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If you are a founder of a business and own a significant percentage of shares, I think it’s pretty reasonable and morally acceptable to sell some percentage for

If you are a founder of a business and own a significant percentage of shares, I think it’s pretty reasonable and morally acceptable to sell some percentage for liquidity before everyone else gets the same choice. The investors will be sure to keep you tied in, and that money can massively derisk the project for you. I encourage every founder I speak to do this. Non founding executives with short tenure doing the same is a little shadier, but everything is a negotiation and nobody was forced into the transaction. A rank and file employee can push for whatever they like - more money, stock or even liquidity if they have enough perceived importance. Look at it from the other side. Say an exec joins a series C business and plays a big role in growing the company to 3x revenue in 2 years. At the next raise they ask to cash out some equity to buy their beachfront house. Seems a fair enough ask, and with that track record it would probably be worth investors writing the cheque.

LegitShady 4y ago
If your executives start selling off shares before the employees who had been there waiting for their paper value to turn into real value get the same opportunity (as you said, with founders it depends on if its reasonable), then even if its legal its going to destroy any trust and the best people will stop believing in your company and move on to someone who hasn't demonstrated working against the employees interests. In your last case, if someone wants to cash out equity but employees can't, then you've destroyed trust and your company may fail in the future because the employees can't trust you to protect their equity.
- slt2021 4y ago
  VCs who signed up for this deal are idiots. Now their DataRobot investment is practically worthless, because CEO cashed out and most important product people are going to leave the company. VCs who sign up for these deals should think more than one step ahead.
hvs 4y ago
"In fact, the executives had worked at DataRobot for a year and a half or less when the sales took place. And under their watch, expenses skyrocketed while revenue growth slowed, with the company missing one of Wright’s 2021 revenue targets by 75%."
- deleted 4y ago
  [deleted]
ahepp 4y ago
Why does an executive deserve to de-risk more than other employees? If anything, that's backwards. Who the hell doesn't want to de-risk? Why is that option only given to certain people, as opposed to offering everyone at the company a chance to sell 10% of their shares? I'm sure it's legal, but it absolutely is fucking the employees over. Saying "the employees could have negotiated better" is kinda just playing the thunderdome card. Employees can't reasonably prevent company insiders from fucking them over with stock shenanigans. That's part of what makes the practice so insidious, and why public stock markets are so highly regulated.
- Animats 4y ago
  > Why does an executive deserve to de-risk more than other employees? Yes. The SEC used to prevent insiders from selling stock until two years after the IPO. That ended some time around 2006, I think.
  - nopzor 4y ago
    lock up periods are still fairly common, did the sec really require 2 years at one point?
    - Animats 4y ago
      Yes. It took me six years to cash out of Autodesk, since the first stages went to getting enough cash to pay the taxes on the next stage.
- slt2021 4y ago
  it is not an executive's fault to want to de-risk. THis is capitalism, and everyone looks out to himself only. it is venture capitalist's fault for signing up for this deal, that KILLED a company. Sure, they bribed executive to sign term sheet by allowing him to cash out, but now the entirety of DataRobot is going to be worth 0. VCs basically destroyed value of their LPs. next time, VCs should think about employees who put hard work and keep company operating, not only executives. Without people - any startup is just a worthless legal entity.
chadash 4y ago
There are necessary protections in place for minority shareholders in public companies. For example, I can't just buy up 51% of a company and then vote that the company is now going to give all of its profits to me. The same situation should apply here. Employees are typically minority shareholders and as such, should get some basic protections. Early liquidity has significant value. I'd bet that plenty of employees would give up a percentage of their equity in order to cash out at least some of their shares early. Giving this ability to larger shareholders and not to smaller ones is very similar to saying that only large shareholders get to share in profits.
muskmusk 4y ago
Selling before everyone else is putting yourself over others. It's a terrible move from a morale standpoint if it gets out. Doesn't matter whether it is "morally acceptable" or not. If you want peak performance from your employees then leaders eat last.
ChrisMarshallNY 4y ago
