It's amazing to me what companies will stick in these contracts, and how deep down the rabbit hole they'll stick it. It's their stock to do it with, of course, but it's just annoying that seemingly employee-centric companies will do such seemingly abusive things. For example, I've seen instances of sale restrictions being four contracts deep (e.g., "shall be governed by (x) agreement", and that agreement says "shall be bound by terms in (y)", and so on) in an agreement that employees were only ever officially given a draft version of but apparently still held as effective. It should have never been signed of course, but the obtuse nature and comforting language these things are couched in can be confusing.
At the same time, it's also unfortunate that people don't do research to look at other instruments for liquidity (like pre-paid forward transactions) that the restraining company has zero control over. In Uber's case though, it seems like they're actually paying on the up-and-up. Many companies intentionally deflate the fair market value of shares far, far below the actual valuation (like 1/25th the value paid by investors in the last round, for example), so offering to sell at what the investors paid in at is pretty decent.
Private equity is confusing and usually doesn't work in your favor. My general advice is to always appreciate it, but never depend on it as part of your compensation in any way (and Good Lord, don't bank your retirement on it!).
never depend on it as part of your compensation in any way
This is very true. I've been in the position of having worthless share options before. It's something everyone who's tempted to work 80 hour weeks because they have share options should remember. You should also remember the Google cook, who had $200m in options that the company tried to do him out of because he wasn't a developer.
Are we talking about Charlie Ayers, the Google Cook? He earned $26 million from his options, not $200 million. He also had over 150 employees and 5 executive chefs reporting to him. He did well and was fortunate but he also wasn't just some guy in a lunch room preparing cafeteria food.
Bean counters and penny pinchers will never fully realize the value of someone like that. He kept people well fed, with healthy options that let them spend more time socializing with their peers and getting back to their desks to code. The alternative is having people waste time in traffic commuting to the dearth of eating options (many of which are far less healthy. many engineers left to their own devices don't choose the healthiest options) near the Google campus. There is no doubt that Google got their $26 million worth in the productivity he accreted to his fellow employees in those early days.
Not wanting to turn your secretaries, groundskeepers, cooks, and security guards into millionaires is a mindset I have a hard time understanding. Isn't that the very measure of a breakout success?
"the company tried to do him out of because he wasn't a developer"
Is this true? Serious question because I've never heard that before (quite the opposite, I've only heard other early Google employees defend him from external sources as being, if anything, (relatively) undercompensated).
Anyway, the point stands, being a lowly common stock holding employee is a lottery that you can lose on in an infinite number of ways even if the company is wildly successful, which is already a huge longshot.
If you get a bunch of money from it, great; but you certainly shouldn't rely on it to pay off anything.
If you don't have a seat in the board room, assume your options -- or even the stock you outright own -- is worth zero. They'll dilute you in a heartbeat. I once asked the CEO about how the current dilution round was going to affect people who had exercised and left the previous year, and was told that they were no longer moving the company forward.
My general advice is to always appreciate it, but never depend on it as part of your compensation in any way (and Good Lord, don't bank your retirement on it!).
If thats the case why would talented folks work for a startup? Go work for Facebook or Google...
People who work for startups under conditions like these do it for a variety of reasons that have little to do with compensation in the near or medium term (even if they mistakenly believe they are being compensated fairly).
IMO, if you're savvy with your opportunity costs in your life (i.e., your time and whatever money you receive for it), you should never, ever accept ethereal long-term "gains" in lieu of immediate compensation. Your time investment is very real and concrete and spending it is irrevocable, and no matter how it's a "sure thing," equity in anything never is. There are far too many variables at play that you have zero control over. The founders could screw you over. You could get acqui-hired except you aren't part of the new team. The market conditions for your startup could turn out to be less than favorable. When it comes time to exercise your options, your shares could be heavily restricted and never be able to be sold or transferred. Investors could dilute the crap out of your shares to the point that you've actually lost money on the deal (which happens VERY often). Why waste a non-renewable resource like your life on something that very, very, very likely will yield you nothing?
