FanDuel founders to receive no cash from sale to Paddy Power Betfair(heraldscotland.com)
heraldscotland.com
FanDuel founders to receive no cash from sale to Paddy Power Betfair
http://www.heraldscotland.com/business_hq/16333124.fanduel-founders-to-receive-no-cash-from-sale-to-paddy-power-betfair/
186 comments
Feels like the old maxim, learn from the mistakes of others. I wonder what they could have done differently? Seems like raising capital to promote the business was necessary due to competition, but ultimately the amount they raised was their trojan horse.
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Quick question to those in the know, what payment is the founding team getting then, the one mentioned at the end? Is that some kind of executive termination pay?
THE PRIVATE equity backers of Scottish technology business FanDuel have completed their boardroom coup by ensuring that none of the firm’s founders or employees will be able to share in the proceeds of its impending sale to Paddy Power Betfair.
That's slightly more people than just the founders. I'm sure the employees were expecting some compensation.
That's slightly more people than just the founders. I'm sure the employees were expecting some compensation.
In a company which isn't generating a profit such as FanDuel employee equity is pretty much worthless. If you get offered equity in a startup you should value it at nothing unless the financials are very solid and the employees between them have a sizeable stake such that their interests are well represented at the board level.
I was commenting on a headline that could of added two extra words and conveyed that this isn't just a founder problem but something that has affected all of the employees also.
“Answer this survey question to continue reading the article”.
1. This is terrible UX and while I understand the need to make money this roadblock does nothing but increase bounce rate.
2. “Continue” is pretty deceptive unless you count the article headline as part of the article.
3. I assume this survey is trash but I am going to take it as an experiment then report back.
4. I wish HN would develop a policy on articles that rely on subscriptions or other inputs to actually read. I don’t think they should be banned but they should be paywall flagged so they can be turned off. Its better for comments (people actually read article) better for users not downloading data they can’t use and then being disappointed they can’t participate
Edit: it was a demographics survey for a giftcard drawing that would probably be sold onwards to a marketing firm if you provide an email. I guess it’s not too much to ask for but I suspect many people will be unwilling to do it because they are skeptical, not interested enough or simply have no idea how long it will take and arent willing to invest the time.
1. This is terrible UX and while I understand the need to make money this roadblock does nothing but increase bounce rate.
2. “Continue” is pretty deceptive unless you count the article headline as part of the article.
3. I assume this survey is trash but I am going to take it as an experiment then report back.
4. I wish HN would develop a policy on articles that rely on subscriptions or other inputs to actually read. I don’t think they should be banned but they should be paywall flagged so they can be turned off. Its better for comments (people actually read article) better for users not downloading data they can’t use and then being disappointed they can’t participate
Edit: it was a demographics survey for a giftcard drawing that would probably be sold onwards to a marketing firm if you provide an email. I guess it’s not too much to ask for but I suspect many people will be unwilling to do it because they are skeptical, not interested enough or simply have no idea how long it will take and arent willing to invest the time.
The survey didn't come up for me. That kind of thing makes policies against this more difficult.
TL; DR FanDuel was sold for less than its liquidation preference, so common stock holders got nothing.
Just want to say thanks for jumping all over this comment thread to explain liquidation topics and scenarios. I'm alarmed how much folks who get into startups don't understand these things, and lament how much I still don't know about it all.
Then again, so much of startup culture actively conspires to make deal structure/cap tables/liquidation preferences opaque, because nobody wants to say "Hey, come work for this startup for 2σ under market salary and x% equity. Never mind that the equity will get crazy diluted and a liquidation event might get cleaned out before it ever gets to your end of the table. That is, if a liquidation event ever happens!" So I don't feel totally ignorant about not understanding it, just yearning.
Then again, so much of startup culture actively conspires to make deal structure/cap tables/liquidation preferences opaque, because nobody wants to say "Hey, come work for this startup for 2σ under market salary and x% equity. Never mind that the equity will get crazy diluted and a liquidation event might get cleaned out before it ever gets to your end of the table. That is, if a liquidation event ever happens!" So I don't feel totally ignorant about not understanding it, just yearning.
If a deal is complicated it's to screw you over. I think people would be surprised at how much of the economy runs on handshake deals.
I'm curious - what happens to the current set of employees in this situation?
Presumably some of them have vested stock, and it just got zeroed out. If there's ever a good time to ragequit, this seems like the appropriate hour.
Presumably some of them have vested stock, and it just got zeroed out. If there's ever a good time to ragequit, this seems like the appropriate hour.
Why would you 'ragequit' at this time, and not before?
If the value of the company of the company is less than the value of liquidation preferences, then the employees' stock is worth ~zero. Its value doesn't suddenly go to zero at the moment a transaction takes place. The transaction happens at that price because that's the value.
If the value of the company of the company is less than the value of liquidation preferences, then the employees' stock is worth ~zero. Its value doesn't suddenly go to zero at the moment a transaction takes place. The transaction happens at that price because that's the value.
The value of zero may not have been known to those employees before the transaction. Now they know definitively their options are worthless.
Yes. Very sad that option-holders and shareholders often do not have sufficient information about the rights attached to each share class, to estimate the value of their shares (even if they can perfectly value the enterprise overall).
The options-holders and shareholders may have perfect information about the share structure and preference structure of the company, but unless they're in the room when the deal is being done, they won't know what that means in terms of final value.
The value of anything is the lesser of what someone will pay for it and what the owner will sell it for. The PE team may have raised expectations about the value before the sale, so that everyone thought they would get something despite the preferences. Then they sold it for less...
The value of anything is the lesser of what someone will pay for it and what the owner will sell it for. The PE team may have raised expectations about the value before the sale, so that everyone thought they would get something despite the preferences. Then they sold it for less...
OK, so we agree that in order to value their shares/options, the employees need:
1) info on the share structure and preference structure
2) a somewhat accurate valuation of the company
Whilst it's possible that people value their own shares wrongly due to missing/wrong info about #2:
- (major) Misunderstanding or not knowing #1 almost always creates a larger error or uncertainty in the calculation, than does an error in #2, and
- (minor) With #2, it's impossible to be certain anyway, so everyone has some of level of error
1) info on the share structure and preference structure
2) a somewhat accurate valuation of the company
Whilst it's possible that people value their own shares wrongly due to missing/wrong info about #2:
- (major) Misunderstanding or not knowing #1 almost always creates a larger error or uncertainty in the calculation, than does an error in #2, and
- (minor) With #2, it's impossible to be certain anyway, so everyone has some of level of error
There is no such thing as an "accurate valuation" though.
I was just involved in the sale of a company that had no assets, an outstanding court case against it that it was losing, and a tax bill of $3.5m against it. The buyer paid $5m for it. That number was literally the fist number that I plucked out of the air during the first conversation we had with the buyer, and somehow it stuck as the deal valuation.
Unless you're in the room during the deal, you have no idea what number is going to be used.
I was just involved in the sale of a company that had no assets, an outstanding court case against it that it was losing, and a tax bill of $3.5m against it. The buyer paid $5m for it. That number was literally the fist number that I plucked out of the air during the first conversation we had with the buyer, and somehow it stuck as the deal valuation.
Unless you're in the room during the deal, you have no idea what number is going to be used.
It sounds strange that a company with 'no assets' was bought for a non-negligible sum.
If you had said 'it had no physical assets' or 'book value of its assets was zero' or similar, it would make sense.
But if literally had no assets, what was the buyer buying? The name of the company?
Back on topic: even after the 5MM exit value is known, it's impossible for me to value the shares of an employee who owns 1% of the shares. The value is almost certainly between zero and 50k, but without seeing the share docs, no one knows.
If you had said 'it had no physical assets' or 'book value of its assets was zero' or similar, it would make sense.
But if literally had no assets, what was the buyer buying? The name of the company?
Back on topic: even after the 5MM exit value is known, it's impossible for me to value the shares of an employee who owns 1% of the shares. The value is almost certainly between zero and 50k, but without seeing the share docs, no one knows.
Yes, basically, the name of the company. And that is an intangible asset worth entirely whatever people think it's worth. The only place where you can make any guess as to what it's worth is in the room when the deal is being done.
As you say, if you have 1% of the company, then you could have 1% of $1 (which was a serious offer for the same business made 3 years ago) or 1% of $5m. The big difference is not in the 1%, but in the sale price. To get the same difference from share structure, you'd need a variance in shareholding of 1%-1000%.
Though I'll grant you that share classes and preferences can reduce your value to 0, but it's a lot harder for preferences to raise the value an order of magnitude.
Again, if you're not in the room when the deal is done, you have no idea what anything is worth, or whose interests are really being looked after. There's all sorts of shady deals and backhanders that can go on with bonuses and commissions that mean that everyone except the shareholders come out good.
It's kinda like the old poker saying: there's always a sucker at the table. If you don't know who it is, it's you. Same for acquisitions... if you're not in the room when the deal is being done, then you're the sucker.
As you say, if you have 1% of the company, then you could have 1% of $1 (which was a serious offer for the same business made 3 years ago) or 1% of $5m. The big difference is not in the 1%, but in the sale price. To get the same difference from share structure, you'd need a variance in shareholding of 1%-1000%.
Though I'll grant you that share classes and preferences can reduce your value to 0, but it's a lot harder for preferences to raise the value an order of magnitude.
Again, if you're not in the room when the deal is done, you have no idea what anything is worth, or whose interests are really being looked after. There's all sorts of shady deals and backhanders that can go on with bonuses and commissions that mean that everyone except the shareholders come out good.
It's kinda like the old poker saying: there's always a sucker at the table. If you don't know who it is, it's you. Same for acquisitions... if you're not in the room when the deal is being done, then you're the sucker.
