> Dalla worked at Philz for nine years until last year, when he was laid off. He said that many longtime employees left around the same time as the company’s culture shifted to a more profit-driven, corporate culture.
> On his way out, he said that CEO Sadarangani urged him against exercising his stock options — options that will now, barring changes to the current deal, be worth nothing. “I always assumed they would do the right thing,” Dalla said.
Wouldn't the options also be worth nothing now? So by not exercising them at least the exercise money was spared?
There is a bunch of shady and unfair behavior by the acquirers here, but yeah, that line doesn’t make sense. If the options are worthless, then exercising them would have been a waste of money - the CEO was helping this person out!
I think this article was written by someone with lots of outrage and little actual understanding.
Yes. Preferred shares give investors their investment back first if things go wrong.
If an investor gives you a million dollars for a piece of your company, and you turn around and sell the company for a million dollars, then the investor gets their million dollars back and you get nothing. Obviously. Any other outcome would be shenanigans.
Under standard deal terms investors get 1x, i.e. their money back. That's all.
Because someone who might invest some money, maybe wouldn't invest that money if they didn't get the preferred class protections?
This is similar to how different credit risks get assigned different interest rates.
Companies failing (or close enough to failing that they restructure and wipe out common) is not uncommon in start-ups. If you want a more or less sure thing, you'll have to work at a more or less sure employer, and the risk/reward will be different.
Now, whether those who exercised their Philz options and paid for the shares, were really aware in what they were doing -- I don't know! But there doesn't seem to be anything explicitly sinister about the way this was set up, or went down -- simply, the business didn't do well enough. Which is too bad, because I think their coffee is actually good.
If you raise money, sometimes you just want the money. Other times, you are happy to cede some ownership and/or control. If things go pear shaped, investors want some protection. If things go really well, sometimes they band together and kick you out of your own company. At some point rules have to be codified: the systems for doing this are share classes, voting rights, information rights, articles of association, board resolutions, etc. While you can start a totally new system and run your company using a magical talking stick and rubber duckies on the blockchain, the reality is that just makes it unfamiliar and hard for conventional institutional capital to invest in, it also makes it hard for slow-moving conventional institutions such as banks and lenders to grok your operational process and internal structure, which in both cases generally limits your upside.
I mean, look at Meta. The stock you can actually buy through your broker is not actually a stock that can control the company, so in a very real sense it's not a "share" in Meta. Zuck controls nearly all the "preferred" shares that have supervoting privileges, so he can operate it as though it's essentially a private firm. The board, which in a conventional public company could exercise control over the CEO, has no ability to remove him.
"In a liquidation, common stockholders receive whatever assets remain after creditors, bondholders, and preferred stockholders are paid."
Coupled with what sounds like an already bad financial state of the company... I'm not claiming no foul play, but it looks like there is a reasonable avenue for what is happening.
Yet the board and CEO will get paid... So they're not that out of money. Just out of money enough to screw everybody but themselves.
> Philz board members, which include former CEO Phil Jaber and his son, Jacob Jaber; representatives from investment firms Summit Partners and TPG Growth; and CEO Mahesh Sadarangani will receive payouts or bonuses from the deal.
The article implies that it's not a liquidation or bankruptcy, though, just a sale.
I don't know how you can buy a company without buying its stock from the shareholders, given that they are the owners of the company, but there must be some special circumstance that's not mentioned in the article.
There are tricks. I've been through such an acquisition. The purchaser sets up a new "Philz Coffee Co LLC" then purchases assets and operations for the exact amount the preferred stock holders want. They then liquidate the old company. Because the old company was never legally "bought" the common stock holders are SOL because they now own stock in a fictional company. That's not to say they don't have options... but I am not a lawyer and that definitely involves lawyers.
I agree with you and don't know enough to speak authoritatively. That being said, I did find this definition of liquidation (below). The article hints the business was in trouble, the way I'm reading it, if the sale doesn't cover all obligations, its would be a liquidation.
"Business liquidation involves selling off a company’s assets, such as equipment, inventory, and real estate, and using the proceeds to pay off debts and obligations. This process usually occurs when a business is no longer profitable, facing insurmountable financial challenges, or the owner decides to retire or pursue other opportunities."
If there was no money (aka bankruptcy) then board, top management and other investors would also not get anything (divide remaining assets between all stock). But this is different, this is sale, not bankruptcy. Some people get money while common stock owners (aka company owners) don't get anything.