More concretely, I would never accept a below market salary in exchange for equity in anything. I don't understand this practice. I will take equity as bonuses, perks, and so on, but I never factor it into my compensation considerations. Perhaps I'm at the place in life where risk doesn't attract me, but to me it's a foolish move even at 20 or whatever age it's apparently appropriate.
Take the real money and go buy lottery tickets. Your chance of success to become fabulously wealthy is about the same. Better yet, put it in a well-performing retirement account and guarantee yourself a bundle of money a little later in life. Why make yourself an underpaid, overworked slave for someone to make a few bucks when you could live a healthy, more comfortable life and have the same end game more reliably?
(And yes I know some people crave that sort of work environment, but I think those people are mentally ill ;))
I'm not saying you're a bad person if you prefer this situation or whatever. I just don't understand it, very likely never will understand, and at this point in life, have no interest in trying. :) I think there are a lot of people like me, though, who arrived at that conclusion the hard way by working their tails off for years and getting nothing in return, and then when it's over, looking back and seeing their mistakes in "taking the deal" so to speak.
Pre-ipo transfer restrictions are pretty normal. It never even occurred to me to try selling Google pre-ipo. It wasn't really a thing before secondmarket came along, and arguably trading on those markets is taking a company public without their consent.
If I ever start another company, I would definitely have transfer restrictions. It's pretty important to control your equity, and I think the day-trading mentality is toxic. (I would also avoid ever trading on the traditional stock markets, but that's a larger topic)
> It's pretty important to control your equity, and I think the day-trading mentality is toxic.
Equity is compensation. You can't tell your employees what to spend paychecks on, and you shouldn't be trying to block them from gaining liquidity. Maybe a doctor just told them they have a year to live, and won't be around for your planned 2019 IPO.
Unless you are granting them voting shares it is unfair to lock them into your vision of the company going forward, especially if they have departed.
I agree that it needs to be clearly communicated (and perhaps they did not do that in this case), but there's no reason why equity must be liquid. I certainly have no expectations of immediate liquidity in my startup investments.
Voting is a non-issue. Assuming things are structured right, the founders should retain majority control. The investment is primarily an investment in their vision, not something to be micro-managed by shareholders.
As a founder, how do you attract engineers from places like Google to your startup?
"I am Paul Buchheit, I made Gmail" seems like it would work for you, and something similarly awesome might work for like 10s or 100s of founders.
As a Google employee (with pretty high, low variance, liquid compensation), it seems having stock/options or options even a successful pre IPO company are kind of terrible. When you seemed to have won (worked for a successful company, vested), you don't even really win, or at least, not yet. Stay in that same desk, working on that same project until some indefinite future liquidity event happens.
There's also no reason why equity must be illiquid -- or skewed to benefit a company more than the employees that built it. There are ways for people who received equity as compensation to take a little out on terms that are fair for everyone. Just because it's always been done a certain way is not a good justification for this position... after all, Uber is breaking the taxi business in a similar fashion.
And it's doubly unfair to restrict the stock so that you can buy it back and then flip it for a much higher price. There might be legitimate reasons to control stock shares, but "so you can screw the people who backed you when nobody else would" is definitely not one of them.
Transfer restrictions need to buy the stock at the offered price. If I have a good faith buyer willing to pay $200 per share, the company should offer $200.
I was a start-up where the board just decided to be as difficult as possible, just to be difficult, and said, "you will need to hire an auditor to review the books to come up with an accurate market value, and we will not cooperate with the auditor", not in those exact words. Which of course completely breaks the books of a minority shareholder in a moderately successful company.
It's not the companys equity, its the shareholders equity - a company is owned by it's shareholders not the other way around.
It the same sort of issue thats allowed management teams in large listed companies to just do what they want even when it's not in shareholders interest - compare the compensation packages of many boards with the return they make for shareholders.
I'm in what might be a very similar position: I'm employed at a startup and was just given an option grant as a performance bonus. I believe I can't sell the stocks, and we're not really looking to go public, so I don't know what use they are or what any of it means. Is there a certain class of lawyer I can take my paperwork to and pay some fee for them to go over it and tell me what my options are (no pun intended)?
