4 ms·
Yes, it was a problem to be solved for several reasons: 1) 409A (option pricing) valuation problems 2) Increase in # of shareholder problems 3) Legal issues
by harryh 11y ago
Yes, it was a problem to be solved for several reasons:
1) 409A (option pricing) valuation problems
2) Increase in # of shareholder problems
3) Legal issues (for both the company and employee) if buyers of shares later felt deceived by sellers
4) Team cohesion issues if different employees were getting radically different prices for there sales
You might disagree with the solution, but these are definitely real problems worthy of consideration.
- x0x0 11y ago5) breaks golden handcuffs if the employees can afford to leave
- harryh 11y agoThat too. Though that is a much more nuanced issue with a lot of arguments on both sides.
- x0x0 11y agonot as nuanced as all that as an employee, if you are lucky/skilled enough to end up at a successful startup, and you aren't very careful with tax issues, you can find yourself stuck: if you leave, you have to exercise, and immediately owe hundreds of thousands of dollars (or more!) on a completely illiquid asset that you can't sell. Which doesn't even take into account the potential for that asset to become less valuable. That's not a decent way to treat people. Startups don't write the tax code, but many are willing to take advantage of it to control people this way. After you put your 4 years in, you should be free to re-up or leave. Not free to leave if you are willing to risk all your liquid assets and/or borrow heavily.
- harryh 11y agoThat is certainly one point of view. And if one person leaves it's not likely to materially affect the business as everyone else keeps it going. Another point of view is that if all the early employees disappear at the 4 year mark (or whenever they feel they've vested "enough") that could cause very serious problems for the business. There is an element of a prisoner's dilemma here and it's not unreasonable to think about ways to keep people from defecting. As I said, it's complicated.
- x0x0 11y agoI'm operating under the assumption that most people aren't counting down the seconds until they can leave, but some will want to. Four years is a long time, and 10+ years to IPO is a quarter of your career.
- harryh 11y agoIndeed. Your points here make things even more complicated. :)
- s73v3r 11y agoIt's not complicated. If the company is that bad that people want to leave as soon as they're vested, then the company deserves to fail.
- harryh 11y agoSo you think the managers should just look around, say "yup, we deserve to fail" and give up? No. That's not the way it works.
- s73v3r 11y agoI'm saying they shouldn't consider a solution being something that restricts they're employees. They should be looking at why people want to leave, instead of how they can prevent people from leaving.
- damoncali 11y agoThat's a different issue - that many options agreements require exercising within 30 days of leaving (or so). There's no reason it has to be done that way. There are very good reasons that restricted stock is, well, restricted.
- SeoxyS 11y agoThat's the value in derivatives. Equidate & others like it avoid all these problems by selling the economic interest of the stock without adding shareholders.
- s73v3r 11y agoYou have to be a pretty shitty company to think this is an acceptable solution to #4.