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When a Unicorn Startup Stumbles, Its Employees Get Hurt

nytimes.com

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Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#21

Post by sarciszewski »

ScottGillis wrote: post #18
sarciszewski wrote: post #5

> Even worse, they had paid taxes on the stock based on the higher value. That's the most annoying part of the entire article, and why I ask for salary rather than equity. Keep your stock, I'd rather pay my bills.

It's all about risk. Unfortunately, this risk did not pay off.

If you want risk, be an entrepreneur. If you want security, be an employee for a big company.

And I suppose I should add, "If you want to get screwed over, be an employee at a unicorn startup," based on this new information.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#22

Post by bpodgursky »

sarciszewski wrote: post #5

> Even worse, they had paid taxes on the stock based on the higher value. That's the most annoying part of the entire article, and why I ask for salary rather than equity. Keep your stock, I'd rather pay my bills.

While that does suck... they exercised early for the capital gains tax treatment. If there was no risk involved, it doesn't really deserve a lower tax rate.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#25

Post by throwaway1223 »

I interviewed at this company a couple years back and a huge selling point at the interview was their upcoming IPO plans. They eventually gave me an offer which I turned down because enterprise and security is a boring area to work on. Based on these recent series of articles on startups, its becoming more and more apparent that while starting a startup is a fantastic thing to do, being an employee of one has mostly downsides. Its a much better career move for non-founders to work for large established companies.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#26

Post by tvladeck »

jameshart wrote: post #17
tvladeck wrote: post #13

Earlier quoted context omitted.

The valuation of the company and the waterfall of the payment are two separate things. Presumably this was the highest valuation they could have gotten (no reason not to believe it given that it was a distressed sale). And the tax on the common stock the employees received when they exercised their options was based on the valuation of the common stock - so the tax system did correctly handle that.

They're not separate. The valuation of a thing is dependent on how much money the owners of that thing are willing to accept for it. The common stock holders' interests were poorly represented in the price negotiation. The decision to structure stock ownership in that way is, again, entirely the company's, not the tax system's. Sure, employees share some responsibility for accepting compensation that includes stock w…

> The common stock holders' interests were poorly represented in the price negotiation.

You're mistaken here. Your point rests on there being a possibility that Blackberry paid the same amount for the company (the valuation), but common stock holders got more (the waterfall). This was not possible.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#27

Post by caseysoftware »

mathgeek wrote: post #20

> To pay those taxes, some employees emptied savings accounts and borrowed money. Investing your life savings and/or loaned money into a single stock is always a huge warning sign that you're being foolish.

Yes, this strikes me as very Enron-ish throughout.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#28

Post by JonFish85 »

tvladeck wrote: post #19
BlewisJS wrote: post #15

Earlier quoted context omitted.

You can't presume that they exercised early voluntarily. If you leave the company, you typically have 90 days to exercise options or they are forfeited back to the company. In other cases, they actually just expire after enough time passes, which again forces employees to exercise before a liquidity event.

Fair point. I did make that assumption.

Again though nobody forced them to exercise. It accelerates the timeline, but it's not forcing anyone into anything more than having to make a decision.

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#29

Post by ardiem »

davidu wrote: post #11
untog wrote: post #4

The fact that some employees have to pay taxes based on the valuations that VCs dream up terrifies me.

Only those who early exercise, or exercise their stock as it vests. They did this to try and optimize for long-term capital gains. For most employees who leave their option grants as options, there is nothing to worry about. When you are given a grant of stock options, you can sometimes ask the company to let you exercise it early, and vest the shares instead of the options. If you do this when the fair market value…

Correct me if I'm wrong, but even with an early exercise (or an exercise of vested options) where the valuation matches the strike price, that employee would still have had to personally fork over the amount needed to purchase the underlying shares. In the scenario described in the article, they've still lost a substantial chunk of money if the valuation is now a fraction of the strike price.

Secondly, while capital losses can be carried forward indefinitely, you can only apply ~$3,000 per year (as a deduction, not a credit).

Re: When a Unicorn Startup Stumbles, Its Employees Get Hurt

#30

Post by tvladeck »

BlewisJS wrote: post #16
tvladeck wrote: post #13

Earlier quoted context omitted.

The valuation of the company and the waterfall of the payment are two separate things. Presumably this was the highest valuation they could have gotten (no reason not to believe it given that it was a distressed sale). And the tax on the common stock the employees received when they exercised their options was based on the valuation of the common stock - so the tax system did correctly handle that.

The article states that 6 months earlier, the board turned down a potential sale valued at double the eventual sale price.

This would be relevant only if the better opportunity was contemporaneous with the one Good accepted. As you mentioned, that opportunity was six months' gone.
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