Stock is worth zero, but good employees will get retention packages to stick around with the new company.
but good employees will get retention packages to stick around with the new company
Maybe. Often acquisitions are just for the customer list. Betfair is located in London (and Dublin for tax purposes IIRC), it has no office in Scotland.
Maybe. Often acquisitions are just for the customer list. Betfair is located in London (and Dublin for tax purposes IIRC), it has no office in Scotland.
This acquisition was made to bolster their US strategy. CEO of FanDuel is becoming the head of the combined US entity.
What's a realistic retention package for the engineering staff in this case? I'm genuinely curious.
I'm not sure TBH. I've heard that startups and comanies in the UK generally don't offer large stock packages to employees. That could just be anecdata, but that's what I've heard.
A 6-7 figure stock-based retention package would seem normal for the 3 acquisitions I've been through. Vesting length is all over though (short as 1 year, long as 4).
A 6-7 figure stock-based retention package would seem normal for the 3 acquisitions I've been through. Vesting length is all over though (short as 1 year, long as 4).
I always wonder, though, that (usually) a good percentage of the value in these deals is the institutional knowledge of the company. The purchasing company better know the amount of ill will engendered when connected leaders like the CEO make out like bandits while everyone else gets screwed can have a serious negative effect on the value of the company.
Despite equity being worth nothing, that doesn't mean that employees are all fucked. If the company is actually buying the company for the capability they provide, rather than just customers+brand, there are usually generous offers at the new company for those that the acquiring company wants to ensure stay.
I'm sympathetic towards regular people people being legally scammed by nasty contracts, but how did that happen here?
This was not a clueless Joe being forced to sign a non-negotiable contract with a giant company. Presumably those clauses and investment contracts were negotiated between lawyers of both parties. Why did they accept such clauses?
This was not a clueless Joe being forced to sign a non-negotiable contract with a giant company. Presumably those clauses and investment contracts were negotiated between lawyers of both parties. Why did they accept such clauses?
> Why did they accept such clauses?
They're super standard and for the most part make sense.
Liquidation preferences say if your firm is worth $90 million, and I invest $10 million, I get my $10 million back before you (i.e. the common stock holder) get anything. If the firm sells for $200 million, I get $20 million and doubled my investment. If the firm sells for $20 million, I get $10 million back and the common splits the remaining $10 million. If the firm sells for $9 million, I get it all. This makes sense because management (a) owns lots of common stock and (b) manages the company. As a risk-sharing measure, it makes sense for the people closest to the operations (and extracting a cash salary) to bear more downside risk.
Drag-along rights are the corporate equivalent of collective action clauses [1]. They exist to prevent a person who holds two percent of the company from preventing shareholders who own 60% from selling. (Approving mergers requires supermajorities in most jurisdictions.)
[1] https://en.wikipedia.org/wiki/Collective_action_clause
Disclaimer: I am not a lawyer. This is not legal advice. Consult with a lawyer before negotiating fundraising terms.
They're super standard and for the most part make sense.
Liquidation preferences say if your firm is worth $90 million, and I invest $10 million, I get my $10 million back before you (i.e. the common stock holder) get anything. If the firm sells for $200 million, I get $20 million and doubled my investment. If the firm sells for $20 million, I get $10 million back and the common splits the remaining $10 million. If the firm sells for $9 million, I get it all. This makes sense because management (a) owns lots of common stock and (b) manages the company. As a risk-sharing measure, it makes sense for the people closest to the operations (and extracting a cash salary) to bear more downside risk.
Drag-along rights are the corporate equivalent of collective action clauses [1]. They exist to prevent a person who holds two percent of the company from preventing shareholders who own 60% from selling. (Approving mergers requires supermajorities in most jurisdictions.)
[1] https://en.wikipedia.org/wiki/Collective_action_clause
Disclaimer: I am not a lawyer. This is not legal advice. Consult with a lawyer before negotiating fundraising terms.
These clauses generally don't cause any grief if the outcome is a win or a complete failure. It's only when it's a partial failure and people are dividing up what there is -- typically less than was put in -- that these cause major differences in outcomes.
You're describing participating preferred (that is, investors get paid out once as preferred and again after conversion to common). A liquidation preference is more common than participating, where the preferred investors get paid out (for example) at least 2X their investment (can be any multiplier, the highest I ever heard was 5X).
Most investments in Silicon Valley are clean deals, with a liquidation preference of 1X and nonparticipating preferred. Companies without a clean deal usually were too thirsty for unicorn status ($1B valuation) or had difficulty raising money.
Most investments in Silicon Valley are clean deals, with a liquidation preference of 1X and nonparticipating preferred. Companies without a clean deal usually were too thirsty for unicorn status ($1B valuation) or had difficulty raising money.
> You're describing participating preferred
I'm describing non-participating preferred, which as you point out is far more common.
Here's how it would go with participating preferred. As before, I invest $10 million at a $90 million pre-money valuation. If the firm sells for $200 million, first I get back my $10 million. Then I convert to common and get 10% of the remaining $190 million, or $19 million. Before I got $20 million (10% of $200 million). Now I get $29 million. (In the down round scenario, the outcome is the same.) Participating preferred is--nowadays--increasingly confined to distressed finance.
TL; DR Participating preferred gets to have its cake and eat it too. Non-participating preferred must choose between (a) its preference or (b) converting to common.
I'm describing non-participating preferred, which as you point out is far more common.
Here's how it would go with participating preferred. As before, I invest $10 million at a $90 million pre-money valuation. If the firm sells for $200 million, first I get back my $10 million. Then I convert to common and get 10% of the remaining $190 million, or $19 million. Before I got $20 million (10% of $200 million). Now I get $29 million. (In the down round scenario, the outcome is the same.) Participating preferred is--nowadays--increasingly confined to distressed finance.
TL; DR Participating preferred gets to have its cake and eat it too. Non-participating preferred must choose between (a) its preference or (b) converting to common.
I misread your comment, thanks
These terms are by no means confined to distressed finance. Many unicorns got their “billion dollar” number using adverse terms such as these
Which explains this outcome, Fanduel was a “unicorn”:
https://seekingalpha.com/article/4010443-fanduel-unicorn-bac...
These terms are by no means confined to distressed finance. Many unicorns got their “billion dollar” number using adverse terms such as these
Which explains this outcome, Fanduel was a “unicorn”:
https://seekingalpha.com/article/4010443-fanduel-unicorn-bac...
If you're a minority shareholder sometimes you have no option but to accept. Changes to the articles of association of a company only have to be approved by a majority of the shareholders. This is the price you pay for raising equity capital. There is nothing particularly scammy going on here, the majority shareholders are protecting their interests and the interests of the company to the extent permitted by the law.
I had the same reaction about these both being sophisticated parties with legal representation. Probably the founders were either more optimistic about the likely outcome (so there would have been cash leftover for them) or they were under pressure when the deal was being struck.
I don’t have any inside information about what happened — this is just generic speculation about what might have led to this outcome.
I don’t have any inside information about what happened — this is just generic speculation about what might have led to this outcome.
I met Nigel + Leslie at a conference in 2010 I believe as they were starting to talk about raising funding and shifting to the US Markets.
Was always impressed with their growth, but it seems to be a good reminder to be wary of the cost of that growth.
Was always impressed with their growth, but it seems to be a good reminder to be wary of the cost of that growth.
Is there any reason for founders to ever deal with these investors ever again?
Unless the investors were trying to retire, this seems incredibly short sighted.
Unless the investors were trying to retire, this seems incredibly short sighted.
From the perspective of a founder, I would be quite nervous about accepting an investment and drawing any kind of salary if the deal didn't include liquidation preferences. They are so standard (at least in North American tech) that if they were missing, I'd worry about their competence.
Structuring a deal without LPs would mean that founders could push for extremely early exits, cash out with modest (though life changing) returns and investors could lose most of their investments. Adding that kind of risk would make it even harder for first time founders to raise a round.
Structuring a deal without LPs would mean that founders could push for extremely early exits, cash out with modest (though life changing) returns and investors could lose most of their investments. Adding that kind of risk would make it even harder for first time founders to raise a round.
I posted this in another reply, but it’s not the liquidation preferences themselves so much as the fact that it was the investors pushing for liquidation at a price point that precluded the founders from getting any money
Being a founder, I tend to always take the founders' side, but even with that bias, I'm not sure there's anything wrong here. It sounds like things went to hell, the founders left, and a new CEO came in who used to be an exec with one of the VC firms. Things were very messy. Complicating matters, it doesn't sound like FanDuel was in great financial shape - a Forbes article suggested they could face a cash crunch in 2018.
With what I know, it's hard to attribute anything the VC firms did to malice.
With what I know, it's hard to attribute anything the VC firms did to malice.
Isn't that a bit like asking why they sold for $465M instead of demanding $930M? Presumably, they sold for the highest amount they could get. If the company falls off the hockey stick, there may be no better time than right now to sell it for what you can get.
$465M was right at the point where investors still got ROI while investors got nothing. It’s not like they took a loss. If I were a founder I would be beyond pissed that the investors sold right in the band where they made money but not the founders and employees. Granted, I don’t know the exact terms of their contract nor the full context
Alternative explanation is that the company was already sinking. It had dropped past the point where founders and employees were going to get anything out of the deal and was started to approach the point where investors would lose money. Investors stepped in at this point and dumped the company to prevent an even bigger loss. It is unlikely the investors were waiting around for the valuation to drop to this point for the sole purpose of screwing the other parties.
I understand what you're saying - if I was the founder here, I might be pretty pissed off too. But, I balance that with the knowledge that this company got very messy, and as founder, one of my jobs is to keep things from ever getting that messy.
I'm not sure there's any lesson here.
Taking investment from scum private equity like KKR didn't turn out well? Wow, who could have predicted.