This is precisely the reason for accredited investor requirements to invest in private companies, it’s extremely easy to be screwed over as a small-time shareholder in a private company.
Investing in shares is, like most things in life, a task that requires some skill and understanding. Hence the concept of accredited investors. When you're swimming with the big boys, it pays to know the rules of the game.
Unfortunately employees getting or buying shares from their employer have little to no investment skills. Yes, it's possible for these shares to be worth something, but if the company fails, they're last in line.
It behooves tech staff, who think the road to glory is paved in stock options to get professional financial and legal (not to mention tax) advice.
Or just consider all stock offerings to be worthless. The times it isn't are a rounding error.
Disagree. I exercised some small amount of options long time ago (like 10+ years). Never called, never cared, also thought it's long gone. But recently got a nice check from them out of the blue when they got sold to a larger company. Even though all the people I worked with long gone as well, including CEO. I checked the numbers, all seems correct.
It’s a check for ‘can this person handle losing a large chunk of money when they get swindled by management after investing in a private company’, which will almost certainly be the case if you don’t have more money to kick in every round (dilution) or don’t own preferred shares, or any number of other tricks. Google or Meta recently ‘acquired’ a company by offering them salary packages that matched the equity they had in their company and then skipped buying the company so anyone with shares left got screwed over when the husk was sold for 1% of its prior value, since it was almost worthless once all the talent was acquihired.
No, not always. Only under specific circumstances like preferences. There are pro rata terms and minority shareholder rights. Something smells fishy about the article, but I suspect it is the journalist’s ignorance.
I think if it’s publicly traded and they aren’t comitting fraud then this situation couldn’t happen. If the company is drowning in debt and unprofitable you would have already lost your money because the stock would have lost value.
That sucks. It sucks that employees’s common stock will be cancelled. It also sucks that the vitality of the company will be drained. Maybe this was its destiny.
With investments they were able to furnish nice locations pretty well. Better than many normal franchises.
But perhaps that was overshooting and they will be brought back to financial reality by the PE firm —they’ll try to make it turn a profit at the expense of employees and customers but then again maybe it was existing on borrowed time (money).
At least, so far, it’s a slightly better story than the ice cream shop that grew too fast and then had a complete meltdown from the financial burden.
Crazy. IDK, do you think the company taken over by a strictly for profit entity that just completely wiped out the value of all common shares and employee held stock and options will lead to me getting a better cup of coffee?
Private Equity is basically buying a rusted-out car for $500, painting over the rust, using it for rideshares until the wheels fall off, then pushing it into the ocean. Then you use your profits to buy another rusted car. Except the car is a local coffee chain.
Philz Coffee reportedly nearing a $145M PE acquisition. Just another "only in SF" story. Where your barista’s startup dream comes true, and the morning pour exits before your Series B.
McDonalds did not officially endorse Israel. The franchise owner of all the McDonalds restaurants in Israel did. McDonalds corporate did not approve the message although it seems like it did not really matter what the facts were. (https://www.theguardian.com/business/2024/apr/05/mcdonalds-i...)
everyone takes a side on everything. explicitly or implicitly. intentionally or unintentionally. due to the interconnected nature of the world, it is impossible to construct a true-neutral position. the appearance of neutrality becomes more difficult the more important an issue is to those you interact with.
so, it's not really well-defined to ask whether or not a coffee shop "should" be taking sides, it will take one in all situations. it is a (slightly) more tractable question to ask "how should a coffee shop take a side?" Given how difficult this question is to answer still, I like to answer it with, "doing good is generally aligned with the long-term profit-motive."
this is also why boycotts are actually useful! though collective action, you can align the profit-motive with "good" clearly. this makes it easier for a coffee shop to move in-line.
Apparently not all that pro-Palestine, if Wikipedia is to be believed:
> At the end of 2023, five employees were sent home from the Gilman Street location for wearing Pro-Palestine pins. Despite asking for a written statement from management about why the pins were not allowed, the employees never received any information from management. The employees were sent home and the entire staff unionized.
In my experience around the SF bay area the vast majority of local or independent coffee shops have a Palestinian flag or stand with Palestine poster right on the front glass.
While I think that your choice in coffee shop has little to no effect on the actual Palestinian country or people, you can always try going local instead of supporting these multi million dollar chains.
