The company played some nasty mind games with their employees regarding equity. They did a 7 (I think?) for 1 split, and then had the recruiters telling employees that they had "never seen a company give out so many shares before." They sent out spreadsheets with calculators that would let you estimate the value of your shares, and just casually let you know that Apple was trading at ~$700/share. iirc, they even pre-filled in the line for potential value with Apple's current share price (so, 5000 shares * 700 Apple-level share price = 3.5M). At every company meeting, they'd get really pumped about how they were going to IPO. They would throw parties celebrating their 100 millionth patient life covered, even though it seemed pretty obvious those numbers weren't real. No 401k match, since you're not going to need it after we IPO.
There was even a second market offering to let Ryan sell enough shares to pay his taxes and maybe buy a nice house in South Park.
I don't feel bad for the engineers, since they were generally exposed to enough information that they should have been able to call bullshit. I feel bad for the customer success team, who were often given a tenth of the amount of shares as engineers but would still frequently talk about retiring when we IPO. Hopefully the exec bonuses will be voted down, and there'll be a class action lawsuit.
This is a problem that faces a lot of startups. We should all be more wary of information that's given out, and be more demanding of transparency. Learn a less from all of us PF employees: the more a company talks about their IPO, the less likely it's going to happen.
> There was even a second market offering to let Ryan sell enough shares to pay his taxes and maybe buy a nice house in South Park.
Who was buying the shares from Ryan in this secondary market?
> This is a problem that faces a lot of startups. We should all be more wary of information that's given out, and be more demanding of transparency. Learn a less from all of us PF employees: the more a company talks about their IPO, the less likely it's going to happen.
I generally agree, but no matter how much information is given out, if the last deal is done secretly and with bonuses and pre-arranged values, there is no amount of information that can protect you from that.
Fraud is hard to prove because it requires providing intention, but certainly some of the elements of fraud are present.
I don't remember who was buying, but I think it was literally on "Second Market" before they were acquired by NASDAQ (iirc)... I wanna say that was in the summer of 2015, and was the only official liquidity opportunity that was offered for employees, at least in the last few years that I was aware of. I know some of my colleagues got out with sharespost sales, but those were only the ones who had enough shares qualify for that sale (which, again screwing the lower compensated employees, wouldn't be the customer service teams).
In my mind, there's two things that should change: first, and most importantly, we need better protections for employees in these kinds of situations; second (and a distant second, but still salient since it's the only thing that you really can do to protect yourself), people should be more wary. I totally agree that you can't protect yourself from these kinds of deals done in secret. But, you can look for the kinds of warning signs and stay away.
I know people who were laid off during one of the multiple rounds of layoffs, and still went back to buy their shares. That's some strong Kool-aid, and it makes very little sense to me why one would do that in this context if they weren't being given some strong misinformation.
Unfortunately this is the rule more than the exception.
I've been at a startup that handed out split stock options like candy while the CEO was planning on using his majority control to transfer all IP to a separate entity.
I've been at a startup where the executive team buried a clause in the equity agreement that would allow them to forcibly buy back all shares, where the sum valuation of the company was how much money was deposited into a single, explicitly defined bank account.
I've seen a non-compete agreement that stated the employee was not only barred from working for competitors for five years, but working in the entire industry altogether.
It's amazing the depths of greed you can find when you read the fine print.
>I've seen a non-compete agreement that stated the employee was not only barred from working for competitors for five years, but working in the entire industry altogether.
Too bad that's probably not enforceable. But sure it sounds serious when you don't know no better.
It was definitely not enforceable, but it was a great indicator of intent. When I pointed out the paragraph to the President, who wrote the agreement, he said, "Oh, we didn't mean to do that. I don't know why that's in there."
He was a lawyer.
When I pointed out the bank account valuation to the CEO of that startup, he said, "that's not what that says." I informed him that I had run the agreement through two lawyer friends who had confirmed my interpretation.
This is one area that YC has a strong incentive to act in, but hasn't. A startup ecosystem with a best practices guide to equity and suboptimal exits would help everyone.
Doesn't have to be rules, just a guide and companies who comply and those who don't.
For an example how this could work, see the CFA and GIPS. Every big asset manager is in compliance with GIPS. Every reputable startup should choose whether to be compliant with best practices for equity for employees.
In the short term perhaps, but in the long term? What happens when word gets around that you shouldn't join a startup because even if it succeeds, your equity will just be stolen from you?
What happens when word gets around that you shouldn't join a startup because even if it succeeds, your equity will just be stolen from you?
That word has already gotten around and is one of the main reasons for ageism in the industry - the only people who will work for startups are those who haven’t been burnt or wised up yet.
Yeap, imagine if the company's HR rep was able to say that their equity distribution is compliant with YC employee favorable equity standards (YCEFE) or whatever. I think it would make hiring much easier. Ultimately, the exits which barely pay investors back are not how YC or anyone in VC makes money (power law) so creating an equity standards system seems like an obvious choice.
"This is one area that YC has a strong incentive to act in, but hasn't."
This is an interesting thing to consider. If you look at the current president of YC (sama), at least from an outsider's perspective, he's the beneficiary of exactly the type of behavior you're trying to get away from. Based on his company's exit, he is now a VC, but his company was acquired for essentially what it raised, meaning the employees' stock was likely worthless. I have absolutely nothing personal against sama, but let's remember that YC doesn't exist as a charity, it's a business.