It's been well known for at least a decade what private equity does to businesses. Either the founders couldn't raise from anywhere else, or they got greedy.
Taking investment from scum private equity like KKR didn't turn out well? Wow, who could have predicted.
It's been well known for at least a decade what private equity does to businesses. Either the founders couldn't raise from anywhere else, or they got greedy.
Yes. Liquidation preferences are a thing, and getting mad about them isn't helpful.
Also, from the details in the article about "drag along" and whatnot, the typical terms for a Silicon Valley investment appear to have even more drag along to them.
Also, from the details in the article about "drag along" and whatnot, the typical terms for a Silicon Valley investment appear to have even more drag along to them.
It’s not about there liquidation preferences themselves IMO, it’s that they were exercised in this manner. In this case it was the investors pushing for a liquidation under the limit, not the founders
That's not what I saw described in the article. The circumstances and results in the article sound like they would be reasonable for a Silicon Valley situation under typical VC funding terms.
Stories like this seem to validate that people should choose real liquid equity of public companies over the paper equity of startups when considering employment.
> people should choose real liquid equity of public companies over the paper equity of startups
Or ask for more cash.
Or ask for more cash.
If you like lower risk and lower gain, sure.
The most important thing is being educated. Every time this topic comes up on HN it appears that many people are unaware that liquidation preferences are a thing and many sales that are down-rounds have no money falling on common.
The most important thing is being educated. Every time this topic comes up on HN it appears that many people are unaware that liquidation preferences are a thing and many sales that are down-rounds have no money falling on common.
employee stocks are engineered to be lower gain (impossible to sell, liquidation preferences etc.), take the cash and use it to take some risk you can control. You like risk? take the money and go to Las Vegas.
Just to clarify: how educated do you need to be? Founders don’t appear to be obligated to tell you when they make deals that effect you, and more importantly retroactively reduce how much they paid you.
If you are paid in stock, and the founders make a deal that reduces the payout value of that stock (in this case to zero) they have stolen from you in a way that has no recourse. Literally they paid you with something that was presumably claimed to have value, and then after a few years made deals that made that worth less. Even though you had already been “paid”.
How much education can you do that would protect you from this?
If you are paid in stock, and the founders make a deal that reduces the payout value of that stock (in this case to zero) they have stolen from you in a way that has no recourse. Literally they paid you with something that was presumably claimed to have value, and then after a few years made deals that made that worth less. Even though you had already been “paid”.
How much education can you do that would protect you from this?
Given the 8 comments you've made so far in this discussion, I'd say that my two education suggestions are spot-on.
> If you like lower risk and lower gain, sure.
Given how much the big tech companies are paying though, especially when it comes to RSUs, I'm not sure this calculus makes sense anymore, especially for early employees. Founders may do exceptionally well on many cases, but for most early employees at startups there really isn't that much potential upside in most cases, compared to the guaranteed earnings you can get at a top tech company.
Given how much the big tech companies are paying though, especially when it comes to RSUs, I'm not sure this calculus makes sense anymore, especially for early employees. Founders may do exceptionally well on many cases, but for most early employees at startups there really isn't that much potential upside in most cases, compared to the guaranteed earnings you can get at a top tech company.
My take is over the last 30 years the return for early employees has become progressively worse. To the point where the best case scenario you only break even vs a traditional job.
Yeah, there's ample evidence that it's almost all no gain on the startup exit side, unless you got very lucky and worked for the right company.
I can confirm that RSU payouts at the giants far dwarf what you can get at almost all startups. The total comp difference is insane.
I can confirm that RSU payouts at the giants far dwarf what you can get at almost all startups. The total comp difference is insane.
If it really was lower gain then sure. But as it is, on average, startups give you more chance of ending up with nothing but an entry in a CV.
If you're only interested in the average, then you should definitely value startup options at zero. Not everyone thinks that way, but you certainly have a valid opinion.
I made a comment along those lines on HN a few years ago, and was told in no uncertain terms that I was unrealistic in expecting to be paid my worth unless I accepted payment in lottery tickets/stock-with-no-guaranteed-conversion-clause.
This article further affirms my position: it’s not just founders that got no payout, the employees didn’t either. Cool beans, you work your ass off for a company at below market rates with the promise that you’ll get a big payout when it sells, and then it turns out even when it sells for half a billion your stock is worth nothing. This isn’t the lottery of “the company may fail” this is the lottery of “I hope VC doesn’t rewrite the charter to ensure that we don’t get paid”. Oh, and the CEO alone got 11million. That sounds like there was plenty of money available
This article further affirms my position: it’s not just founders that got no payout, the employees didn’t either. Cool beans, you work your ass off for a company at below market rates with the promise that you’ll get a big payout when it sells, and then it turns out even when it sells for half a billion your stock is worth nothing. This isn’t the lottery of “the company may fail” this is the lottery of “I hope VC doesn’t rewrite the charter to ensure that we don’t get paid”. Oh, and the CEO alone got 11million. That sounds like there was plenty of money available
Selling for half a billion means nothing if you've taken hundreds of millions in outside funding
Well apparently there was enough cash to pay the current CEO 11 million. It seems that they could easily have afforded a few hundred thousand per employee, and still given an order of magnitude more money to the ceo than any of the employees.
This is theft in all but name.
This is theft in all but name.
But that assumes that all other things are equal, which isn't true. It's a very different experience working for a startup.
That said, if one has the choice between a startup job vs. one with equity with real value, they should only consider taking any startup comp package with the intention of being fully okay with their decision if the equity goes to zero. And note that this is a decision you can reevaluate periodically.
Read https://github.com/jlevy/og-equity-compensation and ask all of the questions. Probably ask a couple more, like about liquidation preferences and conversion of vested ISOs to NSOs with long expiration if you leave before liquidity.
That said, if one has the choice between a startup job vs. one with equity with real value, they should only consider taking any startup comp package with the intention of being fully okay with their decision if the equity goes to zero. And note that this is a decision you can reevaluate periodically.
Read https://github.com/jlevy/og-equity-compensation and ask all of the questions. Probably ask a couple more, like about liquidation preferences and conversion of vested ISOs to NSOs with long expiration if you leave before liquidity.
its why people choose ICOs: immediate liquidity with the biggest "controversy" being that VCs get to buy at a lower price.
this is distinct from a decade+ long private equity drama, only to find out that you, all employees and even the founders get nothing from the exit event. This is where getting to the exit is wrought with landmines, just to find out your particular exit is horrible but a fairly standard affair.
now that there is competition lets talk about what we can do to make both markets better
this is distinct from a decade+ long private equity drama, only to find out that you, all employees and even the founders get nothing from the exit event. This is where getting to the exit is wrought with landmines, just to find out your particular exit is horrible but a fairly standard affair.
now that there is competition lets talk about what we can do to make both markets better
Can someone familiar with the current funding climate say if standard deals at all levels involve liquidation preference nowadays? As in, if Im considering a seed-round, will there be any sophisticated investors doing no preference? Have talked to some investors in the scene (UK) but cannot seem to get a clear picture on this.
Is declining to accept a liquidation preference at seed level a red flag for any serious investor? What about subsequent rounds?
Is declining to accept a liquidation preference at seed level a red flag for any serious investor? What about subsequent rounds?
As an investor who invests at the Seed to Series A stage, I can tell you that a non-participating 1x liquidation preference is standard. I would refuse to invest in any deals that didn't include it, but won't be asking for anything more.
I think it's a pretty fair term. It prevents investors getting screwed by a sale for less than the round valuation, which could look quite attractive to a founder who could get their first million, screwing their investors in the process.
I think it's a pretty fair term. It prevents investors getting screwed by a sale for less than the round valuation, which could look quite attractive to a founder who could get their first million, screwing their investors in the process.
In the USA or UK ?
The UK tends to have stronger protection for employee shares -not that there haven't been some dodgy deals BAXI getting taken over by carpetbaggers and screwing the owners is a well know case in the UK.
And I have been on the receiving end of losing $1,000,000 at Poptel if only ICANT weren't such a bunch of ass%^&&S and the CoOp had been a bit more tech savvy - still water under the bridge.
Poptel was a worker co op btw so I had .5%
The UK tends to have stronger protection for employee shares -not that there haven't been some dodgy deals BAXI getting taken over by carpetbaggers and screwing the owners is a well know case in the UK.
And I have been on the receiving end of losing $1,000,000 at Poptel if only ICANT weren't such a bunch of ass%^&&S and the CoOp had been a bit more tech savvy - still water under the bridge.
Poptel was a worker co op btw so I had .5%
This is in the USA. While I've invested in a few foreign companies, I'm not familiar with how other countries deviate generally from SV norms.
[deleted]
As a comparison, the startup I helped found in 2004 had a 2X liquidation preference -- that was a bad time to raise money. And as a founder, I'll happily take 1X.
Thank you this is a helpful data point.
> Is declining to accept a liquidation preference at seed level a red flag for any serious investor?
Investors may be receptive to nixing liquidation preferences, particularly early on, if the founder agrees in writing to take no employment benefits. Asking an investor to relinquish their downside protection while retaining your own (a cash salary) is cause for further questions.
That said, it's awkward to (a) ask for capital while (b) prominently communicating that you see the risk of selling the business below where they've valuing it as being non-negligible. If you, as the founder, have that little faith in the venture, a better conversation may be hand about what can be done to increase your confidence in it.
Liquidation preferences aren't required, particularly later on. But you’ll give up on other terms by filtering for investors who don't care for them.
Investors may be receptive to nixing liquidation preferences, particularly early on, if the founder agrees in writing to take no employment benefits. Asking an investor to relinquish their downside protection while retaining your own (a cash salary) is cause for further questions.
