Amazon bought Eero for $ 97 million and the employees always got themselves

When Amazon announced the creation of a WiFi system, it sounded like a classic Silicon Valley success story: a promising startup is acquired by the highest bidder in the market, and everyone rolls in cash. But it is not this story. This story talks about the loss of tens of millions of dollars by investors and the loss of shares of dozens of employees.

According to confidential documents consulted by Mashable, Amazon has acquired Eero for $ 97 million. Eero executives reported multi-million dollar bonuses and eight-figure wage increases. All the others, however, have not been so successful. Investors were hit hard and the acquisition of Amazon made Eero shares worthless: a drop of $ 0.03 per share against $ 3.54 in July 2017. The Employees should have spent about $ 3 to exercise their shares, which meant that they would actually lose money. they've tried to pull out.

Current and former Eero employees who have chosen not to exercise these options are now empty-handed. And those who exercised options, investing their financial trust in society, lost money.

Meanwhile, Eero leaders who remain to help Amazon lead its war for smart home rule will earn about $ 30 million.

The circumstances surrounding the sale of Eero to Amazon show how extremely competitive it is in the smart home market. Creating material takes time and is the type of money that is usually found in the pockets of technology giants. If you want to win in the products sector, you want to be on the side of the giants. And even then, your victory can still be a loss.

Great expectations

In its early days, Eero set all the conditions for Silicon Valley: a "disruptive" product, Stanford pedigrees chummy co-founders, a product launched in an apartment and how his wireless mesh router system would reinvent the high tech. There was even a clean and minimalist design.

In 2016, the Eero system went on sale. Critics were thrilled with the performance and packaging. Three months after the successful launch of the product, he had one.

The main product of Eero is a "wireless mesh router", which changes the way Internet access is provided throughout the house, thus enabling faster and more consistent coverage. Instead of a twin modem and router, mesh WiFi systems communicate across multiple devices throughout the home, allowing the fastest WiFi signals to reach more physical obstacles. The installation and configuration of Eero are simple – no cables need to be needed – and the system is managed via an application on your smartphone.

Eero may have been the first to use WiFi, but the competition was fast. Several companies, including Luma and NetGear, have launched similar products over the next year.

According to former Eero employees, the biggest challenge came from Google. The technology giant launched its own mesh network in late 2016 for only $ 299. At the time, Eero was selling 500 dollars.

The company tried to stay a step ahead and diversify – including Hive, a smart home security system – but then launched a bomb: a similar product called Nest Secure. Shortly after, Eero abandoned Hive, causing a period of unease and confusion.

"The day they killed [Hive] was the day the company changed, "said a former employee.

After the return of Eero employees after the holidays, 20% of the workforce was laid off. Then came massive attrition. An ex-employee described this as a period of "desperate fear." The morale was so low that the group of disabled human resources sent emails and banned employees from sending emails to tell them that they were leaving.

Then the big news fell.

Movin 'up?

On February 11, Eero announced to the public that Amazon had acquired the company. Rumors about the details of the transaction spread quickly. But all the excitement disappeared once the employees realized that neither Eero nor Amazon disclosed any price. This discomfort turned into anger when the documents started to arrive.

"I was really surprised when the announcement was made and I immediately knew it was bad," an ex-employee said. "When they do not advertise the price, it's not good, what I did not know was how bad it was."

Employees tried to guess from news stories and social media what the deal meant to them. When the stock price leaked, some former employees sighed with relief at not exercising their options. Others ended up with a worthless stock and a disappointment.

The letter, dated February 15, gave employees four days to decide what to do with their Eero shares. Some even received the letter on or after the deadline.

This would be the last communication that most former employees would receive from Eero. However, those who chose to buy or exercise their shares received a bundle of dense financial information "the size of a directory", including acquisition conditions that tell a different story to that of Amazon and Eero's Commendation.

"I was a lot less salty about the situation before getting this document," said a former employee. "I do not blame the managers for their compensation, but I feel they could have taken a little less to avoid screwing up employees who spent their own money because they believed in society."

First, the documents (reviewed by Mashable with financial experts) begin with a reiteration of the share price of CEO and co-founder Nick Weaver.

"Unfortunately, the transaction will not give the financial return we all hoped for," wrote Weaver in his introduction.

He revealed that the final selling price was $ 97 million. reports that Eero took $ 90 million in venture capital (the the Wall Street newspaper put the number at $ 100 million). PitchBook, an extremely accurate source of information on capital resources, has called for a final round of $ 40 million Series D funding from December 2017, bringing the total to $ 138 million. Eero declined to comment, rather than confirm the sale.

An additional debt line of $ 10 million borrowed by Eero brings the total amount of funds invested to $ 148 million, or 150% of the Amazon sale price.

"I knew instantly that it was bad."

"One obvious way to judge whether an exit is excellent or not is if the valuation of the outflow is less than the amount of capital invested in the start-up," Rob Chandra, partner at Avid Park Ventures and speaker at the # 39, UC Berkeley's Haas business school, explained. "So it's not a good exit."

Still, $ 97 million is not sneezing. At first glance, it seems that the company was able to give investors something as close as they had invested, while creating jobs at Amazon for the remaining employees.

