My Company Sold for $100 Million And I Got Zilch. How Can That Be?
Heidi Roizen answers your questions
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Dear Heidi:
I’m so raging mad right now my fingers can barely work the keyboard. Four years ago, I landed a VP of engineering job at a red-hot startup, for which I was granted options for 2% of the company. I’ve been toiling away all these years through the ups and downs, setbacks and growth, and multiple rounds of capital. The new capital that came in subsequent to my joining reduced my percentage ownership, but I still had 1% of all outstanding shares even after that. While it hasn’t ended up becoming the unicorn I was hoping for, we recently were told that the company was being acquired for $100 million — so at least I thought I was walking away with a cool million bucks. But today, the transaction closed, and I was informed that my options are worth Bupkis! Nada! Zilch! My question, in addition to referring me to a good employment attorney, is, can you explain to me how this could possibly be true?
— Former Millionaire, Dogpatch, SF
Dear Former Millionaire:
I feel your pain. I really do. I’ve always thought it unfortunate that common practice is to tell employees share amounts and strike prices but not give them all the other numbers needed to help them evaluate what their options will end up being worth. For what it’s worth, I encourage all the companies I work with to be more transparent. I guess yours wasn’t.
There are probably multiple issues at play here, but I’m going to guess the biggest one is your preference overhang. Let me explain.
When venture capitalists buy equity, they typically do not buy the same shares employees get, which are common shares. They buy preferred shares. You can even guess from the name that these are somehow better. After all, if you were given the option of something preferred or something common, which would you take? There are all sorts of reasons this is so, including the obligation VCs have to protect the downside of investing the money they get from their Limited Partners — who are often entities like pension funds and school endowments. There are also some advantages to common shareholders by having two classes of stock — for example, this allows the company…