That said, it's awkward to (a) ask for capital while (b) prominently communicating that you see the risk of selling the business below where they've valuing it as being non-negligible. If you, as the founder, have that little faith in the venture, a better conversation may be hand about what can be done to increase your confidence in it.
Liquidation preferences aren't required, particularly later on. But you’ll give up on other terms by filtering for investors who don't care for them.
Thank you for the response. It seems like liquidation preferences really come into play at growth stage when things get 'messier' due to capital needs, and declining them at seed round would send a very negative signal because the valuation must grow for any kind of success beyond the seed round?
From what gets printed in the press, it appears that lots of unicorns are having to agree to pretty high liquidation preferences in their latest rounds.
Having recently raised a seed in the UK; there is simply no reason to accept any sort of prefs for a seed round. There is plenty of SEIS/EIS money about - and part of those tax relief schemes is the investors need to take ords or they lose the tax-relief.
Your mileage may vary etc.
Your mileage may vary etc.
And generally the UK is stricter on multishare classes - and approved share schemes have some strict rules on what sort of shares employees must be issued with.
Is there any good resources on raising seed in UK (besides family / friends). ?
Just raised a seed on convertible notes, was never asked for any kind of preference
> Just raised a seed on convertible notes, was never asked for any kind of preference
Notes are debt. They're inherently higher than stock on the capital structure. They may convert into shares with no preference. But as long as they're notes, they're higher than even preferences shares.
Notes are debt. They're inherently higher than stock on the capital structure. They may convert into shares with no preference. But as long as they're notes, they're higher than even preferences shares.
Sure but those preferences only really affect equity payouts when the company’s in distress.
When selling the a non-distressed company, equity will receive cash.
When selling the a non-distressed company, equity will receive cash.
> those preferences only really affect equity payouts when the company’s in distress
Liquidation preferences and bankruptcy priority only matter when a company is distressed.
Liquidation preferences and bankruptcy priority only matter when a company is distressed.
Is it not possible to sell a company that is currently profitable, cash flow positive, and is worth less than what investors had put in?
That ask will happen on conversion by the A round investor.
There's a lot more here, including responses from the founders: https://twitter.com/Suhail
Seems the founding CEO spent 10 years there and got nothing, but a new CEO of 6 months walked away with $11MM.
Seems the founding CEO spent 10 years there and got nothing, but a new CEO of 6 months walked away with $11MM.
The new CEO had previously been CFO since 2014. If his actions turned an unsalable company into a company that could be sold for $465 million then I'd say he's probably worth the $11 million. And the founding CEO surely drew a reasonable salary despite the company making a loss.
Yeah, to be clear, I'm not saying anyone did anything wrong.
Possibly, but how many more of these deals will it take until the employee pool goes away permanently?
If you have the skills to be good at a startup, you can go to one of the big boys for a lot of cash.
If you have the skills to be good at a startup, you can go to one of the big boys for a lot of cash.
I think this says more about top end compensation, rather than startup compensation. The effect is going to be top end employees not really being early employees at startups, but that's not necessarily bad.
Likely the new CEO was brought on specifically to engineer a sale. The new CEO arguably brought value to investors if the old CEO wasn't willing to sell and there was significant concern that there would be no residual value. Such is life.
We don't know, as far as I can tell, if the prior CEO took money off the table during prior funding rounds. So he might have made some money.
Happy to be corrected if someone is in the know or has a reference, but it's pretty common on large fund raising rounds.
Happy to be corrected if someone is in the know or has a reference, but it's pretty common on large fund raising rounds.
Quick math here:
“the aggregate value being paid for FanDuel “is approximately $465m”.”
“2014 and 2015 respectively led $70 million and $275m” (345 million)
“Mr King is expected to receive a payment of up to $11.3m as a result of the Paddy Power Betfair deal. The firm’s current chief technology officer Robin Spira is due to make up to $3.5m, its legal officer Christian Genetski stands to make up to $6.2m, and it chief financial officer Andy Giancamilli is due to receive up to $5m” (Those add up to $26 m)
So it looks like the investors got just over 7% return on a venture investment. (Which is not an unusual ask for preferred shares).
“the aggregate value being paid for FanDuel “is approximately $465m”.”
“2014 and 2015 respectively led $70 million and $275m” (345 million)
“Mr King is expected to receive a payment of up to $11.3m as a result of the Paddy Power Betfair deal. The firm’s current chief technology officer Robin Spira is due to make up to $3.5m, its legal officer Christian Genetski stands to make up to $6.2m, and it chief financial officer Andy Giancamilli is due to receive up to $5m” (Those add up to $26 m)
So it looks like the investors got just over 7% return on a venture investment. (Which is not an unusual ask for preferred shares).
The difference is that the returns of a venture capital fund come from the performance of a few portfolio companies. The returns of a private equity fund come from the performance of most companies. Private equity investors, like KKR here, are happy with the 7% premium return because they usually get it from each investment. The 7% return from liquidation preference would be a poor performing investment in a venture capital portfolio. Another way of looking at it is that the hit to reputation that a venture capital firm would take on this outcome isn't worth the 7% return at the expense of founders. The money is in the 10x to 100x deals.
7% is a bad return when you risk-adjust this kind of deal.
So many ways it could go wrong. There are less risky ways to make . 7%, with a lot less work.
So many ways it could go wrong. There are less risky ways to make . 7%, with a lot less work.
[deleted]
Also note that the retention bonus total is known to be at least 5.5%, it's often the case that up to 10% of the purchase price in these "no money falls on common" deals is paid out to make sure that the deal closes.
Yes, and there are often transaction costs. The bankers that introduced the buyer to the seller, the lawyers that have to go over the deal terms, and the accountants and due diligence people.
7%... that’s a sad return. They could’ve done better with more traditional investing.
If you're shocked or surprised by this, you should give Venture Deals, Third Edition: Be Smarter Than Your Lawyer and Venture Capitalist by Brad Feld & Jason Mendelson a read.
https://smile.amazon.com/Venture-Deals-Smarter-Lawyer-Capita...
https://smile.amazon.com/Venture-Deals-Smarter-Lawyer-Capita...
I literally can't parse the semantics of this headline
FanDuel founders = The founders of FanDuel
To receive no cash = will not receive any money
From sale to = as a result of the sale of (FanDuel)
PaddyPower Betfair = to the company Betfair, which itself is owned by PaddyPower
The founders of FanDuel will not receive any money as a result of the sale of FanDuel to the company Betfair, which itself is owned by PaddyPower.
To receive no cash = will not receive any money
From sale to = as a result of the sale of (FanDuel)
PaddyPower Betfair = to the company Betfair, which itself is owned by PaddyPower
The founders of FanDuel will not receive any money as a result of the sale of FanDuel to the company Betfair, which itself is owned by PaddyPower.
I figured it out, I was just making a lighthearted joke
I'm another victim of Poe's law.
I think I'm the victim, given how many downvotes I'm getting...
As the writer of the headline, you get a pity upvote from me.
Y'all need to chill
Just because you founded a company, it does not mean you get a cut of the final sale.
Starting a company is hard. You can struggle to make it profitable, never get there, and end up deeply in debt years later.
Fanduel became relevant mainly because of the marketing it was able to purchase without that it would have fallen by the wayside. You need lots of money for that.
The founders must have needed cash at a critical time so they must have had a reason to put their shares second to the shares of the equity firm.
It makes no sense to feel bad for them. They knew what they were doing and they got more time out of the business than they would have gotten otherwise.
Yes, it's not the greatest outcome but it really is,"just business."
Starting a company is hard. You can struggle to make it profitable, never get there, and end up deeply in debt years later.
Fanduel became relevant mainly because of the marketing it was able to purchase without that it would have fallen by the wayside. You need lots of money for that.
The founders must have needed cash at a critical time so they must have had a reason to put their shares second to the shares of the equity firm.
It makes no sense to feel bad for them. They knew what they were doing and they got more time out of the business than they would have gotten otherwise.
Yes, it's not the greatest outcome but it really is,"just business."
Well yeah, legally - financially. Still, it doesn't seem "fair".
I bet the founders got money out of the business when the equity firm made its investment. It's common for that to happen. I'm sure they did ok. Even after I know the outcome I would trade places with one of them.
The ones that probably got screwed are the employees that got options thinking they would cash out in the future.
The ones that probably got screwed are the employees that got options thinking they would cash out in the future.
It may not seem 'fair', but the reality is that the company that the founders had equity in died in the 2015 round of financing. It was replaced with a company which needed to make a big bet (lots of ad spending) to stay strong in this particular market and the bet did not pay off. If you take $200M+ of financing then the people writing the check are expecting you to exit no lower than $1.5B -- ~$500M is, to use the parlance of this particular company, a single when the team needed a home run.
If it doesn't seem fair, it usually isn't. Maybe not even if founders knew this could happen and accepted it willingly (which I doubt they did). This is just the more powerful and experienced squeezing out the weaker ones to grab as much profit as possible.
It was completely fair if you actually look at the probable course of events. In 2014 FanDuel needed money, a lot of money. They had a valuation approaching a billion but were losing ground to DraftKings and as the space was heating up they needed to grow fast. What probably added urgency to this need to grow was that both companies were starting to court various teams and leagues for partnerships, and no one wants to partner with the also-ran. FanDuel picked up the NBA and a handful of NFL teams, but DraftKings got the NHL and NFL (and the NFLPA) so DraftKings was still pulling ahead. Then in late 2015 New York and other states put the brakes on the entire industry by declaring it illegal sports betting. FanDuel has just accepted a big chunk of money and now their ability to continue operating was suddenly called into question. I have no idea what choices they made at this point, but it is pretty clear they made the wrong ones. An attempted merger with DraftKings was called off when the DoJ indicated it had anti-trust worries, and since 2016 when various state laws were changes it seems DraftKings has tacked hard into becoming an online sports book with partnerships with various casinos (including several in New Jersey, which coincidentally is challenging the constitutionality of the national gambling restrictions in the Supreme Court) while since 2016 we see a whole lot of not much from FanDuel. My guess is that when the DraftKings merged died they started spending the war chest trying to buy growth with an eye towards an exit. This is also when new management stepped in, so it is possible that the investment round was a proxy investment in a potential DraftKings buyout and when that died the company had to start looking around for a fast exit.
