21 ms·

When a Unicorn Startup Stumbles, Its Employees Get Hurt

344 points by igonvalue 11y ago

brown9-2 11y ago
Ms. Wyatt introduced BlackBerry’s chief, John S. Chen, who winkingly apologized for how his deal makers had driven Good’s final sale price down to $425 million, less than half of the company’s $1.1 billion private valuation. I've never been a CEO or acquired a company but I think there probably aren't too many worse things you could say to the employees of a company that you've just acquired.
- atonse 11y ago
  You should see how awkwardly he debuted one of the latest phones, and you'll understand. Might just be social awkwardness. (Still sucks, but feels microscopically less malicious).
- pinewurst 11y ago
  Also can you imagine being an employee at that meeting? Not only are your share values decimated (literally), you're now working for walking dead BlackBerry assuming you're not soon laid-off.
- djloche 11y ago
  The "deal makers" didn't drive down the value of the company. Good did it themselves. They were hemorrhaging money. They did not have the stronger position at the negotiation table.
- gamble 11y ago
  A company I was working for was acquired and the first thing the new management said in the initial meeting was that they had no interest in owning us. They were only acquiring the company because another office had government contracts they wanted. Also, our equity was worthless now. But don't worry, because no one is getting fired! (Instead everyone resigned within a few months)
randomname2 11y ago
This article is written as if it's the startup's fault that tax laws are irrational. Doesn't reflect well on the NYT.
- powera 11y ago
  The startup and/or its employees should have known the tax laws. It's not like this exact thing hasn't been happening for years and years. (And it kind of is the startups fault that there isn't a way to exercise-and-sell the options. If it was a public company you wouldn't need to take the risk of a massive AMT bill)
  - FastComputer 11y ago
    Exactly! I had left options on the table at several companies because I knew about the tax implications. In one case, I would have made money had I accepted the options. During the 1999 crash, they actually bailed out some dot-come speculators who "didn't know" about AMT. This outraged me. I purposely didn't speculate, and yet I was forced to subsidize those who did. America is disgustingly unfair. (Most of the people posting here do not understand taxes and the AMT.)
- jameshart 11y ago
  The decision to accept a deal which valued the employees' equity so low compared to the VC owned equity is entirely the company's own. I suppose you could argue that the tax system should be aware that common stock valuation should not be inferred from preferred stock valuation...
  - tvladeck 11y ago
    The valuation of the company and the waterfall of the payment are two separate things. Presumably this was the highest valuation they could have gotten (no reason not to believe it given that it was a distressed sale). And the tax on the common stock the employees received when they exercised their options was based on the valuation of the common stock - so the tax system did correctly handle that.
untog 11y ago
The fact that some employees have to pay taxes based on the valuations that VCs dream up terrifies me.
- davidu 11y ago
  Only those who early exercise, or exercise their stock as it vests. They did this to try and optimize for long-term capital gains. For most employees who leave their option grants as options, there is nothing to worry about. When you are given a grant of stock options, you can sometimes ask the company to let you exercise it early, and vest the shares instead of the options. If you do this when the fair market value (FMV) of the underlying stock is the same as when the options are granted, you will not be in a precarious tax situation. However, many people wait a couple years before deciding to exercise their options, and as a result, they need to recognize a paper gain when they exercise later as the FMV is substantially higher. That's what happened here. They exercised later, thinking the stock price would go even higher, and they were wrong, but they had to pay taxes on that higher price. While it's true they paid a lot of extra taxes, since they never recognized the gains, they can roll that tax credit forward to cover future gains they may get at some other point in the future. I'm not sure how long you can roll these losses forward, but I think it's for a substantial period of time.
  - ardiem 11y ago
    Correct me if I'm wrong, but even with an early exercise (or an exercise of vested options) where the valuation matches the strike price, that employee would still have had to personally fork over the amount needed to purchase the underlying shares. In the scenario described in the article, they've still lost a substantial chunk of money if the valuation is now a fraction of the strike price. Secondly, while capital losses can be carried forward indefinitely, you can only apply ~$3,000 per year (as a deduction, not a credit).
    - pc86 11y ago
      > that employee would still have had to personally fork over the amount needed to purchase the underlying shares Then what is the difference over just buying the shares outright as opposed to exercising options? My understanding has always been that exercising options means getting a benefit (the shares) which has a value (the strike price) and you subsequently pay tax on that value.
sarciszewski 11y ago
> Even worse, they had paid taxes on the stock based on the higher value. That's the most annoying part of the entire article, and why I ask for salary rather than equity. Keep your stock, I'd rather pay my bills.
- ScottGillis 11y ago
  It's all about risk. Unfortunately, this risk did not pay off.
  - sarciszewski 11y ago
    If you want risk, be an entrepreneur. If you want security, be an employee for a big company. And I suppose I should add, "If you want to get screwed over, be an employee at a unicorn startup," based on this new information.
    - pc86 11y ago
      I'm not as pessimistic as most here, but start-up employee really is the worst of all worlds. 1. Reports vary but the general consensus seems to be lower pay than a Fortune 500 or similar for more demanding hours. 2. If you're offered equity it's an insulting fractional percentage (how can you be offered 0.1% and not let the profanities fly?), and will need to use actual money to exercise the options. 3. There are tons of stories of completely incompetent and/or corrupt founders literally locking the door on employees (Zirtual et al). 4. I'd be remiss if I didn't at least bring up the insane (comparatively) COL of the Bay Area compared to even other large US metropolitan areas. I'm not going to start railing about VC-istan because I do think the degree to which the system is rigged gets overblown, but if you're going to be involved in start-ups it doesn't make sense to be anything other than a founder, C-level-for-hire employee, or investor IMO.
    - ryguytilidie 11y ago
      I always find it funny when startup founders believe that they are taking on more "risk". So when the company isn't doing well, the founder lays themselves off first right? No? Hm, seems like the rank and file employee takes on the risk there... Not to mention that it's probably a lot easier for a founder to get another job than their employees. Oh and by the way, the founder has been paid more, has gotten more stock and has probably had investors pay for a lot more nice dinners/drinks than their employees. But yeah, the founders deserve to be compensated much higher because of this "risk", yes indeed.
rwmj 11y ago
Can the overpaid tax be claimed back?
- deleted 11y ago
  [deleted]
- Apes 11y ago
  Theoretically, but only over a very long period of many years. If it's a big enough overpay, then it's possible for it to take many decades. edit: Here's a VERY simplified overview: http://www.wikihow.com/Claim-AMT-Credit http://www.wikihow.com/Claim-AMT-Credit
  - toomuchtodo 11y ago
    I have enough overpaid tax at 33 to tide me over until death. Lessons learned.
tvladeck 11y ago
Regarding the fact that the employees had to pay tax on what turned out to be worthless shares: They could have avoided this by waiting to exercise their options on the eve of the liquidity event. In this case there would have been no risk. But they exercised earlier presumably to start the clock on long term capital gains treatment for the stock they received when they exercised. They took risk they didn't need to take and they got burned. It's worth keeping that in mind as another aspect to the story.
- BlewisJS 11y ago
  You can't presume that they exercised early voluntarily. If you leave the company, you typically have 90 days to exercise options or they are forfeited back to the company. In other cases, they actually just expire after enough time passes, which again forces employees to exercise before a liquidity event.
  - tvladeck 11y ago
    Fair point. I did make that assumption.
    - JonFish85 11y ago
      Again though nobody forced them to exercise. It accelerates the timeline, but it's not forcing anyone into anything more than having to make a decision.
      - tptacek 11y ago
        Typically, when you leave a company that issued you incentive options, you are forced to execute within 90 days or forfeit the shares entirely.
    - alttab 11y ago
      To your point though, and to press it further - if companies require that you exercise your options in a window after they vest or they expire - they were never really options to begin with. In essence, the vesting schedule on expiring options is a timeline for you forking over risk-filled cash or forfeit part of your "compensation." The advice seems to suggest if their options expire if you don't buy them at a certain point (except for leaving the company, which makes sense), say no and ask for cash. If they can't pay, now you know where you really stand.
mathgeek 11y ago
> To pay those taxes, some employees emptied savings accounts and borrowed money. Investing your life savings and/or loaned money into a single stock is always a huge warning sign that you're being foolish.
- caseysoftware 11y ago
  Yes, this strikes me as very Enron-ish throughout.
  - mathgeek 11y ago
    Interesting. In what ways? Enron was a public company that committed fraud.
    - caseysoftware 11y ago
      The management pushing the stock and painting a rosy picture while behind the scenes the ship was sinking. The employees putting everything they had (and then some) into a single stock from their employer. I don't know if there was criminal behavior involved but an imbalance of information was in play that cost the employees everything and then some.
    - TDL 11y ago
      I believe before the collapse Enron's management would berate employees who sold stock in their 401-ks. Management actively mislead their own employees. I've heard this from a number of sources (including a family friend who left Enron a couple years before the collapse.) Obviously, take my comment with a grain of salt since it's mostly based on anecdote.