Are you upset you received options instead of cash for your bonus? If so, you could have mentioned that you would take a salary raise instead of options. There really isn't much you can do with options until they go public or the company gets bought. You can also try to sell them on Secondary Market or SharesPost.
Oh, I'm not upset, I'm doing quite well otherwise, I've just been unable to find a law firm advertising anything related to what I'm looking for, which either means to me I need a specific type of lawyer to evaluate it or any ol' lawyer might work?
Ahhh, it's probably better to have an investor look over it as they probably deal with hundreds of these. It would probably be the simplest route and they have a clear understanding of this market.
Don't spend money on a lawyer to ask about your company's stock options. Instead, sit down with HR when it's convenient, and ask them to explain to you the key terms.
How many shares am I getting? Roughly what percentage of the company does it represent? When do I need to pay for them? How much do they cost me? Do they expire at some point? Once I buy them, can I sell them?
That should cover most of what you need to know for now. Then read the paperwork and see if it matches mostly what you were told. Then forget about them and wait until something big happens at your company.
You can definitely pay a lawyer to explain this stuff to you. Make sure to pick one who has regular experience with startups and equity. Because a) you don't want to pay 'em to learn it, b) they'll need current experience to tell you what "normal" looks like, and c) if things go south, it's good to have an established relationship with a lawyer who regularly works in the field.
The (awesome) lawyer I've used for years is Adam Slote of Slote, Links, and Boreman: http://www.slotelaw.com/
But I'd encourage you to do your research first, so that you aren't paying a lot of money to be spoon-fed stuff you could get from Wikipedia and elsewhere. I'd start here:
It might be worth paying a lawyer for advice specific to your situation, but sometimes people pay lawyer (or consulting) rates for what is generic information about a particular topic.
In the case of stock options, you may want to do some preparation so you know what questions you need to ask:
1. Read the paperwork to get a general sense of what you have been given. Make a bullet point summary of the rights (exercise date, price) and obligations (e.g. deadlines for exercise, or what happens if you leave).
You will also want to understand the tax implications of the grant, as there may be things you need to do now, in order to minimize your tax liability.
IANAL but feel free to email me at the address in my profile
I would try reading your agreement, it usually plainly talks about what its restrictions are.
For instance a very common clause is called "first option" (don't quote me on these names, not 100% certain they are correct), in order to sell the stock you must first offer the company the stock at the same price.
An alternative (probably the one in the Uber example here) is "first option at market" where in order to sell you must first offer to sell to the company at the market rate ("helpfully" determined by the company).
Yes there are lawyers who can help you however, options are essentially worthless unless the company goes public.
Option grants, employee benefits, bonuses...these are all carrot sticks employers use for employee retention. Bigger companies like Google can offer bus rides, better benefits, higher salary, etc. Make sense?
If you got into a legal battle with your employer, there would be consequences to future employment.
The same is true of investors. A legal battle with a company you invested in might close off access to future deals.
Now, a reasonable person might evaluate the facts of the case if they have time...but not everyone has the time and/or would agree that they should sue Uber.
It is alot like having worked on a porn site I think. Some people would go "Oh, cool, you worked on a big project there that had the kind of scale we hope to achieve."
Others would look at it and drop your resume directly into the trashbin.
I suspect there is a similar effect on VC/Angel access to startups that are popular enough to have a bidding war like Uber.
I have an Aunt who is no longer able to find a job in the industry she originally worked due to a legal battle with someone who is well known and respected in that industry.
She has a job in a different industry now and makes significantly less [like 50%]. She doesn't think she'll be able to retire before 70 because of it.
Admittedly, the industry was very small and incestuous and it isn't like Tech where labor holds alot of power at present.
I also have a family friend who is an idiot and did something similar for stupid reasons [it turns out he signed paperwork he thought he never had, didn't keep copies]. He ended up in a government job eventually but he spent a couple years on welfare because he didn't believe my parents when they told him no one would hire him.
