4 ms·

The situation I recently went through reads like a horror story: > was the founding engineer at a startup, essentially do co-founder work for 18 months getting

The situation I recently went through reads like a horror story: > was the founding engineer at a startup, essentially do co-founder work for 18 months getting the company off the ground. > company is a breakout success, raises a large growth round. > founders each take a couple of million dollars off the table in secondaries, no option for employee liquidity. > founders start thinking about early employees as "problems" because they have too much equity and could easily hire multiple FAANG engineers for the equity comp they're paying the early team. push all early employees out of the company. > horrible ego-based decision making such as this kills the company culture and runs the company into the ground. company is a mess, stock is now worth significantly less. --- > early employees have to pay money to exercise their stock options which are worth millions on paper. early employees have to front money to pay taxes on the capital gains on the stock. > founders have pocketed millions, off the backs of other people's work, while the employees who built the company all owe huge tax bills and have no path whatsoever to ever seeing liquidity with the floundering company. > all of this is because the employees did their jobs too well, the company grew too fast, and the founders egos got completely out of control. To be blunt, situations like this should be illegal. joint-stock companies aren't slush funds for three people to personally enrich themselves off the labor and capital investment of others, they're supposed to be entities where all shareholders participate in the upside of the value creation together. Until there's some sort of legal framework for pursuing class-action lawsuits against founders who defraud their employees like this I don't think this situation will ever get better. There are already laws against self-dealing transactions by company executives, I don't see what is different in cases of extreme founder liquidity off the backs of other people's work.

