Startup the Madness What every Employee Needs to Know About Stock Options
More and more is being written to expose who the real winners are in the startup world; and as I’ve written about, it’s not the employees. Not only are the employees likely to deal with EEOC violations being ignored by HR, possibly asked to engage in unethical or illegal behavior on behalf of their employer, now the stock option carrot that’s been dangled just got shaved down to a sliver as explained in recent article in Business Insider.
There is ‘preferred stock’ which the investors or VC’s get and there is ‘common stock’ which is what the employees get. And owners of preferred stock get the added perk of ‘liquidation preferences,’ which means once the startup sells, the owners of preferred stock get a guaranteed amount of money from the sale.
Preferred stock owners are often guaranteed 1 X their investment. Ok so far this appears logical. Investors risk and get their investment back plus a multiple of their investment.
However, when preferred stock owners have 2x or 3x liquidation preferences is when employee common stock holders find out they were chasing a carrot that never existed.
The article further explains:
VC @ 2 X liquidation preference buys 50% of a startup for $50 million ($100 million post-money valuation)
Startup sells for $75 million = VC gets 50% more of the $75million
VC get then entire $75 million
Employee common stock holders = carrot shavings=No Money
Again, one of the goals of this blog is to help employees protect themselves and to ask the right questions when interviewing, especially for a startup. If a startup CEO is unwilling to discuss: 1. If the CEO is also a partner with the any of the VCs investing in the Company 2. Or if CEO is not willing to be transparent regarding options—It should raise suspicion of any potential employee!
Is what these CEOs and VCs doing illegal? Each company will have to be looked at on a case by case but it is unethical not to disclose the options payout to employees. And again, if we go with fact based evidence over time as an indicator of the future: if a company is willing to overlook employee’s EEOC rights, they are likely to be engaging in far greater illegal activity.
I learned to ask where the money was coming from after kissing a few toad startups but still didn’t ask all the right questions. This is a complex topic and if anyone has more to add on the topic please do. The more the employees speak out to protect one another the better!
Like this article you may also like: Startups from Tech to Device
Or: Startup the Egos
Or another from Business Insider: 22 Year Veteran of Startsups Says Employees are Getting Screwed by VCs & CEOS