The latest shitty clause that Valley companies are including in their options contract prohibits you from selling fully vested and exercised shares even if you have a willing buyer.
Apparently companies saw all the employees getting rich from private companies like Palantir and Facebook pre-IPO and considered that a problem to be solved. Check your contract, you probably don't "own" the stock you think you do.
as an employee, if you are lucky/skilled enough to end up at a successful startup, and you aren't very careful with tax issues, you can find yourself stuck: if you leave, you have to exercise, and immediately owe hundreds of thousands of dollars (or more!) on a completely illiquid asset that you can't sell. Which doesn't even take into account the potential for that asset to become less valuable.
That's not a decent way to treat people. Startups don't write the tax code, but many are willing to take advantage of it to control people this way.
After you put your 4 years in, you should be free to re-up or leave. Not free to leave if you are willing to risk all your liquid assets and/or borrow heavily.
That's a different issue - that many options agreements require exercising within 30 days of leaving (or so). There's no reason it has to be done that way. There are very good reasons that restricted stock is, well, restricted.
And if one person leaves it's not likely to materially affect the business as everyone else keeps it going.
Another point of view is that if all the early employees disappear at the 4 year mark (or whenever they feel they've vested "enough") that could cause very serious problems for the business. There is an element of a prisoner's dilemma here and it's not unreasonable to think about ways to keep people from defecting.
I'm operating under the assumption that most people aren't counting down the seconds until they can leave, but some will want to. Four years is a long time, and 10+ years to IPO is a quarter of your career.
I'm saying they shouldn't consider a solution being something that restricts they're employees. They should be looking at why people want to leave, instead of how they can prevent people from leaving.
That's the value in derivatives. Equidate & others like it avoid all these problems by selling the economic interest of the stock without adding shareholders.
There are some very tricky legal issues for companies when employees start selling on the private market. I will admit that I'm not terribly well versed on them, but IIRC these private sales essentially forced Facebook into an IPO that they weren't necessarily ready for.
Well, on one hand it is a pain the buns for the company in facilitating secondary transactions. On the other, it makes good sense that it should be doable. The secondary markets like Sharespost/Secondmarket don't seem to have made much progress in getting companies on board.
There are a few other secondary solutions, including mine (full disclosure: co-founder of EquityZen here).
Ultimately the company (the issuer of the options) holds the cards on these transactions. For a robust secondary private market, you need to:
- keep the company aware of the transactions, and understand their transaction process (right of first refusal, board approval, other transfer restrictions)
- provide that the buyer has been vetted and is an appropriate entrant on the company's Cap Table
- ensure that you are non encroaching on the company's own plans to provide systematic liquidity to their employees
- keep an audit trail of the transaction process to ensure no leakage of sensitive (or non-public) information
We're headed in the right direction. Pinterest deserves credit on a few different fronts:
1) Allowing employees to extend their window to exercise their options once they leave the company
2) Providing liquidity to their employees
I'm curious to hear from any hiring managers on this thread: do you think that offering liquidity/financing solutions for exercising options/helps attract better talent?
I'd actually like to lay the blame where it belongs, at the feet of YCombinator (the incubator, not the commenter crowd). YC's boilerplate options plans included share transfer restrictions and made early exercise (83b elections) out to be the bogeyman. Almost every YC company has the same option plan because of PG's tutelage. People copied these plans because "hey it's what YC does."
Let's be perfectly frank and talk about the facts here:
1) There is zero cost to the company to allowing 83b elections. All it does is remove the possibility of golden handcuffs (which are very effective when a new unicorn is minted every week).
2) There is no more "500 shareholder rule" after the JOBS act. It removed that. There is no penalty for having lots of shareholders -- especially when most stock transferred has no voting rights and no disclosure rights. Facebook "paid the price" for having lots of shareholders but in reality they did not. GS's investor vehicle took care of that. Facebook was not "forced" to go public. They went public at an incredibly old age as far as growth companies go.
3) There's an almost non-zero cost to have another company (like SecondMarket) handle share registration and transfers. It's not a huge overhead. Consider it your Nerf ammunition cost for the quarter.
4) The state of current stock option agreements is not to help you the employee. It's for the benefit of the company. Option agreements in the 80's and 90's did grow out of an altruistic "hey we're all in this together" theme. Today, it's "hey I have to give you these things because everyone else does, but if it were up to me, you would get bupkis and free meals."
Full disclosure, I work at a YC funded, non-unicorn. My shares (on paper) are worth a fair amount of money, and I need several $100k to buy the shares and pay taxes. I feel like I'm in a not-uncommon state. I know my options are technically worth zero right now since I can't sell them for anything (that is the definition of worth), but I know my wife will divorce me if I quit and walk away from them.
I've heard that Uber is supposedly the worst at this. There's no timeline specified in the option agreement. You must offer them right of first refusal, but there's no mention of timeliness. They can (and do) choose to ignore every share transfer that comes up in a board meeting (unless you're in the elite inner circle and are allowed to sell shares).
tl;dr Don't even consider a position at a company whose option agreement won't let you early exercise and won't let you freely transfer shares.
Apparently companies saw all the employees getting rich from private companies like Palantir and Facebook pre-IPO and considered that a problem to be solved. Check your contract, you probably don't "own" the stock you think you do.