I will preface this by saying I know NOTHING about the actual deal between Yahoo and del.icio.us. Om Malik’s posting, in which he speculated about the buyout price, set me thinking about the various scenarios for employees in this buyout. You may recall a couple of weeks ago I wrote about participating vs preferred shares, and how they could impact employee stockholders and founders at exit, especially in the case of a small exit. If the numbers are as Om speculates, then this seemed like a perfect opportunity to illustrate that impact.
So, for the sake of argument we are going to assume that the cap structure of the company is 25% VC owned (as Om speculates), 15% for the employee stock option pool (a common number), and 60% founders stake. We will treat the 1.5 million investment in April as the sole investment.
If the VC owns common stock, as the employees and founders do, this is what the exit scenario looks like at $5, $10 and $15 million.
| Exit Price | $ 5,000,000 | $10,000,000 | $15,000,000 | |||
| Founders | $ 3,000,000 | 60% | $ 6,000,000 | 60% | $ 9,000,000 | 60% |
| Employees | $ 750,000 | 15% | $ 1,500,000 | 15% | $ 2,250,000 | 15% |
| VCs | $ 1,250,000 | 25% | $ 2,500,000 | 25% | $ 3,750,000 | 25% |
If, however, the VC owns preferred stock, with a 1 time liquidation preference, this is the exit scenario. You can see the effect of the preferred stock. It puts a floor on the VC’s risk.
| Exit Price | $ 5,000,000 | $10,000,000 | $15,000,000 | |||
| Founders | $ 2,800,000 | 56% | $ 6,000,000 | 60% | $ 9,000,000 | 60% |
| Employees | $ 700,000 | 14% | $ 1,500,000 | 15% | $ 2,250,000 | 15% |
| VCs | $ 1,500,000 | 30% | $ 2,500,000 | 25% | $ 3,750,000 | 25% |
If that stock is participating preferred stock (a very common scenario) with a 1 time liquidation preference, a significant uptick in the VC takehome occurs.
| Exit Price | $ 5,000,000 | $10,000,000 | $15,000,000 | |||
| Founders | $ 2,100,000 | 42% | $ 5,100,000 | 51% | $ 8,100,000 | 54% |
| Employees | $ 525,000 | 11% | $ 1,275,000 | 13% | $ 2,025,000 | 14% |
| VCs | $ 2,375,000 | 48% | $ 3,625,000 | 36% | $ 4,875,000 | 33% > |
And finally, if the VC is very greedy, and wants a 2x liquidation preference, plus participation, there’s a dramatic difference.
| Exit Price | $ 5,000,000 | $10,000,000 | $15,000,000 | |||
| Founders | $ 1,200,000 | 24% | $ 4,200,000 | 42% | $ 7,200,000 | 48% |
| Employees | $ 300,000 | 6% | $ 1,050,000 | 11% | $ 1,800,000 | 12% |
| VCs | $ 3,500,000 | 70% | $ 4,750,000 | 48% | $ 6,000,000 | 40% |
Again, I don’t know what the structure and terms of the del.icio.us / Yahoo! deal was, so this is all illustrative. As Om says "I am speculating here, and have no information. So treat it like that…. simple speculation". Per my earlier point, though, most exits aren’t home runs, and the impact of liquidation preferences is felt most acutely on a small exit. It’s prudent to plan for the singles and doubles rather than just the home run.
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