Written by Chris Walton, JDBrian Jacobs founded Akademos in 1999 to operate online bookstores for colleges and universities. It seemed like a promising idea — Amazon started as an online bookstore, and the education vertical looked like a defensible niche. Jacobs raised capital from friends, family, and angel investors. Some bought common stock at prices as high as $26 per share.
Twenty-one years later, the company had never produced a single profitable year. A venture capital fund had poured in millions through successive rounds of preferred stock and debt, each round adding another layer of liquidation preferences to the capital structure. By the time the fund proposed a $12.5 million cash-out merger, the common stockholders would need the company to be worth at least $40 million before they’d see a dollar. Nobody thought it was worth $40 million. Nobody thought it was worth $20 million. The best third-party offer was $10 million. The common stockholders received nothing in the merger. They sued. Vice Chancellor Laster’s 93-page opinion found the fair value of their shares was zero.
Jacobs v. Akademos, Inc. (Del. Ch. Oct. 30, 2024) is a case that sits at the intersection of three things Eton’s clients deal with every day: 409A valuations of common stock in venture-backed companies, preferred stock waterfalls that determine where value breaks, and the question of what happens when the capital structure outgrows the enterprise value. The opinion is a 93-page practitioner’s guide to what the common stock in a stacked capital structure is actually worth — which, when the losses are chronic and the preferences are deep, may be nothing at all.
The factual background matters because the pattern is one every startup ecosystem participant will recognize. Akademos started with a defensible idea, raised seed capital from the founder’s network, and spent a decade trying to achieve the scale that would make a thin-margin business profitable. When angel money ran out, the company sought venture capital. The KV Fund — the venture capital affiliate of Kohlberg & Company, founded by Jerome Kohlberg Jr. after his departure from what became KKR — invested $2.5 million in 2009 in exchange for Series A Preferred Stock.
The Series A carried a liquidation preference triggered by a “Deemed Liquidation Event.” That’s the provision that would determine who got paid.
Then the cycle repeated. The company needed more cash. The KV Fund provided it — first as additional Series A Preferred ($1 million in 2010), then as Series A-1 Preferred ($1.83 million in 2011, giving the KV Fund majority voting control), then as Series B Preferred ($1 million in 2016, plus $3 million of converted debt at a 1.5x multiplier). In parallel, the fund extended promissory notes with repayment premiums: $2 million in 2018 (the “2018 Note,” redeemable at 1.5x in a change of control) and $2.25 million in 2019 (the “2019 Note,” with a 2x repayment premium in a change of control).
Each infusion was necessary. Each infusion was documented. Each infusion added another layer to the preferred stack. And each infusion was available to the common stockholders on the same terms — the KV Fund offered participation rights in the 2018 Note, for example, and every common stockholder declined. By the time the merger was proposed, the capital structure looked like this: Series A, A-1, and B Preferred Stock with liquidation preferences, plus accrued dividends, plus the 2018 Note at 1.5x repayment, plus the 2019 Note at 2x repayment. The aggregate senior claims totaled approximately $40 million.
The company’s enterprise value, by every available measure, was a fraction of that.
The capital structure created a payment waterfall — a priority sequence in which each class of security must be satisfied before the next class receives anything. In a venture-backed company, that waterfall typically runs: secured debt → unsecured debt → preferred stock (in order of seniority) → common stock. Each layer absorbs enterprise value before the next layer receives a dollar.
Here’s the basic waterfall math for Akademos. At a $12.5 million enterprise value:
The 2019 Note ($2.25 million at a 2x repayment premium) consumes $4.5 million. The 2018 Note ($2 million at a 1.5x repayment premium) consumes $3 million. The Series A, A-1, and B Preferred Stock liquidation preferences consume the remaining consideration. After the preferred stack is satisfied, the residual for common stock is zero. The common wouldn’t participate until enterprise value reached approximately $40 million — more than three times the merger price.
This is the same analytical framework that drives option pricing models (OPM) and probability-weighted expected return methods (PWERM) in 409A valuations. The common stock is functionally a call option: it has value only if the enterprise value exceeds the strike price (the aggregate preferences). When the enterprise value is $12.5 million and the strike price is $40 million, the option is deeply out of the money. In financial theory, a deeply out-of-the-money option still has some value because of time value and volatility. In a courtroom measuring fair value on a specific date for a company with twenty years of losses, the theoretical optionality has no factual support.
