What Happens to Staff When a Unicorn Startup Goes South

February 5, 2016

In Silicon Valley’s immensely competitive entrepreneurial environment, many startups end up failing shortly after they launch. But among these many fallen firms stand a few “unicorns,” or private tech companies with valuations worth more than $1 billion. At these lucky startups, the strategy is to increase the firm’s value as much as possible until it can be sold to the highest bidder. Not only does such a sale grant enormous payouts for founders and investors, it can also enrich regular employees who bought company shares or received stock grants for their work.

At least that’s what happens when a deal goes smoothly. If a unicorn’s value collapses, however, employees can end up losing big while their bosses walk away relatively unscathed. That certainly seems to be the case at Good Technology, a startup once valued at $1.1 billion that ultimately sold to BlackBerry for just $425 million. Employees with a stake in the company watched their stock price drop from a projected $4.32 to a mere 42 cents per share. Meanwhile, the preferred stock owned by Good’s venture capitalist backers held at $3 per share, nearly seven times as much as employees’ stock value.

While the sale saddled most employees with worthless stock, others ended up losing a lot more on the deal. Good Technology’s high valuation required staffers to pay a hefty income tax on their shares, leading some to withdraw from their retirement and savings accounts. So when the deal with BlackBerry bottomed out, those employees were left with shares worth a fraction of the tax that they had already paid, effectively wiping out their savings.

At the same time, Good’s CEO Christy Wyatt made $4 million off the deal, along with a $2 million severance payout when she left the company shortly after. Like the company’s major investors, Wyatt received preferred stock that was guaranteed to stay at a certain value. This is meant to protect the immense investments of venture capitalists that pour hundreds of millions of dollars into startups. As Good’s situation shows, though, the system operates at the expense of regular employees if a company’s value suddenly drops. For staffers at Silicon Valley’s approximately 140 unicorn startups, this potentially spells bad news for the future.

 

Questions:

  1. Did Good Technology’s CEO and venture capital investors behave in an ethical manner?
  1. Do Silicon Valley startups run the risk of upsetting investors if they change their stock policies to better protect employees?

 

Source: Katie Benner, “When a Unicorn Startup Crumbles, Its Employees Get Hurt,” The New York Times, December 23, 2015. Photo courtesy of: rumpleteaser.

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