11 ms·

Even if the company has a successful exit lots of times the founders have different stock class than employees which allows them to cook the books in creative w

• carimura 2y ago
  "Cooking the books" could mean many things but most people would interpret this as fraud. There are many exit scenarios that aren't fraud but rather stacks of preferential stock that get paid before common, who usually get paid last. What happened in your exit scenario?
  • __turbobrew__ 2y ago
    See my comment further down. Im not going to go into any more details than that as the details of the sale are not public.
  • awesome_dude 2y ago
    My read is that the poster felt that the accounting practices, which were likely legal and commonplace, violated implied contractual obligations.
    • Viliam1234 2y ago
      It's technically legal -- the best kind of legal!
      • fragmede 2y ago
        No. Fuck that shit. When the spirit of the law and the letter of the law conflict, I want us as humans to be able to step back and say that, hey, it doesn't make sense when you put it that way, and ignore the rules and do what's actually right.
        • dpc050505 2y ago
          As someone living in a country with common law and having taking business law 101 (so certainly NAL) this sometimes ends up being a bit of a guessing game as to how a judge will interpret jurisprudence. There's a lot of room for improvement in legal systems and they move extremely slow due to the political nature of things.
          • fragmede 2y ago
            totally, which is why we go to a jury of peers for things
          • cyanydeez 2y ago
            wouldn't you rather the 50/50 chance for some _seemingly_ impartial person to intepret a deal, than have to pay a lawyer more than somethings worth to enforce some complex 500 page word salad to keep a business run by a person whose dones this hundreds of times before?
        • pc86 2y ago
          Ah yes the cornerstone of any stable judiciary - "ignore the rules and do [what I want]."
    • __turbobrew__ 2y ago
      That’s correct, I don’t believe anything illegal was done but certain things were done to dilute the employee share class which didn’t dilute founder shares. Just start reading about preferred stocks and you will realize they can basically be blank cheques to have any value and have voting rights to issue as much other common stock as they want. Additionally there was some liberty on what “sale price” actually was in the contract. This may be common operation, but the sale price according to my contract was much lower than the amount of dollars which was exchanged for the company.
    • JumpCrisscross 2y ago
      There’s also a lot of plain fraud in private tech companies.
    • throwaway2037 2y ago
      > implied contractual obligations What does this phrase mean? There is no way that any sound contract law will grant any weight to the term "implied". Either it is written (and agreed) or not. So, I would say anything that is not explicit is meaningless in term of contract law. (Again: I am only talking about jurisdictions with serious, mature contract law, not some banana republic.)
      • datadrivenangel 2y ago
        If I say I'll give you 50% of the revenue we generate, and then the details of the contract allow me to bring on other people with the same deal of 50% of the revenue, and then you all share 50% it would likely feel unfair.
      • awesome_dude 2y ago
        > There is no way that any sound contract law will grant any weight to the term "implied". Nobody is suggesting that any law would. > Either it is written (and agreed) or not. Yet you managed to infer things that weren't in the post. > So, I would say anything that is not explicit is meaningless in term of contract law. Again, where is anybody saying anything to the contrary?
      • RHSeeger 2y ago
        Sometimes what the contract says and what the contract _looks_ like it says to a layman can read very different. - Granted $500k of stock on start, and then have it diluted as stock is added for new investors - Hollywood accounting - net vs gross There's lot of places where a contract can be represented as one thing, only to have it be far less than that.
        • throwaway2037 2y ago
          Then it is a poorly written contract, and the party that agreed to it was tricked or poorly advised. Plain and simple. We see this often with "fast and loose" term sheets for some corporate and sovereign bonds on less reliable names. There is a whole podcast (I forget the name at this very moment) that does nothing but discuss dubious bond contracts. Frequently, the co-hosts will ask: "Who in their right mind would agree to such a contract? This clause is totally unenforceable / provides no protection against event X/Y/Z." And, yet, these contracts still exist in the wild. Dumb question: Do you think the average dev in Silicon Valley pays a third-party employment contract lawyer to review the terms and conditions before agreeing? Sadly, I feel the answer is "no". Speaking personally, I would never agree to such complex employment compensation terms without third-party advice. Yes, I know it is not cheap (maybe 500 USD per hour), but the alternative looks much worse, and most people here facing these contracts can afford it.
  • SpicyLemonZest 2y ago
    "Fraud" is a strong word, and there's nothing inherently wrong with having multiple share classes. But I really feel that preferred stock as implemented by most early stage startups is an intentional attempt to deceive employees. There's a lot of founders out there telling early engineers they're getting "0.5%" when they know full well that a $1B acquisition down the line is not going to put 5 million dollars in the engineer's pocket.
    • sudoshred 2y ago
      Playing both sides with this comment
      • SpicyLemonZest 2y ago
        I don't intend to be on the founders' side at all, I'm just not quite sure I'd throw them in jail over it. I'd definitely call it "cooking the books" comfortably.
