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If the company is private then employees exercising options generally (always?) have clauses that restrict them from selling that stock whether they are accredi

by 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.)
        shostack 11y ago
        That's more to the point I was getting at. There's the legal situation, and then the political one. Selling shares in a private company could raise some red flags from management thinking an employee wants to cash out and bail, management worried about the perception of the company's health (internally and externally), management concerns about loss of control, etc. All reasons why managers might make life difficult for said employee after the fact.
    - prostoalex 11y ago
      They generally don't want their cap table to explode with randos, and if there's access to sensitive information, they obviously don't want the cases where unscrupulous party buys shares just to feed that data to competitors. With that said, it's obviously in their interest to provide some liquidity to avoid their long-time employees from defecting to GOOG or NFLX or FB, which reward with perfectly liquid stock grants, so in case of demand from the buy-side an employer would orchestrate a secondary market transaction. On the buy side in most cases you'd see an SPV managed by the VC who invested in previous rounds (which helps with keeping the cap table low). Ironically, for smaller VCs entire economics of their firms are based on these SPVs (which sometimes charge upwards of 2% management fee on top of 20% carry - and that's for a chunk shares sitting quietly doing nothing).
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.

by dhj 11y ago

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.)
      - shostack 11y ago
        That's more to the point I was getting at. There's the legal situation, and then the political one. Selling shares in a private company could raise some red flags from management thinking an employee wants to cash out and bail, management worried about the perception of the company's health (internally and externally), management concerns about loss of control, etc. All reasons why managers might make life difficult for said employee after the fact.
  - prostoalex 11y ago
    They generally don't want their cap table to explode with randos, and if there's access to sensitive information, they obviously don't want the cases where unscrupulous party buys shares just to feed that data to competitors. With that said, it's obviously in their interest to provide some liquidity to avoid their long-time employees from defecting to GOOG or NFLX or FB, which reward with perfectly liquid stock grants, so in case of demand from the buy-side an employer would orchestrate a secondary market transaction. On the buy side in most cases you'd see an SPV managed by the VC who invested in previous rounds (which helps with keeping the cap table low). Ironically, for smaller VCs entire economics of their firms are based on these SPVs (which sometimes charge upwards of 2% management fee on top of 20% carry - and that's for a chunk shares sitting quietly doing nothing).

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.