6 ms·

I would be really curious if someone could shed some light on how a healthy company could simply decide to "extinguish" exercised shares. Like how exactly would

I would be really curious if someone could shed some light on how a healthy company could simply decide to "extinguish" exercised shares. Like how exactly would they go about doing that, and do you have examples I can read up describing where and how this happened? I would understand if that happened when the company is in trouble (e.g. valuation dropping below the last preferred valuation, so preferences kick in, or as a result of the company having to honor very high liquidation preferences), but otherwise? The only couple very shady cases I know about where Facebook with the Brazilian cofounder (with a complicated legal process where they reincorporated the company into a new one or something like that) and Skype with the employees (who naively signed a clawback clause in their agreement stating that the company could repurchase shares in the future at the original grant value even if their price skyrocketed, or something similar). In all the other cases I know about where employees got screwed, it was because the company saw its valuation plummet and the investors preferences kicked in, in one way or another, so "extinguishing" common shares in that case is "expected" and more similar to a public company declaring bankruptcy and seeing the shareholders being wiped out while the bond holders can generally recoup something, since they have "preferred" terms inherent in the nature of the bonds.

mrnobody_67 8y ago
See Zynga, cancelling options prior to IPO: https://news.ycombinator.com/item?id=3220819 https://news.ycombinator.com/item?id=3220819
- deanmoriarty 8y ago
  Sure, that is incredibly shady, and doesn't deserve any sort of justification. But, for the sake of the discussion, I'm purely focusing on common shares that the employee already owns, which means vested options that were already exercised. Zynga's shady practice was affecting unvested options.
martin_ 8y ago
It happened to me recently, here's a couple of snippets document I received: The TLDR is "The majority of the board has already approved the decision of eliminating common stock and distributing excess payments to two founders and the product lead" Each holder of Preferred Shares is entitled to receive cash merger consideration in exchange for the cancellation of his, her or its shares pursuant to the terms of the Merger Agreement. Each holder of Common Shares will not be entitled to receive any merger consideration in exchange for the cancellation of his, her or its Common Shares. In case interested, here's the full redacted disclosure -- docusigns followed very shortly after: https://pastebin.com/q6q7XMvF https://pastebin.com/q6q7XMvF
- deanmoriarty 8y ago
  Hold on a second (and thanks for this!). If I read your document right, it says: The Company expects that the proceeds available for distribution to the holders of Preferred Shares, including the full release of the Indemnity Escrow Fund, will be approximately $0.5816 for each Preferred Share (the “Estimated Per Share Consideration”). And in another portion, it says: before any distribution or payment of merger consideration is made to holders of Common Shares, the holders of Preferred Shares are entitled to receive $2.66 per Preferred Share (the “Liquidation Preference”). And The holders of Common Shares will not be entitled to receive any merger consideration in exchange for the cancellation of their Common Shares because the maximum potential merger consideration payable to the Stockholders pursuant to the Merger Agreement is less than the aggregate amount of the Liquidation Preference. Does this indicate that the company sold for an amount low enough that not even the investors recouped their original capital (selling shares at $0.5 instead of the $2.66 they were at least worth according to the liquidation preferences, so overall a significant "failure")? Because if that's the case, it seems completely normal to me that common shares were nullified and it's fundamentally different than saying that shares were extinguished for "no reason" (i.e. out of pure corporate greed), like I interpreted GP's comment. If not, this is instead a horror story.
  - martin_ 8y ago
    Yes that’s correct, I don’t think anything nefarious happened. The big bummer, though, is I had $0.01 shares and paid AMT at a much higher valuation and expect it to take a few decades to claim back the loss. Was my first time working with ISOs and didn’t know about 83b’s
    - deanmoriarty 8y ago
      Yes, that indeed sucks. Out of curiosity, how much AMT credits are you able to recoup each year? I understand it completely depends on your tax situation since it's basically the spread between regular liability and AMT liability, but just to get an idea, is it to the tune of $1k/y, $5k/y, $10k/y? I, like you, have a good amount of AMT credits from a previous employer, and will just start next year to try to recoup them more seriously (since in the years before I was always affected by AMT even without ISOs, due to California income...).
xrd 8y ago
This is what startups pay a lawyer to do. It's not that hard: restructure the company ownership in a long document with complicated terms. Get the employee to sign it and voila, early employees are screwed. The only real response is just not signing, but they will tell you the company will die if you don't do it, and you probably will just take it rather than fighting. At least I did.
- deanmoriarty 8y ago
  But signing something without not understanding it is too naive. So, assume I already left the company and exercised a big bag of common options and so I have a decent amount of common shares. If they tell me to sign something that looks shady I just say: "No, it looks shady". What then, can they do?
  - stingraycharles 8y ago
    Send to lawyer's office to pressure you. It doesn't take a lot of imagination to see that this can happen. People are generally naive, and there are just a few that will resist and fight.
    - johannes1234321 8y ago
      Especially if you depend on the money the job pays now and you can't pay a legal battle while searching a new job.
      - xrd 8y ago
        This. Stated another way, you need to make a decision in the very small timeframe about the tiny chance of success in the far away future, versus guaranteed success (your next paycheck) in the very close future.
    - village-idiot 8y ago
      Very few people also have their own lawyers, although pretty much everyone involved in a startup should have one.
sonnyblarney 8y ago
'Extinguishing' aside, there are ways to essentially devalue shares, simply by offering up a lot more, at a low price to current investors, thereby washing away the relative value of old shareholders. Once investors do this, they can take control of a company, and even issue new equity to current employees to keep them happy. This is a tricky thing in normal scenarios because obviously the shareholders getting wiped out might sue, unless they are 'in on the deal' and coughing up more money. There are legal obligations around valuation as well, it can't be 'made up'. But if a company is effectively bankrupt, then the board can basically nullify old shares by making them worth 'near zero' and issuing new shares cheaply.
- sonnyblarney 8y ago
  I should add that this happened to me as an employee of a fairly large telecom startup. The common term is 'washout round' [1] and this practice is not entirely uncommon. [1] https://www.investopedia.com/terms/w/washoutround.asp https://www.investopedia.com/terms/w/washoutround.asp