        • sudoshred 2y ago
          Intentional misrepresentation is fraud, but I understand pragmatically how the line could become blurred. What I object to is the idea that blurring that line is intentional, even if that is not acknowledged.
    • fnbr 2y ago
      Can you explain? In most cases, preferences won’t come into play, assuming you raise at a standard 1x preference and sell for more than you have raised. In that case, owning 0.5% should roughly translate into $5M (modulo dilution).
      • immibis 2y ago
        That would be the naive mathematical interpretation and how the system would work if engineers designed it. Lawyers designed it, though, and they probably know some tricks to make that not happen.
  • matt-p 2y ago
    There's also just the case that a buyer is happy buying say 88% of the company and having 12% (usually non-voting) shares lie with employees/former employees. Stock options are only really, truly worth anything if they IPO.
    • fragmede 2y ago
      Not since... I'm not sure the regulatory change, but if employees are able to sell back to the company or to private investors, resulting in cold hard cash in employee bank accounts, without the company going public, I'd say they are worth something. We can argue about how, without an IPO, the price isn't fairly decided upon, but having cold hard cash in the bank is nonetheless real.
      • robertlagrant 2y ago
        I've never heard of being able to sell back stock options. You don't own anything with an option. You just have the right to buy at a price in the future.
        • fragmede 2y ago
          I didn't say stock options. There is a mechanism through which SpaceX employees have been able to cash out some sort of financial object that they received, despite the company not being public.
          • robertlagrant 2y ago
            The comment you were replying to ended with this: > Stock options are only really, truly worth anything if they IPO.
            • fragmede 2y ago
              fair. the important thing here is that IPO is not the only way to liquidity for early employees
  • guappa 2y ago
    It is fraud to take advantage of the fact that your employees don't realise their stocks are not the same kind of stock that the VC and the founders have.
    • __turbobrew__ 2y ago
      morally, yes legally, no
      • SR2Z 2y ago
        Different stock classes SHOULD be illegal. I have yet to hear a single good argument for it that isn't obviously self-serving. And ownership stake in the company should be a simple thing to understand, not some byzantine mess designed to fuck over the engineers.
      • guappa 2y ago
        I don't know where you live but in my country going to some old person and trick them into signing stuff they don't understand is illegal. Banks aren't even allowed to suggest buying high risk stuff.
• Gamemaster1379 2y ago
  I got forced into working for some garbage startup at a job early in my career. The CEO was absolutely psychotic and never put much effort into hiding his motives. The guy gave me a "Pre selection" letter (bokded at the top that it was "NOT A LEGAL DOCUMENT") that I was selected to receive 1,000,000 shares, vested at 250k a year (no one year cliff into monthly). 1,000,000 of how many? Didn't say. Percentage? Nope. Was it 25% 3% .00003% Who knows! I eventually was forced out after him verbally abusing me, making unsubstantiated accusations about how I spoke to other employees, and doing things like asking me to clock out and continue to talk about work. I received two death threats after I quit. And, seven years later, I get a threatening letter falsely accusing me of defaming the company under random online accounts. After rejecting the allegations, I got a "settlement letter" that demands I forfeit all obligations, and can never talk about the employer again. It also explicitly stated I'd get $0 and that they "wouldn't appear at my place of residence" as my benefits. Last I saw the SEC audited them and said they had no revenue and no products to commercialize. They raised $6m on fundraising sites selling SAFEs, but had $800k in assets and $6m in debt. Oh, the most interesting part is the owner had the company paying his other computer repair business $5k a month for IT services. It really reenforced for me how meaningless the whole process. Working for that company was a lifetime mistake.
  • fragmede 2y ago
    Damn, that really sucks. It really is the luck of the draw. I started at a company that just paid me an hourly rate with no promises of stock options but I could just as easily have been dragged into some kind of mess like you experienced.
    • Gamemaster1379 2y ago
      That's what I started as well with this employer. I never wanted to get involved with their other project but they forced me on it. I was trying to find another employer the entire time but it was just around the time Trump got elected the first time and nobody seemingly wanted to hire
• JumpCrisscross 2y ago
  > the founders have different stock class than employees This is super uncommon. > stocks which are traded on the NYSE so nobody can cook the books without commiting securities fraud The exact same fraud rules apply to private and public stock.
  • iancmceachern 2y ago
    I've personally seen it happen multiple times from inside, it happens all the time. It happened in the largest medtech acquisition in history (at the time) its Public knowledge.
    • Seattle3503 2y ago
      Where can I read more about this?
      • iancmceachern 2y ago
        https://www.therobotreport.com/jj-must-face-lawsuit-auris-health-acquisition/ https://www.therobotreport.com/jj-must-face-lawsuit-auris-he...
    • JumpCrisscross 2y ago
      > personally seen it happen multiple times from inside, it happens all the time I’m not saying it doesn’t. Just that founders having a separate class of stock is very, very rare. > happened in the largest medtech acquisition in history (at the time) its Public knowledge Supervoting stock is absolutely a thing with companies. We’re not talking about that. We’re talking about start-up founders.
