
Ask HN: My startup has concealed from me that it raised funding. What to do? - mendacium
I&#x27;m a founding engineer at a startup and just found out that the founders have concealed an investment from me leaving me with a potential tax bill on $10,000s of income that I had not received.<p>I did my best to keep my story within 2000 words but I couldn&#x27;t shorten it anymore without leaving off important details so I posted the full text here: http:&#x2F;&#x2F;pastebin.com&#x2F;xLLNUF0H<p>I feel so disgusted and cheated right now. I had worked for this company for almost 3 years doing everything possible to maximize its chance of success: from working overtime to meet deadlines to answering support emails on weekends, and now I find out that they&#x27;ve kept this investment (and the tax implications that go along with it) hidden from me for over a year. I&#x27;m left thinking that they concealed it so they wouldn&#x27;t have to give me a raise, but I am more concerned about the tax implications of these shares. I had to leave work early yesterday when I found out about this and I don&#x27;t think I&#x27;ll be able to come in to work today. What should I do? Should I confront the founders about this? Is there any use in contacting a lawyer?
======
CPLX
Well despite the fact that this is very stressful, I would start with the
maxim that one should employ Hanlon's Razor[0] and not ascribe to malice what
can adequately be explained by stupidity.

It's quite possible, nee probable, that they are just disorganized and
genuinely thought you already knew, or that it didn't matter, or otherwise
were clueless or inexperienced enough to not really understand what had
happened.

I think it would be a mistake to get into it with them on a war footing. Early
stage companies like this make mistakes of this kind all the time, and it's
not necessarily a sign that the whole ship is doomed. If they have the ability
to get revenue and investment and pay salaries and whatnot it's possible that
there's a positive outcome in the future.

I would schedule an initial consultation with a lawyer who deals with these
kinds of things. Get a referral and schedule an hour or so to go over it with
them. They'll probably charge you a few hundred bucks, or even waive it if you
have a close friend or existing client of theirs refer you.

Sit down with a lawyer, bring the docs, and explain what happened and get some
sense of the implications. Then approach the founders with the attitude that
it must be an administrative mistake or misunderstanding. If they are evasive
or otherwise shady that should become clear quickly. If they are genuinely
concerned and want to help fix the problem then great. But personally I
wouldn't blow up your relationship with everyone until you have a better idea
which of those two scenarios is more descriptive.

[0]
[http://en.wikipedia.org/wiki/Hanlon's_razor](http://en.wikipedia.org/wiki/Hanlon's_razor)

~~~
aantix
OP should consider this a good lesson (and one that I learned going through an
acquisition); unless you're a founder, you cannot control "the deal".

Unless you're in the room when the chips are (re)divvied up, you have to trust
someone else to advocate for you. And after tolling away for a few years,
trading your life for the promise of a better future through being acquired,
ultimately you end up in a shitty position.

Don't be diluted in thinking the founders will "take care of everyone".

Your only leverage in the end is to walk away (and try and blow up the deal or
company, if you're that critical). And if you do walk and they don't stop you
and counter offer, you probably weren't going to get anything anyway.

~~~
smt88
> and try and blow up the deal or company

Never do that. Not only does it create bad blood, which could only be bad for
you in the long run, it may also leave you open to a lawsuit.

The business world is often about shoveling shit. People who always get their
revenge tend to have no friends and lots of burned bridges.

~~~
aantix
>Not only does it create bad blood, which could only be bad for you in the
long run, it may also leave you open to a lawsuit.

Don't buy this fud. There's nothing illegal about walking away from a shitty
deal. Whatever your motives just plainly state "this deal no longer makes
sense for me".

If you're a great engineer, then have some self respect, and walk away from a
shitty deal. Go somewhere else where they respect the people that build value.

And if you aren't a great engineer, you weren't going to get anything anyways,
so go somewhere that will raise your game and better positions you for the
future.

>People who always get their revenge tend to have no friends and lots of
burned bridges

There's a big difference between being bitter on a daily basis vs coming to
terms with your past three years that are basically only going to net you an
extra 100K (which you could easily get hustling in a few months consulting in
SV).

Think deliberately about what you're toiling away for. An extra 20K? An extra
100K? REALLY? All the extra weekends for years is worth that? Get mad at
yourself. Demand more. And if they deny you, walk, and position yourself
better next time.

~~~
smt88
First, I was against doing intentional harm. I absolutely think s/he should
walk away, but making enemies doesn't solve any problems and certainly could
create some.

