When a Unicorn Start-Up Stumbles, Its Employees Get Hurt

Employees at Good Technology, once valued at $1.1 billion, ... Executives frequently get special bonuses so they will not leave during deal ... Technology|WhenaUnicornStart-UpStumbles,ItsEmployeesGetHurthttps://www.nytimes.com/2015/12/27/technology/when-a-unicorn-start-up-stumbles-its-employees-get-hurt.htmlGivethisarticleAdvertisementContinuereadingthemainstoryOnSept.4,employeesofGoodTechnology,amobilesecuritystart-upinSunnyvale,Calif.,awoketodiscoverthattheircompanywasbeingsoldtoBlackBerry,themobiledeviceandsoftwaremaker.SomeworkersimmediatelybegantryingtofigureoutwhatitmeantforGoodtoabandonitslong-anticipatedplantogopublic—amovethatwouldhavepotentiallyturnedtheirsharesinthestart-upintogold.Theydidn’tgetfirmanswersthatday,buttheprospectsdidnotlookgreat.Around9a.m.,hundredsofemployeesfiledintoaconferenceroomorstartedupvideoconferencesoftwaretowatchGood’schiefexecutive,ChristyWyatt,discussthesale.Ms.WyattintroducedBlackBerry’schief,JohnS.Chen,whowinkinglyapologizedforhowhisdealmakershaddrivenGood’sfinalsalepricedownto$425million,lessthanhalfofthecompany’s$1.1billionprivatevaluation.“They’reverypolitewhenthey’rebeatingyouoverthehead,”Ms.Wyattjokedinresponse.JusthowpunishingthatpricewasbecameclearinlateSeptember.Inaninvestordocumentaboutthesalethatwasdistributedtoshareholders,employeesdiscoveredtheirGoodstockwasvaluedat44centsashare,downfrom$4.32ayearearlier.Incontrast,preferredstockownedbyGood’sventurecapitalistswasworthalmostseventimesasmuch,morethan$3ashare.ThepaperworkalsoshowedthatGood’sboardhadturneddownan$825millioncashofferjustsixmonthsearlier,inMarch.Forsomeemployees,itmeantthattheirshareswerepracticallyworthless.Evenworse,theyhadpaidtaxesonthestockbasedonthehighervalue.Afewnightsaftertheinvestordocumentwentaround,aglassconferenceroomwallatGood’sheadquarterswasbroken,accordingtoanincidentreport.Atasubsequentcompanymeeting,Ms.Wyatttoldemployeesthatcounselorswereavailabletotalktopeoplewhoneededtovent.“Manyemployeesmaynotrecoverwhatthey’velost,”saidMatthewParks,Good’sdirectorofcloudproducts,whohasworkedatthecompanysince2006.HisGoodsharesarenowworthafractionofthesix-figuretaxbillthathepaidforthestockallottedtohimbeforethecompanywassold.WhatGood’semployeesexperiencedisanexampleofwholosesoutwhenacompanybackedbyventurecapitalgoessouth.Whileplentyofpeople—includingfounders,topexecutivesandinvestors—areinvolvedintheriseofastart-up,thosehitthehardestduringacompany’sfallaretherank-and-fileemployees.Investorsandexecutivesgenerallygetprotectionsinastart-upthatemployeesdonot.Manyinvestorshavepreferredstock,aclassofsharesthatcancomewithaguaranteedpayout.Executivesfrequentlygetspecialbonusessotheywillnotleaveduringdealtalks.InGood’scase,thesixinvestorsontheboardhadpreferredsharesworthacombined$125million.AfterthesaletoBlackBerry,Ms.Wyatt,whohassinceleftthecompany,tookhome$4million,aswellasa$1.9millionseverancepayment,accordingtoinvestordocuments.Incontrast,start-upemployeesgenerallyowncommonstock,whosepayoutcomesonlyafterthosewhoholdpreferredsharesgettheirmoney.InGood’scase,theboard’spreferredstockwasworthalmostthesameasall227millioncommonsharesoutstanding.Missingoutontheupsideofthesalewasbadenough,butthatwasn’tthehalfofit.SomeGoodemployeesactuallylostmoneywhenBlackBerryboughtthecompany.Goodwasaunicorn,thatis,aprivatecompanywithavaluationofmorethan$1billion.Thehighvaluationincreasedthepapervalueofemployeeshares—andthustheincometaxbillsleviedontheirstockwhentheyreceivedthestockgrants,orwhentheyboughtandsoldshares.Topaythosetaxes,someemployeesemptiedsavingsaccountsandborrowedmoney.SomeofGood’scommonshareholdershavesuedmostoftheboardforabreachoffiduciaryduty,assertingthatdirectorslookedaftertheinterestsofonlypreferredshareholders.