7 ms·

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 pl

by 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
  Throwaway account, reporting on the secondary market! Companies will often do everything in their power, including running roughshod over their contractural and legal obligations, to prevent employees from selling stock on the secondary market. If they're not total jerks, they will encourage you to participate in "internal buybacks". Unfortunately, these buybacks are run as a service for investors, presenting them massively undervalued in exchange for loyalty. Regulators have just begun to take interest in the abuse of transfer agency by privately-held companies distributing shares in lieu of compensation. Similar attention should be paid to the information provided to prospective employees at the time of hire, when the decision to accept stock in lieu of cash is made.
  - mcfunley 11y ago
    In my case, * Internal buybacks ("tender offers") were actually all above the current (publicly-listed) stock price. Private valuations can be pretty inflated. I think it's a good idea to take these and diversify. * My company did use a backchannel to stop me from selling privately to one of their investors before the IPO (at roughly double the current market price). So I think the spirit of your comment is right.
  - ryporter 11y ago
    So, are these shares massively overvalued or massively undervalued? It seems like the anti-equity crowd here will never be happy. They want cash when the company offers equity, and equity when the company arranges for an offer of cash.
- URSpider94 11y ago
  This is while the Board was still sitting on the information that the company was tanking in value, and they thought their shares were valued at $4 or more. Not after the sale.
nemo44x 11y ago
I agree 100% with this. Employees should be suspicious that they have access to an investment nobody else does - invest now! I've seen countless friends get burned in various ways believing they would be getting rich soon from their options and then fizzle. Either through the company just never having a liquidity event or being sold for less than previous valuation rounds. The worst is I've seen people reject job offers that were far superior in cash compensation because they had a recent big option grant. A friend of mine stayed on at a place even though he didn't get a cash raise but instead was given some options that vested over a few years in addition to the options he already had, some of which were vested. Did it not ring a bell that a company that can't give him cash but can instead offer compensation out of thin air in the form of options is in trouble? And then there are the golden handcuffs were an employee is scared to leave because their options have too high a fair market value and their tax costs would be considerable. Further limiting their career growth. I've seen the other side too where friends have taken home a really nice pay day after liquidity - but it is the exception and not the rule. I recommend joining young companies that are willing to pay you a lot of cash for your exceptional ability and experience (execution is critical at this stage across the entire company from engineering to sales) and maybe take it easy on the option grants. Some stock is fun but don't count on getting rich on it.
- MichaelGG 11y ago
  In the exceptional cases where they got a nice pay day, was the company unable to pay cash? If not then there's the answer why no bells ring.
  - nemo44x 11y ago
    It's true, the media loves the story of the regular folks who struck gold when their company went public and that resonates with typical employees who don't understand the financial constructs that make up many VC deals.
- wdewind 11y ago
  > Did it not ring a bell that a company that can't give him cash but can instead offer compensation out of thin air in the form of options is in trouble? This is not an accurate heuristic for "how good is a company doing." There are many legitimate reasons you'd want to pay someone in stock instead of cash. > And then there are the golden handcuffs were an employee is scared to leave because their options have too high a fair market value and their tax costs would be considerable. This is definitely something to consider. If your options agreement allows you to early exercise you can avoid all of the tax penalty and remove the golden handcuffs if you exercise immediately (before you have realized a gain) and file your 83-b with the IRS. If it doesn't allow early exercise you probably don't want anything to do with it. > I recommend joining young companies that are willing to pay you a lot of cash for your exceptional ability and experience (execution is critical at this stage across the entire company from engineering to sales) and maybe take it easy on the option grants. Some stock is fun but don't count on getting rich on it. I'd recommend learning as much about business as possible, and consider working at a startup an investment, and you an investor. If you aren't comfortable investing then you shouldn't be working in startups. There is basically no reason to work at a startup if you aren't favoring the equity ($, work-life balance, perks etc. are all going to be better at BigCo).
ap22213 11y ago
