So there was a “secret” D round where certain higher-ups were able to buy preferred shares and, basically, negotiate a salvage fee while the ship was still sinking? Who got those shares? I want to make sure that I don’t work with those guys in the future.
What happened to the regular employees who believed in the company enough to exercise their options? I’m assuming they were paid way less than market for the better part of a decade?
Nothing? Just: “Fuck you, I’m eating.”?
There was a layoff in August.. Did they let the people they let go know that they were cooking up a deal that would make their vested options worthless? Did they put a time pressure on them to exercise their options after getting laid off? Did they give their money to SoftBank?
These are very rich men whose company failed. I can’t imagine cashing out while screwing over everyone I worked with along the way. I couldn’t do it. At least face your people and say “Sorry this happened. We’re all in the same place.”
> I assume the founders don’t get anything out of this sale?
Why wouldn't they? They start by owning 100% of the company. They sell a % to investors - say, 50% for $300M, which is put into the company.
That still leaves them with 50% ownership. Selling the company - or their stake in it - for $190M will still mean they get half of that. On top of other things, like continued employment by the new owner and other enticements for them to either keep working or leave.
Disclaimer: this is armchair logic from someone who doesn't know how this works and lives half a world away.
Well, at least you added a disclaimer! Because this isn't how it works - founders have common shares, investors have preferred shares and usually always get paid back first.
I am also not too familiar with these agreements. But I have heard that there are complicated contracts in every investment. There are for example things like liquidation preferences. Meaning first all VCs get their invested money back and after that the remainder is split.
liquidation preference protects investors from founder fraud. say you invest $1M for 20% at 5M valuation in a preseed round where the founder has nothing and then a day later the founder liquidated the company for the value of cash assets, keeping 800k of your money. also preferred has a different voting structure, making it easier for investors to fire the CEO
The founder and investor agree on dual class stock ("common" vs "preferred") as part of the investment terms. Nothing stops a founder from incorporating with single-class share structure, but the structure exists and is standardized for good reason. Mainly, it gives the board checks and balances against the CEO so that they can force the CEO to honor their promises to the investors. In addition to "preferred" vs "common", each "Series" of preferred shares is subject to their own terms, which are established in the financing contracts per the negotiated terms of the financing. Come to think of it, this preferential treatment might be why the shares are called "preferred". Pre-seed and seed is mostly standardized but beyond that the terms of each Series of stock are custom negotiated and that's where you see things like liquidity preference, vesting, anti-dilution, dividends, rights, board seats and other control clauses, etc. If a founder were to simply say "everyone is treated the same, we all get common" that would impact the valuation and dilution, as the preferred structure is a factor in the price. In a way, the founder is saying "i'm going to give you preferred to remove your perceived downside risk so that I can keep more of the company"
Investors normally always have at least 1x liquidation preferences. Common stock is usually always wiped out when a company is sold for less than it raised.
I always wondered about this - if capital interest rates are low, shouldn't capital be getting compensated very little? Shouldn't labour be worth more?
This sounds a bit like a basic version of AWS' Nitro - specialised chips that deal with the storage, networking, etc. leaving only the actual customer workloads on the actual CPUs. If Microsoft are buying to add this to Azure, that would indicate they're pretty behind AWS on that front (among many others).
Microsoft have had similar for years. Last I heard it was an FPGA with some ARM cores attached, with the former offloading networking and storage, and the latter running various services that the Azure backend talks to, on a custom Linux distribution. The main processors are all still x86 though, typically running Windows Server to host whatever VMs have been provisioned.
Are there any public talks or papers you’re aware of on this?
AWS (rightly) make a lot of noise about Nitro and the benefits of their architecture - I’d expect anyone who is actually in a similar position to be doing the same.
You'd have to look back, but I think AWS was ahead of many folks in doing this, but surely aren't alone. Today Intel, AMD and Nvidia all offer "DPUs" which is the generic name for what AWS Nitro does. And as others mention Azure has been doing it in FPGAs, so similar idea, just a bit slower and more expensive.
AWS seems to own more of the lower levels of the stack than Microsoft. Right or wrong I can't say. If you do it better than off the shelf, and cheaper, then it's a win of course. Screw up and that's another story.
> "Then along came Microsoft, with its need for efficient Azure cloud datacenters. We understand Redmond has no interest in selling Fungible’s kit [storage arrays] to external customers."
The article goes on to say:
> "In the absence of any other possible suitors and VC funding seemingly drying up, Fungible management, we are told, agreed to a lower offer from Microsoft than they would have liked."
So in the current funding climate, Microsoft was able to buy up this useful technology at a discount price.
Only $40M was returned to the investors. Pradeep lead the D round with a 5x liquidity preference and took $150M off the top. The company was seriously sinking so investing his own money saved them until MSFT bought what was left. MSFT is rewarding those employees who get job offers.
Interesting that they used MIPS64 architecture. Will Microsoft continue that direction with this tech? Elsewhere I heard that this was one of their 'mistakes'.
And it begins. We’re going to see a lot of VC-backed firms with mildly decent products or teams sell for down-round valuations to those who are still flush with cash.
