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I started off once thinking "yay, X% means I get X% of the company!" and then I found out the shares can be diluted. Then I learned "non-dillutable". Then I le

I started off once thinking "yay, X% means I get X% of the company!" and then I found out the shares can be diluted. Then I learned "non-dillutable". Then I learned about vesting periods, windows for exercising options, and a whole slew of financial terms and devices; each one seemed to come with its own unique "gotcha" that, if you didn't know about, would cost you nearly everything. Everyone I talk to about these always says "well, don't do that one thing, or if you do that one thing be sure you do it in this way and you're set". The cumulative knowledge you need becomes pretty high pretty quickly though, and the chances of me doing the right legal and financial incantation at the right moment becomes lower. Nowadays I go with cash. I don't get 'golden handcuffs' that hold me to a job I don't like because it might pay off later. I can calculate the expected value and risks with cash without tons of research. I know my legal recourses if I get screwed out of cash.

jdavis703 9y ago
Let's not forget the "asset only" acquisition where the company sells it's IP and employees but doesn't sell any shares. Been through one of these and this is what happened, screwing over former employees who had bought options and investors. I think the only people who profited were the bankers.
- icedchai 9y ago
  I've seen this happen multiple times. It is by far the most common "acquisition" in my experience.
  - Wago 9y ago
    This is terrifying. How does that work out financially for the founders?
- harryh 9y ago
  What you describe is what happens when a company fails. It's not really screwing people over as just a description of failure.
- sulam 9y ago
  I've been on the other side of two of these and the explicit alternative in each case was bankruptcy. Also asset transfers are more expensive to the acquirer because you have to explicitly delineate the assets you're buying and what you're not buying. This makes for more lawyer time and pushes the transaction costs up significantly. The real reason to do it is because the team there at the time is more valuable as a group than they would each be on the open market individually. Anyone _not_ there doesn't add that kind of value to the deal. You may want to argue that IP is also part of these deals and past employees created part of that. This is probably true for some deals, but it has been minimally true for the deals I've seen directly. Sample size of two isn't great, but keep in mind the value of startups is largely believed to be in execution, not ideas. A startup on the verge of bankruptcy probably doesn't have immensely valuable IP because it's 1) not producing present value obviously and 2) isn't obviously worth a lot in the future, otherwise someone would be willing to give you discounted cash today for an ownership percentage of its future value (aka an investment).
  - hinkley 9y ago
    Nothing I love more than being bought and sold like cattle. Out of curiosity, how do you keep the employees from walking after an asset only transfer? The vague promise to them about future riches has already been broken. And you will up changing business practices that ruffle feathers (I'm not sure how you could avoid it. This stuff is rarely written down). Hell, you'll probably assign them to a new project anyway. So how do you keep them from leaving in droves?
    - sulam 9y ago
      Payouts! They get some mix of salary (comparable to existing employees), stock (more generous than existing employees) and a cash payout that's fairly generous if they meet some goals laid out in advance. And you didn't ask, but if not enough of the team accepts an offer, then it evaporates.
      - nissimk 9y ago
        If I am to believe HBO, then sometimes those goals are drinking beers on the rooftop.
jasode 9y ago
>"yay, X% means I get X% of the company!" and then I found out the shares can be diluted. There seems to be a common misunderstanding about dilution. Dilution is not really the issue. In fact, dilution is a positive sign. It means more investors value the company and want to buy into the ownership. How do current owners who collectively own 100% of the shares "sell" more shares to future owners?!? By way of dilution. That means everybody gets diluted including the founders, the angels, the VCs, and yes the employees too. More important than dilution is the shares multiplied by price.
- nissimk 9y ago
  If dilution is a non issue then why do professional venture investors demand anti dilution clauses?
  - harryh 9y ago
    Professional investors generally get pro rata rights which allows them to buy more stock in later rounds. They do this because they want the ability to buy more shares in companies that are succeeding. They don't get magic stock that magically doesn't get diluted.
    - sroussey 9y ago
      Ratchets are a thing, far less common in the valley in the last decade than the decade before, particularly at earlier stages. Founders can put them in as well. Don't forget warrants as part of a deal too.
    - PeterFBell 9y ago
      They used to! Ask anyone who was involved in startups around 200-2002 about the full-ratchet anti-dilution provisions many investors demanded and received. Not fun for anyone else in a down round . . .
      - jhall1468 9y ago
        Down-rounds were huge back then, regardless weighted average was still the more common way of doing things, even in the early 2000s. Often times, these days, startups are putting pay to play provisions in, so even the weighted average ratchet requires them to keep investing in order to receive their anti-dilution. Honestly, unless a startup has SERIOUS capital problems, an anti-dilution isn't going to make it's way into a share purchase, so the companies that are still seeing this (and the ones from the early 2000s) weren't in incredible shape to begin with.
arca_vorago 9y ago
Do you know of a good resource that could bring a lay IT person up to speed on these kinds of nuanced details? To me it just seems lots of us just dont know about this stuff. I count myself lucky to have a paralegal SO who does it everyday and walks me through it, but most people don't have that.
matchagaucho 9y ago
VC liquid prefs are the real equity killer, according to this article.
- sroussey 9y ago
  Did it even mention participating preferred?
flanbiscuit 9y ago
Just looking through the replies to your comment makes me throw up my hands in confusion and frustration. You say one thing, the next person argues against one point, then someone counter-argues, and so on. It's all a confusing mess. It's like you need a financial rep to be with you at job interviews to understand all this stuff.
- le-mark 9y ago
  Just say no to options, and demand market level salary. I interviewed at an early stage start up in the mid west. The CEO lamented "People here just don't understand stock options" and as the first technical employee I'd be "by far the highest paid person in the company". I said "People do understand stock options, they're a gamble" and declined the offer. I don't want to be the highest paid person at any company.
tdumitrescu 9y ago
Only one data point, but my experience at several companies has been that annual follow-on/refresher grants more than make up for dilution from new rounds. A company which only gives you a single grant upon start of employment and then lets it coast for 4 years is doing it wrong.
libertymcateer 9y ago
Did you ever engage a lawyer to review your option documentation?
- deathanatos 9y ago
  While I agree generally w/ this advice, in my experience, companies try to make that impossible or very difficult for employees. For example, most hiring offers are exploding: I've been given exploding offers over a weekend, over holidays: try getting a lawyer when you're not at home. Further, again in my experience, getting a lawyer is actually significantly challenging to someone who hasn't done it: you need a lawyer in the relevant area of law, and you need to know their price, and these two critical pieces of information seem generally to be the things left off the website. You can argue that an employee should try to negotiate for adequate time, and maybe they should, but not all will. Those too timid to do so are effectively being taken advantage of; thus I find most companies' positions morally reprehensible.