The founders immigrated from Palestine so that's not surprising. They even donate a portion of proceeds to Palestinian aid efforts. Surprised to see they are going under though. They have been a grocery store staple for a while.
> Dalla worked at Philz for nine years until last year, when he was laid off. He said that many longtime employees left around the same time as the company’s culture shifted to a more profit-driven, corporate culture.
> On his way out, he said that CEO Sadarangani urged him against exercising his stock options — options that will now, barring changes to the current deal, be worth nothing. “I always assumed they would do the right thing,” Dalla said.
Wouldn't the options also be worth nothing now? So by not exercising them at least the exercise money was spared?
correct, not exercising them would have been better.
The tax hit, too, depending on the type and amount of options
There is a bunch of shady and unfair behavior by the acquirers here, but yeah, that line doesn’t make sense. If the options are worthless, then exercising them would have been a waste of money - the CEO was helping this person out!
I think this article was written by someone with lots of outrage and little actual understanding.
Is there any good reason why preferred stock exists? It just seems like another tool to screw people over in favor of investors.
Yes. Preferred shares give investors their investment back first if things go wrong.
If an investor gives you a million dollars for a piece of your company, and you turn around and sell the company for a million dollars, then the investor gets their million dollars back and you get nothing. Obviously. Any other outcome would be shenanigans.
Under standard deal terms investors get 1x, i.e. their money back. That's all.
To entice investors? Im not a lawyer, but I assume you're perfectly free to try to raise money by selling common stock to investors?
The reason is to protect investors.
Because someone who might invest some money, maybe wouldn't invest that money if they didn't get the preferred class protections?
This is similar to how different credit risks get assigned different interest rates.
Companies failing (or close enough to failing that they restructure and wipe out common) is not uncommon in start-ups. If you want a more or less sure thing, you'll have to work at a more or less sure employer, and the risk/reward will be different.
Now, whether those who exercised their Philz options and paid for the shares, were really aware in what they were doing -- I don't know! But there doesn't seem to be anything explicitly sinister about the way this was set up, or went down -- simply, the business didn't do well enough. Which is too bad, because I think their coffee is actually good.
If you raise money, sometimes you just want the money. Other times, you are happy to cede some ownership and/or control. If things go pear shaped, investors want some protection. If things go really well, sometimes they band together and kick you out of your own company. At some point rules have to be codified: the systems for doing this are share classes, voting rights, information rights, articles of association, board resolutions, etc. While you can start a totally new system and run your company using a magical talking stick and rubber duckies on the blockchain, the reality is that just makes it unfamiliar and hard for conventional institutional capital to invest in, it also makes it hard for slow-moving conventional institutions such as banks and lenders to grok your operational process and internal structure, which in both cases generally limits your upside.
The big answer is "no."
I mean, look at Meta. The stock you can actually buy through your broker is not actually a stock that can control the company, so in a very real sense it's not a "share" in Meta. Zuck controls nearly all the "preferred" shares that have supervoting privileges, so he can operate it as though it's essentially a private firm. The board, which in a conventional public company could exercise control over the CEO, has no ability to remove him.
Voting rights in founder-led public companies, and liquidation preference rights in private investments, are very different things.
We have many more good locally owned coffee shops today.
It's only a matter of time until those locally owned coffee shops become popular, expand, over-expand, then get acquired.
Southpark had a great episode on this where they burn down the Walmart and then this happens https://www.youtube.com/watch?v=scTjHvot3Uo
That is overly pessimistic. Plenty of businesses don't ever do what you suggest.
Followed by regression towards the mean in quality, leading to under performance and giving way to a new crop of locally owned competition.
> On his way out, he said that CEO Sadarangani urged him against exercising his stock options
I'm curious about this, as it sets off a little alarm in my head. Is this a legal thing for the CEO to do?
they can just cancel stock?
> “All Common Stock will be canceled for no consideration and all Options will be canceled and extinguished for no consideration”
How is this even legal?
"In a liquidation, common stockholders receive whatever assets remain after creditors, bondholders, and preferred stockholders are paid."
Coupled with what sounds like an already bad financial state of the company... I'm not claiming no foul play, but it looks like there is a reasonable avenue for what is happening.
Yet the board and CEO will get paid... So they're not that out of money. Just out of money enough to screw everybody but themselves.
> Philz board members, which include former CEO Phil Jaber and his son, Jacob Jaber; representatives from investment firms Summit Partners and TPG Growth; and CEO Mahesh Sadarangani will receive payouts or bonuses from the deal.
