At most private companies, stock options aren't worth the paper they're written on. Unless of course the company sells, in which case they're worth slightly more than the paper they're written on. And besides that, to exercise them you usually have to pay a pretty hefty sum. I generally don't consider equity as a part of my compensation package when I work for a private company.
Dear Unicorn, Exit Please
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Re: Dear Unicorn, Exit Please
#12Why isn't it easier for employees to sell shares of private companies?
Most companies have a Right of first refusal clause embedded in the options agreement effectively limiting selling shares of private companies even after exercising options.
If they are RSU's , I am assuming they can't be sold at all in the private markets ?
Can anyone with prior experience elablorate on these ?
Re: Dear Unicorn, Exit Please
#13The honest reality of unicorn'hood is also that your post-IPO performance is almost assured to be flattish (on average) with potential for swings in either direction of course. So when you look at the delta between your strike price and your actual potential future IPO price -- that is really probably the net of the win you can hope to achieve... and often it's not as good as you'd hope.
I think the idea is that if you're an employee with a bunch of vested options, those options capture a big chunk of the real upside of the company. IPO buyers might get modest returns, but the reason for that is the amount of value baked into those internal shares.
Re: Dear Unicorn, Exit Please
#14Earlier quoted context omitted.
Because there's no one they can sell their shares to. With a public company, you can sell your shares on the stock market.
Perhaps they should be able to sell their shares back to the company? The company would be responsible for raising more money and have some allocation for share buyback.
Who would determine the price of common shares without a liquid market?
Re: Dear Unicorn, Exit Please
#15Earlier quoted context omitted.
Because there's no one they can sell their shares to. With a public company, you can sell your shares on the stock market.
Perhaps they should be able to sell their shares back to the company? The company would be responsible for raising more money and have some allocation for share buyback.
A few very good companies do make this possible, but it takes effort to set up and is not the default.
Re: Dear Unicorn, Exit Please
#16I think that if you held a secret poll of founders of these companies, the majority of them would say they don't want this to change. Retention is really hard, and this is an incredibly powerful retention device at a fast growing company.
As an employee though, you can always vote with your feet. When considering a job at a startup, you should go over the stock option plan and ask hard questions. Remember... the founders (generally) don't have stock options. So sometimes founders at small startups don't even know the implications of the stock option plan they've created, and might be open to changing it if it means the difference between hiring you and not hiring you.
And for the larger companies that have thought about it, you can always pick the ones with more employee friendly plans. The higher the initial value of the company when joining, the harder it is to exercise options if you can't sell the stock immediately (because you have both a high exercise price and taxes on gains). So this can be a non-trivial difference between compensation offers at bigger companies.
Re: Dear Unicorn, Exit Please
#17Earlier quoted context omitted.
Perhaps they should be able to sell their shares back to the company? The company would be responsible for raising more money and have some allocation for share buyback.
Who would determine the price of common shares without a liquid market?
Other employees, the management team, and the board.
Re: Dear Unicorn, Exit Please
#18Allowing employees to make 83B elections on their options immediately after starting would help this situation a lot. Most companies don't "allow" you to do this. I've heard conflicting things on the subject. Some say the company has no say in the matter and it's purely in the IRS' court (exercise and notify IRS). Others say the company must allow you to do it.
Second, the bogeyman of "letting some strange interloper see our books" is a myth. Every company's share plan that has share restrictions, also does not confer disclosure rights to common shareholders. That is, you have no right to see the books if you're a common shareholder in these companies. It's not the same with public equities as it is with this new round of startups. It used to be that case that you exercised 1 share of stock upon hitting your cliff. That way you could see the books and see what's really going on. The powers that be (Hello YC) have instructed their companies to remove disclosure rights as a workaround.
The myth that "having lots of shareholders increases costs too much" is also just a myth. Any company with a valuation north of a few mil can afford a finance team (or person) to keep track of registered shareholders. There are services that do this for you. We're talking about companies worth billions of dollars, not the corner bakery worried about the cost of flour because any rise might drive them out of business.
Re: Dear Unicorn, Exit Please
#19Ultimately, I think that the interests of employees will not make a company decide to go public, unless it's already borderline.
To solve this, it seems like a more likely path is longer exercise windows, more liquidity in the markets for stock and/or options. If we're talking about "unicorns" like AirBnB, Uber and such, I imagine there is a demand so if a way for buyers and sellers to come together existed, it could work.
There are some advantages companies would be forgoing, but it's not like going public just to let employees cash out.
Re: Dear Unicorn, Exit Please
#20Why isn't it easier for employees to sell shares of private companies?
It's getting easier with companies like sharespost.com but securities regulation generally discourage the sale of private company stock in any "open" (aka. public) way - this is ostensibly to protect buyers of stock from investing in risky assets that they know little about and for which there is little public information.
Buyers are generally hesitant because they want to get financial info and other private data to make an analytic investment decision. Given that VC-style investment are more normalized now and they aren't as based on fundamentals, investors are definitely more willing to invest without private financials BUT really large asset managers (who spend 99% of their funds on public stocks with their expansive disclosures) will not tolerate this, limiting the market. Besides, they are getting common stock, which sucks compared to the other investors who get preferred stock.
Companies don't usually want this to happen because they don't want a shareholder (who has voting and other legal rights) that they don't know or trust, and who is not aligned with them in the way that employees and VC are (supposed to be..ha).
The solution growing in popularity tries to deal with all of these by having a company organize a secondary offering, like what pinterest does (palantir does it too, twilio recently did, so do a bunch of companies). Usually this means the company knows the buyer (sometimes an existing investor) and basically gives them the info they would give a VC, except the investors buys employee shares rather than new stock - sometimes this will be asked for an investor when they are doing a preferred stock deal, and the investor will agree as an additional "company favorable" term. Important to note here too, that USUALLY the biggest sellers in these deals are the founders, so while it's a very nice thing for them to do for their employees, there's some healthy self-interest there as well =)