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I have seen the jealousy part this first hand. I went to work for a startup in the late 90s during the first "bubble". I was one of the first employees on-board

I have seen the jealousy part this first hand. I went to work for a startup in the late 90s during the first "bubble". I was one of the first employees on-board and the company was ramping up quickly. The plan, as with most Internet startups at the time, was to IPO and everyone would be happy. Salaries and options were fairly quiet talk. No one really discussed them that I ever heard. Then we started preparing for the IPO. A few documents "accidentally" got included in a public filing. These documents included a list of current employees, their salaries, and the number of options they were granted. There was also one sales employee who had gotten an employment contract that was completely out of the norm of what others were getting paid. All of the sudden salaries and options became a major discussion point among employees. To make matters worse, prior to the IPO it was determined that too many options had been granted and they needed to rain in the grants. The solution was an 1 for 8 reverse split (meaning that if you were initially granted 8000 options you now only had 1000). This was kind of an icing on the cake morale blow for employees. It didn't help when the stock soared at the IPO and people were comparing what they should have made with what they actually made. EDIT - fixed typo

imh 11y ago
Can you explain how such a split works? My understanding was that after those things, everyone still has the same percent of the company as before, right? So how does that affect your payout? Forgive me for being naive.
- jeffmould 11y ago
  It is confusing, so I will try to break it down as simple as possible at least the way I understood/understand it. The reason the reverse split happened in the first place was that the company was trying to get a certain valuation with a certain opening price for the stock at IPO. With the number of shares they had granted in the option pool, hitting those target numbers was impossible. To adjust for this, it was decided to do a reverse split to reduce the number of shares out thus allowing them meet their valuation and opening price for the IPO. For example, if they wanted raise $8,000,000 on the IPO and have a $20 opening price they could only have 400,000 shares out. Instead they had 32,000,000 shares out. This would have meant to hit the same $8,000,000 raise, they would have had to open at $0.25. So to adjust they did the 1 for 8 reverse split meaning they went from the 32,000,000 shares to 400,000 shares out. Now they can open at $20 and raise their $8,000,000. Using the same example above, here is where it hits the employee. Let's say on opening day the company opens at $20. Now let's say in the original picture you owned 8000 shares and stock closed that day at $60. You would stand to have made approximately $320,000 ($480,000 - $160,000). However, now with the reverse split you now only have 1000 shares. The stock still opens at $20 and still closes at $60. But now you only made $40,000 ($60,000 - $20,000). That's the downfall of a reverse split. At least with a normal split (i.e. 2 for 1) you have an upside potential on earnings. This is how a lot of early employees of companies like Microsoft, Apple, Under Armour, etc... have made out significantly well for themselves. With a reverse split they are taking away shares so there is no upside.
  - jsnell 11y ago
    If anything, I'm more confused after that. You're comparing the case of a $20 share price without a reverse split to the same share price with the split. That's absurd, since changing the number of shares changes the price (market cap = number of shares * price of a share -- and the market cap is to a first approximation fixed). The proper comparison would be a share price of 20 -> 60 with the reverse split, or a share price of 2.5 -> 7.5 without. And with those numbers you'll see that the split had no effect at all. Maybe there's a scenario in which a reverse split screws up the employees. But I don't think it's the one you're describing.
    - jeffmould 11y ago
      Sorry if it confused you. You are right I am comparing the pricing of $20 using both with and without the split. Let me try again. Let's say you have 32,000,000 shares and you want to raise $8,000,000. You would need to price the stock at $0.25 per share to guarantee that raise (32,000,000 * 0.25 = $8,000,000). Now let's say an employee has 8000 shares. At IPO their 8000 shares are worth $2000 if the stock opens at $0.25. Let's say the price goes up 4x, or to $1.00, that day. The gain is $6000 ($8000 - $2000). To rectify the issue of the $0.25 opening price (major stock exchanges will not allow a stock to open that low and have minimum prices), the company decides to do a reverse split to reduce the outstanding shares and in turn raise the price of the stock. The company still wants to raise $8,000,000 so to adjust the number of shares outstanding (go from 32,000,000 to 400,000) they must do an 1 for 8 reverse split. If an employee had been granted 8000 shares when they started, they would, after the reverse split, only have 1000 shares. After the reverse split and on IPO day the company now opens at $20 (8,000,000 / 400,000). Now let's say the price still goes up 4x, or to $80. The gain is still 4x, and the employee walks away with a $60,000 gain instead. Where I think this confuses everyone is comparing the gain pre-split and post-split. You are right in that the gain is the same and in theory the employee neither lost or gained anything through the split. However, from an employee morale perspective the employee still views it as a loss. In the back of the employee's head they took the job under the premise of having 8000 shares and when the company IPOs they begin comparing what they should have had to what they really have after the split (8000 vs 1000 or $480,000 vs. $60,000). The other part that I have left out is that with the reverse split your strike price goes up. So if you were originally brought on with 8000 shares and a $1 strike, you now have 1000 shares and a $8 strike. I didn't factor this in the math above in an attempt to make it easier to follow. Hopefully that clarifies, sorry if I made that more confusing. You are 100% right the percentages and the gains are still the same in theory. It is a perspective that causes the loss of morale. That is why I was using my original comparison numbers. I am by no means an accountant or attorney so probably not the best person to explain the accounting aspect of a reverse split. :)
BurningFrog 11y ago
That was either not a reverse split, or your company had really math challenged employees.
- jeffmould 11y ago
  Typo, should have been 1 for 8 reverse split. UGH. Having one of those days. It is 1 for 8 reverse split. Sorry trying to do this from my phone and haven't had a full pot of coffee.

