5 ms·

Wait, you bought $2K worth of shares, the company is successful, and the shares are worth nothing? How!? It's not directly relevant to me as I don't have optio

Wait, you bought $2K worth of shares, the company is successful, and the shares are worth nothing? How!? It's not directly relevant to me as I don't have options, but I suddenly feel like I don't understand stock again.

maaku 12y ago
I would like to hear the GP's story, but if you've seen The Social Network then you have a reference point for how this could happen (separate classes of stock, dilution protections, etc.).
avn2109 12y ago
Basically it works like this: If your options become very valuable, the people on the other side of the table are no longer the friendly technical founders that you know and love. Instead, they're replaced by calm, professional capitalists and attorneys, whose sole raison d'etre is to separate you from "your" claim to their assets by many convoluted and entirely legal tricks, all of which feel profoundly unjust to the common man. They are specialists; they do this all day, every day, and since you are just an unsophisticated code monkey, it's vaguely like playing one-on-one basketball with Lebron. So unless you have something their bosses really want (perhaps domain knowledge of the business) you almost invariably end up with pennies and fake smiles.
- kabdib 12y ago
  That's exactly right. "Sorry, it's the red options that have worth, all of those blue options were devalued in [some arcane legal event] and are worthless now." I've thought about talking to a lawyer, but I'm guessing that what they did was totally legal, on the order of selling the company's assets to a company of the same name for a dollar in hand, or something like that, with some kind of structure to keep the major investors happy.
  - cheriot 12y ago
    There are laws requiring major shareholders to protect the interests of minority shareholders for this exact reason. It may be worth talking to that lawyer.
    - kabdib 12y ago
      Interesting. The email I got from their stock administrator read: > As a result of a transaction in 2001 that created CompanyName Acquisition Corporation, now named CompanyName, Inc., all equity interests in the predecessor companies were extinguished. I guess I'll talk to a lawyer. They were sold for $3.5B, so that might be an interesting up-side.
      - cheriot 12y ago
        Wow, I hope you write about what you find out. The situations like that I've heard of, and admittedly that's mostly from following the press, is that the old shares are traded for shares in the new entity. If minority owners aren't protected, it's a crack in the foundation of silicon valley.
  - infinii 12y ago
    But is this 'legal' even if the employee didn't sign anything to change the previously agreed upon arrangement (options)??
    - pc86 12y ago
      As with every legal question the answer is "sometimes." But typically, yes it is legal. See the comment below that basically allows the "extinguishing" of options under certain restructuring.
- darkarmani 12y ago
  The most recent way I found out was the offer letter that spoke of my grant said "on board approval." A year later, they had never gotten board approval. I was long gone, but another year later and my old colleagues had finally gotten their grant. Preventing board approval for a long time is a nice way to extend the 1-year cliff. Even better, my email to the controller and then to the CFO was completely ignored. That is what really set off my spidey-sense. IMHO, if the officers aren't willing to acknowledge my questions in email, they have legal reasons for not having anything recorded. Oh, and they were recently acquired by BAE for a lot of money. The officers made a killing, but my friends made around 4-figures. I have no idea what they did to get board approval but it feels like they rejiggered things to dilute everyone else.
x0x0 12y ago
One common example is the case of employees who have left and a company that is acquired. The acquiring company often has an incentive to take part of the bucket of cash and stock allocated to the purchase and shift it to retention bonuses, screwing former employees who exercised their options.
stmfreak 12y ago
The path to liquidity is not always straight up and to the right. Some funding rounds can drastically revalue prior shares through reverse splits. This can make your 1% stake magically turn into a 0.05% stake in a single funding round. Even if they don't reverse split, funding rounds issue new shares which is dilutive if you do not also get an additional grant. Once you leave a company, your precious few shares get diluted and reverse split with all the funding rounds between your departure and the liquidity (IPO or acquisition) event.
- infinii 12y ago
  So how do you protect yourself against this? Is there something you can put in the initial contract to prevent reverse splitting in the future?
  - darkarmani 12y ago
    There are so many ways to screw you, that your best protection is a management team you trust.
    - mathgeek 12y ago
      I'd argue that the best protection is the advice of a lawyer, and not to mix trust with financial matters. History is strewn with tales of people who trusted other people with their money.
      - darkarmani 12y ago
        > I'd argue that the best protection is the advice of a lawyer That advice turns into: "You could fight this and possibly win, but it would take a year and it would cost more than you'd get back." I get what you are saying. You definitely can't really "trust" anyone, but there are so many ways to legally screw you that I'm not sure you can trust protection using a lawyer.
- zackmorris 12y ago
  Does that just happen with stock options or normal stocks as well? It would seem that if there are 100 shares and I have 1, then it should be worth 1% of the company no matter how successful it becomes. I can understand how options might be subject to tinkering, but if stocks are as well then the whole thing sounds like a racket. I just mean that the idea of dilution suggests to me that the original company has been dissolved and reconstituted somehow. That sounds like something seriously in need of regulation...

