
OnLive assets acquired by newly formed company - il
http://techcrunch.com/2012/08/17/source-onlive-found-a-buyer-cleaned-house-to-reduce-liability-prior-to-acquisition/
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MediaSquirrel
This article is bullshit. The CEO of a company cannot "take back" or "wipe
out" your right to purchase stock, aka stock options.

More likely what happened is that the company sold for equal or less than the
outstanding preferred stock overhang. Another way of saying this: OnLive's
investors got all the money (they raised $56MM) and the founders and employees
got ZERO for their common stock.

A stock option is a binding CONTRACT to purchase stock (typically common stock
when you're dealing w/ employee stock options) at a set price. If a company is
acquired and the price of common stock is below the "strike price" of the
employee stock options then the employee has a valueless option to buy stock
for more than it's worth.

Oftentimes in an "exit" that's just shy of bankruptcy, common stock holders
will get nothing and investors will get all the proceeds, often at pennies or
nickels on the dollar.

So... Did OnLive screw its employees? Highly unlikely.

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brk
You're arguing the wrong details.

From what I understand the legal corporate entity that employees had options
in essentially ceased to exist before employees had a chance to exercise their
options. And, that corporation ceased to exist because it built no effective
value, so employees had underwater options with no logical incentive to
exercise in the first place.

Summarized as 'your options are now gone'.

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MediaSquirrel
If the company ceased to exist, then it died in an asset sale and the founders
got nothing while investors got cents on the dollar.

If the company was acquired and common stock holders cashed out in a positive
way, then it was a proper acquisition and OnLive was required to disclose its
stock optionees and the buyer would have been required to set aside cash/stock
in escrow to pay them out. Otherwise yes they would be subject to liability
and lawsuits, which would be dumb to expose yourself to.

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DigitalSea
I think the most heartbreaking thing about all of this is the lady in the
comments who said her husband just lost his job and she's pregnant with health
complications. This is ridiculous, if someone bought OnLive, they just bought
a publicly tainted company and apparently it's EA (a company that is no
stranger to being dicks).

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sek
Steve Perlman should be publicly shamed, that's the only way to prevent this.
These greedy people should be scared to do this in the future.

You may get more money, but your reputation is fucked.

Morally i find this way more infuriating than Yahoo suing Facebook.

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wmf
Because if he just shut down the company instead, his employees would totally
have it made. There's no happy way to do a fire sale, which is what this looks
like.

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sek
Well somebody got a lot of money, we will find out later who, but definitely
not the one who needed it the most. And please USA, get your health care
fixed. It is so sad to read these stories all the time. You are the richest
country on earth.

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brk
From the sounds of it, 'a lot of money' is probably both an overstatement and
also a value significantly less than 'money they invested into the company'.

Nobody came out a winner in this deal.

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DigitalSea
If the CEO was going to get nothing which I strongly doubt, he should have
just quit. Nobody would taint their reputation for zero return, Steve Perlman
definitely would have made something out of this - it might not be a lot of
money but I can almost bet that it is a hell of a lot more money than those
who were fired and shafted received.

I think someone needs to orchestrate some kind of small-scale campaign to
smear Steve Perlman from ever running any kind of company in the future.

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boling11
He's been working on this for over a decade. It's a bit unfair to assume that
his motivations are purely monetary and reputational.

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justin_vanw
Luckily this sort of thing rarely happens. The reason is that you need great
engineers to trust you if you want to succeed. By founding a startup you are
taking great personal risk, but your employees are also taking some of that
risk with you. Most startups pay (very very) below market salaries, and bring
employees up to parity with a much less terrible place to work (very few very
bright people would prefer to work in at a big company), and by giving out
options.

I suspect that the CEO and other high level managers at this company will have
serious trouble recruiting the next time they want to start something new,
because they now have nothing to offer. Nobody is going to trust their
promises, stock options they issue will be seen as basically worthless (since
everyone will think they are likely to be screwed out of them), so they will
have to pay market rates (which is probably 2x-6x what startups generally pay
in total compensation).

If I were a founder of a company, and I were faced with this choice, I would
probably rather let the company fold than cash out (or in this case probably
just not go under) while leaving employees behind. Failure is rarely punished
in the valley, but nowhere is dishonesty or double dealing more likely to be
recognized and rejected.

