If you have startup stock options, check your option plan(blog.conspire.com) |
If you have startup stock options, check your option plan(blog.conspire.com) |
Basically the way this works is that we give new employees an up front lump sum in the amount of how much it costs to purchase the shares of the company. The employee then purchases those shares from us in line with a vesting agreement. All warrants and conversions are exactly the same as the founders shares.
This means that they pay tax on this purchase as regular income rather than capital gains up front with the money we give them for it. This prevents a heavy tax bill at conversion and allows them to retain their vested shares regardless of if they work for us or not after the first 12 month vesting period.
We calculated that the up front taxes are magnitudes cheaper in the long run because the increased valuation will cover those differences handily and there is no waiting period like there is with capital gains tax.
In the end though our intention was to make a simple way for our employees to actually own the stock we give them as compensation and it not be something that they can lose or be restructured easily. If a VC or acquisition wanted to restructure that away for employees then they would be forced to restructure everyone's, so we are all in.
Since valuations of pre-series A companies is effectively $0, the cost for employees to buy their shares upfront is minimal (literally a few dollars for a few percent).
But as a company raises capital, it's legally required to have a "409a valuation", which establishes the "fair market value" of the stock. Once this happens, it can cost $x,xxx's of dollars for employees if they're given founders stock (restricted stock) upfront, compared to stock options that have no upfront cost.
One solution to this is to give employees a signing bonus to buy the restricted stock upfront, so it cancels out the amount they owe upfront. Alternatively, you could grant stock options, and sign something that says the company will give them a bonus equal to the exercise price of the options.
The boundary cases where there is a contentious firing will have to be taken case by case but then whatever that portion of the taxes are due for the percentage vested we would compensate the bonus as though it was 100% vested based on the agreement.
And of course, yes, the company may say "we're spending our money to buy this for you, don't worry" the truth is money is money. Someone (company or you) is buying the option early, thus having less money to spend on other things.
Alternatives could be the company pays you that money, so it's yours to spend as you see fit. Including, someday, buying the option if you want.
Hope that helps!
Ignorance in the case of not knowing it can be done - many "startup" lawyers are operating with a playbook written in 1996.
Cash conservation in the sense of "holy schmoly I'd have to pay $X,XXX upfront in taxes to cover their option purchases???"
And "justice" in the sense of "well I'm taking a personal risk as a founder, so if you're not all in with me then suck it and your options will just go back in the pool when you quit."
My (very basic) understanding is that this works fine early on, but once a company reaches a certain size & valuation it becomes hard to continue.
Mostly because they don't have experience with option plans, and lawyers tend to recommend what's best for the company (not what's best for the employees).
I granted my early employee founder's stock (same as mine), mainly because I was screwed by stock options in the past. But I had to actively request this from our lawyer (the default is for lawyers to suggest stock options).
Then the idea is that they pay, say, 6k in taxes on the bonus. Then they write you a check for 20k to early exercise the options and file and 83b.
So they're out 6k in taxes but on the other hand they've early exercised so they actually own the stock (subject to 4 years of vesting).
1) What happens if they can't afford the 6k in taxes?
2) What if they don't want to early exercise? Can they just keep the bonus in cash?
3) What if they leave the company in less than 4 years. Do they have to pay the pro-rated portion of the bonus back?
2) Cash bonus would be dependent on employe exercising the grant.. it probably shouldn't be presented as a bonus, so the employee doesn't have to select between the bonus or the stock. If they prefer a cash heavy compensation package, that should probably be discussed in isolation from a stock purchase reimbursement / bonus.
3) This is a tough question. If an employee leaves before 4 years, the company has to buy the restricted stock back from the employee. Perhaps there's a way to legally require the employee to return the buyback check to the company.
Interesting. Can you provide more detail on this? Do you just pay the lump sum outright as a hiring bonus? Obviously this works at early stages when the stock is like $0.001/share, but what happens after you've raised a few rounds and the current fair value of the stock is in the 6-7 digit range?
Also, are you not worried about reporting requirements once you reach a certain number of shareholders?
As a young and naive engineer I learned of this fact the day the first startup I worked for was acquired. First I read the big number that was to be paid for the company, was ecstatic, and immediately starting doing "x-million times half a percent" in my head followed by a sinking feeling as I read the clause stating that common stock holders would get $0.