Man we are such cattle in this topic. If employees could publicly sell their stock, employees would share information constantly about things like this.
I cant imagine one measure increasing salaries and efficiency more than allowing employees to trade stock.
"but let's remember that YC doesn't exist as a charity, it's a business."
But let's also remember that the people running YC are adults, fully capable of telling right from wrong, and fully capable of being held responsible for their actions. Being "a business" is no more of an excuse for their actions than "following orders" is.
Being able to tell right from wrong, and acting on knowing something you're doing is wrong are different things. It is much easier to do something you know is wrong, when you stand to benefit to the tune of a few dozen million dollars.
> The company played some nasty mind games with their employees regarding equity. They did a 7 (I think?) for 1 split, and then had the recruiters telling employees that they had "never seen a company give out so many shares before." They sent out spreadsheets with calculators that would let you estimate the value of your shares, and just casually let you know that Apple was trading at ~$700/share. iirc, they even pre-filled in the line for potential value with Apple's current share price (so, 5000 shares * 700 Apple-level share price = 3.5M). At every company meeting, they'd get really pumped about how they were going to IPO. They would throw parties celebrating their 100 millionth patient life covered, even though it seemed pretty obvious those numbers weren't real. No 401k match, since you're not going to need it after we IPO.
man...fuck this shit hard...this is just straight up deceiving people
Yeah, that looks similar to the one that I got. But I don't remember it having the shares outstanding listed, because I specifically remember asking around to try to figure that number out. But that was years ago and maybe my memory is bad.
thanks for sharing, and sorry for your horrible experience. just want to confirm you scrubbed numbers like the number of shares so there's no way someone can deduce your identity.
I only gave this a quick look but what's the problem with this? They're wildly optimistic projections but there's doesn't seem to be any funny math going on. That said, if they're sending out something like this while knowing valuations are not going to approach anything like that, it's pretty scummy.
>I don't feel bad for the engineers, since they were generally exposed to enough information that they should have been able to call bullshit.
I want to ask this without sounding like it's an indictment: do most honestly offer their empathy with similar conditions?
Interestingly, if someone wrote "I don't feel sorry for fast food workers, they had enough info to learn a skill and earn more," that usually strikes a nerve with a lot of people. But software devs getting nothing?
Someone in that position should presumably have some skill with logic and numbers to simply do the job. It would be like someone in finance not understanding how the payout would work. How could they even do the job and not understand a lot of the basics involved?
That said, getting fleeced sucks and most likely it is similar to why people who know better fall for most scams - they think they can beat the system. They know it is false information but they think they are good enough to still come out ahead and the other sucker is going to take a hit. Sometimes they are right but most of the time they are the sucker.
Sure, these founders went too far, but the basic problem of Founders >>> Employees is there at every startup. When even employee #1 at typical SV startup signs on for 1% and employee #4 already for half that, why do “employees” still think there’s anything equitable about equity?
Listen up, prospective employee: if your founder makes several million, you’ll get zilch. If founder makes tens of millions, you might get enough for a modest car. If your founder makes over $100 million, you might have enough for a down payment on a house. Then you can go to the next startup and work super hard all over again to try to mint another mega-millionaire.
This fatalist attitude is just as bad as the overly naive attitude that I'm sure left many employees of this company feeling screwed.
Employees have agency. Founders don't have some magical power over you with which to screw you. You choose to work for them in exchange for money, stock, whatever. If stock is a sizable part of your compensation, you probably should be asking a lot of questions about it. How many shares will I get?
How many shares do you have? How is the company doing? What are the future plans? When am I going to get liquidity? Do your own accounting. If they won't give you the information you require, don't join! If the company isn't hitting its benchmarks, leave! There are lots of other companies out there to join, including many publicly traded ones so you'll always have the full financials (and liquid stock).
If you do your homework and are serious about continually evaluating the company at which you work, you will not get screwed. Your time is the investment, and every 3-6 months you should re-evaluate whether the company is the best place to work. You don't owe the company anything! They need to keep proving to you, quarter after quarter, that what compensation they are giving you is worth you continuing to work there. Are you guaranteed to be successful? Of course not. Being an employee of a startup is risky, and you might make the "right" move that ends up not working out. Just from this article it seemed to me there were many clear warning signs this company wasn't all it was cracked up to be, and some employees didn't evaluate the company's trajectory properly and ended up getting screwed. It's a lesson learned but I'm sure many of them could have pointed out in retrospect where they went wrong.
And I'll also add that being a founder sucks, and being an employee is comparably much easier. First, getting companies off the ground is really really hard and founders have to do that themselves. As an employee you can look around and join a company that already is showing some traction, saving yourself a bunch of time and frustration. Additionally, as an employee you can and should leave if the company starts falling behind its benchmarks and you think there are better opportunities elsewhere. As a founder you can't really do this, you basically have to stick it out until the end.
So basically, being a founder isn't any better or worse than being an employee, they are different paths with different expectations, and each one of them has to be done with care to get the most out of it.
"This fatalist attitude is just as bad as the overly naive attitude that I'm sure left many employees of this company feeling screwed."