Second, you seem not to understand the difference between "breaking the law"
and "getting sued". Intentionally screwing over a company can be both legal
and lead to a lawsuit that you end up losing.

~~~
aantix
1) You are critical to the company's success yet..

2) They don't want to compensate you to your liking..

3) So you walk. Yes, this is meant to intentionally hurt the company with the
only lever that you have (your skill set and institutional knowledge).

You working for this company costs you opportunities elsewhere.

You're convincing yourself to stay because it "doesn't solve any problems and
certainly could create some." Your vague fears are holding you back.

But if we get rid of these vague fears, here's what we know is certain:

1) You're critical to the success of the company.

2) But you're not going to be compensated to your liking

3) And you're costing yourself other opportunities by sticking around.

Quit being scared, look them straight in the eye, and say "I am walking unless
I get X,Y,Z." If they say no, then kindly resign and don't look back. Bring on
the lawsuit (highly doubtful).

------
ChuckMcM
So if it went down exactly as you said, you can relax, you don't have to worry
about any extra bills to pay.

Two things that are important here are that the "official" valuation of the
stock is what company counsel said it was, and if they had changed the
valuation of the stock, unless there is only 'preferred' stock (unlikely) your
common (likely) stock hasn't changed value at all.

When you did the last stock exercise if the CEO mislead you on the price it is
their problem not yours.

Finally, and this is really really important, when you are not publicly traded
the stock can be worth anything you say it is worth. The 409a process is one
which allows the company to have a way of valuing the common stock but it
doesn't come into play, generally until you have enough investors to make the
calculation significant.

------
davidu
There is so much misinformation in this thread.

I would consider that perhaps your facts are wrong. Perhaps the first investor
did a convertible note. Perhaps he did a loan.

First thing I would do is calmly talk to the CEO directly and tell him what
the CFO told you and why it makes you concerned.

There's no reason to be disgusted (yet) from reading your pastebin.

And even if it's true, then you simply need to ask the company to cover your
tax burden and then move forward with getting back to work.

This is not that big of a deal.

------
bowline_nc
You shouldn't be in bad shape tax-wise. I don't know Canadian tax law - but in
the US, you only get taxed when you sell the shares. Capital gains would not
be recognized if you exercised the options and held onto the shares.

Since you have been exercising your options - you are a shareholder in the
company (or a member depending on the structure) and I would imagine that the
company's operating agreement would require them to disclose any funding
rounds to you. I'd get a hold of that if you can.

It sounds like you're working with amateurs, so I'd pass it by a lawyer to
determine the real impact on you - but I wouldn't flip out until you get the
entire picture. They may be planning on diluting the hell out of you or they
may just not know what the hell they're doing.

I'd say it's too early to tell.

~~~
jlmorton
> Capital gains would not be recognized if you exercised the options and held
> onto the shares.

That's not exactly accurate in the US. You need to pay income tax - not
capital gains - on the spread between the strike price and the fair market
value. Since the company is not publicly traded, the fair market value needs
to be assessed. The IRS has rules on how to do this, but many companies use
independent third party auditors to do this, though an early stage company
probably would not do this.

Once an investment has been made, a fair market value has been established,
and you need to report the difference between the strike price and the
investment price as income when you exercise options. Capital gains applies
when you later sell the stock for a gain.

Edit: Though I should point out, this is only for non-qualified stock options.
If the options are tied to performance metrics, for instance, this may not
apply.

Edit 2: See here for a discussion of this:
[http://www.investopedia.com/articles/optioninvestor/07/esoab...](http://www.investopedia.com/articles/optioninvestor/07/esoabout.asp)

~~~
emcrazyone
he can't pay income tax if he's never received the income.

"I will be left with a tax bill on $10,000s of additional "income" that I
never received"

~~~
davidu
Actually, and unfortunately, in the US, that's how it works.

His paper gains are taxed. It's not quite "income" but it's taxed that way.

~~~
limeyx
That actually depends on if the options were ISO's (where you'd only have to
account for the spread in AMT calculations) or non-Quals where yes you'd have
to pay regular tax on the spread at exercise time.

If he's really a founding engineer though he should have filed an IRS 83B
election and basically paid close to zero tax on all this

~~~
davidu
Correct.

------
johnloeber
Yes, you have been cheated quite seriously. Consult a lawyer immediately,
especially since the (Canadian) tax filing deadline is soon. Do not press the
issue with the founders until you've received thorough legal counsel.