There is extremely good advice in the parent post. For those new to the game, please read it closely. I've been with 5 startups over the last 15 years. Each had developed good, commercially-viable, revenue-generating tech. But, in all cases, instead of going IPO, each was acquired. And, usually they were acquired by other investors' or board members' companies (sometimes at a loss). I would love to know the actual statistics for how many 'ground floor' developers get rich on options, but I'm guessing that it's very few. Startup culture is cool - I love it. They give me piles of money to experiment and develop new stuff and build new products. If you have an 'inventor mindset', like a casual work culture, and like to see shit get done, it's a great way to go. But, unless you're a founder or very early employee, make sure you negotiate for market-rate compensation with reasonable working hours. Of course, this all depends on the specific company and its board, but generally the options game is a scam. I've made a decent amount of money over the last 15 years - enough to retire on. But, very, very little of that was from a big startup cash-out. Instead, I just negotiated my salary and benefits effectively, saved a ton, and invested as much as I could. Compound interest is your friend; your employer's stock options? not so much.
- S4M 11y ago
  > And, usually they were acquired by other investors' or board members' companies (at a loss). Holy shit is that even legal? It seems like a giant conflict of interest.
  - gaius 11y ago
    "No conflict, no interest" -- John Doerr
- infecto 11y ago
  "Compound interest is your friend; your employer's stock options? not so much. " This x 10. I wish people realized this more often.
nissimk 11y ago
Information asymetry is the way people get screwed over in financial transactions. Most potential startup employees have no idea what common or preferred shares are. Let alone all of the other details like dilution, liquidation preference, tax implications of employee stock options and lack of liquidity in private securities. Potential startup employees should learn about these things and understand how to protect themselves. I'm sure the startups prefer to hire sheeple.
- Xcelerate 11y ago
  Where can one learn about these?
  - nissimk 11y ago
    Search for those terms in google and see what type of explanation makes the most sense to you. There are textbook definitions, legal explanations and more business oriented explanations. Read through threads like these specifically for people's anecdotes about how they got screwed over. There's this scene in "the big short" where Eisman is talking to the credit default swap sales guys from one of the big banks. He's never traded credit default swaps before so he knows that he is at a disadvantage. He asks the sales guys, "How do I get f*cked in this deal?" And then he sticks around until they explain the scenarios to him. That's a really good lesson about financial securities. There are so many embedded options that each have a different payout scenario. You need to understand what are the potential future scenarios and how do they impact your position.
  - prostoalex 11y ago
    "Consider Your Options" was recommended at one private company I worked for that was nearing exit http://fairmark.com/books-fairmark-press/consider-your-options/ http://fairmark.com/books-fairmark-press/consider-your-optio...
- cubano 11y ago
  Of course they should...on top of all the new tech stacks and modern dev paradigms because, of course, engineers have an infinite ability to learn. I'm not disagreeing with you, per se, but I do marvel at the sheer volume of information young engineers are expected to grok these days...
woah 11y ago
Most of this seems like a reasonable comment, but are you actually angry that people are learning to code?
- ditonal 11y ago
  Absolutely not! I do, however, think it's extremely questionable when VCs lobby for taxpayer money to fund for-profit bootcamps that they invest in to train people for the skills their companies need. It's outsourcing the cost of training to the taxpayer, all while driving up the value of their bootcamp investments. Instead, these companies should drop their "we're a poor startup that needs people who can hit the ground running", and actually train people themselves. These "startups" are funded by extremely well-off VCs who could afford it. They shouldn't ask the middle class to pay for it for them. Democrats and VCs have a very tight nit relationship. http://www.latimes.com/business/technology/la-fi-tn-obamas-100-million-plan-to-boost-hightech-training-hiring-20150309-story.html http://www.latimes.com/business/technology/la-fi-tn-obamas-1... http://www1.nyc.gov/office-of-the-mayor/news/114-15/mayor-bill-de-blasio-nyc-tech-talent-pipeline-industry-partners-commitments-to http://www1.nyc.gov/office-of-the-mayor/news/114-15/mayor-bi...
  - cjcole 11y ago
    One nit to pick: "tight-knit"
rlucas 11y ago
> Tech employees need to wake up about common vs preferred shares, and that the former are worthless. > ... > They are worthless because they are designed, as a financial instrument, to be fake equity with no real protection from dilution and liquidation preference. You've muddled orthogonal concepts together here. 1. Common shares are not worthless. In general, just ask any founder who's had a successful exit. Founder shares (unless purchased along side financial investors for hard cash) are always common shares; if your straw man were correct, then there would be no wealthy founders. 