One of the jobs of C-suite people is to run the optics. The way the company is perceived; both in and out; is really up to them. I remember the company I worked with (a highly reputable Japanese company) made a deal with an SV startup. It was a great startup. The people behind it were the "real deal." Some of the most brilliant people I've had the honor to work with. The tech was risky as hell. I think a number of mistakes were made by the beancounters and executives that inked the deal. The Japanese company basically became VC shareholders of the startup. They paid several million dollars, in a few tranches. We worked our asses off, in that deal. People in all parts of the relationships were burning themselves out. Like I said, risky tech. Things ended up not working out as planned. After one of the tranches, one of the founders went out and brought a top-of-the-line Model S. Pissed off the Japanese, something fierce. Things went south, fairly quickly, after that. I don't think it was the cause for the breakup, but it lost the startup some powerful friends, in Tokyo, when they really needed them.
- Domenic_S 4y ago
  They got pissed about a multi-million dollar investment because a founder spent (financed?) $100k on a car?
  - ChrisMarshallNY 4y ago
    It was the optics. I suspect he ordered it long before the payment, and it would not surprise me if he could afford it (way more than $100K, with his trim package), without the money from the deal. Several of the principals were independently wealthy. However, Japanese executives make a fraction of what US execs make, and work in more difficult conditions. VPs that control billion-dollar budgets have desks that schoolteachers would sniff at. Like I said, optics. It’s not a good idea to piss off people that sign the checks, or will have your back, when you report failure.
    - daniel-cussen 4y ago
      Yeah he could buy that car at a different moment after a significant success, in that case no problem. It looked like squandering all the work the Japanese put into the deal.
tfehring 4y ago
The issue is the principal-agent conflict that cash-out opportunities create. The executives have a fiduciary duty to shareholders, including their employees. Cashing out not only reduces the alignment of incentives between executives and shareholders, it also frequently causes executives to accept funding deals that are suboptimal for other shareholders. E.g., they may accept funding at a lower valuation or with otherwise less favorable terms in exchange for a partial cash out. Of course, you're correct in saying that everything is a negotiation. Rank-and-file employees should have accounted for the risk that they'd get screwed over by the founders and required more cash or equity to compensate for that risk. But I worry about a future in which the best talent refuses to work at private startups because the risk of getting screwed renders employee equity next-to-worthless. Arguably we're already there.
- lovich 4y ago
  Are we not already there? Any equity grant I’ve been given has always seemed like a lottery ticket to a lottery ticket to a lottery ticket. The company not only has to do well, it has to decide to actually IPO, and then there are lockout dates, and it’s always given as options instead of straight grants, and the vesting, and all the other constraints that I’ve forgotten. I’ve just valued them as zero when considering offers and only consider the salary portion which has the insidious(for employers) effect of making me unaligned with the companies best interests beyond the end of the week. Talking to my coworkers at every place I’ve worked it seems like a common feeling. Granted I’ve never worked at a unicorn company or faang so it might just be a function of working for less competent employers who are cargo culting compensation and don’t understand how it’s supposed to bind the employees to the company having a good future It seems like a lot of companies are so afraid of their employees gaining any sort of value out of the company that they’d rather risk failure than risk the situation being a win/win. The employers aren’t completely brain dead and they seem fine enough at negotiating and evaluating risk when it’s company to company negotiations. I can only assume it’s some cultural component of the wealthy class that leads to the continual self sabotage
  - tfehring 4y ago
    For private unicorns I think the answer is no, I've seen plenty of good people join companies that are perceived to be likely to IPO soon. There's plenty of shady stuff that can still happen in late-stage startups, but I think the perception (which is probably somewhat but not completely accurate) is that at that point the equity is enough of a known quantity to be somewhat de-risked. For earlier stage startups...yeah, I dunno. To be clear, I think the illiquidity and vesting period and all of that are basically fine, well-understood risks, and in principle startups can offer enough equity to compensate "true believers" for those risks. What gets me is the really shady unforeseeable stuff, like converting part of the acquisition price to retention bonuses avoid paying out ex-employees for their vested equity. Between that unquantifiable risk and the inherent risk and illiquidity of early startup equity, I'd personally discount the 409a valuation by something like a factor of 5 when evaluating a job offer from an early-stage startup. I don't see a ton of people leaving FAANG or similar companies for early-stage startups, but obviously there are lots of engineers outside of FAANG companies, and I'm sure it helps that valuations are rich enough (or were until recently) to compete with non-tech companies on cash comp.
bagels 4y ago
It is ethically repulsive to exclude any shareholding employee when doing this.

