[AlwaysBCoding]

The situation I recently went through reads like a horror story:

> was the founding engineer at a startup, essentially do co-founder work for 18 months getting the company off the ground.

> company is a breakout success, raises a large growth round.

> founders each take a couple of million dollars off the table in secondaries, no option for employee liquidity.

> founders start thinking about early employees as "problems" because they have too much equity and could easily hire multiple FAANG engineers for the equity comp they're paying the early team. push all early employees out of the company.

> horrible ego-based decision making such as this kills the company culture and runs the company into the ground. company is a mess, stock is now worth significantly less.

---

> early employees have to pay money to exercise their stock options which are worth millions on paper. early employees have to front money to pay taxes on the capital gains on the stock.

> founders have pocketed millions, off the backs of other people's work, while the employees who built the company all owe huge tax bills and have no path whatsoever to ever seeing liquidity with the floundering company.

> all of this is because the employees did their jobs too well, the company grew too fast, and the founders egos got completely out of control.

To be blunt, situations like this should be illegal. joint-stock companies aren't slush funds for three people to personally enrich themselves off the labor and capital investment of others, they're supposed to be entities where all shareholders participate in the upside of the value creation together. Until there's some sort of legal framework for pursuing class-action lawsuits against founders who defraud their employees like this I don't think this situation will ever get better. There are already laws against self-dealing transactions by company executives, I don't see what is different in cases of extreme founder liquidity off the backs of other people's work.

[llmblockchain]

This happened to me as well, but even worse because they killed my equity by getting rid of me on month 11 of year one.

I joined a company as employee #2 (though, I started the same day as #1). I started working with the founder and co-founder in a We Work office that barely fit the four of us.

Within 11 months the company was worth over a billion dollars and my wife was about to give birth. At this time the company had around ~15 employees (mostly in sales).

I find a job posted on our site for a job that sounds an awful lot like mine. The founder/CEO is suddenly vary combative with me every day over nothing (shouting at me). I felt like he was trying to get me to react negatively to him. I just dealt with it because my wife was about to give birth.

One day I come in and I just couldn't deal with it anymore when he was shouting at me. I basically told him to stick it up his ass and he went ballistic. I was "fired" at this point and had to leave and leave behind my company laptop.

I get a call to meet with the founder the next day to discuss the exit. We meet at a cafe. He presents a folder with a bunch of "evidence" for why I was being let go. None of it was really damning in any way (he had private emails between me and an employee, Slack private messages, etc). He tried to spin some narrative as to why I was being fired and not given my stock even though the cliff was around the corner. I also had to return my signing bonus ($XX,XXX).

I told him good luck and showed him the job posting that was dated after he found out my wife was giving birth. I also had printed email exchanges proving the company was doing some less-than-legal operations.

Needless to say I got to keep my signing bonus, but not the stock. I also got glowing recommendations for every job I applied to after that.

[indoordin0saur]

Wait, your 11 month old company with a handful of employees was valued at a billion?

[llmblockchain]

Yes-- and worth more today.

I don't think it's an ordinary path. The founder had success before, and the company I was a part of skipped seed and started with a series A before raising more pretty quickly.

edit:

From the looks of it, they have 500+ employees now.

[indoordin0saur]

Seems like you would have had a good case to a lawsuit, at least enough to give them a headache settle in court. Strange that they dumped you if you were valuable to the effort. Did they just squeeze you for what you were worth and decided they could get by with other engineers or did they not see your work as valuable?

[llmblockchain]

> Strange that they dumped you if you were valuable to the effort. Did they just squeeze you for what you were worth and decided they could get by with other engineers or did they not see your work as valuable?

Yes and no? I was certainly brought on as a valuable asset to the company.

I was introduced to the founder via a mutual acquaintance. I had other job offers at the time and had no intentions of joining, but the acquaintance asked me to speak with the founder and hear him out. I was basically tossed an offer that was silly to refuse.

I provided a lot of value and was responsible for building the most successful product the company offered.

I think things went a bit south when they wanted to raise even more money and bring in more investors. I think I was a bit of a black sheep in the company (I didn't have the phd+company pedigree as the other founding members). I felt like maybe I didn't look so good when they presented to investors. They certainly pitched the company as being built by the elites of AI and machine learning... and yet there I was ;p

[nine_k]

If we talk about stock options, the company is still private, and no stock was issued.

