What's the likely scenarios for an employee whose been there for 2 years, an employee whose been there for 1 year, and an employee whose been there for 6 months? If we assume 1 year cliff on options.
Great question. The answer is the same for all of them: roughly 0.
Jet's last valuation was $1.6bn and it was, and continues to, burn cash like crazy. Investors aren't dumb, they see that.
So they add a terms to their investment whereby they guarantee a return on their investment. For a company that needs hundreds of millions of dollars and is trying to beat Amazon? Let's say 3x.
That means that if I put in $100m dollars at a $1.6b valuation, then you sell at a $4.8bn or above, then everything is fine because I got my 3x. If you sell for less, as they did, then I get my $300m first, before anyone down the line. That's called liquidation preference.
Jet was burning capital so they likely had to make a lot of concessions in fundraising. Given that their estimated total funding is around $800m, there isn't much else to go around.
You'll notice that some employees and the founders got around $300m worth of Walmart stock. Why would they need that if the company just sold for $3bn? Because the sale likely netted them next to nothing.
This is a badly inaccurate description of how liquidation preferences work, both mechanically and also with respect to what's "market."
First, it's exceptionally unusual to see anything more than a 1x liquidation preference (i.e. investors receive their initial investment back before anyone else gets paid) among well-funded companies. It's somewhat common to see a 6-10% interest rate added on top, but a 3x liquidation preference is the VC equivalent of a payday loan.
The other component is whether the liquidation preference is "participating" or "non-participating." The easiest way to think about that is that a participating preference receives its initial investment back out of the sale proceeds, then shares in the remainder of the profits alongside the common stockholders. A non-participating preference is like a "greater-of" - basically downside protection in the event that the company is sold for a much lower than expected amount.
Suppose Jet's received $800m in funding like you said, and suppose the investors have gotten pretty aggressive terms - call it 6 rounds of funding that each took 20% post-money, all of which have a 1x liquidation preference and are getting 10% interest. Let's say the interest takes the preference to $1 billion because we're more or less making up numbers at this point, but we're in the right ballpark.
So the common stockholders (founders and employees) own 26% of the company at this point (.8^6), and a billion dollars comes off the top of the $3 billion sale amount. The common stockholders would therefore receive about $520 million.
The Walmart stock is publicly traded, so it's a lot like getting cash (though it may be subject to a short lock-up in a deal like this). Companies like to do combination cash/stock deals for a variety of reasons.
> For a company that needs hundreds of millions of dollars and is trying to beat Amazon? Let's say 3x.
Jet.com raised its A, A1, B1 and B2 with 1x liquidation preferences. Common will get a pay-out.
Since all of Jet's preferred stock is non-participating, their holders will probably receive a dividend, convert to common and then participate alongside everyone else. (All Jet preferred stockholders get an 8% dividend except A1, who got a flat 48ยข per share, so that's a bonus $45 or so million to preferred.)
If no employees get anything, why wouldn't they organize and threaten to quit together (leaving Walmart buying the name, a founder or two and some technology with nobody to run it) to try to stop the deal? Isn't the whole idea of accepting 1/2 salary at a start-up because of your glorious equity? Whenever I hear about these "deals" where employees end up with nothing or close to nothing, I wonder what they are thinking. Why accept that?
EDIT: I suppose if the alternative is "run out of money next month and everyone's fired anyway", then worthless equity and a possible job maintaining that code at Walmart doesn't sound so bad.
The company raised $500-800m at at least a $1b valuation, no idea on later round(s), seem less reported, maybe a downish round?
Investor liquidation preference guarantees investors get their money back 1x or 2x or 3x or whatever (assuming they don't lose all of it).
So if they raised at a $1b valuation, sell for $3b, a 2x preference means there's $1b in profit left after paying investors. Again, assuming you know how the rounds were structured, which I don't. And not counting taxes. Or other contract terms that kick in on certain conditions.
So best case scenario, there's $1b for employees + $300m in options. Unless liquidation pref is 2.5x which means $500m cash left + $300m in Walmart options. If it's not vested, they can make a problem out of it (or they can accelerate vesting, but it's up to Walmart mostly). Most employees will probably need to do their time at Walmart, so to speak, and not get fired there.
Early employee maybe got 1%? That would have been diluted of course. But $10m is probably best case scenario (after taxes, you can afford a pretty nice place in the Bay Area and have some left over) If you got more like .1% of the company (still kind of a lot, really, and the founder sold their last co for $500m so better odds?), you just made a million bucks, which will be about 700k after taxes. And you've got a job at Walmart.