Salary takes preference over equity and debt in all liquidations.
The article implies that it's not a liquidation or bankruptcy, though, just a sale.
I don't know how you can buy a company without buying its stock from the shareholders, given that they are the owners of the company, but there must be some special circumstance that's not mentioned in the article.
There are tricks. I've been through such an acquisition. The purchaser sets up a new "Philz Coffee Co LLC" then purchases assets and operations for the exact amount the preferred stock holders want. They then liquidate the old company. Because the old company was never legally "bought" the common stock holders are SOL because they now own stock in a fictional company. That's not to say they don't have options... but I am not a lawyer and that definitely involves lawyers.
Further reading:
https://en.wikipedia.org/wiki/Asset_stripping
If the purchase amount is less than the liquidation preference amount of preferred shares then there is nothing to pay common shareholders.
I agree with you and don't know enough to speak authoritatively. That being said, I did find this definition of liquidation (below). The article hints the business was in trouble, the way I'm reading it, if the sale doesn't cover all obligations, its would be a liquidation.
"Business liquidation involves selling off a company’s assets, such as equipment, inventory, and real estate, and using the proceeds to pay off debts and obligations. This process usually occurs when a business is no longer profitable, facing insurmountable financial challenges, or the owner decides to retire or pursue other opportunities."
The article flat out states that they ran out of money. That's the special circumstance. Basically this was a fire sale.
If there was no money (aka bankruptcy) then board, top management and other investors would also not get anything (divide remaining assets between all stock). But this is different, this is sale, not bankruptcy. Some people get money while common stock owners (aka company owners) don't get anything.
This is precisely the reason for accredited investor requirements to invest in private companies, it’s extremely easy to be screwed over as a small-time shareholder in a private company.
Investing in shares is, like most things in life, a task that requires some skill and understanding. Hence the concept of accredited investors. When you're swimming with the big boys, it pays to know the rules of the game.
Unfortunately employees getting or buying shares from their employer have little to no investment skills. Yes, it's possible for these shares to be worth something, but if the company fails, they're last in line.
It behooves tech staff, who think the road to glory is paved in stock options to get professional financial and legal (not to mention tax) advice.
Or just consider all stock offerings to be worthless. The times it isn't are a rounding error.
Disagree. I exercised some small amount of options long time ago (like 10+ years). Never called, never cared, also thought it's long gone. But recently got a nice check from them out of the blue when they got sold to a larger company. Even though all the people I worked with long gone as well, including CEO. I checked the numbers, all seems correct.
I'm not saying there's never an outcome. I'm saying the percentage of positive outcomes is tiny compared to the number of players.
Congrats on the check. But I think you approached it in the right way. Assume they're worth nothing until proved wrong.
The concept of accredited investors is nothing of the sort. It's an arbitrary income / net worth threshold.
It’s a check for ‘can this person handle losing a large chunk of money when they get swindled by management after investing in a private company’, which will almost certainly be the case if you don’t have more money to kick in every round (dilution) or don’t own preferred shares, or any number of other tricks. Google or Meta recently ‘acquired’ a company by offering them salary packages that matched the equity they had in their company and then skipped buying the company so anyone with shares left got screwed over when the husk was sold for 1% of its prior value, since it was almost worthless once all the talent was acquihired.
Common stock holders are last in line. Only if things go well do common stock holders have a chance. And even then they might still get worked.
A follow up question: how can I check that my own stock is not subject to the same terms? Can publicly traded companies do the same?
Of course. Common stock can always get wiped out by superior classes.
No, not always. Only under specific circumstances like preferences. There are pro rata terms and minority shareholder rights. Something smells fishy about the article, but I suspect it is the journalist’s ignorance.
I think if it’s publicly traded and they aren’t comitting fraud then this situation couldn’t happen. If the company is drowning in debt and unprofitable you would have already lost your money because the stock would have lost value.
Right? Can anyone answer this? The article doesn’t go into it.
The common stockholders have voting rights...
Probably also drag along terms which render said rights broadly ineffective
Just dissolving peoples savings/retirements. If i was CEO i'd be terrified for my life if i did that...
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Nice try at being a chud, you succeeded.
Speaking as a coffee drinker, I saw Philz distribute through retail stores far away from SF, and expect enshittification (figuratively) in the future.
For other Tesora addicts, the house brand Italian roast at Safeway/Von's is very similar and a lot cheaper.