And please spare us all the 'powerful' squeezing out the weaker BS; the FanDuel founders would have had incredibly high-priced legal counsel for an investment round of this size and knew exactly what the upside and downside was for every possible variation of success.
And please spare us all the 'powerful' squeezing out the weaker BS; the FanDuel founders would have had incredibly high-priced legal counsel for an investment round of this size and knew exactly what the upside and downside was for every possible variation of success.
> (including several in New Jersey, which coincidentally is challenging the constitutionality of the national gambling restrictions in the Supreme Court)
An update on that: New Jersey won, 6-3, with Kagan joining the conservative wing of the court in this majority. The conclusion is that Congress and the states each have concurrent power to regulate sports gambling. Congress hadn't actually done that directly, but rather had banned states from legalizing it. That's been struck down.
Opinion analysis from the excellent SCOTUSblog: http://www.scotusblog.com/2018/05/opinion-analysis-justices-...
An update on that: New Jersey won, 6-3, with Kagan joining the conservative wing of the court in this majority. The conclusion is that Congress and the states each have concurrent power to regulate sports gambling. Congress hadn't actually done that directly, but rather had banned states from legalizing it. That's been struck down.
Opinion analysis from the excellent SCOTUSblog: http://www.scotusblog.com/2018/05/opinion-analysis-justices-...
Can the founders fairly ask for a cut of proceeds they didn't contribute to? It was the marketing money spent, not the engineering or the idea that made the business saleable. So the people that put their money at risk get their return (7% - barely more than a money market account), and the founders get salary.
The question would be - how much compensation did they get out of the company before they left?
Those founders aren’t necessarily deeply in debt. They shifted their risk over to investors in exchange for equity.
Possibly worth noting that the actual story being sold here is essentially: Scottish entrepreneurs screwed out of company by non-Scotish investors.
Gee, not even $500k or a mil?
My heart breaks for them.
This is why VC's are called vultures. They claim they want you to have skin in the game, yet the founders get screwed. I know folks are thinking but the VCs are not making much, so what? Their entire game is to make it all up from another startup 100x which is why they take massive equity for $$$ invested.
My heart breaks for them.
This is why VC's are called vultures. They claim they want you to have skin in the game, yet the founders get screwed. I know folks are thinking but the VCs are not making much, so what? Their entire game is to make it all up from another startup 100x which is why they take massive equity for $$$ invested.
Arguably, this is why this may be a foolish move for them. If the next 100xer avoids them based on a history of penny pinching on non 100x deals, they've been penny wise and pound foolish.
KKR is a private equity firm not a venture capital firm. The investment philosophies are different.
I will reiterate my prior statements: if you take a job that pays you (in part) in stock, with no path to sell it pre-IPO, you should never accept anything other than the highest class of preferred stock. If the company is unwilling to give you that, then you should assume that their, or their VC, long term plan is to screw you.
At this point there have been enough cases where startups have clawed back the shares the issues, never gone public even when they’ve “made it” so you can’t sell your stock, or in this case outright stolen from their employees by changing the company charter to retroactively devalue all the stock that they used to pay their employees.
[edit: charter is not spelled “charta”. I’d swear I used to be able to spell...]
At this point there have been enough cases where startups have clawed back the shares the issues, never gone public even when they’ve “made it” so you can’t sell your stock, or in this case outright stolen from their employees by changing the company charter to retroactively devalue all the stock that they used to pay their employees.
[edit: charter is not spelled “charta”. I’d swear I used to be able to spell...]
> you should never accept anything other than the highest class of preferred stock. If the company is unwilling to give you that, then you should assume that their, or their VC, long term plan is to screw you
If this is your mentality, don't work for a start-up.
Employees don't get preferred stock. Founders don't get preferred stock. Your downside protection is your cash salary. Asking for preference as a non-capital contributing stakeholder conveys a fundamental mis-understanding of start-up financing's tradeoffs. (I would be highly suspect of a company throwing preferred stock at employees. It smells like something between incompetence and a scam.)
If this is your mentality, don't work for a start-up.
Employees don't get preferred stock. Founders don't get preferred stock. Your downside protection is your cash salary. Asking for preference as a non-capital contributing stakeholder conveys a fundamental mis-understanding of start-up financing's tradeoffs. (I would be highly suspect of a company throwing preferred stock at employees. It smells like something between incompetence and a scam.)
All employees who are getting paid below market rates are providing a direct and ongoing capital investment of their own money. At minimum they are investing the difference between their market rate salary and the amount you are paying them. That is a direct investment in the company that is no different from investments from VCs. In fact I would argue the cash investment of employees must be greater than that of any VC, because if it weren’t you would simply pay them entirely in cash. The only way paying in stock makes sense is if you recognize that they are investing more from each paycheck than your VCs are willing to pay. Otherwise your VC “partners” would insist you pay market rate and don’t issue stock.
But your advice is still basically "Don't work for a startup", because I still do not know of any startup that would incentivize employees with preferred shares.
I think much better advice is to (a) be sure you have a good understanding of the cap table, and what the liquidation preferences are for the preferred investors, and (b) have a general sense of how likely it is for your shares to be diluted over time.
I think much better advice is to (a) be sure you have a good understanding of the cap table, and what the liquidation preferences are for the preferred investors, and (b) have a general sense of how likely it is for your shares to be diluted over time.
No, my advice is to balance the expected return on your stock against your personal margin of safety - startup companies have younger employees almost entirely due to the reduced cost of the risk.
My personal risk level is maybe lower than “I quit my job and started a company”, but I consider my work to have value, and I consider an employer structuring employment agreements such that my return is is given a lower precedence than another investor to be either sign that they do not value my work at at least market rate, and given the risk entailed my expected income should be much greater than market rate.
Your claim is basically: startups have been able to screw employees because that’s what startups do.
The funding your describing for example is /not/ funding, it’s an extremely high interest loan, and in that case should not be considered a share in the company.
I also realized I had not said earlier: the theft in this case did not happen when the company was sold, it happened when one group of shareholders rewrote the company charter for the express purpose of devaluing the shares belong to all employees.
This gets to the heart of my problem with the “pro let yourself get screwed” argument: because VC funding is miscategorized as ownership rather than a loan, it is in their interest to screw the people who actually invest in the company.
Maybe it makes me unemployable for believing that my work has value and my not believing that “taking on risk” should mean “others should be able to treat my investment in the company as being not real investment” is unrealistic.
But I find it hard to feel sorry for anyone stupid enough to sign a contract that has any room to legally discard your investments. Is it bullshit that this company did that? Yes. Is it the employee’s fault that they had their investment stolen: yes.
Would I ever sign a contract that allowed someone to dilute my investment in anything without compensation? Of course not, because that’s stupid.
My personal risk level is maybe lower than “I quit my job and started a company”, but I consider my work to have value, and I consider an employer structuring employment agreements such that my return is is given a lower precedence than another investor to be either sign that they do not value my work at at least market rate, and given the risk entailed my expected income should be much greater than market rate.
Your claim is basically: startups have been able to screw employees because that’s what startups do.
The funding your describing for example is /not/ funding, it’s an extremely high interest loan, and in that case should not be considered a share in the company.
I also realized I had not said earlier: the theft in this case did not happen when the company was sold, it happened when one group of shareholders rewrote the company charter for the express purpose of devaluing the shares belong to all employees.
This gets to the heart of my problem with the “pro let yourself get screwed” argument: because VC funding is miscategorized as ownership rather than a loan, it is in their interest to screw the people who actually invest in the company.
Maybe it makes me unemployable for believing that my work has value and my not believing that “taking on risk” should mean “others should be able to treat my investment in the company as being not real investment” is unrealistic.
But I find it hard to feel sorry for anyone stupid enough to sign a contract that has any room to legally discard your investments. Is it bullshit that this company did that? Yes. Is it the employee’s fault that they had their investment stolen: yes.
Would I ever sign a contract that allowed someone to dilute my investment in anything without compensation? Of course not, because that’s stupid.
> Would I ever sign a contract that allowed someone to dilute my investment in anything without compensation? Of course not
So you’d never buy a share in a public company either, since public companies are allowed to issue additional shares to new investors when they raise capital.
I don’t see anything wrong with your view. It’s basically an extremely conservative risk tolerance perspective. But it’s extreme, and extreme views tend to leave money on the table.
So you’d never buy a share in a public company either, since public companies are allowed to issue additional shares to new investors when they raise capital.
I don’t see anything wrong with your view. It’s basically an extremely conservative risk tolerance perspective. But it’s extreme, and extreme views tend to leave money on the table.
I wouldn't if the new purchasers could - after the sale was complete - rewrite the charter to make only their shares have any value.
[deleted]
> If this is your mentality, don't work for a start-up.
Not all start-ups are the same. My last start-up took VC from a top tier entity and exclusively used common shares for all owners, no exceptions under any circumstances. No special arrangements, every share was the same.
My current start-up will follow the same pattern. No investors will be allowed in without accepting their position as common shares. If they don't like it, they can fuck off. It's important to tell all interested investors how things are going to be up front and to stick rigidly to it. There's enough capital sloshing around right now that the tilt is aggressively in the entrepreneur's favor, use that to your advantage while you have it (it'll last until the next recession).
