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Employees at Practice Fusion got nothing as execs pocketed millions

227 points by coloneltcb 9y ago

49erfanboy415 9y ago
This is pretty crazy. I'm surprised no other news outlets are picking this up. The company says it is normal to pay management fat payouts to drive the company into the ground? Why should they get paid for selling for $100M when they took over and it was worth $700M?
- aetherson 9y ago
  I have no particular knowledge of this specific company, and it's quite possible that their manager payouts are overly high. But: Somebody's paying $100M for this company. That's much less than the company was hoped to be worth, but it's still a huge chunk of change. The buyer is trying to get something for that investment. That means they need the company to perform in some way. Maybe just shut down in an orderly fashion while they monetize the client list in some manner, but for $100M, I'd guess that they want to operate the company somehow. For that, they need the cooperation of the senior managers. So they pay them to cooperate. It kind of sucks, but you have to give the managers of the company some incentive to stick around and help you do whatever it is you want to do with the company instead of saying "Fuck you we're out of here." If it helps, I'm certain that $750k - $7M was much smaller than the payout those execs were hoping/expecting to get from a more successful outcome.
  - mgkimsal 9y ago
    > ...but for $100M, I'd guess that they want to operate the company somehow....For that, they need the cooperation of the senior managers. So they pay them to cooperate... I'm not sure how much cooperation I'd want from "senior managers" who managed to manage a company in to 1/7th of what it was valued at. If it was intentionally fraudulent... you want those people around and making decisions still? If it was incomptence... you want those people around and making decisions still? Yes, I'm oversimplifying, and no doubt there's always other factors to consider, but this thinking bothers me along the same lines as "we needed to pay those large bonuses to keep the CEO around - we couldn't get anyone else as capable and experienced!" while the company is simultanesouly tanking.
    - Maro 9y ago
      I don't know anything about this company. But, just because the valuation went down, doesn't mean it's the management's fault. Maybe the old valuation was based on wishful thinking, and over time it sunk in [to everybody] that there are core problems with the product/biz.model/etc that they can't solve. This I've seen multiple times are startups. There's some fundamental problem which is masked by growth. Management keeps hiring people and hopes somebody eventually magically fixes the problem. After ~5 years the company accepts the problem. OR a new competitor emerged, etc. Even a shitty management team is a management team that keeps the company running.
      - mgkimsal 9y ago
        It sounds like this particular company was engaged in 'wishful thinking' re: the valuation, and sounded like they were using deception at the core (if they were trying to deceive employees, probably tried to deceive investors too).
      - s73ver_ 9y ago
        "But, just because the valuation went down, doesn't mean it's the management's fault." Yes, it does. The justification for the extremely high salaries and bonuses that execs get is because they are the ones who are "taking risks" and "are responsible for the company." Here, they are literally being rewarded for failure, and at the expense of people who were actually doing work.
        mgkimsal 9y ago
        > Here, they are literally being rewarded for failure, Because who else would 'risk' so much - like only getting a $400k bonus instead of an $1m bonus? It takes special character and fortitude to steel yourself for such challenges!
    - aetherson 9y ago
      It's not about "we couldn't get anyone else as capable and experienced," it's just about "we couldn't get anyone else as experienced." I don't think that anyone in these situations deludes themselves that the management team of a company are paragons of greatness, but doing a sudden replacement of the entire senior management team at a time when the company's morale is very low to start with and where you're certainly trying to make some major changes to the organization is a recipe for disaster. Bringing on new senior management takes time. Coming up to speed on the workings of an even moderately sized company takes time.
btown 9y ago
> CNBC talked to three former employees who lost between $40,000 and over $100,000 each because they exercised their options in previous years and had to pay tax based on their heightened value at the time. Interestingly, the recently passed tax reform bill seems to make this type of loss less likely - though it would seem to be too late for these employees. https://www.towerswatson.com/en/Insights/Newsletters/Global/executive-pay-matters/2017/12/What-the-final-tax-reform-bill-approved-by-House-Senate-means-for-compensation https://www.towerswatson.com/en/Insights/Newsletters/Global/... (see section Private Company Equity Grants)
- kapauldo 9y ago
  How is this a loss? They paid taxes on gains? Not sure what the badness is here. They cashed out and paid taxes.
  - seattle_spring 9y ago
    > How is this a loss? They paid taxes on gains? Not sure what the badness is here. They cashed out and paid taxes. They didn't take real gains, they took illiquid paper gains and paid AMT (Alternative Minimum Tax). Example: Strike price was $1 / share, "on-paper" price was $20 / share. Employee had 20,000 shares, with a "paper" gain of $380,000. They had to pay the taxes on those gains even though the stocks were not publicly traded and therefore illiquid.
    - lmm 9y ago
      So they were taxed on a best-effort valuation of the thing they received from their employer? That seems like how tax is supposed to work. (How else would you do it - in-kind taxes?) Illiquid investments are a risk, if you lose money on them then you lose money on them, and you don't get back the taxes you paid, just as you don't get back the taxes on income you lost at the card tables.
      - seattle_spring 9y ago
        Then you must support paying unrealized gains on your home and stocks each year, even if you don't sell them? Because it's literally the same thing. > How else would you do it The same way every other investment works: Tax the gains when the asset is sold.
bdittmer 9y ago
Recently happened to me. Founders raid the series c for liquidity. Take out a predatory note to keep the company afloat. Sell the company in a fire sale and reap transaction bonuses, RSU grants, etc. Common stock wiped out and those that built the company left with nothing. Lesson learned? It rarely pays to be an early employee at a startup.
- jhwang5 9y ago
  Which company, if you don't me asking?
  - compsciphd 9y ago
    I won't give the game away, but pretty easy to figure out...
    - reagan83 9y ago
      Those with questionable/poor ethics ethics should be called out. There is no reward for staying silent while people/companies do wrong by others.
      - doorbumper 9y ago
        The problem is that there is no reward for speaking up, while there is punishment for speaking up.
  - zenlikethat 9y ago
    Looks like Quri (https://angel.co/quri-1 https://angel.co/quri-1). All you had to do was Google OP's handle and dig into where they worked recently that had their characteristics
    - gaius 9y ago
      If the OP chose not to say, it’s unreasonable to doxx them
markbnj 9y ago
