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I'm getting screwed with my stock options

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I'm getting screwed with my stock options

#1

Post by concernedmitch »

So, I joined a startup 1,5 years ago. 2 non technical founders, a half baked product with no revenue at all, built with a freelancer. Joined remotely from a EU country, as a contractor with shit money and 10% equity in options. Fast forward to today, we got seed funding, are 17 people, and the founders want to take 4 points out of my 10 points to extend the options pool. They are each giving 4 points as well. The issue is, that in my situation 4 points represents 40 percent of my options, whereas in their case more like 10% of theirs. Talking undiluted percentages here.

I don't know what to fucking do. I'm "c level", but I'm feeling helpless. Also, we've set up an office here, and hired some people, so quitting and leaving feels like a bad option.

Also related question. I'm thinking of exercising my existing vested shares as soon as possible, but I'm not aware of possible legalities. Startup is US based, I'm EU based.

Experience + feedback much appreciated.

Re: I'm getting screwed with my stock options

#2

Post by MCRed »

What you're looking for is an anti-dilution clause. There may be one in the stock option agreement that prevents this. If not, whether they can do it is going to depend on the stock option agreement and the laws of the state where they are incorporated.

I believe the best advice for you is to find a lawyer in the state where the company is incorporated and hire them.

It sounds to me like you've already gotten a raw deal on your ownership, and they think they can just walk all over you. Dilution at the time of funding should affect everyone the same, and if they want 12 percent for an option pool, then everyone should get diluted fairly (every share should lose %12 of its ownership). I believe anything else might be considered fraud, depending on the terms of the agreement.

You can exercise your vested shares whenever you like (under most agreements) and the only legalities I can think of are the tax implications.

Re: I'm getting screwed with my stock options

#4

Post by arethuza »

Having handled things like that badly in the past - the first thing I would recommend is to calm down and think about it rationally as a business transaction open to negotiation.

Also, aren't share option pools handled by (potentially) issuing new shares (in UK terms the difference between issued and authorized share capital) rather than shuffling around existing shareholdings/options?

Re: I'm getting screwed with my stock options

#5

Post by jonathanjaeger »

Definitely talk to a lawyer in the U.S. who works with startups. If they incorporated in the same way most startups with investors do, it's a Delaware C-Corp, and lawyers who work with startups will know the nuances of the vesting and options legalities.

I worked with Scott Walker to incorporate my startup. He's very helpful and takes calls without charging (if you listen to This Week in Startups or Mark Suster's Both Sides podcast you'll hear them talk about him in the ads):

http://walkercorporatelaw.com/

Re: I'm getting screwed with my stock options

#6

Post by vessenes »

You definitely want a lawyer, but on the face of it, this is an aggressive move by your partners. The start of a fair negotiation would be equal pro-rata dilution. So if it was 45/45/10, and you want to make 12% in the options pool, you should get diluted 12%, just like them.

That would mean they'd go down to 39.6% and you would go down to 8.8%.

Since you're remote and the company is growing, I would personally expect real problems on the horizon.

Finally, exercising your options is most likely a good plan; options often expire after someone leaves.

Re: I'm getting screwed with my stock options

#7

Post by patio11 »

How about "I appreciate your desire to have more stock available to give new hires. You've proposed that I give up 4%, which is 40% of my allocation. I'm amenable to giving up 1%, which is 10% of my allocation and equal to the portion which you're willing to give up, and lets us bring in a whole new engineer."

If they counter offered, I might give up another 0.5% in return for "OK, you guys can have 1.5%, but in return the company rescinds your repurchase right with regards to 3%." (i.e. We accelerate vesting.)

This is a negotiation. Nothing you say results in you owning less than 6% of this newly valuable company, right? No need to agree to the proposal in front of you just because it is in front of you.

Re: I'm getting screwed with my stock options

#8

Post by jbverschoor »

If they want to issue out new shares for employees, then they can simply issue new shares. This will dilute the existing shares but not by 40%. More like 11%

They cannot simply take away from you that's your.. Unless they have stated otherwise somewhere.

So just talk with them and maybe you misunderstood something.

Re: I'm getting screwed with my stock options

#9

Post by jbverschoor »

vessenes wrote: post #6

You definitely want a lawyer, but on the face of it, this is an aggressive move by your partners. The start of a fair negotiation would be equal pro-rata dilution. So if it was 45/45/10, and you want to make 12% in the options pool, you should get diluted 12%, just like them. That would mean they'd go down to 39.6% and you would go down to 8.8%. Since you're remote and the company is growing, I would personally expec…

He can exercise his options. Which means he needs to pay money right now to own actual stock of company. Which is unsellable without a buyer.

Re: I'm getting screwed with my stock options

#10

Post by yumraj »

Definitely talk to a lawyer, one who knows about startups. NOTE: the lawyers for your startups represent the company, so don't talk to them - find your own lawyer.

Other than that, AFAIK what you mention is not typical. Option pool should not be created by "taking" options from employees, but rather by issuing new shares which dilutes everyone equally. You should bring it up and ask that they create the option pool by issuing new shares which will at least indicate to them that you know what you're talking about and perhaps reduce their inclination to screw you.

Also, what was your vesting schedule? If it was four years, you should have already vested 3.75%, which you can exercise anytime. If they take 4% of the remaining, you're left with just 2.25% to vest over next 2.5 years, which is just wrong.

Also: before you begin negotiation, do understand your BATNA - Best alternate to a negotiated agreement. In other words, what will you do/can do if there is no mutual agreement. This will tell you if you're overall in a strong position or weak. This will include any advice you get from the lawyers, your employee agreement, etc.

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