Build things that don't absolutely require venture capital (but can be accelerated by it if it makes sense). And or build in a very lean manner, to boost your chances. Maximize your leverage by getting as far as you can without venture capital. Under no circumstances allow venture capitalists to have anything other than common shares, with no special arrangements (their money does not get out first). But it limits the prospective VCs? See the first item.
Not all start-ups are the same. My last start-up took VC from a top tier entity and exclusively used common shares for all owners, no exceptions under any circumstances. No special arrangements, every share was the same.
My current start-up will follow the same pattern. No investors will be allowed in without accepting their position as common shares. If they don't like it, they can fuck off. It's important to tell all interested investors how things are going to be up front and to stick rigidly to it. There's enough capital sloshing around right now that the tilt is aggressively in the entrepreneur's favor, use that to your advantage while you have it (it'll last until the next recession).
Build things that don't absolutely require venture capital (but can be accelerated by it if it makes sense). And or build in a very lean manner, to boost your chances. Maximize your leverage by getting as far as you can without venture capital. Under no circumstances allow venture capitalists to have anything other than common shares, with no special arrangements (their money does not get out first). But it limits the prospective VCs? See the first item.
Okay, however, bear in mind that selling to investors a riskier class of equity than is their custom, will likely meet with lower valuations. In business, lower risk = more money, and vice versa.
Lower valuations also mean less extreme growth expectations in order for the founders and employees to get a successful exit.
This may be a good tradeoff for a business with a long enough pre-investment runway, where the VC money is merely an optional accelerant, as the post you're replying to advocates.
This may be a good tradeoff for a business with a long enough pre-investment runway, where the VC money is merely an optional accelerant, as the post you're replying to advocates.
Agreed, lower valuations during a raise ought to reduce the risk of a crushing down-round and double-or-nothing gambling. If the deal could really be structured for straight common stock, no ratchet, no option pool shuffle, etc., this could quite dramatically shift the landscape.
OTOH, it would be very interesting to see how everything comes out in the wash. Suppose one needed to raise a hard floor of $5mm: a VC that might take 10% ownership for 1x preferred and a board seat, well, what will they demand when it's strictly common on offer for that $5mm--20%, 30%? Playing along with the idea of making it big, wouldn't it make more sense not to give up so much equity?
OTOH, it would be very interesting to see how everything comes out in the wash. Suppose one needed to raise a hard floor of $5mm: a VC that might take 10% ownership for 1x preferred and a board seat, well, what will they demand when it's strictly common on offer for that $5mm--20%, 30%? Playing along with the idea of making it big, wouldn't it make more sense not to give up so much equity?
> Your downside protection is your cash salary.
This salary is pretty much always lower than what you could make elsewhere. The benefit to working at a startup can be simulated by taking a well paying job at a non-startup and playing the lottery.
This salary is pretty much always lower than what you could make elsewhere. The benefit to working at a startup can be simulated by taking a well paying job at a non-startup and playing the lottery.
Based on this article alone anything other than preferred stock isn’t viable. Unless executive have skin in the game - say no executive can make money off a sale of the company or a funding round unless all the employees who have been paid in stock have been given first rights to convert their stock before any member of the executive or founder team. This seems reasonable, as it prevents the founders or executive board from doing what happened here: theft.
Actually, if a company exits at some multiple of the money raised, the common stock will have some value. But it is true that once a company has raised more than 50 million or so things become less likely. That is why I advise people to value their options at zero in terms of financial plans.
Possibly--factors such as liquidation preferences > 1x, dividends due on change in control, and ordinary debt can still leave nothing for common.
> Based on this article alone anything other than preferred stock isn’t viable
Common stock pays when companies do well. It diverges from non-participating preferred when companies sell for less than their most-recent valuation. Investors get preferences, employees get cash salaries.
> say no executive can make money off a sale of the company or a funding round unless all the employees who have been paid in stock have been given first rights to convert their stock
Everyone could convert their stock. But the stock was worthless. Preferences are obligations, like debt. If a company with $400 million in debt due on acquisition sells for $300 million, should the owners get a pay-out?
> what happened here: theft
If KKR et al hadn't invested when they did, FanDuel would have closed down. This wasn't a tradeoff between employees making money and not. It was a tradeoff between employees (a) losing their jobs years ago and (b) keeping their salaries and having the chance, if the company did well, of making more off their options. They kept their jobs. But the company didn't do terrifically well. The lotto didn't pay out, but HR did.
Common stock pays when companies do well. It diverges from non-participating preferred when companies sell for less than their most-recent valuation. Investors get preferences, employees get cash salaries.
> say no executive can make money off a sale of the company or a funding round unless all the employees who have been paid in stock have been given first rights to convert their stock
Everyone could convert their stock. But the stock was worthless. Preferences are obligations, like debt. If a company with $400 million in debt due on acquisition sells for $300 million, should the owners get a pay-out?
> what happened here: theft
If KKR et al hadn't invested when they did, FanDuel would have closed down. This wasn't a tradeoff between employees making money and not. It was a tradeoff between employees (a) losing their jobs years ago and (b) keeping their salaries and having the chance, if the company did well, of making more off their options. They kept their jobs. But the company didn't do terrifically well. The lotto didn't pay out, but HR did.
Again as I have said repeatedly - the ceo got 11 million. It seems that they could have taken less and employees could have taken more.
As far as the employees losing there jobs years ago: if that had happened they would have got jobs elsewhere, maybe jobs that paid them what they were worth.
Other things that make it theft: people who got the biggest pay outs were the ones he rewrote the charter to ensure that the employees got nothing.
This is theft. If you change the value of something you have already used to pay someone, it is theft.
And yeah “it’s a lottery”, but what they did was basically the same as you buy a lottery ticket that says there a 10% chance of winning $1000 if you wait 6 months before scratching it off, and then 5 months later they say “we’ve change the reward amounts, now it’s $100. Except instead of being a lottery ticket it was the employees time, money, and cost from losing out on other opportunities.
In very simple probability terms. The value of stock as payment for employment at a startup is
ExpectedValue = amount * P(non preferred stock gets money) * ExpectedStoxkPrive
The exact amount you would accept for working at a startup obviously varies from person to person. You estimate the probability that you’ll be able to sell your stock, based on the details of the company, and offer to work in exchange for what you consider a fair amount. After that the company deliberately changes the probability of you receiving a pay out on the stock you have already been granted. That is they retroactively changed what they paid you.
Also employees don’t get cash salaries, they get a mix of cash and stock. The statement is: we know your time is worth more than we can afford to pay you in cash. So we will accept that you are reinvesting part of your earnings as a capital investment in the company.
The company depends of capital being invested until it is profitable. The stock being granted to employees is because the employees are directly investing their own money into the company.
The difference between employees and VC is the VC have enough ownership of the company to steal from the other owners.
As far as the employees losing there jobs years ago: if that had happened they would have got jobs elsewhere, maybe jobs that paid them what they were worth.
Other things that make it theft: people who got the biggest pay outs were the ones he rewrote the charter to ensure that the employees got nothing.
This is theft. If you change the value of something you have already used to pay someone, it is theft.
And yeah “it’s a lottery”, but what they did was basically the same as you buy a lottery ticket that says there a 10% chance of winning $1000 if you wait 6 months before scratching it off, and then 5 months later they say “we’ve change the reward amounts, now it’s $100. Except instead of being a lottery ticket it was the employees time, money, and cost from losing out on other opportunities.
In very simple probability terms. The value of stock as payment for employment at a startup is
ExpectedValue = amount * P(non preferred stock gets money) * ExpectedStoxkPrive
The exact amount you would accept for working at a startup obviously varies from person to person. You estimate the probability that you’ll be able to sell your stock, based on the details of the company, and offer to work in exchange for what you consider a fair amount. After that the company deliberately changes the probability of you receiving a pay out on the stock you have already been granted. That is they retroactively changed what they paid you.
Also employees don’t get cash salaries, they get a mix of cash and stock. The statement is: we know your time is worth more than we can afford to pay you in cash. So we will accept that you are reinvesting part of your earnings as a capital investment in the company.
The company depends of capital being invested until it is profitable. The stock being granted to employees is because the employees are directly investing their own money into the company.
The difference between employees and VC is the VC have enough ownership of the company to steal from the other owners.
This is sunk cost reasoning.
No one takes on more debt / raises more funds unless they have to. If your company needs to raise more capital your stock options are worth exactly 0 dollars. You already lost that bet, because your company isn’t solvent without external funds.
The new investors may give you a new bet, but don’t think your original bet still stands - you lost that when you had to do another round of founding. You should also expect the new bet to be significantly worse than the old bet, because you have no leg to stand on in the bargaining of the terms of the new bet.
No one takes on more debt / raises more funds unless they have to. If your company needs to raise more capital your stock options are worth exactly 0 dollars. You already lost that bet, because your company isn’t solvent without external funds.
The new investors may give you a new bet, but don’t think your original bet still stands - you lost that when you had to do another round of founding. You should also expect the new bet to be significantly worse than the old bet, because you have no leg to stand on in the bargaining of the terms of the new bet.
No, did you actually read the article?
The “investors” changed the terms of incorporation /after/ they’d accumulated control of the company, specifically to change the payout rules so that only the VC funding got paid.
The “investors” changed the terms of incorporation /after/ they’d accumulated control of the company, specifically to change the payout rules so that only the VC funding got paid.
Your premises aren’t totally wrong, but your conclusion is off. Value post-founder to pre-IPO equity at zero and if the offer—-all things considered—-is better than any other you have available, take it.
No, you'll never get preferred shares working for a startup, so don't even ask for them; it would also highlight a misunderstanding of what those shares are.
Preferred shares are for investors, and they have 'preference' during liquidity, i.e. if the company is sold, they get their $X back first, then the rest is split among all shareholders etc..