      • iancmceachern 2y ago
        Its very common, so common that they call them "founders shares"
        • 2y ago
• babyshake 2y ago
  One other trick I learned about and should warn others about - getting an offer for shares (an employee level %) where there is in fact no options pool and existing shares will be diluted for every new employee who joins the team. I got such an offer, and not only was this information not given to me until I asked about any events aside from funding rounds that would be dilutive, but it was presented as standard operating procedure.
  • gruez 2y ago
    >getting an offer for shares (an employee level %) where there is in fact no options pool and existing shares will be diluted for every new employee who joins the team How's this different than if an option pool exists? The more people have options, the further the pie will be split up. Having an option pool or not doesn't change this.
    • mikepurvis 2y ago
      First, dilution should only be happening at funding events, not every time a new senior staff person is hired, and second the dilution should affect everyone equally— founders, execs, angels, VCs. It's super unfair to give an employee "x shares" that turn out on exit to be shares of a fixed pie that is different from the one the investors have their shares in.
    • pc86 2y ago
      When the option pool is created that is the dilutive event, so new employees getting their grants doesn't result in current employees being diluted, because the entire pool was already taken into account.
      • CPLX 2y ago
        But that’s not true. An options pool containing shares owned by the company is the same from a “how much of the company do I own” perspective as unissued or even uncontemplated shares. The only real advantage to the options pool is ease of management of the shares. There’s a lot of paperwork around issuing new shares you don’t want to do it every time you hire a programmer. And I guess you could argue that telling people the pool exists lets them not be surprised by the future dilution when they’re issued. But the pool itself hasn’t diluted anyone. Dilution is created by increasing the number of shares held by the company’s owners. Actions like issuing shares from a pool (or the inverse, buyback or cancellation of grants) affect every shareholders relative dilution.
• mancerayder 2y ago
  Can you share at a high level what you meant by cooking in the context of the exit?
  • fragmede 2y ago
    dilution
  • hibikir 2y ago
    When the founders still control the board, in practice the buying company understands that what makes the acquisition work is that said founders end up happy, and that the outcomes for your typical employee can be sacrificed to the edge of what the law allows. Maybe there's management carve-outs. Maybe the total value of the acquisition is lower, but as part of the negotiation, there are great transaction bonuses, or retention bonuses. The investors with preferred shares still get their liquidation preferences, but the common stock is worth a pittance. Maybe instead of an acquisition, some of this is turned into an asset sale, or there's some considerations for founders that involve very friendly rollover equity. Maybe the founders add a new kind of stock, or create a new legal entity as part of the acquisition that does... "interesting" things. An inventive legal team cannot do miracles, can make sure that the employees feel robbed either way. The acquirer, the founders and the VCs with the biggest share will get what they want, and come up with something neither will challenge. So it can be down to just the workers to pool together and decide to sue for violation of fiduciary duty, which might not be fast or easy to prove. You aren't in the room where it happens, but everyone else is.
  • gen220 2y ago
    Dilution and liquidation preference. Dilution is sort of a necessary evil that comes with raising new rounds of capital. I understand how >1x liquidation preference is legal, but it seems incredibly unethical, especially since it's never communicated to common stockholders. IMO, if you feel the need to hide your cap table from your employees, it's probably unethical. Yes, indeed, most cap tables are unethical.
• szundi 2y ago
  [dead]
• pc86 2y ago
  Somewhere along the line "privately-owned company" morphed into "do what in any regulated industry would be considered fraud." Multiple classes of stock for non-investors in a pre-IPO/private company should be illegal because there's no visibility or transparency. The other side of the table has no legal right to audits or reviewing the books so the opportunity for fraud is huge. Maybe have an out if you have verified third-party audits and cooking the books like you mention (which happens all the time) carries the same fraud penalties as if you did it for a public company.
  • duped 2y ago
    I think you can nix the qualifiers - multiple classes of stock have inherent problems and should probably never be legal
    • pc86 2y ago
      At least in public companies there are enough safeguards where I think a reasonable person could be fine with it.
  • hiatus 2y ago
    > The other side of the table has no legal right to audits or reviewing the books so the opportunity for fraud is huge. Are private companies allowed to share some information with a subset of their investors and not others?
  • tom_m 2y ago
    Well, they don't always get away with it. Depends on who gets pissed off.
  • grepfru_it 2y ago
    This is highly country dependent, but in America for example, if this is not presented in your employment contract then it is not something your employer needs to do. However, if your employer is a public organization then all of this information needs to be made available to shareholders. While you may not have access to this information, it is not secret and can be shared by any of the shareholders. Due to this, there is an implicit requirement to reduce risk and “cooking the books” while allowed is generally seen as risky since shareholders may run for the hills. In a smaller, privately run company there are no shareholders to run for the hills. Just a bunch of employees who hold paper IOUs. In order to get that audit protection, the employee would need to negotiate that into their employment agreement!