2. Liquidation preference is a negotiated term which does have a rational basis for existing. Whenever you're putting in a larger proportion of the company's cash than the ownership you're buying, it is crucial to have protection against someone essentially liquidating the company for the cash. Say investor X is putting in $8 into a company that has $2 in the bank, but X is only buying 10% of the company. If the company is liquidated for that $10 tomorrow, X gets back $1 and the common stockholders get $9. (There are other protections against a perverse liquidation incentive, too, but this is the economic one.) 3. The "real protection" from dilution is raising reasonable tranches of capital at a monotonically increasing series of valuations, which valuations actually correspond to a clearing price between bid and ask. Three key items here: "reasonable tranche," "monotonically increasing," and "clearing price." a. Reasonable tranche: raise reasonable sized rounds, because huge rounds create weirdness (lopsided power, outsized compensatory "asks" by investors, etc.). b. Monotonically increasing: needless to say, down rounds are the big dilution problems. Sometimes they happen because life isn't perfect and problems come up. Sometimes they happen because the company screwed up and raised too much at too high a valuation previously. c. Clearing price: if the company and investor actually agree on the "true" valuation then it's easy. If they still try to force a deal where the company wants a crazy "optical" valuation that the investor doesn't really see, then you'll get layering-on of sweeteners to make the effective valuation much much lower than the notional, but all kinds of terrible side effects may accrue.
- ditonal 11y ago
  Thank you for the informative response. 1) Ok, Google/FB common shares were worth something. Those are extreme outliers in exits, and had ethical founders. But founders have another option if they drive the common share value to nothing - retention bonuses. They can say, ok we will make all the common shares worthless, but you can just give me a huge package as part of the aquisition. So employees can't rely on founders looking after common shares out of self-interest. If you read the article, it looks like that's extremely similar to what happened in this case. 2) All these financial experts can figure out a way to protect their necks without leaving the employees necks under the axe. 3) Real protection would also be voting rights, which generally preferred shares get a lot more of, and then less tangible things like invitation to board meetings, something mere employees accept is absurd to expect. As long as employees agree to sacrifice compensation while being told they're not investors and don't deserve to be treated like one, they're getting hoodwinked.
ThrustVectoring 11y ago
I see basically two kinds of equity compensation. The first is "what the founders have, but less of it." It's very difficult for the founders to make a boatload of money off the company without also compensating you. These have some sort of value - if the founders want to make $10MM off it, you're getting something like $100K. The second is everything else. There's an obvious incentive to screw over the "founders don't have this" class of equity, so I value these at zero. This includes the vast majority of stock options.
harryh 11y ago
Investors made ~no money on this deal. That's not the playbook. Most of your comment is just wrong. EDIT: Ah yes. Downvotes. On Hacker News you get to pick your own facts. Lolz.
- ditonal 11y ago
  Sure, the primary objective is a huge IPO. It's the playbook in the sense of it was plan B to break even by cutting employees out. Investors might have not made out, but they broke even, and scratched the back of execs who can repay the favor in other contexts.
  - harryh 11y ago
    What do you mean cutting employees out? Cutting them out of what? Their were no returns made on the investor's capital. There's nothing to be cut out from. Taking investor's money and building a company that is only worth the value of what the investors put in and then being pissed you didn't get rich in the process is pretty nuts.
    - serge2k 11y ago
      Who's talking about getting rich? If investors are breaking even then employees deserve to at least not be losing out thanks to taxes. Preferably they should get enough return to roughly make up for any salary loss they took in exchange for equity. If the VCs start raking in cash then employees should too. The story here is execs made money (6 million for the CEO), VCs roughly broke even, employees got screwed over. That, IMO, is completely immoral and shouldn't be allowed to happen.
      - harryh 11y ago
        Employees only lost money due to taxes because they tried to manipulate their tax rates. There's really on the employees, not anyone else. I agree with you about the CEO.
        11y ago
jpollock 11y ago
The best articles of incorporation I saw had preferred stock for the founders, but any acquisition or liquidity change would convert all preferred shares to common 1:1 and instantly vested all options. It did cause some interesting tax issues for people when we were bought, but I don't think I'd sign any other set of terms now. But then, the founders were very classy.
- antoinevg 11y ago
  Genius :-)
- balls187 11y ago
  By having multiple classes of stock, the founders were unable to take advantage of pass-through taxation via S-Corp Designation. The losses incurred by a company at early stages offset personal tax liabilities by a significant amount. Having an acceleration clause isn't anything out of the norm though. I negotiated an acceleration clause if upon we took qualified investment of a certain dollar amount.
  - jpollock 11y ago
    This wasn't a US firm, so US tax laws wouldn't have applied. I'd definitely consult a local accountant when setting up a company.

