No Layoffs in Philz Coffee Sale, But Stock-Owning Former Employees Will Lose Out

As private equity firm Freeman Spogli completes a deal to buy Bay Area coffee company Philz Coffee, there won’t be any job cuts or store closures, CEO Mahesh Sadarangani said.

Some former employees, however, will have to say goodbye to their investments.

Ten former employees who invested in the company by buying shares during and after their time at Philz — known as “common stock,” which can bring voting rights and ownership — before 2022, “did lose their money in the investment,” as part of the deal with the equity company, Sadarangani said.

“That’s not an easy thing. What I would say, with any investment, there’s risk, but no current team members were impacted,” Sadarangani said. “And as we think about moving forward in our growth, it’s something I don’t take lightly.”

What’s happening to Philz is something that occurs “fairly often” when a smaller company is sold, according to UC Berkeley School of Law professor Prasad Krishnamurthy.

Especially when the company runs out of money.

“Philz appears loaded up on debt and preferred shares. So, for whatever price they’re being potentially sold to the private equity holder — and that could be either through a kind of merger and acquisition transaction or it could be through asset sale,” Krishnamurthy said. “Either way, after the debt holders get paid off and after the preferred shareholders get paid up, there doesn’t seem to be any money left over for the common shareholders.”

Former employees who anonymously spoke with Mission Local said they paid tens of thousands of dollars to purchase their stock, which is now essentially worthless.

“I was expecting to at least gain something of it,” said a former employee, who paid $12,000 for her shares in 2013.

Current employees will be getting a “thank you” bonus of an undisclosed amount as part of the deal, Sadarangani said.

“That’s what’s really exciting as we think about what’s most important about this brand,” Sadarangani said.“It’s our team and our customers that we’re very thankful for.”

The company, which was founded in San Francisco’s Mission District in 2003, currently has 77 stores spread across California and Chicago and around 1,500 employees, with plans to expand to 10 more locations. Sadarangani said they’re considering locations in adjacent states like Arizona and Texas.

“But nothing is going to change,” Sadarangani said. “We want to have that same great cup of coffee, one cup at a time, but just bring it to more communities.”

The sale was announced in a release Aug. 4. Philz declined to state the price of the sale, but Mission Local reported $145 million.

Chris Watts, a former manager of the Castro and Mission locations, said the company’s culture had soured in recent years, becoming increasingly corporate even before the sale.

“Become a people company again,” said Watts, who told KQED he left the company late last month after being told to reduce his staff’s hours in a way that would affect their health insurance. “That’s one of our ideals that we all lived off of, was we are a people company and a coffee company second. By the way that they’re treating everyone right now, it’s all about profits, it’s not about people.”

Sadarangani denied that Philz changes employee benefits based on hours.

For the CEO’s part in the private equity deal, he “will receive compensation and proceeds in connection with the transaction,” according to the company’s website, and will be reinvesting “100%” of his after-tax proceeds back into the company.

KQED’s Carly Severn and Elize Manoukian contributed to this report.