I would be surprised if the actual outcomes for employees were higher; unsurprised if lower.
> $10m is probably best case scenario (after taxes, you can afford a pretty nice place in the Bay Area and have some left over)
That's an extreme overstatement - a 'pretty nice place' in the bay area would cost in the $1M range, maybe $2M if you have a pretty jaded view of 'pretty nice'.
> you just made a million bucks, which will be about 700k after taxes.
More like 500K - 39.6% federal and up to 12% CA state tax.
> Investor liquidation preference guarantees investors get their money back 1x or 2x or 3x or whatever (assuming they don't lose all of it).
I haven't looked into the walmart/jet deal but one hangup on this assumption is very often the entity purchasing was the entity that invested initially in the first place (directly or indirectly).
That is they are just moving money around and buying something they already own (either directly or indirectly and in some cases very very indirectly).
If the employees/common share holders are splitting say $1B, an employee's 1% is actually much more. It wouldn't be surprising to think the investor's preferred shares were ~50% of the equity or more, leaving the common shares with the remaining 50%. That employee's 1% is actually 2% of the remaining, so ~$20M using the numbers above.
The short answer is that it's very hard to know as Jet was a fairly unusual company. They raised (and spent) a tremendous amount of capital and it's not generally known what terms those raises were done on.
If the terms were favorable (standard preferred stock) the employees likely made several billion dollars (in aggregate) on the deal. If the terms were not favorable the employees could have made relatively little. You'll note that some other people in this thread are assuming various liquidation preferences just to validate their priors (employees always get screwed) with no real evidence to support their claims.
One way to look at it however is to consider the question "What is Walmart buying in this deal?" From my perspective they're not really buying a pile of code or a customer base or a brand name (none of that seems this valuable). What they are really buying is an energized and engaged team working until the leadership of a reportedly excellent CEO. They hope that this team will do a lot to help Walmart to capture a larger share of the future of e-commerce (where Amazon is clearly kicking their ass at the moment). So if a lot of the asset Walmart is buying is the people then it would't be an effective purchase if most of those people got screwed as part of the sale. This is just speculation on my part but I think it makes logical sense.
There was an article where the cofounder mentions everyone gets the same lump of stock depending on pay grade. He also mentions it helps incentivize people to work nights and weekends so based on his unrealistic expectations of work life balance and giving out stock based on "lumps" I can come to my own conclusions.
Usually for large acquisitions like these the employees are kept on the same vesting schedules they were already on (especially if the company is so young). There is probably additional stock options issued for retention on top of this. So, if you have been there for 2 years, you are probably 50% vested, 1 year 25% etc. Typically if you have not reached your cliff, it is kept in place.
There are some circumstances where in a big acquisition like this founders or key employees are asked to re-start the vesting clock on their shares. This is more common in small buys but can happen in big ones too. In this case you get some payout for e.g. the 2 years you were there and then the rest of your stock (and maybe a refresher) get spread over 3 or 4 years.
In terms of payout, if you assume by series C that 50-75% of the company was sold to investors then $1.5B to $2.25B will go to investors and the remaining 750 million to $1.5 billion goes to founders and employees. Obviously this is a huge range and you need the cap table to know what really happened.
I don't know. But I can offer up some speculation. To do that we have to put in a guess about what "common" shares of stock would be worth, and how many of those shares our employees could access.
We know that Jet has been a bit unconventional in their pay practices [1] with their transparent salary metric. But we don't know how their options differ. Sometimes options have a "change of control" clause. In those cases the vesting schedule for common shares is accelerated when the company is acquired.
TechCrunch says "$3B cash plus $300M in shares to the Founders and employees". That sounds like part of the acquisition offer is stock offers to employees to come to Walmart. The new stock options would have cliffs and restrictions as well but they are for a publicly traded stock (so you know that you will be able to trade them, vs a private company where you may never be able to trade them). If the Crunchbase article is correct and there are 1K - 5K employees, we'll assume the distribution follows the power law but even with that, smallest grants would be at least $100K if distributed over 5K points with a $300M total.
Second there is the "value" of common stock. If the company had raised a total of $800M, and already had a 2x liquidation preference with participation, that would have $1.4B to distribute across the final common pool. In common scenarios that would mean that people who had been employed for a year or more would be able to exercise n/48ths of their stock option (where n was months of service as long as n was 12 or higher). The Tech Crunch article also said that they had been shooting for a $3B valuation in the last funding round. Given that jump you might expect common shares from the resulting acquisition to have a value that was at least 2.1 times their strike price. That might not represent a lot of money though, a million shares with a strike price of 10 cents a share, now worth 21 cents a share is a $110K gain. That said it would depend on how many shares were outstanding. If they had held back 20% of the share pool for employee options, and distributed half of it, that would be 10% of the company in options, or potentially $300M in value. That arbitrarily lines up with stock number quoted in the press release. If that relationship was accurate, it would suggest that Walmart was converting the options straight to Walmart share options (another common practice) where the acquiring company keeps the previous vesting schedule.
