Can anyone point to a deal where liquidation prefs are exercised? Because any buyer would have to be crazy to let those stay in place. (If you're buying for a price that the liquidation kicks in, then it's not a giant success and there are usually a dearth of options for the investors so they'd rather cave on the liquidation prefs than no deal.)
It used to be that they were terms for throwaway during acquisition, but perhaps things have changed.
The buyer shouldn't care if they are in place or not. In many ways it is better for the buyer because they know the employees didn't get a payout. Now the employees are more likely to stay on with the buyer instead of "calling in rich".
> The buyer shouldn't care if they are in place or not
Sure I do. Given a finite pot of money, I want 100% of it to go into incentive-based payouts. If the new company doesn't hit the goals, then I didn't lose so much money on the acquisition.
If the money pot went to feathering the nest of the investors and the acquisition doesn't work, then I've lost the entire pot.
Then you won't get the chance to be the buyer. If the business is doing well, owners will want you to pay for it and won't accept your integration risk. If the company is struggling, they won't give up their preferences.
I don't think this has ever been a throwaway term during an acquisition in cases where the investors proceeds were higher under their liquidation preference rights than they would have been under their pro rata stockholder rights.
Thinking back over all such deals I worked on as a startup attorney, I can't think of a single one where the liquidation preferences were not asserted by the preferred stockholders (i.e., investors).
The selling owners generally view it as a buyer's problem to figure out retention, which is usually accomplished by the buyer making equity grants to the team that vest over time following the acquisition.
Sellers sometimes have a similar incentive issue -- i.e., they need to incentivize a team whose equity will be worthless in an acquisition. This is often accomplished by some form of "management incentive plan" which can have all sorts of structures. But the gist is typically to set aside some of the acquisition proceeds for distribution to key employees or management.
My experience is in line with yours - investors always assert liq pref when they can, have never seen them give much on it. I've seen preferred throw common a few cents on the share, but usually it's zero.
Basically, Trados got sold, preferred got their liquidation preference and common stock got zero dollars. Common stockholder sued saying that they should have held out for a deal that gave Common some $$ and that the board (which was controlled by preferred) violated their duty to common, but DE court said that the board + preferred were OK to do the deal.
Usually this is happening mid or later stage, where a once hot company is flat or declining, and the preferred holders control the majority of the board and the company (and sometimes the founder is already gone), in which case the preferred holders effectively control the decision entirely.
> The remaining $52.2 million was distributed to holders of the company's preferred stock—less than their total liquidation preference of $57.9 million
I'm not sure that's different than my point. $7.8M for the current employees/management, most of which should have gone to fill liq prefs. What am I missing?
It used to be that they were terms for throwaway during acquisition, but perhaps things have changed.