This is a pretty common scenario when a venture funded company doesn't reach a valuation that exceeds the various preferences accumulated in investment rounds. The company is ultimately sold, all of the sales proceeds are taken by the preferred shareholders, who carve out set-asides for founders and senior management to keep them onboard and not scare the acquirer off with internal strife.
mattschmulen 9y ago
If I had a dollar for every time an XO, Sales VP, or board investor (I’m looking at you Todd Rulon-Miller) said we were expecting an IPO filing in two years (bless thier optimistic little hearts) and sold for executive bonuses and a common stock price for the parts then I would have 3$. Best exit I ever had was an XO who’s singular prediction statement was “I think we have a chance at building and contributing to this technology and I think that might be valuable to this software enterprise segment, do you want to go find out?”. Buyer beware, contributor beware; it’s just how the game goes. Look for the humble introspective and you increase your odds, there is no guarantee, you only control your investment. That’s a tough break for those that were over exposed you have to cap your liability to your comfort level. bummer for those that caught the bill.
- seattle_spring 9y ago
  How does an engineer protect themselves against this sort of outcome? Just never work for startups? I currently find myself in a similar situation, where the books look dire but the executives keep saying that we're so close to profitability. I'm 85% certain that my stocks will be worth nothing, but I stick around because I still see an ounce of promise. Am I just a sucker?
  - nshelly 9y ago
    I think for early stage companies you should see the startup as a 1) learning opportunity first and chance to work with a great team driven by a passion outside of pure money, and 2) an out-of-the-money call option / favorable lottery ticket. Also, the new tax bill got rid of AMT for incomes under $500,000 for individuals ($1m for couples). It's difficult to go over that amount with ISO's as the FMV of your shares is valued at around 10-30% of preferred. You could exercise your options once every year for example to stay under that limit. If you've already exercised and paid AMT, try to invest your other savings and if you need to take a loss you can offset it against those capital gains. While it might not be something you're passionate about, I would also add that reading about startup law, discussing with your peers, and knowing your rights, and even asking (getting in writing) the terms of the investment rounds, is invaluable and certainly something you should do if you want to understand your full package.
mbesto 9y ago
Founded in 2005, Practice Fusion competes in the crowded electronic medical records market and discovered a niche by offering free software that was popular among small and solo physician practices. Instead of charging for its software, Practice Fusion generates the bulk of its revenues through advertising to doctors. Oh what could go wrong....
- Bucephalus355 9y ago
  Silly. Doctors could just use OpenEMR, free and meets most of the regulatory standards. http://www.open-emr.org http://www.open-emr.org
  - ch4s3 9y ago
    I've met exactly 2 doctors who have actually used OpenEMR and they were both researchers. It is quite nice, but the last time I looked it wasn't trivial to set up and run. I think it one of those "it's free if you time is worth nothing" kind of things. And, there are some other EHRs out there that are nice and won't break the bank.
    - JshWright 9y ago
      > there are some other EHRs out there that are nice and won't break the bank. In fact, due to the various "pay for performance" models out there, a good EHR will make you money (making it easier to prove you are meeting various thresholds for the quality measures in question).
      - ch4s3 9y ago
        Yeah, quality measure reporting is key, the good ones do that well for sure. However I think they're missing the ability to monitor quality on a day to day and week to week basis for the most part. It's also really hard to track quality trends.
        JshWright 9y ago
s73ver_ 9y ago
Stories like this are extremely common nowadays. Startups are going to have to come up with some other way to attract talented workers, as most people know that equity is a joke, the hours are extremely long, and the pay is crap.
- yborg 9y ago
  During the dotcom bubble I knew that VCs were kicking themselves every time some 'secretary becomes a millionaire' story came out because this meant they left money in other people's pockets. Over the last 20 years investors have refined their game and this never happens now, indeed, it's the opposite. I think the only reason to go in other than as a founder in a startup is as someone right out of school for experience. Otherwise they have to be treated like any position, on a straight cash comp/benefits basis, ignoring the likely worthless equity scrip. In my experience, the best play is to go in on a contract basis once a startup is in the "burn baby burn" phase and you can bill market rate for all of those hours.
  - DoofusOfDeath 9y ago
    My experience with startups has actually been quite positive. I negotiate compensation on the assumption that anything stock-related has zero value. Then I just enjoy the other great perks of a startup I care about: influence over technical issues, and camaraderie.
    - stevenwoo 9y ago
      So do you try to get a fair market salary + enough to cover equivalent benefits at a mature company - if the stock-related stuff has zero value?
      - DoofusOfDeath 9y ago
        I'd say total compensation has worked out roughly the same. It's a little hard to compare since I've sometimes worked remotely, and with companies headquartered in Silicon Valley, Cambridge (MA), and in less techy regions. The non-startups were actually located outside of Silicon Valley and Cambridge. If I adjust for the different regions' cost of living, the (salary+benefits) dollar value were about the same across the board. One caveat: The non-startups in SV and Cambridge gave me stock grants that vested over a number of years. If I'd stayed long enough for them to vest, the total compensation for those non-startups would have been about $7k-10k/year higher (pre-tax) that the compensation I got from startups.
conanbatt 9y ago
Sometimes people see this and start thinking that options or stocks should be regulated harder by the sec so employees dont get shady deals and screwed like this. But there is a much simpler way to prevent this from happening altogether: let employees trade the shares they got from openly in the market. That way, you would get a market signal on stocks on startups and shady deals like this would get whistleblowed on the market long before they are signed.
spiderPig 9y ago
I wouldn't join any start-up involving Peter Thiel at this point. Palantir is another prime example. Biggest grifters in the valley, the paypal mafia
tzhenghao 9y ago
For those who want to gain some context on how such a thing could happen, I recommend the book Venture Deals by Brad Feld and Jason Mendelson [1]. There's a good section in the book that talk about share preferences and the order in which the pile of money is cashed out. [1] - http://a.co/aeI2gqq http://a.co/aeI2gqq
- prepend 9y ago