It really has an impact, at least anecdotal. It is possible I'm unusual in having close relationships with 2 people who had this happen and its much rarer in the general population.
It normally effects the first job you get after the legal battle.
However after the first job, nobody cares because you've proven yourself not to purposeful "trouble maker", and most likely makes the company look bad instead.
So, basically, your VC money is awesome, wonderful and welcome until the check clears...and then you're the "enemy" for wanting to stay in control of it.
Doesn't this reduce every early investment in a startup into a binary thing? You either lose it all, or hit a home run. Unless you pull a Groupon and exit everyone before the IPO.
The quote mentions Uber investors, not employees, even though the article deals mostly with an Uber employee trying to sell shares. This is why I'm a bit confused.
It seems like reforms are needed to protect workers from predatory stock option contracts like these. Workers have almost no negotiating power in these cases, since they usually have common shares and no board voting power.
Ultimately, workers need to value the options properly: ~$0.
Interestingly, with options/RSUs clauses in employement contracts, workers are making "investments" in privately held securities on the order of ~$100K.
In general (outside of employment contracts) such investments are not legal if the worker is not signed off as a "sophisticated investor".
I would like the SEC to close this loophole, by mandating some minimum disclosure requirements about the potential risks of options/RSUs, and barring employers from making misleading statements.
Employers need to do something to address the candidates' concern if they value options at $0.
And I don't mean "explain and promise really hard that the employee won't get screwed over." How about letting the employee's options be safe against dilution? How about not refusing third-party offers unless you agree to pay the same asking price?
Investors put money into a company. Company uses money to pay workers. Everyone goes home happy.
We're already there, only newbies and people who don't know any better are taking a discount on market salary for options. The bulk of the people I know who work at startups are demanding - and getting - market salaries, and the options are of negligible importance.
I'd say the options are worth more like 5% of whatever their value is when you get them. They aren't worthless but it really is a high risk gamble that you are going to get value out of them.
A lottery ticket with 5% odds of payoff would be phenomenal. I think $0 is the proper value - I've never worked for a startup that paid dollar one on options.
Warning, if I work somewhere, you should short that stock / not take options. Sorry.
Does that ever get depressing? Like, "Well the last seven companies I worked for all went belly-up in a few years, I don't expect this one to last much longer..."
Fair enough. Maybe it is more like .1-1%. I made up the 5% number off the top of my head tbh. I'd really need to sit down and see what % of startups actually go public. That would be a fairer number to use. 1 in 20? 1 in 50? 1 in 100?
Please keep your profile updated with where you work so I can short them. <3
5% is IMO extremely generous. Basically what that means is that there is a 5% chance that:
1 - Your options will fully vest before you leave the company due to internal or external factors
2 - The company will reach an exit (as opposed to flop over and die)
3 - The company will reach an exit sizable enough that after accounting for cut price, your options are still worth the value when you got them (accounting for inflation, of course)
4 - That #3 is still true after accounting for dilution
5 - You will successfully be able to exercise and exit your position without running into restrictions like this scenario.
Personally, the odds of all 5 points being hit for a particular company is a lot lower than 5%. It may be worth doing the math, but almost all of the time the number is so close to 0 that it's useful just to value all options at $0.
tl;dr: Never take a pay cut for options. Good God.
A lot of those 11% are still "failures" for the employees though - IPOs almost always are positive for employees, but acquisitions are not.
It is common for floundering companies to sell or go for acquihires, in which case your options are most certainly underwater and worthless.
Even in small acquisitions (that aren't just a fire-sale in disguise) it's quite possible for the investors and founders to get paid, but leave employees with little to no payout as well (certainly not the tune the options were originally valued).
Considering how difficult it is to differentiate between a "real" acquisition (with requisite payouts for all involved) and desperation acquisitions/acquihires, I doubt we'll ever see the true percentage. In any case, as an employee holding options, you are the last in line to get paid, never forget that.
