RSUs (restricted stock) can be granted to employees if the startup is very very early because the par value of each share rounds down to $0.
If you join a company that just had a seed or Series A, the par value would be much higher, and if you were granted RSUs, you would need to buy the shares at whatever they’re valued at, which can be a lot if you’re buying 1% of a $10mm company (compared with a stock option which is simply the option to buy stock at a later date).
RSUs have voting rights and is usually the same stock founders have.
That’s said, an investor (or a founder for that matter) can come in at any time and rework the whole ownership structure by simply increasing the authorized share pool in a company from (let’s say) 10 million shares to 100 million shares, and then grant all of the newly created shares to other entities, thereby cutting the value of all other shares by 1/10.
A lot of it comes down to what investors force startups to do when they accept VC money, and also how ethically and morally the founders act from the perspective of employees with stock interest.
I’m a CEO and when I hire people, I’m very generous with stock options, but I tell people upfront they’re just lottery tickets. That’s really what they are.
IANAL, but there are two "problems" with this claim.
One is that "just create a bunch of shares and only give them to the founder" is true, but has tax consequences. (In your example, you just gave ~90% of the company to the founder at valuation $XM. Whether as options or as Restricted Stock, there's going to be a tax consequence to that either at grant or during vesting). A dishonest founder might do that, but they'd have to believe it was going to work out in their favor beyond just "I already have 40%, let's increase the value of the company".
Second though is that the Founders, usually as CEO and Board Directors, have a fiduciary duty to their shareholders. Even if you have full control of the voting rights, reallocating all the equity is a violation of that fiduciary responsibility. The injured parties have to sue you for it, and that might make the company equity worthless, but just because a company is private doesn't mean "anything goes".
Is there any kind of clause or legal structure that would prevent the kind of alteration to ownership structure you describe above? It seems like you’re saying anyone can do anything at any time. That’s scary and I feel like we need laws against that, or a different structure for representation of workers.
This is largely true at any smaller seed maturity or even Series A maturity.
As a sibling commenter mentioned, companies do have a fiduciary duty. But realistically, if the shareholders are composed of relatively unsophisticated investors/employees, you can do anything without being sued.
I obviously don’t subscribe to this kind of behavior at my own company, but being in the position it has opened my eyes the extent to which one could go if you were very greedy.
I take RSU to mean “RSUs in a publicly traded company” - i.e., the value of the shares is well known and the sort of “sell the IP and fuck the employees” shenanigans is much harder to pull off.
You can get RSUs in private startups which doesn’t mitigate the risks being discussed here. That said there are still benefits to having RSUs over options (i.e., 90 day exercise window).
I also take it to mean RSUs in a public company. I wouldn’t want RSUs in a private startup because I couldn’t sell them, but I’d still take the tax hit as they vest.
RSUs are actual stock that can be sold on the market. Options are the ability to buy a share in the future at a given price. One is real money now and the other is maybe money later.
Isn't this just a way of saying "work exclusively for public companies if you value equity"? You will not be able to sell private company shares on the market.
But I think you’re ignoring the liquidation preference discussed at the top of this thread: surely RSUs have the same junior rights as the shares from options if the company is acquired. One difference is that people are generally required to exercise options (and pay taxes on that) before they leave the company. But you also talk about selling RSUs on public markets so maybe you are thinking of something else?
If your RSUs vest when your company is still private, you’ll owe taxes but not be able to sell the shares for the money you’ll need to pay the taxes. That sounds way worse than options.
The most common way to issue them is so-called "double trigger" vesting where you have both a) a service requirement (the time) and b) an event required (like IPO or sale). Since you have risk of forfeiture if IPO/sale does not happen, IRS does not deem vested (and thus taxable) until both triggers are satisfied.
I’ll stick to RSUs.
Saying you helped exit a company seems to go over well in interviews though.