4 ms·

How can early employees defend themselves? What stock structures, if any, fight against this? Is there nothing possible common stock holders can do to protect t

How can early employees defend themselves? What stock structures, if any, fight against this? Is there nothing possible common stock holders can do to protect themselves aside from pray the founders have some shred of morality?

JonFish85 11y ago
Like all common share holders, they have almost no options. Not being a lawyer I can't speak to what is legally possible, but I imagine it's hard to prove that moves like this are necessarily not in the best interests of the shareholders as a whole. Common shareholders just happen to be a tiny, tiny percentage of the whole.
joshjkim 11y ago
Very little can be done, and it's designed that way. Capital > labor, all that. The best option is to attempt downside protection by selling shares in the secondary market, even at a discount - of course, Spotify being a EU company, I don't know how difficult it is to do that, though I imagine (like most other things) it's more regulated (aka. tougher to do) than in the US. Even if easy, it's getting harder and harder to find secondary market buyers. Rough out there!
jvm 11y ago
Note that the founders interests are aligned with the early employees, they are all taking an equal haircut. Either (a) the founders are sacrificing themselves for the sake of the company which means they were already in dire straits or (b) they actually believe that this will be a net positive for the value of common shares, e.g. by avoiding a down round. Well, actually, (c) the founders have lost their controlling interest and are being strong-armed by early investors, but early investors' preferred share privileges are usually not very helpful by this point.
- joshjkim 11y ago
  True - probably, founders have no choice. One side note though: it's increasingly common for founder's to cash out a few million in later stage rounds, often under wraps, to "keep them from being tempted to take lower buyout offers" is the usual theory, which is code for getting them to be more aligned with the investors. In any case, those deals are often not accessible to employees, just founders. The most cynical take is that the investors are buying them off to be not just more aligned with investors, but less aligned with employees =)
- sk5t 11y ago
  Their interests are aligned, but early employees stand to take an even closer haircut on options--assuming significant strike price--rather than founder shares.
- jacquesm 11y ago
  > Note that the founders interests are aligned with the early employees, they are all taking an equal haircut. I disagree. The founders definitely have an important stake in the outcome but they stand to get very wealthy if it works out and early employees will - in most cases - make back a premium on the lower wages they took because of stock options (which you should never do) and the extra hours they put in to make the company a success. Note that simply because of the asymmetry between the potential pay-out the goals are not aligned. Superficially, yes, they are aligned because if the founders get nothing the employees will also get nothing but employee options are not the same as vested founder shares and employees could easily be 'under water' based on the value of their options being lower than the amount of money they left on the table by choosing this particular employer rather than a more established one. So for founders the incentive to gamble is much higher (all-or-nothing), in fact I'd argue their goals are roughly the same as early (seed round) investors rather than early employees, once they decide to take on venture capital. The pressure will be on to go home-run-or-bust. Note that the deal outlined above is exactly one of those. Conservative founders running a profitable business would not gamble like this, but since it doesn't matter any more the only way they will get anything out of this is the home-run and what's good for the employees is no longer relevant to the management that inked this deal (for employees it might actually be better to jump ship at this stage because the 'bust' scenario is a lot more likely with this much pressure than without).
  - Trundle 11y ago
    I don't understand where you're saying that employees aren't also going for a home run or bust outcome. That's exactly what they signed up for when they took that job instead of with a more established company. "Bust" is the most likely outcome when you sign up to work for a startup, so unless their goals/wants have changed I don't see why they'd want to jump ship now.
    - jacquesm 11y ago
      The Spotify that raised it's initial round has a completely different risk profile than the Spotify that exists today. Employees as a rule are not looking at the company in the same way that investors and founders do. If you have evidence that employees as a rule understand the amount of risk involved and that they understand fully that the most likely value of their stock options is zero then I'm definitely all ears. But that's usually not how it's being sold. In fact, it is sold along the lines of 'we're not going to pay you your market rate but you have quite a bit of stock (in reality .000001% (or some other rounding error)) if you work really hard for the next 4 years YOU TOO WILL BE RICH. But the number of employees that actually do end up like this is small. Still larger than the number of founders but the founders really will be rich, the employees are lucky if they make up for their lost income. Of course some employees will be more savvy than others and will negotiate a wage that reflects the reality of start-up life but more often than not the employees accept (substantially) below market wages in return for a bunch of empty promise. Feel free to blame them for not being informed, but to claim they have 'the same incentives' is definitely not the case in my experience.
- charlesdm 11y ago
  Founders haver probably already sold off equity worth tens/hundreds of millions of dollars during previous rounds. Taking some off the table..
jacquesm 11y ago
You can't, really. This is one reason why I think the 'start-up' scene is statistically so-so for founders, potentially great for investors but not so good to outright bad for early employees except in a very few exceptional situations. Everything has to work out just-so for employees to end up wealthy beyond making up for the lost pay and the overtime, assuming they even get that (most likely: nothing).
rdli 11y ago
Early employees always get diluted. That's what happens when you raise additional capital, regardless of structure. They make up for this with a combination of a lower exercise price, the vesting clock starting earlier, and typically a larger grant for earlier employees. Companies retain employees by giving additional refresh grants and/or raises. I'm not sure why it's OK for Uber to raise a few billion $ and there isn't a fuss about how that's hurting employees when it's not okay here. They both are getting diluted.

