
Facebook, Zynga Impose Fees on Private Sales of Shares - ssclafani
http://www.bloomberg.com/news/2010-04-21/linkedin-zynga-may-use-stock-sale-limits-to-curb-pre-ipo-value-inflation.html
======
brown9-2
I might sound stupid, but how is it that a company can put restrictions on
sales of it's stock _after_ those slices of ownership are already allocated
and granted to individuals?

~~~
Bricejm
This is the same as any large company giving equity but requiring a vesting
period. The reason you give equity vs. cash is to create an incentive for an
employee to want their company to succeed. If the large transfer fees are in
place to limit shareholders so they can stay under the 500 mark then it's a
bit shady. If your shares are vested per the agreement you signed, it should
be your right to sell when you want to without a substantial fee.

~~~
tptacek
Not so. Your (hypothetical) employee stock agreement, which you were required
to sign as a condition of being issued stock options, stipulates that your
shares are not transferable, intended for personal investment and not resale,
and that your exercise of those options is conditioned on a series of terms
that ensures the company can prevent you from selling them.

The reason for this is that your (hypothetical) company isn't trying to create
a broad market of investors in its equity. Rather, it's trying to express an
incentive that allows employees to share in the upside of a liquidity event at
the company.

This issue is distinct from vesting. Even after you've vested, the company is
unwilling to yield control of who owns its shares. The company is fine with
you parting ways and retaining your upside interest (in fact, it's happy you
did!), but not fine with you selling the package that gives you that interest.

For obvious reasons, the story is totally different at public companies.

~~~
ojbyrne
The story is also different if you're issued restricted stock, rather than
options.

~~~
tptacek
I think (from other comments) you're implying that ISO/ESO options are
contractually non-transferable (and can't be executed by non-employees), but
that no similar contract governs actual restricted shares. Not convinced this
is the case; with restricted stock, your shareholder's agreement probably
allows the company to keep you from selling your shares.

------
SriniK
I have a fundamental question. How are these companies allowed to trade off
the market? As whole point of free/open market(stock market) is to have
companies follow the regulations and guidelines protected by someone like SEC.
Are these protected? Or just blind bets on the company? How does one protect
insider trading/rigging - if at all it is relevant?

~~~
tptacek
They operate under exemptions from registration offered to accredited buyers
of companies that don't solicit investments; even then, it's a bit of a legal
high-wire act.

~~~
SriniK
That sounds like a lot of risk from the investors' point of view. I know these
companies are awesome and good but should we be worried about god knows who is
doing what trade. If these are not bound by rules, it is so easy to rig the
stock price.

~~~
d2viant
You're right, there is a lot of risk, which is why you have to be an
accredited investor in order to take part in such a transaction.

~~~
tptacek
There's a lot more risk from the company's point of view in this case than
from the investor's.

------
alain94040
This is not a good thing. While I understand why companies would rather not
have their shares trade, imposing a $6,000 fee is anti- startup employees.

~~~
tptacek
The vast majority of startup employees don't (and never will) qualify for
secondary markets; most (all?) of the companies being traded here are IPO-
quality already.

Startup employees shouldn't be joining companies in the expectation of being
able to sell private shares.

~~~
borism
they might not qualify to be an accredited investor to be a buyer, but I
didn't know there were any restrictions on being a seller there? I've got the
impression that all FB employees who had vested stock were able to sell...

~~~
tptacek
There are contractual restrictions on employees selling their stock;
accreditation isn't the issue. Though, for what it's worth, the major
secondary markets won't help make a market for tiny companies anyways.

~~~
borism
There might be, but judging by numerous reports of FB and likes employees
selling their stock left and right there didn't seem to exist any restrictions
at those places. That's the whole point of starting to restrict those deals
now, don't you think?

~~~
tptacek
Two things here.

First, there are almost certainly restrictions on Facebook employee stock. I
don't know what they are, because I don't work at Facebook, but the
boilerplate employee stock contract restricts sale entirely (or gives the
company first refusal on sales at a minimal static valuation); anything
employees are allowed to do with Facebook stock constitutes something Facebook
went out of its way to allow.

Secondly, my point isn't about Facebook. I'm responding to Alain, who
indicates that this is the start of a worryingly anti-startup-employee trend.
But it isn't. Virtually the entire marketplace of startup employees works for
companies with far more restrictive policies. You simply cannot normally sell
your (private company) employee stock. The companies you're hearing about that
do allow it are --- not too much of an exaggeration --- epsilon from IPO
already.

~~~
alain94040
I'll rephrase my statement that it's "anti-employees".

If you go by currently admitted practices, then it's completely fine. But if
you raise your standards to figuring out what the future _should_ look like,
I'm hoping that 10 years from now, people will wonder why such restrictions
were ever in place. Because really, why, at a fundamental level, can't an
employee who has vested some shares, not sell them?

If I told you that you couldn't spend the cash salary I'm giving you, you'd
think I'm crazy. So, if the employee has earned the stock, why is it
restricted? I understand the nitty-gritty SEC issues, but fundamentally... why
not?

~~~
tptacek
Even if the SEC registration rules were thoroughly relaxed --- which they
won't be any time soon, and which we could spend a thoroughly engaging several
hours debating (plus side: rational market for startups, downside: hedge funds
gone wild), it wouldn't matter.

That's because we're talking about _closely held private companies_. There is
more to being a private company than simply not having public shares; in
particular, private companies are typically very careful about who they permit
to hold equity, because:

* Company shareholders can more easily sue the company

* Shareholders may be entitled to information the company doesn't want to disclose (the big one being: revenue)

* Shareholders may have enough control rights to foul up investment and M&A activities, which competitors and bad actors might want to exploit.

I'm sure there are other reasons too.

Long story short: even if there were no SEC regulations, it doesn't seem
likely that everyone's employee stock would suddenly become transferable.
Employee stock isn't transferable because _companies don't want it to be_ ;
they use options to express "incentive interest in a future liquidity event of
the company", not to distribute ownership of the company to the broader
market.

~~~
ojbyrne
Closely held companies have a simple remedy to all of those - they force you
to litigate to exercise your rights. The company invariably has the resources
to bury an employee.

~~~
tptacek
That may be so, but it's orthogonal to the issue at hand. Employees aren't
prevented from selling their shares only because of stupid SEC regulations,
but also because most companies don't want their equity resold.

Envision any legal future you want, and companies will still find a way to
express that employees should share the upside of an acquisition, but cannot
distribute company equity to outsiders.

Can I just say, real quick: for all I know, there's a trend in the valley
right now towards giving employees unrestricted common stock on exercise of
their options. I think this is crazy --- unrestricted stock once allowed me to
imperil a deal at a prior employer --- but who knows? All I can say is that
every startup I've worked at or known people working at, employee stock was
heavily restricted.

------
guelo
I'm guessing these fees won't discourage Zuckerberg from selling the $100
million of stock he recently promised to give to the Newark public schools.

~~~
ojbyrne
I can almost guarantee he doesn't even have to pay the $2500.

~~~
borism
He granted the stock, not the cash.