  I second this recommendation. This article reminded me of the Venture Deals section where they break down the different kinds of capitalization and payouts in different scenarios. While the examples are written for founders, it’s also useful for any employee with shares trying to figure out their value. Most importantly for employees joining a company to get the info to make the decision whether to join. Or for employees thinking about how to treat their options or limited shares. I’ll add that for a few companies, when I asked the necessary questions then hiring manager or founder either couldn’t or wouldn’t answer. So, like another commenter’s advice, I valued the shares at zero. This meant sometimes I didn’t join, but sometimes I did. Almost always my zero valuation was accurate, but once I got a pleasant surprise.
kabdib 9y ago
Yeah, as an "investor" and an employee of several startups, I generally wound up on the losing side of the equation, to the tune of tens of thousands of dollars. Stuff that amounted to, "Oh, we extinguished those shares, sorry about that," when the corporation was worth several billion. This stuff is broken. You are far better off working for a mature company with decent management; if you are any good, you won't necessarily have "fuck you" money at the end of ten years, but you'll probably be ahead by several million dollars, and the value of "several" might be pleasantly surprising.
- DenisM 9y ago
  “Surprising several” is at least 3 million over ten years. Which companies pay to “any good” engineers enough to pocket $300k per year, after tax and living expenses?
  - mlevental 9y ago
    there are plenty of senior devs at FANG making that. not just machine learning/data scientist magician but just good devs that have been there for 10 years
    - CaveTech 9y ago
      You'd have to be making 700k+ a year to be banking 300k after tax. Perhaps the valley slipped away from me but I find it hard to believe that there would be average employees in that range.
      - nappy-doo 9y ago
        I did it at a FANG, and it wasn't 700k/year. Admittedly, this is the longest runup in stocks we've had for some time, but just prudent saving and investing (and possibly working for a FANG outside the valley) did it for me.
      - loeg 9y ago
        Your tax math is bad. The pre-tax figure, even with California income tax, is closer to 500k than 700k. And some of that 300k/year difference is coming from growth of invested savings, not just W-2 income.
former_pf_emp 9y ago
The company played some nasty mind games with their employees regarding equity. They did a 7 (I think?) for 1 split, and then had the recruiters telling employees that they had "never seen a company give out so many shares before." They sent out spreadsheets with calculators that would let you estimate the value of your shares, and just casually let you know that Apple was trading at ~$700/share. iirc, they even pre-filled in the line for potential value with Apple's current share price (so, 5000 shares * 700 Apple-level share price = 3.5M). At every company meeting, they'd get really pumped about how they were going to IPO. They would throw parties celebrating their 100 millionth patient life covered, even though it seemed pretty obvious those numbers weren't real. No 401k match, since you're not going to need it after we IPO. There was even a second market offering to let Ryan sell enough shares to pay his taxes and maybe buy a nice house in South Park. I don't feel bad for the engineers, since they were generally exposed to enough information that they should have been able to call bullshit. I feel bad for the customer success team, who were often given a tenth of the amount of shares as engineers but would still frequently talk about retiring when we IPO. Hopefully the exec bonuses will be voted down, and there'll be a class action lawsuit. This is a problem that faces a lot of startups. We should all be more wary of information that's given out, and be more demanding of transparency. Learn a less from all of us PF employees: the more a company talks about their IPO, the less likely it's going to happen.
- conanbatt 9y ago
  This sounds like straight down fraud. > There was even a second market offering to let Ryan sell enough shares to pay his taxes and maybe buy a nice house in South Park. Who was buying the shares from Ryan in this secondary market? > This is a problem that faces a lot of startups. We should all be more wary of information that's given out, and be more demanding of transparency. Learn a less from all of us PF employees: the more a company talks about their IPO, the less likely it's going to happen. I generally agree, but no matter how much information is given out, if the last deal is done secretly and with bonuses and pre-arranged values, there is no amount of information that can protect you from that.
  - former_pf_emp 9y ago
josh_fyi 9y ago
I have the opposite question. As long as deals are legal and meet generally accepted ethical standards, it seems that founders and investors have no interest in favoring employees in negotiations that restructure cap tables. So why do employees make money in a good fraction of successful exits?
- vageli 9y ago
  Do you have any sources for your "good fraction" comment? I was under the impression that a "good fraction" of startups outright fail before IPO.
  - josh_fyi 9y ago
    I don't know what percentage that is. It is more than 0, however. So my question is, "So why do employees make money in X% of successful exits, where X is more than 0?"
jVinc 9y ago
"Planning for potential acquisition exits also includes having bonus pools for key employees (which include founders and current executives) that align their incentives with company stakeholders to achieve value upon an exit." That has too be a joke right? They are arguing that the terms that will lead to only the executives and founders getting a cash out are necessary in order to align their incentives to achieve value for stakeholders.... who will receive nothing in the sale? Seems like the only thing this bonus structure is incentivising is their orchestration of a quick and dirty last minute exist so they can get their bonuses while the rest of the company burns down. Hopefully it will get voted to hell, and a new structure will be put in place where the key employees don't make a dime until the ensure that all stakeholders make money.
- bdittmer 9y ago
  See my previous comment. This is exactly what happens. The sale doesn’t get voted to hell because the voting shares (i.e. preferred stock) have liquidation preference and get paid back first, in some instances multiple their initial investment, before the rest of the pie is sliced.
tw1010 9y ago
Part of me wonders why this is even surprising. Aren't the execs the ones with all the control over the power-levers? Why do employees expect to ever get something in situations like this? (I'm trying to look at this from an outsiders perspective.) What levers can employees even affect to shift the balance of influence in their favour? Coalitions and complaints I guess is the only thing that comes to mind. So in a sense, this article is not really a neutral reporting of the facts. In a sense, the article is one of a fairly limited set of tools that underdogs can use to shift the balance of power more in their favour.
golergka 9y ago
If I understand the situation correctly, the important term here isn't "employees", but "shareholders". It seems that management acted in it's own interest, disregarding the interest of company's shareholders. Is my understanding correct? If so, doesn't US have laws against such behaviour?
khazhou 9y ago
Sure, these founders went too far, but the basic problem of Founders >>> Employees is there at every startup. When even employee #1 at typical SV startup signs on for 1% and employee #4 already for half that, why do “employees” still think there’s anything equitable about equity? Listen up, prospective employee: if your founder makes several million, you’ll get zilch. If founder makes tens of millions, you might get enough for a modest car. If your founder makes over $100 million, you might have enough for a down payment on a house. Then you can go to the next startup and work super hard all over again to try to mint another mega-millionaire.
