[ncd]

In the case @tyre mentioned above, the number of owners on the cap table would have actually been reduced during the sale, not increased.

The problem is not with the spirit under which that clause was added to the company's bylaws--the problem is the knee-jerk reaction by which they halted any discussion of sales (and didn't try to find a solution that worked), whether or not the proposed sale actually had a material effect on the cap table. Not to mention that ROFRs exist to eliminate cap table problems altogether.

Employees are unaware of these "veto" clauses, and continuing to hide them is acting in bad faith. But of course companies don't want employees to be aware of these clauses--it would become crystal clear how absolutely worthless equity is for the vast majority of employees at startups (even at Valley darlings like Gusto).

[birken]

As a preface, I'm as employee friendly as it comes for options and I've been through the ringer on this whole option process.

I don't think it is fair for an employee of a private company to be upset that they can't sell their shares whenever they want. There are more than just issues of the cap table. If one person wants to sell shares then isn't it only fair that everybody get the opportunity? So now it becomes a process. If the company endorses the process, then it can potentially affect the 409A valuation in addition to being a pretty big distraction and time sink.

So you can't just say because Employee X wants to sell shares and has a buyer lined up, the company shouldn't get in the way. The most fair thing for everybody might be to block the sale.

As a caveat to this, I believe that if founders sell shares then they should also give employees a right to sell shares, and not doing so is reason to get upset. However, if the founders aren't selling shares then I don't think it is wrong for them to make everybody wait for an IPO, acquisition or a other structured stock sale.

[tyre]

The founders of Gusto did sell shares, without a broader option for employees (they hand picked some employees that they wanted to allow to sell shares.)

Regardless I think employees should be able to sell shares. We (Seneca Systems) have a right of first refusal where we can choose to buy the shares. In that case, we do get to choose the investors, indirectly, because we can raise money to pay for it.

It really comes down to how you balance power between the two groups. Personally, we believe that founders and investors have enough rights with a RFR. We shouldn't have veto power over major life events for our employees.

Is it more inconvenient? No, not really. But it is a big deal for employees that have worked their asses off to make our company what it is.

[angersock]

It is sad founders and employees are considered different groups here.

[brianwawok]

Why shouldn't they be? Founders put in the initial blood sweat and tears for below market rates. Some guy hired at year 3 for market rate? Just an employee.

[JamesBarney]

Because 95% of the time it's not market rate because the employee thinks his equity is worth something, and founders never disabuse them of this notion. And many owners pretend like the equity is some form of employee ownership. Then they never inform them of the multitude of clauses that shift all possible risk away from the company, founders, and investor onto the backs of the employees.

Again I want to reiterate that all of this is great if the the company is upfront with possible employees about how the deal is structured, and that the employee is just an employee with a few lottery tickets so they might as well be working at AmaGooBookSoft for twice as much money. And upfront the owners told the employee that they definitely should not put in their blood, sweat, tears, and family time into the startup because they're not a part owner, they are "Just an employee".

[brianwawok]

Oh 100% agree, many startups abuse employees with fake kool aid and pretend dreams. Not just startups, trading companies do this, sure other markets do too. Talk a lot about the awesome that will happen down the road, but nothing in writing (or writing that contradicts claims). Feel bad for people that sign up for such bum deals...

[arcticbull]

Where do you draw the line? How about employee #1? They're probably paid the same (almost zero) as the founders, over almost the same period of time, but with 1/10 of the equity. Are they employees or founders? Neither?

[brianwawok]

Should be a curve I guess not a line.

But every situation is different. Some employee #1s make say 75% of market rate. Some make less. Some make more. It depends in each case if it is "fair".

I am not sure what the word founder really means. There on day1? > 33% of the company? Not sure.

[Klinky]

If it's a headache perhaps options aren't the best form of compensation? Options do have a stigma of being used as a way to pay people less right now, while later screwing those people out of the value of those options when it comes time to cash out. Companies need to make sure they don't become hypocrites, play favorites, or just act like huge greedy assholes when it comes time to share the wealth.

[wtvanhest]

This is a place where a regulatory response is probably needed.

I would like to see a law that says that if a company blocks a sale, the employee can auction their shares off to current investors and the company has the last chance to bid. It may change control if the company doesn't want to buy the shares, but it does not change investor relations or any material work the founder/team would need to do to stay in compliance.

[hkmurakami]

>Employees are unaware of these "veto" clauses

Please correct me if I am wrong, but don't all option agreements have a "no transfer" clause that explicitly covers sales of the securities?

[ncd]

They do, and this Agreement specified that the ROFR was the only practical limit on transfers. Indeed, the sale passed the scrutiny of outside attorneys who looked at all documents that had been given to the employees.

It wasn't until a buyer had been found and the company had been notified that they pulled out the company bylaws and revealed this extra clause deep in the bowels of that document--a document which had never been furnished before.

[hkmurakami]

Wow that is... Pretty questionable wrt ethics (why did they explicitly call out ROFR, limiting their rights in the first place???).

Really appreciate you sharing.