This week I read about the creator of RxBar, and how his company sold for $600 million, making him an overnight millionaire. Peter Rahal now spends his time reading and going to parties with other wealthy bachelors in Miami. This opened my mind to how valuable consumer goods companies can be, and how much can be made based on the cashflow, the value to the buyer, and the expected growth.
But selling a company isn’t all cash and dreams. If you work at a startup which is undergoing a sale and have equity, it is entirely possible that you get nothing from the sale. This is because of preferred shares and a possible bridge note. Preferred shares get paid in a sale before common shares do, and the bridge note gets paid first. The example in the above article goes like this: you work for a company that is being sold for $100m, and you own 1% in common shares. You’d expect a tidy £1m pay day on sale, but you end up with nothing. How?
Let’s say that seed, series A, and series B investors put $60m in over the rounds. They expect their money back at a minimum 1x multiplier, sometimes more, and these investors get paid before employees do due to their “preferred shares”. Bankers fees are $3m, and key employees are paid $17m to stick around throughout the transaction, a “carve out”. The carve out is treated as a debt that the companies owe, which means that it is also paid before common shares. Let’s also say that the company needed a bridge loan of $20m to keep operating through the transaction and not go bankrupt, and this also needs to be paid as it is a debt. So, 60+17+3+20=100, and the $100m gets shared around without anyone with “common shares” seeing a penny.
This seems like an innately unfair way of doing things. Employees slave away, expecting a big pay day when the company is sold. But this is the world of common vs preferred shares. If a company is being sold, or about to be liquidated, it is better to be a lender than an owner, whether that is in public markets (bonds paid before equity) or in a privately owned company.
Callum Macdonald 