Another problem, however, is that even if you do confront them and get to
claim what's rightfully yours, you're probably going to be asked to leave the
company. It's worth noting this as you plan ahead.

Anyway, I'm very sorry to hear this. That's disastrous.

~~~
Justsignedup
> going to be asked to leave the company

I think this is moot. Such a disaster would indicate bad shit is happening.
Lawyer up asap.

------
Smushman
Don't create any problems, specifically don't:

1\. Stop going in to work (at least without a good reason such as health). 2\.
Confront anyone, at all. 3\. Degrade your work (in as much as you can help
yourself). 4\. Talk about it, even here or elsewhere.

All of these things will likely be brought up if this goes to court. Don't
damage your image.

Recognize you cannot trust your employer, so no point in confronting them or
asking anything. Try to be all smiles and don't give anything away. You don't
want them to start digging for information on their side.

Get a lawyer. I hope you can afford that. It will be hard to find one but
persist.

Write down all details you can remember right away with dates and times,
including overtime hours, special projects, extras you performed, reviews of
your work and performance, comments that may matter, copies of your email,
etc.

Good luck sir... Apologies this happened.

------
charlesdm
First: this situation sucks. :(

Second: Yes, consult a tax attorney. Your own attorney, not theirs. Don't talk
to the founders. You need to know where you're at first. Legal500 could be a
decent starting point:
[http://www.legal500.com/c/canada/tax](http://www.legal500.com/c/canada/tax).

It could very well be that they disregarded some security rule (i.e.
notification of a capital increase or something like that) and can now be sued
for your situation (in the event it's too late to fix things).

One thing to consider if you get a capital gains tax loss is that you usually
can offset it against other gains. Do you know if you can carry that loss
forward in Canada, or do you need to use it in the same year?

Given an S&P fund tends to return around 7% (averaged) per annum, you can
actually use it over several years if you can carry forward the loss
indefinitely.

Third: Time to look for a new job.

~~~
tonyspiff
> Do you know if you can carry that loss forward in Canada, or do you need to
> use it in the same year?

"You can use a net capital loss to reduce your taxable capital gain in any of
the three preceding years or in any future year."

[http://www.cra-
arc.gc.ca/E/pub/tg/t4037/t4037-e.html#P2313_1...](http://www.cra-
arc.gc.ca/E/pub/tg/t4037/t4037-e.html#P2313_116906)

------
fsk
There are legitimate reasons to exercise early, if you think the business will
be sucessful.

1\. You avoid the tax issues the OP faced if you exercise at a lower
valuation.

2\. It's also more tax efficient if you plan to hold the shares or wait a few
years to sell.

It sounds like your bosses are ethically challenged. With 3%, you are an
employee and not a cofounder.

Instead of suing them, consider writing it off as a loss and learning
experience and move on. As a minority shareholder, they can dilute you out of
your shares and you would have no recourse.

~~~
mikeash
I can't imagine writing this off. He's been seriously wronged, to the tune of
quite a lot of money. The raise alone (promised in writing, never delivered)
is probably substantial, considering it's been about a year since it should
have happened. The tax issue seems less clear, but I have a hard time
imagining you wouldn't be liable if you hid important investment details from
a shareholder and therefore caused him a huge tax liability.

In any case, it certainly seems worth talking to a lawyer to see if there's a
case, and if there is a case it's absolutely worth pursuing. If you let people
get away with this behavior, you just encourage more of it.

~~~
fsk
It doesn't really pay to win $50k in a lawsuit paying $30k on legal fees, plus
the years it takes for the legal system to run its course.

A lawsuit is a lot of stress.

There's no guarantee he'd win.

The corporation can be bankrupt when/if he wins.

You can't keep working there after you sue them or your lawyer sends them a
threat letter.

There's no point continuing to work with dishonest people. Given their
dishonesty, the shares are probably worthless.

~~~
mikeash
You may be right, but he may also have an easy case. The point is, talk to a
lawyer before deciding what to do. It could be that there is no case and
pursuing this would be completely pointless. It could be that this is a
complete slam-dunk for both damages and legal fees and it's completely worth
doing. Or it could be somewhere in between, but he needs to know where he
stands before deciding.

~~~
fsk
He needs an accountant more than a lawyer.

You can usually negotiate a payment plan. Plus, he gets a credit when he sells
or writes off the shares,

------
arethuza
So you've been exercising options and therefore own stock - don't companies
have a legal requirement to inform existing stockholders when an investment
happens?