One of Akademos’s own board members, Burck Smith, understood this when he joined in 2019. He refused to take his compensation in stock options, telling the company he didn’t think the common stock would have any value short of a deal at $41 million or more — and he doubted the company could achieve more than $20–30 million. The company rejected his request for cash compensation, and Smith ultimately accepted $25,000 and a small option package. If a board member won’t take options because he doesn’t believe the common has value, that’s market evidence.
Before the KV Fund proposed the merger, the company and its investment banker ran a dual-track process — simultaneously seeking outside investment and acquisition interest. The results were unambiguous:
No one expressed any interest in an investment. Not one. The company approached multiple boutique investment banks; four declined to even take the engagement. The one that did run a process generated zero investment interest. The market’s verdict on investing in Akademos: no.
On the acquisition side, the company received a few indications of interest, but none valued the company above approximately $10 million. The investment banker then contacted sixteen additional parties focused on distressed businesses. Three expressed potential interest. Two started diligence. No one suggested a valuation. None made an offer.
Earlier, in 2015, Barnes & Noble had offered approximately $30 million in a stock-for-stock deal — but walked away after a major customer (City College of Chicago) signaled it might rebid its contract, and Barnes & Noble reduced its offer to $20 million before ultimately terminating discussions. That near-miss was the company’s high-water mark. By 2020, the market had moved further away.
The KV Fund’s $12.5 million proposal was the highest price anyone was willing to pay. The three-week go-shop that followed the merger agreement produced no competing offers. The dual-track process, the go-shop, and the Barnes & Noble history together established the market evidence that no one believed the company was worth enough for the common to participate.
This is the section that should be read by every 409A practitioner who values common stock in venture-backed companies.
The common stockholders in Akademos pointed to the company’s historical 409A valuations, which had assigned value to the common stock. Their argument: the company’s own appraisers determined the common had value, so the court should credit that determination. Vice Chancellor Laster rejected this evidence. The reasoning goes to a fundamental distinction between what a 409A valuation measures and what a court determines in litigation.
Purpose. A 409A valuation determines the fair market value of common stock for purposes of Section 409A of the Internal Revenue Code — specifically, to set the exercise price of stock options so that the company doesn’t trigger adverse tax consequences for option holders. The engagement is a tax-compliance exercise. A Delaware statutory appraisal determines the fair value of shares as a proportionate interest in a going concern for purposes of compensating stockholders who dissent from a merger. The purposes are different, and different purposes produce different standards.
Methodology. A 409A valuation of common stock in a venture-backed company with preferred stock typically uses an OPM (option pricing model) or PWERM (probability-weighted expected return method) to allocate enterprise value across the equity classes. The OPM treats each class of equity as a call option with a different strike price and allocates value by modeling the probability distribution of future outcomes — including low-probability, high-upside scenarios in which the enterprise value exceeds the preferred stack and the common participates. A litigation fair value analysis measures what the common is actually worth on a specific date given the company’s current condition. For a company with twenty years of losses and no credible path to the $40 million breakeven, the low-probability upside scenario in the OPM has no factual support in a courtroom. The theoretical optionality that gives the common value in the 409A context collapses under judicial scrutiny.
Context. A 409A valuation is prepared in the ordinary course of business, at a point in time when the company is still operating and presumably still raising capital. It reflects a forward-looking investment context. A litigation fair value analysis is prepared in the context of a specific transaction — in this case, a merger that represented the company’s best available exit after an exhaustive market process. The context shapes the analysis. In the 409A context, the company is a going concern with options. In the litigation context, the company was out of options.
The practical implication for 409A practitioners: your 409A report is correct for its purpose. The OPM allocation that assigns $0.50 per share to common stock in a company with a stacked capital structure is performing a valid tax-compliance function. But that number is not a representation of what the common is worth in an arm’s-length sale, in a statutory appraisal, or in any context where the question is “what would someone actually pay for this stock today?” After Akademos, any party that relies on a 409A valuation to establish fair value in litigation should expect the court to draw the same distinction Laster drew.
The petitioners presented a DCF analysis with financial projections showing future profitability. Laster rejected the projections as speculative, finding they contradicted two decades of actual results. This holding connects to the projection credibility principle that runs through the entire Delaware appraisal pipeline:
In Ramcell v. Alltel, litigation-built projections were weighted at only 30% because they had no ordinary-course anchor. In DFC Global, the Supreme Court criticized reliance on management projections that had been adjusted for litigation. In Blue Blade v. Norcraft, the court rejected both experts’ projections and built its own model. Akademos takes the principle to its logical endpoint: when the historical record flatly contradicts the projections — twenty years of losses versus a forecast of profitability — the projections fail on their face.
