Postmates investors changed their preferred stock to common stock so employees wouldn’t flee


One downside to the new fundraise.

Postmates’ difficult but successful investment raise of $141 million has given the delivery startup new life. But its investors felt they needed to forfeit some perks in the progress to make sure early employees were motivated to stay with the company.

The fix that investors came up with was to convert the shares they previously bought from preferred shares to common shares — the type of stock or stock option that employees typically hold. Such a move isn’t extremely common, but there is some precedent for it. Gilt Groupe investors, for example, did the same when the company raised its last round of funding. But its $250 million sale was still bad for most employees.

To understand why such a decision is still noteworthy, you need to understand preferred stock. Venture capital investors often receive preferred stock when investing in startups. One advantage of preferred stock is what’s called a liquidation preference, which gives these preferred stock holders the right to recoup all of the money they invested before common shareholders make a dime in the event of a sale of the company.

In the case of Postmates, the company had raised around $140 million previously and then another $141 million in this round led by existing backer Founders Fund for a total of around $280 million.

For argument’s sake, let’s imagine that Postmates doesn’t create as much value as it hopes it will and ends up selling for $300 million — or half of its approximate $600 million valuation.

In this instance, investors would recoup the $280 million they had invested before employees see a nickel. Then, the measly $20 million remaining would get divvied up among all common shareholders. Pretty crummy.

Postmates is in dozens of cities and has delivery partnerships with big-name chains like Starbucks and Chipotle. But it is still unprofitable and far from a sure thing, so outcome like the one outlined above is plausible. And that potential result might make it harder to retain talented employees looking for upside from the Postmates stock or stock options they hold.

Now, with investors converting their past preferred shares to common shares, a $300 million sale would just result in them getting their $141 million back from this latest funding round. The remaining $160 million or so from the sale would then be split among common shareholders. Such a scenario still wouldn’t be a dream outcome for employees, but it’d be a hell of a lot better than the alternative.

And if Postmates, on the other hand, has a great outcome — let’s say a $1 billion sale — the conversion from preferred shares to common shares won’t really hurt the investors because there should be enough proceeds to go around for everyone.

My sense is many Postmates investors believe the company is going to either have a fantastic outcome or some version of a disappointing one. In the latter case, the earnings from a sale of preferred shares really wouldn’t move the needle for VC firms anyway.

So what were the intentions of the investors who made this move? No one wants to talk about it on the record. And Postmates CEO Bastian Lehmann declined to provide context when asked.

So we’ll take a stab at it. It’s certainly possible that part of this action may be based in wanting to look out for employees. But it’s also just smart business. A startup that can’t retain good people is basically worthless to an investor.

The one open question I’m still chasing is what, if anything, the investors in this round got in exchange for giving up their preferences from previous investments. Quartz reported that Postmates was offering deal “sweeteners” to attract investors.

But one investor told Recode that there was nothing “of consequence” added to this deal. Postmates needed money. Postmates investors still saw potential in the company so agreed to hand over more money. Postmates investors also didn’t want a talent exodus, so they gave up their preferred shares.

If you do have more information on this story, you can email me at jason@recode.net or message me on just about any encrypted messaging app at 917 655-4267.

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