On September 4, employees of Good Technology, a mobile security start-up in Sunnyvale, California, awoke to discover that their company was being sold to BlackBerry, the mobile device and software maker.
Some workers immediately began trying to figure out what it meant for Good to abandon its long-anticipated plan to go public - a move that would have potentially turned their shares in the start-up into gold. They didn't get firm answers that day, but the prospects did not look great.
Around 9 am, hundreds of employees filed into a conference room or started up video-conference software to watch Good's chief executive, Christy Wyatt, discuss the sale. Wyatt introduced BlackBerry's chief, John S Chen, who winkingly apologised for how his deal makers had driven Good's final sale price down to $425 million, less than half of the company's $1.1-billion private valuation.
"They're very polite when they're beating you over the head," Wyatt joked in response.
Just how punishing that price was became clear in late September. In an investor document about the sale that was distributed to shareholders, employees discovered their Good stock was valued at 44 cents a share, down from $4.32 a year earlier. In contrast, preferred stock owned by Good's venture capitalists was worth almost seven times as much, more than $3 a share. The paperwork also showed that Good's board had turned down an $825-million cash offer just six months earlier, in March.
For some employees, it meant that their shares were practically worthless. Even worse, they had paid taxes on the stock based on the higher value.
A few nights after the investor document went around, a glass conference room wall at Good's headquarters was broken, according to an incident report. At a subsequent company meeting, Wyatt told employees that counsellors were available to talk to people who needed to vent.
"Many employees may not recover what they've lost," said Matthew Parks, Good's director of cloud products, who has worked at the company since 2006. His Good shares are now worth a fraction of the six-figure tax bill that he paid for the stock allotted to him before the company was sold.
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 that they don't 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, 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 after the interests of only 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.
Through their lawyers, Wyatt and Good's board declined to comment. BlackBerry also declined to comment.
With the number of Unicorn companies estimated at more than 140 today, the situation of Good's employees may befall other Silicon Valley workers as more start-ups begin to show signs of wobbling. Many Unicorns have raised hundreds of millions - if not billions - of dollars. Most of those dollars must first be repaid to investors and other preferred shareholders before employees see a dime.
The odds that the Unicorns will all reap riches if they are sold or go public are slim. Over the last five years, at least 22 companies backed by venture capital sold for the same amount as or less than what they had raised from investors, according to a data company, Mattermark. This means investors did not reap many returns - but there was even less left over for employees. Last year, the flash sale company Ideeli was sold to Groupon for $43 million after raising $107 million from investors. Fisker Automotive, the maker of hybrid electric vehicles, sold for $149 million after raising more than $1 billion.
At an all-hands company meeting in June, Wyatt again said Good was spending responsibly. Thanks to the cash from a recent $26-million legal settlement, she added, the company had "a ton of options," including an initial public offering, according to a video of the gathering.
"We were under the impression that Good was doing well, that there was nothing wrong with cash flow and that we had a lot of options," said Igor Makarenko, Good's chief information security officer, who has been an employee since 1997.
After the deal with BlackBerry was announced in September, some employees said they were angry that Wyatt did not stay around. She went on a planned trip to China, where she gave advice on staying innovative at a World Economic Forum gathering, and to London for business. She subsequently left Good.
Back in the United States, Good's common shareholders were pushing back. In October, Brian Bogosian, a former Good CEO and a significant shareholder, along with two institutions that own common shares, said the board was not looking after the interests of common stockholders and sued in Delaware Chancery Court. They are seeking unspecified damages and fees.
"We listened to these executives and, in the end, incurred huge tax bills because we trusted them," Parks said. "Employees essentially ended up paying to work for the company."
© 2015 The New York Times News Service
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