Depending on how deep the funding is, a company might be majority owned by their VC firm investors, and if they give out too many board seats an overnight rugpull/takeover (via a majority board vote) is possible. There are other tactics, such as severely reducing the price of shares, typically $0.00000001 per, and issuing (hundreds of) billions of new shares so that the previous private stockholders end up with basically nothing.

Can you explain how this issuance of new shares works? Once someone has the power to do that (and I assume assign them to whomever they please), why wouldn't they? Doesn't such power fly in the face of a share representing ownership, if that ownership can be unilaterally diminished?

With board approval the majority owners can do pretty much anything. You can re-cap existing shareholders down to basically zero ownership to privilege new ones, you can screw the employee pool in favor of the investors and founders (that's pretty normal, actually, employees should always assume they'll be screwed in an exit), you can even dilute specific previous investors/founders out of the pool like what Zuck did to Saverin.

The reason you don't is that you don't want to get a reputation as a shady operator. If you recap a big VC out you're probably never going to raise again. Fuck an angel and word will get around, though it's not as bad as crossing a VC. Screwing employees is not great but news of that doesn't spread as widely so people do it a lot.

Re: "share representing ownership", there's a reason that when companies get 409a valuations for employee options they're usually valued at a small fraction of the preferred shares that investors buy. Your interest is not anywhere near as real as the people buying preferred shares until you go public.

> You can re-cap existing shareholders down to basically zero ownership to privilege new ones, you can screw the employee pool in favor of the investors and founders (that's pretty normal, actually, employees should always assume they'll be screwed in an exit), you can even dilute specific previous investors/founders out of the pool like what Zuck did to Saverin.

Isn't the majority shareholders disowning the minority shareholders security fraud?

https://en.wikipedia.org/wiki/Tunneling_(fraud)

https://www.investopedia.com/terms/t/tunneling.asp

Also it seems that Saverin arrived at a settlement.

> If you recap a big VC out you're probably never going to raise again.

Is this even possible? With how savvy most VCs are about guarantying a return from the companies they invest in, it's hard to imagine they'd leave this very obvious strategy open to exploitation.

I mean, yeah, you might never raise another round if you screw a VC, but if you screw them out of hundreds of millions of dollars, would it matter?

It's possible, it's just a terrible idea in most cases. Most VCs don't have enough control to prevent it, but it's considered a really scummy move and will kill future prospects.

> Once someone has the power to do that (and I assume assign them to whomever they please), why wouldn't they?

Depends on game mechanics. Reputation matters for repeat plays. Someone might display their power to prevent being taken advantage of by other players (current/future). YCombinator might let themselves be taken advantage of because founders fear investors, and stories about historic matters matters.

> Doesn't such power fly in the face of a share representing ownership, if that ownership can be unilaterally diminished?

Yes, that's why phrases such as "corporate raiding" exist. Minority ownership interests in enterprises aren't as well protected generally as majority ownership. Legal cases can drag on for years with no relief.

Liquidation preferences can play a big role here. It doesn't mean nobody makes money, but very few investors may take all of the money.

The payout is often in a mix of cash and stock, and the stock will vest. Sometimes there are holdbacks for performance. That can result in not-too-much cash being available upfront, and it'll all go to preferred shareholders leaving little for founders and none for employees.

Of course, as an employee you'll now have stock in the acquiring company, should you choose to stay and vest. If the acquirer is itself illiquid, though, you've traded one lottery ticket for another.

Salaries, rent on office space, equipment... If a company raises $50M in funding, spends $30M in four years before it gets acquired for $80M, then net-net the investors have same amount of money after 4 years of work.

Eh? If you spend $30m and get $80m back you are in the black to the tune of $50m overall, even though your investors would probably be underwater.

Investors usually have liquidation preference. If they do, they'll have a first dibs on that $50m up to their invested amount.