mrnobody_67 8y ago

See Zynga, cancelling options prior to IPO: https://news.ycombinator.com/item?id=3220819 https://news.ycombinator.com/item?id=3220819

deanmoriarty 8y ago
Sure, that is incredibly shady, and doesn't deserve any sort of justification. But, for the sake of the discussion, I'm purely focusing on common shares that the employee already owns, which means vested options that were already exercised. Zynga's shady practice was affecting unvested options.

martin_ 8y ago

It happened to me recently, here's a couple of snippets document I received: The TLDR is "The majority of the board has already approved the decision of eliminating common stock and distributing excess payments to two founders and the product lead" Each holder of Preferred Shares is entitled to receive cash merger consideration in exchange for the cancellation of his, her or its shares pursuant to the terms of the Merger Agreement. Each holder of Common Shares will not be entitled to receive any merger consideration in exchange for the cancellation of his, her or its Common Shares. In case interested, here's the full redacted disclosure -- docusigns followed very shortly after: https://pastebin.com/q6q7XMvF https://pastebin.com/q6q7XMvF

deanmoriarty 8y ago
Hold on a second (and thanks for this!). If I read your document right, it says: The Company expects that the proceeds available for distribution to the holders of Preferred Shares, including the full release of the Indemnity Escrow Fund, will be approximately $0.5816 for each Preferred Share (the “Estimated Per Share Consideration”). And in another portion, it says: before any distribution or payment of merger consideration is made to holders of Common Shares, the holders of Preferred Shares are entitled to receive $2.66 per Preferred Share (the “Liquidation Preference”). And The holders of Common Shares will not be entitled to receive any merger consideration in exchange for the cancellation of their Common Shares because the maximum potential merger consideration payable to the Stockholders pursuant to the Merger Agreement is less than the aggregate amount of the Liquidation Preference. Does this indicate that the company sold for an amount low enough that not even the investors recouped their original capital (selling shares at $0.5 instead of the $2.66 they were at least worth according to the liquidation preferences, so overall a significant "failure")? Because if that's the case, it seems completely normal to me that common shares were nullified and it's fundamentally different than saying that shares were extinguished for "no reason" (i.e. out of pure corporate greed), like I interpreted GP's comment. If not, this is instead a horror story.
- martin_ 8y ago
  Yes that’s correct, I don’t think anything nefarious happened. The big bummer, though, is I had $0.01 shares and paid AMT at a much higher valuation and expect it to take a few decades to claim back the loss. Was my first time working with ISOs and didn’t know about 83b’s
  - deanmoriarty 8y ago
    Yes, that indeed sucks. Out of curiosity, how much AMT credits are you able to recoup each year? I understand it completely depends on your tax situation since it's basically the spread between regular liability and AMT liability, but just to get an idea, is it to the tune of $1k/y, $5k/y, $10k/y? I, like you, have a good amount of AMT credits from a previous employer, and will just start next year to try to recoup them more seriously (since in the years before I was always affected by AMT even without ISOs, due to California income...).

xrd 8y ago

This is what startups pay a lawyer to do. It's not that hard: restructure the company ownership in a long document with complicated terms. Get the employee to sign it and voila, early employees are screwed. The only real response is just not signing, but they will tell you the company will die if you don't do it, and you probably will just take it rather than fighting. At least I did.

deanmoriarty 8y ago
But signing something without not understanding it is too naive. So, assume I already left the company and exercised a big bag of common options and so I have a decent amount of common shares. If they tell me to sign something that looks shady I just say: "No, it looks shady". What then, can they do?
- stingraycharles 8y ago
  Send to lawyer's office to pressure you. It doesn't take a lot of imagination to see that this can happen. People are generally naive, and there are just a few that will resist and fight.
  - johannes1234321 8y ago
    Especially if you depend on the money the job pays now and you can't pay a legal battle while searching a new job.
    - xrd 8y ago
      This. Stated another way, you need to make a decision in the very small timeframe about the tiny chance of success in the far away future, versus guaranteed success (your next paycheck) in the very close future.
  - village-idiot 8y ago
    Very few people also have their own lawyers, although pretty much everyone involved in a startup should have one.

sonnyblarney 8y ago

'Extinguishing' aside, there are ways to essentially devalue shares, simply by offering up a lot more, at a low price to current investors, thereby washing away the relative value of old shareholders. Once investors do this, they can take control of a company, and even issue new equity to current employees to keep them happy. This is a tricky thing in normal scenarios because obviously the shareholders getting wiped out might sue, unless they are 'in on the deal' and coughing up more money. There are legal obligations around valuation as well, it can't be 'made up'. But if a company is effectively bankrupt, then the board can basically nullify old shares by making them worth 'near zero' and issuing new shares cheaply.

sonnyblarney 8y ago
I should add that this happened to me as an employee of a fairly large telecom startup. The common term is 'washout round' [1] and this practice is not entirely uncommon. [1] https://www.investopedia.com/terms/w/washoutround.asp https://www.investopedia.com/terms/w/washoutround.asp