gedy 2y ago
Not to put you on spot, but this behavior is unprofessional, and you should name names IMHO.
- AlwaysBCoding 2y ago
  The company is Phantom, and the VCs are Paradigm.
  - dpe82 2y ago
    I think "this happened at a crypto company" is important context to your original post.
  - brendanyounger 2y ago
    Crypto? I'm _shocked_.
carbocation 2y ago
I'm focusing on a tiny technical detail here but from the description, it sounds like the ISOs weren't set up with an 83(b) election which is another bummer.
- dpe82 2y ago
  A tiny, but *absolutely critical* detail!
- 1024core 2y ago
  I recognize some of those words....
tomp 2y ago
employees aren't shareholders they get options, not equity personally, I never understood why they don't get actualy equity (in particular, given that the options are "fairly priced" i.e. the call price is the latest equity round price, making them worth literally $0!) and that equity should have the same terms as investors get (no "liquidation preference" lol) because - guess what - you're literally exchanging your labour (== money) for them!
- georgeecollins 2y ago
  That's elective. It's fine and not uncommon to just give employees stock (actual shares, not options) in a company as compensation. Famously Wizards of the Coast gave shares to employees and vendors to create alignment. Someone is going to point out that giving actual shares is a taxable event. And that is sometimes the rational for options. But there are work arounds: you can put shares in a 401k for example. 401ks were originally created to be employee incentives, but morphed into being used for retirement, but you can still do it either way.
  - bluGill 2y ago
    There are a lot of ways to do this. However you should NEVER have any significant value in the stock of the company you work for. It has happened - and will happen again - that the company you work for goes bankrupt unexpectedly and now not only are you out of a job but your savings has vanished as well! Even if the company is doing well you need to diversify your savings out of that one basket. There is one exception: if you are high enough in the company that you actually know the non-public information as it happens (not either because you need to know or months later in the all-employee meeting). Then the shareholders demand you hold a lot of value in the company so that if you do something bad for the company it hurts. Most of us will never be that high.
    - georgeecollins 2y ago
      Financial advisors will advise you against the risk of having all your wealth in the company you work for for just the reason you describe. If you have a net worth of $10m and it is all in the company you work for you could in one moment loose your job and be broke. So you should diversify. However, employees often have virtually no net worth (why else are they worried about paying taxes on share, except they can't take the risk of loss? I can say from experience that when I worked for a startup but had previous personal financial success I just absorbed the tax bill for exercising options knowing that the shares I paid taxes on could ultimately be worthless.). So if all their net worth is in a company its not ideal but it is a risk you can take when you are young. I see the argument of avoiding taxes and not taking ownership until the shares are liquid-- good arguments, it is true-- as being used as ways to justify giving employees shares or options that are likely to be less valuable then the ones held by founders and investors.
nine_k 2y ago
If we talk about stock options, the company is still private, and no stock was issued. Paying taxes on options for stock that may never materialize, or never be worth much, sucks. I won't (and didn't) buy options before an IPO or an acquisition is scheduled, even if they had been granted, unless I have money to gamble on it. I won't consider options as a part of my pay, unless I'm a founder %) They are but a lottery ticket, even when your personal effort may significantly affect the odds of it winning.
- bagels 2y ago
  The options are exerciseable whenever they are vested (and if you are on good terms, sometimes before that). This can be a waste of money, or a huge boon in terms of taxes avoided.
  - nine_k 2y ago
    In what circumstances would that be a huge boon, and how much risk / uncertainty is involved?
    - bagels 2y ago
      Let's say you have the opportunity to sell your shares in the private market for $2/share a few years after you've vested. Exercise earlier: Strike price: $0.10 FMV at exercise: $0.20 Taxes: AMT on $0.10 gain (might be $0 in taxes) + Long term capital gains on $2.00-$0.10 Exercise at sale: Strike price: $0.10 Taxes: short term capital gains on $2.00-$0.10 Assuming a decently sized transaction: If your marginal rate is 35%, your long term capital gains rate might be 20%, saving you 15% of the sale price in taxes. There is a risk that the money you pay to exercise ends up buying you worthless shares. It all depends on the specific numbers. The longer you wait to exercise, the more likely you will have to pay significant AMT taxes (assuming increasing valuations) to the point where it no longer makes sense to exercise because you'd have to pay so much in AMT taxes for shares that may become worthless. I gladly paid $10k to exercise so I could save $150k in taxes because I thought the odds were high that I would later be able to sell my shares for more than I paid.
georgeecollins 2y ago
I wonder if this problem could be avoided if the early technical founder insisted on having the same class of stock as the founders. IANAL but in my (limited) experience these games are easier to play when the founders (or often the C-suite people) have a different class of stock then key employees. Or that's how I have seen the game played where one employee can have a liquidity event and another doesn't, or the dilution is unequal. I am no expert! Can someone explain to me if having the same class of stock as the founders is a meaningful protection?
- AlwaysBCoding 2y ago
  I'm not sure if you even need the same class of stock as it is needing some assurance of the same liquidity rights as founders. If the company charter ensured that any secondary liquidity event would have equal participation between shareholders (including employee stock options) it would be a lot healthier and prevent this class of fraud. It's such a garbage situation right now for employees, because even if you find product-market fit, you do the work and your company is successful you can still get dumped on by your founders taking secondaries and subsequently checking out of the company.
  - georgeecollins 2y ago
    Isn't "some assurance of the same liquidity rights" just a way of saying "the same class of stock". The same class of stock will have the same liquidity rights.
    - AlwaysBCoding 2y ago
      you don't need the same voting rights, for example
llmblockchain 2y ago
This happened to me as well, but even worse because they killed my equity by getting rid of me on month 11 of year one. I joined a company as employee #2 (though, I started the same day as #1). I started working with the founder and co-founder in a We Work office that barely fit the four of us. Within 11 months the company was worth over a billion dollars and my wife was about to give birth. At this time the company had around ~15 employees (mostly in sales). I find a job posted on our site for a job that sounds an awful lot like mine. The founder/CEO is suddenly vary combative with me every day over nothing (shouting at me). I felt like he was trying to get me to react negatively to him. I just dealt with it because my wife was about to give birth. One day I come in and I just couldn't deal with it anymore when he was shouting at me. I basically told him to stick it up his ass and he went ballistic. I was "fired" at this point and had to leave and leave behind my company laptop. I get a call to meet with the founder the next day to discuss the exit. We meet at a cafe. He presents a folder with a bunch of "evidence" for why I was being let go. None of it was really damning in any way (he had private emails between me and an employee, Slack private messages, etc). He tried to spin some narrative as to why I was being fired and not given my stock even though the cliff was around the corner. I also had to return my signing bonus ($XX,XXX). I told him good luck and showed him the job posting that was dated after he found out my wife was giving birth. I also had printed email exchanges proving the company was doing some less-than-legal operations. Needless to say I got to keep my signing bonus, but not the stock. I also got glowing recommendations for every job I applied to after that.
- indoordin0saur 2y ago
  Wait, your 11 month old company with a handful of employees was valued at a billion?
  - llmblockchain 2y ago
    Yes-- and worth more today. I don't think it's an ordinary path. The founder had success before, and the company I was a part of skipped seed and started with a series A before raising more pretty quickly. edit: From the looks of it, they have 500+ employees now.