- birken 9y ago
  This fatalist attitude is just as bad as the overly naive attitude that I'm sure left many employees of this company feeling screwed. Employees have agency. Founders don't have some magical power over you with which to screw you. You choose to work for them in exchange for money, stock, whatever. If stock is a sizable part of your compensation, you probably should be asking a lot of questions about it. How many shares will I get? How many shares do you have? How is the company doing? What are the future plans? When am I going to get liquidity? Do your own accounting. If they won't give you the information you require, don't join! If the company isn't hitting its benchmarks, leave! There are lots of other companies out there to join, including many publicly traded ones so you'll always have the full financials (and liquid stock). If you do your homework and are serious about continually evaluating the company at which you work, you will not get screwed. Your time is the investment, and every 3-6 months you should re-evaluate whether the company is the best place to work. You don't owe the company anything! They need to keep proving to you, quarter after quarter, that what compensation they are giving you is worth you continuing to work there. Are you guaranteed to be successful? Of course not. Being an employee of a startup is risky, and you might make the "right" move that ends up not working out. Just from this article it seemed to me there were many clear warning signs this company wasn't all it was cracked up to be, and some employees didn't evaluate the company's trajectory properly and ended up getting screwed. It's a lesson learned but I'm sure many of them could have pointed out in retrospect where they went wrong. And I'll also add that being a founder sucks, and being an employee is comparably much easier. First, getting companies off the ground is really really hard and founders have to do that themselves. As an employee you can look around and join a company that already is showing some traction, saving yourself a bunch of time and frustration. Additionally, as an employee you can and should leave if the company starts falling behind its benchmarks and you think there are better opportunities elsewhere. As a founder you can't really do this, you basically have to stick it out until the end. So basically, being a founder isn't any better or worse than being an employee, they are different paths with different expectations, and each one of them has to be done with care to get the most out of it.
coldcode 9y ago
The year before the dot com collapse in March 2001 the new CFO at my company told us we'd all be millionaires in the next year. We didn't believe him though despite the market as it sounded stupid, and 10 months later we went Chapter 7. Never ever trust execs when they promise the moon.
code4tee 9y ago
This is an extreme case but the issues are not that uncommon in tech. Most employees with “equity” are not in a good place to know what that equity might actually be worth... and it’s very common for it to be worth far less than one thinks. All the covenants with founders, early investors, debitors and others are often not known by the common minion employee options/share holder. Yet those details typically determine if said employee will make a lot, a little or nothing at all at a liquidity event.
dawhizkid 9y ago
Pretty much the only reason why you should join a startup as an employee vs working at an established company is learning and opportunity for more responsibility. The thing is that working at a startup doesn't at all guarantee you'll learn more than at a larger company and your learning is going to be much more self-directed since there will be a smaller focus on professional development. If you're not learning then leave.
sjg007 9y ago
It seems simple to have a 1x payback clause for all shareholders. Investors get this, so if you are a common stock holder you should too. Maybe the solution is that investors can have 10x voting rights but the share value is otherwise the same. So the preferred price = the common price. Or just some clause saying pay all shares out at 1x first and then distribute some other way if you want. At least you're not being a jerk then.
throwaway52112 9y ago
Is this really that news-worthy? My impression was that this happened all the time. Something similar happened at the last startup I worked at. Employees were compensated with stock options over larger salaries. When the company got acquired, I along with every other employee walked away with nothing while the founders became multi millionaires. This pretty much killed my friendship with one of the founders, who later tweeted a picture of himself in a Ferrari and another toasting to his new status as a self-made millionaire. I'm not sure you can get much more obnoxious than that. The least employers can do is hide it when they throw employees under the bus for obscene amounts of personal profits. Maybe even act a little benevolent about it by saying you plan on donating a portion of it to charity?
sitkack 9y ago
I worked for a company that offered me 2000 shares when I was hired. I asked two questions, How much is the company worth? What is the number of shares outstanding. Both of which they wouldn't give me. I told them the stock was worthless, that I wanted a 25k pay bump, which they granted. Years later they ended up getting acquired for a hefty sum (950+ million) and people who were in the employee 5-50 range and worked there for 8+ years literally only received enough for a good used honda civic. Only two people in eng made over a million, 1.5 and 6, but that was only because they were managers that kept the cattle inline.
- conanbatt 9y ago
  The game is pretty rigged in this regard, and investors are sophisticated enough to know how to maximize what they get at the cost of the common shares.
davesque 9y ago
I was thinking about this the other day. As I see it, American companies and probably many companies in the world have a really f'ed up attitude about how employees fit into the mix. I don't see how the cost of entrepreneurship could be nearly as high as it is. Sure, from the point of view of an average person, starting a business is risky and should lead to potentially high reward. But how many average people are able or willing to start a business at all nowadays? In reality, the sorts of people who end up starting businesses are those for whom starting a business is not as risky e.g. people who are wealthy or whose families are wealthy or who are just burning VC money. The risk is lower and so the cost of entrepreneurship should be lower. Also, it seems there's a lot of talk in tech about wanting to use the great wealth accumulated to help the world or whatever. So then why not just start with the actual people in tech and not just the founders? Why act so uncharitable to the people directly working for you?
fnbr 9y ago
This is the reason that I plan to either work at Big N companies, where my equity is given to me in RSUs, or start my own company. Working at a startup in any role that's not a founder or an exec seems like a total scam, unless you have an incredible amount of confidence in the founders, and their integrity.
eip 9y ago
Equity in a startup is worth roughly as much as a jar of farts. Plan your career accordingly.

