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0 pointsalain940407y ago0 comments

The answer is hidden in your question: you own common stock. The investors got preferred stock. As the name implies, their stock has privileges. A common one is liquidation preference. They get their money back first, then the common shareholders get whatever is left.

For an extreme example, say the VC invested $10M for 10% of the company, and then the company doesn't manage to grow, and gets acquired for the same $10M amount. The initial VC gets the $10M back from the acquisition (they make their money back, no profit). Then there is $0 left, and the common shareholders (early employees and often founders) get nothing.

It's a contrived example, and there are many other complexities to such a deal, but you get the idea.

0 comments

adtac7y ago

Let's say the company gets acquired for $20M. Is it still possible for the other 90% to make $0? Or is the preference amount exactly equal to the invested amount?

TuringNYC7y ago

Yes, it is possible to have 1.25 or 1.5x first money out liquidity preference. I'm not sure how common that is though, but I've seem it multiple times.

Also note, you can end up with negative returns since you may have paid taxes on the options.

SEE: https://www.nytimes.com/2015/12/27/technology/when-a-unicorn...

pge7y ago

Typically preference = invested capital, but there are exceptions where it could be more (usually only if investors were investing in a distressed situation)

zerr7y ago

Can't you ask for preferred stock instead of common? Isn't it a common case?

alain94040OP7y ago

Common stock is the common case... Unless you are in a strong negotiating position, common stock is what you'll get.

A company can't easily give you preferred shares. Someone has to define what preferred includes: rights to elect someone on the board, right to oversee spending decisions from the CEO, etc... It costs money to structure preferred shares. You also can't piggy-back on a preferred class that already exists, unless the investors that "own" that class are happy to dilute their privileges with you (highly unlikely).

Common stock always exists, by definition, in a corporation. So it's easy to give it to you.

streblo7y ago

It is definitely not common to get preferred stock as an employee

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