But this is not the case. The story told in the financial documents indicates that the situation was even worse for investors – and yes for employees – than what they might look like.

The documents indicate that after transaction costs and debt, the actual price will be closer to $ 54.6 million. This means that Amazon covers about 40 million dollars of debt incurred by Eero. Ex-employees believe that the debt comes from the hardware manufacturing costs, since they stated that Eero had used the company funding to manufacture the products. Jeff Scheinrock, a professor at UCLA's Anderson School of Management and an experienced investor and entrepreneur, has himself acknowledged that this was probably the case.

"What this says is that Eero was running out of money," Scheinrock said. "A lot of that money is going to pay off debts." They had difficulties and probably could not raise extra money, so they had to look for a way out. "

That left about $ 54 million to employees and investors. By reviewing the share prices listed in the acquisition documents, the amount raised at each round of financing and the amount of shares each VC received during these rounds, you can get a good idea of ​​the investor's losses. . Finally, thanks to the "last in, first out" philosophy, Eero D-Series investors, led by Qualcomm, will recover 84% of their investments. The series round and investors in the A-C series will all recover 31 cents on the dollar.

But not everyone involved in Eero has lost.

Amazon has created a "Management and Employee Loyalty Plan" for Eero's top executives. As part of this plan, the documents indicate that they allocate 10% of the "real counterparty" (the $ 54 million transaction price) to executive bonuses and salary increases, even if that meant greater losses. for investors.

Ten leaders receive the majority of this money. The three co-founders – Nick Weaver, Nathaniel Hardison and Timothy A. Schallich (of Amos) – as well as other executives and affiliates, will collectively receive approximately $ 3.7 million in cash, as a "bonus of transaction ".

The 10 executive officers will also receive between $ 29 million and $ 23 million in salary increases, retention and annual bonuses earned over three years (for a potential total of $ 32.6 million). These are all financial incentives to what Amazon apparently views as the main Eero team to stay and create the product.

"Eero is an inventive and customer-centric team that has rapidly developed an impressive WiFi solution that allows home technologies to work in place of work," said an Amazon spokesperson at Mashable, to the question to know why the company had acquired Eero.

Nevertheless, former employees are wondering if there might have been more money for shareholders if the executives had not received as much money and bonuses.

Image: Bob Al-Greene / Mashable

"They do not value society much for past contributions," said Rob Chandra, partner of Avid Park Ventures. "They really value more what it's going to do in the future."

Amazon, when asked, said that he valued "both".

(Equipment

The key to Eero's future is also what contributed to his failures.

Many outlets have speculated that the acquisition of Eero by Amazon had everything to do with the plans of the tech giant and his desire to increase his domiciliation at home. When Eero announced the deal on March 12, he reported greater communication between Alexa and Eero devices. A former employee said that Eero was already discussing this issue in 2018, but that it did not make sense at the time.

The googles and amazons of the world have "money, size, structure, to buy markets," said Scheinrock. "If you are just a single market company [like Eero]It's very difficult to compete with a giant. "

Hardware startups require a lot of money, and advances in technology can make a product obsolete before it has a chance to take off. Nearly all (97%) of the 400 hardware startups tracked in a scenario have died or have become "zombies", companies that survive for some time with money in venture capital, but end up collapsing. .

"When you do it right, it's possible to create extremely valuable hardware companies that differentiate themselves from the competition. Successful companies can gain scale and aim to become public, "said Seth Winterroth, partner of Eclipse Ventures. "But it's hard at home right now for startups. The market is extremely fragmented, there is a lot of noise and you are competing with giant tech companies looking to "own" the home-based consumer. "

When asked if Amazon thought its presence was making life harder for small hardware companies, a spokesman focused on how its investments help "developers and device manufacturers of all sizes to create products ".

The bar of success in home hardware technology is incredibly high – but it can be achieved. According to Winterroth, Peloton is a notable example. The interior bike manufacturer has created a useful product that is convincing enough to grow and develop profitably on its own. On the other hand, many players have fallen into the hands of an overcrowded hardware market, populated by super well-funded players. Remember ? What would you say ?

"We buy you or we die."

Winterroth points out that the race to dominate Google and Amazon also offers tremendous opportunities. Between Alexa, Siri, Google Assistant and all their physical iterations, there is no clearly dominant smart home system. But it also makes these big players desperate for competition. Home appliances are in part a marketing strategy to support their customers – including buying, monitoring and using the Internet – entirely through the device company. So, as the former Eero employees have pointed out, they are willing to sell these products at a much cheaper price than a start-up can afford.

"If you do not have a product of an order of magnitude greater than what it is in the market, you are overwhelmed by the marketing coverage and marketing strategies of the big ones. companies, "said Winterroth. "This is a very difficult hurdle for small businesses to overcome."

To compete effectively with these companies, the product itself must instantly appear as a value to consumers, enter the market at the right time, work perfectly and serve as a channel for subscription and software services. For most companies, including Eero, this is an obstacle that is too difficult to reach.

"I just think that the growing consensus is that hardware is a losing bet, especially when all the big players underestimate you," said a former employee. "There is simply no gain with equipment – we buy you or you die."