'Clawback' terms are almost always applied to investors, not employees, in which case, by virtue of type distinction, you'll never get those.
Though it's reasonable to ask about certain aspects of share rights, there's no way on earth a regular startup is going to give you all the details and fine-print on their stocks that'll give you all then information you'd be after.
Unfortunately, basically nobody gets this information when joining a startup. Even later stage investors don't necessarily get to see all the terms of earlier investors, depending on the situation.
Preferred shares are for investors, and they have 'preference' during liquidity, i.e. if the company is sold, they get their $X back first, then the rest is split among all shareholders etc..
'Clawback' terms are almost always applied to investors, not employees, in which case, by virtue of type distinction, you'll never get those.
Though it's reasonable to ask about certain aspects of share rights, there's no way on earth a regular startup is going to give you all the details and fine-print on their stocks that'll give you all then information you'd be after.
Unfortunately, basically nobody gets this information when joining a startup. Even later stage investors don't necessarily get to see all the terms of earlier investors, depending on the situation.
Employees that get part of their payment in stock are also investors. It’s just that they have less leverage so it is understood that, unlike the other investors that have preference, employees won’t get their investment back.
Even though one could rhetorically try to make the case that 'employees are investors' ... really, in any common sense of the term, they are not. Employees are compensated with equity, they are not investors. Not even founders would be referred to as investors, unless they've put a meaningful amount of cash up for equity.
Let’s try to rearrange this to demonstrate that your reasoning that employees are not investors is wrong:
Instead of paying employees below market rate, the startup pays employees an actual fair market rate. Note that because of the short term failure risk of a startup a fair market rate is /still/ higher than market rate and an established company. Now each time they receive a paycheck the employees give you back a chunk of the money in exchange for common shares. The end result is the employees have the same amount of cash and shares, and the company has the same amount of cash.
Employees working below market rate are investing in the company. Getting paid isn’t “security” it is the part of their income the employee is choosing not to invest in the company.
Instead of paying employees below market rate, the startup pays employees an actual fair market rate. Note that because of the short term failure risk of a startup a fair market rate is /still/ higher than market rate and an established company. Now each time they receive a paycheck the employees give you back a chunk of the money in exchange for common shares. The end result is the employees have the same amount of cash and shares, and the company has the same amount of cash.
Employees working below market rate are investing in the company. Getting paid isn’t “security” it is the part of their income the employee is choosing not to invest in the company.
Yes, the 'employees are investing their time' point is an established argument, this rhetoric is well-trodden.
But they're still not investors.
Putting in a considerable amount of hard cash, is a fundamentally different thing than considering the after-tax value of some possible future gain from employment ... and then putting in hard cash. (Though it's definitely a valuable calculation to make on the part of the employee.)
If someone walks around the Valley talking about how they are 'investors' in X, Y or Z because they worked there for some time as an employee, but did not invest in a round, they will definitely be misinterpreted because the premise is simply not generally accepted. Moreover, this person would either be marked as 'not understanding what he is saying' or 'purposely misleading people'.
Consider the vastly different terms attached to the equity of either side ... and that so many actual startup employees who have done modestly well on some exit and then do 'part time' Angel investing, generally participate along the lines of classical 'investors terms' , not on the terms of the employees of the startups they fund. There's a reason that this is the common standard, and that there is no movement afoot to put investors and staffers on the same terms.
But they're still not investors.
Putting in a considerable amount of hard cash, is a fundamentally different thing than considering the after-tax value of some possible future gain from employment ... and then putting in hard cash. (Though it's definitely a valuable calculation to make on the part of the employee.)
If someone walks around the Valley talking about how they are 'investors' in X, Y or Z because they worked there for some time as an employee, but did not invest in a round, they will definitely be misinterpreted because the premise is simply not generally accepted. Moreover, this person would either be marked as 'not understanding what he is saying' or 'purposely misleading people'.
Consider the vastly different terms attached to the equity of either side ... and that so many actual startup employees who have done modestly well on some exit and then do 'part time' Angel investing, generally participate along the lines of classical 'investors terms' , not on the terms of the employees of the startups they fund. There's a reason that this is the common standard, and that there is no movement afoot to put investors and staffers on the same terms.
I think I understand what you're saying but it seems like a distinction without a difference. "Real" investors get stock. Employees get "equity" (in some form of stock).
It seems like a fiction that benefits "real" investors at the expense of employees "investment". As long as VCs can maintain this fiction they can exploit the other stockholders. Sort of like "Well, you're just a woman, you're not a "real" fill-in-the-blank. We shouldn't have to pay you like one."
It seems like a fiction that benefits "real" investors at the expense of employees "investment". As long as VCs can maintain this fiction they can exploit the other stockholders. Sort of like "Well, you're just a woman, you're not a "real" fill-in-the-blank. We shouldn't have to pay you like one."
The distinction between investors investing actual money, and employees who are comped with equity is is not a fiction.
Investors are in a totally separate class for so many reasons, and it's why there are distinctions in the type of equity they get.
The market for both talent and capital is very liquid and there really aren't that many secrets - so the current equilibrium between capital and talent is a function of the reality of market dynamics, not some sort of 'secret marketing magic' that VC's use. Although on a case by case basis, there's going to be some leveraging by VC's on some level, one could argue the corollary is the number of completely-full-of-crap 'founders' who are full of rubbish, some of them not even aware they are, or who are simply not aware of the real amount of risk they are offering. Silicon Valley is full of people who are making things for companies that will fail, and are therefore taking huge salaries at the expense of capital.
In fact, VC as an asset class is kind of a loser overall, globally - and almost all of the returns go to the top handful of funds, so one could argue that it's the mid-to-long tail of VC's that are the 'chumps' in the equation, because they're literally losing money while staffers making 'stuff that nobody wants' are walking away with small fortunes in salary for which there was no ROI.
So 'investors' are different than 'employees who take equity as comp' - and the 'power balance' between them can favour one side or the other, even as this clear distinction remains.
Investors are in a totally separate class for so many reasons, and it's why there are distinctions in the type of equity they get.
The market for both talent and capital is very liquid and there really aren't that many secrets - so the current equilibrium between capital and talent is a function of the reality of market dynamics, not some sort of 'secret marketing magic' that VC's use. Although on a case by case basis, there's going to be some leveraging by VC's on some level, one could argue the corollary is the number of completely-full-of-crap 'founders' who are full of rubbish, some of them not even aware they are, or who are simply not aware of the real amount of risk they are offering. Silicon Valley is full of people who are making things for companies that will fail, and are therefore taking huge salaries at the expense of capital.
In fact, VC as an asset class is kind of a loser overall, globally - and almost all of the returns go to the top handful of funds, so one could argue that it's the mid-to-long tail of VC's that are the 'chumps' in the equation, because they're literally losing money while staffers making 'stuff that nobody wants' are walking away with small fortunes in salary for which there was no ROI.
So 'investors' are different than 'employees who take equity as comp' - and the 'power balance' between them can favour one side or the other, even as this clear distinction remains.
That might be true but you also have this bit in the article:
> “Mr King is expected to receive a payment of up to $11.3m as a result of the Paddy Power Betfair deal. The firm’s current chief technology officer Robin Spira is due to make up to $3.5m, its legal officer Christian Genetski stands to make up to $6.2m, and it chief financial officer Andy Giancamilli is due to receive up to $5m” (Those add up to $26 m)"
All these guys can be classified as "late stage" employees and I can't believe that these guys were given a way much more bigger payout than to the founders or to the original team of founding employees. I am not saying they don't deserve the payout however some comments below stated that these guys are possibly the reason why the company could even have an exit thus rewarded accordingly but wouldn't one argue that if the founders did not start the company, there wouldn't be anything to sell with? I am just completely confounded how unfair compensation is regardless of what the terms of the VC were.
My honest question to YC members - What is the general advice shared between the YC community to prevent this happening to founders and/or founding employee(s)?
> “Mr King is expected to receive a payment of up to $11.3m as a result of the Paddy Power Betfair deal. The firm’s current chief technology officer Robin Spira is due to make up to $3.5m, its legal officer Christian Genetski stands to make up to $6.2m, and it chief financial officer Andy Giancamilli is due to receive up to $5m” (Those add up to $26 m)"
All these guys can be classified as "late stage" employees and I can't believe that these guys were given a way much more bigger payout than to the founders or to the original team of founding employees. I am not saying they don't deserve the payout however some comments below stated that these guys are possibly the reason why the company could even have an exit thus rewarded accordingly but wouldn't one argue that if the founders did not start the company, there wouldn't be anything to sell with? I am just completely confounded how unfair compensation is regardless of what the terms of the VC were.
My honest question to YC members - What is the general advice shared between the YC community to prevent this happening to founders and/or founding employee(s)?
Don't want this stuff to happen? Bootstrap and self-fund. If you take other people's money, you're subject to their rules.
It's usual to pay ~ 10% to the people who are needed to make the deal close. The founders, who have common shares and/or options, knew the terms when they started. If you think any of this is unfair, don't take external funding.
I’m fairly sure the employees are important - you know, the ones who make the company have any value?
That said in this case someone took external funding, those “investors” took control of the company, kicked out basically everyone who would work for them (not the company), placed their own executives in the company. Changed the terms of incorporation to make sure that no one else got money. And then the people they put in charge agreed to sell on terms that again favorited only themselves and the VCs, finally the VC ensured that the people they put in charge got paid off nicely.
Meanwhile the employees who could not influence any of this - the founders choose the funding terms - got their prior income stolen by having their investment artificially reduced to zero.
The founders fucked themselves, but also all of their employees. Who I would bet were not told that their shares were going to be artificially reduced to zero value
That said in this case someone took external funding, those “investors” took control of the company, kicked out basically everyone who would work for them (not the company), placed their own executives in the company. Changed the terms of incorporation to make sure that no one else got money. And then the people they put in charge agreed to sell on terms that again favorited only themselves and the VCs, finally the VC ensured that the people they put in charge got paid off nicely.
