5 ms·

As an ex-Gusto employee, let me provide another side. Gusto also has a company bylaw where they can veto any employee sale. Not Right of First Refusal, but can

by tyre 10y ago

As an ex-Gusto employee, let me provide another side. Gusto also has a company bylaw where they can veto any employee sale. Not Right of First Refusal, but can flat out veto an employee selling stock to buy a home, pay off student loans, start a company, etc. This isn't covered at the time of hiring, nor present in the option agreement provided to employees. As an early ZenPayroll (now Gusto) employee and a leader of the culture up to 70 employees, I'm honestly embarrassed by the company's stance here. It's hypocritical (in my opinion) to the values talked about by the company. Employees should benefit from the success of the company they worked hard to build. As a current founder, believe me I understand why founders get a much larger share. But at least be transparent. You can read about our approach to equity, and everything else, here: https://octopoedi.gitbooks.io/employee-handbook/content/ https://octopoedi.gitbooks.io/employee-handbook/content/

abalone 10y ago
It should be presented transparently, but that's a pretty standard term and there's a good reason for it. Those so-called secondary sales put more owners onto the cap table which can cause accounting and investor-relations headaches for small companies. Things like information rights, control issues, regulatory responsibilities. At a pre-IPO stage, it can be good for the company (including option-holders) to control who they invite in to own it. Basically Facebook and a few others tried allowing secondary sales, had problems, and since then the industry has retreated from that idea.
- mgummelt 10y ago
  That is a real problem, yes, but the fair solution is right of first refusal, not vetoing a sale.
  - ncd 10y ago
    Precisely--this is the exact reason that ROFRs exist. They make sure that a company has the option of keeping its cap table clean in the event of a sale by an employee. What these companies want is to have their cake and eat it too: prohibit sales of stock to outsiders without having to pay for the privilege. The cynic in me says that this is because companies of this kind are far less likely to be in the position to exercise ROFRs and pay for it via profits simply because they are not yet profitable. And I'm sure investors don't like the idea of their capital being used to buy back shares of vested stock from employees.
    - mgummelt 10y ago
      It doesn't matter whether the cost is incurred on profits or otherwise, they just don't want to pay. Vetoing sales is unfair, but rational on the part of the company, so long as their recruits and employees don't understand the implications of these contracts, and therefore aren't choosing other employers on that basis. Including this constraint in the bylaws of the company rather than the Option Agreement is particular devious, and I've actually never heard of such a trick. I'm surprised it's legal.
- ncd 10y ago
  In the case @tyre mentioned above, the number of owners on the cap table would have actually been reduced during the sale, not increased. The problem is not with the spirit under which that clause was added to the company's bylaws--the problem is the knee-jerk reaction by which they halted any discussion of sales (and didn't try to find a solution that worked), whether or not the proposed sale actually had a material effect on the cap table. Not to mention that ROFRs exist to eliminate cap table problems altogether. Employees are unaware of these "veto" clauses, and continuing to hide them is acting in bad faith. But of course companies don't want employees to be aware of these clauses--it would become crystal clear how absolutely worthless equity is for the vast majority of employees at startups (even at Valley darlings like Gusto).
  - wtvanhest 10y ago
    This is a place where a regulatory response is probably needed. I would like to see a law that says that if a company blocks a sale, the employee can auction their shares off to current investors and the company has the last chance to bid. It may change control if the company doesn't want to buy the shares, but it does not change investor relations or any material work the founder/team would need to do to stay in compliance.
  - birken 10y ago
