For startup employees, it often doesn't matter whether or not the acquiring party pays in shares or in cash. The more important consideration is that in low-price acquisitions, the investors will get the lion's share of the proceeds.
If the company in question raised $2mm and was acquired by a company that just raised $11mm, it's probably safe to say that the purchase price was less than $5mm.
If you assume that the $2mm investment represented 50% ownership, the math looks like this:
* $1mm acquisition - Preferred sees $1mm, common stock sees $0.
* $2mm acquisition - Preferred sees $2mm, common stock sees $0.
Depending on the cap on the participating preferred, the rest could vary, but if you assume it's at least a 2x;
* $3mm acquisition - Preferred sees $2.5mm, common stock sees $500k.
* $4mm acquisition - Preferred sees $3mm, common stock sees $1mm.
So in a best case scenario, 1% ownership would be worth $10k, and would probably be worth much less than that. Do you care if you get your $10k in stock vs. cash? You're probably not indifferent, but that amount won't move the radar for most of those with equity in the startup world.
Thanks for your analysis. As you mentioned, it's a best-case scenario, too. If the payout comes in cash, at least you have some extra jingle to buy your mom a nice gift. After that, it's back to the office on Monday.
If the company in question raised $2mm and was acquired by a company that just raised $11mm, it's probably safe to say that the purchase price was less than $5mm.
If you assume that the $2mm investment represented 50% ownership, the math looks like this:
* $1mm acquisition - Preferred sees $1mm, common stock sees $0.
* $2mm acquisition - Preferred sees $2mm, common stock sees $0.
Depending on the cap on the participating preferred, the rest could vary, but if you assume it's at least a 2x;
* $3mm acquisition - Preferred sees $2.5mm, common stock sees $500k.
* $4mm acquisition - Preferred sees $3mm, common stock sees $1mm.
So in a best case scenario, 1% ownership would be worth $10k, and would probably be worth much less than that. Do you care if you get your $10k in stock vs. cash? You're probably not indifferent, but that amount won't move the radar for most of those with equity in the startup world.