by ditonal 11y ago

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
Throwaway account, reporting on the secondary market! Companies will often do everything in their power, including running roughshod over their contractural and legal obligations, to prevent employees from selling stock on the secondary market. If they're not total jerks, they will encourage you to participate in "internal buybacks". Unfortunately, these buybacks are run as a service for investors, presenting them massively undervalued in exchange for loyalty. Regulators have just begun to take interest in the abuse of transfer agency by privately-held companies distributing shares in lieu of compensation. Similar attention should be paid to the information provided to prospective employees at the time of hire, when the decision to accept stock in lieu of cash is made.
- mcfunley 11y ago
  In my case, * Internal buybacks ("tender offers") were actually all above the current (publicly-listed) stock price. Private valuations can be pretty inflated. I think it's a good idea to take these and diversify. * My company did use a backchannel to stop me from selling privately to one of their investors before the IPO (at roughly double the current market price). So I think the spirit of your comment is right.
- ryporter 11y ago
  So, are these shares massively overvalued or massively undervalued? It seems like the anti-equity crowd here will never be happy. They want cash when the company offers equity, and equity when the company arranges for an offer of cash.
URSpider94 11y ago
This is while the Board was still sitting on the information that the company was tanking in value, and they thought their shares were valued at $4 or more. Not after the sale.

nemo44x 11y ago

I agree 100% with this. Employees should be suspicious that they have access to an investment nobody else does - invest now! I've seen countless friends get burned in various ways believing they would be getting rich soon from their options and then fizzle. Either through the company just never having a liquidity event or being sold for less than previous valuation rounds. The worst is I've seen people reject job offers that were far superior in cash compensation because they had a recent big option grant. A friend of mine stayed on at a place even though he didn't get a cash raise but instead was given some options that vested over a few years in addition to the options he already had, some of which were vested. Did it not ring a bell that a company that can't give him cash but can instead offer compensation out of thin air in the form of options is in trouble? And then there are the golden handcuffs were an employee is scared to leave because their options have too high a fair market value and their tax costs would be considerable. Further limiting their career growth. I've seen the other side too where friends have taken home a really nice pay day after liquidity - but it is the exception and not the rule. I recommend joining young companies that are willing to pay you a lot of cash for your exceptional ability and experience (execution is critical at this stage across the entire company from engineering to sales) and maybe take it easy on the option grants. Some stock is fun but don't count on getting rich on it.

MichaelGG 11y ago
In the exceptional cases where they got a nice pay day, was the company unable to pay cash? If not then there's the answer why no bells ring.
- nemo44x 11y ago
  It's true, the media loves the story of the regular folks who struck gold when their company went public and that resonates with typical employees who don't understand the financial constructs that make up many VC deals.
wdewind 11y ago
> Did it not ring a bell that a company that can't give him cash but can instead offer compensation out of thin air in the form of options is in trouble? This is not an accurate heuristic for "how good is a company doing." There are many legitimate reasons you'd want to pay someone in stock instead of cash. > And then there are the golden handcuffs were an employee is scared to leave because their options have too high a fair market value and their tax costs would be considerable. This is definitely something to consider. If your options agreement allows you to early exercise you can avoid all of the tax penalty and remove the golden handcuffs if you exercise immediately (before you have realized a gain) and file your 83-b with the IRS. If it doesn't allow early exercise you probably don't want anything to do with it. > I recommend joining young companies that are willing to pay you a lot of cash for your exceptional ability and experience (execution is critical at this stage across the entire company from engineering to sales) and maybe take it easy on the option grants. Some stock is fun but don't count on getting rich on it. I'd recommend learning as much about business as possible, and consider working at a startup an investment, and you an investor. If you aren't comfortable investing then you shouldn't be working in startups. There is basically no reason to work at a startup if you aren't favoring the equity ($, work-life balance, perks etc. are all going to be better at BigCo).

ap22213 11y ago

There is extremely good advice in the parent post. For those new to the game, please read it closely. I've been with 5 startups over the last 15 years. Each had developed good, commercially-viable, revenue-generating tech. But, in all cases, instead of going IPO, each was acquired. And, usually they were acquired by other investors' or board members' companies (sometimes at a loss). I would love to know the actual statistics for how many 'ground floor' developers get rich on options, but I'm guessing that it's very few. Startup culture is cool - I love it. They give me piles of money to experiment and develop new stuff and build new products. If you have an 'inventor mindset', like a casual work culture, and like to see shit get done, it's a great way to go. But, unless you're a founder or very early employee, make sure you negotiate for market-rate compensation with reasonable working hours. Of course, this all depends on the specific company and its board, but generally the options game is a scam. I've made a decent amount of money over the last 15 years - enough to retire on. But, very, very little of that was from a big startup cash-out. Instead, I just negotiated my salary and benefits effectively, saved a ton, and invested as much as I could. Compound interest is your friend; your employer's stock options? not so much.

