"In a liquidation, common stockholders receive whatever assets remain after creditors, bondholders, and preferred stockholders are paid."

Coupled with what sounds like an already bad financial state of the company... I'm not claiming no foul play, but it looks like there is a reasonable avenue for what is happening.

Yet the board and CEO will get paid... So they're not that out of money. Just out of money enough to screw everybody but themselves.

> Philz board members, which include former CEO Phil Jaber and his son, Jacob Jaber; representatives from investment firms Summit Partners and TPG Growth; and CEO Mahesh Sadarangani will receive payouts or bonuses from the deal.

Salary takes preference over equity and debt in all liquidations.

The article implies that it's not a liquidation or bankruptcy, though, just a sale.

I don't know how you can buy a company without buying its stock from the shareholders, given that they are the owners of the company, but there must be some special circumstance that's not mentioned in the article.

There are tricks. I've been through such an acquisition. The purchaser sets up a new "Philz Coffee Co LLC" then purchases assets and operations for the exact amount the preferred stock holders want. They then liquidate the old company. Because the old company was never legally "bought" the common stock holders are SOL because they now own stock in a fictional company. That's not to say they don't have options... but I am not a lawyer and that definitely involves lawyers.

Further reading:

https://en.wikipedia.org/wiki/Asset_stripping

Shocking that that's legal

If the purchase amount is less than the liquidation preference amount of preferred shares then there is nothing to pay common shareholders.

I agree with you and don't know enough to speak authoritatively. That being said, I did find this definition of liquidation (below). The article hints the business was in trouble, the way I'm reading it, if the sale doesn't cover all obligations, its would be a liquidation.

"Business liquidation involves selling off a company’s assets, such as equipment, inventory, and real estate, and using the proceeds to pay off debts and obligations. This process usually occurs when a business is no longer profitable, facing insurmountable financial challenges, or the owner decides to retire or pursue other opportunities."

This is precisely the reason for accredited investor requirements to invest in private companies, it’s extremely easy to be screwed over as a small-time shareholder in a private company.

The article flat out states that they ran out of money. That's the special circumstance. Basically this was a fire sale.

If there was no money (aka bankruptcy) then board, top management and other investors would also not get anything (divide remaining assets between all stock). But this is different, this is sale, not bankruptcy. Some people get money while common stock owners (aka company owners) don't get anything.

Right, that's what makes them common stock owners; their shares aren't preferred.

Investing in shares is, like most things in life, a task that requires some skill and understanding. Hence the concept of accredited investors. When you're swimming with the big boys, it pays to know the rules of the game.

Unfortunately employees getting or buying shares from their employer have little to no investment skills. Yes, it's possible for these shares to be worth something, but if the company fails, they're last in line.

It behooves tech staff, who think the road to glory is paved in stock options to get professional financial and legal (not to mention tax) advice.

Or just consider all stock offerings to be worthless. The times it isn't are a rounding error.

The concept of accredited investors is nothing of the sort. It's an arbitrary income / net worth threshold.

It’s a check for ‘can this person handle losing a large chunk of money when they get swindled by management after investing in a private company’, which will almost certainly be the case if you don’t have more money to kick in every round (dilution) or don’t own preferred shares, or any number of other tricks. Google or Meta recently ‘acquired’ a company by offering them salary packages that matched the equity they had in their company and then skipped buying the company so anyone with shares left got screwed over when the husk was sold for 1% of its prior value, since it was almost worthless once all the talent was acquihired.

Which company was that?

Not Abel.ai, so who?

https://news.ycombinator.com/item?id=44640343

Disagree. I exercised some small amount of options long time ago (like 10+ years). Never called, never cared, also thought it's long gone. But recently got a nice check from them out of the blue when they got sold to a larger company. Even though all the people I worked with long gone as well, including CEO. I checked the numbers, all seems correct.

I'm not saying there's never an outcome. I'm saying the percentage of positive outcomes is tiny compared to the number of players.

Congrats on the check. But I think you approached it in the right way. Assume they're worth nothing until proved wrong.

Common stock holders are last in line. Only if things go well do common stock holders have a chance. And even then they might still get worked.

A follow up question: how can I check that my own stock is not subject to the same terms? Can publicly traded companies do the same?

Of course. Common stock can always get wiped out by superior classes.

No, not always. Only under specific circumstances like preferences. There are pro rata terms and minority shareholder rights. Something smells fishy about the article, but I suspect it is the journalist’s ignorance.

I think if it’s publicly traded and they aren’t comitting fraud then this situation couldn’t happen. If the company is drowning in debt and unprofitable you would have already lost your money because the stock would have lost value.

Right? Can anyone answer this? The article doesn’t go into it.

The common stockholders have voting rights...

Probably also drag along terms which render said rights broadly ineffective