5 ms·

Facebook, Zynga Impose Fees on Private Sales of Shares

36 points by ssclafani 16y ago

alain94040 16y ago
This is not a good thing. While I understand why companies would rather not have their shares trade, imposing a $6,000 fee is anti- startup employees.
- tptacek 16y ago
  The vast majority of startup employees don't (and never will) qualify for secondary markets; most (all?) of the companies being traded here are IPO-quality already. Startup employees shouldn't be joining companies in the expectation of being able to sell private shares.
  - borism 16y ago
    they might not qualify to be an accredited investor to be a buyer, but I didn't know there were any restrictions on being a seller there? I've got the impression that all FB employees who had vested stock were able to sell...
    - tptacek 16y ago
      There are contractual restrictions on employees selling their stock; accreditation isn't the issue. Though, for what it's worth, the major secondary markets won't help make a market for tiny companies anyways.
      - borism 16y ago
        There might be, but judging by numerous reports of FB and likes employees selling their stock left and right there didn't seem to exist any restrictions at those places. That's the whole point of starting to restrict those deals now, don't you think?
        tptacek 16y ago
        Two things here. First, there are almost certainly restrictions on Facebook employee stock. I don't know what they are, because I don't work at Facebook, but the boilerplate employee stock contract restricts sale entirely (or gives the company first refusal on sales at a minimal static valuation); anything employees are allowed to do with Facebook stock constitutes something Facebook went out of its way to allow. Secondly, my point isn't about Facebook. I'm responding to Alain, who indicates that this is the start of a worryingly anti-startup-employee trend. But it isn't. Virtually the entire marketplace of startup employees works for companies with far more restrictive policies. You simply cannot normally sell your (private company) employee stock. The companies you're hearing about that do allow it are --- not too much of an exaggeration --- epsilon from IPO already.
        borism 16y ago
        Absolutely agreed on most parts of second point - the mentioned companies are quite far from being start-ups for quite some time now. But not quite IPO-ready either, didn't FB delay it's own for at least couple of years? I would even argue so far that when a start-up starts participating in those secondary markets it's not a start-up anymore. Your stock can be had by almost anyone (with at least $1000000 that is) without much due diligence etc.
        alain94040 16y ago
        I'll rephrase my statement that it's "anti-employees". If you go by currently admitted practices, then it's completely fine. But if you raise your standards to figuring out what the future should look like, I'm hoping that 10 years from now, people will wonder why such restrictions were ever in place. Because really, why, at a fundamental level, can't an employee who has vested some shares, not sell them? If I told you that you couldn't spend the cash salary I'm giving you, you'd think I'm crazy. So, if the employee has earned the stock, why is it restricted? I understand the nitty-gritty SEC issues, but fundamentally... why not?
        tptacek 16y ago
        Even if the SEC registration rules were thoroughly relaxed --- which they won't be any time soon, and which we could spend a thoroughly engaging several hours debating (plus side: rational market for startups, downside: hedge funds gone wild), it wouldn't matter. That's because we're talking about closely held private companies. There is more to being a private company than simply not having public shares; in particular, private companies are typically very careful about who they permit to hold equity, because: * Company shareholders can more easily sue the company * Shareholders may be entitled to information the company doesn't want to disclose (the big one being: revenue) * Shareholders may have enough control rights to foul up investment and M&A activities, which competitors and bad actors might want to exploit. I'm sure there are other reasons too. Long story short: even if there were no SEC regulations, it doesn't seem likely that everyone's employee stock would suddenly become transferable. Employee stock isn't transferable because companies don't want it to be; they use options to express "incentive interest in a future liquidity event of the company", not to distribute ownership of the company to the broader market.
  - ojbyrne 16y ago
    They probably shouldn't be joining as employees. Without the expectation of capital gains, they're better off (in terms of pay, benefits, working for non-asshole managers) working for established companies. Or doing it on their own.
brown9-2 16y ago
I might sound stupid, but how is it that a company can put restrictions on sales of it's stock after those slices of ownership are already allocated and granted to individuals?
- tptacek 16y ago
  One common way is to make a contract term stating that the company gets first refusal (at a minimal valuation) on all sales as a condition of exercising the option. Employees with private company shares have very few actual rights; this is almost part of what defines "private companies". It's not a stupid question. There are a lot of misconceptions about employee startup stock; it is, to an extent greater than commonly imagined, really just a glorified profit sharing plan.
- Bricejm 16y ago
  This is the same as any large company giving equity but requiring a vesting period. The reason you give equity vs. cash is to create an incentive for an employee to want their company to succeed. If the large transfer fees are in place to limit shareholders so they can stay under the 500 mark then it's a bit shady. If your shares are vested per the agreement you signed, it should be your right to sell when you want to without a substantial fee.
  - tptacek 16y ago
    Not so. Your (hypothetical) employee stock agreement, which you were required to sign as a condition of being issued stock options, stipulates that your shares are not transferable, intended for personal investment and not resale, and that your exercise of those options is conditioned on a series of terms that ensures the company can prevent you from selling them. The reason for this is that your (hypothetical) company isn't trying to create a broad market of investors in its equity. Rather, it's trying to express an incentive that allows employees to share in the upside of a liquidity event at the company. This issue is distinct from vesting. Even after you've vested, the company is unwilling to yield control of who owns its shares. The company is fine with you parting ways and retaining your upside interest (in fact, it's happy you did!), but not fine with you selling the package that gives you that interest. For obvious reasons, the story is totally different at public companies.
guelo 16y ago
I'm guessing these fees won't discourage Zuckerberg from selling the $100 million of stock he recently promised to give to the Newark public schools.
- ojbyrne 16y ago
  I can almost guarantee he doesn't even have to pay the $2500.
  - borism 16y ago
    He granted the stock, not the cash.
- etm117 16y ago
  Even if it did, would it matter? It is $2500 per transaction. I am sure it would only take 2 or 3 transactions for him to sell $100M worth of shares since there are so many people hot on being in at the floor (what they think is the floor) of the IPO which will inevitably happen just like it did with Google.
SriniK 16y ago
I have a fundamental question. How are these companies allowed to trade off the market? As whole point of free/open market(stock market) is to have companies follow the regulations and guidelines protected by someone like SEC. Are these protected? Or just blind bets on the company? How does one protect insider trading/rigging - if at all it is relevant?
- tptacek 16y ago
  They operate under exemptions from registration offered to accredited buyers of companies that don't solicit investments; even then, it's a bit of a legal high-wire act.
  - SriniK 16y ago
    That sounds like a lot of risk from the investors' point of view. I know these companies are awesome and good but should we be worried about god knows who is doing what trade. If these are not bound by rules, it is so easy to rig the stock price.
    - d2viant 16y ago
      You're right, there is a lot of risk, which is why you have to be an accredited investor in order to take part in such a transaction.
      - tptacek 16y ago
        There's a lot more risk from the company's point of view in this case than from the investor's.