Paying taxes on options for stock that may never materialize, or never be worth much, sucks.

I won't (and didn't) buy options before an IPO or an acquisition is scheduled, even if they had been granted, unless I have money to gamble on it. I won't consider options as a part of my pay, unless I'm a founder %) They are but a lottery ticket, even when your personal effort may significantly affect the odds of it winning.

[bagels]

The options are exerciseable whenever they are vested (and if you are on good terms, sometimes before that). This can be a waste of money, or a huge boon in terms of taxes avoided.

[nine_k]

In what circumstances would that be a huge boon, and how much risk / uncertainty is involved?

[bagels]

Let's say you have the opportunity to sell your shares in the private market for $2/share a few years after you've vested.

Exercise earlier: Strike price: $0.10 FMV at exercise: $0.20 Taxes: AMT on $0.10 gain (might be $0 in taxes) + Long term capital gains on $2.00-$0.10

Exercise at sale: Strike price: $0.10 Taxes: short term capital gains on $2.00-$0.10

Assuming a decently sized transaction: If your marginal rate is 35%, your long term capital gains rate might be 20%, saving you 15% of the sale price in taxes.

There is a risk that the money you pay to exercise ends up buying you worthless shares.

It all depends on the specific numbers. The longer you wait to exercise, the more likely you will have to pay significant AMT taxes (assuming increasing valuations) to the point where it no longer makes sense to exercise because you'd have to pay so much in AMT taxes for shares that may become worthless.

I gladly paid $10k to exercise so I could save $150k in taxes because I thought the odds were high that I would later be able to sell my shares for more than I paid.

[carbocation]

I'm focusing on a tiny technical detail here but from the description, it sounds like the ISOs weren't set up with an 83(b) election which is another bummer.

[dpe82]

A tiny, but *absolutely critical* detail!

[1024core]

I recognize some of those words....

[tomp]

employees aren't shareholders

they get options, not equity

personally, I never understood why they don't get actualy equity (in particular, given that the options are "fairly priced" i.e. the call price is the latest equity round price, making them worth literally $0!)

and that equity should have the same terms as investors get (no "liquidation preference" lol) because - guess what - you're literally exchanging your labour (== money) for them!

[efnx]

Because that’s the racket! They can’t pay you top dollar because they’re a lean startup, so they make up for it by adding “equity” to remuneration. But that equity is in the form of options which you have to buy with your not-top-dollar salary, so it’s unlikely you will. Then you leave the company before an event and those options expire after a month or so, going back into the pool for another engineer to do the same. The house always wins!

[0xB31B1B]

its not done this way because the founders want to screw you, its done this way because of a bunch of arcane tax laws. Its complicated to explain, but the origin of all of these weird "options not equity" and "90 days to expire" type things are because of US tax law. If the startup could give you shares without putting the employee and the company both in a very puntantive tax situation they would.

[AlwaysBCoding]

This isn't true. Company executives don't owe a fiduciary duty to employees or holders of stock options in a company, they only owe a fiduciary duty to concrete shareholders. There are a lot of founders of less than high moral character who want to keep it this way.

I sent a Section 220 demand letter to the founders of this company to get transparency on the money that was taken during the secondary stock sale and they're currently fighting me on it because I wasn't a shareholder at the time the secondary sale took place, I only held options in the company at the time.

This anecdote is illustrating a real world situation in which it is being used as a way for founders to try to screw their employees, not because their hands are tied by some arcane tax law.

[indoordin0saur]

I'm pretty unknowledgeable when it comes to tax law but... If you're an employee at a series A start-up valued at $50 million and part of your annual salary pay package is being issued equity worth $100,000 do you have to pay tax on that immediately? If you can't cash out because there hasn't been a liquidity event how do you pay the tax?

[AlwaysBCoding]

you are issued equity in the form of stock options. Stock options give you the opportunity to buy stock in the company at a specific "strike price" enshrined as the fair market value of the company when you sign your offer letter.

you aren't actually vesting stock month to month you are vesting your stock options. when you "exercise" your stock options you pay the company the strike price * number of options you want to exercise in order to purchase the actual stock in the company.