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dchichkov
I would argue that these employees on "(very very) below market salaries" are
taking more risk than that hypothetical founder.

They take same uncertainty risk [company failing]. Similar financial risk
[unless founder has invested own money]. But. They don't have any control over
the company. That results in larger uncertainty risk.

~~~
justin_vanw
I disagree. Employees are still collecting a salary, and they probably haven't
put lots of money into the company up front (although over time they are
effectively doing so in the form of lower salary).

Generally founders of startups have taken a leap of faith well before there
are any employees collecting a salary. They work full time on the idea for a
year or two before they can approach investors, living off of savings or small
investments money from friends and family. By the time the first employees are
brought in, there is enough money in the bank to pay salary and benefits for a
year or longer.

Do I think that most startups under value the opportunity/uncertainty risk
that employees take? Absolutely.

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dchichkov
I'm not sure, that past activities of founders (or employees) are relevant to
risk estimation.

It should be just financial/lost opportunity/uncertainty risks that go into
the equation. A particular founder or employee is _going_ to take some risk by
joining/or staying with the company.

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rootedbox
If something that you have equity in has no value or little value.. then it's
all really a mute point. Remember kids start ups are high risk ventures; your
equity can be diluted, and taken away... all legally.

~~~
Smudge
Double-check how soon your options will start vesting before you sign-on, so
that you don't get screwed over by something like this.

(Also, btw, it's "moot", not "mute")

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famousactress
How much difference does it really make? If all of OnLive's folks were vested,
couldn't they still could have been fired and their shares diluted w/ another
round or creepy acquisition terms?

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Smudge
Diluted, yes. Eliminated, no. See other comments in this thread about the
"cliff" -- once you're past it, it's harder to get screwed over.

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famousactress
I don't find this distinction very useful, and I disagree that it's harder to
get screwed over. It's in fact, just as easy.. we're only talking about
degree. I think your argument is that instead of your shares being worth zero,
they can only be diluted to any positive real number... which brings me little
comfort.

~~~
btilly
There is a distinction.

With dilution the founders, who are more likely than you to have a say in what
happens, are _also_ likely to suffer that dilution. However in the incident
that happened the founder didn't lose a dime.

~~~
danielweber
Can't the founder be issued a bunch of new shares as part of the dilution? (I
mean in theory, not in this specific case.)

~~~
btilly
In theory, yes. However in practice you generally need signoff from other
investors, who are unlikely to be supportive.

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tibbon
So their PR firm has put out this statement:
<http://www.engadget.com/2012/08/17/onlive-confirms/>

It feels a bit (actually a lot) strange that they'd dissolve the entire
company and lay off everyone to attempt to get out of an agreement for servers
or something. It just doesn't add up. Also, why the employee reports aren't
saying this... just strange. PR spin at its best?

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joshu
i read somewhere that they had INSANE capex spends on the hosting.

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rdl
opex, I think you mean.

I'm curious who they were using, who negotiated the deal, and what drugs they
were on. I heard something like 1800 simultaneous users and $1000/seat/mo.

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hncommenter13
There appears to be quite a bit of confusion as to what happened here. The
TechCrunch article doesn't really provide enough detail, saying only that the
staff was fired in order to "reduce the company’s liability" which doesn't
really make sense.

I am not a lawyer, but as an investor I have seen this happen before. My guess
(no connection to the company, wasn't aware of them prior to today) is that in
lieu of filing for bankruptcy, they did an Assignment for the Benefit of
Creditors.

But what may have happened is: 1\. OnLive recognizes that they're essentially
bankrupt. Directors and managers now have a fiduciary duty to maximize the
recovery for creditors, not for shareholders.

2\. Instead of going through a formal bankruptcy process, the company does an
Assignment for the Benefit of Creditors (see a good explanation here [1]). Any
price paid for the assets by a buyer above what is owed to the creditors goes
to satisfy the liquidation preferences, though it's unlikely there will be
much if any recovery of value above the debts owed to the creditors. The value
of the common equity is totally wiped out (both common stock and employee
options) as the total value of the assets is well below the amount due
creditors + the liquidation preferences.

3\. A buyer for the assets (the source of money with which to pay off the
creditors who now own the assets of the defunct company) forms a new company,
call it OnLive Asset Acquisition Corp.

4\. OnLive Asset Acquisition Corp purchases the assets (not the stock) of the
defunct corporation now owned by creditors. The new acquirer buys the assets
so as to avoid any existing/potential liabilities of the defunct corporation
from whom it purchases the assets. Imagine there's a company whose only asset
is a rack of servers that you wish to purchase. To gain ownership of the
servers, you could buy all the shares of the company or you could just buy the
servers as an asset with no encumbrances. You would likely do the latter, as
buying the stock comes with potential liabilities for past/future money owed
or lawsuits. That's likely what happened here, but for IP, etc.

5\. The original employer OnLive is no longer operating. The employees are all
terminated, as their employer is gone and its operating assets are owned by a
new company. The new company may or may not seek to hire some or all of the
employees of the defunct company.

6\. Even if employees had been able to exercise their options, they were
virtually certain to be worthless. There is no way the price paid by the new
owner for the assets of the dead company would exceed the debts + liquidation
preferences (otherwise the directors wouldn't have liquidated it). Had the
employees exercised their options, any cash they paid to do so would have gone
to the creditors to satisfy the company's debts and they would have received
zero in proceeds.

It's a sad story for the employees, but there are rarely any happy outcomes
for a company in bankruptcy.

Again, I'm purely speculating on what happened. But based on the facts
disclosed so far, it's not clear that one can conclude that the employees
received a specific and unusual screwing by management vs. a typical screwing
associated with the liquidation of a bankrupt employer.

[1] [http://bankruptcy.cooley.com/2008/03/articles/the-
financiall...](http://bankruptcy.cooley.com/2008/03/articles/the-financially-
troubled-compa/assignments-for-the-benefit-of-creditors-simple-as-abc/)