    As a preface, I'm as employee friendly as it comes for options and I've been through the ringer on this whole option process. I don't think it is fair for an employee of a private company to be upset that they can't sell their shares whenever they want. There are more than just issues of the cap table. If one person wants to sell shares then isn't it only fair that everybody get the opportunity? So now it becomes a process. If the company endorses the process, then it can potentially affect the 409A valuation in addition to being a pretty big distraction and time sink. So you can't just say because Employee X wants to sell shares and has a buyer lined up, the company shouldn't get in the way. The most fair thing for everybody might be to block the sale. As a caveat to this, I believe that if founders sell shares then they should also give employees a right to sell shares, and not doing so is reason to get upset. However, if the founders aren't selling shares then I don't think it is wrong for them to make everybody wait for an IPO, acquisition or a other structured stock sale.
ng12 10y ago
> It's hypocritical (in my opinion) to the values talked about by the company. Any company paying employees with equity has the same goal: hire/retain talented people with the least amount of cash possible. Founders/CEOs will talk until they're blue in the face about values, why they give equity, how to view equity, etc, but I find all of it pretty meaningless. Personally, having gone through the gauntlet, I would never work at a company that refused to give me a cash-heavy offer even if I didn't intend on taking it.
- dchichkov 10y ago
  In my opinion, the current situation, and lack of golden standards with the employee equity, especially early employee equity poisons the atmosphere in the Silicon Valley like nothing else. Early employees often take most of the risk that the founders take, plus they have no control, plus no access to information that founders have, plus they have the risk of negative impact on their careers even after leaving the startup (think no-compete agreements, arbitrary feedback from immature founders, etc). I think incubators like YC should understand that in the long term it would harm their business and should act and fix it. And formalize the contracts with early employees. Personally, I think that the golden rule should be that the equity in the startup should be determined by risk / value that every investor (including founders, employees) takes / brings in during the life time of the company. To evaluate what founders / employees bring in - just take inflation adjusted average yearly income, over previous five years. Adjust to the hours they are working, add any investments they are bringing in. Adjust, based on the risk profile of the company and their position in the company. What we have right now, with cliffs/vesting/dilutions/option expiration is a kludge, this kludge is ridiculous. And the result is that professionals just avoid joining startups as employees.
  - x0x0 10y ago
    afaik (talk to your lawyer when changing jobs! they're really not that expensive!) non-competes are unenforceable in the vast majority of cases in CA. There may be limited exceptions for executives. There is even a question if asking for it invalidates the entire employee agreement.
mavelikara 10y ago
Chris elaborates his points here in a post titled "Dear Gusto, Mission is More Than Marketing" : https://medium.com/@octopoedi/dear-gusto-mission-is-more-than-marketing-34340e594837 https://medium.com/@octopoedi/dear-gusto-mission-is-more-tha...
mahyarm 10y ago
Your handbook mentions nothing about a ROFR, buyback options in bylaws, access to company bylaws or a complete lack of restrictions on equity ownership. All I can see is your equity vesting schedule. You also do not talk about what employees could do with their options / stock and how the company would probably react to it. Like how would you react if they did a ESO fund style purchase of their options? Sold them on second market? Just purchased it personally? I could be missing it but I can't see it right now.
- ncd 10y ago
  Correct--these things are spelled out in the Stock Purchase Agreement each employee is given. I can tell you, however, that all limits imposed are spelled out clearly in that document, and not hidden in our bylaws. But you're right--we should put it in the handbook as well, because that's our living document for past, present, and future employees.
- tyre 10y ago
  Yep. I linked to that because we do some things, like vesting, a bit differently. We want potential employees to have access to that information before applying. For the standard stuff, we walk through that with the employee during onboarding. Given that companies are starting to add these unfriendly clauses, we will spell out clearly that we only have a ROFR. I can also publish our bylaws