No, it isn't. It's reality.
"Founders don't have some magical power over you with which to screw you. "
They absolutely do. They have the power to dilute your share to nothing, and they have the power to make special deals which cut you out of receiving anything.
"And I'll also add that being a founder sucks"
That doesn't change a damn thing. That doesn't excuse for one second the shenanigans that founders pull to screw over their employees.
Seriously, this idea that we're entirely in control of our own destiny, which has the side effect of blaming the victim over the whole thing, needs to end.
> They absolutely do. They have the power to dilute your share to nothing, and they have the power to make special deals which cut you out of receiving anything.
This is an exaggeration. Founders/officers don't have the power to dilute the common shareholders "down to nothing" unless they believe it is best for the shareholders. All officers have a fiduciary duty to the shareholders, and can be sued if they violate this.
People get confused because in cases like this the company sells for $100 million and the investors get something, the founders get something and employees screwed. Then they take to leap to say employees ALWAYS get screwed! The truth is, if your company raises $150 million and sells for $100 million, its a fire sale. If you are an employee, you are never going to get anything in a fire sale, so you had no reason to expect anything in the first place. As an employee, you will only get paid with equity if the company grows REALLY REALLY BIG. If the company isn't growing, or isn't growing fast, employees not get anything. This isn't a scam, this isn't some founder trick, its just the way companies work. If the company isn't growing REALLY REALLY FAST, leave!
Yes, it is sleazy for the founders to be showing a document with a "what-if" valuing the company at 5B when it ends up selling for 100M. But as an employee you must be able to differentiate between a 5B company vs a 100M company, that is literally a 50x difference. If you can't, how can you possibly complain?
No, it's not. We're literally in a comment section about that very thing happening.
"If you are an employee, you are never going to get anything in a fire sale, so you had no reason to expect anything in the first place."
Bullshit. The leaders of the company got quite a bit, so no, it is not unreasonable to expect those that are actually doing the work to get something.
You are trying to excuse these shenanigans as perfectly acceptable, and all it's doing is coming off as saying that employees should just shut up and deal. But you're not giving anyone any reason why they should agree to these shitty terms; why they should bust their ass just to make some founder rich while they get stuck with nothing.
And then you have the absolute gall to blame this on the employees, saying that it's their fault they didn't leave in time. As if it's somehow their fault that the founder was a scumbag who fucked them over? And as if that the vast, vast majority of startups aren't doing the exact same thing?
You have no defense for any of these actions. The blame rests solely on the founders who sold out those that worked hard for them. And I really, really, really hope that these stories get around, so that it makes things incredibly hard for scumbag founders to try and deceive hard working people into working for worthless equity.
> The leaders of the company got quite a bit, so no, it is not unreasonable to expect those that are actually doing the work to get something.
It is unreasonable to expect it, because that isn't how the law works. The employees can complain and file lawsuits all they want, but they'll probably lose. It's a fire sale with retention bonuses for the officers by the acquiring company. That is all very standard stuff that the courts of law will not overturn as unfair unless there was some fraud that goes beyond what was written in the story. A founder selling a very optimistic viewpoint of their company's future is not against the law.
But guess what, if you are buying that viewpoint and trusting the founders, that's on you. As an employee you have the power to do 2 things: not join companies run by sleazy people and quit companies that are going poorly. If you don't exercise either of those options, you are leaving yourself wide open to be screwed.
And look, if you want to sit back and tweet at how horrible these founders are, go for it. I do think bad behavior like this should be called out as a massive signal to any future employees not to work for companies started by these sleazeballs. But don't talk about how silicon valley is a rigged game that employees cannot win. Silicon valley right now is a fucking gold rush for employees. There are lots of great companies out there paying lots of money to software engineers who take the time to find them. This company was not one of them, and the employees gave up a lot of value working at some shit-ass company instead of finding a good one.
The entirety of your posts on this topic have come down to, "Either bend over and take it, or leave the company, in which case you get fucked out of your hard earned compensation as well."
"But don't talk about how silicon valley is a rigged game that employees cannot win."
Why not? This is not the first story we've heard of this, and it won't be the last. In fact, I'd say stories like this are far, far more common. So yes, I will keep beating the drum that the game is rigged, until it isn't. Because it absolutely is, and you have to be incredibly blind, or benefitting from the rigged game, to claim it isn't.
Evaluating the worth of a company and stock options is very hard and usually requires several skill sets the employee doesn't have, as well as information the company is reluctant to give out.
If I asked the founder for all of the financial documents the company has signed so I could know it's obligations, I can't imagine that a majority of the founders/CEOs would say "sure here you go". And even if they did, the cost of a lawyer to go over all of that paperwork to make sure you didn't miss anything would be expensive.
Financial literacy is a very important skill. Yes, startups are complicated. To be an informed employee you need to deeply understand how stock options work, you need to deeply understand how startup financing works, and it wouldn't hurt to have a general understanding of business. And look, if you just want to be a software engineer, then you don't have to learn these things, but then you can't complain if you get screwed. Or take a job at a publicly traded company and use the stock price as a proxy for how the company is doing.