And remember, in these deals, common stock/option holders (i.e. employees) usually get nothing when the sales price is less than the total invested due to liquidation preferences. This is why it's so important for employees to look at how much a company as raised when considering the value of their equity.
down round sale doesn't mean purchase price is less than invested.
i.e. company brought in a total of 30-40 million in investment at a 300 million valuation. sells for 200 million. they still sold for a lot more than invested.
also, for people still at the company, my observation from friends who were in that situation is that if they are buying the company for the talent, they get good retention offers.
In this case, yes, it could be that they are wiped out, but the employees got a salary and the investors will lose money overall. so the employees come out ahead of the investors.
In this case, they got over $300 million in total funding, not just valuation, so your point doesn't apply here.
> In this case, yes, it could be that they are wiped out, but the employees got a salary and the investors will lose money overall. so the employees come out ahead of the investors.
Except, and this is what a lot of startup employees don't really grasp, is that a VC is always widely diversified while an employee can't be. At any given time a VC will have lots of investments, and they should expect most of these to be relative losers. Employees, however, can only work for one company at a time, and for startups they usually take significantly under market rate given that they're taking a chance on their equity.
One should never work for a startup for the equity.
The equity is a "bonus/lottery ticket" for the future.
IMO, You work for a startup because you get to work on exactly what you want to work on in a way that would be more difficult in a larger company (in terms of technology, the amount of effect you can have, the learning experience....) and the salary is sufficient for your goals and needs (i.e. support yourself in a lifestyle that you are content with and able to put sufficient savings away for the future so that you will be able to afford the things you want/need in that future).
If the salary isn't sufficient, you shouldn't work for a startup banking on the equity, as you can't bank on it.
If the experience of what you will be working on isn't special and you could work for a larger firm that pays more, you should work for them, not the startup, as you aren't getting any extra value to make up for the lower pay from the startup.
At the end of the day, a startup that goes to 0, the investors lost all their money, but all the employees got a salary for the time being there + whatever growth/value they personally got of the work that they can take to their next job. If the startup doesn't go to 0, but goes to under invested dollars value, it is effectively the same thing, the equity employees were issued is 0 and the investors have lost money, while the employees at least are net positive on their salary.
I really think people who say to work for a startup to take less salary because of the lottery ticket that is equity are making the wrong decisions. I'm saying that as someone who is now on his 3rd non public company, where the first job didn't work out for me (and the company was then sold at a down round, though more money than they had raised), the second company ran out of money and was "aquihired" by a larger firm and "Hopefully" this third company will go public (though current market trends make that a hazy crystal ball for the foreseeable future). But none of these jobs I took because of the equity, I took them because the salary was sufficient for my goals/needs and I got to work on things I really wanted to work on in a manner to have an impact that I couldn't have elsewhere.
yes, I was responding to the concept of a down round in general and explicitly noted that in this case, the company was worth less than what the people invested.
Worse, they probably lost money. Many employees exercise their options anticipating a liquidity event so they can pay the long-term tax rates over the short-term rates. Anyone who exercised their options is probably underwater.. By A LOT. Fungible was really hot at one point. I can imagine employees losing $10k-100k if they thought a sale was coming.
You should always be able to know revenue, so valuation is x 2 if a consultancy and x 10 if software. Likewise, increase/decrease based on whether revenue is doubling/tripling annually or not. The average multiple goes up and down all the time, so don't fixate on the value this month / year, as an exit, if any, can be many years out.
Nowadays typical to have no participation multiple, just 1x preferred shares ("first money out"), so you can add up the money raised, which is often ~public
Ex: a co that raised a total of $100M on $10M revenue... returns you nothing. They can call themselves a unicorn but that's between them and the investors. The investors, through preferred shares, own all the current market value.
Also, ultimately, this is all funny money. A company no buyer wants is worth nothing. Likewise, if some sort of existential PR bet by the acquirer, the acquisition $ can be magnitudes more than any sense of team/IP/revenue $, like the early acquisition of Cruise.
It becomes even weirder when you consider that big vc’s can send you business from other companies they’ve invested in, or those of their friends. Suddenly, it’s like your value just went up 10x the sales price. Basically vc’s become like market makers, and startups are somewhere in between crypto and publicly traded companies. There are key differences though, like that startups can actually create new value and bring in new money to the ecosystem, or that there are real regulations to speak of, or that vc’s are usually protected and get cashed out first. All of these things influence the real valuation.
Having been burned by equity of nothing too often I tend to flat out refuse equity in general, but since you bring it up what is the advice/recommendation here?
Trying to work for actually profitable companies should help! (No, haven't seen any profit from any options yet. I usually negotiate for mor cash when I can.)
Yup. Working for early stage start-ups is like entering a lottery that sells incredibly expensive tickets. Sure, you might get really rich some day, but there's a much bigger chance you miss out on wages and spend more than 40 hours a week working with no payday ever.
People should really be more aware of this, but as usual, everyone only focuses on the winners.
What happened to the regular employees who believed in the company enough to exercise their options? I’m assuming they were paid way less than market for the better part of a decade?
Nothing? Just: “Fuck you, I’m eating.”?
There was a layoff in August.. Did they let the people they let go know that they were cooking up a deal that would make their vested options worthless? Did they put a time pressure on them to exercise their options after getting laid off? Did they give their money to SoftBank?
These are very rich men whose company failed. I can’t imagine cashing out while screwing over everyone I worked with along the way. I couldn’t do it. At least face your people and say “Sorry this happened. We’re all in the same place.”