    - brown9-2 11y ago
      Various accounts of the Enron saga include anecdotes of employees happily (and being encouraged to) invest most or all of their 401k in Enron stock.
    - erik998 11y ago
      The tragedy of Enron was the automatic investment plans in the 401k for most employees. The default choice was Enron stock. Also, depending on the nature of the matching contribution, Enron stock might have benefited from a larger matching employer contribution percentage or discounted share price. This is why 401k plans now offer various choices that are suitable and diversified for most people. http://blogs.wsj.com/moneybeat/2014/07/04/are-you-stuck-on-your-companys-stock/ http://blogs.wsj.com/moneybeat/2014/07/04/are-you-stuck-on-y... A defined benefit plan could have prevented this tragedy. It's funny though. Defined benefit plans are mocked at by large firms but increasingly being used by wealthy individuals/families and their small businesses. Nothing beats government subsidized PBGC insurance for the future retirement plans of America's job creators.
lectrick 11y ago
This sounds tautological...
Spooky23 11y ago
If Good was a unicorn, that definition needs some work. Good was in a downward arc since 2011-2012 imo. How many new customers did they acquire compared to Airwatch/MobileIron/etc?
- sangnoir 11y ago
  "Unicorn" is rather well-defined (if somewhat arbitrarily):any valuation north of $1bn qualifies a startup as a unicorn. In some cases - such as this, the $1bn+ valuation is fleeting / illusory.
  - Spooky23 11y ago
    Gotcha. Usually you hear the term referring to Uber, Dropbox, etc. I never would have put Good in that company. (Although Dropbox can't seem to make a product that I am willing to pay for)
throwaway1223 11y ago
I interviewed at this company a couple years back and a huge selling point at the interview was their upcoming IPO plans. They eventually gave me an offer which I turned down because enterprise and security is a boring area to work on. Based on these recent series of articles on startups, its becoming more and more apparent that while starting a startup is a fantastic thing to do, being an employee of one has mostly downsides. Its a much better career move for non-founders to work for large established companies.
ditonal 11y ago
Very glad the NYTimes ran this piece. The only part they underplayed is they made it sound like the startup "stumbled." No, it sounds like it went exactly as planned. Blackberry got the acquisitions, investors got their money, execs got their bonuses, and the rank-and-file got nothing. That isn't stumbling, that's the playbook. Tech employees need to wake up about common vs preferred shares, and that the former are worthless. They are NOT worthless because they are "lottery tickets" and most startups fail. They are worthless because they are designed, as a financial instrument, to be fake equity with no real protection from dilution and liquidation preference. The most insulting aspect of common shares is that engineers get talked into pay cuts on the premise that they get these options, essentially being asked to invest a portion of their potential compensation into the company, but are then told they don't deserve to be given real equity because they aren't "real" investors. I understand that from a founder's perspective, asking someone to give you millions of dollars is significantly more challenging than asking someone to take a 30% pay cut, so it's easy to give strong preference to the former. But, supposedly and debatably, it's also difficult to recruit talent, and it's going to be significantly more difficult as employees increasingly realize that Common ISO's aren't "lottery tickets" they are "toilet paper". So either startups are going to have to re-invent these equity packages, or the talent will flock away from the VC companies and towards companies that can pay salary. Of course, the VCs have a huge playbook to flood the market with more talent to (taking $100 mil taxpayer money to fund the same bootcamps they invest in to work for the same companies they hire via Obama's tech talent shortage program, for example), so who knows.
- ryporter 11y ago
  According to the article, employees had the opportunity to sell their "worthless" shares for $3/share.
  - Spoom 11y ago
    Prior to the deal, on the secondary market, while all of their managers were telling them that the shares would only massively increase in value.
  - dradbdgj 11y ago
deleted 11y ago
[deleted]
seanconaty 11y ago
It is precisely the protections of preferred stock that led to the overvaluation in the first place. http://recode.net/2015/05/10/heres-one-thing-all-the-billion-dollar-unicorns-have-in-common/ http://recode.net/2015/05/10/heres-one-thing-all-the-billion... As a common stock holder, you should know that you'll be the last one paid, if at all, because few companies can meet unicorn expectations.
jerf 11y ago
Is there some other industry where, when a company stumbles, its employees don't get hurt? I live in Michigan, and when the car industry "stumbled" everyone I locally know at least knew someone who got hit, at the very very least with long-term stagnant wages even as their responsibilities amped up to cover the missing people, and they were the ones who came out relatively unscathed. I mean, the details of the article are all fine and dandy and interesting (no sarcasm, there's nothing wrong with the facts and they're at least worth a story), but the headline and framing seem to imply that there's some sort of alternative? The only problem unique to the tech-unicorns here is exercising stock options when you can't pay for the taxes. Don't do that.
- justinph 11y ago
  At least with the auto industry, the unions were able to offer some protections for the worker. How many programmers belong to a union?
  - jerf 11y ago
    Unions can't do anything about the company you're working for running out of resources. That's not what they are for.
    - gaius 11y ago
      The can ensure the pie is sliced more fairly tho'.
      - walshemj 11y ago
        And lobby for more sane tax for employee share options.
    - serge2k 11y ago
      They can help protect you from getting screwed over while the execs walk away with millions.
sbov 11y ago
Ultimately the problem seems to be preferred shares driving the valuation of common shares. They obviously aren't the same, so I don't know why it happens. I'm not a lawyer so I don't know if there's a way around this.
- nemo44x 11y ago
  Fair Market Value drives the value of common shares, not preferred share costs. FMV is derived using a formula the IRS has to project what a share in the company is worth and it is usually far less than what the latest investors paid.
dsugarman 11y ago
I imagine this is going to be a lot worse now with unicorn craze. It seems like to some, any liquidation terms were acceptable to get to the $1b valuation mark.
- nemo44x 11y ago
  Indeed. Smart, young companies are refusing preferred share investments and are willing to keep their valuation lower because of that. It's true that you're selling a larger portion of your future for less money in many ways, but you protect the founders and original investors as well as the employees too. Huge growth is important but it's also important to be smart about it. Selling a part of your company for a bit less if often better than mortgaging the common shares.
grandalf 11y ago
The real question is, when do you "buy in" to a valuation. Things are only worth what someone else will pay. So if you don't have evidence that there is a buyer eagerly wanting to pay $5/share for the options you are getting for $4/share, don't assume they are worth anything. Because of dilution math, it's very rare for employees of all but unicorn startups to cash in at anything close to the expected value of the shares. That means that your 50K shares awarded after a $5M series A (on a big pre money valuation) are not going to be worth much if the company sells for $10M the following year. Founders should set up a chart that tracks the various possible outcomes and lets employees understand what their options will be worth in those scenarios and see what the founder would get in those scenarios. This would allow additional shares to be given to valued employees if the company turns out to be a beautiful white horse but not quite a unicorn. The thing to be aware of is when the founder has the option of cashing out for $10M and the employees effectively getting nothing. If this happens the investors will have essentially lost interest and will potentially get their investment back but will not mention the deal to anyone again. This is a sort of perverse incentive because the founder will be inclined to deceive employees into thinking a big exit is on the way, while simultaneously negotiating a low millions acquisition and high salary at the acquiring company. In that scenario, the founder should have to renegotiate so that the most valuable employees get at least 10% of the founder's payout, but employees rarely have (or use) that much leverage with the founder.
alexatkeplar 11y ago
By joining a late stage (vs early stage) startup as an employee, you are trading execution risk for valuation risk. At an early stage startup, your shares are essentially free to purchase - especially if you join a company which hasn't had a formal external valuation event (like a fundraise) yet. All your risk is around the startup evolving into a successful business with a high value. Join a late-stage startup, and most of the execution risk is gone. But the company may already have an artificially high value attached - so you have a lot of risk that your shares end up being worth significantly less than you paid for them. The real unicorn, for an employee, is a middle- to late-stage company which has successfully executed, is growing, and ideally hasn't had any formal external valuation events. There your shares are cheap to buy and extremely likely to increase in value.
- jonas21 11y ago
  > The real unicorn, for an employee, is a middle- to late-stage company which has successfully executed, is growing, and ideally hasn't had any formal external valuation events. And, like a real unicorn, it doesn't exist. At least not in today's funding environment.
  - alexatkeplar 11y ago
    No, I know a couple. Look for companies with around $10-100m annual revenues and no external investors. If you speak to their owners, their biggest frustration is, ironically, competing with unicorns for talent recruitment.
- gibrown 11y ago
  I pretty much agree that's a higher probability way to make money. I think "the real unicorn" is working for and with good people though.
ChuckMcM 11y ago