JonFish85 11y ago

Like all common share holders, they have almost no options. Not being a lawyer I can't speak to what is legally possible, but I imagine it's hard to prove that moves like this are necessarily not in the best interests of the shareholders as a whole. Common shareholders just happen to be a tiny, tiny percentage of the whole.

joshjkim 11y ago

Very little can be done, and it's designed that way. Capital > labor, all that. The best option is to attempt downside protection by selling shares in the secondary market, even at a discount - of course, Spotify being a EU company, I don't know how difficult it is to do that, though I imagine (like most other things) it's more regulated (aka. tougher to do) than in the US. Even if easy, it's getting harder and harder to find secondary market buyers. Rough out there!

jvm 11y ago

Note that the founders interests are aligned with the early employees, they are all taking an equal haircut. Either (a) the founders are sacrificing themselves for the sake of the company which means they were already in dire straits or (b) they actually believe that this will be a net positive for the value of common shares, e.g. by avoiding a down round. Well, actually, (c) the founders have lost their controlling interest and are being strong-armed by early investors, but early investors' preferred share privileges are usually not very helpful by this point.

joshjkim 11y ago
True - probably, founders have no choice. One side note though: it's increasingly common for founder's to cash out a few million in later stage rounds, often under wraps, to "keep them from being tempted to take lower buyout offers" is the usual theory, which is code for getting them to be more aligned with the investors. In any case, those deals are often not accessible to employees, just founders. The most cynical take is that the investors are buying them off to be not just more aligned with investors, but less aligned with employees =)
sk5t 11y ago
Their interests are aligned, but early employees stand to take an even closer haircut on options--assuming significant strike price--rather than founder shares.
jacquesm 11y ago
> Note that the founders interests are aligned with the early employees, they are all taking an equal haircut. I disagree. The founders definitely have an important stake in the outcome but they stand to get very wealthy if it works out and early employees will - in most cases - make back a premium on the lower wages they took because of stock options (which you should never do) and the extra hours they put in to make the company a success. Note that simply because of the asymmetry between the potential pay-out the goals are not aligned. Superficially, yes, they are aligned because if the founders get nothing the employees will also get nothing but employee options are not the same as vested founder shares and employees could easily be 'under water' based on the value of their options being lower than the amount of money they left on the table by choosing this particular employer rather than a more established one. So for founders the incentive to gamble is much higher (all-or-nothing), in fact I'd argue their goals are roughly the same as early (seed round) investors rather than early employees, once they decide to take on venture capital. The pressure will be on to go home-run-or-bust. Note that the deal outlined above is exactly one of those. Conservative founders running a profitable business would not gamble like this, but since it doesn't matter any more the only way they will get anything out of this is the home-run and what's good for the employees is no longer relevant to the management that inked this deal (for employees it might actually be better to jump ship at this stage because the 'bust' scenario is a lot more likely with this much pressure than without).
- Trundle 11y ago
  I don't understand where you're saying that employees aren't also going for a home run or bust outcome. That's exactly what they signed up for when they took that job instead of with a more established company. "Bust" is the most likely outcome when you sign up to work for a startup, so unless their goals/wants have changed I don't see why they'd want to jump ship now.
  - jacquesm 11y ago
    The Spotify that raised it's initial round has a completely different risk profile than the Spotify that exists today. Employees as a rule are not looking at the company in the same way that investors and founders do. If you have evidence that employees as a rule understand the amount of risk involved and that they understand fully that the most likely value of their stock options is zero then I'm definitely all ears. But that's usually not how it's being sold. In fact, it is sold along the lines of 'we're not going to pay you your market rate but you have quite a bit of stock (in reality .000001% (or some other rounding error)) if you work really hard for the next 4 years YOU TOO WILL BE RICH. But the number of employees that actually do end up like this is small. Still larger than the number of founders but the founders really will be rich, the employees are lucky if they make up for their lost income. Of course some employees will be more savvy than others and will negotiate a wage that reflects the reality of start-up life but more often than not the employees accept (substantially) below market wages in return for a bunch of empty promise. Feel free to blame them for not being informed, but to claim they have 'the same incentives' is definitely not the case in my experience.
charlesdm 11y ago
Founders haver probably already sold off equity worth tens/hundreds of millions of dollars during previous rounds. Taking some off the table..

jacquesm 11y ago

You can't, really. This is one reason why I think the 'start-up' scene is statistically so-so for founders, potentially great for investors but not so good to outright bad for early employees except in a very few exceptional situations. Everything has to work out just-so for employees to end up wealthy beyond making up for the lost pay and the overtime, assuming they even get that (most likely: nothing).

rdli 11y ago

Early employees always get diluted. That's what happens when you raise additional capital, regardless of structure. They make up for this with a combination of a lower exercise price, the vesting clock starting earlier, and typically a larger grant for earlier employees. Companies retain employees by giving additional refresh grants and/or raises. I'm not sure why it's OK for Uber to raise a few billion $ and there isn't a fuss about how that's hurting employees when it's not okay here. They both are getting diluted.