Ed is feeling rather chipper having run into an executive from a much larger company who tells him they could be interested in buying the company.
'The purchase price being offered is on the low side - about two thirds of what we're hoping to get if the IPO is successful,' writes Ed in his diary, 'but the deal involves some excellent remunerative provisions for senior management and directors.'
Ed calls a board meeting. After explaining the proposed deal to the board, this is what he tells them:
'"All of us here in this room will come out of it with about the same amount as if we IPO'd, because the VCs can probably be persuaded to agree to all our stock, whether restricted our not, vesting at the moment of sale, and, in addition we will all get large new options from the acquiring company as retention incentives."'
"'And what will happen to the value of the stock options held by those employees who are not in this room?" asked the vp in charge of manufacturing operations.
"Those shares will be valued proportionately to the purchase price", I tell him.'
'"So they'll be worth two thirds of what they would be if we IPO'd," he retorted.'
'"Yes," I replied.'
'Scowling, looking like a boiler about to blow, the manufacturing guy waded in:
"So it goes like this Ed. We accept a low price for the company which means all the employees' share options are worth less than they would get if we went to an IPO, but all of us here get full vesting of our stock immediately on the sale and we also get large additional options from the acquiring company. Is that it?"'
'"That's about it'," I said.
'"And all the employees, some of whom have been here since the company was founded, who are the people who have built the value of this company, get shafted. Is that right?"'
'"Well you could put it that way," I say "but . . . "'
'"But nothing,"' retorted the manufacturing guy, "I always thought you were a shit, Ed, now I know you a copper-bottomed, downright immoral shit. I am 100% against this acquisition."'
'There's a murmur of approval around the board-room - even the VCs' representatives don't look very supportive', writes Ed, 'still - mustn't get depressed - only 214 days to the IPO and Yours Truly will be exceedingly well-stitched whichever way things turn out.'
"A bird in the hand is worth two in the bush"
A sure thing today. Or a paper gain that might be more but might not happen or might be worth less than you hope for. And at best isn't going to happen till next year...
Might not be such a bad deal for employees.
Not to mention the sheer emotional payoff of getting rid of Ed as your CEO. That's worth a lot!
I think I'd take the offer if I worked there.
Ah Yes, El Rupester, but I assume that if you worked there you would be on of the elite who are going to get a full price for your shares. If you were one of the engine room guys whose shareholding value was going to be severely diluted, would you still be agreeable to the buy-out?
If it got rid of Ed?
I'd say two-thirds of IPO hypothetical was a very fair price for that!!
Now I see it, Yes El Rupester, it's probably worth it