I can't imagine what changes are coming. Probably Son of Philz AItalian Roast.
It was fun and flavorful.
Sounds like Windsurf.
That sucks. It sucks that employees’s common stock will be cancelled. It also sucks that the vitality of the company will be drained. Maybe this was its destiny.
With investments they were able to furnish nice locations pretty well. Better than many normal franchises.
But perhaps that was overshooting and they will be brought back to financial reality by the PE firm —they’ll try to make it turn a profit at the expense of employees and customers but then again maybe it was existing on borrowed time (money).
At least, so far, it’s a slightly better story than the ice cream shop that grew too fast and then had a complete meltdown from the financial burden.
[flagged]
Did you seriously need an LLM to tell you PE buyouts never go well for the acquired company?
Crazy. IDK, do you think the company taken over by a strictly for profit entity that just completely wiped out the value of all common shares and employee held stock and options will lead to me getting a better cup of coffee?
...
Private Equity is basically buying a rusted-out car for $500, painting over the rust, using it for rideshares until the wheels fall off, then pushing it into the ocean. Then you use your profits to buy another rusted car. Except the car is a local coffee chain.
Adios to your favorite brand amigo
Philz Coffee reportedly nearing a $145M PE acquisition. Just another "only in SF" story. Where your barista’s startup dream comes true, and the morning pour exits before your Series B.
Pretty sure the barista's startup dream wasn't to have the stock they own to be cancelled.
But what's more quintessentially SF than realizing your options are worthless?
Exactly! Man… some people don’t get sarcasm
Wasn't Philz the only Pro-Palestine coffee chain. That's too bad.
I fail to understand why a coffee shop should be taking sides on geopolitical conflicts.
I agree. No idea why Starbucks, McDonalds, Zara etc. came out shouting support for Israel out of nowhere. Requiring a boycott from sane people.
> Requiring a boycott from sane people.
It sounds like you don't agree.
i guess we don’t agree on sanity itself.
Is that a thing that happened?
McDonalds did not officially endorse Israel. The franchise owner of all the McDonalds restaurants in Israel did. McDonalds corporate did not approve the message although it seems like it did not really matter what the facts were. (https://www.theguardian.com/business/2024/apr/05/mcdonalds-i...)
yes. prompting listings/apps for finding brands to boycott, one which i use very much: https://www.boycat.io/
Because all businesses are run by people and everything is inherently political
Coffee production by itself is already mired in geopolitics.
And as a customer, where we spend our money matters. It’s often the only voice we have.
Take a look at Black Rifle Coffee Company. Their brand attracts a certain type of customer. It’s a market differentiator.
everyone takes a side on everything. explicitly or implicitly. intentionally or unintentionally. due to the interconnected nature of the world, it is impossible to construct a true-neutral position. the appearance of neutrality becomes more difficult the more important an issue is to those you interact with.
so, it's not really well-defined to ask whether or not a coffee shop "should" be taking sides, it will take one in all situations. it is a (slightly) more tractable question to ask "how should a coffee shop take a side?" Given how difficult this question is to answer still, I like to answer it with, "doing good is generally aligned with the long-term profit-motive."
this is also why boycotts are actually useful! though collective action, you can align the profit-motive with "good" clearly. this makes it easier for a coffee shop to move in-line.
I'm actually surprised this went negative, I thought HN was gonna love this
[dead]
Apparently not all that pro-Palestine, if Wikipedia is to be believed:
> At the end of 2023, five employees were sent home from the Gilman Street location for wearing Pro-Palestine pins. Despite asking for a written statement from management about why the pins were not allowed, the employees never received any information from management. The employees were sent home and the entire staff unionized.
i assume this was AFTER this takeover?
Unless I'm misunderstanding something, the takeover has still not happened.
In my experience around the SF bay area the vast majority of local or independent coffee shops have a Palestinian flag or stand with Palestine poster right on the front glass.
While I think that your choice in coffee shop has little to no effect on the actual Palestinian country or people, you can always try going local instead of supporting these multi million dollar chains.
indeed. I love the late night Yemeni shops that have popped up.
The founders immigrated from Palestine so that's not surprising. They even donate a portion of proceeds to Palestinian aid efforts. Surprised to see they are going under though. They have been a grocery store staple for a while.
if you make coffee at home you can decide yourself whether it’s pro Palestine or pro Israel
who needs coffee, i rawdog my days.