227 points by coloneltcb 9y ago

This is pretty crazy. I'm surprised no other news outlets are picking this up. The company says it is normal to pay management fat payouts to drive the company into the ground? Why should they get paid for selling for $100M when they took over and it was worth $700M?

aetherson 9y ago
I have no particular knowledge of this specific company, and it's quite possible that their manager payouts are overly high. But: Somebody's paying $100M for this company. That's much less than the company was hoped to be worth, but it's still a huge chunk of change. The buyer is trying to get something for that investment. That means they need the company to perform in some way. Maybe just shut down in an orderly fashion while they monetize the client list in some manner, but for $100M, I'd guess that they want to operate the company somehow. For that, they need the cooperation of the senior managers. So they pay them to cooperate. It kind of sucks, but you have to give the managers of the company some incentive to stick around and help you do whatever it is you want to do with the company instead of saying "Fuck you we're out of here." If it helps, I'm certain that $750k - $7M was much smaller than the payout those execs were hoping/expecting to get from a more successful outcome.
- mgkimsal 9y ago
  > ...but for $100M, I'd guess that they want to operate the company somehow....For that, they need the cooperation of the senior managers. So they pay them to cooperate... I'm not sure how much cooperation I'd want from "senior managers" who managed to manage a company in to 1/7th of what it was valued at. If it was intentionally fraudulent... you want those people around and making decisions still? If it was incomptence... you want those people around and making decisions still? Yes, I'm oversimplifying, and no doubt there's always other factors to consider, but this thinking bothers me along the same lines as "we needed to pay those large bonuses to keep the CEO around - we couldn't get anyone else as capable and experienced!" while the company is simultanesouly tanking.
  - Maro 9y ago
    I don't know anything about this company. But, just because the valuation went down, doesn't mean it's the management's fault. Maybe the old valuation was based on wishful thinking, and over time it sunk in [to everybody] that there are core problems with the product/biz.model/etc that they can't solve. This I've seen multiple times are startups. There's some fundamental problem which is masked by growth. Management keeps hiring people and hopes somebody eventually magically fixes the problem. After ~5 years the company accepts the problem. OR a new competitor emerged, etc. Even a shitty management team is a management team that keeps the company running.
    - mgkimsal 9y ago
      It sounds like this particular company was engaged in 'wishful thinking' re: the valuation, and sounded like they were using deception at the core (if they were trying to deceive employees, probably tried to deceive investors too).
    - s73ver_ 9y ago
      "But, just because the valuation went down, doesn't mean it's the management's fault." Yes, it does. The justification for the extremely high salaries and bonuses that execs get is because they are the ones who are "taking risks" and "are responsible for the company." Here, they are literally being rewarded for failure, and at the expense of people who were actually doing work.
      - mgkimsal 9y ago
        > Here, they are literally being rewarded for failure, Because who else would 'risk' so much - like only getting a $400k bonus instead of an $1m bonus? It takes special character and fortitude to steel yourself for such challenges!
  - aetherson 9y ago
    It's not about "we couldn't get anyone else as capable and experienced," it's just about "we couldn't get anyone else as experienced." I don't think that anyone in these situations deludes themselves that the management team of a company are paragons of greatness, but doing a sudden replacement of the entire senior management team at a time when the company's morale is very low to start with and where you're certainly trying to make some major changes to the organization is a recipe for disaster. Bringing on new senior management takes time. Coming up to speed on the workings of an even moderately sized company takes time.

btown 9y ago

> CNBC talked to three former employees who lost between $40,000 and over $100,000 each because they exercised their options in previous years and had to pay tax based on their heightened value at the time. Interestingly, the recently passed tax reform bill seems to make this type of loss less likely - though it would seem to be too late for these employees. https://www.towerswatson.com/en/Insights/Newsletters/Global/executive-pay-matters/2017/12/What-the-final-tax-reform-bill-approved-by-House-Senate-means-for-compensation https://www.towerswatson.com/en/Insights/Newsletters/Global/... (see section Private Company Equity Grants)

kapauldo 9y ago
How is this a loss? They paid taxes on gains? Not sure what the badness is here. They cashed out and paid taxes.
- seattle_spring 9y ago
  > How is this a loss? They paid taxes on gains? Not sure what the badness is here. They cashed out and paid taxes. They didn't take real gains, they took illiquid paper gains and paid AMT (Alternative Minimum Tax). Example: Strike price was $1 / share, "on-paper" price was $20 / share. Employee had 20,000 shares, with a "paper" gain of $380,000. They had to pay the taxes on those gains even though the stocks were not publicly traded and therefore illiquid.
  - lmm 9y ago
    So they were taxed on a best-effort valuation of the thing they received from their employer? That seems like how tax is supposed to work. (How else would you do it - in-kind taxes?) Illiquid investments are a risk, if you lose money on them then you lose money on them, and you don't get back the taxes you paid, just as you don't get back the taxes on income you lost at the card tables.
    - seattle_spring 9y ago
      Then you must support paying unrealized gains on your home and stocks each year, even if you don't sell them? Because it's literally the same thing. > How else would you do it The same way every other investment works: Tax the gains when the asset is sold.

bdittmer 9y ago

Recently happened to me. Founders raid the series c for liquidity. Take out a predatory note to keep the company afloat. Sell the company in a fire sale and reap transaction bonuses, RSU grants, etc. Common stock wiped out and those that built the company left with nothing. Lesson learned? It rarely pays to be an early employee at a startup.

jhwang5 9y ago
Which company, if you don't me asking?
- compsciphd 9y ago
  I won't give the game away, but pretty easy to figure out...
  - reagan83 9y ago
    Those with questionable/poor ethics ethics should be called out. There is no reward for staying silent while people/companies do wrong by others.
    - doorbumper 9y ago
      The problem is that there is no reward for speaking up, while there is punishment for speaking up.
- zenlikethat 9y ago
  Looks like Quri (https://angel.co/quri-1 https://angel.co/quri-1). All you had to do was Google OP's handle and dig into where they worked recently that had their characteristics
  - gaius 9y ago
    If the OP chose not to say, it’s unreasonable to doxx them

markbnj 9y ago

This is a pretty common scenario when a venture funded company doesn't reach a valuation that exceeds the various preferences accumulated in investment rounds. The company is ultimately sold, all of the sales proceeds are taken by the preferred shareholders, who carve out set-asides for founders and senior management to keep them onboard and not scare the acquirer off with internal strife.