------
3am
You should talk to a CPA [edit: sorry, Canada - CGA], not an attorney, first.

You are upset about something that might not be an issue. You haven't
mentioned what type of stock options you have (in the US there are ISO and
NQSO, and - upon a quick check - it appears there are different types in
Canada as well, with differing tax treatment). Omitting that detail in
addition to the ... unusual way in which you exercised them makes me think you
may have more of an academic familiarity with the process.

It would have been nice if the founders told you about the investment, but
your reaction is completely out of proportion with what happened. Lawyering up
[edit: distinct from a consultation] will be the equivalent of ending your
career track with them and burning your bridges entirely.

And really, if the market value of your options has increased, consider the
positive side of that news if you own 3%.

------
BSousa
Offtopic:

First time I read this topic. I didn't read the pastebin, just the comment and
was wondering how someone was a founder and not be included in the
valuations/investment side of things, or at least informed.

Then I read the link. How is this consider a 'founding engineer'? Are people
looking so much to be founders that they call themselves that even they are
obviously employees (first one but still employee). He got a salary and
generous (aha) stock options, that doesn't make him a founder one bit. Heck, I
was offered equivalent equity at a start up just to serve as technical
director and shape up their initial development team, so how in god's name is
3% something a 'founder' has?

------
misterbwong
Wow. I know nothing about investment, VC's, convertible notes, etc...but the
one thing I DO know is that if you're THIS hesitant to talk to your co-
founders about company issues, your partnership is in trouble. Communication
is key and asking HN about it is not going to help. Why even consider
lawyering up when you're going on rumors and hearsay and haven't even given
them the chance to explain?

~~~
hga
"Co-founders???" "Partnership???"

If there's one thing this event makes clear, he's hired help.

------
Fando
The best approach is to go directly to the founders and ask them to help you.
Literaly use those words. Such an approach makes them stake their integrity
and avoid hostility. Ask them for assistance. Best way to resolve a conflict.
Keep calm, talk with the people involved and voice your concerns directly. Be
cool, don't act frantic. Ask every possible question, and tell them how it
made you feel, do not keep you thoughts hidden, level with them. The most
important - be patient and cool. Find out everything you can. It will become
clear quickly, either you're being screwed or there's been a mistake. Then you
can choose a course of action. Even if you're being screwed, act cool be
patient and firm. Deal with it professionally.

------
josho
I'm hung up on the fact that you are exercising your options. Why? If the
options are set to expire that quickly then something else is amiss as well.
Generally you exercise options only when you intend to sell or leave the
company and would lose those options. From what you described, you gave no
reason for exercising the options.

I'd speak with the founders and enquire why they never executed the agreement,
that is the raise that was conditional on getting funded. From a contract
point of you, you should be eligible to receive that money.

From a trust point of view you can no longer trust these individuals. Without
trust in a small organization I don't see the point in sticking around.