I remember clearly when I was in a similar situation with the sale of a company I helped start in 1999. All this gain on paper which required (because of the Alternative Minimum Tax rule) that I pay taxes on gains I had not realized. And then later realizing an actual loss. And the decade afterwards of getting $3,000/year that I could claim against my taxes. The only reason I'm not still claiming my $3,000 a year is that we had some gains that could be offset by those losses in 2007 and 2008. Of course there are the much higher fees to have your taxes prepared. I agree with the Times that it is the non-executive employees who get the worst of it, both because it may be the only investment they have (other than their 401k) and they may not have any experience in managing risk. For example, the article mentions, and my own experience mimics, that the executives are in a bind when it comes to discussing company performance and prospects. Legal risks abound if they mislead and existential risks abound if they demoralize the company. It would be especially problematic when the company has started the IPO process as Good had. Then there is the greed factor that comes in on everyone's part. The board turns down an $825M offer because they feel it is their duty, given they expect the company is worth more than that. Employees don't cash out some of their holding at $3/share expecting a bigger IPO lift. Both angry because nobody came from the future to tell them, hey this is the best offer you are ever going to get for this stock, take it. And so they "ride" the value down and get angrier and angrier but its hard to know at whom. When this happened to me, I was holding 10,000 shares of Sun stock that had been $60 a share in 2000, that was going down and down and down. It later reverse split 3:1 (so down to 3,333 shares) and sold for $9.50 a share to Oracle or about $32,000. I was really angry at myself for "losing" so much money. Of course it wasn't that I had "lost" the money, I never had it, it was all on paper, I just hadn't converted at the time because I was hoping to convert when it was even "more". Or put another way, my greed kept me from selling something which could have paid off my mortgage at the time.
- balls187 11y ago
  Thanks for sharing your story. When you got the stock, was it issued as option grant, or actual stock grant? What would your advice be to people who hold most of their "investment" in a single companies stock?
  - 11y ago
jackgavigan 11y ago
It's interesting to compare this article with the coverage of the acquisition at the time. "When Good Technology announced Friday that it had sold itself to its long-standing rival BlackBerry for $425 million in cash, it was a moment of triumph for Good CEO Christy Wyatt." - http://uk.businessinsider.com/how-christy-wyatt-sold-good-to-blackberry-2015-9 http://uk.businessinsider.com/how-christy-wyatt-sold-good-to...
- rwmj 11y ago
  She made out like a bandit with $6m and no need to turn up to work ever again, so for her I'm sure it was pretty triumphant. The fact that the very first action of the acquiring company was to give her enough money to never come back tells you all you need to know about her ability as CEO.
kevinpet 11y ago
Can anyone provide any info on what actually happened here? The article says that the preferred was "worth" more, which is a pretty vague statement. I interpret this as meaning that they didn't convert because their liquidation preferences guaranteed a higher payout. What seems relevant to me, and anyone else who works at a pre-IPO startup, is what were the things to look for ahead of time. According to Crunchbase, Good raised $291M in 4 rounds. Assuming those investors owned 40% of the business, then at $1.1B, common was splitting $660M (preferred would convert). At $425M, assuming 1x liquidation preference, common is splitting $134M, an 80% decrease. I think you could get to the numbers in the article assuming 1x participating or something similar. This should have been pretty predictable to employees. You will not get rich if your company sells for only 1.4x the total amount invested.
- diziet 11y ago
  What most likely happened was that investors together owned closer to 80% of the business and possibly had liquidation overhangs and some sort of anti-dilution that ended up in a similar situation. That's what liquidation preferences and overhangs do for companies that raise 100m+, they eat in the common.
- jcdavis 11y ago
  I think the bigger concern (as far as employees are concerned) in this particular case is that the board turned down multiple more lucrative acquisition offers. In addition to all the other issues mentioned here, the preferred/common split means that the preferred holders (ie the board) have much different incentives/risks than common - they can afford to "swing for the fences" due to the downside of liquidation preferences.
willyk 11y ago
For those interested in this topic, I suggest reading 'Venture Deals' by Brad Feld. While it's broader than this topic, it does cover some of the legal/technical elements of vc funding and exits, which help when trying to understand outcomes such as this (i.e., preferred vs common shares, etc). http://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist/dp/1118443616 http://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalis...
keithpeter 11y ago
UK resident here: why were employees paying tax on the nominal value of the shares? Is it not possible to structure the compensation so that tax is payable when the shares are sold (capital gains) or on any dividends paid on the shares?
- dikaiosune 11y ago
  There's tax due on incentive stock options (ISOs, I think I have the name right?) when you exercise the option. So, if my layman understanding is correct, you get an offer to pay a discounted price on company stock whenever you want (usually based somewhat on valuation when you're hired). Then, the company's valuation increases (all on paper and in private, not public market price corrections, just whatever investors think is "fair"), and you exercise your stock option. The difference between the price you paid (your option price) and the value of the share (as determined by the private valuation) is now taxable income in the eyes of the IRS. You will owe taxes on stocks that might still end up being worthless, and your employer also has the power to prevent you from selling them before they go public/are bought out.
- ryan-c 11y ago
  > Why were employees paying tax on the nominal value of the shares? Alternative minimum tax, created in 1969 to target 155 high-income households who were using too many tax loopholes. It was not adjusted for inflation, and it did not anticipate rank-and-file employees receiving stock options. > Is it not possible to structure the compensation so that tax is payable when the shares are sold (capital gains) or on any dividends paid on the shares? Yes, but this requires the employee to pre-pay for the shares when they are issued. Normal tax rules do not consider exercising options to be a taxable event, but AMT rules do. You can exercise options resulting in modest paper gains without them being taxed.
- thetrb 11y ago
  I'm not an expert on this, but when you exercise stock options you have to pay taxes on the fair market value at that time. In some cases it might make sense to exercise stock options before you can actually sell them (e.g. if you expect the price to keep going up to save on taxes or if you're leaving the company when you typically only have a limited amount of time to exercise or lose those options). So in these cases you now own the stock and paid taxes on it, but if the stock price falls drastically after that you might have actually paid more taxes than the stock is worth now.
blizkreeg 11y ago
This topic has been in conversation a lot recently. Yet I feel we only have anecdotal data. I was wondering if we can get some real numbers on employee outcomes. I created a spreadsheet that aims to capture this and hopefully, we can get some real insights and conclusive data. https://docs.google.com/spreadsheets/d/1bIYwuz3bhRWPYazVamMDGamwrawnEtvDe8K-ys-6KtU/edit#gid=0 https://docs.google.com/spreadsheets/d/1bIYwuz3bhRWPYazVamMD... All data is anonymous. You don't even need to be logged in to edit. What do people think of this?
- dewitt 11y ago
  Real data is good, but that's not a good way to get real data. I'm not a stats person, but it would seem to suffer from both an extremely small potential sample (those who read your post), a self-selection bias (those who gain an advantage by participating, e.g., the aggrevieved), and an outright unsual candidate sample pool (Hacker News). Perhaps try something like Google Consumer Surveys, and ask a one-two question like: (1) are you currently working for a pre-IPO startup and (2) are your options underwater. Or similar.
  - x0x0 11y ago
    It's going to be functionally impossible to get good data. Not least because I suspect the vc industry really really doesn't want potential startup employees to see the numbers. Or to think to hard about the wave of upcoming ipo devaluations coming to unicorns (viz a recent discussion from Mark Suster where 5/7 of 2015 large ipo exits where down rounds compared to previous valuations [1]). If the numbers were amazing you'd see someone like First Round giving exit surveys to all their companies and trumpeting the mean or median outcome. Or even YC; they are probably in a position to collect that data. The best you'll be able to do is a site like glassdoor, with all the sample bias that implies. But even with glassdoor, I've told a recruiter to go away because their company pays poorly according to glassdoor. The recruiter then whined about glassdoor, but since he didn't provide me with salary numbers, what does he expect? I've also pondered building a site similar to glassdoor to confidentially discuss outcomes, but the best you'll ever be able to do is anecdata. [1] http://www.bothsidesofthetable.com/2015/10/18/venture-outlook-2016/ http://www.bothsidesofthetable.com/2015/10/18/venture-outloo...
arbitrage314 11y ago
If you're going to work at a startup, ask for two things: 1. No employee equity whatsoever, but a slightly higher salary to make up for it 2. The ability to invest in the the next round I've worked at a startup and done #1 and #2 above, and it's working out great. I'm very happy to be owning preferred shares.
- msoad 11y ago
  That's a very interesting approach!
- startupnoub 11y ago
  arbitrage314: Aren't you just lowering your risk, while simultaneously lowering your reward? Eg, let's say you negotiate a 20k/year increase by not getting any stock options. If you spend that 20k to invest in their next round, you'll be paying for preferred shares, rather than common shares. Therefore, you'll be able to afford about 5x less shares than if you were exercising employee grants. Am I wrong? Sure, you'll get preferred shares, but if the company does very well, your ultimate reward will be less.
arbitrage314 11y ago