In retrospect it sounds obvious that if the company sells for less than the money the investors put in, your x percent is worth nothing. But it's easy to get carried away thinking you actually own a percent of the company, and that a sale means a pay day for you. Don't let the first word of acquisition get you too excited, the come down sucks.
So what you should do is value the stock options at 0. If you have the spare cash, buy them as early as you can, but don't count them for anything. They are a lottery ticket that your company is the next Google and like any lottery ticket they are likely worth nothing. If the startup is offering to pay you half of what you'd make elsewhere, waving stock options at you telling you they'll make you rich, consider if they just handed you a pile of lottery tickets and half a paycheck. If you'd still take it (maybe you really like the people, or want to work in this field), go for it. Otherwise, they are just trying to get your for a far cheaper price than you'd get elsewhere.
They told me they were giving me 5,000 shares (for example). OK... 5,000 of how many? What % of all the shares is 5,000? My understanding is you need this information to know if the equity is worth something or nothing. Yet, they really don't want to give me this information.
For one of these jobs the recruiter I was going through (this is a big recruitment company) literally told me nobody has ever asked these questions about the options they were getting.
Am I doing something wrong? Do I have a misunderstanding of how these things work? Is it unreasonable for me to be told the outstanding shares?
Founders often end up in a situation where there is significant dilution and as the hockey stick changes into a slightly different shape they know that nobody's options are worth anything.
Founders with integrity will acknowledge this and make adjustments. Those without integrity pretend it isn't true and create a culture of secrecy around options grants/terms.'
Edit: You should also be able to do the math on what your options are worth fairly easily as funding rounds approach and valuations occur.
This is a very common occurrence, and unless you have a seat at the board, you are completely at the company's mercy when events like this happen.
Usually they will make current employees "whole," although the definition of that varies a lot. If you've left, though, you are completely shafted. The board will say "well you are no longer contributing to the company" but the same thing applies to the VC fund that invested last round and didn't this round.
There are an amazing number of hoops that you have to jump through for options in a start-up to pan out, and you have to hit essentially all of them, or else they are worthless.
http://www.scribd.com/doc/55945011/An-Introduction-to-Stock-...
It gives a detailed background of a lot of key issues related to stock options and some really well reasoned recommendations that are applicable to anybody taking a job involving stock options.
Maybe I'm reading this incorrectly, but if you don't have single-trigger or double-trigger acceleration, the employer has all the leverage they need to renegotiate your (incentive) contract.
The difference is the starting point of the negotiation. If the acquirer wants to keep you, the "right" language in the option plan means the starting point is your original comp package. You have to explicitly agree to a reduced package for it to change. If you have the "wrong" language, there is simply no deal in place to start the negotiation.
You can honestly say, "sorry, not my decision, I can't stay if I don't get all my options (now or on schedule)". That could be a somewhat stronger negotiating position.
Why would anybody agree to that? At least insist the first half percent vest proportionally over the first year with each paycheck.
If you can arrange something more advantageous, by all means do it, but I think you're going to have a hard time negotiating away the cliff. Having the cliff ensures that employee has proved herself before getting a stake in the company, which most investors and founders believe is important.
I don't object to 4-year vesting. I don't object to cliffs, either, per se. But I wouldn't consider being treated that way for such a tiny stake as 1%.
Firing someone just before things vest might trigger ERISA. Don't do that.
If you're paying a full salary/benefit for them, the options etc is really just trying to keep them from jumping around? I'm open to all ideas but would like to find some common/typical silicon valley way to do this for startups.
If you're going to found a company, go for it. I'd like to do the same myself someday. If you're going to work for a startup, make sure they pay you well. In dollars (or your local currency). I treat stock options as a lottery ticket, not a substitute for income.
Basically working for a startup is much like working for a big company. Neither really offers you long term stability. You have to deal with politics in both. The biggest difference in my opinion is that startups typically have really long hours and some pretty big egos.
I joined a startup around 2009 as an early employee, left after a couple years, and bought the vested stock. (The company is based in the US, and I'm not a US citizen, FYI). I've been holding on to these stocks so far. Compoany has rasied a small series A just around the time I joined. The company has raised a few rounds of funding since I left.
It now looks like the company may IPO/ or be privately acquired. I have not been in touch with anyone in the company over the past couple years.
What steps do I take now to ensure I don't get screwed as part of the exit, and/or my stocks diluted to become meaningless? I'm looking for general advice.
Think of it as both giving back and pushing back on what can be predatory treatment of employees.
