Last Call For Silly Conned Valley

Looks like the same game of musical chairs that dot.com era tech companies played fifteen years ago when I was a college puke haven't changed a bit in the age of the "sharing economy". Meet the suckers employees of Good Technology, a mobile security tech firm bought out by Blackberry. While the founders and investors made millions, the employees paid in common stock were destroyed, because after all, some games are just that old.

What Good’s employees experienced is an example of who loses out when a company backed by venture capital goes south. While plenty of people — including founders, top executives and investors — are involved in the rise of a start-up, those hit the hardest during a company’s fall are the rank-and-file employees. 

Investors and executives generally get protections in a start-up that employees do not. Many investors have preferred stock, a class of shares that can come with a guaranteed payout. Executives frequently get special bonuses so they will not leave during deal talks. 

In Good’s case, the six investors on the board had preferred shares worth a combined $125 million. After the sale to BlackBerry, Ms. Wyatt, who has since left the company, took home $4 million, as well as a $1.9 million severance payment, according to investor documents. 

In contrast, start-up employees generally own common stock, whose payout comes only after those who hold preferred shares get their money. In Good’s case, the board’s preferred stock was worth almost the same as all 227 million common shares outstanding. 

Missing out on the upside of the sale was bad enough, but that wasn’t the half of it. Some Good employees actually lost money when BlackBerry bought the company. Good was a “unicorn,” that is, a private company with a valuation of more than $1 billion. The high valuation increased the paper value of employee shares — and thus the income tax bills levied on their stock when they received the stock grants, or when they bought and sold shares. To pay those taxes, some employees emptied savings accounts and borrowed money. 

Some of Good’s common shareholders have sued most of the board for a breach of fiduciary duty, asserting that directors looked only after the interests of preferred shareholders. 

“It’s not unusual for employees to be wiped out while venture capitalists make money,” said Dennis J. White, a partner in Boston at the law firm Verrill Dana, who has studied deals like Good’s.

So yes, the rules were that they paid capital gains taxes for shares that were at the time valued at ten times what they ended up being worth when the company was bought out, and since these were the little peons, they didn't have the loopholes and tax shelters.

Imagine paying taxes on 100,000 common shares being valued at $4 a share. That's $400,000 in stock value, automatically putting you at the top 15% capital gains tax rate for a healthy chunk of it.  No big deal, so you pay $60,000 in taxes now on $400,000 worth of stock that will go up up up when the company goes public.  Even if the stock only goes from $4 to $5, you've more than made that money back and you're pretty well off.  Should the stock shoot up to $20, $40 or more, you're a tech multi-millionaire.

But the employees at Good paid 15% taxes on $4 a share and the company was sold out from under them for a tenth of that price, meaning basically everyone lost money.

And in some cases, they lost tens of thousands of bucks or more.  Imagine you actually owed 20 cents in taxes for every share you had.  Now imagine you had a million shares.  $200,000 in the hole, bam.

Saw a lot of that 15 years ago.  People didn't learn then.  They know even less now.

Merry Christmas, right?