I'm going to keep repeating this comment until the world hears it--I think most people joining startups are being taken advantage of without realizing it. Sorry to be repeating myself: If you're primarily interested in making money, or if you love the startup but not the compensation, you should NOT work at that startup. If you're a good developer, you can get a better deal by working at an established company and simply investing. This has been true for every startup offer I've ever seen. Ever. I've considered lots of startup jobs because I believed strongly in the companies. Every single time, however, I was able to get a larger chunk of the company by keeping my current job and simply investing. To give an example, my current job pays about $250k, and one year, I invested $100k of that into a startup, leaving me with ~$150k of salary. This $150k + startup equity was a better deal than the startup was offering in both salary and equity (BY FAR). Plus, equity bought as an investor is much less tax toxic than equity options received as an employee of a startup. On the other hand, most people who work at startups aren't interested in money. If that's you, that's totally cool!
- askafriend 11y ago
  Can you explain how you were able to invest 100k into a startup without being an angel investor?
  - arbitrage314 11y ago
    Most startups are more than happy to take your money. Just email or meet with the founders, explain your enthusiasm for the company, and you're usually good to go! For higher-profile deals, though--e.g., Uber--you wouldn't be able to invest such a small amount.
    - DocSavage 11y ago
      Doesn't this just apply to those with either sufficient net worth or earned income to qualify as an accredited investor? Or have you heard of startups taking the money of some new graduate making less than $200k/year with insufficient net worth?
tomasien 11y ago
If you strip away all the logically questionable parts of this story, there are 2 really important takeaways: - Companies: don't make employees exercise options when they leave the company. I love the new "10 years to exercise" trend that has started to emerge. - Employees: don't pay taxes or exercise options early to maximize your gains at an eventual exit. It makes no sense - keep the optionality.
mikekij 11y ago
This article highlights the need for two changes in the startup world: 1) We need a different term for the "post-money valuation" that VCs place on a company after fundraising. It is not a valuation in the same way that a public company is valued, due in large part to the preferred stock liquidation preference. Employees hear about a $1B valuation and assume that the IPO or acquisition price will be some multiple of that "valuation". 2) We need some tax reform that prevents employees from needing to pay a tax bill with cash for illiquid shares in a privately held company. It makes perfect sense for an employee of a publicly traded company to need to allocate some of their stock grants to tax obligations, seeing as though they can sell those shares at any time. But employees of privately held companies can't sell their stock (usually), and needing to take real dollars to pay a tax bill on those shares is just not the spirit of the law.
- tomasien 11y ago
  I'm not sure we need #2 - we need companies to be better about not forcing their employees to exercise options when they leave the company and we need employees not to exercise options early to minimize the taxes they may have to pay in a windfall. This can simply be executed by every company without any government tax code reform needed.
  - marme 11y ago
    we need both what you suggest and tax reform around options. It is crazy that you have to pay tax on stock you cant sell. It would be incredibly easy for the IRS to just say when you execute an option that stock will always be treated as regular income and can never get benefit of capital gains tax no matter how long you hold it before selling. There are obviously many drawbacks to this but at least you cant get screwed paying taxes on money you never earn. This will never happen because the people lobbying for the current tax codes are not the people getting hurt by these ridiculous AMT rules. AMT was created to prevent people like steve jobs from collecting their entire salary in the form of options and not paying any taxes but the people most effected are clearly not rich CEOs like steve jobs If i buy a plot of land work hard to build a house on that land i dont have to pay tax on the increased value of the property until i sell it yet if i work at a company and buy options as it grows i am taxed immediately before i can realize a gain
zaroth 11y ago
The problem here is the valuation model for the common stock was broken. Properly factoring in liquidation preferences and your 409a valuation of common stock would not have ever hit $4.29 per share with 229 million shares outstanding. The fact that preferred shares sold for that price is completely irrelevant, it's like saying the Tesla sells for $80k so we'll just value this Nissan Leaf the same. The IRS does not force these companies to improperly value the common stock. It's just the default position they take because it's cheaper for the company this way. The 409a valuation is based on the price someone would pay for 100% of the outstanding shares of converted-to-common shares. This is much lower than preferred stock investment price (where the dollars are being put into the company to grow it, not being paid to shareholders to retire). It's even much lower than the secondary market price since that's the price for a small percentage of shares -- try selling them all and the bid/ask would fall to zero. The price of illiquid common stock must reflect the risk-taking stance of management and the Board. Even having an $800m offer doesn't have to boost the common stock valuation so much because if management is declining those offers and swinging for the fences you can reasonably factor in that risk in the price. Unless and until an actual IPO, companies should take a discounted future cash flow model based on single-digit future growth to demonstrate the common stock value is absolutely worthless, and everyone should be required to file 83(b). We know its a lottery ticket, the tax code allows us to value it appropriately. The real problem is companies straight out fucking up their 409a. Common stock shareholders at Good would not be crazy to consider a lawsuit.
iblaine 11y ago
A similar thing happened to me. I joined a late stage startup with a market cap of $1.5B. It IPO'd a few years later with some critics calling it the worst IPO of the year. It now has a market cap of $600M. I felt betrayed by execs who had nothing but glowing things to say about the health of the business. I gave the company 2-3 quarters to show signs of hope then quit.
antoinevg 11y ago
The only thing that scares me more than the current information asymmetry between investors and startup employees is the thought of the kind of structures engineers can come up with when their livelihood is at stake!
walshemj 11y ago
The answer to this is to 1 ban these multi class share classes 2 reform employee share taxation so that you only pay tax on a real liquidity event. I know 1 is hard but 2 should be do able given SV's lobbying power.
zaroth 11y ago
The biggest problem with employee equity is the taxes. Investors pay cash for their shares, and the transaction is completely tax neutral. When a company sells its own shares in exchange for cash, the IRS does not charge a penny. But if an established company wants to get equity into the hands of its employees now you have a problem. The way the tax law is written, you have basically 3 choices. Either the employee is paying you "fair market value", or you are giving them options with a strike price at "fair market value" and they can hope for future appreciation. Otherwise, if you try to just give them shares, the IRS needs to be paid, and in cash! So, for example, to simply give 10% of outstanding common shares (an illiquid and diluting asset) to your employees, you would have to pay 4% of your company's "fair market value" in cash to the IRS! The problem is all in how you define this "fair market value" thing. If you sell some VCs equity along with what's basically a note payable (liquidation preference) and then say the "value" of the company is equal to the total raised divided by the percentage equity stake they received, all while totally ignoring the 'note payable' -- that's complete madness! And it's the world we live it today. If, alternatively, you first subtract off the top of any amount raised the full amount of any liquidation preferences, then only the remainder was divided by the percentage equity stake to arrive at a valuation... For example, raise $10m for a 10% stake with a $10m preference -- then for tax purposes your common stock valuation should still be $0. Now you can grant however many common stock shares you want all day long, and you don't bleed cash to the IRS in order to do it. Employees would still have to pay the full load of taxes on any gains when they sell the shares. But this fixes a huge challenge of fairly compensating employees with equity without even dodging any fair share of taxes. Taxes should be due and payable when liquid value is actually received, not before.
Justsignedup 11y ago
tl;dr -- if you are not a founder, your stock is never going to get as much thought as a founder / investor's will. And also they make decisions on your behalf, often which benefits them greatly, and you little.
- ezxs 11y ago
  more like - if you are not an exec....
georgemcbay 11y ago
I worked for this company (Good Technology) from July 2012 until Jan 2015 in their San Diego office. I never exercised my options (they clearly weren't worth the strike price I had as a late joining employee at any time that I had vested shares) so no skin off my back, though I do know people who got screwed by exercising options because they left the company prior to the sale to Blackberry and were essentially forced to exercise the shares or just lose them. (I'm all for the trend pushing for much longer windows on this). I also know a lot of people who came from companies this company aquired who stuck around for the eventual big payout that was much bandied about by much of the C-level management the entire time I was there who basically traded years of sweat equity for nothing (better than walking away in the hole, though!) I found the article to be a pretty fair writeup of the events and a useful warning to people on the risks of stock exercising prior to liquidity events. This is a lesson I learned the hard way years ago (first dotcom boom), so I didn't get burned this time, and actually really enjoyed my time working for this company because the team in San Diego (which was pretty well isolated from the teams at the Sunnyvale headquarters) was a great group of people to work with, and I was paid pretty decently.
depsypher 11y ago
Wow. Employees get hurt, and the CEO gets awarded "CEO of the Year" http://finance.yahoo.com/news/good-technology-chairman-ceo-christy-175400298.html http://finance.yahoo.com/news/good-technology-chairman-ceo-c...
brianmcconnell 11y ago
Good/Visto alum here. I am just thankful that some omniscient hedge fund people offered to buy my shares at a little over a buck a share five years ago (hoping to cash in on their forthcoming IPO no doubt). This company was not a unicorn. It was a tapeworm! Not at all surprised at the outcome, except that it wasn't an outright courthouse auction of office supplies.

