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Comment by asshammer | Hacker News Reader

How is that legal?

Employee options are common shares. VC gets preferred shares (typically). When the company is acquired for less than the investment or goes under, preferred shares get paid out first. So even if common shares have vested, there's no guarantee they're worth some percentage of the current valuation of the company.

Pretty sure it wasn't, but I didn't really have the resources nor the energy to fight it.

On the one hand, I was told before that the CEO would be buying out all the outstanding stock of people leaving the company

On the other, I was never presented with any kind of form or bill of sale to sign, which is what I was waiting for so I could contest it and attempt to keep my shares.

At the end of the day, the amount of shares I owned was so incredibly low, that I figured it didn't really matter, and that I was incredibly eager to be done with the whole place after all of the shit I had been through, that it wasn't even worth fighting for.

So on my next to last day, I was simply handed an envelope with a personal check inside, made out to me, for the amount of One Pittance.

Depends on the contract. It could be argued as unconscionable but that is a different matter.

You're suggesting that having classes of shares is unconscionable?

If the idea of preferred shares shocks your conscience, you should spend a lot more time studying how startup financing works (at a nuts and bolts level) before taking the plunge and working at one.

There have been several comments on here lately that make me realize how few people actually understand how equity works in startups. I mean, if people are shocked to learn about preferred stock, what would they think about participating preferred?!?

I guess this is really something you only learn when you are the one signing the financing docs.

It's not so much the fact that they are preferred stock but that you could argue that the stock is re-purchased at what could be considered to be less than market value.

Imagine if you will a publicly traded company that repurchases preferred shares, right before the company agrees to be acquired, for substantially less than the post acquisition valuation. You bet there'd be law suits....

Nonetheless your point stands, if you are considering acquiring preferred stock (whether purchased with cash, other equity, or hard work) you should do so with your eyes wide open.

  >> You bet there'd be law suits....

The legal protection for employees of privately traded companies appears to be considerably lower than for stockholders of publicly traded companies.

  >> if you are considering acquiring preferred stock ...

Generally preferred stockholders are treated pretty fairly. Employees get common stock. 'Buyer' beware.

That's because employees generally can't negotiate the terms of stock grant (exceptions to the employee stock option contract are often board-level decisions), but every venture funding deal is heavily negotiated with lawyers on both sides.

Generally, a company wants to get the best deal with the most lax terms possible, and will try to accomplish that. The preferences given to investors are part of the market pricing of an investment deal. You can no more declare that investors shouldn't have liquidation preferences than you can declare that they should price the deal 50% higher.

  >> You can no more declare that investors shouldn't have liquidation preferences ...

Not suggesting that. In fact, I have no objection to any clauses or terms that are negotiated in the original funding, although employees don't always have access to the terms in these agreements. However, these negotiated terms merely form an upper bound to what employees actually get.

There are a variety of situations in which the investors end up with more than the original agreement would suggest, and employees end up with less. Some of them are discussed here: http://news.ycombinator.com/item?id=2958766

Founders sometimes end up with an outcome similar to the investors, but more often an outcome similar to the employees. Employees expect that their interests are aligned with the founders, and that founders will protect them, but this is not always the case.

I'd appreciate it if you can recommend some books/articles on the subject.

It really depends on what you're looking to learn, but if it's "pitfalls in financing startups", I'd start here:

http://www.grellas.com/resources.html

Brad Feld and Jason Mendelson released an excellent book this year.

Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist

http://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalis...

Well, how much do you think shares in a bankrupt company should be worth? If there's not enough money to go around, someone is going to get left with the short stick.

I think his point wasn't that someone getting the short stick was illegal, but rather that shares were bought from me without my direct consent.

Company boards can do this from time to time in takeover situations.

Consider: Berkshire-Hathaway bought the entirety of Burlington Northern Santa Fe for a fixed price, negotiated with the BNSF board. They bought it outright and did a merger. They didn't go to each individual shareholder and ask permission. Many shareholders probably weren't even paying attention enough to check in their portfolio.

The alternative is that mergers are impossible and you're stuck with having a 95%-owned subsidiary with its own corporate structure and all the overhead that entails.

(Of course this is prone to abuse. There are laws to protect minority shareholders' rights.)

Did your contract have drag-along rights[1]? I'm certainly no expert, but I think that's quite common. It would be very difficult to sell a company if you had to track down every single shareholder no matter how small their stake. So it's basically a majority rule.

[1] http://www.feld.com/wp/archives/2005/02/term-sheet-drag-alon...

I'm guessing if the company was put under administration, employees holding stock (which is bound to fundamentals anyhow) would just be another creditor realizing market rate.

Not sure what "under administration" means exactly, but the company was folding, and the CEO was selling the remains (the software, a few of the people, the name if they wanted it) to an investor who owned another company, to do with what he wanted.

So it was priced at the "market" value, which he estimated to be quite low (and he was probably right, we weren't all that successful at the time).

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