~~~
late2part
Your assumption is incorrect regarding the reasons for exercising options.
Early exercise of options often garners positive tax benefits for the
optionee.

~~~
josho
That's a good point. What I left unstated, and what I was wondering was if
this individual was given guidance by the founders to exercise his options.
Thereby effectively reducing his salary further, when he already stated that
his salary was an issue of contention. Something I'd be guarded about.

However, you are right, if this company succeeds, he saves some money on taxes
by owning stock early.

------
3pt14159
I can give you a good recommendation for a lawyer that I've used in the past.
I don't want to post his name here, since the primary reason I like him is
that he doesn't over-bill or charge too much, but his work is pretty good. The
way he does this is by refusing to meet in person or other time wasters like
random coffees. Other lawyers are better for networking, but if you just need
startup related paperwork done email me (even anonymously) and I'll do an
introduction.

He works out of Toronto.

------
somberi
This is my personal experience. So take it as a sample of one.

A CTO, a decade younger to me, sought my advice on a similar situation -
Founder-CEO divvied up equity in new and unfair ways without telling the CTO.
The CTO wanted to raise hell, and take his loyal team members with him and
basically handicap the company.

I advised him against doing this.

My view is - Even an unfair portion can mean real (but reduced) value, only if
the company succeeds. And to that end, a rational angle will be to not act in
a way, that damages value.

I told him to let his displeasure be known and leave but with his calm intact.
And whatever, he had to do, meditate, jog, or whatever, to bring a calm mind
to the table, he should do it.

He resigned, told the team that he built, that his initial pitch about the
company doing interesting things are still true (which he truly believed), but
he was leaving.

Fast forward a year and half, the company got sold for two-digits (Million
USD), and he got a handsome payout, and the founders apologized.

He still wonders if the outcome would have been the same if he had acted in a
way that damages the company.

Your first responsibility is to your peace and calm. Abstract yourself out of
the deal, a business deal at that. Not worth your angst.

------
aleem
You are now faced with a number of decisions, namely: financial, emotional,
moral and a business decision in general.

On the financial front, the decision is easy to remedy, if the other founders
are willing. Ideal scenario is (a) Your 3% equity is fully-vested (b) 3%
equity cannot be further diluted (c) you get retrospective compensation and
(d) You get another good raise.

Morally, you have been wronged. It is tempting to take the high ground and
take full offensive on principal alone (fight) or cut all ties (flight). But a
moral victory won't last long when you need to find a new job, when you
realise your stake is gone or if the company gets a big exit 2 years down.

Emotionally, you have every right to be upset and you'll need to find a way to
deal with it. My own two cents is, "don't be a wuss" or anywhere near that
frame of mind--you'll come out stronger and smarter, whatever happens.

In terms of making a value-judgement business decision, your best outcome is
that things get reconciled and you put this all behind yourselves, they
apologise, you build a rapport with them and have discussions on how this can
be avoided in the future. You may need to highlight to them all that you have
given to this company and you are willing to reconcile if they are. You should
probably not go in to work for 3-4 days (I am presuming they know you are
upset and why) and wait for them to contact you during this time. If they
contact you and are showing any signed of reconciliation your conversation
should be about (a) how they can make things right financially (all 4 points
above) and (b) how to avoid this in the future so that the company can have a
strong moral standing. During this time, you should prepare for the worst and
talk to a lawyer with the correct expertise.

------
Silhouette
Given the amount of money involved, the potential damage to your career, and
the possibility that you will have deadlines related to tax returns/payments
coming up after which you might not be able to fix some of this, I would
suggest you do the following, concurrently:

1\. Find an accountant.

2\. Find a lawyer.

3\. Keep written notes of everything, including copies of any relevant
electronic communications and details of anything significant that was said to
you verbally or on a call, by whom, and when.

4\. _Possibly_ start recording any future calls, but check the legality of
doing so in your jurisdiction and any notice requirements first. (Don't ask
the Internet, ask your lawyer.)

5\. Don't talk to anyone at work about what you're doing until you've received
proper professional advice.

Make sure the accountant and lawyer are yours, not the company's. Their
advisors will have a conflict of interest and can't/shouldn't advise you
personally as well. In any case, there is a possibility that the company
lawyers and/or accountants have committed serious breaches of professional
ethics and/or crimes here.

Make sure all your records are completely under your control, so if they kick
you out of their electronic systems and the building at a moment's notice you
still have all your evidence.

And from a practical point of view, don't assume malice or that this will end
badly, because it may well just have been a naive but innocent screw-up, but
do assume that whatever happens you _might_ need another job by the end of
this process and plan accordingly just in case.

And obviously don't post any more details publicly.

------
techjuice
When in doubt, it is best to ask an Attorney. It was a good idea to ask the
company lawyer but you cannot always take their word as their job is to tell
you what they want you to hear in the best interest of the company. The
information might have been withheld from you as you were not a C-Level
executive or similar or higher in the company.

When joining a company if you are a founder always insure the titles are
correct as they do make a difference even if you are a founder. If you are not
a C-Level executive, apart of the board or an investor the groups under them
will always be the last to find out what is going on. If your in the C-Club
you are always in the mailing group list for all the important meetings and
are expected/invited to all of them. To be honest though, it appears you were
left out because you were not family and they probably just considered you as
just an engineer that they gave some stock too and not really privileged to
the company inner workings or financial activities.

------
ffn
Looks like there is plenty of good what-to-do advice already, so I'll just
give some how-to-do advice:

Use the Teddy Roosevelt tactic of speak softly but carry a big stick (you
already have one, since you're the engineer and the product is on your
shoulders). As in, hint to them that you have sought legal counsel and that,
if worse comes to worse, you wouldn't mind sudo rm -rf the entire code base.
Be sure to be in the passive tone and say things like, "I had no choice but to
be forced to seek advice from counsel", "this project means more to me than my
life, and it saddens me greatly to see you guys do this to me", "please don't
force me to take all time and effort I've put into this and go away forever",
"I want to be working on fixing this and building a future, than crying at
home and writing bitter memoirs", etc.

In general when speaking to them, highlight the fact you're the victim and (in
the words of 4chan) the betafag. This is because you people are already in a
highly emotional confrontation, and if everyone gets their backs up, chances
are everyone except the lawyers will lose money (also, lawyers don't do
anything except charge and tell you to settle, so you can't depend on them).
The point is to act nice, but hint between the lines the lifeline of this
business as well as the reputations of everyone involved is in your hands.

If the founders give in or compromise to your demands (which they should if
you act like a reasonable human being who they have hurt and not an aggressive
asshole out for revenge), let it all be water under the bridge - the founders
have, no doubt, learned their lesson from this also and will improve in the
future. But if they don't, don't sudo rm -rf the entire repo, instead, just
write up your story, publish on HN, and go find work elsewhere (there is no
sense in throwing good money after bad).

