For those of you who are new to the story, here's what's going on: The New York Observer wants to buy DealBreaker, a Wall Street tabloid blog that has served as the platform for the humor and scoops of writer Bess Levin. Breaking Media, which owns DealBreaker as well as Fashionista and AboveTheLaw, would reportedly like to sell. But Bess Levin is holding out for more money, according to Nicholas Carlson at Business Insider.
I don't think Bess has any actual equity in Breaking Media and she certainly has no contractual rights to veto a sale of DealBreaker. But in this situation actual equity ownership and contractual rights are irrelevant. Bess holds a de facto veto because so much of the value of the company would be lost if she left.
DealBreaker's readers are frothy-mouthed fans of Bess. Any acquisition that didn't bring Bess along would be counter-productive. Bess's fans would turn against the site, and Bess would likely find backers for a competitor. (Barry Ritholtz has already offered to stake her.)
To put it differently, despite what the paperwork might say, Bess is an economic owner of DealBreaker. Attempts to pay out the legal owners while ignoring her economic ownership will fail.
It didn't have to be this way. DealBreaker's owners could have bought out Bess's economic ownership earlier if they had put her under a multi-year contract. If she was under contract, DealBreaker could be sold without her consent. But they would have had to pay for this by offering her a signing bonus or a significantly higher salary.
To put it still differently, over the last couple of years Bess and Breaking Media were faced with the choice to divide between them the risk that DealBreaker wouldn't find a buyer. Breaking Media could have assumed this risk by paying a premium to Bess to get her to agree to a multi-year contract. In essence, the premium they would have paid would have been money they risked in order to capture the hoped for return upon a sale.
Instead, Bess assumed the risk, giving up the right to higher pay under contract for the right to demand higher pay on a sale.
In any case, Bess is not unfairly holding up the deal, although I'm sure some of Breaking Media's investors might view it that way. She is merely exercising a right she retained and that the investors never bought.
It was, however, probably foolish for Breaking Media to proceed this far into the deal without explicitly locking Bess in with a contract.
The sale of DealBreaker would certainly have gone a lot smoother if Breaking Media's investors had paid for Bess's ownership stake earlier rather than waiting until the last moment.
(Full disclosure: I ran DealBreaker from 2006-2008. I was not under contract there . At some point I was offered a small equity stake in Breaking Media but I left before it vested. Currently, I have no direct financial interest in Breaking Media. Also, I left DealBreaker to join the company that became Business Insider, which broke the news of the potential DealBreaker sale. Bess, Felix, Mike and Nich are friends of mine. I don't think I've ever met this Robert Cyran fellow. Barry Ritholtz tried to bet me $10,000 over the CRA's role in the housing bubble.)
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