

Employees Are Cashing Out Their Private Shares, But Is It Healthy For Startups? - ssclafani
http://www.businessweek.com/magazine/content/11_18/b4226070179043.htm

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jamesaguilar
Is it healthy for startups? Probably not. It means your workers are no longer
indentured to your megalomaniacal aspirations and personal views on the
valuation of your company. It means they are not enslaved to your whim
regarding whether or not your company needs liquidity. In short, it is good
for employees at the expense of companies.

~~~
ojbyrne
Which will produce better companies.

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jamesaguilar
That may be true but I am not certain that it follows. It's true that much of
the economy is a positive sum game but not all parts of it are. In this case,
if you model a startup as a product that has a relatively fixed market-value
after some amount of work by employees, then it is entirely possible that
shifting market power over labor to employees will make it more expensive to
produce that fixed-value product. Perhaps this change will also spur employees
to greater efforts or attract even more talented employees for a shorter
duration, but that's not necessarily the case.

~~~
lsc
The problem with employees losing interest because they've already gotten paid
is one we've faced before, and one that's easily solved. Vesting. Hell, if you
don't want your employees to sell out before the IPO, simply set your vesting
schedule so that nobody vests pre-IPO.

Really, the only difference here is that now it's /possible/ to let people
vest and cash out before the IPO.

To me, this seems like a simple work-around to the regulatory rules that make
IPOs difficult. If the market was regulated like it was 1998, twitter,
facebook, groupon, etc, etc... would all have IPO'd some time ago, and
employees would have cashed out the old fashioned way.

I guess this does mean that companies need to be more careful about vesting
schedules... the article seemed to say that the guy doing the selling worked
at facebook 6 months. It seems pretty funny to me that much anything would
vest in that time period.

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roel_v
"Hell, if you don't want your employees to sell out before the IPO, simply set
your vesting schedule so that nobody vests pre-IPO."

I think the whole point is that these employees are actually selling _futures_
, not vested shares. The only solution is to prohibit _that_ , and I don't
think such things are contractually allowed (otherwise the lawyers mentioned
in the article, who tried stopping these secondary markets, would have
succeeded and this article wouldn't have been written).

~~~
lsc
I think vesting would still at least help the problem. If I'm a startup
employee with options that are not vested and I'm selling you futures on my
yet-to-be-vested stock, you're not only betting on the stock, you are betting
that I'm going to stick around at the company and not quit or get fired before
I vest. I don't think futures on un-vested stock options are going to be worth
nearly as much as options on vested stock.

~~~
roel_v
Of course, and although part of that risk (from the pov of the broker and the
buyer) could be hedged contractually, there is still the risk of dilution etc.
That's why I'm interested in learning more about the exact mechanics of this
'cashing out' - it seems to me that the staff involved must be paying a hefty
risk premium for their liquidity. I haven't seem many details of how these
deals are structured show up, though. Probably because it would reduce the
numbers that employees actually receive much smaller, making for much less
interesting headlines.

~~~
lsc
> part of that risk (from the pov of the broker and the buyer) could be hedged
> contractually

everything I can think of here (e.g. not actually paying the seller anything
until their shares vest) ends up leaving the seller (the employee with the
stock options) with strong incentives to not get fired at a place where doing
the minimum required work really ought to get you fired. So I guess that could
reduce an employee's incentive to work hard by reducing the upside, but it
certainly wouldn't eliminate it. And all those things also reduce the
investors upside, too; I mean, sure, you've covered the downside, but I get
fired and you don't get any of that facebook stock you wanted. Do the deal
with two unvested employees, and maybe you end up with more facebook exposure
than you can afford.

> it seems to me that the staff involved must be paying a hefty risk premium
> for their liquidity.

yeah, especially if the shares are unvested.

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ardit33
I think earlier liquidity is healthier for the eco-system.

It allows more mobility of employees and the creation of new companies when
people cash some of their stock for cash and move on and found new companies.

It only sucks for companies that treat their employees badly, or don't
compensate enough, etc...

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anamax
Loyalty is earned, not owed.

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onan_barbarian
Smoothing out the income that employees get from options seems like it could
be both healthy (psychologically) and good for tax purposes, at least in some
jurisdictions (Australia, for example).

I'm not sure how having an incentive for employees to want the company to be
more valuable not just at a far-off IPO but also in the next six months or two
years is a bad thing. As another poster pointed out, there can be restrictions
placed on transfers of ownership.

~~~
roel_v
A large windfall like this would be structured in a SPV that pays out over
many years anyway, also in Australia, no?

~~~
onan_barbarian
Honestly, I don't know. Would be nice to have experience in this area. :-)

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ojbyrne
Replacing a club with a market. Obviously the club insiders will complain.

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guelo
These companies allow this to happen, if they wanted to they could restrict
the transfer of ownership of the shares. But the secondary market allows zuck
to blow $100 mill on public schools and such.

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patio11
Zuckerberg will have access to $100 million regardless of the secondary
market, because he can call up any investment bank and say "I invented poking.
Will you give me a $100 million loan at sweetheart interest rates?", and they
will say "Of course, Mr. Zuckerberg." because you do not piss off future
clients with multi-billion dollar accounts over the trifling matter of a
million here or there. (Zuckerberg has substantial influence in deciding e.g.
who to pick for underwriting the Facebook IPO.)

The huge impact of secondary markets isn't that Zuckerberg gets to invest
other people's money in public schools, it is that a married Facebook engineer
who did not invent poking but might have worked on optimizing MySQL calls gets
to send his kids to private school using his own wages. He cannot call up
Goldman Sachs and get a loan secured by the value of his Facebook options,
because he does not have anything Goldman Sachs wants.

~~~
guelo
There's no doubt it is a great deal for the engineer, but the question the
article is posing is if it is good for the company. The point I was trying to
make is that if they try to stop it it would also personally affect top
management, so they won't do it even if they should.

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kevinburke
Having too much of your own wealth invested in one place is very risky (from a
personal finance POV). However it signals disloyalty/bad outcomes in the
venture (think of an entrepreneur looking to sell all of his shares; would you
buy them?).

The idea behind getting shares is that you're motivated to work harder because
your worth is tied to the worth of the company. However it's not clear that
the thing holding you back is a lack of motivation.

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pdenya
First page had some interesting info but tl;dr. A summary would be appreciated
from folks that finished the article.