~~~
bagels
Threatening to ruin the business is not 'seaking softly', nor is it likely to
end in the best outcome.

------
nerdy
You have every right to feel disgusted and cheated among other things but
don't assume those feelings to be true.

However hard it might be, keep your mind clear and free of things that might
upset you. Remove yourself from the circumstance mentally as if you were
advocating on a friend's behalf. Don't let your emotions cloud your judgement.
Sometimes you can become so jaded that you manufacture self-fulfilling
prophecies.

With a clear head, exercise every option possible. I'd absolutely contact a
lawyer and _plan_ for a future that looks dramatically different but don't
jump ship quite yet. Talk with your legal advisers about what the best next
steps are and carefully execute in conformance with their advice.

Figure out what's really going on but be prepared in every aspect possible
(emotionally, financially, legally) for whatever might be around the next
corner. Don't get caught on your heels.

Best luck to you; it seems like a very unfortunate situation.

------
pthreads
Caveat: At least in the US and ASFAIK :-

As long as the company provided you with the properly assessed strike-price
and FMV for your options at the time of exercise (upon which they become
shares) I don't think the founders are obligated by law or otherwise to
disclose any investments to their employees.

Even though you may be a founding engineer, officially you are still an
employee. You are not on the board of directors and/or until the time of
exercising options you were not a shareholder. Hence the company likely has no
obligation to provide you with the details of the company's financials.

On the other hand if you exercised your options based on incorrect FMV the
company provided then the additional tax burden would not be your fault but I
am not sure in your situation what recourse you have. As others may have
suggested your lawyer should be able to answer that.

------
at-fates-hands
The best course of action is to just go along with it while you get legal
council. The more information you can glean while you're working there will
only help strengthen your case. If you simply lawyer up and confront the
owners, they'll go into bunker mode, fire you and then lawyer up themselves.

Act normal, and continue to work and essentially collect as much as evidence
you can. You can drop hints, talk to people to find out what they know, etc.

The more you know, you can start to build a timeline and the implications that
the company was effectively doing this behind your back for nefarious reasons.
The more you have documented, the more you strengthen your case so when its
time to actually threaten them with legal recourse, you'll have all the
evidence you need while they'll be scrambling to build a defense.

Hope this turns out well for you!

------
akc
How does one go about finding an attorney in these situations?

------
tekelsey
As you talk to legal counsel, you might possibly ask if you could get a tax
shelter of some kind - it may not be feasible, but sometimes colleges will
take donated real estate, for example, and the pay an annuity. So say a farmer
had a piece of land, it increased to a million, and wants to avoid capital
gains. In some cases donation of assets can result in doing something good for
an institution but also getting ongoing income out of it.

Not sure it applies to capital gains with options/alternative minimum tax, but
a tax lawyer might know.

If the tax bill does turn out to be like the price of a car, aside from taking
some form of legal action, or if it fails or is not possible, then you can
make payment arrangements, so that in theory, paying off the tax over time
will maintain your ability to keep hold of the asset of the options.

------
zaroth
This might not be true in Canada, but in the States when investors buy
preferred shares with a liquidation preference (even 1x non-participating) the
common share valuation can still be quite low, even possibly still PAR. It's
called a 'thin common' valuation strategy.

The general idea is, what is the value an investor would have paid without any
of the additional rights granted by the preferred shares? Usually for early
stage startups the answer is reasonably close to "$0" \-- the deal would never
happen without the preference. The common shares are often still worthless, in
reality and for tax purposes as well, after a Series AA and sometimes even
after Series A.

