Is this waiver clause enforceable?
EDIT: Let this be a lesson folks! Always have an attorney review your options grant contract.
TL;DR A stockholder's right to inspect under Section 220 ~may only~ might only be able to be removed via statute.
EDIT: Edited to reflect IANAL and the statute might be up for interpretation.
Happy to help. This stuff gets super-complicated quickly. My understanding, and this comes mainly from passing conversations with other lawyers, is that it's a grey area.
If they expressed a waiver clearly and expressly, as it appears here, they may have a good case that you have no inspection rights.
There is also the question of whether you have to expressly consent or not, or if, after the fact, they handed you something that said "oh, by the way, congrats on waiving your rights"
For unvested shares, you buy the shares and pay for them immediately, but the company has the right to buy them back at cost if you leave before a certain duration of employment (which is when you "vest").
For options "you aren't holding any", you don't own any shares until you exercise your options.
Clearly this is an area in which an attorney would be helpful. IANAL.
I guess what we have at Google is different. I don't give them any money, and the shares vest over time. (Might be just a misuse of terminology to use `vest' here?)
If you left after 2 years, you would only receive half this amount even though you were "given" these shares when you joined. On the books, you are listed as holding all those shares. For example, since you are a RSU holder, you have the right to make an 83b election, though at such a mature company most of the tax benefits would be suspect.
As a RSU holder, you have full rights of being a shareholder, even for the shares that have not vested yet (this is why startup founders will have voting power from Day 1 even though 0% of their stock has vested yet). That being said you hold GOOG shares and not GOOGL shares (the latter has voting rights) so for all intent and purposes what you describe is accurate for what you see on the surface, despite the underlayers being more subtle.
Isn't this what the "gig" economy is leading us to? Uber is very similar: you aren't an employee, so no Social Security, no workman's comp, none of the hard-fought labor gains of the 20th century.
If you have good alternate options (eg another startup trying to hire you etc), you can demand better conditions.
You can get access to the books as a shareholder specifically 'For the purpose of valuing my shares", but then if you decide to buy or sell shares based on what you learned (and what other use is there to valuing your shares?), you're insider trading?
I assume you're referring to stocks of the company in question (or possibly its competitors as well). For a private company, you can't trade stocks outside company-approved periods anyway, so would this really be an additional restriction in practice?
It's selling restricted stock that's the big problem. You can do it, but it's complicated, and there are waiting periods.
Just curious, what if you had an attorney and they pointed that clause out. Would it have made you reconsider the offer? I guess you can attempt to strike it out from contract and see what happens, or more ask for more options instead?
That said, I think it's a foolish clause for companies to try and force through even though I can see their arguments for it. It puts the employee at a distinct disadvantage, and invites future problems when the employee wants to do something with their shares and has no choice but to sue for records access. Requiring an NDA would be sufficient. Beyond damages, the stigma of being the guy who broke their NDA and leaked financial data would pretty much guarantee no startup would ever touch you with a ten-foot pole. As incentives go, it's a strong one.
Is checking what lawsuits you participated in part of a normal employment background check? It seems to me that most employers might avoid looking at that sort of thing for the same reason they avoid looking at your family status.
That said, it's just a hypothetical and there would be a lot of factors at play in real life. But if it were at a startup with any sort of profile, or it had well-known investors, I wouldn't bet on the news staying a secret.
I admit that in the past I have always had the luxury of feeling like I could turn down a job if the terms weren't right. I've never had to, though. Having said that, I have witnessed people failing to join companies I've been at because they couldn't come to terms on the contract. It happens.
I work on contract now, rather than as an employee, so I have a lot more flexibility with the contract. I suspect it will have to be that way forever because I'm at the point in my life where I refuse to sign an inventions agreement.
One side point that I think is important to point out is if your employer tries to get you to sign something new after you are already on contract, they usually have absolutely no leverage. They can't threaten to fire you over it because that would be considered duress and contracts can't be signed under duress (where I lived, anyway).
Whenever I get handed new agreements to sign when I'm already under contract, I always ask for compensation. No compensation, no contract. Usually the documents disappear in a wink. One time they didn't and all I had to do was phone up the legal department and say, "HR has given me this thing to sign, but I don't want to. They seem to be implying that I won't have a job any more unless I sign it. Is that really the case? I have my employment contract here and this isn't in one of the termination clauses..." In less than 5 minutes I had an apology from HR (Ha ha! I should have framed it. I'll never get another one!)
Obviously I'm not a lawyer. This is not advice (legal or otherwise). Consult a lawyer if you find yourself in similar situations.
In most of the US that won't work. "At-will" employment takes care of that. So they legal would say "sure" don't sign it. But if they really mean you won't have job there, well, in a few months you'll find you won't. But not because you didn't sign the contract, it will be for "restructuring" reasons.
Retaliation for refusing to sign a contract under duress ties back to "continued employment isn't considered compensation for signing an additional employment contract." Even if there's a restructuring a few months later, the burden of proof would be on the employer to prove that there was no retaliation.
