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Semi related question: One has to be an accredited (i.e. wealthy) investor to invest in startups, but this does not apply to employees exercising options. Does

Semi related question: One has to be an accredited (i.e. wealthy) investor to invest in startups, but this does not apply to employees exercising options. Does that mean that employees who do not meet the wealth requirements to be accredited are only ever able to sell ownership, and only to accredited investors?

ska 11y ago
This depends on jurisdiction of course, but employees may also be able to invest, even if they don't meet the requirements. It's not easy for an employee to get access to a secondary market anyway, but yes they should also be enforcing the transaction rules.
dhj 11y ago
If the company is private then employees exercising options generally (always?) have clauses that restrict them from selling that stock whether they are accredited investors or not. Not a lawyer, but I think there may be two reasons: 1) prevent covert takeover from the original founders 2) prevent a general market for private companies (before IPO). IPO involves a lot of regulatory overhead to confirm full disclosure. I think the restriction is to maintain control, but it may be a legal requirement before public market. In other words you can't sell except as part of a board approved sale of the company or a public offering. I think opportunities to buy are based on new issuance of stock (for accredited investors) not based on trades of existing stock.
- shimon 11y ago
  I too assumed this limitation was widespread. But if unicorns are high-valued private companies, and there is a secondary market for their stock, then surely some holders are not restricted this way. Anyone know why / what triggers that? When is it typical for stock granted to employees to actually be resellable?
  - mavelikara 11y ago
    Depends on the terms under which the employee is issued stock. From a 2014 article[1]: Two months ago, an early Uber employee thought that he had found a buyer for his vested stock, at $200 per share. But when his agent tried to seal the deal, Uber refused to sign off on the transfer. Instead, it offered to buy back the shares for around $135 a piece, which is within the same price range that Google Ventures and TPG Capital had paid to invest in Uber the previous July. Take it or hold it. The employee also learned that Uber had amended its bylaws more than a year earlier, in order to restrict unapproved secondary sales. It was unclear if the bylaw change actually applied to shareholders who had not been party to the vote — lawyers seem to disagree on this point of Delaware law — but Uber threatened litigation if he tried to proceed. So he held. The financial and reputational hassles of a lawsuit would have just been too much, even if he had won. [1]: http://fortune.com/2014/06/20/uber-plays-hardball-with-early-shareholders/ http://fortune.com/2014/06/20/uber-plays-hardball-with-early...
    - shostack 11y ago
      Really interesting, thanks for sharing. Does this generally piss off the employer? I wonder if the employee faced any sort of retaliation or anything from this.
      - mavelikara 11y ago
        > Does this generally piss off the employer? I wonder if the employee faced any sort of retaliation or anything from this. No, it should not piss off any employer! The equity that is offered to you to as part of your employment is remuneration for your efforts. The employer should not be upset at you for wanting to convert that to cash. It is true that the employer might not want their stock to go to outside parties. In that case, they should arrange for alternate arrangements (buybacks, employee-liquidity in funding rounds etc). But you are not doing anything inherently unethical to warrant any retaliation.
        djhn 11y ago
        I completely agree with you, but this isn't mutually exclusive with facing retaliation (in terms of internal politics, for instance.)
- thwarted 11y ago
  1) prevent covert takeover from the original founders Wouldn't this be more reliable to do by keeping control via different classes of stock and or limiting the total size of the employee option pool to some significantly less percentage than the founders have? What's the most common/recommended size of the employee option pool (I want to say I've heard it is like 5-15% depending on the age of the company)?
- pjlegato 11y ago
  More typically, the company has the "right of first refusal" -- when a stockholder has an outside offer, they are first required to let the company buy their stock back at the price that the outsider is offering before selling to an outsider. This is both to maintain control and to avoid having more than 500 shareholders, which triggers all kinds of additional regulations.
  - throw2192015 11y ago
    > This is both to maintain control and to avoid having more than 500 shareholders, which triggers all kinds of additional regulations. I _think_ the JOBS Act of 2012 increased this to 2000 instead of 500.
jluxenberg 11y ago
Side note: You're considered an "accredited investor" if you made $200k/year in each of the prior two years and expect a similar income in the current year. https://www.investor.gov/news-alerts/investor-bulletins/investor-bulletin-accredited-investors https://www.investor.gov/news-alerts/investor-bulletins/inve... So, not necessarily just "wealthy" individuals.
- personjerry 11y ago
  That's pretty wealthy by most standards, isn't it?
  - colinbartlett 11y ago
    I think the point was that you don't necessary need wealth (assets) for which the threshold is $1 USD Million excluding the value of your primary residence. You can instead have a high income (the $200k mentioned) and zero wealth. I suspect that many more people qualify as accredited under the income requirement than qualify under the asset requirement.
    - ddlatham 11y ago
      I suspect the opposite http://money.cnn.com/2014/03/14/news/economy/us-millionaires-households/ http://money.cnn.com/2014/03/14/news/economy/us-millionaires...
  - pjlegato 11y ago
    Yes, though in San Francisco it isn't, because the cost of living is so insanely high.
  - TuringNYC 11y ago
    Yes, except in places like SF. That sort of income wont afford you more than a 1br (assuming you want to buy.)
- zardo 11y ago
  So... "incomey" individuals then?
nradov 11y ago
The dirty little secret is that most of those secondary market exchanges don't really verify accredited investor status. They just do the bare minimum to check off the boxes and ensure SEC compliance. Acquaintances of mine were able to purchase shares by simply lying about their incomes and assets.
prostoalex 11y ago
That is correct, the reason for such regulation is depicted in the movie "Wolf of Wall Street", where Florida grandmas are being pitched some "incredible opportunities". If you're a seller and you did not verify investor accreditation, you're opening yourself up to a lawsuit when things go bad with the investment - what if the buyer comes back and claims he was defrauded and duped into buying shaky securities? The broker participating in such transaction, in theory, has a chance of having their license revoked due to participation in alleged fraud.