Lots and lots of variables. On the plus side, if an employee did have a stock option and it was at least partially vested, that option was probably worth non-zero dollars so in the world of startups that counts as a win. How big a win will vary from person to person.
tyre|9 years ago
Jet's last valuation was $1.6bn and it was, and continues to, burn cash like crazy. Investors aren't dumb, they see that.
So they add a terms to their investment whereby they guarantee a return on their investment. For a company that needs hundreds of millions of dollars and is trying to beat Amazon? Let's say 3x.
That means that if I put in $100m dollars at a $1.6b valuation, then you sell at a $4.8bn or above, then everything is fine because I got my 3x. If you sell for less, as they did, then I get my $300m first, before anyone down the line. That's called liquidation preference.
Jet was burning capital so they likely had to make a lot of concessions in fundraising. Given that their estimated total funding is around $800m, there isn't much else to go around.
You'll notice that some employees and the founders got around $300m worth of Walmart stock. Why would they need that if the company just sold for $3bn? Because the sale likely netted them next to nothing.
emagdnim2100|9 years ago
First, it's exceptionally unusual to see anything more than a 1x liquidation preference (i.e. investors receive their initial investment back before anyone else gets paid) among well-funded companies. It's somewhat common to see a 6-10% interest rate added on top, but a 3x liquidation preference is the VC equivalent of a payday loan.
The other component is whether the liquidation preference is "participating" or "non-participating." The easiest way to think about that is that a participating preference receives its initial investment back out of the sale proceeds, then shares in the remainder of the profits alongside the common stockholders. A non-participating preference is like a "greater-of" - basically downside protection in the event that the company is sold for a much lower than expected amount.
Suppose Jet's received $800m in funding like you said, and suppose the investors have gotten pretty aggressive terms - call it 6 rounds of funding that each took 20% post-money, all of which have a 1x liquidation preference and are getting 10% interest. Let's say the interest takes the preference to $1 billion because we're more or less making up numbers at this point, but we're in the right ballpark.
So the common stockholders (founders and employees) own 26% of the company at this point (.8^6), and a billion dollars comes off the top of the $3 billion sale amount. The common stockholders would therefore receive about $520 million.
The Walmart stock is publicly traded, so it's a lot like getting cash (though it may be subject to a short lock-up in a deal like this). Companies like to do combination cash/stock deals for a variety of reasons.
JumpCrisscross|9 years ago
Jet.com raised its A, A1, B1 and B2 with 1x liquidation preferences. Common will get a pay-out.
Since all of Jet's preferred stock is non-participating, their holders will probably receive a dividend, convert to common and then participate alongside everyone else. (All Jet preferred stockholders get an 8% dividend except A1, who got a flat 48ยข per share, so that's a bonus $45 or so million to preferred.)
unknown|9 years ago
[deleted]
ryandrake|9 years ago
EDIT: I suppose if the alternative is "run out of money next month and everyone's fired anyway", then worthless equity and a possible job maintaining that code at Walmart doesn't sound so bad.
dave_sullivan|9 years ago
$3b purchase price + $300m in Walmart options
The company raised $500-800m at at least a $1b valuation, no idea on later round(s), seem less reported, maybe a downish round?
Investor liquidation preference guarantees investors get their money back 1x or 2x or 3x or whatever (assuming they don't lose all of it).
So if they raised at a $1b valuation, sell for $3b, a 2x preference means there's $1b in profit left after paying investors. Again, assuming you know how the rounds were structured, which I don't. And not counting taxes. Or other contract terms that kick in on certain conditions.
So best case scenario, there's $1b for employees + $300m in options. Unless liquidation pref is 2.5x which means $500m cash left + $300m in Walmart options. If it's not vested, they can make a problem out of it (or they can accelerate vesting, but it's up to Walmart mostly). Most employees will probably need to do their time at Walmart, so to speak, and not get fired there.
Early employee maybe got 1%? That would have been diluted of course. But $10m is probably best case scenario (after taxes, you can afford a pretty nice place in the Bay Area and have some left over) If you got more like .1% of the company (still kind of a lot, really, and the founder sold their last co for $500m so better odds?), you just made a million bucks, which will be about 700k after taxes. And you've got a job at Walmart.