jdavis703 9y ago

Let's not forget the "asset only" acquisition where the company sells it's IP and employees but doesn't sell any shares. Been through one of these and this is what happened, screwing over former employees who had bought options and investors. I think the only people who profited were the bankers.

icedchai 9y ago
I've seen this happen multiple times. It is by far the most common "acquisition" in my experience.
- Wago 9y ago
  This is terrifying. How does that work out financially for the founders?
harryh 9y ago
What you describe is what happens when a company fails. It's not really screwing people over as just a description of failure.
sulam 9y ago
I've been on the other side of two of these and the explicit alternative in each case was bankruptcy. Also asset transfers are more expensive to the acquirer because you have to explicitly delineate the assets you're buying and what you're not buying. This makes for more lawyer time and pushes the transaction costs up significantly. The real reason to do it is because the team there at the time is more valuable as a group than they would each be on the open market individually. Anyone _not_ there doesn't add that kind of value to the deal. You may want to argue that IP is also part of these deals and past employees created part of that. This is probably true for some deals, but it has been minimally true for the deals I've seen directly. Sample size of two isn't great, but keep in mind the value of startups is largely believed to be in execution, not ideas. A startup on the verge of bankruptcy probably doesn't have immensely valuable IP because it's 1) not producing present value obviously and 2) isn't obviously worth a lot in the future, otherwise someone would be willing to give you discounted cash today for an ownership percentage of its future value (aka an investment).
- hinkley 9y ago
  Nothing I love more than being bought and sold like cattle. Out of curiosity, how do you keep the employees from walking after an asset only transfer? The vague promise to them about future riches has already been broken. And you will up changing business practices that ruffle feathers (I'm not sure how you could avoid it. This stuff is rarely written down). Hell, you'll probably assign them to a new project anyway. So how do you keep them from leaving in droves?
  - sulam 9y ago
    Payouts! They get some mix of salary (comparable to existing employees), stock (more generous than existing employees) and a cash payout that's fairly generous if they meet some goals laid out in advance. And you didn't ask, but if not enough of the team accepts an offer, then it evaporates.
    - nissimk 9y ago
      If I am to believe HBO, then sometimes those goals are drinking beers on the rooftop.