mattschmulen 9y ago

If I had a dollar for every time an XO, Sales VP, or board investor (I’m looking at you Todd Rulon-Miller) said we were expecting an IPO filing in two years (bless thier optimistic little hearts) and sold for executive bonuses and a common stock price for the parts then I would have 3$. Best exit I ever had was an XO who’s singular prediction statement was “I think we have a chance at building and contributing to this technology and I think that might be valuable to this software enterprise segment, do you want to go find out?”. Buyer beware, contributor beware; it’s just how the game goes. Look for the humble introspective and you increase your odds, there is no guarantee, you only control your investment. That’s a tough break for those that were over exposed you have to cap your liability to your comfort level. bummer for those that caught the bill.

seattle_spring 9y ago
How does an engineer protect themselves against this sort of outcome? Just never work for startups? I currently find myself in a similar situation, where the books look dire but the executives keep saying that we're so close to profitability. I'm 85% certain that my stocks will be worth nothing, but I stick around because I still see an ounce of promise. Am I just a sucker?
- nshelly 9y ago
  I think for early stage companies you should see the startup as a 1) learning opportunity first and chance to work with a great team driven by a passion outside of pure money, and 2) an out-of-the-money call option / favorable lottery ticket. Also, the new tax bill got rid of AMT for incomes under $500,000 for individuals ($1m for couples). It's difficult to go over that amount with ISO's as the FMV of your shares is valued at around 10-30% of preferred. You could exercise your options once every year for example to stay under that limit. If you've already exercised and paid AMT, try to invest your other savings and if you need to take a loss you can offset it against those capital gains. While it might not be something you're passionate about, I would also add that reading about startup law, discussing with your peers, and knowing your rights, and even asking (getting in writing) the terms of the investment rounds, is invaluable and certainly something you should do if you want to understand your full package.

mbesto 9y ago

Founded in 2005, Practice Fusion competes in the crowded electronic medical records market and discovered a niche by offering free software that was popular among small and solo physician practices. Instead of charging for its software, Practice Fusion generates the bulk of its revenues through advertising to doctors. Oh what could go wrong....

Bucephalus355 9y ago
Silly. Doctors could just use OpenEMR, free and meets most of the regulatory standards. http://www.open-emr.org http://www.open-emr.org
- ch4s3 9y ago
  I've met exactly 2 doctors who have actually used OpenEMR and they were both researchers. It is quite nice, but the last time I looked it wasn't trivial to set up and run. I think it one of those "it's free if you time is worth nothing" kind of things. And, there are some other EHRs out there that are nice and won't break the bank.
  - JshWright 9y ago
    > there are some other EHRs out there that are nice and won't break the bank. In fact, due to the various "pay for performance" models out there, a good EHR will make you money (making it easier to prove you are meeting various thresholds for the quality measures in question).
    - ch4s3 9y ago
      Yeah, quality measure reporting is key, the good ones do that well for sure. However I think they're missing the ability to monitor quality on a day to day and week to week basis for the most part. It's also really hard to track quality trends.
      - JshWright 9y ago

s73ver_ 9y ago

Stories like this are extremely common nowadays. Startups are going to have to come up with some other way to attract talented workers, as most people know that equity is a joke, the hours are extremely long, and the pay is crap.

yborg 9y ago
During the dotcom bubble I knew that VCs were kicking themselves every time some 'secretary becomes a millionaire' story came out because this meant they left money in other people's pockets. Over the last 20 years investors have refined their game and this never happens now, indeed, it's the opposite. I think the only reason to go in other than as a founder in a startup is as someone right out of school for experience. Otherwise they have to be treated like any position, on a straight cash comp/benefits basis, ignoring the likely worthless equity scrip. In my experience, the best play is to go in on a contract basis once a startup is in the "burn baby burn" phase and you can bill market rate for all of those hours.
- DoofusOfDeath 9y ago
  My experience with startups has actually been quite positive. I negotiate compensation on the assumption that anything stock-related has zero value. Then I just enjoy the other great perks of a startup I care about: influence over technical issues, and camaraderie.
  - stevenwoo 9y ago
    So do you try to get a fair market salary + enough to cover equivalent benefits at a mature company - if the stock-related stuff has zero value?
    - DoofusOfDeath 9y ago
      I'd say total compensation has worked out roughly the same. It's a little hard to compare since I've sometimes worked remotely, and with companies headquartered in Silicon Valley, Cambridge (MA), and in less techy regions. The non-startups were actually located outside of Silicon Valley and Cambridge. If I adjust for the different regions' cost of living, the (salary+benefits) dollar value were about the same across the board. One caveat: The non-startups in SV and Cambridge gave me stock grants that vested over a number of years. If I'd stayed long enough for them to vest, the total compensation for those non-startups would have been about $7k-10k/year higher (pre-tax) that the compensation I got from startups.

conanbatt 9y ago

Sometimes people see this and start thinking that options or stocks should be regulated harder by the sec so employees dont get shady deals and screwed like this. But there is a much simpler way to prevent this from happening altogether: let employees trade the shares they got from openly in the market. That way, you would get a market signal on stocks on startups and shady deals like this would get whistleblowed on the market long before they are signed.