~~~
trotsky
The details make it sound more like a PE rescue to me, but I agree that it's
unlikely that there is some kind of windfall being withheld - the likely other
option probably would have been bounced paychecks.

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pyoung
In another thread, the rumor is that they were going out of business, not
getting acquired.

<http://news.ycombinator.com/item?id=4398439>

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y4m4
Quite splendidly some one has edited -
<http://www.crunchbase.com/person/steve-perlman> his middle name as (The DICK)

Revision history here <http://www.crunchbase.com/person/steve-
perlman/diff/8/9> at 4:59pm by 24.6.50.198

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sandGorgon
Loiks like TheVerge was covering this live and had a reporter stationed
outside. www.theverge.com/2012/8/17/3250507/onlive-employees-fired-all-hands-
meeting-acquisition-imminent

Onlive declared a "variation of bankruptcy" to get out of employee
liabilities.

~~~
rhizome
We'll see if that gets them out of class-action territory.

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drone
Anything to substantiate the rumor?

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Karunamon
Onlive employees walking out the front door carrying boxes is pretty
convincing to me..

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drone
No, them being fired was not in question - them being fired, so that the owner
can walk away with all of the money from an acquisition is the substance of
the article.

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wmf
The "owner" in this case is mostly some VC firms who almost always have
liquidation preference over employees anyway.

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tomjen3
The se kinds of things seem to be more and more common. I hope employees take
note and protect themselves when they sign up in new places (read no more
cliff agreements).

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cdmckay
What's a cliff agreement?

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metabrew
If your options (1 option = chance to buy 1 share, at a price that's typically
fixed when the options was issued) vest over a three year period, it means you
would be issued 1/(12*3) of your total options per month, for three years.

A common clause in such a vesting schedule is a "1 year cliff", meaning you
don't actually get any options granted to you for the first year of
employment. After a year, you get a third (1 of 3 years) worth of options in a
lump sum, then the usual monthly amount each month after that.

If you fire employees before they reach their cliff, they don't get any
options, and won't benefit at all from any liquidation event / sale / etc.

~~~
joshu
i think typically you get your full 25% at the end of the first year and then
it starts vesting monthly.

~~~
Evbn
It varies. Amazon does every six months after year 1.

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danbmil99
Sounds a bit like what happened to GM

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EdgarVerona
OnLive CEO Considered Harmful.