344 points by igonvalue 11y ago

Ms. Wyatt introduced BlackBerry’s chief, John S. Chen, who winkingly apologized for how his deal makers had driven Good’s final sale price down to $425 million, less than half of the company’s $1.1 billion private valuation. I've never been a CEO or acquired a company but I think there probably aren't too many worse things you could say to the employees of a company that you've just acquired.

atonse 11y ago
You should see how awkwardly he debuted one of the latest phones, and you'll understand. Might just be social awkwardness. (Still sucks, but feels microscopically less malicious).
pinewurst 11y ago
Also can you imagine being an employee at that meeting? Not only are your share values decimated (literally), you're now working for walking dead BlackBerry assuming you're not soon laid-off.
djloche 11y ago
The "deal makers" didn't drive down the value of the company. Good did it themselves. They were hemorrhaging money. They did not have the stronger position at the negotiation table.
gamble 11y ago
A company I was working for was acquired and the first thing the new management said in the initial meeting was that they had no interest in owning us. They were only acquiring the company because another office had government contracts they wanted. Also, our equity was worthless now. But don't worry, because no one is getting fired! (Instead everyone resigned within a few months)

randomname2 11y ago

This article is written as if it's the startup's fault that tax laws are irrational. Doesn't reflect well on the NYT.

powera 11y ago
The startup and/or its employees should have known the tax laws. It's not like this exact thing hasn't been happening for years and years. (And it kind of is the startups fault that there isn't a way to exercise-and-sell the options. If it was a public company you wouldn't need to take the risk of a massive AMT bill)
- FastComputer 11y ago
  Exactly! I had left options on the table at several companies because I knew about the tax implications. In one case, I would have made money had I accepted the options. During the 1999 crash, they actually bailed out some dot-come speculators who "didn't know" about AMT. This outraged me. I purposely didn't speculate, and yet I was forced to subsidize those who did. America is disgustingly unfair. (Most of the people posting here do not understand taxes and the AMT.)
jameshart 11y ago
The decision to accept a deal which valued the employees' equity so low compared to the VC owned equity is entirely the company's own. I suppose you could argue that the tax system should be aware that common stock valuation should not be inferred from preferred stock valuation...
- tvladeck 11y ago
  The valuation of the company and the waterfall of the payment are two separate things. Presumably this was the highest valuation they could have gotten (no reason not to believe it given that it was a distressed sale). And the tax on the common stock the employees received when they exercised their options was based on the valuation of the common stock - so the tax system did correctly handle that.

untog 11y ago

The fact that some employees have to pay taxes based on the valuations that VCs dream up terrifies me.

davidu 11y ago
Only those who early exercise, or exercise their stock as it vests. They did this to try and optimize for long-term capital gains. For most employees who leave their option grants as options, there is nothing to worry about. When you are given a grant of stock options, you can sometimes ask the company to let you exercise it early, and vest the shares instead of the options. If you do this when the fair market value (FMV) of the underlying stock is the same as when the options are granted, you will not be in a precarious tax situation. However, many people wait a couple years before deciding to exercise their options, and as a result, they need to recognize a paper gain when they exercise later as the FMV is substantially higher. That's what happened here. They exercised later, thinking the stock price would go even higher, and they were wrong, but they had to pay taxes on that higher price. While it's true they paid a lot of extra taxes, since they never recognized the gains, they can roll that tax credit forward to cover future gains they may get at some other point in the future. I'm not sure how long you can roll these losses forward, but I think it's for a substantial period of time.
- ardiem 11y ago
  Correct me if I'm wrong, but even with an early exercise (or an exercise of vested options) where the valuation matches the strike price, that employee would still have had to personally fork over the amount needed to purchase the underlying shares. In the scenario described in the article, they've still lost a substantial chunk of money if the valuation is now a fraction of the strike price. Secondly, while capital losses can be carried forward indefinitely, you can only apply ~$3,000 per year (as a deduction, not a credit).
  - pc86 11y ago
    > that employee would still have had to personally fork over the amount needed to purchase the underlying shares Then what is the difference over just buying the shares outright as opposed to exercising options? My understanding has always been that exercising options means getting a benefit (the shares) which has a value (the strike price) and you subsequently pay tax on that value.

sarciszewski 11y ago

> Even worse, they had paid taxes on the stock based on the higher value. That's the most annoying part of the entire article, and why I ask for salary rather than equity. Keep your stock, I'd rather pay my bills.

ScottGillis 11y ago
It's all about risk. Unfortunately, this risk did not pay off.
- sarciszewski 11y ago
  If you want risk, be an entrepreneur. If you want security, be an employee for a big company. And I suppose I should add, "If you want to get screwed over, be an employee at a unicorn startup," based on this new information.
  - pc86 11y ago
    I'm not as pessimistic as most here, but start-up employee really is the worst of all worlds. 1. Reports vary but the general consensus seems to be lower pay than a Fortune 500 or similar for more demanding hours. 2. If you're offered equity it's an insulting fractional percentage (how can you be offered 0.1% and not let the profanities fly?), and will need to use actual money to exercise the options. 3. There are tons of stories of completely incompetent and/or corrupt founders literally locking the door on employees (Zirtual et al). 4. I'd be remiss if I didn't at least bring up the insane (comparatively) COL of the Bay Area compared to even other large US metropolitan areas. I'm not going to start railing about VC-istan because I do think the degree to which the system is rigged gets overblown, but if you're going to be involved in start-ups it doesn't make sense to be anything other than a founder, C-level-for-hire employee, or investor IMO.
  - ryguytilidie 11y ago
    I always find it funny when startup founders believe that they are taking on more "risk". So when the company isn't doing well, the founder lays themselves off first right? No? Hm, seems like the rank and file employee takes on the risk there... Not to mention that it's probably a lot easier for a founder to get another job than their employees. Oh and by the way, the founder has been paid more, has gotten more stock and has probably had investors pay for a lot more nice dinners/drinks than their employees. But yeah, the founders deserve to be compensated much higher because of this "risk", yes indeed.

rwmj 11y ago

Can the overpaid tax be claimed back?

deleted 11y ago
[deleted]
Apes 11y ago
Theoretically, but only over a very long period of many years. If it's a big enough overpay, then it's possible for it to take many decades. edit: Here's a VERY simplified overview: http://www.wikihow.com/Claim-AMT-Credit http://www.wikihow.com/Claim-AMT-Credit
- toomuchtodo 11y ago
  I have enough overpaid tax at 33 to tide me over until death. Lessons learned.

tvladeck 11y ago

Regarding the fact that the employees had to pay tax on what turned out to be worthless shares: They could have avoided this by waiting to exercise their options on the eve of the liquidity event. In this case there would have been no risk. But they exercised earlier presumably to start the clock on long term capital gains treatment for the stock they received when they exercised. They took risk they didn't need to take and they got burned. It's worth keeping that in mind as another aspect to the story.

BlewisJS 11y ago
You can't presume that they exercised early voluntarily. If you leave the company, you typically have 90 days to exercise options or they are forfeited back to the company. In other cases, they actually just expire after enough time passes, which again forces employees to exercise before a liquidity event.
- tvladeck 11y ago
  Fair point. I did make that assumption.
  - JonFish85 11y ago
    Again though nobody forced them to exercise. It accelerates the timeline, but it's not forcing anyone into anything more than having to make a decision.
    - tptacek 11y ago
      Typically, when you leave a company that issued you incentive options, you are forced to execute within 90 days or forfeit the shares entirely.
  - alttab 11y ago
    To your point though, and to press it further - if companies require that you exercise your options in a window after they vest or they expire - they were never really options to begin with. In essence, the vesting schedule on expiring options is a timeline for you forking over risk-filled cash or forfeit part of your "compensation." The advice seems to suggest if their options expire if you don't buy them at a certain point (except for leaving the company, which makes sense), say no and ask for cash. If they can't pay, now you know where you really stand.

mathgeek 11y ago

> To pay those taxes, some employees emptied savings accounts and borrowed money. Investing your life savings and/or loaned money into a single stock is always a huge warning sign that you're being foolish.

caseysoftware 11y ago
Yes, this strikes me as very Enron-ish throughout.
- mathgeek 11y ago
  Interesting. In what ways? Enron was a public company that committed fraud.
  - caseysoftware 11y ago
    The management pushing the stock and painting a rosy picture while behind the scenes the ship was sinking. The employees putting everything they had (and then some) into a single stock from their employer. I don't know if there was criminal behavior involved but an imbalance of information was in play that cost the employees everything and then some.
  - TDL 11y ago
    I believe before the collapse Enron's management would berate employees who sold stock in their 401-ks. Management actively mislead their own employees. I've heard this from a number of sources (including a family friend who left Enron a couple years before the collapse.) Obviously, take my comment with a grain of salt since it's mostly based on anecdote.
  - brown9-2 11y ago
    Various accounts of the Enron saga include anecdotes of employees happily (and being encouraged to) invest most or all of their 401k in Enron stock.
  - erik998 11y ago
    The tragedy of Enron was the automatic investment plans in the 401k for most employees. The default choice was Enron stock. Also, depending on the nature of the matching contribution, Enron stock might have benefited from a larger matching employer contribution percentage or discounted share price. This is why 401k plans now offer various choices that are suitable and diversified for most people. http://blogs.wsj.com/moneybeat/2014/07/04/are-you-stuck-on-your-companys-stock/ http://blogs.wsj.com/moneybeat/2014/07/04/are-you-stuck-on-y... A defined benefit plan could have prevented this tragedy. It's funny though. Defined benefit plans are mocked at by large firms but increasingly being used by wealthy individuals/families and their small businesses. Nothing beats government subsidized PBGC insurance for the future retirement plans of America's job creators.

lectrick 11y ago

This sounds tautological...