If the company has grown in value since you joined then you would have a taxable event upon exercising your stock options because you are buying the stock at the strike price, but the fair market value of the stock is significantly higher, so that is a taxable capital gain that you have to deal with.

Any sane company will give you a 10-year exercise window after leaving the company to actually pull the trigger and "exercise" your stock options so that you don't incur a tax liability but some companies only give you three months. Which means not only do you have to front the cash to "exercise" the options, but you also have to pay the tax liability on the capital gain of stock for that year.

If you're asking how you can possibly be expected to pay the tax on a million dollar+ capital gain, without ever even having access to cash or a guarantee you even will have access to cash in the future, then welcome to the scam that is being an employee at a Silicon Valley startup and the fucked up logic of the US tax code.

[0xB31B1B]

my comment was a response to the comment above, complaining about options and exercise windows offering options, not what you're talking about WRT secondary sales and corporate privacy. The reason we have options and all this weird stuff is indeed tax law. Private companies do not grant equity because it is generally extremely tax disadvantaged to both the employee and the company itself. For instance, the 90 day window is a consequence of ISOs to NQOs, which has a direct tax consequence. I'm not arguing that 90 day exercise window is absolutely better than 10 year exercise window, im just saying that everything is downstream from tax and corporate law.

[georgeecollins]

That's elective. It's fine and not uncommon to just give employees stock (actual shares, not options) in a company as compensation. Famously Wizards of the Coast gave shares to employees and vendors to create alignment.

Someone is going to point out that giving actual shares is a taxable event. And that is sometimes the rational for options. But there are work arounds: you can put shares in a 401k for example. 401ks were originally created to be employee incentives, but morphed into being used for retirement, but you can still do it either way.

[bluGill]

There are a lot of ways to do this. However you should NEVER have any significant value in the stock of the company you work for. It has happened - and will happen again - that the company you work for goes bankrupt unexpectedly and now not only are you out of a job but your savings has vanished as well! Even if the company is doing well you need to diversify your savings out of that one basket.

There is one exception: if you are high enough in the company that you actually know the non-public information as it happens (not either because you need to know or months later in the all-employee meeting). Then the shareholders demand you hold a lot of value in the company so that if you do something bad for the company it hurts. Most of us will never be that high.

[georgeecollins]

Financial advisors will advise you against the risk of having all your wealth in the company you work for for just the reason you describe. If you have a net worth of $10m and it is all in the company you work for you could in one moment loose your job and be broke. So you should diversify.

However, employees often have virtually no net worth (why else are they worried about paying taxes on share, except they can't take the risk of loss? I can say from experience that when I worked for a startup but had previous personal financial success I just absorbed the tax bill for exercising options knowing that the shares I paid taxes on could ultimately be worthless.).

So if all their net worth is in a company its not ideal but it is a risk you can take when you are young. I see the argument of avoiding taxes and not taking ownership until the shares are liquid-- good arguments, it is true-- as being used as ways to justify giving employees shares or options that are likely to be less valuable then the ones held by founders and investors.

[bluGill]

If you have almost no net worth than put it in a bank savings account. If you have more than almost nothing put it in 401k or IRA plans - a house is sometimes a good option too (but only if you will live there for a decade, and of course location location location). Only when you have the above in great shape should you thinking about anything else more risky.

[fardo]

Actual equity is hard cash, options are a potentiality of cash.

As the company with equity, any calls you’re selling are guaranteed covered, which hedges against downside loss of having given away equity and it exploding in value. Calls also theoretically align incentives better than equity because it gets the staff member personally interested in seeing the stock rise, rather than just selling immediately to take profit if they’re short your company’s future outlook.

Lots of other nice properties - If you sell the option, either discounted or at some full price, you make a money premium, which helps runway. If the stock falls, you make money from having chosen options and basically don’t have to give the employees anything. If the stock rises, you’re probably making great sums from your (much larger) equity share, and your losses versus just giving them equity are essentially capped at the difference between the current price and strike price, instead of theoretically unlimited cost. This is easily quantified with some multiplication when issuing the options, meaning in a growing company, you have knowably limited exposure, and essentially are just giving them the equity you would’ve given them anyways.