gedy 2y ago

Not to put you on spot, but this behavior is unprofessional, and you should name names IMHO.

AlwaysBCoding 2y ago
The company is Phantom, and the VCs are Paradigm.
- dpe82 2y ago
  I think "this happened at a crypto company" is important context to your original post.
- brendanyounger 2y ago
  Crypto? I'm _shocked_.

carbocation 2y ago

I'm focusing on a tiny technical detail here but from the description, it sounds like the ISOs weren't set up with an 83(b) election which is another bummer.

dpe82 2y ago
A tiny, but *absolutely critical* detail!
1024core 2y ago
I recognize some of those words....

tomp 2y ago

employees aren't shareholders they get options, not equity personally, I never understood why they don't get actualy equity (in particular, given that the options are "fairly priced" i.e. the call price is the latest equity round price, making them worth literally $0!) and that equity should have the same terms as investors get (no "liquidation preference" lol) because - guess what - you're literally exchanging your labour (== money) for them!

georgeecollins 2y ago
That's elective. It's fine and not uncommon to just give employees stock (actual shares, not options) in a company as compensation. Famously Wizards of the Coast gave shares to employees and vendors to create alignment. Someone is going to point out that giving actual shares is a taxable event. And that is sometimes the rational for options. But there are work arounds: you can put shares in a 401k for example. 401ks were originally created to be employee incentives, but morphed into being used for retirement, but you can still do it either way.
- bluGill 2y ago
  There are a lot of ways to do this. However you should NEVER have any significant value in the stock of the company you work for. It has happened - and will happen again - that the company you work for goes bankrupt unexpectedly and now not only are you out of a job but your savings has vanished as well! Even if the company is doing well you need to diversify your savings out of that one basket. There is one exception: if you are high enough in the company that you actually know the non-public information as it happens (not either because you need to know or months later in the all-employee meeting). Then the shareholders demand you hold a lot of value in the company so that if you do something bad for the company it hurts. Most of us will never be that high.
  - georgeecollins 2y ago
    Financial advisors will advise you against the risk of having all your wealth in the company you work for for just the reason you describe. If you have a net worth of $10m and it is all in the company you work for you could in one moment loose your job and be broke. So you should diversify. However, employees often have virtually no net worth (why else are they worried about paying taxes on share, except they can't take the risk of loss? I can say from experience that when I worked for a startup but had previous personal financial success I just absorbed the tax bill for exercising options knowing that the shares I paid taxes on could ultimately be worthless.). So if all their net worth is in a company its not ideal but it is a risk you can take when you are young. I see the argument of avoiding taxes and not taking ownership until the shares are liquid-- good arguments, it is true-- as being used as ways to justify giving employees shares or options that are likely to be less valuable then the ones held by founders and investors.

nine_k 2y ago

If we talk about stock options, the company is still private, and no stock was issued. Paying taxes on options for stock that may never materialize, or never be worth much, sucks. I won't (and didn't) buy options before an IPO or an acquisition is scheduled, even if they had been granted, unless I have money to gamble on it. I won't consider options as a part of my pay, unless I'm a founder %) They are but a lottery ticket, even when your personal effort may significantly affect the odds of it winning.