Spooky23 11y ago

If Good was a unicorn, that definition needs some work. Good was in a downward arc since 2011-2012 imo. How many new customers did they acquire compared to Airwatch/MobileIron/etc?

sangnoir 11y ago
"Unicorn" is rather well-defined (if somewhat arbitrarily):any valuation north of $1bn qualifies a startup as a unicorn. In some cases - such as this, the $1bn+ valuation is fleeting / illusory.
- Spooky23 11y ago
  Gotcha. Usually you hear the term referring to Uber, Dropbox, etc. I never would have put Good in that company. (Although Dropbox can't seem to make a product that I am willing to pay for)

throwaway1223 11y ago

I interviewed at this company a couple years back and a huge selling point at the interview was their upcoming IPO plans. They eventually gave me an offer which I turned down because enterprise and security is a boring area to work on. Based on these recent series of articles on startups, its becoming more and more apparent that while starting a startup is a fantastic thing to do, being an employee of one has mostly downsides. Its a much better career move for non-founders to work for large established companies.

ditonal 11y ago

Very glad the NYTimes ran this piece. The only part they underplayed is they made it sound like the startup "stumbled." No, it sounds like it went exactly as planned. Blackberry got the acquisitions, investors got their money, execs got their bonuses, and the rank-and-file got nothing. That isn't stumbling, that's the playbook. Tech employees need to wake up about common vs preferred shares, and that the former are worthless. They are NOT worthless because they are "lottery tickets" and most startups fail. They are worthless because they are designed, as a financial instrument, to be fake equity with no real protection from dilution and liquidation preference. The most insulting aspect of common shares is that engineers get talked into pay cuts on the premise that they get these options, essentially being asked to invest a portion of their potential compensation into the company, but are then told they don't deserve to be given real equity because they aren't "real" investors. I understand that from a founder's perspective, asking someone to give you millions of dollars is significantly more challenging than asking someone to take a 30% pay cut, so it's easy to give strong preference to the former. But, supposedly and debatably, it's also difficult to recruit talent, and it's going to be significantly more difficult as employees increasingly realize that Common ISO's aren't "lottery tickets" they are "toilet paper". So either startups are going to have to re-invent these equity packages, or the talent will flock away from the VC companies and towards companies that can pay salary. Of course, the VCs have a huge playbook to flood the market with more talent to (taking $100 mil taxpayer money to fund the same bootcamps they invest in to work for the same companies they hire via Obama's tech talent shortage program, for example), so who knows.

ryporter 11y ago
According to the article, employees had the opportunity to sell their "worthless" shares for $3/share.
- Spoom 11y ago
  Prior to the deal, on the secondary market, while all of their managers were telling them that the shares would only massively increase in value.
- dradbdgj 11y ago

deleted 11y ago

[deleted]

seanconaty 11y ago

It is precisely the protections of preferred stock that led to the overvaluation in the first place. http://recode.net/2015/05/10/heres-one-thing-all-the-billion-dollar-unicorns-have-in-common/ http://recode.net/2015/05/10/heres-one-thing-all-the-billion... As a common stock holder, you should know that you'll be the last one paid, if at all, because few companies can meet unicorn expectations.

jerf 11y ago

Is there some other industry where, when a company stumbles, its employees don't get hurt? I live in Michigan, and when the car industry "stumbled" everyone I locally know at least knew someone who got hit, at the very very least with long-term stagnant wages even as their responsibilities amped up to cover the missing people, and they were the ones who came out relatively unscathed. I mean, the details of the article are all fine and dandy and interesting (no sarcasm, there's nothing wrong with the facts and they're at least worth a story), but the headline and framing seem to imply that there's some sort of alternative? The only problem unique to the tech-unicorns here is exercising stock options when you can't pay for the taxes. Don't do that.

justinph 11y ago
At least with the auto industry, the unions were able to offer some protections for the worker. How many programmers belong to a union?
- jerf 11y ago
  Unions can't do anything about the company you're working for running out of resources. That's not what they are for.
  - gaius 11y ago
    The can ensure the pie is sliced more fairly tho'.
    - walshemj 11y ago
      And lobby for more sane tax for employee share options.
  - serge2k 11y ago
    They can help protect you from getting screwed over while the execs walk away with millions.

sbov 11y ago

Ultimately the problem seems to be preferred shares driving the valuation of common shares. They obviously aren't the same, so I don't know why it happens. I'm not a lawyer so I don't know if there's a way around this.

nemo44x 11y ago
Fair Market Value drives the value of common shares, not preferred share costs. FMV is derived using a formula the IRS has to project what a share in the company is worth and it is usually far less than what the latest investors paid.

dsugarman 11y ago

I imagine this is going to be a lot worse now with unicorn craze. It seems like to some, any liquidation terms were acceptable to get to the $1b valuation mark.

nemo44x 11y ago
Indeed. Smart, young companies are refusing preferred share investments and are willing to keep their valuation lower because of that. It's true that you're selling a larger portion of your future for less money in many ways, but you protect the founders and original investors as well as the employees too. Huge growth is important but it's also important to be smart about it. Selling a part of your company for a bit less if often better than mortgaging the common shares.

grandalf 11y ago

The real question is, when do you "buy in" to a valuation. Things are only worth what someone else will pay. So if you don't have evidence that there is a buyer eagerly wanting to pay $5/share for the options you are getting for $4/share, don't assume they are worth anything. Because of dilution math, it's very rare for employees of all but unicorn startups to cash in at anything close to the expected value of the shares. That means that your 50K shares awarded after a $5M series A (on a big pre money valuation) are not going to be worth much if the company sells for $10M the following year. Founders should set up a chart that tracks the various possible outcomes and lets employees understand what their options will be worth in those scenarios and see what the founder would get in those scenarios. This would allow additional shares to be given to valued employees if the company turns out to be a beautiful white horse but not quite a unicorn. The thing to be aware of is when the founder has the option of cashing out for $10M and the employees effectively getting nothing. If this happens the investors will have essentially lost interest and will potentially get their investment back but will not mention the deal to anyone again. This is a sort of perverse incentive because the founder will be inclined to deceive employees into thinking a big exit is on the way, while simultaneously negotiating a low millions acquisition and high salary at the acquiring company. In that scenario, the founder should have to renegotiate so that the most valuable employees get at least 10% of the founder's payout, but employees rarely have (or use) that much leverage with the founder.

alexatkeplar 11y ago

By joining a late stage (vs early stage) startup as an employee, you are trading execution risk for valuation risk. At an early stage startup, your shares are essentially free to purchase - especially if you join a company which hasn't had a formal external valuation event (like a fundraise) yet. All your risk is around the startup evolving into a successful business with a high value. Join a late-stage startup, and most of the execution risk is gone. But the company may already have an artificially high value attached - so you have a lot of risk that your shares end up being worth significantly less than you paid for them. The real unicorn, for an employee, is a middle- to late-stage company which has successfully executed, is growing, and ideally hasn't had any formal external valuation events. There your shares are cheap to buy and extremely likely to increase in value.

jonas21 11y ago
> The real unicorn, for an employee, is a middle- to late-stage company which has successfully executed, is growing, and ideally hasn't had any formal external valuation events. And, like a real unicorn, it doesn't exist. At least not in today's funding environment.
- alexatkeplar 11y ago
  No, I know a couple. Look for companies with around $10-100m annual revenues and no external investors. If you speak to their owners, their biggest frustration is, ironically, competing with unicorns for talent recruitment.
gibrown 11y ago
I pretty much agree that's a higher probability way to make money. I think "the real unicorn" is working for and with good people though.