------
alain94040
It seems that you are over-reacting. Ask nicely for a clarification about
exactly what form that first investment took. if, as others pointed out, it
was a convertible note, the stock price may not be impacted.

The fact that the company lawyer gave you the stock price indicates that they
are not lying to you. So your taxes are probably fine. The only thing
questionable is whether they should have given you the raise they promised in
writing upon raising funding. If the amount they raised is small, I can see
how the founders would think it's too low to trigger the raise.

So overall, everything may just be fine. By the way, you are not a co-founder,
you are the first employee.

------
yodasan
I'd suggest talking to the cofounders in a non-accusatory manner. Startups are
often disorganized and crazy and my guess is that the tax implications of your
shares didn't even cross their minds because there are so many things going
on. Also, what was the previous investment amount? If the previous investment
is from a family or friend, my guess is that it's more of a bridge than an
investment to keep the company afloat until true investment comes in (not
enough to raise salaries). Either way, I'd give them the benefit of the doubt
and not jump to conclusions too early before talking to them.

------
tarr11
Usually there's no need to exercise until you either leave the company or
there is some sort of acquisition. As you found out, it can be problematic.
Did you have a specific reason to do that?

You should definitely talk to a lawyer and an accountant. I could see an
argument where your gains would be based on the company's 409A valuation,
which can be significantly lower than what the last investors put in.

Based on what you wrote, I am not seeing a bad intention from the founders.
seems like talking to them might be helpful.

~~~
msandford
Exercising the options makes it harder for him to get screwed later on. Also
it can put you in a better position later on when you sell because you pay
capital gains tax on the appreciation of the stock rather than ordinary income
tax on the options.

This works because stock is considered an investment where as options are not
considered investments (according to the tax code) and by holding the stock
for more than a year it's considered "long term" and thus it gets classified
as capital gains.

Ultimately I think it's a very smart thing to do especially if the company
says that the stock is valued at $0.0001/share meaning that he can exercise
1000 shares per $1. The only time there's ever a downside to exercising early
is if your strike price is substantially above $0/share meaning that it might
cost a sizable sum. If it's free -- or nearly free -- to exercise, there's
really no reason not to.

Unless of course you end up in a situation like this person has.

------
gus_massa
From the pastebin:

> _" contingent on raising target angel round of financing"._

My English is not good enough, so I'm not sure what this means, in particular
"target".

If their "target" was $100.000 and they "only" raised $99.000, are they forced
to give you the raise?

[Also, as other said, with a 3% you are not a "engineer founder", you are only
a "engineer first employed". In any case, talk to a lawyer.]

------
chrisgoman
There should be a provision somewhere in your operating agreement that tax
liability on unrecognized income will be paid by the company -- look for that.
Additionally, if it's an LLC (or even a partnership), you can look for
something called Profits Interest
[http://www.gilaberttax.com/2014/01/14/profits-interest-vs-
ca...](http://www.gilaberttax.com/2014/01/14/profits-interest-vs-capital-
interest/)

------
pbreit
You should talk to a lawyer and/or accountant but this doesn't sound right at
all. First, why are you buying your options? In he US you typically don't
acquire them till you leave the company. I also don't see how you could rack
up that sort of tax bill on a company and shares that cheap. You should also
consider asking the "company" to help you out with the tax bill. This all just
doesn't sound right.

------
brudgers
Link to details: [http://pastebin.com/xLLNUF0H](http://pastebin.com/xLLNUF0H)

Sorry to hear this.

------
damoncali
The tax problem is a common one and one of the major downsides to equity
compensation in some situations. I've never heard of your particular situation
where they didn't keep you informed of the valuation, though. That's fairly
awful. I would be livid.

------
clamstew
Trust is one of the most important things in a start up. If this was an
oversight that's one thing but if not, then walk away and get a better job.
There are plenty out there. It's near to impossible to work effectively with
people you don't trust.

------
eaxitect
You should ask a lawyer before confront founders in order to know your
options.

------
lrm242
Never, ever exercise options unless you have a market to immediately sell into
OR otherwise have means to cover the potentially significant tax bill. This
bit so many people in the dot-com boom. Options should be exercised and a
portion of the received stock immediately sold to cover the tax which will be
due on the exercised vs strike price. This is one reason that restricted stock
in the US is MUCH better tax wise. In the US you can file an 83-b election and
receive tax treatment on the basis at time of purchase, which for most
startups is effectively 0.

NEVER EVER exercise options unless there is a real market in which you can
realize value from the received stock directly UNLESS you REALLY know what
you're doing (read: have money and a good accountant/lawyer).

------
api
How do you conceal that in a small venture?

Sounds like you have a real communication problem in that company if something
like this can happen and nobody has a clue.

------
j_m_b
>leaving me with a potential tax bill on $10,000s of income that I had not
received.

This is why I formed a C Corporation and not an LLC.