36 points by ssclafani 16y ago

This is not a good thing. While I understand why companies would rather not have their shares trade, imposing a $6,000 fee is anti- startup employees.

tptacek 16y ago
The vast majority of startup employees don't (and never will) qualify for secondary markets; most (all?) of the companies being traded here are IPO-quality already. Startup employees shouldn't be joining companies in the expectation of being able to sell private shares.
- borism 16y ago
  they might not qualify to be an accredited investor to be a buyer, but I didn't know there were any restrictions on being a seller there? I've got the impression that all FB employees who had vested stock were able to sell...
  - tptacek 16y ago
    There are contractual restrictions on employees selling their stock; accreditation isn't the issue. Though, for what it's worth, the major secondary markets won't help make a market for tiny companies anyways.
    - borism 16y ago
      There might be, but judging by numerous reports of FB and likes employees selling their stock left and right there didn't seem to exist any restrictions at those places. That's the whole point of starting to restrict those deals now, don't you think?
      - tptacek 16y ago
        Two things here. First, there are almost certainly restrictions on Facebook employee stock. I don't know what they are, because I don't work at Facebook, but the boilerplate employee stock contract restricts sale entirely (or gives the company first refusal on sales at a minimal static valuation); anything employees are allowed to do with Facebook stock constitutes something Facebook went out of its way to allow. Secondly, my point isn't about Facebook. I'm responding to Alain, who indicates that this is the start of a worryingly anti-startup-employee trend. But it isn't. Virtually the entire marketplace of startup employees works for companies with far more restrictive policies. You simply cannot normally sell your (private company) employee stock. The companies you're hearing about that do allow it are --- not too much of an exaggeration --- epsilon from IPO already.
        borism 16y ago
        Absolutely agreed on most parts of second point - the mentioned companies are quite far from being start-ups for quite some time now. But not quite IPO-ready either, didn't FB delay it's own for at least couple of years? I would even argue so far that when a start-up starts participating in those secondary markets it's not a start-up anymore. Your stock can be had by almost anyone (with at least $1000000 that is) without much due diligence etc.
        alain94040 16y ago
        I'll rephrase my statement that it's "anti-employees". If you go by currently admitted practices, then it's completely fine. But if you raise your standards to figuring out what the future should look like, I'm hoping that 10 years from now, people will wonder why such restrictions were ever in place. Because really, why, at a fundamental level, can't an employee who has vested some shares, not sell them? If I told you that you couldn't spend the cash salary I'm giving you, you'd think I'm crazy. So, if the employee has earned the stock, why is it restricted? I understand the nitty-gritty SEC issues, but fundamentally... why not?
        tptacek 16y ago
        Even if the SEC registration rules were thoroughly relaxed --- which they won't be any time soon, and which we could spend a thoroughly engaging several hours debating (plus side: rational market for startups, downside: hedge funds gone wild), it wouldn't matter. That's because we're talking about closely held private companies. There is more to being a private company than simply not having public shares; in particular, private companies are typically very careful about who they permit to hold equity, because: * Company shareholders can more easily sue the company * Shareholders may be entitled to information the company doesn't want to disclose (the big one being: revenue) * Shareholders may have enough control rights to foul up investment and M&A activities, which competitors and bad actors might want to exploit. I'm sure there are other reasons too. Long story short: even if there were no SEC regulations, it doesn't seem likely that everyone's employee stock would suddenly become transferable. Employee stock isn't transferable because companies don't want it to be; they use options to express "incentive interest in a future liquidity event of the company", not to distribute ownership of the company to the broader market.
- ojbyrne 16y ago
  They probably shouldn't be joining as employees. Without the expectation of capital gains, they're better off (in terms of pay, benefits, working for non-asshole managers) working for established companies. Or doing it on their own.