imh 11y ago

Can you explain how such a split works? My understanding was that after those things, everyone still has the same percent of the company as before, right? So how does that affect your payout? Forgive me for being naive.

jeffmould 11y ago
It is confusing, so I will try to break it down as simple as possible at least the way I understood/understand it. The reason the reverse split happened in the first place was that the company was trying to get a certain valuation with a certain opening price for the stock at IPO. With the number of shares they had granted in the option pool, hitting those target numbers was impossible. To adjust for this, it was decided to do a reverse split to reduce the number of shares out thus allowing them meet their valuation and opening price for the IPO. For example, if they wanted raise $8,000,000 on the IPO and have a $20 opening price they could only have 400,000 shares out. Instead they had 32,000,000 shares out. This would have meant to hit the same $8,000,000 raise, they would have had to open at $0.25. So to adjust they did the 1 for 8 reverse split meaning they went from the 32,000,000 shares to 400,000 shares out. Now they can open at $20 and raise their $8,000,000. Using the same example above, here is where it hits the employee. Let's say on opening day the company opens at $20. Now let's say in the original picture you owned 8000 shares and stock closed that day at $60. You would stand to have made approximately $320,000 ($480,000 - $160,000). However, now with the reverse split you now only have 1000 shares. The stock still opens at $20 and still closes at $60. But now you only made $40,000 ($60,000 - $20,000). That's the downfall of a reverse split. At least with a normal split (i.e. 2 for 1) you have an upside potential on earnings. This is how a lot of early employees of companies like Microsoft, Apple, Under Armour, etc... have made out significantly well for themselves. With a reverse split they are taking away shares so there is no upside.
- jsnell 11y ago
  If anything, I'm more confused after that. You're comparing the case of a $20 share price without a reverse split to the same share price with the split. That's absurd, since changing the number of shares changes the price (market cap = number of shares * price of a share -- and the market cap is to a first approximation fixed). The proper comparison would be a share price of 20 -> 60 with the reverse split, or a share price of 2.5 -> 7.5 without. And with those numbers you'll see that the split had no effect at all. Maybe there's a scenario in which a reverse split screws up the employees. But I don't think it's the one you're describing.
  - jeffmould 11y ago
    Sorry if it confused you. You are right I am comparing the pricing of $20 using both with and without the split. Let me try again. Let's say you have 32,000,000 shares and you want to raise $8,000,000. You would need to price the stock at $0.25 per share to guarantee that raise (32,000,000 * 0.25 = $8,000,000). Now let's say an employee has 8000 shares. At IPO their 8000 shares are worth $2000 if the stock opens at $0.25. Let's say the price goes up 4x, or to $1.00, that day. The gain is $6000 ($8000 - $2000). To rectify the issue of the $0.25 opening price (major stock exchanges will not allow a stock to open that low and have minimum prices), the company decides to do a reverse split to reduce the outstanding shares and in turn raise the price of the stock. The company still wants to raise $8,000,000 so to adjust the number of shares outstanding (go from 32,000,000 to 400,000) they must do an 1 for 8 reverse split. If an employee had been granted 8000 shares when they started, they would, after the reverse split, only have 1000 shares. After the reverse split and on IPO day the company now opens at $20 (8,000,000 / 400,000). Now let's say the price still goes up 4x, or to $80. The gain is still 4x, and the employee walks away with a $60,000 gain instead. Where I think this confuses everyone is comparing the gain pre-split and post-split. You are right in that the gain is the same and in theory the employee neither lost or gained anything through the split. However, from an employee morale perspective the employee still views it as a loss. In the back of the employee's head they took the job under the premise of having 8000 shares and when the company IPOs they begin comparing what they should have had to what they really have after the split (8000 vs 1000 or $480,000 vs. $60,000). The other part that I have left out is that with the reverse split your strike price goes up. So if you were originally brought on with 8000 shares and a $1 strike, you now have 1000 shares and a $8 strike. I didn't factor this in the math above in an attempt to make it easier to follow. Hopefully that clarifies, sorry if I made that more confusing. You are 100% right the percentages and the gains are still the same in theory. It is a perspective that causes the loss of morale. That is why I was using my original comparison numbers. I am by no means an accountant or attorney so probably not the best person to explain the accounting aspect of a reverse split. :)

BurningFrog 11y ago

That was either not a reverse split, or your company had really math challenged employees.

jeffmould 11y ago
Typo, should have been 1 for 8 reverse split. UGH. Having one of those days. It is 1 for 8 reverse split. Sorry trying to do this from my phone and haven't had a full pot of coffee.