And as for the availability of the documents and financial information, the main ones you care about are: revenue, expenses, total burn and cash in the bank. Any company that will not reveal those is being shady, full stop. These figures should be so top of mind the CEO or CFO should know them off hand without even having the look. A good company will share all of these with the full company every month or quarter, because they are really important indicators of how the company is doing and what the overall strategy should be.
You don't need a lawyer. You are not auditing the company, you are just getting a sense for the company's trajectory. Your job is actually really easy. If things are going well that is normally obvious. Revenue going up. Burn going down. Fundraising rounds at higher valuations. If these things aren't happening or you suspect something shady is going on, leave! You don't need to break the case, just get a better job at another company that is doing better.
"the main ones you care about are: revenue, expenses, total burn and cash in the bank"
That's part of it, but not all of it. Total number of outstanding shares (including warrantable shares!) can change the complexion of things a lot. And then there's the question of preference -- deals that a company made years ago can make for a big difference in share value.
Unless a company has an incredibly clean cap table, a rank-and-file employee will never really know how much their shares are worth until they are either worthless, or have a cash-in-hand buyer. What you're talking about is the general case of "things are moving in a pretty good direction", and that's important. But to really gauge value of a stock option is much, much more complex (and is constantly changing!). Even if an employee were able to come to a reasonable estimate of common stock value, one bad month can wipe that away (an emergency $5m round to make payroll? a loan backed by stock? a long-term lease backed by stock?).
Most of the time the company should share with you the most relevant info: # shares outstanding, liquidation preference on the term sheet, strike price of shares, FMV of shares and so on. If they don't then run. They're making you a deal you can't properly evaluate.
And if your founder fails (like most startups) and ends up wasting several years earning no income then you get to have had a modest job for however long the founder was able to last
The founder will swan straight into his or her next Series A without missing a beat. They have already proven themselves to be a willing pawn for VCs to exploit Workers after all. The petit bourgeoisie, if you will.
I’m thinking a lot about this right now. Do you know of any successful company that did not adhere to giving conventional (i.e. very small) amounts of equity to employees?
I’m also wondering whether giving significantly more equity than usual to employees would deter potential investors, even if their own share of the cake remains the same (i.e. only by diluting the founders).
welcome to the collusion club. don't worry you'll never get the right to vote on anything. so even if you did get any kind of weird deal they'll just "fix" it in the next round, or your company goes up in flames.
Recently happened to me. Founders raid the series c for liquidity. Take out a predatory note to keep the company afloat. Sell the company in a fire sale and reap transaction bonuses, RSU grants, etc. Common stock wiped out and those that built the company left with nothing. Lesson learned? It rarely pays to be an early employee at a startup.
Looks like Quri (https://angel.co/quri-1). All you had to do was Google OP's handle and dig into where they worked recently that had their characteristics
Definitely a great lesson to be learned. I'd be interested in some stats on the average payout percentage for engineers of acquired startups (broken down by tenure, obvi).
Yeah, as an "investor" and an employee of several startups, I generally wound up on the losing side of the equation, to the tune of tens of thousands of dollars.
Stuff that amounted to, "Oh, we extinguished those shares, sorry about that," when the corporation was worth several billion.
This stuff is broken. You are far better off working for a mature company with decent management; if you are any good, you won't necessarily have "fuck you" money at the end of ten years, but you'll probably be ahead by several million dollars, and the value of "several" might be pleasantly surprising.
“Surprising several” is at least 3 million over ten years. Which companies pay to “any good” engineers enough to pocket $300k per year, after tax and living expenses?
there are plenty of senior devs at FANG making that. not just machine learning/data scientist magician but just good devs that have been there for 10 years
You'd have to be making 700k+ a year to be banking 300k after tax. Perhaps the valley slipped away from me but I find it hard to believe that there would be average employees in that range.
I did it at a FANG, and it wasn't 700k/year. Admittedly, this is the longest runup in stocks we've had for some time, but just prudent saving and investing (and possibly working for a FANG outside the valley) did it for me.
I worked for a company that offered me 2000 shares when I was hired. I asked two questions,
How much is the company worth? What is the number of shares outstanding.
Both of which they wouldn't give me. I told them the stock was worthless, that I wanted a 25k pay bump, which they granted.
Years later they ended up getting acquired for a hefty sum (950+ million) and people who were in the employee 5-50 range and worked there for 8+ years literally only received enough for a good used honda civic. Only two people in eng made over a million, 1.5 and 6, but that was only because they were managers that kept the cattle inline.
The game is pretty rigged in this regard, and investors are sophisticated enough to know how to maximize what they get at the cost of the common shares.
If I had a dollar for every time an XO, Sales VP, or board investor (I’m looking at you Todd Rulon-Miller) said we were expecting an IPO filing in two years (bless thier optimistic little hearts) and sold for executive bonuses and a common stock price for the parts then I would have 3$. Best exit I ever had was an XO who’s singular prediction statement was “I think we have a chance at building and contributing to this technology and I think that might be valuable to this software enterprise segment, do you want to go find out?”. Buyer beware, contributor beware; it’s just how the game goes. Look for the humble introspective and you increase your odds, there is no guarantee, you only control your investment. That’s a tough break for those that were over exposed you have to cap your liability to your comfort level. bummer for those that caught the bill.
How does an engineer protect themselves against this sort of outcome? Just never work for startups?