1. Acceleration on change of control (the article covers this). 1 year acceleration is fairly common it seems. There should be something here. But fully acceleration of granted options is probably more than you realistically can hope for. After all, you didn't need to work for that year to get the options. There should be some balance here.
2. Rule 83b electoins. Particularly relevant for pre-funding startups and especially for founders. It allows you to pay all the tax on options up front rather than be hit by yearly AMT bills;
3. Clawback agreements. This is a nasty one that was most publicly brought to light with Skype (the second time around). A bunch of executives were fired before the acquisition went through, allegedly for performance reasons. Their options could be bought back at issue price, resulting in a windfall for SilverLake of possibly several hundred million. Want to sue? Well the company was incorporated overseas. Good luck with that.
The moral of the story is watch out for any rights the company has to repurchase your options and at what price.
Repurchases in general aren't necessarily evil. It's good to avoid having a lot of shareholders for early stage companies (due to SEC limits on number of shareholders for non-public companies) but such repurchases need to be fair.
4. You're taxed on options based on their fair market value when they're issued barring a Rule 83b election;
5. Liquidation preferences. VCs generally have some form of preferential treatment on how they're repaid in the event of a buyout. This can take a number of forms.
The most reasonable is that they're simply guaranteed to get their money back. Meaning if they paid $10M for a 40% stake in a company that gets bought for $15M they're going to get their $10M back instead of 40% * $15M = $6M. That's not unreasonable.
But what's not reasonable (IMHO) is "participating preferred" liquidation preferences. What this means in the above scenario is the VC will get $10M of the $15M back and then 40% of the remaining $5M. So the other 60% are divvying up $3M. That's a lot less attractive.
6. Bonuses in lieu of acquisition. You may see a headline that says your company has been bought for $100M and you own 1%. Great! You're now a millionaire! Not so fast...
It may turn out the VC owns 40% participating preferred with $20M funding and the company is actually only being bought for $50M. The other $50M is incentives in the new company paid to the founders and possibly key executives.
So you're only getting 1% of $30M.
7. Dilution. Your 1% may not be 1%. You may have been told something like "there are 1M shares outstanding and we're granting you 10,000 options over 4 years with 1 year cliff". So you own 1% right? Well, maybe you do and maybe you don't.
The company may be reporting outstanding shares rather than outstanding shares plus any obligations it's made. It really needs to report on a fully diluted basis. There may be convertible notes and rights of existing VCs to buy in in future funding rounds, etc.
So anyway there are a lot of potential traps.
Should i consult a lawyer before i join this company? If so, can you guys recommend some lawyer contacts? I have been in bay area for last one year and i don't have much contacts. Help! Thanks
Generally I prefer to leave the legal stuff for my lawyer and focus on coding, but having a reasonable knowledge on the case is preferred.
In my opinion, you should think about instruments such as RSU's and options as accruing to you at the date of vest, not the date of grant. From an accounting standpoint, that's how the company is viewing it, or at least should be.
As a founder, it's good to know what terms are "standard" and what terms are more pro-employee or more pro-management. Then you can use that information when setting up the option plan with your lawyer, and push back if you feel the lawyer is overzealous in protecting your own interest.
Once the plan is in place, it's unfortunately too late for the employee to seek more favorable terms.
My previous employer gave me stock options on top of my salary. I never really cared about the stock options too much. A few months ago, I found out the owner created a new LLC (and moved the company to this new LLC) essentially making my options worthless overnight.
I would rather get paid my true market value.
Seen this way way too many times. I've fell victim to it myself, staying at someplace for too long.
I've never regretted leaving a place too soon.
What annoyed me more than the couple $K I lost from the options was the opportunity cost of not leaving the job earlier. Like all startups, the company paid below average wages (since startups pay a significant proportion of compensation in the form of options) so if I left earlier, I would have gotten a large pay bump from having joined a non-startup that paid a normal salary.
that is what i've been wondering about. If going into startup i take a $50K/year salary hit wouldn't it mean that i'm actually investing $50K/year and thus should get the same quality and price of shares (not options) what the early investors do?
If the startup took on any debt, at the front of the line is a bank. Their 'note' usually gets paid first. $POOL -= $BANK
When people invested in the Series A, B, C, ... their stock came with a 'liquidation preference' (which can have a few variants, but the two most common are, the investor chooses if they want the liquidation preference or the common value, the investor gets their liquidation preference and the common value. Note that these numbers are in $dollars not in $shares, so if VC A puts in $1M dollars with a 2X liquidation preference they get back $2M dollars. $POOL -= $LIQUIDATION
Sometimes at the same level, or just behind the investors, are convertible note holders, who gave money or equipment in exchange for shares. They often have the choice of getting either their money back, or the shares. $POOL -= $NOTE.