spiderPig 9y ago

I wouldn't join any start-up involving Peter Thiel at this point. Palantir is another prime example. Biggest grifters in the valley, the paypal mafia

tzhenghao 9y ago

For those who want to gain some context on how such a thing could happen, I recommend the book Venture Deals by Brad Feld and Jason Mendelson [1]. There's a good section in the book that talk about share preferences and the order in which the pile of money is cashed out. [1] - http://a.co/aeI2gqq http://a.co/aeI2gqq

prepend 9y ago
I second this recommendation. This article reminded me of the Venture Deals section where they break down the different kinds of capitalization and payouts in different scenarios. While the examples are written for founders, it’s also useful for any employee with shares trying to figure out their value. Most importantly for employees joining a company to get the info to make the decision whether to join. Or for employees thinking about how to treat their options or limited shares. I’ll add that for a few companies, when I asked the necessary questions then hiring manager or founder either couldn’t or wouldn’t answer. So, like another commenter’s advice, I valued the shares at zero. This meant sometimes I didn’t join, but sometimes I did. Almost always my zero valuation was accurate, but once I got a pleasant surprise.

kabdib 9y ago

Yeah, as an "investor" and an employee of several startups, I generally wound up on the losing side of the equation, to the tune of tens of thousands of dollars. Stuff that amounted to, "Oh, we extinguished those shares, sorry about that," when the corporation was worth several billion. This stuff is broken. You are far better off working for a mature company with decent management; if you are any good, you won't necessarily have "fuck you" money at the end of ten years, but you'll probably be ahead by several million dollars, and the value of "several" might be pleasantly surprising.

DenisM 9y ago
“Surprising several” is at least 3 million over ten years. Which companies pay to “any good” engineers enough to pocket $300k per year, after tax and living expenses?
- mlevental 9y ago
  there are plenty of senior devs at FANG making that. not just machine learning/data scientist magician but just good devs that have been there for 10 years
  - CaveTech 9y ago
    You'd have to be making 700k+ a year to be banking 300k after tax. Perhaps the valley slipped away from me but I find it hard to believe that there would be average employees in that range.
    - nappy-doo 9y ago
      I did it at a FANG, and it wasn't 700k/year. Admittedly, this is the longest runup in stocks we've had for some time, but just prudent saving and investing (and possibly working for a FANG outside the valley) did it for me.
    - loeg 9y ago
      Your tax math is bad. The pre-tax figure, even with California income tax, is closer to 500k than 700k. And some of that 300k/year difference is coming from growth of invested savings, not just W-2 income.

former_pf_emp 9y ago

The company played some nasty mind games with their employees regarding equity. They did a 7 (I think?) for 1 split, and then had the recruiters telling employees that they had "never seen a company give out so many shares before." They sent out spreadsheets with calculators that would let you estimate the value of your shares, and just casually let you know that Apple was trading at ~$700/share. iirc, they even pre-filled in the line for potential value with Apple's current share price (so, 5000 shares * 700 Apple-level share price = 3.5M). At every company meeting, they'd get really pumped about how they were going to IPO. They would throw parties celebrating their 100 millionth patient life covered, even though it seemed pretty obvious those numbers weren't real. No 401k match, since you're not going to need it after we IPO. There was even a second market offering to let Ryan sell enough shares to pay his taxes and maybe buy a nice house in South Park. I don't feel bad for the engineers, since they were generally exposed to enough information that they should have been able to call bullshit. I feel bad for the customer success team, who were often given a tenth of the amount of shares as engineers but would still frequently talk about retiring when we IPO. Hopefully the exec bonuses will be voted down, and there'll be a class action lawsuit. This is a problem that faces a lot of startups. We should all be more wary of information that's given out, and be more demanding of transparency. Learn a less from all of us PF employees: the more a company talks about their IPO, the less likely it's going to happen.

conanbatt 9y ago
This sounds like straight down fraud. > There was even a second market offering to let Ryan sell enough shares to pay his taxes and maybe buy a nice house in South Park. Who was buying the shares from Ryan in this secondary market? > This is a problem that faces a lot of startups. We should all be more wary of information that's given out, and be more demanding of transparency. Learn a less from all of us PF employees: the more a company talks about their IPO, the less likely it's going to happen. I generally agree, but no matter how much information is given out, if the last deal is done secretly and with bonuses and pre-arranged values, there is no amount of information that can protect you from that.
- former_pf_emp 9y ago

josh_fyi 9y ago

I have the opposite question. As long as deals are legal and meet generally accepted ethical standards, it seems that founders and investors have no interest in favoring employees in negotiations that restructure cap tables. So why do employees make money in a good fraction of successful exits?

vageli 9y ago
Do you have any sources for your "good fraction" comment? I was under the impression that a "good fraction" of startups outright fail before IPO.
- josh_fyi 9y ago
  I don't know what percentage that is. It is more than 0, however. So my question is, "So why do employees make money in X% of successful exits, where X is more than 0?"

jVinc 9y ago

"Planning for potential acquisition exits also includes having bonus pools for key employees (which include founders and current executives) that align their incentives with company stakeholders to achieve value upon an exit." That has too be a joke right? They are arguing that the terms that will lead to only the executives and founders getting a cash out are necessary in order to align their incentives to achieve value for stakeholders.... who will receive nothing in the sale? Seems like the only thing this bonus structure is incentivising is their orchestration of a quick and dirty last minute exist so they can get their bonuses while the rest of the company burns down. Hopefully it will get voted to hell, and a new structure will be put in place where the key employees don't make a dime until the ensure that all stakeholders make money.

bdittmer 9y ago
See my previous comment. This is exactly what happens. The sale doesn’t get voted to hell because the voting shares (i.e. preferred stock) have liquidation preference and get paid back first, in some instances multiple their initial investment, before the rest of the pie is sliced.

tw1010 9y ago

Part of me wonders why this is even surprising. Aren't the execs the ones with all the control over the power-levers? Why do employees expect to ever get something in situations like this? (I'm trying to look at this from an outsiders perspective.) What levers can employees even affect to shift the balance of influence in their favour? Coalitions and complaints I guess is the only thing that comes to mind. So in a sense, this article is not really a neutral reporting of the facts. In a sense, the article is one of a fairly limited set of tools that underdogs can use to shift the balance of power more in their favour.

golergka 9y ago

If I understand the situation correctly, the important term here isn't "employees", but "shareholders". It seems that management acted in it's own interest, disregarding the interest of company's shareholders. Is my understanding correct? If so, doesn't US have laws against such behaviour?