My personal, unscientific ballpark is that the odds of exiting your options for at least the same amount as the original grant valuation is somewhere in the sub-1% range.
I know a number of places where the acquisition price was enough to perfectly cover whatever amount was needed to cover a majority of VCs on the board.
I.e., five people on a board, from VC group 1, VC group 2, VC group 3, the founder, and someone else. The VCs invested $44,140,000 into the company and get that at a minimum from any acquisition. Then the company gets acquired for $44,140,000.
I'm 99% sure this violates the fiduciary responsibilities a board of directors has, but, who the hell is going to sue?
> A lot of those 11% are still "failures" for the employees though - IPOs almost always are positive for employees, but acquisitions are not.
> My personal, unscientific ballpark is that the odds of exiting your options for at least the same amount as the original grant valuation is somewhere in the sub-1% range.
Fair enough, but lets call it .5%. Maybe I was off a decimal place. ;)
.5% of a chance at $200,000 is still worth something.
Eh. I own a lot of stock in one of the companies I used to work for. I can't legally sell it. That doesn't mean I don't own it, but I mentally adjust its on-paper value appropriately, basically multiplying its on-paper value by the chance that the company might go public. In effect, what I own is a lottery ticket, but I do own that ticket.
Is there room for legislation to ensure at least some liquidity in employee stock? I hate turning to government, but the current system makes it literally impossible for an employee to value options.
Isn't there a law that if there are more than 500 shareholders for a private company that the company must go public? Sounds like a totally reasonable reason for keeping a tight hold on the stock.
There's no requirement to go "public" in the sense of listing on an exchange, and available for public purchase. What changes at that point is SEC regulatory compliance kicks in: earnings/revenue go public, SEC compliance paperwork has to be filed just like a public corp. That's really why people try to stay under that number - you have all the drawbacks of being public, except a floated share price, and it would effective crush any IPO pop that they would expect to get, as financials would be totally available, so offer price would have to reflect the company's financials.
The underwriter of an IPO goes around and sells your stock to their largest clients in advance (which is where the company gets its payout). They sell your stock at say 10% less than what they think it will settle at. All the pre-IPO buyers cash out within the first few hours of trading. Without a big enough "pop" your stock is considered to have been a bad investment by the underwriters and the pre-IPO buyers because they didn't see 10%+ one day returns.
IPOs are layers upon layers of scams and shady dealings.
I think it's a fine line- I'm not in finance, but from what I understand you want some incentive to purchase a new issue as you have a set target of shares you're trying to move. I think that doubling in price is a bad thing, but I don't think movement of a few dollars per share is necessarily a bad thing.
Yes, but they should pay market rates for the stock. The article made it sound like they were trying to buy it up at $4 billion evaluation when they knew they'd be auctioning some off for $10+ billion.
Not that I think Uber is handling this constructively, but there's a valid reason why they would not offer the valuation bandied about in the press: they are not buying the same equity as the $17 billion+ equity.
The venture investors bought Preferred equity, the shares being sold by the employee are almost certainly Common equity. Common equity is worth less than Preferred equity. The times I have seen offers to buy Common shares in connection with a Preferred round, the discount has been as high as 50%.
This makes sense: assume you are an investor putting $1.2 billion into a company that has previously raised $300 million (this is roughly the recent Uber situation.) You are investing at a $17 billion valuation. Now assume that you were very, very wrong on the valuation and the company ends up selling for 90% less: $1.7 billion. You still get your money back. If the company goes on and sells for $34 billion, you double your money. This asymmetrical payout is one reason venture firms are comfortable taking the risk of such a high valuation.
Now assume you bought $10 million of Common shares from a former employee. If the company ended up selling for $1.7 billion, you would get back roughly $100,000 (assuming the preferred owns half the company.) You don't really have an asymmetrical payout: you stand to lose money if the valuation is wrong.
A wider the spread between the Preferred price and the Common price implies less confidence in the Preferred valuation. The actual valuation is the Common valuation, and the extra amount paid for Preferred stock is a kind of option value. So an alternative explanation to Uber short-changing its Common shareholders is that they believe the expected value of the company is closer to $4 billion than $17 billion and the Preferred buyers think the range of possible outcomes has an extremely large standard deviation.