The founder, Jacobs, had repeatedly asserted that the company was on the verge of success. He had previously suggested valuations around $70 million. The court found him not credible — “Panglossian in the extreme” — noting that “he was too close to his creation to be objective.” His assertions about the company’s prospects were advocacy dressed as analysis.
For startup founders and their counsel: believing in your company is a founder’s job. Translating that belief into defensible financial projections is a different exercise. A DCF that projects profitability for a company that has never been profitable requires a credible, identifiable basis for the inflection — a new product, a new contract, a structural change in cost or revenue. “We believe we’ll achieve scale” is not a basis. “We signed a contract with X that adds Y in guaranteed annual revenue and shifts our gross margin from Z% to Z+10%” is a basis. The court in Akademos found nothing in the second category.
The common stockholders also brought breach of fiduciary duty claims. Because the merger was a conflicted-controller transaction — the KV Fund controlled the company and was the buyer — the entire fairness standard applied. The defendants bore the burden of proving the transaction was entirely fair in both dimensions: fair price and fair dealing.
The process was imperfect. The company did not condition the merger on the MFW protections (approval by both an independent special committee and a majority of the unaffiliated stockholders). The defendants explained that the company lacked the funds to support a full MFW process — an explanation the court found credible given the company’s financial distress. The go-shop was only three weeks. The merger initially closed in September 2020 but was restructured and closed again in December 2020 after the lawyers discovered a procedural defect in the first closing.
But the price was fair. Laster held that “[t]he common stockholders received nothing in the Merger, but that was the substantial equivalent of what they had before.” The court applied entire fairness as a unitary standard — evaluating fair price and fair dealing together, not as independent boxes that must each be separately checked. The strength of the fair price evidence was sufficient to carry the entire fairness burden despite the procedural imperfections.
The court drew an important distinction between fair price for purposes of appraisal and fair price for purposes of entire fairness. In appraisal, the court picks a single number representing fair value. In entire fairness, the court determines whether the transaction price falls within a “range of fairness” — a broader standard that accommodates the practical constraints of distressed transactions. Akademos is a case where the price was at the very bottom of any conceivable range (zero for the common), and it was still fair — because the market evidence confirmed that zero was where the common actually sat.
For VC fund counsel structuring take-privates of portfolio companies: the dual-track process is what made this work. The investment banker contacted multiple parties, ran an exhaustive outreach, and produced market evidence that nobody valued the company above the preferred stack. That evidence, combined with the go-shop that generated no competing bids, established the factual foundation for fair price. The process doesn’t need to be perfect. It needs to produce evidence that the price reflects reality. The KV Fund’s net loss on the entire investment was $18 million — a fact the court noted. When the controller loses money on the deal, the squeeze-out narrative loses its force.
If the protection isn’t in the courtroom — and after Akademos, it isn’t, when the common is underwater — the protection is in the term sheet. The capital structure decisions made at each funding round determine the breakeven point at which the common begins to participate. Every founder and startup counsel should understand how each term affects that breakeven:
Liquidation preference multiples. A 1x non-participating liquidation preference is standard. A 2x or 3x preference doubles or triples the amount that must be returned to the preferred before the common participates. Akademos’s 2019 Note carried a 2x repayment premium. That single term consumed $4.5 million of the $12.5 million merger consideration.
Participation rights. Participating preferred gets its liquidation preference plus a pro rata share of the remaining proceeds alongside the common. Non-participating preferred chooses the higher of its liquidation preference or its pro rata share. Participation rights raise the breakeven dramatically because the preferred takes value from both the senior and the residual tiers. A participation cap limits the double-dip.
Accrued dividends. Cumulative preferred dividends accrue whether or not declared and add to the liquidation preference over time. Akademos’s preferred carried accrued dividends that increased the senior claims year after year. If your term sheet includes cumulative dividends, every year the company operates without a liquidity event raises the breakeven for the common.
Anti-dilution ratchets. A down round triggers anti-dilution protection that increases the preferred’s share of the equity — further diluting the common and pushing the breakeven higher. Full ratchet anti-dilution is the most punitive; broad-based weighted average is less so. The difference matters when the company is raising survival capital at a lower valuation.
Pay-to-play provisions. These require existing preferred holders to participate in a new round or lose their preferential rights (converting to common). Pay-to-play provisions protect the common by preventing passive preferred holders from free-riding on new investors’ capital while maintaining their full liquidation preference. Akademos didn’t have effective pay-to-play, and the KV Fund accumulated preferences through each successive round.
