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I don't understand why companies would want to prevent employees from selling stocks. Most startup equity is worth very little. Giving employees more options to

by j_baker 13y ago

I don't understand why companies would want to prevent employees from selling stocks. Most startup equity is worth very little. Giving employees more options to sell said equity makes it worth more which also makes it a more effective means of recruiting employees.

ChuckMcM 13y ago
There are a number of reasons for it, one they can constrain what employees do, but they can't constrain what 3rd parties do. Investors are bound by their term sheets, employees by their employment agreements, and these people who hold stock and are 'unbound' might cause trouble. (not that they will its just that if they do the company has a limited number of ways to respond)
- bd_at_rivenhill 13y ago
  They can't cause any trouble until the employee shares have been delivered, which would be at the same point that the employee could unload the stock via other means; until that point, all they have is a contract with the employee.
  - ChuckMcM 13y ago
    Perhaps we have different ideas of what "trouble" is :-). My experience is that 'qualified investor' can often be substituted for 'troublemaker' but it may just be coincidence.
jeremyt 13y ago
One reason that hasn't been mentioned is external sales are considered a valuation event for the purposes of valuing option offers for new hires. Especially when liquidity is so low, these secondary offerings result in ridiculous valuations on a very small amount of shares, but that really hurts the ability of the company to offer low strike prices on options to attract talent.
jessedhillon 13y ago
I forget the exact number, but I think if a private company has >= 500 individual shareholders, that triggers an SEC requirement for public disclosures. So this kind of trading activity could force a company to, e.g. reveal that it's not yet profitable, or it's been astroturfing growth on it's current hot app.
- kevinastone 13y ago
  It's not actually trading stock or adding shareholders. It's collateralizing the shares, much like you mortgage your home. They simply front you money with a lien against your shares.

by j_baker 13y ago

ChuckMcM 13y ago

There are a number of reasons for it, one they can constrain what employees do, but they can't constrain what 3rd parties do. Investors are bound by their term sheets, employees by their employment agreements, and these people who hold stock and are 'unbound' might cause trouble. (not that they will its just that if they do the company has a limited number of ways to respond)

bd_at_rivenhill 13y ago
They can't cause any trouble until the employee shares have been delivered, which would be at the same point that the employee could unload the stock via other means; until that point, all they have is a contract with the employee.
- ChuckMcM 13y ago
  Perhaps we have different ideas of what "trouble" is :-). My experience is that 'qualified investor' can often be substituted for 'troublemaker' but it may just be coincidence.

jeremyt 13y ago

One reason that hasn't been mentioned is external sales are considered a valuation event for the purposes of valuing option offers for new hires. Especially when liquidity is so low, these secondary offerings result in ridiculous valuations on a very small amount of shares, but that really hurts the ability of the company to offer low strike prices on options to attract talent.

jessedhillon 13y ago

I forget the exact number, but I think if a private company has >= 500 individual shareholders, that triggers an SEC requirement for public disclosures. So this kind of trading activity could force a company to, e.g. reveal that it's not yet profitable, or it's been astroturfing growth on it's current hot app.

kevinastone 13y ago
It's not actually trading stock or adding shareholders. It's collateralizing the shares, much like you mortgage your home. They simply front you money with a lien against your shares.