They shouldn't have paid for a $17 billion valuation, but if there was a firm offer of $200 a share, they should have had to match the $200 a share instead of offering $135 (which was quoted as a $4B valuation). This would imply a valuation of around $6B.
"At the same time that it was restricting the aforementioned employee from selling, Uber also was preparing to raise new outside funding that ultimately would value the company at more than $18 billion."
Read carefully, this was prior to that round closing. Assumably they'd offer more now. (~5x)
Is there any reason for them to pay more? I mean sure, it is a bit of a dick move but they seem like they aren't exactly trying to buy back the stock. They just don't want too many people selling. So either they get cheap stock or they block the sale. Win win for Uber, right?
It is an abuse of monopoly power in this situation to pay below market rates.
You don't screw people who had faith [investors; early employees with equity] in you. They shouldered a good deal of risk and you knifed them in the back by paying below market rates.
What hasn't been mentioned yet is that employees hold Common Stock, whereas the investors generally hold preferred stock. The preferred stock is worth more than the common stock because of special protections/provisions/voting rights/etc.
It's perfectly reasonable that the price would be lower on a buyback program. On the other hand controlling the equity is pretty important and it's not surprising they won't let it go to open market.
Welcome to the wonderful world of being a minority shareholder.
> The employee also learned that Uber had amended its bylaws more than a year earlier, in order to restrict unapproved secondary sales. It was unclear if the bylaw change actually applied to shareholders who had not been party to the vote — lawyers seem to disagree on this point of Delaware law — but Uber threatened litigation if he tried to proceed. So he held. The financial and reputational hassles of a lawsuit would have just been too much, even if he had won.
One of the main reasons to incorporate in Delaware is that they have an extensive body of settled law on complex corporate issues. That Uber has managed to handle what should have been a pretty common and routine thing in a way that apparently is unclear under Delaware law is worthy of a story.
I would imagine of they happen to be an S or C Corporations. I believe C-Corps are mandated to go public if they exceed 100 shareholders per SEC. It also depends.
The reason people believe that it forces companies to go public is because, in many cases, the incremental cost to going public (above and beyond the filing) is insignificant compared to the advantages.
This is a typical way for a private company to manage who owns its stock -- namely investors, employees, and former employees. It's basically a right of first refusal.
You sell your options back to the company at the current market rate -- the rate at which that most recent investors purchased equity. That's your liquidity. The company will do this because it believes the options are undervalued compared to what they'll be worth in the future. If you don't want to do that, you hold and wait for the options to go up (or unfortunately down) in value.
If the company doesn't want to buy them, you _should_ be free to sell to others. Restrictions in _those_ cases would be worth writing about.
It's true that a lot could have changed since the previous investment round, but isn't that often the case in venture capital funding?
Paying a different price for one person's equity changes the valuation for everyone as the new market rate. This can be bad for an individual (could be sold for higher on private market) but also good (prevents someone else from selling at a major discount). Companies want to control valuation much more closely than that, so valuation is pegged to investment or some other major event.
Whether that's a good way to do things would be a nice discussion topic, but that's not the same as saying uber in particular is playing hardball. A little bit of research would reveal that it's standard practice.
A right of first refusal is usually the right to buy at the same price as a third party has offered, not at some other price determined by the company.
At the same time, it's also unfortunate that people don't do research to look at other instruments for liquidity (like pre-paid forward transactions) that the restraining company has zero control over. In Uber's case though, it seems like they're actually paying on the up-and-up. Many companies intentionally deflate the fair market value of shares far, far below the actual valuation (like 1/25th the value paid by investors in the last round, for example), so offering to sell at what the investors paid in at is pretty decent.
Private equity is confusing and usually doesn't work in your favor. My general advice is to always appreciate it, but never depend on it as part of your compensation in any way (and Good Lord, don't bank your retirement on it!).