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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

#71

Post by nemo44x »

MichaelGG wrote: post #59
nemo44x wrote: post #51

Earlier quoted context omitted.

I agree 100% with this. Employees should be suspicious that they have access to an investment nobody else does - invest now! I've seen countless friends get burned in various ways believing they would be getting rich soon from their options and then fizzle. Either through the company just never having a liquidity event or being sold for less than previous valuation rounds. The worst is I've seen people reject job off…

In the exceptional cases where they got a nice pay day, was the company unable to pay cash? If not then there's the answer why no bells ring.

It's true, the media loves the story of the regular folks who struck gold when their company went public and that resonates with typical employees who don't understand the financial constructs that make up many VC deals.

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

#72

Post by jackgavigan »

It's interesting to compare this article with the coverage of the acquisition at the time.

"When Good Technology announced Friday that it had sold itself to its long-standing rival BlackBerry for $425 million in cash, it was a moment of triumph for Good CEO Christy Wyatt." - http://uk.businessinsider.com/how-christy-wyatt-sold-good-to...

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

#73

Post by kevinpet »

Can anyone provide any info on what actually happened here? The article says that the preferred was "worth" more, which is a pretty vague statement. I interpret this as meaning that they didn't convert because their liquidation preferences guaranteed a higher payout. What seems relevant to me, and anyone else who works at a pre-IPO startup, is what were the things to look for ahead of time.

According to Crunchbase, Good raised $291M in 4 rounds. Assuming those investors owned 40% of the business, then at $1.1B, common was splitting $660M (preferred would convert). At $425M, assuming 1x liquidation preference, common is splitting $134M, an 80% decrease. I think you could get to the numbers in the article assuming 1x participating or something similar.

This should have been pretty predictable to employees. You will not get rich if your company sells for only 1.4x the total amount invested.

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

#74

Post by sokoloff »

ardiem wrote: post #29
davidu wrote: post #11

Earlier quoted context omitted.

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…

Mostly correct, with one correction:

You can apply carried forward capital losses against 100% of your capital gains PLUS an additional $3000 in each future year.

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

#75

Post by ap22213 »

ditonal wrote: post #33

Very glad the NYTimes ran this piece. The only part they underplayed is they made it sound like the startup "stumbled." No, it sounds like it went exactly as planned. Blackberry got the acquisitions, investors got their money, execs got their bonuses, and the rank-and-file got nothing. That isn't stumbling, that's the playbook. Tech employees need to wake up about common vs preferred shares, and that the former are w…

There is extremely good advice in the parent post. For those new to the game, please read it closely.

I've been with 5 startups over the last 15 years. Each had developed good, commercially-viable, revenue-generating tech. But, in all cases, instead of going IPO, each was acquired. And, usually they were acquired by other investors' or board members' companies (sometimes at a loss). I would love to know the actual statistics for how many 'ground floor' developers get rich on options, but I'm guessing that it's very few.

Startup culture is cool - I love it. They give me piles of money to experiment and develop new stuff and build new products. If you have an 'inventor mindset', like a casual work culture, and like to see shit get done, it's a great way to go. But, unless you're a founder or very early employee, make sure you negotiate for market-rate compensation with reasonable working hours.

Of course, this all depends on the specific company and its board, but generally the options game is a scam. I've made a decent amount of money over the last 15 years - enough to retire on. But, very, very little of that was from a big startup cash-out. Instead, I just negotiated my salary and benefits effectively, saved a ton, and invested as much as I could.

Compound interest is your friend; your employer's stock options? not so much.

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

#76

Post by sokoloff »

pc86 wrote: post #66
ardiem wrote: post #29

Earlier quoted context omitted.

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…

> that employee would still have had to personally fork over the amount needed to purchase the underlying shares Then what is the difference over just buying the shares outright as opposed to exercising options? My understanding has always been that exercising options means getting a benefit (the shares) which has a value (the strike price) and you subsequently pay tax on that value.

