[sgk284]

Suppose the following scenario:

A VC invests $10MM at a $100MM valuation and owns 10% of the company with preferred shares. For simplicity, we'll assume they are the only holders of preferred shares.

An employee is given $500,000 in common stock, equal to 0.5% of the company at the same $100MM valuation.

The company then sells itself to an acquirer for $11MM, substantially below the $100MM valuation. The VC, with preferred shares, gets paid first. So they get their $10MM back. The remaining $1MM would then be divided among common stock holders. The employee above would get $5,000, instead of the $55,000 that 0.5% of $11MM would imply.

In the real world, founders, executives, and VCs often get preferred shares, which ultimately screws regular employees.

[harryh]

Correct up until your last sentence. Founders & executives do not often get preferred shares.