LegitShady 4y ago

If your executives start selling off shares before the employees who had been there waiting for their paper value to turn into real value get the same opportunity (as you said, with founders it depends on if its reasonable), then even if its legal its going to destroy any trust and the best people will stop believing in your company and move on to someone who hasn't demonstrated working against the employees interests. In your last case, if someone wants to cash out equity but employees can't, then you've destroyed trust and your company may fail in the future because the employees can't trust you to protect their equity.

slt2021 4y ago
VCs who signed up for this deal are idiots. Now their DataRobot investment is practically worthless, because CEO cashed out and most important product people are going to leave the company. VCs who sign up for these deals should think more than one step ahead.

hvs 4y ago

"In fact, the executives had worked at DataRobot for a year and a half or less when the sales took place. And under their watch, expenses skyrocketed while revenue growth slowed, with the company missing one of Wright’s 2021 revenue targets by 75%."

deleted 4y ago
[deleted]

ahepp 4y ago

Why does an executive deserve to de-risk more than other employees? If anything, that's backwards. Who the hell doesn't want to de-risk? Why is that option only given to certain people, as opposed to offering everyone at the company a chance to sell 10% of their shares? I'm sure it's legal, but it absolutely is fucking the employees over. Saying "the employees could have negotiated better" is kinda just playing the thunderdome card. Employees can't reasonably prevent company insiders from fucking them over with stock shenanigans. That's part of what makes the practice so insidious, and why public stock markets are so highly regulated.

Animats 4y ago
> Why does an executive deserve to de-risk more than other employees? Yes. The SEC used to prevent insiders from selling stock until two years after the IPO. That ended some time around 2006, I think.
- nopzor 4y ago
  lock up periods are still fairly common, did the sec really require 2 years at one point?
  - Animats 4y ago
    Yes. It took me six years to cash out of Autodesk, since the first stages went to getting enough cash to pay the taxes on the next stage.
slt2021 4y ago
it is not an executive's fault to want to de-risk. THis is capitalism, and everyone looks out to himself only. it is venture capitalist's fault for signing up for this deal, that KILLED a company. Sure, they bribed executive to sign term sheet by allowing him to cash out, but now the entirety of DataRobot is going to be worth 0. VCs basically destroyed value of their LPs. next time, VCs should think about employees who put hard work and keep company operating, not only executives. Without people - any startup is just a worthless legal entity.

chadash 4y ago

There are necessary protections in place for minority shareholders in public companies. For example, I can't just buy up 51% of a company and then vote that the company is now going to give all of its profits to me. The same situation should apply here. Employees are typically minority shareholders and as such, should get some basic protections. Early liquidity has significant value. I'd bet that plenty of employees would give up a percentage of their equity in order to cash out at least some of their shares early. Giving this ability to larger shareholders and not to smaller ones is very similar to saying that only large shareholders get to share in profits.

muskmusk 4y ago

Selling before everyone else is putting yourself over others. It's a terrible move from a morale standpoint if it gets out. Doesn't matter whether it is "morally acceptable" or not. If you want peak performance from your employees then leaders eat last.

ChrisMarshallNY 4y ago

One of the jobs of C-suite people is to run the optics. The way the company is perceived; both in and out; is really up to them. I remember the company I worked with (a highly reputable Japanese company) made a deal with an SV startup. It was a great startup. The people behind it were the "real deal." Some of the most brilliant people I've had the honor to work with. The tech was risky as hell. I think a number of mistakes were made by the beancounters and executives that inked the deal. The Japanese company basically became VC shareholders of the startup. They paid several million dollars, in a few tranches. We worked our asses off, in that deal. People in all parts of the relationships were burning themselves out. Like I said, risky tech. Things ended up not working out as planned. After one of the tranches, one of the founders went out and brought a top-of-the-line Model S. Pissed off the Japanese, something fierce. Things went south, fairly quickly, after that. I don't think it was the cause for the breakup, but it lost the startup some powerful friends, in Tokyo, when they really needed them.

