You don't know if any 'little guys' were hurt. If the same amount of money had been taken in through sales of additional stock, at the same pre-money valuation, everyone with vested or unvested options would be more diluted. So treating cash-to-early-shares this way (rather than equity sales) can be a slight benefit to all employees and stockholders.
Meanwhile, investors are diversified and have great counsel, so they can look out for themselves.
The only question for me in a situation like this is if there are people who were vested but unexercised, who would have exercised had they known the unique dividend was coming. It'd certainly be nice for a company to give them the info they'd need to participate knowledgeably.
Secondary transactions don't cause the company to issue more shares. They transfer shares from one party to another, so the total number of shares does not change and existing shareholders take no dilution.
If the only alternative being considered is for founders to sell their existing shares, yes.
But other approaches to limiting founder dilution and rewarding early shareholders could have included new offsetting stock awards to key staff, or selling even more shares to pay bonuses taxed at ordinary income rates. Those could have been more dilutive to smaller shareholders than this dividend approach.
Dividends are legal, tax-favored, and exist to reward actual shareholders-of-record (even though they're rarely used at this growth-needing-capital stage). Closing that alternative wouldn't necessarily benefit the employee-optionholder 'little guy'... but it might benefit the new-money sophisticated investors who would then have more control.
>Dividends are legal, tax-favored, and exist to reward actual shareholders-of-record
there is a special well known definition for a schema when "dividends" are paid using new incoming capital. The dividends you're talking about are supposed to be paid using earnings from the actual business.
When you say "...are supposed to be paid using earnings...", are you referring to a legal requirement? If so, this could be stopped by someone with a legal challenge.
If you just mean traditionally, well, if this is a more efficient way to meet the various goals of all parties to the transaction, I'm with founders/investors/innovation, moreso than tradition.
Also, money is fungible. What if AirBnb has earnings from elsewhere that could pay the dividend, meeting the early shareholders' desire for a interim diversifying return? But, that would then leave less capital for expansion. However, new investors are happy investing money that replaces (and then some) the cost of the dividend to support expansion costs.
There'd then be no essential violation of the way you think things are 'supposed to be': just think of earnings paying dividends, and then new investment adding all required expansion capital. Everybody who's a party to the transaction is happy, in a tax/legally-efficient manner, and no one's rights are trampled.
(As I've mentioned elsewhere, I think the main fairness issue would be if anyone who had the legal right to become dividend-eligible, for example by vested option-exercise, wasn't given that chance. But that's an internal fine detail we don't know about this still-in-progress private company financing.)
>Also, money is fungible. What if AirBnb has earnings from elsewhere that could pay the dividend, meeting the early shareholders' desire for a interim diversifying return? But, that would then leave less capital for expansion. However, new investors are happy investing money that replaces (and then some) the cost of the dividend to support expansion costs.
>There'd then be no essential violation of the way you think things are 'supposed to be': just think of earnings paying dividends, and then new investment adding all required expansion capital.
Even if they had other sources able to completely cover the "dividends", there seems to be the causality link between the investment and the "dividends". In Tom DeLay's case the causality between "donors to RNC" and "RNC to candidates" allowed the jury to recognize shortcut-ed "donors to candidates". It seems to me that it was an obvious bonus (i.e. ordinary income) to founders which for the purposes of lower tax rates (i.e. basically for the reason of greed) was shaped as dividend, and as result they seems to step into the Madoff territory.
>Everybody who's a party to the transaction is happy, in a tax/legally-efficient manner, and no one's rights are trampled.
people were fighting to get a piece of Madoff action.
Meanwhile, investors are diversified and have great counsel, so they can look out for themselves.
The only question for me in a situation like this is if there are people who were vested but unexercised, who would have exercised had they known the unique dividend was coming. It'd certainly be nice for a company to give them the info they'd need to participate knowledgeably.