You pay the strike price in cash and you get the shares. Your "basis" in the shares is the strike price (what you invested).

You base your AMT tax calculation on the difference between the fair market value and the strike price (that's the "phantom income").

When you sell the shares, your realized capital gains is based on the original basis and you may have AMT basis that's different.

If you exercise and immediately sell, AMT doesn't factor in.

Concretely (and picking semi-random numbers): If your strike price is $10/sh, the FMV is $25/share, and you have options on 1000 shares, you'd pay $10K to exercise, get 1000 shares, and have $15K in AMT income to consider.

If those shares later soared to $40 and you sold, you'd have a capital gains of ~$30K ($40K proceeds minus $10K basis minus commissions and fees).

If those shares instead crashed to $0, you'd have possibly paid AMT on the phantom income and you definitely lost the $10K in cash.

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

#77

Post by S4M »

ap22213 wrote: post #75
ditonal wrote: post #33

Very glad the NYTimes ran this piece. The only part they underplayed is they made it sound like the startup "stumbled." No, it sounds like it went exactly as planned. Blackberry got the acquisitions, investors got their money, execs got their bonuses, and the rank-and-file got nothing. That isn't stumbling, that's the playbook. Tech employees need to wake up about common vs preferred shares, and that the former are w…

There is extremely good advice in the parent post. For those new to the game, please read it closely. I've been with 5 startups over the last 15 years. Each had developed good, commercially-viable, revenue-generating tech. But, in all cases, instead of going IPO, each was acquired. And, usually they were acquired by other investors' or board members' companies (sometimes at a loss). I would love to know the actual st…

> And, usually they were acquired by other investors' or board members' companies (at a loss).

Holy shit is that even legal? It seems like a giant conflict of interest.

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

#78

Post by nissimk »

ditonal wrote: post #33

Very glad the NYTimes ran this piece. The only part they underplayed is they made it sound like the startup "stumbled." No, it sounds like it went exactly as planned. Blackberry got the acquisitions, investors got their money, execs got their bonuses, and the rank-and-file got nothing. That isn't stumbling, that's the playbook. Tech employees need to wake up about common vs preferred shares, and that the former are w…

Information asymetry is the way people get screwed over in financial transactions. Most potential startup employees have no idea what common or preferred shares are. Let alone all of the other details like dilution, liquidation preference, tax implications of employee stock options and lack of liquidity in private securities. Potential startup employees should learn about these things and understand how to protect themselves. I'm sure the startups prefer to hire sheeple.

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

#79

Post by willyk »

For those interested in this topic, I suggest reading 'Venture Deals' by Brad Feld. While it's broader than this topic, it does cover some of the legal/technical elements of vc funding and exits, which help when trying to understand outcomes such as this (i.e., preferred vs common shares, etc). http://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalis...

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

#80

Post by dradbdgj »

ryporter wrote: post #49
ditonal wrote: post #33

Very glad the NYTimes ran this piece. The only part they underplayed is they made it sound like the startup "stumbled." No, it sounds like it went exactly as planned. Blackberry got the acquisitions, investors got their money, execs got their bonuses, and the rank-and-file got nothing. That isn't stumbling, that's the playbook. Tech employees need to wake up about common vs preferred shares, and that the former are w…

According to the article, employees had the opportunity to sell their "worthless" shares for $3/share.

Throwaway account, reporting on the secondary market!

Companies will often do everything in their power, including running roughshod over their contractural and legal obligations, to prevent employees from selling stock on the secondary market. If they're not total jerks, they will encourage you to participate in "internal buybacks". Unfortunately, these buybacks are run as a service for investors, presenting them massively undervalued in exchange for loyalty.

Regulators have just begun to take interest in the abuse of transfer agency by privately-held companies distributing shares in lieu of compensation. Similar attention should be paid to the information provided to prospective employees at the time of hire, when the decision to accept stock in lieu of cash is made.

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