Qatar- Good technology was not so good for employees

(MENAFN- The Peninsula) By Matt Levine

Here is a fascinating story by Katie Benner about a fallen unicorn with the puzzlingly generic name “Good Technology.” Good was formed in 2009 by the combination of a startup and a division of Motorola. It “raised about $300m in equity and debt” hitting a peak valuation of more than $1bn in early 2014. It filed for an initial public offering in May 2014 but then it delayed and ultimately cancelled the IPO. Its board turned down an $825m acquisition offer in March 2015 “confident that Good would be valued at around $1bn when it went public.” But then it ran into financial trouble and was ultimately sold for $425m in September.

That $425m was more or less enough to make whole Good’s venture capital investors who owned preferred stock but was a shock to employees who had received common stock and stock options as part of their compensation and who “discovered their Good stock was valued at 44 cents a share down from $4.32 a year earlier.” Some of these employees had bought stock in the open market in addition to the shares they’d received in compensation; others had paid cash taxes to exercise their options in amounts that exceeded what the shares ended up being worth. As a further indignity the buyer was BlackBerry.

Still it feels like there is some difference between Good and Blackberry some reason we should feel worse for Good’s employee-shareholders than for the average public-company employee-shareholder whose stock goes down. If you get stock from your employer and there’s no market where you can sell it then you are stuck with it and if it loses value you are hosed. The other bad effect is that without a public market for the stock there is no way to know how much it is worth or rather how much the market thinks it’s worth.

Companies that buy employee shares offered some Good workers about $3 a share for their stock in the first half of the year. But based on their belief in the company’s robust health the employees refused. You know what I think: Private markets are the new public markets and private companies now have many of the amenities that used to be limited to public markets. Good’s stock wasn’t listed on Nasdaq or anything but employees could sell if they wanted to and could get a sense of the arms-length third-party market-ish price of their stock.

Another possibility is that unlike public companies Good wasn’t subject to Securities and Exchange Commission rules about disclosure and so perhaps Good’s investor-employees were deceived by bad or insufficient financial disclosure. This does seem to be part of the story: Benner notes that when employees were buying in August they “had little idea that an outside appraisal firm had valued Good at $434m and the common stock at about 88 cents a share as of June 30” or for that matter that “by late July the board knew that Good would run out of cash in 30 to 60 days” and was frantically negotiating a deal with BlackBerry.

Good didn’t disclose its conversations with BlackBerry but then most public companies try not to disclose merger negotiations until there’s a deal. And it didn’t disclose that lowball outside appraisal but then most public companies don’t get outside appraisals.

Since Good’s venture-capital investors were first in line to be paid back turning down the deal in March was less risky for them than it was for common-shareholder employees. Both the preferred shareholders and the common shareholders would do much better at $1.5bn than at $825m but the preferred shareholders wouldn’t (and didn’t) do too much worse at $425m than at $825m. The common shareholders did much much worse. As Felix Salmon says “the huge problem is divergent incentives between common and preferred” and the board of directors was aligned with the preferred.

That is true but it still isn’t the whole story at least not for Good. After all Good’s employee-shareholders faced more or less the same choice as the board: Cash out at a mediocre price ($825m for the board $3 per share for the employees) early in 2015 or gamble on a higher price in the IPO. And they both made the same choice: to gamble. The board and the employees had on paper different incentives but they came to the same decision about how much risk they wanted to take.

Private markets are the new public markets and companies with nine- and ten-digit valuations hundreds of employees and years of operating history aren’t dorm-room startups. Private companies that are giant one day can end up smaller the next just like public companies can; private companies that are giant one day are unlikely to go public the next day at ten times their previous valuation. The risk-reward proposition of working at a lot of unicorns looks more like that of working at Facebook in 2015 than working at Facebook in 2004. Private-company trading is catching up with public-company trading; private-company valuations are catching up with public-company valuations.

Of that $80m was in the form of debt with warrants the rest in (preferred) equity. Benner’s article includes a chart of preferred-stock prices that peaked above $6 per share in early 2014 before cashing out at a bit above $3 in the September 2015 deal. I don’t quite know the mechanics of that; the preferred shares had liquidation preferences ranging as high as $4.92 per share but Benner tweeted that “even the pref got renegotiated in the end” so rather than fully making the preferred shareholders whole Good left some value for the common shareholders. Wyatt downplayed those concerns in an employee meeting. On the other hand Good did disclose a series of fair value estimates for its common stock in connection with stock-based compensation grants and stock-based acquisitions. The disclosed fair value starts at $4.61 in September 2012 gets up to a high of $4.92 for in March 2014 falls to $3.88 in May of 2014 and then recovers a bit ending up at $4.26 in February 2015 the last valuation Good did. Obviously public companies don’t normally do that but that’s because they can just use their stock’s trading price as the fair market value. Again when I talk about employees here I mean the ones Benner discusses. Maybe a lot of others cashed out I don’t know. Or whatever Good was; “startup” feels like a bit of the wrong word for a company started in 2009 by buying a business out of Motorola.

Bloomberg