maaku 12y ago

I would like to hear the GP's story, but if you've seen The Social Network then you have a reference point for how this could happen (separate classes of stock, dilution protections, etc.).

avn2109 12y ago

Basically it works like this: If your options become very valuable, the people on the other side of the table are no longer the friendly technical founders that you know and love. Instead, they're replaced by calm, professional capitalists and attorneys, whose sole raison d'etre is to separate you from "your" claim to their assets by many convoluted and entirely legal tricks, all of which feel profoundly unjust to the common man. They are specialists; they do this all day, every day, and since you are just an unsophisticated code monkey, it's vaguely like playing one-on-one basketball with Lebron. So unless you have something their bosses really want (perhaps domain knowledge of the business) you almost invariably end up with pennies and fake smiles.

kabdib 12y ago
That's exactly right. "Sorry, it's the red options that have worth, all of those blue options were devalued in [some arcane legal event] and are worthless now." I've thought about talking to a lawyer, but I'm guessing that what they did was totally legal, on the order of selling the company's assets to a company of the same name for a dollar in hand, or something like that, with some kind of structure to keep the major investors happy.
- cheriot 12y ago
  There are laws requiring major shareholders to protect the interests of minority shareholders for this exact reason. It may be worth talking to that lawyer.
  - kabdib 12y ago
    Interesting. The email I got from their stock administrator read: > As a result of a transaction in 2001 that created CompanyName Acquisition Corporation, now named CompanyName, Inc., all equity interests in the predecessor companies were extinguished. I guess I'll talk to a lawyer. They were sold for $3.5B, so that might be an interesting up-side.
    - cheriot 12y ago
      Wow, I hope you write about what you find out. The situations like that I've heard of, and admittedly that's mostly from following the press, is that the old shares are traded for shares in the new entity. If minority owners aren't protected, it's a crack in the foundation of silicon valley.
- infinii 12y ago
  But is this 'legal' even if the employee didn't sign anything to change the previously agreed upon arrangement (options)??
  - pc86 12y ago
    As with every legal question the answer is "sometimes." But typically, yes it is legal. See the comment below that basically allows the "extinguishing" of options under certain restructuring.
darkarmani 12y ago
The most recent way I found out was the offer letter that spoke of my grant said "on board approval." A year later, they had never gotten board approval. I was long gone, but another year later and my old colleagues had finally gotten their grant. Preventing board approval for a long time is a nice way to extend the 1-year cliff. Even better, my email to the controller and then to the CFO was completely ignored. That is what really set off my spidey-sense. IMHO, if the officers aren't willing to acknowledge my questions in email, they have legal reasons for not having anything recorded. Oh, and they were recently acquired by BAE for a lot of money. The officers made a killing, but my friends made around 4-figures. I have no idea what they did to get board approval but it feels like they rejiggered things to dilute everyone else.

x0x0 12y ago

One common example is the case of employees who have left and a company that is acquired. The acquiring company often has an incentive to take part of the bucket of cash and stock allocated to the purchase and shift it to retention bonuses, screwing former employees who exercised their options.

stmfreak 12y ago

The path to liquidity is not always straight up and to the right. Some funding rounds can drastically revalue prior shares through reverse splits. This can make your 1% stake magically turn into a 0.05% stake in a single funding round. Even if they don't reverse split, funding rounds issue new shares which is dilutive if you do not also get an additional grant. Once you leave a company, your precious few shares get diluted and reverse split with all the funding rounds between your departure and the liquidity (IPO or acquisition) event.

infinii 12y ago
So how do you protect yourself against this? Is there something you can put in the initial contract to prevent reverse splitting in the future?
- darkarmani 12y ago
  There are so many ways to screw you, that your best protection is a management team you trust.
  - mathgeek 12y ago
    I'd argue that the best protection is the advice of a lawyer, and not to mix trust with financial matters. History is strewn with tales of people who trusted other people with their money.
    - darkarmani 12y ago
      > I'd argue that the best protection is the advice of a lawyer That advice turns into: "You could fight this and possibly win, but it would take a year and it would cost more than you'd get back." I get what you are saying. You definitely can't really "trust" anyone, but there are so many ways to legally screw you that I'm not sure you can trust protection using a lawyer.
zackmorris 12y ago
Does that just happen with stock options or normal stocks as well? It would seem that if there are 100 shares and I have 1, then it should be worth 1% of the company no matter how successful it becomes. I can understand how options might be subject to tinkering, but if stocks are as well then the whole thing sounds like a racket. I just mean that the idea of dilution suggests to me that the original company has been dissolved and reconstituted somehow. That sounds like something seriously in need of regulation...