Only if they are sued. And then they can just say. It would take someone who is in on the nudge-nudge wink-wink euphemisms to somehow break the silence and testify. They'd have to have a falling out with the owners / management at the same when the person who is gone sued and then testify that "what we mean by restructuring is person is the wrong race". Then bingo, easy peasy case.
See companies have written rules and communication, and unwritten rules and communication. The unwritten rules are the nudge-nudge wink-wink type things.
If they are very careful they could even start a performance review probation period. Could say we need to "re-evaluate your role, you have to improve your performance review numbers". They set some unrealistic goals, then the clock start ticking. And in the end they have a paper trail of a reason to lay the person off. Even though, according to unwritten communication it was really because they were the wrong race, or gender and so on.
Yes. You're hiding crucial information for valuing a piece of my compensation.
It means that I/you should consider the offer excluding the options (is the compensation adequate if you value the options at near zero?) and/or negotiate for a package that has less options and more direct salary.
On the margin, definitely. Basically as always, it depends on what other options you have available.
(But if the job is only worth taking because of the equity position, then don't take it: without this information, you have literally no way to tell your stock from worthless junk.)
Good thing to learn more about or ask an attorney about.
I don't remember actual details but I am pretty sure someone here can shed more light on this.
Edit: this looks like it: http://lawgeex.com/
I don't have any recommendations, but would love for recommendations to be provided by a reply to this comment.
Large companies are less likely to let you change parts of the contract, but if a startup wants you they may.
Ie only accept the job, if the cash alone is enough, treat the stock as worthless until proven otherwise.
"There have been hundreds of Delaware lawsuits to inspect company books says Ted Kittila, an attorney with Greenhill Law Group. Most requests are settled before a suit is filed, he says."
So, for the cases which went to trial, were the companies held accountable, or were they able to skirt the law somehow? I'm curious whether employees who brought the suits were able to claim damages if the value of their shares changed materially in the interim where the company refused to release the financial information which the shareholder was legally allowed to see. The shareholder could claim that they would have sold if they were given appropriate information which they were illegally denied? Thoughts?
Is this unusual?
Of course this can be diluted, but it seems I had the numbers. I guess I didn't know the updated numbers for future rounds, until buyback offers came around or people quit and exercised and filed their taxes and shared numbers.
See  for my recent experience with Gusto.
trying to properly analyze the cost/benefit ratio of 100% financial transparency.
some potential risks:
* employees leaking financial details to press, future investors, competitors.
* employees getting upset over smaller equity stakes.
Getting accurate financials is tough even when a company isn't cooking the books, let alone when a company is misleading investors. Here's an extreme: "Over-transparency" didn't help Enron's employees. All of the information was there, but people refused to believe it. For startups, it's hard to remain disciplined and realistic about hype from an internal perspective.
Meanwhile, I'm sympathetic to keeping information privileged within private companies.
Seriously, burn is not that hard to ballpark, engineers who are smart enough to code should be able to do this math and make a calculated risk.
Parent's merely suggesting a Q&D sanity check that would help a lot of people who choose blissful ignorance. If you feel like I'm oversimplifying, would you mind elaborating further or sharing examples?
If employees are concerned about it, they should just ask. Good, ethical companies will be more straight with you than shady ones.
The second someone says that, that's a sign they have no actual argument.
Want to buy a house or pay down debt? Not up to you. They keep it secret because candidates would absolutely push back if they knew their options were worthless unless/until the company IPOs.
What reason did they provide for not answering your questions? Which communication avenues did you explore before deciding to leave? Did you try to negotiate with them?
Did you leave any options on the table, or did you exercise your options?
Reasoning presented was basically handwaving about "people wanted different compensation (read: divide and conquer)"/"we don't have to tell you this". I pointed out that, under my reading of the applicable law, I could exercise one of my vested shares and then check the books for myself--they didn't like that one bit. CEO got flustered when I brought the whole thing up--I'm sure they could've dealt with things more reasonably, but being on the spot they fumbled and erred on the side of "let's say as little as possible until we understand what we're doing".
By contrast, I asked a friend of mine what his company cap table looked like and he showed me the whole spreadsheet--a company with more investors, more revenue, more customers, and more traction than the one I was working for at the time. So, I couldn't by the "well we can't show you this" argument, because it was obvious bullshit.
The main takeaway is that one of their senior folks (me) said "Hey, you're paying us below market wages and are refusing to make up for that with competitive equity: why?" and they failed to provide a satisfactory explanation. If you choose to be secretive about that sort of thing, more power to you--but you can't be surprised that you'll be seen as untrustworthy, dishonest, and sheisty by people that ask the questions. If an intern wants the cap table, then I can understand not spending the cycles--but people who are building your teams, building your product, and doing the work your C-level should be doing (grump grump) actually do need that information to make good decisions.
As for your last question, upon my departure my options were bought back for a reasonable amount. You have to watch out for who pays taxes in such cases, but that wasn't an issue. I'm pretty sure they did this so they wouldn't have options outstanding to people that weren't working there anymore, because reasons. It's pretty silly if you ask me. There are reasons for that sort of thing, but those reasons didn't seem to apply.