At this point, if there is anything left in the pool it gets distributed to common shares.
A nice rule of thumb is that the most common liquidation preference is 2X (these days anyway) so if the price is < 2X the amount of money raised to date, the common stock will not have any money allocated to it.
And in those situations it makes no difference if your stock 100% vests on acquisition or not, it is still worth 0.
I had this happen to me in a previous start up. I wasn't really surprised.
A VC invests $10MM at a $100MM valuation and owns 10% of the company with preferred shares. For simplicity, we'll assume they are the only holders of preferred shares.
An employee is given $500,000 in common stock, equal to 0.5% of the company at the same $100MM valuation.
The company then sells itself to an acquirer for $11MM, substantially below the $100MM valuation. The VC, with preferred shares, gets paid first. So they get their $10MM back. The remaining $1MM would then be divided among common stock holders. The employee above would get $5,000, instead of the $55,000 that 0.5% of $11MM would imply.
In the real world, founders, executives, and VCs often get preferred shares, which ultimately screws regular employees.
The mechanics & technicalities are beyond me, but the consequence is as described above.
Founders still behave like VC money is scarce and engineering talent is plenty. I am seeing many of these companies struggle to ship competitive products due to lack of engineering talent, and so I am hoping we see these startups fail and lose to big tech companies that value their engineers, and force the VC funded startup scene to totally re-evaluate their 'standard' offers so that those of us who would prefer smaller teams can join one on fair terms.
My question is: how does this actually benefit me in the big picture? I'm approaching the 10 year date when my options agreement is going to EXPIRE, and it's still unclear to me whether I should exercise them, because as far as I can tell, they're just very expensive (when you consider the tax implications) paper. What's the endgame for this success story putting cash in my pocket? Profit-sharing? Other than the usual big-bang exits you read about, I have no clue.
If the company is successful-but-not-spectacularly-successful for a long time, one way to handle such issues is by structuring the flow of money from the company to the founders as dividends - that way, you'll get paid some fraction of what they get paid, indefinitely. Note that there are other ways to structure that particular money flow, though, and there's very little you can do to influence the choice.
For a select few companies, secondary markets exist that trade in illiquid stock. I understand that many equity agreements forbid selling on those markets and/or quickly selling on those markets. However, this only works if the buyers have a reason to believe that the stock will ever be worth anything at all.
You mention valuations, which suggest that some fairly savvy people have decided to exchange money for shares in this company. Do you know how the investors expected to get paid back? It's possible for founders to screw investors, of course, but this may be another thing worth looking into.
But this strikes me as a problem your company ought to care about, especially if your options were part of a compensation package with below market salary, so maybe bring it up with the relevant people? It does them little good to get people like you upset, take a reputational hit, etc.
What you should do depends heavily on whether you have common or preferred shares. If you have the options to buy common shares, which you probably do, they're worthless so don't even bother exercising them, the people who are invited to the board meetings have all sorts of routes they can take so that your options will become meaningless, so to spend the money to exercise and pay the capital gains on them is madness.
My advice is to recognize that you have a sunk cost (look up sunk cost fallacy) and jump ship. Keep applying to companies like Google, Facebook, Amazon, Microsoft, and other larger companies until one makes you an offer, and those companies will give you real compensation packages and stock plans that you will be able to easily turn into American dollars in a year.
Also, if you exercise and leave, some places like SecondMarket, Equidate, MicroVentures and a few others provide a chance to offload some of that equity.
In regards to salary, your company should be approaching a maturity point where salaries are defined in bands, by HR (by someone titled "Compensation Analyst" or similarly), not decided on a case-by-case basis.
Careful on this one - when you buy, it's a taxable event. The spread between what the IRS thinks the company is worth and what you paid is taxable. You have to pay that NOW.
I've known people that were screwed on this - strike price was around 1, value by IRS was 8 (based on funding rounds). By the time the person could sell the stock, it as worth .013. Fun!
If your company raises funding in the future and the price goes up to 5.00 it's all profit (aside from capital gains tax when you sell, but chances are you'll pay long term capital gains since you're already a shareholder and these things don't happen overnight). This is better than buying in after the round of funding where you'd pay taxes on the difference of 4.00.
