Back in 2012, five software developers who helped found a company that made technology to monitor health care fraud sued the venture capitalists who had invested in their company. They argued their ownership stakes had been diluted by the VCs, who held preferred stock and had padded their own wallets through a merger. The court allowed the case to continue.
I think this case—Carsanaro v. Bloodhound Technologies—is a cautionary tale for today’s growing class of mega private tech companies.
One of the major consequences of companies staying private longer is they end up having more rounds of investors. (Uber and Square are each on investment round seven, as examples.) And those shareholders sometimes have different rights and interests.
The differences aren’t just between shareholders who get common and preferred stock.