Meanwhile the employees who could not influence any of this - the founders choose the funding terms - got their prior income stolen by having their investment artificially reduced to zero.
The founders fucked themselves, but also all of their employees. Who I would bet were not told that their shares were going to be artificially reduced to zero value
This is in no way typical (and 10% seems very high but it obviously depends on deal size). There will be certain cases where management carveouts are part of a deal, but it's far from the norm. Executives who join at a later stage also receive the same type of common stock / options that the founders have, and they typically don't receive much of an equity payout in comparison.
Just to be clear, I'm speaking about deals where no money falls on common, which includes the common shares and options held by all of the executives and employees needed to make the deal close.
Isn't there a way to earn shares in a company that convert to cash in the event of an acquisition?
Not really, not in a way that would solve this sort of problem.
Who would pay that cash? Where would the money come from? How does the buyer valuate that money coming out of somewhere when figuring out their offer? How does it interact with the preferences on the investors’ stock?
Who would pay that cash? Where would the money come from? How does the buyer valuate that money coming out of somewhere when figuring out their offer? How does it interact with the preferences on the investors’ stock?
I guess similar to how stocks work, but instead of having to wait for an IPO, the acquisition price would be distributed proportionally to all of these "acqui-stock" holders.
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A company could give employees debt of some or other seniority, but I’ve never heard of a start-up doing so.
In some ways, this story sheds light on the philosophical differences between private equity firms like KKR [1] and venture capital. At least when it comes to the fat parts of the Bell curve (and ignoring outliers), private equity investments tend to be premised on gaining control of the companies accepting investment and seek return on each investment. The fat part of the venture capital investment Bell curve (and ignoring outliers) is looking for fantastic returns from a few companies and tends not to seek control of the companies it invests in.
To put it another way, founder friendly private equity is not really a thing and venture capital is a philosophy that is rare outside Silicon Valley (though it has become more common in the last decade or so). Venture capital is playing long odds based on possible future value, private equity seeks to buy current assets at a discount. This sort of outcome would be a hit to a venture capital firm's reputation. It's not an unexpected outcome when private equity invests.
[1]: https://en.wikipedia.org/wiki/Kohlberg_Kravis_Roberts
To put it another way, founder friendly private equity is not really a thing and venture capital is a philosophy that is rare outside Silicon Valley (though it has become more common in the last decade or so). Venture capital is playing long odds based on possible future value, private equity seeks to buy current assets at a discount. This sort of outcome would be a hit to a venture capital firm's reputation. It's not an unexpected outcome when private equity invests.
[1]: https://en.wikipedia.org/wiki/Kohlberg_Kravis_Roberts
> private equity investments tend to be premised on gaining control of the companies accepting investment and seek return on each investment
Put another way, losing money on a PE deal is terrible. Losing money on fewer than half of one's VC investments is positively great. When FanDuel sold, it didn't have enough upside left to justify pure venture capital. It was a distressed sale whose alternative was closing down shop. In this timeline, employees got a few more years of cash salaries. On the net, they did better with KKR et al than they would have without.
Put another way, losing money on a PE deal is terrible. Losing money on fewer than half of one's VC investments is positively great. When FanDuel sold, it didn't have enough upside left to justify pure venture capital. It was a distressed sale whose alternative was closing down shop. In this timeline, employees got a few more years of cash salaries. On the net, they did better with KKR et al than they would have without.
> In this timeline, employees got a few more years of cash salaries.
I think most of their employees would have easily been able to get jobs elsewhere.
I think most of their employees would have easily been able to get jobs elsewhere.
That's really a toxic assumption to make.
Would you be willing to flesh out that comment?
As it is, I don't really understand why, and I feel it's overly negative (though I expect to understand why I'm wrong once you explain it more fully).
As it is, I don't really understand why, and I feel it's overly negative (though I expect to understand why I'm wrong once you explain it more fully).
What do you mean by that?
I'm not disagreeing with your statement, but "toxic" is a strong word and I'd like for you to elaborate.
I'm not disagreeing with your statement, but "toxic" is a strong word and I'd like for you to elaborate.
Some people find it hard to get jobs even in a strong tech market, even if they are brilliant due to a variety of circumstances including random chance that is interviews or finding the position in the first place. Blanket statements like this gloss over the human hardships involved for some, and encourages general lack of empathy among our community.
Ironically, if the initial commenter had fleshed out their position like you did, I think the reception would have been much more empathetic.
Sorry, it's just I was on mobile. And as someone below pointed out, it was a pretty emotional response for me. Apologies for the unsubstantiated and harsh allegation.
I just really object to how casually OP waved off people losing their jobs.
I just really object to how casually OP waved off people losing their jobs.
When you say something that triggers someone’s trauma, often their only choice is between an emotional response and simply keeping quiet and hoping to leave the situation.
The same person at a later time (or someone who has obvserved that trauma second hand) can sometimes form a calm, rational, politically correct depiction of the issue for you.
If you demand the latter, you will learn much slower, because you are rejecting the best available information on what things are traumatic to people.
The same person at a later time (or someone who has obvserved that trauma second hand) can sometimes form a calm, rational, politically correct depiction of the issue for you.
If you demand the latter, you will learn much slower, because you are rejecting the best available information on what things are traumatic to people.
Answering to some of the sibling comments:
Employees staying onboard under the assumption that their equity, which is part of their total comp, may yet be worth something - that brings on a serious opportunity cost. If someone stays at FanDuel making $160k/yr + $0 in common stock options versus $350k/yr at Google, that's a shame. If 100+ employees do it, it's tens of millions of dollars of opportunity cost.
Employees staying onboard under the assumption that their equity, which is part of their total comp, may yet be worth something - that brings on a serious opportunity cost. If someone stays at FanDuel making $160k/yr + $0 in common stock options versus $350k/yr at Google, that's a shame. If 100+ employees do it, it's tens of millions of dollars of opportunity cost.
> If someone stays at FanDuel making $160k/yr + $0 in common stock options versus $350k/yr at Google, that's a shame.
That kind of position at Google is one of the hardest to get in the industry. While I wouldn't label this attitude as "toxic", the idea that people from any random startup can just go get a $350k job at Google if it fails is detrimental to this industry. I doubt most of those working for FanDuel (or anywhere else, really) could clear that bar. Not to mention, Google has a limited capacity to absorb people, so the more who apply the higher the bar gets.
That kind of position at Google is one of the hardest to get in the industry. While I wouldn't label this attitude as "toxic", the idea that people from any random startup can just go get a $350k job at Google if it fails is detrimental to this industry. I doubt most of those working for FanDuel (or anywhere else, really) could clear that bar. Not to mention, Google has a limited capacity to absorb people, so the more who apply the higher the bar gets.
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'Private Equity' and 'Founder' are terms that shouldn't really even cross.
PE wants to incentivize leadership, but the concept of 'founder' and all that means, is somewhat beyond.
That said - KKR etc. definitely want to incentivize company leaders to make money, and might likely put in significant bonuses for CEO's in the event of an acquisition.
But yes ... PE entities may care less about this.
But note that it will also be a 'hit' to KKR's reputation in this area. You can be dam sure that future mid-stage entities are going to think twice about the terms of the deal.
PE wants to incentivize leadership, but the concept of 'founder' and all that means, is somewhat beyond.
That said - KKR etc. definitely want to incentivize company leaders to make money, and might likely put in significant bonuses for CEO's in the event of an acquisition.
But yes ... PE entities may care less about this.
But note that it will also be a 'hit' to KKR's reputation in this area. You can be dam sure that future mid-stage entities are going to think twice about the terms of the deal.
Not necessarily. One pattern of PE is to buy a company, make the company borrow money, spend that money on the PE firm's other interests, and then declare bankruptcy to discharge debts.
https://en.wikipedia.org/wiki/Corporate_raid
Wikipedia has a nice overview of the topic of this thread:
https://en.wikipedia.org/wiki/History_of_private_equity_and_...
and of course KKR was the most famous corporate raider in America:
https://en.wikipedia.org/wiki/Barbarians_at_the_Gate:_The_Fa...
https://en.wikipedia.org/wiki/Corporate_raid
Wikipedia has a nice overview of the topic of this thread:
https://en.wikipedia.org/wiki/History_of_private_equity_and_...
and of course KKR was the most famous corporate raider in America:
https://en.wikipedia.org/wiki/Barbarians_at_the_Gate:_The_Fa...
If you own a company you can do what you want with it, so I'm not sure the term 'corporate raid' always applies.
And yes - as part of the acquisition, it's usually loaded up with debt, which is the weird reason why a company should always take on debt (if they are cash flush, then 'raiders' can borrow money to buy the company and load up up with debt since there is room for it).
If you mean 'reputation' - well - yes, if you sell to a known 'raider' well, then they'll do as they please.
As far as 'spending on their own interests' - well that actually can create problems as minority shareholders can sue.
And yes - as part of the acquisition, it's usually loaded up with debt, which is the weird reason why a company should always take on debt (if they are cash flush, then 'raiders' can borrow money to buy the company and load up up with debt since there is room for it).
If you mean 'reputation' - well - yes, if you sell to a known 'raider' well, then they'll do as they please.
As far as 'spending on their own interests' - well that actually can create problems as minority shareholders can sue.
Amusingly, this is the exact strategy explained by Ray Liotta's character in "Goodfellas" when the restaurant owner gets in bed with the Mob. Somehow it's illegal there.
Corporate raiding is not money laundering.
Why would a merger blocked by the FTC trigger a clause like this?
From here : https://www.legalsportsreport.com/14930/fanduel-equity-inves...