Does anyone have a good idea about the laws for valuation tricks and the ways companies skirt them? A company for which I had stock options recently was sold to a larger company, but the deal seems to have been coordinated such that the investors with privileged shares (or whatever they're called) got their money, but the peasant shares (again, I forget the terms) were worthless--all of the "key employees" got generous bonuses and the employees still with the company were to be rewarded by the buyer with (presumably) valuable stock.
I wasn't really banking on these options as part of my financial plan, but surely this sort of thing is illegal, right? What are good search criteria for someone who just wants to learn more about these laws and loopholes for the future (I know I can talk to a lawyer if I want to pursue action in my specific case)? What are the ways a company can legally fuck me over?
Very typical in acquihire situations and probably isn't anything to spend energy feeling bitter about--the company simply wasn't worth enough to trickle value down to common shareholders, and didn't yield the result the founders and early investors imagined.
The structure you describe is 1) legal and 2) typical.
Preferred shares cost more, but for that extra money they come with preference. What is preference? It can vary, but the term that matters most is that they get to earn their money first. A 1X Preferred share (very generous) will be paid their investment back before anyone else sees a dime. Often shares are not 1X, they can be 2X or 3X, which means they will get more than they put in before anyone else sees a dime. There are more variations, but this is what matters in the story you’re telling.
Common shares, which is what employees receive, are much, much cheaper (the strike price will often be pennies on the dollar compare to preferred shares that investors receive). However they simply convert to common stock when they’re exercised, with no special treatment.
How does anyone make money then? The answer has to do with liquidity events that are large enough that everyone is getting their money. If money is limited, the investors get it first.
Everybody doing startups should pick up and read Venture Deals. It explains the various tiers of stock well.
PS the last VCs who funded us have a 2x preference (we were out of options and it was the only money on the table.) In retrospect we should have just shut down and gotten a few years of our lives back.
I wasn't really banking on these options as part of my financial plan, but surely this sort of thing is illegal, right? What are good search criteria for someone who just wants to learn more about these laws and loopholes for the future (I know I can talk to a lawyer if I want to pursue action in my specific case)? What are the ways a company can legally fuck me over?