S4M 11y ago
> And, usually they were acquired by other investors' or board members' companies (at a loss). Holy shit is that even legal? It seems like a giant conflict of interest.
- gaius 11y ago
  "No conflict, no interest" -- John Doerr
infecto 11y ago
"Compound interest is your friend; your employer's stock options? not so much. " This x 10. I wish people realized this more often.

nissimk 11y ago

Information asymetry is the way people get screwed over in financial transactions. Most potential startup employees have no idea what common or preferred shares are. Let alone all of the other details like dilution, liquidation preference, tax implications of employee stock options and lack of liquidity in private securities. Potential startup employees should learn about these things and understand how to protect themselves. I'm sure the startups prefer to hire sheeple.

Xcelerate 11y ago
Where can one learn about these?
- nissimk 11y ago
  Search for those terms in google and see what type of explanation makes the most sense to you. There are textbook definitions, legal explanations and more business oriented explanations. Read through threads like these specifically for people's anecdotes about how they got screwed over. There's this scene in "the big short" where Eisman is talking to the credit default swap sales guys from one of the big banks. He's never traded credit default swaps before so he knows that he is at a disadvantage. He asks the sales guys, "How do I get f*cked in this deal?" And then he sticks around until they explain the scenarios to him. That's a really good lesson about financial securities. There are so many embedded options that each have a different payout scenario. You need to understand what are the potential future scenarios and how do they impact your position.
- prostoalex 11y ago
  "Consider Your Options" was recommended at one private company I worked for that was nearing exit http://fairmark.com/books-fairmark-press/consider-your-options/ http://fairmark.com/books-fairmark-press/consider-your-optio...
cubano 11y ago
Of course they should...on top of all the new tech stacks and modern dev paradigms because, of course, engineers have an infinite ability to learn. I'm not disagreeing with you, per se, but I do marvel at the sheer volume of information young engineers are expected to grok these days...

woah 11y ago

Most of this seems like a reasonable comment, but are you actually angry that people are learning to code?

ditonal 11y ago
Absolutely not! I do, however, think it's extremely questionable when VCs lobby for taxpayer money to fund for-profit bootcamps that they invest in to train people for the skills their companies need. It's outsourcing the cost of training to the taxpayer, all while driving up the value of their bootcamp investments. Instead, these companies should drop their "we're a poor startup that needs people who can hit the ground running", and actually train people themselves. These "startups" are funded by extremely well-off VCs who could afford it. They shouldn't ask the middle class to pay for it for them. Democrats and VCs have a very tight nit relationship. http://www.latimes.com/business/technology/la-fi-tn-obamas-100-million-plan-to-boost-hightech-training-hiring-20150309-story.html http://www.latimes.com/business/technology/la-fi-tn-obamas-1... http://www1.nyc.gov/office-of-the-mayor/news/114-15/mayor-bill-de-blasio-nyc-tech-talent-pipeline-industry-partners-commitments-to http://www1.nyc.gov/office-of-the-mayor/news/114-15/mayor-bi...
- cjcole 11y ago
  One nit to pick: "tight-knit"

