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Startup Employees in the Dark on Equity

A few years ago, a venture-backed ad tech company was sold for about three times the amount that investors had put into the company—but employees got a rude surprise. The VCs who held preferred stock got $6.80 per share, while employees who held common stock got about $1.40, according to documents related to the sale. One employee recounted how that added up to just a few thousand dollars, a fraction of what he’d thought his shares were worth.

Tales of employees getting the short end of such deals abound in the tech industry. Remarkably, though, few employees appear to ask the kinds of questions that would enable them to properly value their equity packages. Of the 18 engineers, salespeople and managers interviewed for this story, none had even basic information that could shed light on the value of their stock, such as the number of shares outstanding and the company’s current valuation. As for things like liquidation preferences and other investor protections that change the math negatively for employees, forget about it. No one had a clue.

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“I tell people to ask how much money they would get if their company was acquired for $100 million, because answering the question reveals ownership percentage, liquidation preference and warrants; and it exposes other things that may have been hidden during a negotiation.”