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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

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
  Closely held companies have a simple remedy to all of those - they force you to litigate to exercise your rights. The company invariably has the resources to bury an employee.
  - tptacek 16y ago
    That may be so, but it's orthogonal to the issue at hand. Employees aren't prevented from selling their shares only because of stupid SEC regulations, but also because most companies don't want their equity resold. Envision any legal future you want, and companies will still find a way to express that employees should share the upside of an acquisition, but cannot distribute company equity to outsiders. Can I just say, real quick: for all I know, there's a trend in the valley right now towards giving employees unrestricted common stock on exercise of their options. I think this is crazy --- unrestricted stock once allowed me to imperil a deal at a prior employer --- but who knows? All I can say is that every startup I've worked at or known people working at, employee stock was heavily restricted.
- Aetius 16y ago
  Forgive me for stating the obvious, but if companies only issue stock that isn't transferable, why not simply issue options? Issuing non-transferable stock seems like two things that accomplish the same goal, namely: to express "incentive interest in a future liquidity event of the company".
  - tptacek 16y ago
    They do issue options. However, for tax reasons (and I'm sure other reasons), employee stock options have to expire within a set number of months after termination.

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
Closely held companies have a simple remedy to all of those - they force you to litigate to exercise your rights. The company invariably has the resources to bury an employee.
- tptacek 16y ago
  That may be so, but it's orthogonal to the issue at hand. Employees aren't prevented from selling their shares only because of stupid SEC regulations, but also because most companies don't want their equity resold. Envision any legal future you want, and companies will still find a way to express that employees should share the upside of an acquisition, but cannot distribute company equity to outsiders. Can I just say, real quick: for all I know, there's a trend in the valley right now towards giving employees unrestricted common stock on exercise of their options. I think this is crazy --- unrestricted stock once allowed me to imperil a deal at a prior employer --- but who knows? All I can say is that every startup I've worked at or known people working at, employee stock was heavily restricted.
Aetius 16y ago
Forgive me for stating the obvious, but if companies only issue stock that isn't transferable, why not simply issue options? Issuing non-transferable stock seems like two things that accomplish the same goal, namely: to express "incentive interest in a future liquidity event of the company".
- tptacek 16y ago
  They do issue options. However, for tax reasons (and I'm sure other reasons), employee stock options have to expire within a set number of months after termination.