Employees of Sequoia-backed Hmlet stripped of stock options after distressed sale

FOUR months after learning of their company’s impending sale to a European operator, current and former employees of co-living startup Hmlet were informed that their stock options will now be worth nothing due to a mechanism that allows certain Hmlet investors to have the first claim to proceeds from an acquisition.

Following the sale of Hmlet to co-living company Habyt, Hmlet’s employee share option programme (ESOP) will be terminated and any options granted will be cancelled, according to a document viewed by The Business Times (BT).

The letter, signed by Hmlet chief executive Giselle Makarachvili, said that based on the terms of the Habyt deal, the ordinary shares in Hmlet have zero value. An email to those impacted by the ESOP cancellation explained that this was a result of the company’s “liquidation waterfall”.

Venture capital (VC) deals typically involve preference shares and a provision called the liquidation preference, which gives investors priority in recovering their initial capital in the event of a trade sale or liquidation, before the rest of the proceeds are distributed among shareholders.

If a startup is sold below a certain valuation, certain investors could lay claim to all sales proceeds and leave nothing for company employees. This could also happen if investors have disproportionately favourable rights. A 3 times liquidation preference, for instance, lets the investor claim triple its original investment.

Hmlet, whose biggest backers are Sequoia and Burda Principal Investments, announced its merger with Habyt in April in a pending share-swap deal. The deal size was undisclosed, but sources put the purchase consideration at at least US$60 million.

Hmlet was one of the rising stars in the co-living space before the Covid-19 pandemic, high cash burn and untenable real estate leases brought the startup to its knees.

Investors valued Hmlet at US$154.4 million in 2019 before its troubles came to light, according to data platform VentureCap Insights.

To date, Hmlet has received US$46.9 million in equity financing; this does not include funding structured through convertible loans or other instruments. Sequoia, Burda and other investors threw the company a US$6 million lifeline in 2021 to help it stage a turnaround.

The acquisition by Habyt was meant to mark a reversal of fortunes for the startup, but some employees say they have been left deeply disappointed that the board and management failed to cut a better deal for them. Some in the tech team had agreed to accept a lower base pay in exchange for a larger equity component, BT understands.

“What all of us were asking for wasn’t hundreds of thousands of dollars, just – something,” said one former employee, who declined to be named for fear of retaliation.

In response to queries from BT, Makarachvili said being part of a global entity gives Hmlet greater efficiency of scale and the ability to leverage technology and enhance both customer and employee benefits.

“We are disappointed to receive this enquiry from The Business Times,” she added. “However, the terms of settlement between Hmlet and our employees / ex-employees regarding their ESOP programme remain strictly confidential therefore, we are not in the position to disclose further details.”

It is unclear whether individuals under Hmlet’s ESOP programme will be subsumed under a separate programme by Habyt.

If so, affected individuals would have to clarify whether they need to start their vesting period from scratch. Stock options are typically drip-fed to employees over a period of a few years.

Hmlet had accumulated over 100 properties on its platform in 5 years as part of an aggressive expansion strategy it eventually had to curb. In April it said it was currently managing 1,200 units across Singapore, Hong Kong and Japan, and eyed rising rental demand in its main markets to target 2,300 rooms by the end of 2022.

The company’s troubles had deepened during the pandemic as it faced a management exodus, including the exit of its CEO and co-founder Yoan Kamalski in March 2021. It ditched an expansion into Malaysia and Thailand and exited Australia saddled with debt.

Hmlet’s backer Burda later sent in its turnaround specialist, Peter Kennedy, to steer the company. Makarachvili was named CEO in October 2021. She will be the head of Asia-Pacific for Habyt post-merger.