This is why it can be a good idea to exercise your vested shares before a round of funding where the price will go up. It's a trick to minimize your taxes. Not saying there's any less risk in purchasing the shares of a startup however.
This is not true, or not necessarily. It's calculated for AMT, so if you're already paying AMT, or would be paying AMT with the addition of this income, then yes: You'll be paying that tax now. This is true for many in California with the high state taxes and a relatively high gross income (versus national averages).
However, if the intrinsic value portion of your exercise (i.e. fair market value minus your strike price) as an addition to your AMT worksheet does not indicate you'll owe AMT for the year, then you will NOT see a tax event. This will be true for many non-Californians exercising after their first year, or even after 4 years, depending on the growth of the fair-market-value.
If you are at risk of paying AMT and your intrinsic value is in the low 6-figures (or lower), one solution might be to wait until the beginning of a new tax year, exercise, and quit your job... then take a year off from wages and work for equity (i.e. form your own startup). You'll avoid paying the 26% on that money due at exercise. If you've been paying AMT in the past, you'll even get a tax credit at the end of the year. Obviously, this plan is not without risks, should only be carried-out if you believe in solid growth in the startup for which you own equity and believe in the ability of the new startup you're founding and/or joining. Also, and obviously, you should consult with an actual accountant before considering this crazy idea ;-)
Because they do matter and are still part of the compensation package. There's still a significant difference between a payout that equates to two year's worth of salary vs another that pays out one year's worth.
Why would you want to do this? Wouldn't it be better to wait until the company is about to be acquired or IPO so you're not spending money on something of no value?
If they are NQSO, the difference between your option price and market price is a taxable event. So if your option price is $1 and the company IPOs and has a price of $12 when you exercise, you owe taxes on $11 per share (this is a gross oversimplification). Now if you had purchased before the company is acquired/goes public, the price might just be $5 so your overall tax bill is lower. You exercise at a lower price and hope the price goes up.
You're usually correct, except for two things (in the US):
1) Holding stock for a year before selling is taxed at the lower long-term capital gains rate (~20% vs ~39.6% at the highest brackets).
2) Exercising an ISO is seen as a taxable income for the purposes of the Alternative Minimum Tax, so exercising late (when the difference between FMV and Strike Price is high) has a higher chance of incurring an AMT burden, whereas exercising early does not incur an AMT burden (because the spread is small) nor a normal tax burden (because this is how ISOs work).
You should not go work for a company that will not tell you the total number of outstanding shares (so you can calculate your % ownership). It's basically the same thing as saying that they're going to pay you 100,000 a year but not bothering to mention the currency.
In other words, if I have an option for N shares that are currently valued at $X, why do I care whether N is 10% or .0001% of the company. The "value" of the grant is the same in either case, no?
Fast forward 10 years ... The company tried to go public and they had to do a 5760 to 1 REVERSE split to shore up their share price. People who naively thought they had 100k shares ended up w less than 20. Thecompany had to cancel the planned ipo, too.
Whenever someone says something like that during a negotiation, you can be sure it's because they don't want to answer the question.
Other good ones:
-"This is totally standard"
-"That form is industry standard"
-"Nobody else has ever had a problem with that"
"...then why can't we take it out?"
"The service level agreement says if something goes wrong we'll get 50% of their staff working on it."
"How many staff do they have?"
"I dunno, but 50% of it sounds like a lot!"
Ask them if they want employees who would sign contracts which lack key bits of information.
I've bitched before about losing potential employees to other companies who, they said, were giving "more options," when we were offering them 0.5% of the company.
You should be asking, and if they aren't answering, realize they are offering you cereal boxtops. Whether you choose to value those at $0, or be insulted at walk away, if up to you.
Assuming if you're truly ready to walk if they don't share, this could even carry over to your negotiation. At this point, it's just business - if this company is willing to give you $XXk more than a competing offer with more candid numbers, then the cash could be worth it to hedge that risk. Depending, of course, on how much you value the upside.
1) Be open with them and tell them that without a cap table you have to assume the options are worth $0. Use that to push for more salary.
2) The reason for not disclosing that information is often that the company is close to another fundraising event (an IPO for example) and that is very confidential information. It's definitely not a bad thing.
3) A safe assumption (to use yourself, not in negotiations) is that the company will exit at around $10/share. There might be a reverse split or something so take this assumption with a grain of salt.