~~~
lrm242
This really has nothing to do with it at all. In fact, an LLC can elect
different forms of tax treatment, including being taxed as a C or S
corporation.

------
vonnik
Find a startup that treats engineers better. Get another gig and then consider
your legal options.

------
alex_mil
Just leave, do your own thing. Ask for 83b elections. Lawyer will cost more
than your tax bill

~~~
hga
" _Ask for 83b elections._ "

He's in Canada. As others have pointed out, at the very least he needs to
engage an accountant to find out exactly what the tax implication are.

------
arielm
To those saying the OP shouldn't talk to the founders: why? I'm just curious.

~~~
noir_lord
By doing what they did they've already proven bad faith, talking to them now
just warns them.

Better to seek legal counsel and have _them_ talk to the founders.

------
gregd
Do you really have any other options except to hire a lawyer?

------
michaelochurch
_Is there any use in contacting a lawyer?_

YES. YES. For the legal and accounting implications, you need to see people
who understand them. I can't help you there. I know enough to know that you
absolutely need a lawyer on your side (and don't fall into the trap of
trusting the company's lawyer).

Career-wise, you need to move on. First, working with a pair of brothers or a
couple or a father/son duo is generally a bad idea. Others' pre-existing
relationships to or within power put you at a career disadvantage and you
should avoid them when possible. Call that a lesson learned. Second, they
obviously didn't see you as important enough to the company to know what's
going on. Don't expect that to change. They've shown their hand; now show your
back as you walk out the door.

That said, don't burn bridges and read Smushman's reply. Don't put anything in
writing that you wouldn't want in the New York Times. (I know that that's
cliche advice, but here it applies. Be extremely cautious, is what I'm
saying.) There's a good chance that if you go into court, these guys will
attack your character and reputation and the quality of your work, even if
they've been cordial to this point. (I've seen startup breakups. They're
ugly.) You can't prevent that but don't give them any ammo. Just find another
job, give 2 weeks' notice, and move along.

Have someone check your references and report back. You'll be shocked at how
willing "jilted" startup founders are to tarnish the reputations of exes who
"quit on" them. Risk-averse corporations don't give bad references but cowboy
founders who've never believed rules apply to them will say all kinds of shit.
If you get a bad reference, you need to reach me offline (michael.o.church at
gmail) and I'll tell you how to fix that up.

Don't stick around because of vesting unless you stand to gain millions. By
all means, get what is rightfully yours based on the time that you have
worked, but don't put your career at risk. These founders don't see you as the
same class of human (most tech founders don't, because they have the investor-
level connections and you don't) and that's not going to change.

Good luck. Above all, don't get angry and try not to hate your soon-to-be ex-
bosses. It will just cloud your judgment. This is extremely common and a
lesson that a lot of people have to learn the hard way. Given the
circumstances, you'll probably get _some_ money out of it but it probably
won't be anything close to what you want or think you deserve.

------
aros
Get a lawyer.

------
spiritplumber
Group everyone involved into a room, stand in front of the only exit, and
calmly announce that nobody gets out until you receive an explanation. State
the facts neutrally as you know them, and ask if they are accurate.

Actually let people out once they have explained. There is no reason to start
kicking ass until you have a complete picture.

Once you have a complete picture, decide whether it's time to start kicking
ass, and by what method.

~~~
claar
I'm going to assume you're not being literal, but FYI, I sat on a kidnapping
jury that was essentially this. Don't trap people, even for a moment; it's
quite illegal.

~~~
spiritplumber
I'm being literal. It works.

If you look at my posting history, you'll notice that I have little care for
the laws of man. Do the right thing, always. If it's legal, good for the law.
If it's illegal, break the law.

But break it properly, so that after you're done breaking it, it will take a
long time for legalists to repair it and people have time to consider that
they may be better off without it.

Now in this case, locking people in with you is excessive. But, making it
clear that it's easier to say truth than to push you aside is appropriate.

