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What happens when you sell your startup? (techcrunch.com)
141 points by gk1 on Nov 8, 2017 | hide | past | web | favorite | 37 comments

He forgot the part where some of the executive team is offered a big payout for retaining employees for a period of time. At which point they at incentivized to straight up lie about how great it is to be bought and sold like cattle. That sweet, sweet stock vesting will make it worthwhile. And then it never quite seems to work out, but the horror only settles in after they get theirs.

Man, do I have some latent resentment...

I respect and trust my founders, but I also believe The Machine can corrupt amd manipulate anyone. At a certain point I wrote off all my stock options as a free lottery ticket, and have valued them at $0 in my big picture life ledger. I work for a combination of money today and love for what I do, but not for the promise of ritches one day.

There's always a chance I'm being foolish or paranoid, but this approach is the safest.

You don't really value them at $0. Shoot me an email and I'll send you a binding contract saying you'll transfer them to me for $100 paid now.

Hey, that's $100 for free! Only it shows you don't really value them at zero. It's only a slightly smaller lie than founders who insist their startup is worth hundreds of millions.

The truth is somewhere betweem the two...

"I value them at zero" is shorthand for "I am not planning my life around them having any value, such as buying a house with a mortgage so large that the only way I can pay it is for those stock options to be worth something significant." Yeah, technically that's not what it means exactly, but when you're making your life plans as if them cashing out at $0 is the most likely outcome, it's not entirely wrong either.

Exactly. In my head I like having the free lottery ticket more than having $100. But in my ledger they are not present as an asset.

In many (most?) cases shares are not transferable in this way. If they are, there is often some kind of private market and the shares have an actual real value.

This makes it much more sensible to value them near zero.

Could you sell a forward contract?

A lottery ticket still has a value, so, they're not valuing them at $0. But they are planning for the case where the value goes to 0, which is a very sane thing to do.

They're rarely transferable.

Don’t think it’s so much an issue of “forgot.” Thats just an alternative example of things that could happen based on the myriad way corp dev deals can be structured based on the goals/incentives of the acquirer.

From my admittedly limited experience of being acquired by a Fortune 200 scientific company, it seems to me that the empty promises and planting of false hopes - to get key people to stick around a few months - is pretty much SOP in any kind of *tech.

Chances are the outgoing CEO or GMs compensation is tied directly to how many key personnel he can keep on, in order to maintain profitability.

After they (the deal team) brain drain the key personnel, they cut the dead weight, move any existing profitable parts of the business to an existing facility, and then shut it down before moving on to the next acquisition a week after that.

At least that wss my experience in biotech...

Here’s the interesting pattern I’ve noticed. The promises are almost always issued from someone not on the board and not a major shareholder. If the person delivering the news doesn’t have the power to back up the claims then good luck getting them to honor them.

The moment they have a VP telling you everything is going to be great you need to start hedging your bets. Update your resume. Catch up with your contacts. And for the love of Pete, don’t make any major purchases.

to be fair, what do you think the purchasing company wants out of the deal? Acquisitions are generally structured as a) acquisition of key talent, b) acquisition of customers, c) acquisition of technology/IP, d) efficiencies from cutting duplicative functions (accounting, HR, etc).

I'm not so sure that there needs to be some sort of greater altruism at play here?

in biotech its almost always an IP transaction

I feel like there is more to add?

Author of the article here. Yes, there are plenty of different ways to wind up a company. But the primary goal of the series was to go over the most common legal terms in investor agreements, so I took this last piece as an opportunity to mostly cover seniority structures and liquidation preferences.

There is also a third option for making money with a startup: To get your startup profitable without selling or going public.

What's the point of that? If you're an employee with stock options you aren't going to see a dime of the profits. You need an IPO or acquisition to make all those extra overtime stock options pay off.

See: the SAS Institute model of profit sharing, which they began shortly after forming the business. It has endured in an extremely successful manner for four decades as SAS has remained private.

