🙋‍♀️ Raise your hand if you heard about the Divvy acquisition last week.

Keep it raised if your jaw hit the floor, horrified at the news that the founders, employees, and most investors weren’t going to see a dime.

Yeah… me too.

So I asked my colleague, the brilliant and patient Elizabeth Yin, to please explain what in the snickerdoodle happened.

Elizabeth is a small angel investor in an SPV that invested in Divvy. But she doesn’t have any secret information. She doesn’t know the founder, didn’t have an inside peek into how the acquisition went down. She also didn’t make any money on this deal.

But she did have some guesses into what happened with this billion-dollar acquisition. And in the process, explained something that every investor, founder, and early employee ought to know about.

Shall we?

First, a brief history of Divvy

Divvy Homes is a proptech company that launched in 2016. When it launched, its model was a game-changer.

Divvy purchased homes for renters, then leased them back to the renters while the renters built up their savings for a down payment. The idea was to help people who were priced out of the traditional market become homeowners.

Divvy’s rise from 2017 to 2021 was the stuff of startup dreams. By the end of 2018, they had raised $45.5m. By 2019, they'd hit unicorn status. And in 2021 Divvy was sportinga $2.3B valuation.

But when interest rates started to climb in 2022, Divvy went through three rounds of layoffs. And in 2025 Brookfield Properties swooped in with a $1B acquisition offer.

By itself, $1B sounds like an awful lot of money. And it is. But it was also less than half of Divvy’s highest valuation.

Despite an incredible journey and a notable acquisition — and the accomplishment of helping +2,000 renters own homes – most people who believed in and supported Divvy won’t see a cent.

So what happened?

Two words: preference stack

Preference stack refers to the order in which shareholders are paid in an exit event.

When Divvy was acquired, there were all kinds of people on the cap table: investors, employees, founders.

Since Divvy didn’t raise more than $1B, you’d think that investors would — at the very least — get a 1x return on their investment.

That would leave some money leftover for the founders and perhaps early employees. Or to repay their debts.

But preference stack could have toppled this scenario.

A preference stack is an investor’s way of calling “first dibs”. It gives certain investors priority when it comes to getting paid after an acquisition or liquidation event.

Here's how it typically works:

1. Investors negotiate a liquidation preference during funding rounds.
2. This preference guarantees them a minimum return before other stakeholders get paid.
3. The preference can be a simple 1x (they get their money back first) or a multiple like 2x or 3x.

Preference stack is not uncommon to see in term sheets, especially at the later stage. A Series D investor, for example, might push for a term sheet that promises they’ll get paid first if there’s an exit.

But during tough economic times, like the ones we've seen recently, these preference stacks can become more aggressive.

If Divvy had an investor (or multiple investors) with preference stack of 3x, that means they’d make a 3x return on their investment before anyone else made a dime.

And if that happened, the other shareholders are left with a much smaller pool to – ahem – divvy up.

This might have happened with Divvy

While we don't know the exact details of Divvy's cap table, we can make an educated guess based on typical scenarios:

1. Late-stage investors likely had significant liquidation preferences.
2. These preferences could have eaten up a large portion of the acquisition money.
3. After fulfilling these preferences, there might not have been enough left to pay earlier investors, let alone employees.

Imagine the disappointment. You've worked years, poured your heart and soul into a company, only to find out that your equity is worth... nothing.

It's a sad reminder that in the world of startups, hustle is not always enough.

A wobbly stack

The preference stack isn't some abstract financial concept. It has real-world impacts that ripple through the entire startup ecosystem.

Let's break it down by stakeholder:

Late-stage investors: They're often the big winners. Their preferences give them a safety net, ensuring they get paid first – often with a guaranteed return.

Early investors: They can find themselves in a tight spot. If the preference stack is too heavy at the top, they might not see returns even on successful exits.

Employees: Often the last in line, employees with stock options can end up with worthless paper if the preference stack eats up all the exit value.

Founders: They're in a tricky position. They need to balance attracting investors with favorable terms while also ensuring there's potential upside for everyone involved.

But it's not just about individual stakeholders. Preference stacks can have broader implications:

1. They can impact valuations. A company with a heavy preference stack might struggle to raise future rounds at higher valuations.
2. They can influence funding strategies. Founders might seek alternative funding sources to avoid stacking too many preferences.
3. They raise ethical questions. Is it fair for late-stage investors to potentially wipe out the upside for early supporters and employees?

This trend towards more aggressive preference stacks in recent years is a double-edged sword. It might help companies secure funding in tough times, but at what cost?

Welp.

The world of startup exits is complex, filled with twists and surprise endings. The preference stack is just one factor that can turn a seemingly successful exit into a big bummer.

But knowledge is power. By understanding the nuances of term sheets, we can all make more informed decisions – whether we're founding companies, investing in them, or joining them.

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