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Ask HN: My startup has concealed from me that it raised funding. What to do?

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Re: Ask HN: My startup has concealed from me that it raised funding. What to do?

#71

Post by lrm242 »

Never, ever exercise options unless you have a market to immediately sell into OR otherwise have means to cover the potentially significant tax bill. This bit so many people in the dot-com boom. Options should be exercised and a portion of the received stock immediately sold to cover the tax which will be due on the exercised vs strike price. This is one reason that restricted stock in the US is MUCH better tax wise. In the US you can file an 83-b election and receive tax treatment on the basis at time of purchase, which for most startups is effectively 0.

NEVER EVER exercise options unless there is a real market in which you can realize value from the received stock directly UNLESS you REALLY know what you're doing (read: have money and a good accountant/lawyer).

Re: Ask HN: My startup has concealed from me that it raised funding. What to do?

#72

Post by lrm242 »

j_m_b wrote: post #69

>leaving me with a potential tax bill on $10,000s of income that I had not received. This is why I formed a C Corporation and not an LLC.

This really has nothing to do with it at all. In fact, an LLC can elect different forms of tax treatment, including being taxed as a C or S corporation.

Re: Ask HN: My startup has concealed from me that it raised funding. What to do?

#73

Post by claar »

spiritplumber wrote: post #62

Group everyone involved into a room, stand in front of the only exit, and calmly announce that nobody gets out until you receive an explanation. State the facts neutrally as you know them, and ask if they are accurate. Actually let people out once they have explained. There is no reason to start kicking ass until you have a complete picture. Once you have a complete picture, decide whether it's time to start kicking…

I'm going to assume you're not being literal, but FYI, I sat on a kidnapping jury that was essentially this. Don't trap people, even for a moment; it's quite illegal.

Re: Ask HN: My startup has concealed from me that it raised funding. What to do?

#74

Post by CPLX »

dragonwriter wrote: post #46
CPLX wrote: post #37

Earlier quoted context omitted.

> in the US, you only get taxed when you sell the shares That's not quite correct with regards to US tax law at least. You can get taxed on the spread between the price you pay and the "fair market value" of the shares received. It's quite possible to get nailed with an insane tax bill in situations like this. You can end up in a situation where a company raises money at high valuations, and that spread is high, gene…

> leading to a horror story of being taxed on a percentage of the millions of dollars you supposedly got but never realized a dime from. If the shares a complete loss and liquidated that way, you also have a capital loss for the millions of dollars which can be applied against income for tax purposes; this may end up somewhat less than offsetting the tax bill depending on your other income because of tax rates; you d…

You can't necessarily offset the tax bill from the gains with the tax savings from the loss. That's the horrible "gotcha" scenario that makes everyone worry, and is in fact a real risk in these scenarios.

I looked around to find a overview of how this works with some case study examples, and this is the best I could come up with in 5 minutes of googling: https://www.sharespost.com/docs/the_stock_option_tax_dilemma...

Re: Ask HN: My startup has concealed from me that it raised funding. What to do?

#75

Post by hga »

misterbwong wrote: post #68

Wow. I know nothing about investment, VC's, convertible notes, etc...but the one thing I DO know is that if you're THIS hesitant to talk to your co-founders about company issues, your partnership is in trouble. Communication is key and asking HN about it is not going to help. Why even consider lawyering up when you're going on rumors and hearsay and haven't even given them the chance to explain?

"Co-founders???" "Partnership???"

If there's one thing this event makes clear, he's hired help.

Re: Ask HN: My startup has concealed from me that it raised funding. What to do?

#76

Post by clamstew »

Trust is one of the most important things in a start up. If this was an oversight that's one thing but if not, then walk away and get a better job. There are plenty out there. It's near to impossible to work effectively with people you don't trust.

Re: Ask HN: My startup has concealed from me that it raised funding. What to do?

#78

Post by pound »

smt88 wrote: post #64
aantix wrote: post #55

Earlier quoted context omitted.

OP should consider this a good lesson (and one that I learned going through an acquisition); unless you're a founder, you cannot control "the deal". Unless you're in the room when the chips are (re)divvied up, you have to trust someone else to advocate for you. And after tolling away for a few years, trading your life for the promise of a better future through being acquired, ultimately you end up in a shitty positio…

> and try and blow up the deal or company Never do that. Not only does it create bad blood, which could only be bad for you in the long run, it may also leave you open to a lawsuit. The business world is often about shoveling shit. People who always get their revenge tend to have no friends and lots of burned bridges.

yes, it's expected that you'll never do or say anything bad about past jobs(/companies/environments/people). But other side of this status quo is enabling all the assholes to be assholes and just helping them to continue behaving/acting like they do.

that's a bit offtopic though.

Re: Ask HN: My startup has concealed from me that it raised funding. What to do?

#79

Post by pthreads »

Caveat: At least in the US and ASFAIK :-

As long as the company provided you with the properly assessed strike-price and FMV for your options at the time of exercise (upon which they become shares) I don't think the founders are obligated by law or otherwise to disclose any investments to their employees.

Even though you may be a founding engineer, officially you are still an employee. You are not on the board of directors and/or until the time of exercising options you were not a shareholder. Hence the company likely has no obligation to provide you with the details of the company's financials.

On the other hand if you exercised your options based on incorrect FMV the company provided then the additional tax burden would not be your fault but I am not sure in your situation what recourse you have. As others may have suggested your lawyer should be able to answer that.

Re: Ask HN: My startup has concealed from me that it raised funding. What to do?

#80

Post by ansible »

aantix wrote: post #55
CPLX wrote: post #34

Well despite the fact that this is very stressful, I would start with the maxim that one should employ Hanlon's Razor[0] and not ascribe to malice what can adequately be explained by stupidity. It's quite possible, nee probable, that they are just disorganized and genuinely thought you already knew, or that it didn't matter, or otherwise were clueless or inexperienced enough to not really understand what had happened…

OP should consider this a good lesson (and one that I learned going through an acquisition); unless you're a founder, you cannot control "the deal". Unless you're in the room when the chips are (re)divvied up, you have to trust someone else to advocate for you. And after tolling away for a few years, trading your life for the promise of a better future through being acquired, ultimately you end up in a shitty positio…

> Don't be diluted in thinking the founders will "take care of everyone".

The normal phrase is "...deluded in thinking...", but in this case, "diluted" is probably appropriate.

I am amused.

Staying on topic...

If you've got any significant stake in the company, you do have an interest in any deals being made. Sometimes it is the case that the current shares will be diluted so that the new investment can be accepted. It depends on how much was reserved at the start.

So you may have been holding stock that was worth 5% of the company, but after the investment it could now be less. It really depends on how the deal was structured (how much for how much basically).

You may not (as a non-founder) have a say in the terms of the deal, but you need to be kept informed.

I've seen cases where the founders will dilute themselves, but not the smaller holders, to try to be fair to them, but that doesn't always happen.

Maybe its time to read up on your corporations by-laws, which may spell out how and when they have to notify you of these sorts of changes.

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