I currently find myself in a similar situation, where the books look dire but the executives keep saying that we're so close to profitability. I'm 85% certain that my stocks will be worth nothing, but I stick around because I still see an ounce of promise. Am I just a sucker?
In other words, assume the stock will always be worth zero, and then make your decision to work there based on that assumption. Will you be happy doing what they want you to do for the salary they are offering if you know the stock will be worth nothing?
The answer isn't always no. Sometimes you'll get to work with amazing people, or on a really hard problem, or get a lot of responsibility you couldn't get at a big company. All of these intangibles might be worth the pay cut.
I think for early stage companies you should see the startup as a 1) learning opportunity first and chance to work with a great team driven by a passion outside of pure money, and 2) an out-of-the-money call option / favorable lottery ticket. Also, the new tax bill got rid of AMT for incomes under $500,000 for individuals ($1m for couples). It's difficult to go over that amount with ISO's as the FMV of your shares is valued at around 10-30% of preferred. You could exercise your options once every year for example to stay under that limit.
If you've already exercised and paid AMT, try to invest your other savings and if you need to take a loss you can offset it against those capital gains.
While it might not be something you're passionate about, I would also add that reading about startup law, discussing with your peers, and knowing your rights, and even asking (getting in writing) the terms of the investment rounds, is invaluable and certainly something you should do if you want to understand your full package.
Can you elaborate or point to any references on how this works? Does this essentially mean if I have some amount of options I want to exercise, and the combined total of that + my income is <$500k, I don't need to pay taxes on the options at all?
Step one: understand your deal. When your hiring manager -- the founder -- breathlessly tells you "FIFTY THOUSAND SHARES" you should respond with these questions:
--What fraction of the company's outstanding shares is that?
--How many of those shares are some kind of preferred shares?
--What was your premoney valuation in your last financing round, both total and per-share?
--How much money did you raise, in return for how many shares?
Or you can ask to see the capitalization table, which if not fraudulent, will answer these questions.
Then you will have some idea of the potential value of the shares you have.
These are reasonable questions for you--for any investor--to ask. They are asking you to invest the one thing they can't pay back: your time.
What if the hiring founder doesn't want to answer these questions for a mere underling such as yourself? In that case, assume a potential share value of zero and make your decisions accordingly.
> What if the hiring founder doesn't want to answer these questions for a mere underling such as yourself? In that case, assume a potential share value of zero and make your decisions accordingly.
That’s your cue to walk: it won’t be the last time they try to scam you and you’ll never be less committed to staying at that company.
Try to get the real scoop. If the corporation isn't very transparent to employees, it might help to exercise at least one share, to have stockholders rights.
It's one thing to be nearly profitable like Amazon was for many years, where current income was going into investment for the future; if a need for profitability arose, investment could be toned down and margins would appear. It's another thing when the current costs are slightly more than the current revenue, but decreasing spending immediately will also decrease revenue immediately. The later situation could be ok, if there's some realistic medium/longer term cost savings or revenue growth plan that is likely to be finished before the money runs out.
Startups that have revenue but not profits are judged a lot harsher in the market right now than they used to be; certainly they're judged harsher than startups with no revenue. If your stock makes your total compensation good/acceptable only if there's a big exit and the required exit is much bigger than is realistic, you're not well compensated -- unless you're getting something else out of it.
> If the corporation isn't very transparent to employees, it might help to exercise at least one share, to have stockholders rights.
Can you elaborate on the benefits of this? I exercised ~10% of my vested options at my 1 year cliff, but I have not received any additional communications. I looked into requesting specifics from the company because they're "A Delaware Company", but apparently the law says that "curiosity" is not a valid reason.
I would ask a lawyer versed in Delaware case law. I am sure they could give you some reasons. I'd imagine you could make a request for inspection on the grounds of independently (and confidentially) assessing the fair market value of your remaining options to determine if you want to purchase them. I mean that's really why you want to documents right? You want to see actual revenues, contracts etc... If the company balks then you might want to engage a law firm to handle your request (or get a group of shareholders together to do so). Also if the company is not forth coming then that's probably a red flag.
> I'd imagine you could make a request for inspection on the grounds of independently (and confidentially) assessing the fair market value of your remaining options to determine if you want to purchase them.
I think you need to be careful to make the purpose to assess the fair value of your current holdings, as the purpose has to be "a purpose reasonably related to such person’s interest as a stockholder". Assessing the value of your unexercised options isn't in the interest of your current holdings. If they push back on this, "why do you want to know the value, you're not planning to sell are you?, etc", then say you need it for estate planning, which is reasonable enough.
It’s a package deal: cash, lottery tickets, skills, connections.
A good reason to stay would be a lot of cash. Or modest cash but a lot skill-learning and/or connection building to open more doors for you next year. Subpar cash plus lottery tickets is not a good reason to stay.
There are some unique skills you can only pick up at startups, namely: 1) running a startup skill, learned from founders 2) running entire product rather than one small piece (larger companies will not let you run the whole product until you “prove” yourself) 3) understanding fundamentals of business, which will slow you to pick better startups to work for, or to make one.
If the C team knew they were going to IPO, the incentive is to mention it as least as possible to employees that leave dont exercise. I dont blame the C team for responding to basic incentives. Its insane to believe someone will choose to fork over their own money in favor of others that are not even at the negotiating table.