by tyre 10y ago

abalone 10y ago

It should be presented transparently, but that's a pretty standard term and there's a good reason for it. Those so-called secondary sales put more owners onto the cap table which can cause accounting and investor-relations headaches for small companies. Things like information rights, control issues, regulatory responsibilities. At a pre-IPO stage, it can be good for the company (including option-holders) to control who they invite in to own it. Basically Facebook and a few others tried allowing secondary sales, had problems, and since then the industry has retreated from that idea.

mgummelt 10y ago
That is a real problem, yes, but the fair solution is right of first refusal, not vetoing a sale.
- ncd 10y ago
  Precisely--this is the exact reason that ROFRs exist. They make sure that a company has the option of keeping its cap table clean in the event of a sale by an employee. What these companies want is to have their cake and eat it too: prohibit sales of stock to outsiders without having to pay for the privilege. The cynic in me says that this is because companies of this kind are far less likely to be in the position to exercise ROFRs and pay for it via profits simply because they are not yet profitable. And I'm sure investors don't like the idea of their capital being used to buy back shares of vested stock from employees.
  - mgummelt 10y ago
    It doesn't matter whether the cost is incurred on profits or otherwise, they just don't want to pay. Vetoing sales is unfair, but rational on the part of the company, so long as their recruits and employees don't understand the implications of these contracts, and therefore aren't choosing other employers on that basis. Including this constraint in the bylaws of the company rather than the Option Agreement is particular devious, and I've actually never heard of such a trick. I'm surprised it's legal.
ncd 10y ago
In the case @tyre mentioned above, the number of owners on the cap table would have actually been reduced during the sale, not increased. The problem is not with the spirit under which that clause was added to the company's bylaws--the problem is the knee-jerk reaction by which they halted any discussion of sales (and didn't try to find a solution that worked), whether or not the proposed sale actually had a material effect on the cap table. Not to mention that ROFRs exist to eliminate cap table problems altogether. Employees are unaware of these "veto" clauses, and continuing to hide them is acting in bad faith. But of course companies don't want employees to be aware of these clauses--it would become crystal clear how absolutely worthless equity is for the vast majority of employees at startups (even at Valley darlings like Gusto).
- wtvanhest 10y ago
  This is a place where a regulatory response is probably needed. I would like to see a law that says that if a company blocks a sale, the employee can auction their shares off to current investors and the company has the last chance to bid. It may change control if the company doesn't want to buy the shares, but it does not change investor relations or any material work the founder/team would need to do to stay in compliance.
- birken 10y ago
  As a preface, I'm as employee friendly as it comes for options and I've been through the ringer on this whole option process. I don't think it is fair for an employee of a private company to be upset that they can't sell their shares whenever they want. There are more than just issues of the cap table. If one person wants to sell shares then isn't it only fair that everybody get the opportunity? So now it becomes a process. If the company endorses the process, then it can potentially affect the 409A valuation in addition to being a pretty big distraction and time sink. So you can't just say because Employee X wants to sell shares and has a buyer lined up, the company shouldn't get in the way. The most fair thing for everybody might be to block the sale. As a caveat to this, I believe that if founders sell shares then they should also give employees a right to sell shares, and not doing so is reason to get upset. However, if the founders aren't selling shares then I don't think it is wrong for them to make everybody wait for an IPO, acquisition or a other structured stock sale.

ng12 10y ago

> It's hypocritical (in my opinion) to the values talked about by the company. Any company paying employees with equity has the same goal: hire/retain talented people with the least amount of cash possible. Founders/CEOs will talk until they're blue in the face about values, why they give equity, how to view equity, etc, but I find all of it pretty meaningless. Personally, having gone through the gauntlet, I would never work at a company that refused to give me a cash-heavy offer even if I didn't intend on taking it.

dchichkov 10y ago
In my opinion, the current situation, and lack of golden standards with the employee equity, especially early employee equity poisons the atmosphere in the Silicon Valley like nothing else. Early employees often take most of the risk that the founders take, plus they have no control, plus no access to information that founders have, plus they have the risk of negative impact on their careers even after leaving the startup (think no-compete agreements, arbitrary feedback from immature founders, etc). I think incubators like YC should understand that in the long term it would harm their business and should act and fix it. And formalize the contracts with early employees. Personally, I think that the golden rule should be that the equity in the startup should be determined by risk / value that every investor (including founders, employees) takes / brings in during the life time of the company. To evaluate what founders / employees bring in - just take inflation adjusted average yearly income, over previous five years. Adjust to the hours they are working, add any investments they are bringing in. Adjust, based on the risk profile of the company and their position in the company. What we have right now, with cliffs/vesting/dilutions/option expiration is a kludge, this kludge is ridiculous. And the result is that professionals just avoid joining startups as employees.
- x0x0 10y ago
  afaik (talk to your lawyer when changing jobs! they're really not that expensive!) non-competes are unenforceable in the vast majority of cases in CA. There may be limited exceptions for executives. There is even a question if asking for it invalidates the entire employee agreement.

mavelikara 10y ago

Chris elaborates his points here in a post titled "Dear Gusto, Mission is More Than Marketing" : https://medium.com/@octopoedi/dear-gusto-mission-is-more-than-marketing-34340e594837 https://medium.com/@octopoedi/dear-gusto-mission-is-more-tha...

mahyarm 10y ago

Your handbook mentions nothing about a ROFR, buyback options in bylaws, access to company bylaws or a complete lack of restrictions on equity ownership. All I can see is your equity vesting schedule. You also do not talk about what employees could do with their options / stock and how the company would probably react to it. Like how would you react if they did a ESO fund style purchase of their options? Sold them on second market? Just purchased it personally? I could be missing it but I can't see it right now.

ncd 10y ago
Correct--these things are spelled out in the Stock Purchase Agreement each employee is given. I can tell you, however, that all limits imposed are spelled out clearly in that document, and not hidden in our bylaws. But you're right--we should put it in the handbook as well, because that's our living document for past, present, and future employees.
tyre 10y ago
Yep. I linked to that because we do some things, like vesting, a bit differently. We want potential employees to have access to that information before applying. For the standard stuff, we walk through that with the employee during onboarding. Given that companies are starting to add these unfriendly clauses, we will spell out clearly that we only have a ROFR. I can also publish our bylaws