Investors hold preferred shares.

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).

>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

So you had experience with these exact problems, yet still structured your latest startup so that your employees would end up with nothing?

More likely they structured the deal in the only way under which they could get any money at all. 1x non-participating is not a bad deal for the company or employees. It only becomes a bad deal when the company fails to create economic value, at which point are the employees really due anything more than salary for time worked?

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”.

>Or they structured the deal in the only way under which they could get any money at all.

Maybe starting a business for which the only way to get funding is by screwing over your employees is exactly the problem here?

I structured the deals all the same-- with the best price I could get each round, and 1x non-participating liquidity preference.

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.

If a set of people collectively take $1MM of investment and turn it into $200K, how much extra bonus on top of their salary should they be paid for that outcome in order to avoid being screwed over in your opinion?

I guess you wanted to just chuck some insults and move on.

> Without disrespect to the effort of founder(s) and employees, the company created negative economic value.

Haha that sounds rather brutal when you say it that way :(

I genuinely mean no disrespect. Not all business endeavors turn out to be profitable, especially in startups.

Yah, I know what you meant :D And I've had success and net economic contribution.

But it's still a jarring way to think of the primary activity of five years of my life.

If employees have shares, they are shareholders. At any rate, it is neglect of fiduciary duty if you dilute shares without simultaneously producing enough value that the share price will increase proportionally.

You didn't address the fact there are different classes of shares, which the person you're responding to pointed out.

Do you have a legal citation for that?

His statement is an overreach, but the point is: you can't just dilute a given shareholder class for the benefit of others willy-nilly.

You can with lawyers. Just saw it happen first hand. It is amazing what cap table engineering can be done with a few 100K in lawyer fees and a devious board member or two.

The company, any reasonably wealthy executives, and the investors all have lawyers. The rank and file largely do not. That's the only reason this works. It would never fly if challenged, but it never gets challenged.

True. But even experienced execs and investors know that lawsuits require time, arbitration, and often don’t go how you would expect. All the while eating up money that should go to shareholders.

I’m agreeing that employees get screwed more often than not, I’m also saying smaller investors get screwed more often than not.

Overreach with respect to legal conclusions is par for the course at HN, it seems...