Domenic_S 4y ago
They got pissed about a multi-million dollar investment because a founder spent (financed?) $100k on a car?
- ChrisMarshallNY 4y ago
  It was the optics. I suspect he ordered it long before the payment, and it would not surprise me if he could afford it (way more than $100K, with his trim package), without the money from the deal. Several of the principals were independently wealthy. However, Japanese executives make a fraction of what US execs make, and work in more difficult conditions. VPs that control billion-dollar budgets have desks that schoolteachers would sniff at. Like I said, optics. It’s not a good idea to piss off people that sign the checks, or will have your back, when you report failure.
  - daniel-cussen 4y ago
    Yeah he could buy that car at a different moment after a significant success, in that case no problem. It looked like squandering all the work the Japanese put into the deal.

tfehring 4y ago

The issue is the principal-agent conflict that cash-out opportunities create. The executives have a fiduciary duty to shareholders, including their employees. Cashing out not only reduces the alignment of incentives between executives and shareholders, it also frequently causes executives to accept funding deals that are suboptimal for other shareholders. E.g., they may accept funding at a lower valuation or with otherwise less favorable terms in exchange for a partial cash out. Of course, you're correct in saying that everything is a negotiation. Rank-and-file employees should have accounted for the risk that they'd get screwed over by the founders and required more cash or equity to compensate for that risk. But I worry about a future in which the best talent refuses to work at private startups because the risk of getting screwed renders employee equity next-to-worthless. Arguably we're already there.

lovich 4y ago
Are we not already there? Any equity grant I’ve been given has always seemed like a lottery ticket to a lottery ticket to a lottery ticket. The company not only has to do well, it has to decide to actually IPO, and then there are lockout dates, and it’s always given as options instead of straight grants, and the vesting, and all the other constraints that I’ve forgotten. I’ve just valued them as zero when considering offers and only consider the salary portion which has the insidious(for employers) effect of making me unaligned with the companies best interests beyond the end of the week. Talking to my coworkers at every place I’ve worked it seems like a common feeling. Granted I’ve never worked at a unicorn company or faang so it might just be a function of working for less competent employers who are cargo culting compensation and don’t understand how it’s supposed to bind the employees to the company having a good future It seems like a lot of companies are so afraid of their employees gaining any sort of value out of the company that they’d rather risk failure than risk the situation being a win/win. The employers aren’t completely brain dead and they seem fine enough at negotiating and evaluating risk when it’s company to company negotiations. I can only assume it’s some cultural component of the wealthy class that leads to the continual self sabotage
- tfehring 4y ago
  For private unicorns I think the answer is no, I've seen plenty of good people join companies that are perceived to be likely to IPO soon. There's plenty of shady stuff that can still happen in late-stage startups, but I think the perception (which is probably somewhat but not completely accurate) is that at that point the equity is enough of a known quantity to be somewhat de-risked. For earlier stage startups...yeah, I dunno. To be clear, I think the illiquidity and vesting period and all of that are basically fine, well-understood risks, and in principle startups can offer enough equity to compensate "true believers" for those risks. What gets me is the really shady unforeseeable stuff, like converting part of the acquisition price to retention bonuses avoid paying out ex-employees for their vested equity. Between that unquantifiable risk and the inherent risk and illiquidity of early startup equity, I'd personally discount the 409a valuation by something like a factor of 5 when evaluating a job offer from an early-stage startup. I don't see a ton of people leaving FAANG or similar companies for early-stage startups, but obviously there are lots of engineers outside of FAANG companies, and I'm sure it helps that valuations are rich enough (or were until recently) to compete with non-tech companies on cash comp.

bagels 4y ago

It is ethically repulsive to exclude any shareholding employee when doing this.