“It’snotunusualforemployeestobewipedoutwhileventurecapitalistsmakemoney,”saidDennisJ.White,apartnerinBostonatthelawfirmVerrillDana,whohasstudieddealslikeGood’s.Throughtheirlawyers,Ms.WyattandGood’sboarddeclinedtocomment.BlackBerryalsodeclinedtocomment.Withthenumberofunicorncompaniesestimatedatmorethan140today,thesituationofGood’semployeesmaybefallotherSiliconValleyworkersasmorestart-upsbegintoshowsignsofwobbling.Manyunicornshaveraisedhundredsofmillions—ifnotbillions—ofdollars.Mostofthosedollarsmustfirstberepaidtoinvestorsandotherpreferredshareholdersbeforeemployeesseeadime.Theoddsthattheunicornswillallreaprichesiftheyaresoldorgopublicareslim.Overthelastfiveyears,atleast22companiesbackedbyventurecapitalsoldforthesameamountasorlessthanwhattheyhadraisedfrominvestors,accordingtoadatacompany,Mattermark.Thismeansinvestorsdidnotreapmanyreturns—buttherewasevenlessleftoverforemployees.Lastyear,theflashsalecompanyIdeeliwassoldtoGrouponfor$43millionafterraising$107millionfrominvestors.FiskerAutomotive,themakerofhybridelectricvehicles,soldfor$149millionafterraisingmorethan$1billion.GoodTechnologyinitscurrentformcameintobeingin2009.Thatwaswhenthemobilesoftwarestart-upVistoboughtMotorola’smobilemessagingandsecuritybusiness,calledGoodTechnology.ThemergedcompanywasrebrandedGoodandeventuallyshifteditsfocustosellingmobile-securitysoftwaretobigcompaniesandgovernments.Ms.Wyatt,aformerMotorolaexecutivewhojoinedGoodin2013,plannedtoexpandbysellingmoresoftwaretoexistingcustomersandtomidsizecompanies.Shehiredmoresalesemployeesandacquiredthreecompanies.Inearly2014,Goodwasvaluedatmorethan$1billionbyinvestorsincludingDraperFisherJurvetsonandOakInvestmentPartners,accordingtotheresearchfirmVCExperts.Intotal,thecompanyraisedabout$300millioninequityanddebtafterVistoboughtGood,accordingtoVCExperts.Good,likemoststart-ups,usedstockoptionsandequitygrantstowooemployees.Theoptionsallowedemployeestopurchasestockatlowprices,evenifthestockhadamuchhighervalue.Topsalesemployeeswereawardedannualbonusesof20,000sharesofcommonstock.WhenGoodpurchasedstart-ups,thoseemployeesgotstockaswell.Thecompany,whichhadabout800employees,beganworkingonaninitialpublicofferingin2013.ItfiledtogopublicinMay2014.Forawhile,thedreamofemployeerichesappearedintact.InMarch,GoodexecutivesfilmedavideopresentationforaninvestorroadshowforanI.P.O.Thecompany,whoserevenuegrew32percentto$212millionin2014,projected17percentrevenuegrowthin2015.ExecutivesexpectedGood’scashtolastthroughtheyear,accordingtothecompany’sprospectus.TheboardandMs.WyattappearedsoconfidentthatGoodwouldbevaluedataround$1billionwhenitwentpublicthattheyrejectedan$825millionacquisitionofferfromCATechnologiesinMarch.CAdeclinedtocomment.YetthreedaysafterGoodrebuffedCA’sbid,bankersrecommendedthatGooddelaytheI.P.O.foramonth.Severaltechcompanieshadgonepublicforlessthantheirprivatevaluations.WhenthestockofMobileIron,apubliclytradedrival,sankinApril,bankersrecommendedthatGoodfurtherpostponetheoffering.Atthesametime,Ms.Wyatt’sgrowthplanwasn’tworking.Goodmisseditsquarterlyforecastforbillings,aproxyfornewbusiness.StartinginApril,theboarddiscussedthe“continuedstrongpressures”onthebalancesheet,andmanagementcontinuallyloweredfinancialforecasts,accordingtoinvestordocuments.ImageChristyWyatt,thechiefofGoodTechnology.ThecompanywassoldtoBlackBerrythisyearfor$425million,lessthanhalfofthecompany’s$1.1billionprivatevaluation.Credit...EarlWilson/TheNewYorkTimesGoodbegandiscussingoptionswithpotentialbuyersandinvestors.Itgota$650millionwrittenofferfromThomaBravo,aprivateequityfirm,butdidnotproceed.ThomaBravodeclinedtocomment.GoodalsoelicitedinterestfromBlackBerryatanunspecifiedprice,accordingtoinvestordocuments.Employeesweretoldlittleaboutthestruggles.AtaMaycompanymeeting,Ms.WyattsaidthecompanymissedfinancialprojectionsandaddressedanemailfromacompetitorthatsaidGoodwouldsoonrunoutofcash,usingtheriskdisclosuresinI.P.O.registrationdocumentsthataddressedGood’sspendingasproof.Inavideoofthemeeting,sheisseentellingemployeesnottoworry.Shecomparedtherisksectionto“commercialsforsomenewpharmaceuticalproductandit’slike15secondsabouttheproductandthenthere’slike45secondsofthe15differentwaysitcankillyou.”Atanall-handscompanymeetinginJune,Ms.WyattagainsaidGoodwasspendingresponsibly.Thankstothecashfromarecent$26millionlegalsettlement,sheadded,thecompanyhad“atonofoptions,”includinganI.P.O.,accordingtoavideoofthegathering.“WewereundertheimpressionthatGoodwasdoingwell,thattherewasnothingwrongwithcashflowandthatwehadalotofoptions,”saidIgorMakarenko,Good’schiefinformationsecurityofficer,whohasbeenanemployeesince1997.CompaniesthatbuyemployeesharesofferedsomeGoodworkersabout$3asharefortheirstockinthefirsthalfoftheyear.Butbasedontheirbeliefinthecompany’srobusthealth,theemployeesrefused.OthersboughtGoodcommonstockinAugust,whenitwasvaluedat$3.34ashare,accordingtoindividualemployeetaxdocumentsreviewedbyTheNewYorkTimes.EmployeeshadlittleideathatanoutsideappraisalfirmhadvaluedGoodat$434millionandthecommonstockatabout88centsashareasofJune30,accordingtoinvestordocumentsandlegalfilings.TheInternalRevenueServiceleviedtaxesonsomeemployeeswhentheirGoodstockwasstillconsideredavaluableassetandworthmultiplesofwhattheyactuallyreceived.Oneperson’staxbillcametomorethan$80,000,whileanotherpaidmorethan$150,000,accordingtointerviewswithcurrentandformeremployees,whoaskednottobenamedtoprotecttheprivacyoftheirfinancialinformation.BylateJuly,theboardknewthatGoodwouldrunoutofcashin30to60days,accordingtoinvestordocuments.GoodracedtocloseadealwithBlackBerry,fromwhichitwasforcedtoborrow$40millionduringthenegotiations.AfterthedealwithBlackBerrywasannouncedinSeptember,someemployeessaidtheywereangrythatMs.Wyattdidnotstayaround.ShewentonapreplannedtriptoChina,whereshegaveadviceonstayinginnovativeataWorldEconomicForumgathering,andtoLondonforbusiness.ShesubsequentlyleftGood.BackintheUnitedStates,Good’scommonshareholderswerepushingback.InOctober,BrianBogosian,aformerGoodC.E.O.andasignificantshareholder,alongwithtwoinstitutionsthatowncommonshares,saidtheboardwasnotlookingaftertheinterestsofcommonstockholdersandsuedinDelawareChanceryCourt.Theyareseekingunspecifieddamagesandfees.RandallJ.Baron,thelawyerrepresentingMr.Bogosianandtheinstitutions,saidthat“managersandcontrollingshareholdersmaynotputtheirinterestsaheadoftheminorityownersofthecompany.”Inalegalresponse,Good’sboardwrotethatthelawsuitwas“acaseofMonday-morningquarterbackingbyformerGoodinsiderswithaxestogrindandnothingtolose.”Lastmonth,110separatecommonstockholdersexercisedtheirshareholderrighttocontestthepayoutamount,accordingtoMr.Baron.Together,thestockholdersownabout32millionofthe75millioncommonsharesthatareeligibleforthataction.Mr.MakarenkoandMr.Parks,whoremainGoodemployees,saidtheystillbelievedinthecompany,buttheirviewsonmanagementandventureinvestorshavechanged.Theyareamongthosecontestingthepayout.“Welistenedtotheseexecutivesand,intheend,incurredhugetaxbillsbecausewetrustedthem,”Mr.Parkssaid.“Employeesessentiallyendeduppayingtoworkforthecompany.”AdvertisementContinuereadingthemainstory