- startup founded in early 2010's, took on some venture funding and recently got acquired - startup forced employees to exercise options within 90 days of leaving company, so lots of employees exercised options with post tax dollars. I would guess anywhere from $500k - $1 million. - all financials released to shareholders, company is now profitable and has a decent warchest. - Series A,B,... etc investors getting some money back because they have preferred shares - employee options/common stock are now worth nothing because of liquidation preference - multiple executives receiving 7 figure payouts
Is this common practice? Is there anything we can do as ex-employee shareholders? Are there any instances of companies paying back their employees for the option exercises during an exit event? What would you do as a founder in this instance?
Any shareholder of the company has shareholder rights, and in fact you would get a vote on any change in ownership of the company (of course your vote probably wouldn't matter at all, but you still have one). Another of these rights is that the executives of a company have a fiduciary duty to all shareholders in their decision making. However I can imagine situations in which the story you've described is both completely reasonable, or situations in which it is grossly illegal. But of course it would only be illegal if one or many shareholders sued the company and won, which is where the lawyer comes in.
There is no sense in sharing any more details here on HN, find a lawyer, talk with them in detail about the situation and listen to their advice.
Some recent threads:
https://news.ycombinator.com/item?id=25487130
https://news.ycombinator.com/item?id=25496166
It sounds like the company raised a round at too high of a valuation.
The rules around options really suck here (the 90 day rule isn't the company's rule, its a tax thing). There is a reason a lot of companies are moving to RSUs: they avoid forcing early employees to make long shot bets with a significant fraction of their liquid assets (or stay at the company potentially over a decade until a liquidity event)
I resigned at 8 weeks of no pay, and couldn’t even legally force my company to give me a redundancy (3 years service) and I’m currently fighting to my right for 2 weeks notice pay (see note 1).
When you work for a startup you don’t have any rights to anything and you shouldn’t expect them to care about you.
Note 1: all this garbage is legal in Australia where all employee rights are hinged on insolvency and “hope for an investor” counts as not trading insolvent, which makes using your employees as creditors without their permission possible.
I’ve learnt my lesson about all of this. I will only work for established companies and I encourage anyone in the job market to think twice about signing with a company.. you need to be as confident in them for their responsibilities as they need to be in you.
The executives have a fiduciary duty to act in the best interest of shareholders. That means you. What that means in an acquisition can vary a lot depending on the specific details of the deal.
This is the extent of my legal knowledge on the subject, which is why you need to talk to a lawyer. The likely result of this avenue depends a lot on the amount at stake - if you paid like $5k to exercise, you probably pay the lawyer hundreds of dollars to send a letter and then negotiate a settlement that pays you 4 or 5 figures, avoiding the expense and risk of a lawsuit on both sides. Assuming of course, that you're already a former employee - current employees can and should have negotiated waiving their shareholder rights as part of the acquisition deal, assuming that their expertise is part of how the acquiring company is valuing the deal.
Laugh all the way to the bank, most likely.
This is sad but common. Stock options in a company that hasn't gone public should be treated as a lottery ticket: It's nice if they turn out to be worth something, but their most likely value is $0.
The founders/executives would have received payouts as the board or acquirer agreed a package to keep them onboard and smooth over the acquisition. Very common. It's not fair but that's what happens. I've seen incompetents awarded millions of dollars. Boards and acquirers don't really value employees and spend very little time discussing them, unless there's a problem.
As others have said, options and stock are a lottery ticket and should be valued at $0. More than likely, the startup you are working for will fail slowly or never become a major hit.
You should actually only accept earning MORE working for a startup than a corporate because the risk is greater, you'll be less employable after and the stock you get will be worthless.
E.g. https://www.secfi.com/products/liquidity
Basically they send you money while the company is still private, and you pay it back (+ a fee) after the company has exited.
If the financing is 'non-recourse', you won't have to pay it back if there never is an exit, or if there is an exit but one in which you don't make any money (like in this case)
So taking liquidity (if it is non-recourse) de-risks you from these kinds of outcomes.
Full disclosure: I'm the CEO of Secfi.
As far as the motive/"is it right": I'm going to take a somewhat contrarian viewpoint than those presented so far, having seen this happen on both sides of table in my life.
In my experience, and in most cases, the founders aren't necessarily doing anything shitty or sociopathic. They likely raised more than they needed at a higher valuation than was deserved -- for perfectly normal reasons, such as a frothy market or the simple fact that in startupland raising money is considered a win itself -- and it caused a set of benchmarks that ultimately became impossible to overcome and thus the common stock became worthless.
Transaction happens, founders are considered key to the successful merger and the acquiring company worries that the merger won't be fruitful if they bail so they receive some compensation as a sign-on bonus and/or an earnout.
If you want to argue that early-employee non-founders get disproportionately screwed in regards to their sweat equity vs. actual equity, you're absolutely right but that's a different argument altogether.
Clearly preferred stockholders are the ones who are getting their money out of the pot, leaving nothing for people who can't hinder that in some way (i.e., non-executive rank-and-file employees).
As far as financials go, sounds like your company agreed to higher liquidation preferences, so probably nothing shady going on. Just poor business decisions that may have been necessary at some point.
However, when i left, i found out the biggest investor had a > 1x liquidity preference. It meant my options were worthless this entire time. It's a shame you have to know to ask about that or else you'll get sold snake oil.
My personal takeaway: choose the founder you trust. Even after such issues, I will be able to communicate with founder and get some justice.