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Buyer Beware: The Tech Startup Employee Stock Scheme – Secil Law – JDSupra

26 points by pg_1234 4y ago

avidiax 4y ago
I've heard of other schemes, like a forced 10,000:1 reverse-split, with shareholders having fewer shares being paid out in cash. Then the company IPOs with a much higher value, but only the shareholders with 10,000+ shares get a piece. My impression is that if rank and file employees profit off an IPO or aquisition, it means someone dropped the ball on pushing them out. Until it becomes impossible to recruit, these shenanigans will continue.
- cyanydeez 4y ago
  It's more that private corporations aren't required disclosure of their articles of incorporation and aren't required to operate in good faith. Basically means scams are protected via government obfuscation.
- pinewurst 4y ago
  Usually the big reverse split is coupled with the issuance of new post-split shares to the insiders. I’ve heard this referred to as a “wash out”.
htrp 4y ago
TLDR: Your exec team and investors (the board) can monkey around with any non-IPO acquisition to make sure they get paid before you as a regular employee. 1) They can put a "deemed liquidation" clause in the company's legal docs so that sales are treated as liquidations. Therefore the preferred stock gets paid before the common stock, making investors whole. 2) Management will negotiate a retention agreement despite the fact that the common is worth 0 to get themselves paid.
singleshot_ 4y ago
In a nutshell: “The corporation’s articles of incorporation, original and as amended, can be difficult to obtain from the state that issued them, and employees or others investing in the company may not realize that what’s hidden in the articles may later prove to be of critical importance.” Entering a startup without understanding liquidation preferences would be insane, but handing an employee a copy of the cap table and the Articles would be insane too. The solution, of course, is to build furniture in your garage.
- cyanydeez 4y ago
  Right, the absolute garbage that is corporate disclosure aids and abets the scam cum business model
  - singleshot_ 4y ago
    You sound like I might be able you convince you to join my furniture cooperative. Shall I send you our ESPP agreement?

26 points by pg_1234 4y ago

I've heard of other schemes, like a forced 10,000:1 reverse-split, with shareholders having fewer shares being paid out in cash. Then the company IPOs with a much higher value, but only the shareholders with 10,000+ shares get a piece. My impression is that if rank and file employees profit off an IPO or aquisition, it means someone dropped the ball on pushing them out. Until it becomes impossible to recruit, these shenanigans will continue.

cyanydeez 4y ago
It's more that private corporations aren't required disclosure of their articles of incorporation and aren't required to operate in good faith. Basically means scams are protected via government obfuscation.
pinewurst 4y ago
Usually the big reverse split is coupled with the issuance of new post-split shares to the insiders. I’ve heard this referred to as a “wash out”.

htrp 4y ago

TLDR: Your exec team and investors (the board) can monkey around with any non-IPO acquisition to make sure they get paid before you as a regular employee. 1) They can put a "deemed liquidation" clause in the company's legal docs so that sales are treated as liquidations. Therefore the preferred stock gets paid before the common stock, making investors whole. 2) Management will negotiate a retention agreement despite the fact that the common is worth 0 to get themselves paid.

singleshot_ 4y ago

In a nutshell: “The corporation’s articles of incorporation, original and as amended, can be difficult to obtain from the state that issued them, and employees or others investing in the company may not realize that what’s hidden in the articles may later prove to be of critical importance.” Entering a startup without understanding liquidation preferences would be insane, but handing an employee a copy of the cap table and the Articles would be insane too. The solution, of course, is to build furniture in your garage.

cyanydeez 4y ago
Right, the absolute garbage that is corporate disclosure aids and abets the scam cum business model
- singleshot_ 4y ago
  You sound like I might be able you convince you to join my furniture cooperative. Shall I send you our ESPP agreement?