jasode 9y ago

>"yay, X% means I get X% of the company!" and then I found out the shares can be diluted. There seems to be a common misunderstanding about dilution. Dilution is not really the issue. In fact, dilution is a positive sign. It means more investors value the company and want to buy into the ownership. How do current owners who collectively own 100% of the shares "sell" more shares to future owners?!? By way of dilution. That means everybody gets diluted including the founders, the angels, the VCs, and yes the employees too. More important than dilution is the shares multiplied by price.

nissimk 9y ago
If dilution is a non issue then why do professional venture investors demand anti dilution clauses?
- harryh 9y ago
  Professional investors generally get pro rata rights which allows them to buy more stock in later rounds. They do this because they want the ability to buy more shares in companies that are succeeding. They don't get magic stock that magically doesn't get diluted.
  - sroussey 9y ago
    Ratchets are a thing, far less common in the valley in the last decade than the decade before, particularly at earlier stages. Founders can put them in as well. Don't forget warrants as part of a deal too.
  - PeterFBell 9y ago
    They used to! Ask anyone who was involved in startups around 200-2002 about the full-ratchet anti-dilution provisions many investors demanded and received. Not fun for anyone else in a down round . . .
    - jhall1468 9y ago
      Down-rounds were huge back then, regardless weighted average was still the more common way of doing things, even in the early 2000s. Often times, these days, startups are putting pay to play provisions in, so even the weighted average ratchet requires them to keep investing in order to receive their anti-dilution. Honestly, unless a startup has SERIOUS capital problems, an anti-dilution isn't going to make it's way into a share purchase, so the companies that are still seeing this (and the ones from the early 2000s) weren't in incredible shape to begin with.

arca_vorago 9y ago

Do you know of a good resource that could bring a lay IT person up to speed on these kinds of nuanced details? To me it just seems lots of us just dont know about this stuff. I count myself lucky to have a paralegal SO who does it everyday and walks me through it, but most people don't have that.

matchagaucho 9y ago

VC liquid prefs are the real equity killer, according to this article.

sroussey 9y ago
Did it even mention participating preferred?

flanbiscuit 9y ago

Just looking through the replies to your comment makes me throw up my hands in confusion and frustration. You say one thing, the next person argues against one point, then someone counter-argues, and so on. It's all a confusing mess. It's like you need a financial rep to be with you at job interviews to understand all this stuff.

le-mark 9y ago
Just say no to options, and demand market level salary. I interviewed at an early stage start up in the mid west. The CEO lamented "People here just don't understand stock options" and as the first technical employee I'd be "by far the highest paid person in the company". I said "People do understand stock options, they're a gamble" and declined the offer. I don't want to be the highest paid person at any company.

tdumitrescu 9y ago

Only one data point, but my experience at several companies has been that annual follow-on/refresher grants more than make up for dilution from new rounds. A company which only gives you a single grant upon start of employment and then lets it coast for 4 years is doing it wrong.

libertymcateer 9y ago

Did you ever engage a lawyer to review your option documentation?

deathanatos 9y ago
While I agree generally w/ this advice, in my experience, companies try to make that impossible or very difficult for employees. For example, most hiring offers are exploding: I've been given exploding offers over a weekend, over holidays: try getting a lawyer when you're not at home. Further, again in my experience, getting a lawyer is actually significantly challenging to someone who hasn't done it: you need a lawyer in the relevant area of law, and you need to know their price, and these two critical pieces of information seem generally to be the things left off the website. You can argue that an employee should try to negotiate for adequate time, and maybe they should, but not all will. Those too timid to do so are effectively being taken advantage of; thus I find most companies' positions morally reprehensible.