Everyone knows the stories. A kid joined a startup, worked her butt off for two to three years, startup goes big-time, has a spectacular exit, and now she no longer needs to work for a living.
That dream is shared by millions in the Bay Area and other places, but for most it remains just that, a dream. I worked in five startups during my tenure in Silicon Valley and learned quickly not to place any financial hopes on options. Negotiate for cash and disregard the options was my strategy. This strategy worked every time, until now.
My last startup, Cellfire, was acquired Friday by Catalina Marketing. Terms were not disclosed, and I have no insider information because I followed my strategy when I left in 2012. I did not purchase my options and so relinquished any hope that Cellfire would gain enough traction to be valued more than the money already invested. All I get is the ability to put “Acquired by Catalina Marketing, 2014” on my resume.
Since I don’t know the terms of the deal, I don’t know how much money I left on the table. I can, however, give you the math that was part of the non-purchase decision when I left.
For those unfamiliar with employee options, these are options to buy shares in the company at a determined price. This price is a factor of the valuation of the company and the shares outstanding when the shares are granted. When you leave the company, you have to make a decision – buy the options at the given price or leave them behind. You typically have 30 days to make this decision and you’re betting that, eventually, the company will be valued higher at acquisition than when your options where granted. If not, you receive nothing. Zilch.
Cellfire’s situation at that time was tenuous. It had somewhere around $40M invested, was still not profitable, and trying to raise more money would either be debt or a “down round,” where the valuation of the company is lower than the previous round of investment. This is where many startups become the living dead. A good enough business to stay afloat, but not enough resources to invest in anything that would make the company grow significantly. That is why I left. As VP of Product and Marketing, there was little money to invest in the product or marketing, leaving me as an expensive babysitter. The usual exits for a company at this point include an asset sale (usually a combo of physical and IP) and acqui-hire, neither of which result in any financial return for departed employees.
One more detail for those unfamiliar with startups. Employee options are almost always common shares. The designation of common separates them from preferred shares, which is what most investors get when they put money into a company. Preferred means that when there is a liquidation or exit of the company, the preferred shareholders get paid first. In simpler terms, the employees only get something out of their shares if the company sells for more than what the investors put in. For Cellfire at that time, that meant a purchaser would have to pay over $40M for the company before the employees saw a dime.
There is another detail that is important here, and that is the liquidation preference. What this means is that investors can put even more preference into their share of the spoils by wanting more of the sale price before common shares get rewarded. Again, for the sake of lawsuits and sanity, I’m guessing that for Cellfire it was a 1.5x liquidation preference, meaning that now the sales price has to be over $60M before common shareholders had a share of the spoils.
In 2012, that was a long, long bet. My decision was between using around $50K of my cash to buy my options and convert them to shares, and more likely than not lose it all, or keep the $50K in cash, invest it in other financial instruments and make 5-10% per year on it. For someone that decided to sell his house and move his family to a new city (Nashville) where it would be harder for him to find a job in a startup ecosystem, the decision was an easy one. Keep the cash.
So in the end, I don’t know (and really don’t want to know) how much money I left on the table. I will say that it feels good to finally be part of a Silicon Valley success. And that is enough for me. If it wasn’t enough for me, I could do nothing about it other than dive into a deep pool of regret.
Another twist to this story is that my forgoing of ownership (not buying the shares) made me a unique resource for the firms performing due diligence for the purchase. In the weeks before this purchase was done, I was contacted by multiple research companies for insight into the digital grocery coupon industry and the strengths/weaknesses of the existing players. I participated in a few calls and was handsomely rewarded for my time, so in some strange, cruel way, I still made money with the Cellfire sale.
Thanks go out to the leadership that made it happen, to the investors including Menlo and Storm who had the patience to make through nine years, to the mentors that allowed me to grow from a director to a VP, and to all the employees of Cellfire, past and present, that made it a pleasant and rewarding six-year journey for my last Silicon Valley startup. Now how about Nashville? Stay tuned….