explicitly described to me by several execs and investors in San Francisco (in my previous life I was a heavy startup guy).
One investor, from one of the top 5 VC firms in the valley, told me that this is how they dilute early employees who left the company after vesting significant equity: in many cases the acquiring company would be pissed at having to pay millions of dollars to people who are not going to effectively bring any value to them anymore, so they redistribute the equity among key employees and execs, by voting a new very large emission of common stocks, and redistributing it with grants having very short-lived vesting cycles (typically 12 months), naturally excluding non-key people.
If you have done multiple rounds of investment already, and need to raise more capital... and the cap sheet is "dirty"-- having non-involved investors, major blocks of shares for employees that are no longer there and were involved on past projects, etc... It can become difficult for a new investor to invest, particularly if the company is otherwise troubled.
After all, the investor wants to make sure there's enough upside for A) them, B) key executives, and C) new employees hired/the incentive option pool. They also do not want to be 6th in line, or whatever, for liquidity preferences. So they may demand that the capital structure of the company change.
Management / the board are generally obligated by fiduciary duty to not recapitalize if there's any reasonable option to protect existing shareholders. But if the only way you're getting a fundraise done is with a recap, it happens-- after all it is still looking out for existing common shareholders in getting them something instead of nothing.
Still, keep in mind that the examples I was explicitly told about were for companies who were going to be acquired in less than 6 months (so there was no new round of investment), and that the recapitalization affected not only the ex-employees (which is terribly dirty and dishonest in itself), but also the existing non-key employees who happened to be there for a long time and got significant equity by joining early (which is a tragedy).
There are other things, though, like carve-outs.
If company A is being acquired by company B, and company B needs key people from company A to stay, and the employees do not have enough upside for company B to be assured they'd stay... you might set aside some acquisition proceeds for those people. This tends to hurt both investors and past employees.
It would be nice if someone maintained a list of all of these “tricks” and what to watch out for in your options agreements. I try to pay attention to this as a layperson, yet I am frequently learning of more lingo and new deal structures that introduce a lot more risk to both founders and employees.
A much more common carveout would be something like this:
- A $15M acquisition of a distressed company that may very well be insolvent if the deal is not completed
- $10M is owed to investors to repay liquidity preferences
- A founder is gone who would get $1.5M of the remaining
- Any reasonable escrow fund, etc, on the $3.5M that would go to the remaining shareholders is not enough for the acquirer to be sure they retain key talent.
This deal can't be reasonably done with $15M split according to the capitalization table.
So instead, the investors take $9M (10% haircut, since they're first in line for any fall-back plan); $4M goes to existing shareholders (20% haircut)-- including that missing founder who now gets $1.2M; $2M is held in an escrow for people that the acquirer needs to keep.
This isn't a breach of fiduciary duty, because it's mostly being dictated by the acquirer and because no shareholder class ends up worse off than they'd be in any likely alternative.
E.g. my last time around-- there was a deal that would have paid back investors and even paid a little to employees... but the acquirer would have required key technical staff to stick around.
The only way that deal would have gotten done would be if it was possible to carve out enough funds for those key technical staff. (It wasn't, so instead it was an asset sale that did not pay back investors).
- I have never been part of a recapitalization or carveout (though I did do diligence on a couple of companies that would have recapitalized as part of a fundraise if funded)-- other than the normal term of stepping up the incentive option pool as part of a capital raise.
- Even so I pretty strongly feel there are times they are necessary tools, and are mostly used in this way.
- Of course, anything can be abused by people with poor ethics.
This happens well before a company is acquired though (it happens when investors put in money into a company and negotiate their way into getting paid out first).
Is Facebook real enough for you?
Can options be traded / liquidated legally outside of the stock market?
You can certainly look for major red flags (e.g. weird clawback clauses in the contract, ...) but at the end of the day, even if the contract is completely clean and the acquisition is a success, the value of your equity will mostly depend on whether the board and investors will decide to screw you or not.
> Can options be traded / liquidated legally outside of the stock market?
There are secondary markets but many options have provisions forbidding unauthorized trading.
Well, many posters here are too smart too fall for that, and don't like to see people talking ill of their VC overlords (who will make them rich, of course). Can't risk the spigot being closed off!
I, for one, am happy to see tech employees standing up to these companies and money-men, even when I don't agree with the politics.
why join a startup that doesn't disclose the cap table based on options when you can join a public company that will typically give you a larger and liquid grant?
Without sounding too conspiratorial, as long as the payouts pay everyone with enough information to figure out that the company was restructured prior to the sale then there really isn't anyone with reason or evidence to sue.
The startups greatest asset in hiring has always been the ability to create outsized reward for employees who will accept higher risk. It doesn't make economic sense for public companies to be capable of matching or exceeding startup equity comp on successful exits.
EDIT: I'm being downvoted, but I've been increasingly hearing a shady Silicon Valley practice where, upon successful acquisition, the board will vote to emit a large number of new shares (think 5-10X the total pool), which will be redistributed just among execs and investors. So, if you are an employee who held on to your 0.1% (which, on 1B, might be worth 1M), you might find out that after the acquisition you are going to be diluted maybe to 0.01%. And this is after all the other "healthy" dilutions that have happened to the company over the years, as part of their financing rounds.