Thats why it should not be in the hands of anyone but the stock owner what he can or cant do with the shares. That way, when they send you a spreadsheet showing you will be a millionare, you go to see how much the shares are actually being sold in the market and worst case scenario, you buy some without being an employee!
"Planning for potential acquisition exits also includes having bonus pools for key employees (which include founders and current executives) that align their incentives with company stakeholders to achieve value upon an exit."
That has too be a joke right? They are arguing that the terms that will lead to only the executives and founders getting a cash out are necessary in order to align their incentives to achieve value for stakeholders.... who will receive nothing in the sale?
Seems like the only thing this bonus structure is incentivising is their orchestration of a quick and dirty last minute exist so they can get their bonuses while the rest of the company burns down. Hopefully it will get voted to hell, and a new structure will be put in place where the key employees don't make a dime until the ensure that all stakeholders make money.
See my previous comment. This is exactly what happens.
The sale doesn’t get voted to hell because the voting shares (i.e. preferred stock) have liquidation preference and get paid back first, in some instances multiple their initial investment, before the rest of the pie is sliced.
> CNBC talked to three former employees who lost between $40,000 and over $100,000 each because they exercised their options in previous years and had to pay tax based on their heightened value at the time.
Interestingly, the recently passed tax reform bill seems to make this type of loss less likely - though it would seem to be too late for these employees.
This is the thing that totally baffles me. If you own shares of the company and they are worth reasonable ( say 40-100k ) amount and you are not someone who has no money in a bank (which is the only time when you should be banking on those 40-100k extra compensation) , and you are being screwed in a buyout you have all the leverage your need: it is spelled lawsuit. Lawsuits throw a monkey wrench into liabilities section so the company has all kinds of intensives to make them go away.
If this is an honest question... an employee who left the firm after 2013 and wanted to exercise their stock options needed to pay taxes up front on shares they received, based on the company's then $700mm+ valuation. But now the price of those shares is significantly less, based on the $100mm sale price. So they ended up paying more in taxes on their stock than they can receive now from the sale of their stock.
In this case, one of the controversies is that company leadership may not have taken such a low sale price (given that they initially had offers of more than twice that) had they not been compensated with personal payoffs outside of the equity structure.
Right, but the $700m valuation was preferred, and the employees likely paid AMT tax on the FMV (about 10-30% of that value). It's certainly sad but at least they can write off the AMT loss against capital gains if they have any and wish to, or take the $3,000 credit every year.
But that is the nasty part. The taxes were paid up front while the credit will be applied over years. Odds are they had to liquidate something else, borrow money, etc so it's not just the lost equity but the opportunity cost.
There's always the "they knew they could lose it!" line but if the leadership was lying internally and externally, I hope they get sued into oblivion.
The article was stating that the employees who exercised their options didn't actually gain any cash. They paid taxes on the "value" of the shares they received (converting from options to actual stock), and not on any real sweet cash money. I think the point is that for most of these people, even if parts of that loss may be recoverable later on (not sure about that), being out $40k - $100k+ on what was a badly misrepresented liklihood stings against execs getting their preference and bonus pool shares. The incentives did not line up, like their press release conflated.
> How is this a loss? They paid taxes on gains? Not sure what the badness is here. They cashed out and paid taxes.
They didn't take real gains, they took illiquid paper gains and paid AMT (Alternative Minimum Tax).
Example: Strike price was $1 / share, "on-paper" price was $20 / share. Employee had 20,000 shares, with a "paper" gain of $380,000. They had to pay the taxes on those gains even though the stocks were not publicly traded and therefore illiquid.
So they were taxed on a best-effort valuation of the thing they received from their employer? That seems like how tax is supposed to work. (How else would you do it - in-kind taxes?) Illiquid investments are a risk, if you lose money on them then you lose money on them, and you don't get back the taxes you paid, just as you don't get back the taxes on income you lost at the card tables.
Then prices would fall to the point where people could afford their homes, or governments would run massive surpluses and could lower their tax rates to remove the burden, or some combination of the two effects. It would remove the disincentive to trade homes which is bad for everyone: if I live next to your job and you live next to my job we'd both be better off if we bought and sold each other's houses, but at the moment we're discouraged from doing that because our tax bills would come due.
You can't always sell the share after exercise. You're taxed on the spread between strike price and fair market valuation as income on exercise, not on sale.
There is an exception around taxes for ISOs that recently became useful with the AMT change in the new tax law, but even in that case you often can't sell the share after you've exercised it without permission from your private company (which you are very unlikely to get).
What do you mean? If you leave a company you are generally forced to decide to exercise or not within 90 days even though you might not actually "cash out" for years, if ever.
This is a pretty common scenario when a venture funded company doesn't reach a valuation that exceeds the various preferences accumulated in investment rounds. The company is ultimately sold, all of the sales proceeds are taken by the preferred shareholders, who carve out set-asides for founders and senior management to keep them onboard and not scare the acquirer off with internal strife.
Sometimes people see this and start thinking that options or stocks should be regulated harder by the sec so employees dont get shady deals and screwed like this.
But there is a much simpler way to prevent this from happening altogether: let employees trade the shares they got from openly in the market. That way, you would get a market signal on stocks on startups and shady deals like this would get whistleblowed on the market long before they are signed.