My experience was not that the company was being malicious. I joined and it worked out fairly well.
3) This is not a safe assumption at all. Just because it worked well for you in one situation does not mean that it will work out in all scenarios.
The reason that companies sometimes don't disclose this information is that when you state ownership as a % it can seem minuscule emotionally. Anything less than 1% just doesn't seem like much even if it actually it.
That being said I don't think this is a good enough reason. Companies should disclose this information and then educate candidates about how to interpret the numbers.
First, with the dilution trick (like Facebook did against a founder). Second, the voting vs. non-voting stock.
Also, if you happen to leave the company you likely have to buy the options. If you don't have the cash, you're screwed. If you have the cash, you might end up in unsellable-stock limbo for years. In their case, about a decade and still counting.
I'm not surprised that people don't ask about the equity, because people are generally woefully uneducated about it.
Recruiters might be lazy and push back because people really don't ask. But if you press the issue and can't get a straight answer, pick another offer.
I'll have to research what convertible notes are.
I'd recommend talking to a law firm that's well versed in startup corporate law. The big firms Cooley and Orrick come to mind.
The net result is that generally speaking the number given by your 409A would seem low compared to the "true" price of the shares, and make it a weak recruitment tool.
(If this assessment is wrong I'd definitely be interested to hear to learn more)
As an aside -- unscrupulous companies can always quote inflated per-share prices based on extremely optimistic valuations e.g. "we're at least 10x the last round of funding -- your options are worth $500k!" So generally speaking, watch out.
What good is equity as compensation if you have to purchase the stock after all?!
For FB specifically, they just pre-sell 40% of issued RSUs. The amount then shows up on paystub as income tax withheld.
There's no extra money to be had on top of the RSU grant - for a global company it would be unfair to treat employees at high tax burden locations differently from employees in low tax burden countries.
If switching to a stock options at some point, what is the proper time? Post-A/B round? (obviously a nice problem to have if you have to worry about such things)
Would be keen on discussing it further sometime, since we seem to have arrived at the same conclusion independently.
I think as long as we have the goal of equity = ownership instead of options to own we will figure out how to structure it. Sounds silly but it is fairly innovative/progressive stuff we are trying to do - which is our whole goal anyway to innovate and progress.
The tax piece is out the door (and is mostly a dead-weight loss if the company doesn't make it, one of the rationales behind options.)
Like, if I'm joining a company that has started to get traction, is well-funded and pays me say 80-90% what Google would pay me, and is likely to either fail or experience a monetization event in the next 3-5 years, and I get 1% of that company, holy shit guys that's amazing. Maybe still overall less compensation than Google would've given me, but more likely to change my life.
If I'm part of the founding team of a company with no product out right now, that's paying me 20-50% of what Google would pay me, and any monetization event is clearly 7+ years off, 1% is a lot less exciting for four different reasons: 1. Obviously I'm giving up more salary. 2. Payout is less likely. 3. Payout even if it happens is farther away. 4. (Crucially) My stake is very likely to be much further diluted before any monetization events.
If you ACTUALLY get 1% of the monetization of any reasonably successful company, you're probably doing pretty damn well. A medium-sized acquisition at $300 million, 1% of that is $3 million. 1% of WhatsApp would've been around $200 million. 1% of Facebook would've made you a billionaire.
Trying to get more than a genuine 1% isn't very important. Trying to figure out what the percentage that they quote you in your job hire process will turn out to be during a monetization is very important.
They have almost never thought through the fact that it generally takes a lot of people to build a successful company so that 100% needs to get divided up into a lot of little pieces.
Well gosh, I don't think there's any need to get nasty about it. I may be naive but give me a break. When I refer to ownership I'm obviously simply referring to being a shareholder. No, I am not invited to board meetings, but as far as I know, neither is anybody else who's not exec staff. Is this unusual?
The options are on common shares. Can you elaborate on schemes in which common shares are made to become worthless? I have been explicitly told that there are no liquidation preference multipliers on the preferred shares, and the valuation is well above where that would matter. So what sorts of shenanigans would make my shares worth less? Please be specific if you don't mind. It may be a dumb question, but just telling me I'm dumb isn't really getting the point across.
Regarding going to {GOOG,FB,AMZN,MSFT}, I've actually already been through a couple of those and experienced the "real compensation packages and stock plans" and got a couple pretty respectable windfalls out of them, but I've decided the tradeoffs aren't worth it. Job satisfaction absolutely can't be beat where I am, and that's worth a lot to me. That doesn't mean I don't wonder what my n% is actually worth and how specifically that works.