ChuckMcM 11y ago

I remember clearly when I was in a similar situation with the sale of a company I helped start in 1999. All this gain on paper which required (because of the Alternative Minimum Tax rule) that I pay taxes on gains I had not realized. And then later realizing an actual loss. And the decade afterwards of getting $3,000/year that I could claim against my taxes. The only reason I'm not still claiming my $3,000 a year is that we had some gains that could be offset by those losses in 2007 and 2008. Of course there are the much higher fees to have your taxes prepared. I agree with the Times that it is the non-executive employees who get the worst of it, both because it may be the only investment they have (other than their 401k) and they may not have any experience in managing risk. For example, the article mentions, and my own experience mimics, that the executives are in a bind when it comes to discussing company performance and prospects. Legal risks abound if they mislead and existential risks abound if they demoralize the company. It would be especially problematic when the company has started the IPO process as Good had. Then there is the greed factor that comes in on everyone's part. The board turns down an $825M offer because they feel it is their duty, given they expect the company is worth more than that. Employees don't cash out some of their holding at $3/share expecting a bigger IPO lift. Both angry because nobody came from the future to tell them, hey this is the best offer you are ever going to get for this stock, take it. And so they "ride" the value down and get angrier and angrier but its hard to know at whom. When this happened to me, I was holding 10,000 shares of Sun stock that had been $60 a share in 2000, that was going down and down and down. It later reverse split 3:1 (so down to 3,333 shares) and sold for $9.50 a share to Oracle or about $32,000. I was really angry at myself for "losing" so much money. Of course it wasn't that I had "lost" the money, I never had it, it was all on paper, I just hadn't converted at the time because I was hoping to convert when it was even "more". Or put another way, my greed kept me from selling something which could have paid off my mortgage at the time.

balls187 11y ago
Thanks for sharing your story. When you got the stock, was it issued as option grant, or actual stock grant? What would your advice be to people who hold most of their "investment" in a single companies stock?
- 11y ago

jackgavigan 11y ago

It's interesting to compare this article with the coverage of the acquisition at the time. "When Good Technology announced Friday that it had sold itself to its long-standing rival BlackBerry for $425 million in cash, it was a moment of triumph for Good CEO Christy Wyatt." - http://uk.businessinsider.com/how-christy-wyatt-sold-good-to-blackberry-2015-9 http://uk.businessinsider.com/how-christy-wyatt-sold-good-to...

rwmj 11y ago
She made out like a bandit with $6m and no need to turn up to work ever again, so for her I'm sure it was pretty triumphant. The fact that the very first action of the acquiring company was to give her enough money to never come back tells you all you need to know about her ability as CEO.

kevinpet 11y ago

Can anyone provide any info on what actually happened here? The article says that the preferred was "worth" more, which is a pretty vague statement. I interpret this as meaning that they didn't convert because their liquidation preferences guaranteed a higher payout. What seems relevant to me, and anyone else who works at a pre-IPO startup, is what were the things to look for ahead of time. According to Crunchbase, Good raised $291M in 4 rounds. Assuming those investors owned 40% of the business, then at $1.1B, common was splitting $660M (preferred would convert). At $425M, assuming 1x liquidation preference, common is splitting $134M, an 80% decrease. I think you could get to the numbers in the article assuming 1x participating or something similar. This should have been pretty predictable to employees. You will not get rich if your company sells for only 1.4x the total amount invested.

diziet 11y ago
What most likely happened was that investors together owned closer to 80% of the business and possibly had liquidation overhangs and some sort of anti-dilution that ended up in a similar situation. That's what liquidation preferences and overhangs do for companies that raise 100m+, they eat in the common.
jcdavis 11y ago
I think the bigger concern (as far as employees are concerned) in this particular case is that the board turned down multiple more lucrative acquisition offers. In addition to all the other issues mentioned here, the preferred/common split means that the preferred holders (ie the board) have much different incentives/risks than common - they can afford to "swing for the fences" due to the downside of liquidation preferences.

willyk 11y ago

For those interested in this topic, I suggest reading 'Venture Deals' by Brad Feld. While it's broader than this topic, it does cover some of the legal/technical elements of vc funding and exits, which help when trying to understand outcomes such as this (i.e., preferred vs common shares, etc). http://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist/dp/1118443616 http://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalis...

keithpeter 11y ago

UK resident here: why were employees paying tax on the nominal value of the shares? Is it not possible to structure the compensation so that tax is payable when the shares are sold (capital gains) or on any dividends paid on the shares?

dikaiosune 11y ago
There's tax due on incentive stock options (ISOs, I think I have the name right?) when you exercise the option. So, if my layman understanding is correct, you get an offer to pay a discounted price on company stock whenever you want (usually based somewhat on valuation when you're hired). Then, the company's valuation increases (all on paper and in private, not public market price corrections, just whatever investors think is "fair"), and you exercise your stock option. The difference between the price you paid (your option price) and the value of the share (as determined by the private valuation) is now taxable income in the eyes of the IRS. You will owe taxes on stocks that might still end up being worthless, and your employer also has the power to prevent you from selling them before they go public/are bought out.
ryan-c 11y ago
> Why were employees paying tax on the nominal value of the shares? Alternative minimum tax, created in 1969 to target 155 high-income households who were using too many tax loopholes. It was not adjusted for inflation, and it did not anticipate rank-and-file employees receiving stock options. > Is it not possible to structure the compensation so that tax is payable when the shares are sold (capital gains) or on any dividends paid on the shares? Yes, but this requires the employee to pre-pay for the shares when they are issued. Normal tax rules do not consider exercising options to be a taxable event, but AMT rules do. You can exercise options resulting in modest paper gains without them being taxed.
thetrb 11y ago
I'm not an expert on this, but when you exercise stock options you have to pay taxes on the fair market value at that time. In some cases it might make sense to exercise stock options before you can actually sell them (e.g. if you expect the price to keep going up to save on taxes or if you're leaving the company when you typically only have a limited amount of time to exercise or lose those options). So in these cases you now own the stock and paid taxes on it, but if the stock price falls drastically after that you might have actually paid more taxes than the stock is worth now.

blizkreeg 11y ago

This topic has been in conversation a lot recently. Yet I feel we only have anecdotal data. I was wondering if we can get some real numbers on employee outcomes. I created a spreadsheet that aims to capture this and hopefully, we can get some real insights and conclusive data. https://docs.google.com/spreadsheets/d/1bIYwuz3bhRWPYazVamMDGamwrawnEtvDe8K-ys-6KtU/edit#gid=0 https://docs.google.com/spreadsheets/d/1bIYwuz3bhRWPYazVamMD... All data is anonymous. You don't even need to be logged in to edit. What do people think of this?

dewitt 11y ago
Real data is good, but that's not a good way to get real data. I'm not a stats person, but it would seem to suffer from both an extremely small potential sample (those who read your post), a self-selection bias (those who gain an advantage by participating, e.g., the aggrevieved), and an outright unsual candidate sample pool (Hacker News). Perhaps try something like Google Consumer Surveys, and ask a one-two question like: (1) are you currently working for a pre-IPO startup and (2) are your options underwater. Or similar.
- x0x0 11y ago
  It's going to be functionally impossible to get good data. Not least because I suspect the vc industry really really doesn't want potential startup employees to see the numbers. Or to think to hard about the wave of upcoming ipo devaluations coming to unicorns (viz a recent discussion from Mark Suster where 5/7 of 2015 large ipo exits where down rounds compared to previous valuations [1]). If the numbers were amazing you'd see someone like First Round giving exit surveys to all their companies and trumpeting the mean or median outcome. Or even YC; they are probably in a position to collect that data. The best you'll be able to do is a site like glassdoor, with all the sample bias that implies. But even with glassdoor, I've told a recruiter to go away because their company pays poorly according to glassdoor. The recruiter then whined about glassdoor, but since he didn't provide me with salary numbers, what does he expect? I've also pondered building a site similar to glassdoor to confidentially discuss outcomes, but the best you'll ever be able to do is anecdata. [1] http://www.bothsidesofthetable.com/2015/10/18/venture-outlook-2016/ http://www.bothsidesofthetable.com/2015/10/18/venture-outloo...

arbitrage314 11y ago

If you're going to work at a startup, ask for two things: 1. No employee equity whatsoever, but a slightly higher salary to make up for it 2. The ability to invest in the the next round I've worked at a startup and done #1 and #2 above, and it's working out great. I'm very happy to be owning preferred shares.

msoad 11y ago
That's a very interesting approach!
startupnoub 11y ago
arbitrage314: Aren't you just lowering your risk, while simultaneously lowering your reward? Eg, let's say you negotiate a 20k/year increase by not getting any stock options. If you spend that 20k to invest in their next round, you'll be paying for preferred shares, rather than common shares. Therefore, you'll be able to afford about 5x less shares than if you were exercising employee grants. Am I wrong? Sure, you'll get preferred shares, but if the company does very well, your ultimate reward will be less.

