On Sept. 4, 2015 BlackBerry acquired Good Technology a mobile security start-up for $425 million, less than half of its $1.1 billion private valuation. What’s worse, the company turned down a $825 million cash offer six months earlier.
Selling for this low valuation was not ideal for any shareholders but the deal was especially difficult for common shareholders (the majority of whom, for unicorns, tend to be employees). The venture capital firms that financed Good Technologies growth, and controlled its board of directors (the same BOD that approved the acquisition), held the majority of their ownership through preferred shares while employees held mostly common stock. The preferred stock, owned by the VCs, fetched $3/share in the sale, down from a high private valuation of about $6.50/share in early 2014. The common stock, which the majority of employees owned, sold for $0.44/share, down from a private valuation of $5/share in early 2014!
Not only did common shareholders’ get much less for their stock than they anticipated but many had paid taxes on the high valued stock in previous years. Some employees even took out loans to cover their tax bills believing their stock was worth six or seven digits. In a matter of months, employees’ stock was worth a fraction of what they thought and they were out cash or in debt from paying Uncle Sam.
Unfortunately this is not an uncommon scenario. According to Mattermark, in the last 5 years at least 22 vc-backed companies have sold for less than or equal to the amount of capital they raised (I have a feeling the number is much higher). That number is destined to rise with the explosion of valuations in Silicon Valley. Selling for less than what was raised is tough on everyone but for professional investors (VCs) it’s their worst nightmare and they do everything in their power to protect themselves from losing money in those situations.
When unicorns fail (or regress) they are no different than most businesses. Those who invested get paid back first and common shareholders get whatever is left. It’s unfortunate that unicorns use their aggressively valued common stock to pay employees who may not understand the complexity (or absurdity) of unicorn valuations. While employees seem to understand the upside of owning stock they tend to underestimate the downside so, when things go wrong, they end up “holding the bag”.
Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisition funding. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.