To put this into context. Facebook will likely hit ~$17 billion in profit for fiscal 2017. They have 20,000 employees. If their only obligation was to employees as owners, they could very safely distribute half a million dollars per year perpetually to every one of their employees (while distributing billions to the early shareholders). This model would have vastly outperformed the IPO model as far as the VC firms are concerned (specifically as far as their institutional capital suppliers are concerned). Most VC investment gets liquidated early on, shortly after the IPO (the same happened with Google, most of the early backers bailed not long after the IPO, or their returns to date would be comically higher; Peter Thiel made the same choice with his Facebook position, selling a lot of it early after the IPO).

It's only better in hindsight, with a prior knowledge that Facebook is a mega-unicorn.

But VCs make decisions with limited information, based on probabilities, and in this case going for an earlier payout via IPO or selling the company is a more rational option.

Maybe if profitability is the goal (and not an IPO nor acquisition), then maybe offering stock options in the first place is a misaligned bad idea. Maybe a better idea is structuring a profit sharing plan? (Or if the options are offered anyway, possibly using that stock as a way to pay dividends someday.)

The stock and IPO reality of the business world bums me out, when a company's product is its stock, a lot of things can get compromised.

Many established companies have something called a profit sharing plan, where a percentage of the profits is actually distributed to the employees.

I actually worked at a company that had that, and we wound up with roughly a $5K bonus every year. Better than nothing, and actually more than I've made off of stock options, which is nothing. Actually it's negative, seeing I exercised some of them.

Current model is all about building a giant company that would IPO for a bazillion, making investors wealthy, and founders/early employees well off. But indeed, why not build a company that can revenue-share with employees, stay small(ish) and nimble, and make everyone well off, without expecting some 1-in-million event to occur. Isn't this how companies were built, at some point in the near past?

Yeah, I've never understood why this is so frequently forgotten. How rare is this route anyway?

It's not rare at all. It's just not celebrated in the big tech news sites. The VC route is way more exciting to cover.

There's a hybrid approach: Indie.vc. It's a VC investment, but the focus is on profitability and sustainability. The terms of an Indie.vc deal let them get paid back via traditional methods (IPO, acquisition), but more importantly, there's also an optional/alternative cash distribution sharing mechanism for paying out via profits over time.

It's not an option on the table if you ever get VC money. VCs want you to sell down the road, because if you stay in control they can never make any exit. It's an implicit agreement that you enter with VCs from the get go.

> Unless you’re one of the lucky few who start and take a company public in an IPO

Not like I have much to draw on, but to me it seems that a huge acquisition is probably more bang for your buck than going public (which is by definition a gamble).

I don't think I'd ever want to be the CEO of a Fortune 500 company. Being at the whims of finicky investors on top of shady market forces 24/7 just seems awful when compared to getting acquired for a pretty penny (WhatsApp or Tumblr come to mind).

On the other hand, you can keep working at a publicly listed company and whenever you feel like leaving you can sell your shares on a liquid market at any time.

Whereas if your private company is bought out by another private company and a significant chunk of the compensation is in stock, the market is far less liquid.

I would say for the median engineer, a buyout is better because valuable employees will be put on a retainer, which is where the real money is for the little guys.

True, but I meant as a founder.

The buyers rarely understand what they are getting. Because of that they will use different marketing approaches and customer service. The good buyers will be lucky to keep 50% of the customers. Other buyers may decide to take the idea and tangibles such as domain names, and rebuild from scratch. In either case it sure is hard watching your baby get sold off and changed.

How likely is it though that the board would have accepted the deal in a real scenario? The VC returns in the example aren't exactly home runs. Wouldn't they be incentivized to block the deal and wait for a better one?

I guess quite likely? In this scenario, it sounds like the goal of Series C was just to get some, any return. And getting back your initial investment sure sounds better than getting nothing back.

I doubt that was the goal of series C as any investor in that round would have been throwing good money after bad. If you're the VC in that case you're probably better off investing in a growth operation that trying to salvage a previous bet

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