rlucas 11y ago

> Tech employees need to wake up about common vs preferred shares, and that the former are worthless. > ... > They are worthless because they are designed, as a financial instrument, to be fake equity with no real protection from dilution and liquidation preference. You've muddled orthogonal concepts together here. 1. Common shares are not worthless. In general, just ask any founder who's had a successful exit. Founder shares (unless purchased along side financial investors for hard cash) are always common shares; if your straw man were correct, then there would be no wealthy founders. 2. Liquidation preference is a negotiated term which does have a rational basis for existing. Whenever you're putting in a larger proportion of the company's cash than the ownership you're buying, it is crucial to have protection against someone essentially liquidating the company for the cash. Say investor X is putting in $8 into a company that has $2 in the bank, but X is only buying 10% of the company. If the company is liquidated for that $10 tomorrow, X gets back $1 and the common stockholders get $9. (There are other protections against a perverse liquidation incentive, too, but this is the economic one.) 3. The "real protection" from dilution is raising reasonable tranches of capital at a monotonically increasing series of valuations, which valuations actually correspond to a clearing price between bid and ask. Three key items here: "reasonable tranche," "monotonically increasing," and "clearing price." a. Reasonable tranche: raise reasonable sized rounds, because huge rounds create weirdness (lopsided power, outsized compensatory "asks" by investors, etc.). b. Monotonically increasing: needless to say, down rounds are the big dilution problems. Sometimes they happen because life isn't perfect and problems come up. Sometimes they happen because the company screwed up and raised too much at too high a valuation previously. c. Clearing price: if the company and investor actually agree on the "true" valuation then it's easy. If they still try to force a deal where the company wants a crazy "optical" valuation that the investor doesn't really see, then you'll get layering-on of sweeteners to make the effective valuation much much lower than the notional, but all kinds of terrible side effects may accrue.

ditonal 11y ago
Thank you for the informative response. 1) Ok, Google/FB common shares were worth something. Those are extreme outliers in exits, and had ethical founders. But founders have another option if they drive the common share value to nothing - retention bonuses. They can say, ok we will make all the common shares worthless, but you can just give me a huge package as part of the aquisition. So employees can't rely on founders looking after common shares out of self-interest. If you read the article, it looks like that's extremely similar to what happened in this case. 2) All these financial experts can figure out a way to protect their necks without leaving the employees necks under the axe. 3) Real protection would also be voting rights, which generally preferred shares get a lot more of, and then less tangible things like invitation to board meetings, something mere employees accept is absurd to expect. As long as employees agree to sacrifice compensation while being told they're not investors and don't deserve to be treated like one, they're getting hoodwinked.

ThrustVectoring 11y ago

I see basically two kinds of equity compensation. The first is "what the founders have, but less of it." It's very difficult for the founders to make a boatload of money off the company without also compensating you. These have some sort of value - if the founders want to make $10MM off it, you're getting something like $100K. The second is everything else. There's an obvious incentive to screw over the "founders don't have this" class of equity, so I value these at zero. This includes the vast majority of stock options.

harryh 11y ago

Investors made ~no money on this deal. That's not the playbook. Most of your comment is just wrong. EDIT: Ah yes. Downvotes. On Hacker News you get to pick your own facts. Lolz.

ditonal 11y ago
Sure, the primary objective is a huge IPO. It's the playbook in the sense of it was plan B to break even by cutting employees out. Investors might have not made out, but they broke even, and scratched the back of execs who can repay the favor in other contexts.
- harryh 11y ago
  What do you mean cutting employees out? Cutting them out of what? Their were no returns made on the investor's capital. There's nothing to be cut out from. Taking investor's money and building a company that is only worth the value of what the investors put in and then being pissed you didn't get rich in the process is pretty nuts.
  - serge2k 11y ago
    Who's talking about getting rich? If investors are breaking even then employees deserve to at least not be losing out thanks to taxes. Preferably they should get enough return to roughly make up for any salary loss they took in exchange for equity. If the VCs start raking in cash then employees should too. The story here is execs made money (6 million for the CEO), VCs roughly broke even, employees got screwed over. That, IMO, is completely immoral and shouldn't be allowed to happen.
    - harryh 11y ago
      Employees only lost money due to taxes because they tried to manipulate their tax rates. There's really on the employees, not anyone else. I agree with you about the CEO.
      - 11y ago

jpollock 11y ago

The best articles of incorporation I saw had preferred stock for the founders, but any acquisition or liquidity change would convert all preferred shares to common 1:1 and instantly vested all options. It did cause some interesting tax issues for people when we were bought, but I don't think I'd sign any other set of terms now. But then, the founders were very classy.

antoinevg 11y ago
Genius :-)
balls187 11y ago
By having multiple classes of stock, the founders were unable to take advantage of pass-through taxation via S-Corp Designation. The losses incurred by a company at early stages offset personal tax liabilities by a significant amount. Having an acceleration clause isn't anything out of the norm though. I negotiated an acceleration clause if upon we took qualified investment of a certain dollar amount.
- jpollock 11y ago
  This wasn't a US firm, so US tax laws wouldn't have applied. I'd definitely consult a local accountant when setting up a company.