bagels 2y ago
The options are exerciseable whenever they are vested (and if you are on good terms, sometimes before that). This can be a waste of money, or a huge boon in terms of taxes avoided.
- nine_k 2y ago
  In what circumstances would that be a huge boon, and how much risk / uncertainty is involved?
  - bagels 2y ago
    Let's say you have the opportunity to sell your shares in the private market for $2/share a few years after you've vested. Exercise earlier: Strike price: $0.10 FMV at exercise: $0.20 Taxes: AMT on $0.10 gain (might be $0 in taxes) + Long term capital gains on $2.00-$0.10 Exercise at sale: Strike price: $0.10 Taxes: short term capital gains on $2.00-$0.10 Assuming a decently sized transaction: If your marginal rate is 35%, your long term capital gains rate might be 20%, saving you 15% of the sale price in taxes. There is a risk that the money you pay to exercise ends up buying you worthless shares. It all depends on the specific numbers. The longer you wait to exercise, the more likely you will have to pay significant AMT taxes (assuming increasing valuations) to the point where it no longer makes sense to exercise because you'd have to pay so much in AMT taxes for shares that may become worthless. I gladly paid $10k to exercise so I could save $150k in taxes because I thought the odds were high that I would later be able to sell my shares for more than I paid.

georgeecollins 2y ago

I wonder if this problem could be avoided if the early technical founder insisted on having the same class of stock as the founders. IANAL but in my (limited) experience these games are easier to play when the founders (or often the C-suite people) have a different class of stock then key employees. Or that's how I have seen the game played where one employee can have a liquidity event and another doesn't, or the dilution is unequal. I am no expert! Can someone explain to me if having the same class of stock as the founders is a meaningful protection?

AlwaysBCoding 2y ago
I'm not sure if you even need the same class of stock as it is needing some assurance of the same liquidity rights as founders. If the company charter ensured that any secondary liquidity event would have equal participation between shareholders (including employee stock options) it would be a lot healthier and prevent this class of fraud. It's such a garbage situation right now for employees, because even if you find product-market fit, you do the work and your company is successful you can still get dumped on by your founders taking secondaries and subsequently checking out of the company.
- georgeecollins 2y ago
  Isn't "some assurance of the same liquidity rights" just a way of saying "the same class of stock". The same class of stock will have the same liquidity rights.
  - AlwaysBCoding 2y ago
    you don't need the same voting rights, for example

llmblockchain 2y ago

This happened to me as well, but even worse because they killed my equity by getting rid of me on month 11 of year one. I joined a company as employee #2 (though, I started the same day as #1). I started working with the founder and co-founder in a We Work office that barely fit the four of us. Within 11 months the company was worth over a billion dollars and my wife was about to give birth. At this time the company had around ~15 employees (mostly in sales). I find a job posted on our site for a job that sounds an awful lot like mine. The founder/CEO is suddenly vary combative with me every day over nothing (shouting at me). I felt like he was trying to get me to react negatively to him. I just dealt with it because my wife was about to give birth. One day I come in and I just couldn't deal with it anymore when he was shouting at me. I basically told him to stick it up his ass and he went ballistic. I was "fired" at this point and had to leave and leave behind my company laptop. I get a call to meet with the founder the next day to discuss the exit. We meet at a cafe. He presents a folder with a bunch of "evidence" for why I was being let go. None of it was really damning in any way (he had private emails between me and an employee, Slack private messages, etc). He tried to spin some narrative as to why I was being fired and not given my stock even though the cliff was around the corner. I also had to return my signing bonus ($XX,XXX). I told him good luck and showed him the job posting that was dated after he found out my wife was giving birth. I also had printed email exchanges proving the company was doing some less-than-legal operations. Needless to say I got to keep my signing bonus, but not the stock. I also got glowing recommendations for every job I applied to after that.

indoordin0saur 2y ago
Wait, your 11 month old company with a handful of employees was valued at a billion?
- llmblockchain 2y ago
  Yes-- and worth more today. I don't think it's an ordinary path. The founder had success before, and the company I was a part of skipped seed and started with a series A before raising more pretty quickly. edit: From the looks of it, they have 500+ employees now.