brown9-2 16y ago

I might sound stupid, but how is it that a company can put restrictions on sales of it's stock after those slices of ownership are already allocated and granted to individuals?

tptacek 16y ago
One common way is to make a contract term stating that the company gets first refusal (at a minimal valuation) on all sales as a condition of exercising the option. Employees with private company shares have very few actual rights; this is almost part of what defines "private companies". It's not a stupid question. There are a lot of misconceptions about employee startup stock; it is, to an extent greater than commonly imagined, really just a glorified profit sharing plan.
Bricejm 16y ago
This is the same as any large company giving equity but requiring a vesting period. The reason you give equity vs. cash is to create an incentive for an employee to want their company to succeed. If the large transfer fees are in place to limit shareholders so they can stay under the 500 mark then it's a bit shady. If your shares are vested per the agreement you signed, it should be your right to sell when you want to without a substantial fee.
- tptacek 16y ago
  Not so. Your (hypothetical) employee stock agreement, which you were required to sign as a condition of being issued stock options, stipulates that your shares are not transferable, intended for personal investment and not resale, and that your exercise of those options is conditioned on a series of terms that ensures the company can prevent you from selling them. The reason for this is that your (hypothetical) company isn't trying to create a broad market of investors in its equity. Rather, it's trying to express an incentive that allows employees to share in the upside of a liquidity event at the company. This issue is distinct from vesting. Even after you've vested, the company is unwilling to yield control of who owns its shares. The company is fine with you parting ways and retaining your upside interest (in fact, it's happy you did!), but not fine with you selling the package that gives you that interest. For obvious reasons, the story is totally different at public companies.

guelo 16y ago

I'm guessing these fees won't discourage Zuckerberg from selling the $100 million of stock he recently promised to give to the Newark public schools.

ojbyrne 16y ago
I can almost guarantee he doesn't even have to pay the $2500.
- borism 16y ago
  He granted the stock, not the cash.
etm117 16y ago
Even if it did, would it matter? It is $2500 per transaction. I am sure it would only take 2 or 3 transactions for him to sell $100M worth of shares since there are so many people hot on being in at the floor (what they think is the floor) of the IPO which will inevitably happen just like it did with Google.

SriniK 16y ago

I have a fundamental question. How are these companies allowed to trade off the market? As whole point of free/open market(stock market) is to have companies follow the regulations and guidelines protected by someone like SEC. Are these protected? Or just blind bets on the company? How does one protect insider trading/rigging - if at all it is relevant?

tptacek 16y ago
They operate under exemptions from registration offered to accredited buyers of companies that don't solicit investments; even then, it's a bit of a legal high-wire act.
- SriniK 16y ago
  That sounds like a lot of risk from the investors' point of view. I know these companies are awesome and good but should we be worried about god knows who is doing what trade. If these are not bound by rules, it is so easy to rig the stock price.
  - d2viant 16y ago
    You're right, there is a lot of risk, which is why you have to be an accredited investor in order to take part in such a transaction.
    - tptacek 16y ago
      There's a lot more risk from the company's point of view in this case than from the investor's.