[tomp]

I think you're confusing a few things.

First of all, we're talking about pre-IPO startups, so you can't just sell the stock.

Second, talking about "company loses money because it gave equity to employees" is as non-sensical as saying "company loses money because it gave equity to investors".

You're not giving away equity, you're exchanging equity (at present value) for cash (from investors) or labour (from employees). They're both investors (investing either their money, or their time/skills), and by investing, they're taking ownership of any potential future gains or losses (and by letting them invest, the company is giving up that potential).

[fardo]

>First of all, we're talking about pre-IPO startups, so you can't just sell the stock

This is often but not universally true - about 40% of companies allow you to do so, and about 40% of those that allow you to do so allow those sales on secondary markets [1]

>company loses money because it gave equity to employees is nonsensical

You lose money in the sense that the gains beyond the strike price which you would have realized had you not sold the call option are your losses: you could’ve not sold the option and profited on that rise instead. You have lost the difference in the profit between these two investment plans.

> You're not giving away equity

I was responding to someone asking “why don’t they just give the equity instead as compensation?”, as opposed to writing call options against it - assuming that as a company you want to incentivize workers to work by setting aside some fraction of your equity which they may receive, these are the reasons a company might prefer to “give” employees that equity with options, instead of discounted equity or stock grants

[1] See page 8 footer of https://www.gsb.stanford.edu/sites/default/files/publication...

[matuszeg]

I have received equity as an employee. When I started, the company was very early and their evaluation was still very low. The way it worked was that I had to pay for the equity grant upfront. I forget exactly how much but it was<$200. This is also how it worked for me as a founder of a company.

That same company eventually raised a sizeable equity round and then began issuing options for new employees. If they were to continue issuing equity grants, the cost to purchase the grant would be much more than $200 (likely tens or hundreds of thousands of dollars). Alternatively, if the company were to give employees equity grants directly instead of having to buy them then that would count as income and the employees would owe taxes on the equity gained. The tax bill could also easily be tens or hundreds of thousands of dollars.

Options avoid all of that and defer the upfront costs that come with an equity grant.

Imo, the real problem is that options can be clawed back once you no longer work for the company.

[indoordin0saur]

IMO, the real problem with options seems to be that you have no idea what they are truly worth. You have the option for 10k shares and you know the company is worth $200 million, but you have no idea how many shares are outstanding. Meanwhile, shares are being diluted, or maybe they aren't. You're just kept in the dark as to what is happening. At least that was my experience.

[OJFord]

They're not a subset no, but the two aren't mutually exclusive.

They can get options, they can get equity, they can get nothing (beyond salary).

Options are common probably because it gives (the company) more or easier control over what happens when.

[gedy]

Not to put you on spot, but this behavior is unprofessional, and you should name names IMHO.

[AlwaysBCoding]

The company is Phantom, and the VCs are Paradigm.

[dpe82]

I think "this happened at a crypto company" is important context to your original post.

[brendanyounger]

Crypto? I'm _shocked_.

[georgeecollins]

I wonder if this problem could be avoided if the early technical founder insisted on having the same class of stock as the founders. IANAL but in my (limited) experience these games are easier to play when the founders (or often the C-suite people) have a different class of stock then key employees. Or that's how I have seen the game played where one employee can have a liquidity event and another doesn't, or the dilution is unequal.

I am no expert! Can someone explain to me if having the same class of stock as the founders is a meaningful protection?

[AlwaysBCoding]

I'm not sure if you even need the same class of stock as it is needing some assurance of the same liquidity rights as founders. If the company charter ensured that any secondary liquidity event would have equal participation between shareholders (including employee stock options) it would be a lot healthier and prevent this class of fraud.

It's such a garbage situation right now for employees, because even if you find product-market fit, you do the work and your company is successful you can still get dumped on by your founders taking secondaries and subsequently checking out of the company.

[georgeecollins]

Isn't "some assurance of the same liquidity rights" just a way of saying "the same class of stock". The same class of stock will have the same liquidity rights.

[AlwaysBCoding]

you don't need the same voting rights, for example