I was in the exact same position as the OP, with expiring options on common shares in a company with no immediate plans to IPO. I (fortunately) didn't take your advice, exercised the options and 3 years later, when we were acquired, I was $500k richer. Of course, everyone's situation is different but I wouldn't take such an absolute position.
I think my inclination would be to exercise the options, because if I didn't, and they turned out to be worth something, I would just want to shoot myself. But this isn't necessarily a rational argument :-)
With the bonus, the stock shenanigans that they can perform will be relatively minor as far as additional expenses would go. If they IPO 4 years later and you get a windfall, good. If they liquidate and you get nothing, oh well.
You could also sell the shares to interested people on something like Equidate. Then you don't have to cash in your options until you have an interested buyer. If you get right of first refusal issues, then the company would be buying out your stock directly in that case.
I've never used something like Equidate, so your milage will definitely vary.
It depends heavily on circumstances, but in a less than amazing sale the acquiring company often wants an incentive for employees to stay. So the acquisition offer will ensure that common gets nothing but they'll be covered by an earn-out over the next year(s).
As you can imagine the negotiation gets very tricky because investors do not generally participate in the earn-out.
The whole thing is well worth reading for anyone involved with VC funded startups. It involved an acquisition with a management incentive plan and preferences that together left nothing for common.
Among other things the court held that where there is a conflict of interest the board must prefer the interests of common shareholders over those specific to preferred (the interests of preferred over common being contractual). It also found that the board had acted procedurally unfairly and in several places suggested outright dishonesty. For those reasons it applied the harshest standard under Delaware law (entire fairness).
In the end however, it found that the company's value as an ongoing concern though not nothing, was not enough to overcome the large liquidation preference and cumulative dividend. Thus, since prior to the deal common stock was worthless a deal valuing them as worthless was fair within the meaning of Delaware law. Note that the litigation lasted 8 years, and at the end of the linked decision it was an open question whether the defendants were going to have to pay plaintiff's legal fees despite having won. (I couldn't find any information on what was ultimately decided there.)
The board decides whether or not to take an offer and that offer includes a set of destinations of funds. In particular, the offer may be $Z = $X1 for retention bonuses and $Y1 for purchasing the equity. Or, the offer may be $Z = $X2 for retention and $Y2 for purchasing the equity. The management - who are likely on the board - may want more of the money to go to retention bonuses for senior execs, while the external board members may want more of the money to go to shareholders. And, in many cases, a board member may be involved in negotiating the deal with the acquirer and may push for a particular deal structure.
tl;dr - The board can have significant impact on how the funds get split up, regardless of the previously signed contracts.
Debt holders do not have priority when the debtor is sold, as the debtor remains in existence. Creditor priority generally matters only where an entity's debt structure is being altered, such as in a bankruptcy, liquidation, or debt restructuring. However, your example is correct if the bank held convertible debt, exercised the option to convert the debt to equity, and the converted equity carried a liquidation preference. (Note that "liquidation" shows up twice in this paragraph but the two usages have very different meanings. "Liquidation" refers to the termination of a corporate business and the distribution of its assets to its creditors and shareholders; "liquidation preference" refers to the maximum return a preferred stockholder may receive when it "liquidates" its holdings in a company as part of an exit event before the common shareholders or subordinated preferred shareholders receive their returns. In the Non-VC world, liquidation preferences are almost always fixed numbers; in the VC-world, liquidation preferences are usually multiples.)
Clearly there are legal regulations around a company going through bankruptcy and/or restructuring, however when an acquisition is occurring outside the structure of dissolution, which is to say the company is being sold to another entity while it is nominally a going concern, the bank's note may (and my experience does) have specific language to cover that situation and its primacy with respect to where the funds from such a sale might be disbursed :-). The good news is that can also keep a bank from "forcing" a company into default which starts to limit what options they have going forward.
All of the recent raises I've been involved in have been Non-Participating Preferred at a 1x multiple. Or at least capped. I was under the impression that was where everyone had sort of settled these days?
I'm basing this almost entirely off personal experience and the cooley report. http://www.cooley.com/files/104854_vf2014q2.pdf
In the example above, if you've got $2M in $LIQUIDATION and $NOTE is $1M, that means that common shareholders dreaming about buyout money should simply subtract $3M mentally from any sale price they hear.
That about it?