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"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 p

"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__ 1y 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 1y ago
My read is that the poster felt that the accounting practices, which were likely legal and commonplace, violated implied contractual obligations.
- Viliam1234 1y ago
  It's technically legal -- the best kind of legal!
  - fragmede 1y 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 1y 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 1y ago
        totally, which is why we go to a jury of peers for things
      - cyanydeez 1y 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 1y ago
      Ah yes the cornerstone of any stable judiciary - "ignore the rules and do [what I want]."
- __turbobrew__ 1y 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 1y ago
  There’s also a lot of plain fraud in private tech companies.
- throwaway2037 1y 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 1y 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 1y 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 1y 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 1y 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 1y 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 1y ago
  Playing both sides with this comment
  - SpicyLemonZest 1y 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 1y 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 1y 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 1y 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 1y 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 1y 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 1y 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 1y 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 1y ago
        The comment you were replying to ended with this: > Stock options are only really, truly worth anything if they IPO.
        fragmede 1y ago
        fair. the important thing here is that IPO is not the only way to liquidity for early employees
guappa 1y 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__ 1y ago
  morally, yes legally, no
  - SR2Z 1y 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 1y 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.

__turbobrew__ 1y 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 1y ago

My read is that the poster felt that the accounting practices, which were likely legal and commonplace, violated implied contractual obligations.

Viliam1234 1y ago
It's technically legal -- the best kind of legal!
- fragmede 1y 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 1y 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 1y ago
      totally, which is why we go to a jury of peers for things
    - cyanydeez 1y 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 1y ago
    Ah yes the cornerstone of any stable judiciary - "ignore the rules and do [what I want]."
__turbobrew__ 1y 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 1y ago
There’s also a lot of plain fraud in private tech companies.
throwaway2037 1y 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 1y 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 1y 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 1y 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 1y 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 1y 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 1y ago
Playing both sides with this comment
- SpicyLemonZest 1y 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 1y 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 1y 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 1y 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 1y 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 1y 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 1y 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 1y 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 1y ago
      The comment you were replying to ended with this: > Stock options are only really, truly worth anything if they IPO.
      - fragmede 1y ago
        fair. the important thing here is that IPO is not the only way to liquidity for early employees

guappa 1y 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__ 1y ago
morally, yes legally, no
- SR2Z 1y 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 1y 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.