This is pretty crazy. I'm surprised no other news outlets are picking this up. The company says it is normal to pay management fat payouts to drive the company into the ground? Why should they get paid for selling for $100M when they took over and it was worth $700M?
I have no particular knowledge of this specific company, and it's quite possible that their manager payouts are overly high.
But: Somebody's paying $100M for this company. That's much less than the company was hoped to be worth, but it's still a huge chunk of change. The buyer is trying to get something for that investment. That means they need the company to perform in some way. Maybe just shut down in an orderly fashion while they monetize the client list in some manner, but for $100M, I'd guess that they want to operate the company somehow.
For that, they need the cooperation of the senior managers. So they pay them to cooperate. It kind of sucks, but you have to give the managers of the company some incentive to stick around and help you do whatever it is you want to do with the company instead of saying "Fuck you we're out of here."
If it helps, I'm certain that $750k - $7M was much smaller than the payout those execs were hoping/expecting to get from a more successful outcome.
> ...but for $100M, I'd guess that they want to operate the company somehow....For that, they need the cooperation of the senior managers. So they pay them to cooperate...
I'm not sure how much cooperation I'd want from "senior managers" who managed to manage a company in to 1/7th of what it was valued at. If it was intentionally fraudulent... you want those people around and making decisions still? If it was incomptence... you want those people around and making decisions still?
Yes, I'm oversimplifying, and no doubt there's always other factors to consider, but this thinking bothers me along the same lines as "we needed to pay those large bonuses to keep the CEO around - we couldn't get anyone else as capable and experienced!" while the company is simultanesouly tanking.
It's not about "we couldn't get anyone else as capable and experienced," it's just about "we couldn't get anyone else as experienced."
I don't think that anyone in these situations deludes themselves that the management team of a company are paragons of greatness, but doing a sudden replacement of the entire senior management team at a time when the company's morale is very low to start with and where you're certainly trying to make some major changes to the organization is a recipe for disaster. Bringing on new senior management takes time. Coming up to speed on the workings of an even moderately sized company takes time.
But, just because the valuation went down, doesn't mean it's the management's fault. Maybe the old valuation was based on wishful thinking, and over time it sunk in [to everybody] that there are core problems with the product/biz.model/etc that they can't solve. This I've seen multiple times are startups. There's some fundamental problem which is masked by growth. Management keeps hiring people and hopes somebody eventually magically fixes the problem. After ~5 years the company accepts the problem. OR a new competitor emerged, etc.
Even a shitty management team is a management team that keeps the company running.
"But, just because the valuation went down, doesn't mean it's the management's fault."
Yes, it does. The justification for the extremely high salaries and bonuses that execs get is because they are the ones who are "taking risks" and "are responsible for the company." Here, they are literally being rewarded for failure, and at the expense of people who were actually doing work.
> Here, they are literally being rewarded for failure,
Because who else would 'risk' so much - like only getting a $400k bonus instead of an $1m bonus? It takes special character and fortitude to steel yourself for such challenges!
It sounds like this particular company was engaged in 'wishful thinking' re: the valuation, and sounded like they were using deception at the core (if they were trying to deceive employees, probably tried to deceive investors too).
For those who want to gain some context on how such a thing could happen, I recommend the book Venture Deals by Brad Feld and Jason Mendelson [1]. There's a good section in the book that talk about share preferences and the order in which the pile of money is cashed out.
I second this recommendation. This article reminded me of the Venture Deals section where they break down the different kinds of capitalization and payouts in different scenarios. While the examples are written for founders, it’s also useful for any employee with shares trying to figure out their value. Most importantly for employees joining a company to get the info to make the decision whether to join. Or for employees thinking about how to treat their options or limited shares.
I’ll add that for a few companies, when I asked the necessary questions then hiring manager or founder either couldn’t or wouldn’t answer. So, like another commenter’s advice, I valued the shares at zero. This meant sometimes I didn’t join, but sometimes I did. Almost always my zero valuation was accurate, but once I got a pleasant surprise.
Part of me wonders why this is even surprising. Aren't the execs the ones with all the control over the power-levers? Why do employees expect to ever get something in situations like this? (I'm trying to look at this from an outsiders perspective.) What levers can employees even affect to shift the balance of influence in their favour? Coalitions and complaints I guess is the only thing that comes to mind. So in a sense, this article is not really a neutral reporting of the facts. In a sense, the article is one of a fairly limited set of tools that underdogs can use to shift the balance of power more in their favour.
Is this really that news-worthy? My impression was that this happened all the time.
Something similar happened at the last startup I worked at. Employees were compensated with stock options over larger salaries. When the company got acquired, I along with every other employee walked away with nothing while the founders became multi millionaires. This pretty much killed my friendship with one of the founders, who later tweeted a picture of himself in a Ferrari and another toasting to his new status as a self-made millionaire. I'm not sure you can get much more obnoxious than that.
The least employers can do is hide it when they throw employees under the bus for obscene amounts of personal profits. Maybe even act a little benevolent about it by saying you plan on donating a portion of it to charity?