arbitrage314 11y ago

I'm going to keep repeating this comment until the world hears it--I think most people joining startups are being taken advantage of without realizing it. Sorry to be repeating myself: If you're primarily interested in making money, or if you love the startup but not the compensation, you should NOT work at that startup. If you're a good developer, you can get a better deal by working at an established company and simply investing. This has been true for every startup offer I've ever seen. Ever. I've considered lots of startup jobs because I believed strongly in the companies. Every single time, however, I was able to get a larger chunk of the company by keeping my current job and simply investing. To give an example, my current job pays about $250k, and one year, I invested $100k of that into a startup, leaving me with ~$150k of salary. This $150k + startup equity was a better deal than the startup was offering in both salary and equity (BY FAR). Plus, equity bought as an investor is much less tax toxic than equity options received as an employee of a startup. On the other hand, most people who work at startups aren't interested in money. If that's you, that's totally cool!

askafriend 11y ago
Can you explain how you were able to invest 100k into a startup without being an angel investor?
- arbitrage314 11y ago
  Most startups are more than happy to take your money. Just email or meet with the founders, explain your enthusiasm for the company, and you're usually good to go! For higher-profile deals, though--e.g., Uber--you wouldn't be able to invest such a small amount.
  - DocSavage 11y ago
    Doesn't this just apply to those with either sufficient net worth or earned income to qualify as an accredited investor? Or have you heard of startups taking the money of some new graduate making less than $200k/year with insufficient net worth?

tomasien 11y ago

If you strip away all the logically questionable parts of this story, there are 2 really important takeaways: - Companies: don't make employees exercise options when they leave the company. I love the new "10 years to exercise" trend that has started to emerge. - Employees: don't pay taxes or exercise options early to maximize your gains at an eventual exit. It makes no sense - keep the optionality.

mikekij 11y ago

This article highlights the need for two changes in the startup world: 1) We need a different term for the "post-money valuation" that VCs place on a company after fundraising. It is not a valuation in the same way that a public company is valued, due in large part to the preferred stock liquidation preference. Employees hear about a $1B valuation and assume that the IPO or acquisition price will be some multiple of that "valuation". 2) We need some tax reform that prevents employees from needing to pay a tax bill with cash for illiquid shares in a privately held company. It makes perfect sense for an employee of a publicly traded company to need to allocate some of their stock grants to tax obligations, seeing as though they can sell those shares at any time. But employees of privately held companies can't sell their stock (usually), and needing to take real dollars to pay a tax bill on those shares is just not the spirit of the law.

tomasien 11y ago
I'm not sure we need #2 - we need companies to be better about not forcing their employees to exercise options when they leave the company and we need employees not to exercise options early to minimize the taxes they may have to pay in a windfall. This can simply be executed by every company without any government tax code reform needed.
- marme 11y ago
  we need both what you suggest and tax reform around options. It is crazy that you have to pay tax on stock you cant sell. It would be incredibly easy for the IRS to just say when you execute an option that stock will always be treated as regular income and can never get benefit of capital gains tax no matter how long you hold it before selling. There are obviously many drawbacks to this but at least you cant get screwed paying taxes on money you never earn. This will never happen because the people lobbying for the current tax codes are not the people getting hurt by these ridiculous AMT rules. AMT was created to prevent people like steve jobs from collecting their entire salary in the form of options and not paying any taxes but the people most effected are clearly not rich CEOs like steve jobs If i buy a plot of land work hard to build a house on that land i dont have to pay tax on the increased value of the property until i sell it yet if i work at a company and buy options as it grows i am taxed immediately before i can realize a gain

zaroth 11y ago

The problem here is the valuation model for the common stock was broken. Properly factoring in liquidation preferences and your 409a valuation of common stock would not have ever hit $4.29 per share with 229 million shares outstanding. The fact that preferred shares sold for that price is completely irrelevant, it's like saying the Tesla sells for $80k so we'll just value this Nissan Leaf the same. The IRS does not force these companies to improperly value the common stock. It's just the default position they take because it's cheaper for the company this way. The 409a valuation is based on the price someone would pay for 100% of the outstanding shares of converted-to-common shares. This is much lower than preferred stock investment price (where the dollars are being put into the company to grow it, not being paid to shareholders to retire). It's even much lower than the secondary market price since that's the price for a small percentage of shares -- try selling them all and the bid/ask would fall to zero. The price of illiquid common stock must reflect the risk-taking stance of management and the Board. Even having an $800m offer doesn't have to boost the common stock valuation so much because if management is declining those offers and swinging for the fences you can reasonably factor in that risk in the price. Unless and until an actual IPO, companies should take a discounted future cash flow model based on single-digit future growth to demonstrate the common stock value is absolutely worthless, and everyone should be required to file 83(b). We know its a lottery ticket, the tax code allows us to value it appropriately. The real problem is companies straight out fucking up their 409a. Common stock shareholders at Good would not be crazy to consider a lawsuit.

iblaine 11y ago

A similar thing happened to me. I joined a late stage startup with a market cap of $1.5B. It IPO'd a few years later with some critics calling it the worst IPO of the year. It now has a market cap of $600M. I felt betrayed by execs who had nothing but glowing things to say about the health of the business. I gave the company 2-3 quarters to show signs of hope then quit.

antoinevg 11y ago

The only thing that scares me more than the current information asymmetry between investors and startup employees is the thought of the kind of structures engineers can come up with when their livelihood is at stake!

walshemj 11y ago

The answer to this is to 1 ban these multi class share classes 2 reform employee share taxation so that you only pay tax on a real liquidity event. I know 1 is hard but 2 should be do able given SV's lobbying power.

zaroth 11y ago

The biggest problem with employee equity is the taxes. Investors pay cash for their shares, and the transaction is completely tax neutral. When a company sells its own shares in exchange for cash, the IRS does not charge a penny. But if an established company wants to get equity into the hands of its employees now you have a problem. The way the tax law is written, you have basically 3 choices. Either the employee is paying you "fair market value", or you are giving them options with a strike price at "fair market value" and they can hope for future appreciation. Otherwise, if you try to just give them shares, the IRS needs to be paid, and in cash! So, for example, to simply give 10% of outstanding common shares (an illiquid and diluting asset) to your employees, you would have to pay 4% of your company's "fair market value" in cash to the IRS! The problem is all in how you define this "fair market value" thing. If you sell some VCs equity along with what's basically a note payable (liquidation preference) and then say the "value" of the company is equal to the total raised divided by the percentage equity stake they received, all while totally ignoring the 'note payable' -- that's complete madness! And it's the world we live it today. If, alternatively, you first subtract off the top of any amount raised the full amount of any liquidation preferences, then only the remainder was divided by the percentage equity stake to arrive at a valuation... For example, raise $10m for a 10% stake with a $10m preference -- then for tax purposes your common stock valuation should still be $0. Now you can grant however many common stock shares you want all day long, and you don't bleed cash to the IRS in order to do it. Employees would still have to pay the full load of taxes on any gains when they sell the shares. But this fixes a huge challenge of fairly compensating employees with equity without even dodging any fair share of taxes. Taxes should be due and payable when liquid value is actually received, not before.

Justsignedup 11y ago

tl;dr -- if you are not a founder, your stock is never going to get as much thought as a founder / investor's will. And also they make decisions on your behalf, often which benefits them greatly, and you little.

ezxs 11y ago
more like - if you are not an exec....

georgemcbay 11y ago

I worked for this company (Good Technology) from July 2012 until Jan 2015 in their San Diego office. I never exercised my options (they clearly weren't worth the strike price I had as a late joining employee at any time that I had vested shares) so no skin off my back, though I do know people who got screwed by exercising options because they left the company prior to the sale to Blackberry and were essentially forced to exercise the shares or just lose them. (I'm all for the trend pushing for much longer windows on this). I also know a lot of people who came from companies this company aquired who stuck around for the eventual big payout that was much bandied about by much of the C-level management the entire time I was there who basically traded years of sweat equity for nothing (better than walking away in the hole, though!) I found the article to be a pretty fair writeup of the events and a useful warning to people on the risks of stock exercising prior to liquidity events. This is a lesson I learned the hard way years ago (first dotcom boom), so I didn't get burned this time, and actually really enjoyed my time working for this company because the team in San Diego (which was pretty well isolated from the teams at the Sunnyvale headquarters) was a great group of people to work with, and I was paid pretty decently.

depsypher 11y ago

Wow. Employees get hurt, and the CEO gets awarded "CEO of the Year" http://finance.yahoo.com/news/good-technology-chairman-ceo-christy-175400298.html http://finance.yahoo.com/news/good-technology-chairman-ceo-c...

brianmcconnell 11y ago

Good/Visto alum here. I am just thankful that some omniscient hedge fund people offered to buy my shares at a little over a buck a share five years ago (hoping to cash in on their forthcoming IPO no doubt). This company was not a unicorn. It was a tapeworm! Not at all surprised at the outcome, except that it wasn't an outright courthouse auction of office supplies.