A founder who understands the waterfall before signing can negotiate a capital structure that doesn’t squeeze the common out at exit. A founder who doesn’t understand it until the merger is proposed is the founder in Akademos.
The 409A / litigation disconnect in Akademos is not universal. There are conditions under which the two measures produce similar answers, and conditions under which they diverge dramatically. Understanding the spectrum matters for both 409A practitioners and litigation counsel:
They converge when the common is in the money. If the enterprise value credibly exceeds the aggregate preferences, the common stock has value under both standards. The OPM allocation in the 409A and the going-concern analysis in litigation will both recognize that value. The methodological details may differ, but the directional answer is the same.
They diverge when the common is at the money. When the enterprise value is close to the breakeven, the OPM assigns meaningful value to the common because of time value and volatility — the theoretical probability that the enterprise value will appreciate above the breakeven before exit. A litigation court may assign less value, because it measures what the stock is worth now, not what it might be worth under favorable assumptions. This is the gray zone where the 409A valuation may be materially higher than litigation fair value.
They diverge maximally when the common is deeply out of the money. This is Akademos. Enterprise value of $12.5 million, breakeven at $40 million. The OPM still assigns some theoretical value because the model accounts for the possibility, however remote, that the company achieves $40 million. The court assigns zero because that possibility is speculative and contradicted by twenty years of evidence. The gap between the 409A number and litigation fair value can be the entire 409A value.
For 409A practitioners: this spectrum should inform how you present the 409A conclusion to the client. The common stock value in your report is correct for tax compliance purposes. It is not a guarantee, a floor, or a litigation weapon. If the client asks “what is my common stock worth?” the honest answer after Akademos is: “For 409A purposes, the OPM assigns $X. For purposes of a sale or appraisal, the answer depends on where the enterprise value sits relative to the preferred stack — and if it’s below the breakeven, the answer may be zero.”
Akademos doesn’t hold that common stock in a venture-backed company is always worthless. It holds that common stock is worthless when the enterprise value is well below the aggregate preferences and the path to value depends on speculative projections that contradict the company’s track record. The common retains value when:
The enterprise value credibly exceeds the breakeven. The company has achieved or is demonstrably approaching profitability. Credible third-party interest confirms market value above the stack. The capital structure includes participation caps, conversion features, or other provisions that give the common a share of value below the full breakeven. Or the preferred holders have agreed to restructure or reduce their preferences in connection with a transaction (as the KV Fund was asked to do in the Barnes & Noble negotiation, but declined).
The threshold question for any common stockholder evaluating their position — or any 409A practitioner assigning value to common — is: does the credible evidence support an enterprise value above the aggregate preferences? If the answer is yes, the common has real value in both the 409A and litigation contexts. If the answer is no, the 409A may still assign theoretical value, but a court will not.
Vice Chancellor Laster’s 93-page opinion described as “a scholarly work of art” by the Delaware Corporate & Commercial Litigation Blog is a practitioner’s guide to three realities of venture-backed company economics:
First, capital structure determines the valuation fight. When the preferred stack requires $40 million before the common participates and the enterprise value is $12.5 million, no methodology — DCF, contingent-claim model, or comparable transaction analysis — can manufacture value that doesn’t exist. The waterfall is the analysis.
Second, 409A valuations serve a tax-compliance purpose and should not be imported into litigation. The OPM’s theoretical probability distribution of future outcomes is not evidence of current fair value. Laster dismissed the 409A valuations without difficulty. After Akademos, any litigant who leads with a 409A report should expect the same treatment.
Third, entire fairness can be satisfied even when the common receives nothing, provided the price reflects economic reality and the market evidence confirms it. A controller who runs a genuine dual-track process, demonstrates that no third party would pay enough to reach the common, and can show that it lost money on the overall investment has the factual foundation to carry the entire fairness burden — even without full MFW protections.
For founders, the lesson is forward-looking: understand the waterfall before you sign the term sheet. Every liquidation preference multiple, every accrued dividend provision, and every repayment premium raises the breakeven point at which your common stock begins to participate. By the time the breakeven reaches a number nobody believes the company can achieve, the common is worthless — not because someone took it from you, but because the capital structure you agreed to placed it there. The courtroom can’t fix that. The term sheet can.
If you need to understand how the capital structure in a venture-backed company affects the fair value of common stock — whether for a 409A engagement, a transaction, or litigation — happy to talk through the waterfall analysis. The breakeven calculation is usually the most important number in the engagement, and it’s the one most clients have never seen.
Schedule a free consultation meeting to discuss your valuation needs.