Pretty much the only reason why you should join a startup as an employee vs working at an established company is learning and opportunity for more responsibility. The thing is that working at a startup doesn't at all guarantee you'll learn more than at a larger company and your learning is going to be much more self-directed since there will be a smaller focus on professional development.
I was thinking about this the other day. As I see it, American companies and probably many companies in the world have a really f'ed up attitude about how employees fit into the mix. I don't see how the cost of entrepreneurship could be nearly as high as it is. Sure, from the point of view of an average person, starting a business is risky and should lead to potentially high reward. But how many average people are able or willing to start a business at all nowadays? In reality, the sorts of people who end up starting businesses are those for whom starting a business is not as risky e.g. people who are wealthy or whose families are wealthy or who are just burning VC money. The risk is lower and so the cost of entrepreneurship should be lower. Also, it seems there's a lot of talk in tech about wanting to use the great wealth accumulated to help the world or whatever. So then why not just start with the actual people in tech and not just the founders? Why act so uncharitable to the people directly working for you?
Founded in 2005, Practice Fusion competes in the crowded electronic medical records market and discovered a niche by offering free software that was popular among small and solo physician practices.
Instead of charging for its software, Practice Fusion generates the bulk of its revenues through advertising to doctors.
I've met exactly 2 doctors who have actually used OpenEMR and they were both researchers. It is quite nice, but the last time I looked it wasn't trivial to set up and run. I think it one of those "it's free if you time is worth nothing" kind of things. And, there are some other EHRs out there that are nice and won't break the bank.
> there are some other EHRs out there that are nice and won't break the bank.
In fact, due to the various "pay for performance" models out there, a good EHR will make you money (making it easier to prove you are meeting various thresholds for the quality measures in question).
Yeah, quality measure reporting is key, the good ones do that well for sure. However I think they're missing the ability to monitor quality on a day to day and week to week basis for the most part. It's also really hard to track quality trends.
I'd be interested to hear more about what you think could be improved. In the vast majority of cases, new data points only occur during a patient visit. "Day to day" or "week to week" tracking aren't really useful in those cases, "visit to visit" is as good as you're going to get.
The year before the dot com collapse in March 2001 the new CFO at my company told us we'd all be millionaires in the next year. We didn't believe him though despite the market as it sounded stupid, and 10 months later we went Chapter 7. Never ever trust execs when they promise the moon.
This is an extreme case but the issues are not that uncommon in tech. Most employees with “equity” are not in a good place to know what that equity might actually be worth... and it’s very common for it to be worth far less than one thinks. All the covenants with founders, early investors, debitors and others are often not known by the common minion employee options/share holder. Yet those details typically determine if said employee will make a lot, a little or nothing at all at a liquidity event.
It seems simple to have a 1x payback clause for all shareholders. Investors get this, so if you are a common stock holder you should too. Maybe the solution is that investors can have 10x voting rights but the share value is otherwise the same. So the preferred price = the common price. Or just some clause saying pay all shares out at 1x first and then distribute some other way if you want. At least you're not being a jerk then.
This is the reason that I plan to either work at Big N companies, where my equity is given to me in RSUs, or start my own company. Working at a startup in any role that's not a founder or an exec seems like a total scam, unless you have an incredible amount of confidence in the founders, and their integrity.
As long as deals are legal and meet generally accepted ethical standards, it seems that founders and investors have no interest in favoring employees in negotiations that restructure cap tables.
So why do employees make money in a good fraction of successful exits?
Stories like this are extremely common nowadays. Startups are going to have to come up with some other way to attract talented workers, as most people know that equity is a joke, the hours are extremely long, and the pay is crap.
During the dotcom bubble I knew that VCs were kicking themselves every time some 'secretary becomes a millionaire' story came out because this meant they left money in other people's pockets. Over the last 20 years investors have refined their game and this never happens now, indeed, it's the opposite.
I think the only reason to go in other than as a founder in a startup is as someone right out of school for experience. Otherwise they have to be treated like any position, on a straight cash comp/benefits basis, ignoring the likely worthless equity scrip. In my experience, the best play is to go in on a contract basis once a startup is in the "burn baby burn" phase and you can bill market rate for all of those hours.
I'd say total compensation has worked out roughly the same.
It's a little hard to compare since I've sometimes worked remotely, and with companies headquartered in Silicon Valley, Cambridge (MA), and in less techy regions.
The non-startups were actually located outside of Silicon Valley and Cambridge. If I adjust for the different regions' cost of living, the (salary+benefits) dollar value were about the same across the board.
One caveat: The non-startups in SV and Cambridge gave me stock grants that vested over a number of years. If I'd stayed long enough for them to vest, the total compensation for those non-startups would have been about $7k-10k/year higher (pre-tax) that the compensation I got from startups.
There was even a second market offering to let Ryan sell enough shares to pay his taxes and maybe buy a nice house in South Park.
I don't feel bad for the engineers, since they were generally exposed to enough information that they should have been able to call bullshit. I feel bad for the customer success team, who were often given a tenth of the amount of shares as engineers but would still frequently talk about retiring when we IPO. Hopefully the exec bonuses will be voted down, and there'll be a class action lawsuit.
This is a problem that faces a lot of startups. We should all be more wary of information that's given out, and be more demanding of transparency. Learn a less from all of us PF employees: the more a company talks about their IPO, the less likely it's going to happen.