ska 11y ago

This depends on jurisdiction of course, but employees may also be able to invest, even if they don't meet the requirements. It's not easy for an employee to get access to a secondary market anyway, but yes they should also be enforcing the transaction rules.

dhj 11y ago

If the company is private then employees exercising options generally (always?) have clauses that restrict them from selling that stock whether they are accredited investors or not. Not a lawyer, but I think there may be two reasons: 1) prevent covert takeover from the original founders 2) prevent a general market for private companies (before IPO). IPO involves a lot of regulatory overhead to confirm full disclosure. I think the restriction is to maintain control, but it may be a legal requirement before public market. In other words you can't sell except as part of a board approved sale of the company or a public offering. I think opportunities to buy are based on new issuance of stock (for accredited investors) not based on trades of existing stock.

shimon 11y ago
I too assumed this limitation was widespread. But if unicorns are high-valued private companies, and there is a secondary market for their stock, then surely some holders are not restricted this way. Anyone know why / what triggers that? When is it typical for stock granted to employees to actually be resellable?
- mavelikara 11y ago
  Depends on the terms under which the employee is issued stock. From a 2014 article[1]: Two months ago, an early Uber employee thought that he had found a buyer for his vested stock, at $200 per share. But when his agent tried to seal the deal, Uber refused to sign off on the transfer. Instead, it offered to buy back the shares for around $135 a piece, which is within the same price range that Google Ventures and TPG Capital had paid to invest in Uber the previous July. Take it or hold it. The employee also learned that Uber had amended its bylaws more than a year earlier, in order to restrict unapproved secondary sales. It was unclear if the bylaw change actually applied to shareholders who had not been party to the vote — lawyers seem to disagree on this point of Delaware law — but Uber threatened litigation if he tried to proceed. So he held. The financial and reputational hassles of a lawsuit would have just been too much, even if he had won. [1]: http://fortune.com/2014/06/20/uber-plays-hardball-with-early-shareholders/ http://fortune.com/2014/06/20/uber-plays-hardball-with-early...
  - shostack 11y ago
    Really interesting, thanks for sharing. Does this generally piss off the employer? I wonder if the employee faced any sort of retaliation or anything from this.
    - mavelikara 11y ago
      > Does this generally piss off the employer? I wonder if the employee faced any sort of retaliation or anything from this. No, it should not piss off any employer! The equity that is offered to you to as part of your employment is remuneration for your efforts. The employer should not be upset at you for wanting to convert that to cash. It is true that the employer might not want their stock to go to outside parties. In that case, they should arrange for alternate arrangements (buybacks, employee-liquidity in funding rounds etc). But you are not doing anything inherently unethical to warrant any retaliation.
      - djhn 11y ago
        I completely agree with you, but this isn't mutually exclusive with facing retaliation (in terms of internal politics, for instance.)
thwarted 11y ago
1) prevent covert takeover from the original founders Wouldn't this be more reliable to do by keeping control via different classes of stock and or limiting the total size of the employee option pool to some significantly less percentage than the founders have? What's the most common/recommended size of the employee option pool (I want to say I've heard it is like 5-15% depending on the age of the company)?
pjlegato 11y ago
More typically, the company has the "right of first refusal" -- when a stockholder has an outside offer, they are first required to let the company buy their stock back at the price that the outsider is offering before selling to an outsider. This is both to maintain control and to avoid having more than 500 shareholders, which triggers all kinds of additional regulations.
- throw2192015 11y ago
  > This is both to maintain control and to avoid having more than 500 shareholders, which triggers all kinds of additional regulations. I _think_ the JOBS Act of 2012 increased this to 2000 instead of 500.

jluxenberg 11y ago

Side note: You're considered an "accredited investor" if you made $200k/year in each of the prior two years and expect a similar income in the current year. https://www.investor.gov/news-alerts/investor-bulletins/investor-bulletin-accredited-investors https://www.investor.gov/news-alerts/investor-bulletins/inve... So, not necessarily just "wealthy" individuals.

personjerry 11y ago
That's pretty wealthy by most standards, isn't it?
- colinbartlett 11y ago
  I think the point was that you don't necessary need wealth (assets) for which the threshold is $1 USD Million excluding the value of your primary residence. You can instead have a high income (the $200k mentioned) and zero wealth. I suspect that many more people qualify as accredited under the income requirement than qualify under the asset requirement.
  - ddlatham 11y ago
    I suspect the opposite http://money.cnn.com/2014/03/14/news/economy/us-millionaires-households/ http://money.cnn.com/2014/03/14/news/economy/us-millionaires...
- pjlegato 11y ago
  Yes, though in San Francisco it isn't, because the cost of living is so insanely high.
- TuringNYC 11y ago
  Yes, except in places like SF. That sort of income wont afford you more than a 1br (assuming you want to buy.)
zardo 11y ago
So... "incomey" individuals then?

nradov 11y ago

The dirty little secret is that most of those secondary market exchanges don't really verify accredited investor status. They just do the bare minimum to check off the boxes and ensure SEC compliance. Acquaintances of mine were able to purchase shares by simply lying about their incomes and assets.

prostoalex 11y ago

That is correct, the reason for such regulation is depicted in the movie "Wolf of Wall Street", where Florida grandmas are being pitched some "incredible opportunities". If you're a seller and you did not verify investor accreditation, you're opening yourself up to a lawsuit when things go bad with the investment - what if the buyer comes back and claims he was defrauded and duped into buying shaky securities? The broker participating in such transaction, in theory, has a chance of having their license revoked due to participation in alleged fraud.