[jodi]

Here are a couple ways that common stock can become worthless: - The most obvious and common, the company fails / does not exit - The company raises money and the investors have liquidation preferences. This means that the investor is guaranteed to make 3 times what they put in when the company is acquired. So, for example, if you raise 10 million dollars and your investors have 3x liquidation preferences, you have to sell the company for over 30 million before common shareholders see any money at all. So in this situation (and it is common), the common stock is essentially worthless.

[danielweber]

Even with a 1X multiplier, that preferred stock still has a good chance to give the 1% employee getting the shaft.

Let's say that there are 5 board members, and 3 of them are VC reps. Those VC companies have 50% of the company, with dibs on the first $50 million. Now, it's time to sell the company.

Pretend the company could be worth between $0 million and $100 million. Figure out what the VCs are likely to sell the company for, remembering that they get 100% of the first $50 million and 0% of the next $50 million.

[crapshoot101]

Respectfully, I cannot recall seeing a single YC company which has given up 3X LP at any stage short of an out and out crisis - and I've seen a few (work on the investor side). Hell, short of short-term debt which is clearly a bridge to an acquisition of sorts, you never see those terms. The high level point is valid (LP is there for a reason), but not to the scale you talk about it.

[guelo]

Besides liquidation, companies might just ask for the options back like Zynga did.