The story surrounding Airbnb’s latest funding round in late 2011 was a great example of how sometimes the interest of the common shareholders can be overlooked by private companies and their preferred controlled board.
In this case, it was rather a case of the interest of prospective common shareholders, options owning employees, that was overlooked. Essentially it seems like as part of its $100m+ funding round, the common shareholders were going to get a $22.5m dividend. Sounds like a great deal for common shareholders such as early investors and employees. Unfortunately for most of the employees, it turned out they where not holding the actual shares but rather options to purchase the shares. The founding management however did hold the actual shares. As only actual shareholders would be entitled to the dividend, this meant that founders were going to get a $21m out of the total $22.5m dividend payment, the remainder $1.5m would presumably go to early investors or the few employees who already exercised their stock options.
Read the AllthingsD article here.
It is normal for late stage funding rounds to include a secondary component, whereby shares are purchased from management and or employees, creating a form of interim liquidity for the common shares. However, in this case, the dividend structure that was chosen instead was going to only benefit the founders.
This led early investor Chamath Palihapitiya to write a letter to CEO Brian Chesky and complain about the perceived unfairness towards employees. This letter was leaked to the public, which resulted in a form of liquidity being implemented for employees that did not share in the dividend.
This is a good example of how the common shareholder (or holders of options to become common shareholders) can be overlooked by a board controlled by preferred shareholders and also shows how a more active investor relations campaign can result in mutually attractive solutions. The leaked email can be said to have been a form of ad hoc shareholder activism normally unheard of in private companies.
As successful private companies choose to stay private while at the same time seeing their shareholder or option holder base grow to close to the 2.000 ceiling, an appropriate IR program will become increasingly important.
In the case of Airbnb, it is unclear what the employee liquidity program has or will look like, however once again a liquidity program really is a form of IR for private companies. It provides information to common and prospective common shareholders on an equal basis, and forms the basis for long term relationships between the company, its shareholders and prospective shareholder. This then paves the way for controlled liquidity where shareholders deal directly with potential buyer with whom they and the company have a pre-existing relationships. Such transactions between parties with pre-existing relationships are in fact encouraged by the current financial regulations and also have the additional benefit of lower transaction costs than a broker-led liquidity program.
Happy 4th of July!