What Tech Employees Are Last To Know

News broke this week that Hudson Bay was closing in on a deal to buy Gilt Groupe for $250 million, a 75% drop from the $1 billion value put on the company a few years ago. But for common shareholders, such a deal would turn out to be an even bigger loss than that price implies.

One common stockholder estimated they would receive roughly $2 to $3 a share from the reported deal, approximately 90% lower than what the shares were worth in 2011. That’s because the most recent investor, General Atlantic, received liquidation preference protections guaranteeing that it would receive its money back first, leaving common shareholders and prior investors to split whatever will be left if the sale goes through.

The episode is a good example of how arcane terms of an investment made by one financier can affect all other shareholders in a private tech company, including founders and employees holding common stock or options. Too often, employees holding common stock are in the dark about how these terms affect them.

So, today we’re updating our Private Tech Database to rank companies based on how friendly their financing terms are towards common shareholders.

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In the case of Gilt Groupe, for example, General Atlantic’s investment wiped out the liquidation preferences of its previous investors. While that was bad for the previous investors, it may turn out to be a blessing for common stockholders. If that hadn’t happened, the proposed $250 million sale would leave no money for common stockholders, as the company has raised more than $300 million in outside capital. Of course, the big collapse in value at Gilt Groupe reflects its struggles to compete in the e-commerce business. Fundamentally, then, the drop in value is due to poor performance of the company.

Vinny Lingham commented on this article.
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