khazhou 9y ago

Sure, these founders went too far, but the basic problem of Founders >>> Employees is there at every startup. When even employee #1 at typical SV startup signs on for 1% and employee #4 already for half that, why do “employees” still think there’s anything equitable about equity? Listen up, prospective employee: if your founder makes several million, you’ll get zilch. If founder makes tens of millions, you might get enough for a modest car. If your founder makes over $100 million, you might have enough for a down payment on a house. Then you can go to the next startup and work super hard all over again to try to mint another mega-millionaire.

birken 9y ago
This fatalist attitude is just as bad as the overly naive attitude that I'm sure left many employees of this company feeling screwed. Employees have agency. Founders don't have some magical power over you with which to screw you. You choose to work for them in exchange for money, stock, whatever. If stock is a sizable part of your compensation, you probably should be asking a lot of questions about it. How many shares will I get? How many shares do you have? How is the company doing? What are the future plans? When am I going to get liquidity? Do your own accounting. If they won't give you the information you require, don't join! If the company isn't hitting its benchmarks, leave! There are lots of other companies out there to join, including many publicly traded ones so you'll always have the full financials (and liquid stock). If you do your homework and are serious about continually evaluating the company at which you work, you will not get screwed. Your time is the investment, and every 3-6 months you should re-evaluate whether the company is the best place to work. You don't owe the company anything! They need to keep proving to you, quarter after quarter, that what compensation they are giving you is worth you continuing to work there. Are you guaranteed to be successful? Of course not. Being an employee of a startup is risky, and you might make the "right" move that ends up not working out. Just from this article it seemed to me there were many clear warning signs this company wasn't all it was cracked up to be, and some employees didn't evaluate the company's trajectory properly and ended up getting screwed. It's a lesson learned but I'm sure many of them could have pointed out in retrospect where they went wrong. And I'll also add that being a founder sucks, and being an employee is comparably much easier. First, getting companies off the ground is really really hard and founders have to do that themselves. As an employee you can look around and join a company that already is showing some traction, saving yourself a bunch of time and frustration. Additionally, as an employee you can and should leave if the company starts falling behind its benchmarks and you think there are better opportunities elsewhere. As a founder you can't really do this, you basically have to stick it out until the end. So basically, being a founder isn't any better or worse than being an employee, they are different paths with different expectations, and each one of them has to be done with care to get the most out of it.

coldcode 9y ago

The year before the dot com collapse in March 2001 the new CFO at my company told us we'd all be millionaires in the next year. We didn't believe him though despite the market as it sounded stupid, and 10 months later we went Chapter 7. Never ever trust execs when they promise the moon.

code4tee 9y ago

This is an extreme case but the issues are not that uncommon in tech. Most employees with “equity” are not in a good place to know what that equity might actually be worth... and it’s very common for it to be worth far less than one thinks. All the covenants with founders, early investors, debitors and others are often not known by the common minion employee options/share holder. Yet those details typically determine if said employee will make a lot, a little or nothing at all at a liquidity event.

dawhizkid 9y ago

Pretty much the only reason why you should join a startup as an employee vs working at an established company is learning and opportunity for more responsibility. The thing is that working at a startup doesn't at all guarantee you'll learn more than at a larger company and your learning is going to be much more self-directed since there will be a smaller focus on professional development. If you're not learning then leave.

sjg007 9y ago

It seems simple to have a 1x payback clause for all shareholders. Investors get this, so if you are a common stock holder you should too. Maybe the solution is that investors can have 10x voting rights but the share value is otherwise the same. So the preferred price = the common price. Or just some clause saying pay all shares out at 1x first and then distribute some other way if you want. At least you're not being a jerk then.

throwaway52112 9y ago

Is this really that news-worthy? My impression was that this happened all the time. Something similar happened at the last startup I worked at. Employees were compensated with stock options over larger salaries. When the company got acquired, I along with every other employee walked away with nothing while the founders became multi millionaires. This pretty much killed my friendship with one of the founders, who later tweeted a picture of himself in a Ferrari and another toasting to his new status as a self-made millionaire. I'm not sure you can get much more obnoxious than that. The least employers can do is hide it when they throw employees under the bus for obscene amounts of personal profits. Maybe even act a little benevolent about it by saying you plan on donating a portion of it to charity?

sitkack 9y ago

I worked for a company that offered me 2000 shares when I was hired. I asked two questions, How much is the company worth? What is the number of shares outstanding. Both of which they wouldn't give me. I told them the stock was worthless, that I wanted a 25k pay bump, which they granted. Years later they ended up getting acquired for a hefty sum (950+ million) and people who were in the employee 5-50 range and worked there for 8+ years literally only received enough for a good used honda civic. Only two people in eng made over a million, 1.5 and 6, but that was only because they were managers that kept the cattle inline.

conanbatt 9y ago
The game is pretty rigged in this regard, and investors are sophisticated enough to know how to maximize what they get at the cost of the common shares.

davesque 9y ago

I was thinking about this the other day. As I see it, American companies and probably many companies in the world have a really f'ed up attitude about how employees fit into the mix. I don't see how the cost of entrepreneurship could be nearly as high as it is. Sure, from the point of view of an average person, starting a business is risky and should lead to potentially high reward. But how many average people are able or willing to start a business at all nowadays? In reality, the sorts of people who end up starting businesses are those for whom starting a business is not as risky e.g. people who are wealthy or whose families are wealthy or who are just burning VC money. The risk is lower and so the cost of entrepreneurship should be lower. Also, it seems there's a lot of talk in tech about wanting to use the great wealth accumulated to help the world or whatever. So then why not just start with the actual people in tech and not just the founders? Why act so uncharitable to the people directly working for you?

fnbr 9y ago

This is the reason that I plan to either work at Big N companies, where my equity is given to me in RSUs, or start my own company. Working at a startup in any role that's not a founder or an exec seems like a total scam, unless you have an incredible amount of confidence in the founders, and their integrity.

eip 9y ago

Equity in a startup is worth roughly as much as a jar of farts. Plan your career accordingly.