I would be surprised if the actual outcomes for employees were higher; unsurprised if lower.
djrogers|9 years ago
That's an extreme overstatement - a 'pretty nice place' in the bay area would cost in the $1M range, maybe $2M if you have a pretty jaded view of 'pretty nice'.
> you just made a million bucks, which will be about 700k after taxes.
More like 500K - 39.6% federal and up to 12% CA state tax.
agentgt|9 years ago
I haven't looked into the walmart/jet deal but one hangup on this assumption is very often the entity purchasing was the entity that invested initially in the first place (directly or indirectly).
That is they are just moving money around and buying something they already own (either directly or indirectly and in some cases very very indirectly).
TwoFactor|9 years ago
harryh|9 years ago
If the terms were favorable (standard preferred stock) the employees likely made several billion dollars (in aggregate) on the deal. If the terms were not favorable the employees could have made relatively little. You'll note that some other people in this thread are assuming various liquidation preferences just to validate their priors (employees always get screwed) with no real evidence to support their claims.
One way to look at it however is to consider the question "What is Walmart buying in this deal?" From my perspective they're not really buying a pile of code or a customer base or a brand name (none of that seems this valuable). What they are really buying is an energized and engaged team working until the leadership of a reportedly excellent CEO. They hope that this team will do a lot to help Walmart to capture a larger share of the future of e-commerce (where Amazon is clearly kicking their ass at the moment). So if a lot of the asset Walmart is buying is the people then it would't be an effective purchase if most of those people got screwed as part of the sale. This is just speculation on my part but I think it makes logical sense.
HenryTheHorse|9 years ago
Jet.com differentiated itself from AMZN through concepts like "happier work culture", which, given WMT's reputation, is rich in irony.
djb_hackernews|9 years ago
eladgil|9 years ago
There are some circumstances where in a big acquisition like this founders or key employees are asked to re-start the vesting clock on their shares. This is more common in small buys but can happen in big ones too. In this case you get some payout for e.g. the 2 years you were there and then the rest of your stock (and maybe a refresher) get spread over 3 or 4 years.
In terms of payout, if you assume by series C that 50-75% of the company was sold to investors then $1.5B to $2.25B will go to investors and the remaining 750 million to $1.5 billion goes to founders and employees. Obviously this is a huge range and you need the cap table to know what really happened.
ChuckMcM|9 years ago
We know that Jet has been a bit unconventional in their pay practices [1] with their transparent salary metric. But we don't know how their options differ. Sometimes options have a "change of control" clause. In those cases the vesting schedule for common shares is accelerated when the company is acquired.
TechCrunch says "$3B cash plus $300M in shares to the Founders and employees". That sounds like part of the acquisition offer is stock offers to employees to come to Walmart. The new stock options would have cliffs and restrictions as well but they are for a publicly traded stock (so you know that you will be able to trade them, vs a private company where you may never be able to trade them). If the Crunchbase article is correct and there are 1K - 5K employees, we'll assume the distribution follows the power law but even with that, smallest grants would be at least $100K if distributed over 5K points with a $300M total.
Second there is the "value" of common stock. If the company had raised a total of $800M, and already had a 2x liquidation preference with participation, that would have $1.4B to distribute across the final common pool. In common scenarios that would mean that people who had been employed for a year or more would be able to exercise n/48ths of their stock option (where n was months of service as long as n was 12 or higher). The Tech Crunch article also said that they had been shooting for a $3B valuation in the last funding round. Given that jump you might expect common shares from the resulting acquisition to have a value that was at least 2.1 times their strike price. That might not represent a lot of money though, a million shares with a strike price of 10 cents a share, now worth 21 cents a share is a $110K gain. That said it would depend on how many shares were outstanding. If they had held back 20% of the share pool for employee options, and distributed half of it, that would be 10% of the company in options, or potentially $300M in value. That arbitrarily lines up with stock number quoted in the press release. If that relationship was accurate, it would suggest that Walmart was converting the options straight to Walmart share options (another common practice) where the acquiring company keeps the previous vesting schedule.
Lots and lots of variables. On the plus side, if an employee did have a stock option and it was at least partially vested, that option was probably worth non-zero dollars so in the world of startups that counts as a win. How big a win will vary from person to person.
[1] http://www.forbes.com/sites/erikamorphy/2015/07/21/jet-com-i...
[2] https://www.crunchbase.com/organization/jet#/entity
[3] https://en.wikipedia.org/wiki/Power_law
theflork|9 years ago