Lesson 05

The announced price is not the price

Instagram is remembered as a billion-dollar acquisition. It did not close at a billion dollars, and the gap is the most useful thing in this section.

The pattern

When Facebook agreed to acquire Instagram in 2012, the figure that entered public memory was $1bn. A significant portion of the consideration was Facebook stock, agreed before Facebook's own public listing. That stock fell substantially before the transaction completed, and the deal closed at a materially lower value.

Everyone holding Instagram equity was paid on the closing value. The announced number belonged to the press release; the closing number belonged to the bank accounts.

This is not an exotic case. Stock consideration, escrow held back against warranty claims for twelve to twenty-four months, earn-outs contingent on post-acquisition performance, transaction costs and debt repayment all sit between an announced headline and a distribution — and that is before the liquidation preference stack takes its turn.

The systematic version of the problem appears in our acqui-hire entry, where retention packages paid to employees can account for the majority of an announced transaction value while never entering the shareholder waterfall at all.

For your own cheque

What an angel takes from this

Treat every announced acquisition price as the maximum consideration rather than the distributed cash. The questions are: how much is cash at closing, how much is stock, how much is held in escrow and for how long, and how much is contingent on performance.
Build the waterfall before you invest, not at the exit. Transaction costs, debt, and the full preference stack are paid before ordinary shareholders receive anything, and in a modest exit that can absorb everything.
Find the breakeven. The sale price at which ordinary shares begin to be worth something is the single most useful number about a position you already hold, and in a heavily funded company it is usually far higher than the founders assume.
When you record your own outcomes, record what was actually received and when. Announced numbers make for better stories and worse records.

Checked, not remembered

Sources

Every figure on this page is traceable to published reporting. Where credible sources disagree we say so above rather than picking the most quotable number, and we do not state what a stake is “worth today” — that moves with the share price and is stale the moment it is written.

ForbesHow Instagram's First Investor Steve Anderson Struck Gold As A One-Man Deal Machineforbes.com ↗TechCrunchSteve Anderson on getting in early with Instagramtechcrunch.com ↗

The mechanics

Terms this story turns on

Exit waterfallThe order in which sale proceeds are distributed — creditors first, then each preferred class by seniority, then ordinary shareholders — and the calculation that tells you what your shares are actually worth.Acqui-hireAn acquisition whose purpose is to hire the team rather than to buy the product, typically priced per engineer and structured so that most of the value goes to employees as retention packages rather than to shareholders.Liquidation preferenceThe right of preferred shareholders to be paid a set amount — normally the money they invested — before ordinary shareholders receive anything from a sale or winding up.Drag-along rightsA provision allowing a defined majority of shareholders to compel every other shareholder to sell on the same terms, so that a buyer can acquire 100% of the company without holdouts.