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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 t

• 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.