In all of my posts, I keep pointing out that the problem with a Unicorn is that the board structure and ownership structure is not aligned with the interests of the employees who are not senior investors. For the most part, employees are junior investors. And in any liquidity event, the senior investors will be made whole before the junior investors.
The latest Unicorpse, Good, is a good example of the problems with boards. The employee interests and board interests are not aligned.
Preferred stock is different from common: Since Good’s venture-capital investors were first in line to be paid back, turning down the deal in March was less risky for them than it was for common-shareholder employees. Both the preferred shareholders and the common shareholders would do much better at $1.5 billion than at $825 million, but the preferred shareholders wouldn’t (and didn’t) do too much worse at $425 million than at $825 million. The common shareholders did much, much worse. As Felix Salmon says, “the huge problem is divergent incentives between common and preferred,” and the board of directors was aligned with the preferred.
Remember the preferred investors have different interests than employees. Employees want to maximize their investments. A startup is an attempt to make a lot of money. An investor has other interests and may want to liquidate a position.
For example, a preferred investor may want to free up capital for better investments, or may want to return money to LP’s or get out of an investment. And in those scenarios the Good exit, is a reasonable exit.
And so we have the perfect storm. The Good preferred investors took a calculated risk with limited downside when they turned down the 825 million deal, unfortunately, for the employees, the downside risk of not taking the 825 million dollars was much larger. When the deal closed, the preferred investors didn’t do badly. The employees got screwed.
The current funding environment is very dangerous to the valley and to employees.
As always, double check the fine print, understand the board motivations and make sure that you go into any situation with your eyes wide open.