Anyway, be aware this applies to shareholders. Having an option to buy shares is not the same thing.
As I type this I find myself wondering if it's not a bad idea to do in general, so that you move from "options holder" to "stockholder". Comments from those with experience?
I exercised some of my shares in a startup I was part of, solely for the sake of becoming a "stockholder" rather than just an options holder.
I felt good about being a stockholder. I did not get any enhanced access to information about the company (for several reasons, among them that they were pretty open anyhow and I didn't ask).
Company later closed down. Investors with classes of shares that were guaranteed more than 1x return on their investment took all the value and common stockholders got nothing. So, obviously, I lost money by exercising my options.
So I suppose I got "feeling good about being a stockholder" for the cost of what I paid for the options. And honestly, looking back on it I'm comfortable with that. I wish the company had succeeded, but I'm glad I was part of it even if it didn't, and what it cost me was not more than I could afford.
Making their jurisdiction of incorporation completely irrelevant as the VCs push for settlement quickly.
Delaware's Court of Chancery isn't even a perk for 99.9% of businesses. Delaware's "body of case law" can be leaned on by courts in ANY state if there is a conflict that state has never seen before.
That's kind of how it works, but not to the effect you hope. Delaware law isn't binding outside of DE, so if another court looked at it, they would only use it as guidance. Versus if a DE court looked at it, they would use it as binding precedent.
Which is the benefit of incorporating in DE. That law is out there and binding due to the large number of incorporations there and large body of case law that has developed. So answers to random questions are really known and agreed upon. Whereas with another state's court, if you can even get them to consider DE law, you're praying that they side with DE law, which isn't always the case. There's more risk.
There is an advantage to incorporating in DE, whether you believe that or not. Even if the advantage is, like using Ruby or Node or something, that everyone knows the law and it's well settled and boilerplate. You don't have to reinvent the wheel.
Reincorporation, foreign incorporation, and continuation corporations are valid ways to switch jurisdictions when you need it.
Just reading Nolo.com and incorporating in DE for limited liability of your pet project, even your pet project that may get employees, isn't necessary.
An interesting counterpoint, for many startups in the Bitcoin / Cryptocurrency space, incorporating /in/ the US is seen as a risk (to some). E.g. ShapeShift, Blockstream.
> Then the question is: where do you form one? Theoretically you have fifty choices, but the easiest place is Delaware. I'm sure you're all familiar with that as well. Delaware is in the business of forming corporations. The law there is very clear and very settled. It's the standard. The other thing is that investors are very comfortable with Delaware. They already invest in companies that are Delaware corporations. Most of their investments are probably Delaware corporations. So if you are also a Delaware corporation then everything becomes much simpler. There's less diligence for the investor to do. You don't have to have a conversation about whether or not to reincorporate your Washington into Delaware.
> We had a company at YC about two years ago that was originally formed as an LLC in, I'll say Connecticut. The founders had lawyer friends there who said that this was right way to do it. When they came to YC we said, you need to convert to Delaware. The Lawyers in Connecticut did the conversion paperwork and unfortunately they didn't do it right. They made a very simple mistake, but it was a very crucial mistake. The company was recently raising money, a lot of money, and this mistake was uncovered. The company thought it was a Delaware corporation for a couple of years but in fact it was still a Connecticut LLC. I'll just say this: four different law firms were needed to figure that one out. Two in Delaware and one in Connecticut. One here in Silicon Valley. The bill right now is at five hundred thousand dollars for a conversion mistake.
http://startupclass.samaltman.com/courses/lec18/ (transcript from http://genius.com/Kirsty-nathoo-lecture-18-mechanics-legal-f...)
But Delaware is Corporate haven. Planet Money did an episode on this
> Easiest place in the world to register a business anonymously is definitely the United States. The four sort of most lax states are more particularly Delaware, Nevada, Wyoming and Oregon.
> And again, we found that in places like the Cayman Islands and the British Virgin Islands and Jersey and then in one of the Channel Islands, we were very, very strict, and, you know, people email back and say, look, we'll sell you a company, but you must send us a scanned notarized copy of the picture page of your passport so we can keep it on file so we know who you are. But in the United States, the answer was, sure, this should take you about 10 minutes. Just fill, you know, fill in the details of the company you want on the website, transfer the money, and we'll send you the company today. I think it would be interesting if you tried to set up a company and compare how many documents they asked for compared to how many of the people in Belize are asked for.
Knowledge of this law might not have helped directly, since you're not a shareholder if you haven't exercised your options yet. It may have spurred you to exercise some/all of your options, just to be able to peek into the books, though.
so, I expect future contracts will include clauses for "voiding of employee inspection rights" and not "company transparency".
I know it's hip with the kids to be cynical these days, but surely you jest...
> It's a piece of paper
The legal term is "contract."
> This price can be higher or lower, you cannot know beforehand.
Yep. That's kind of the point. Risk versus reward and all that.
> It's not a replacement for a salary or a stake in the company.
Not directly, no. Neither is health insurance, 401k, company provided meals or other benefits, but all of these things are perceived by most to have at least some marginal value.
> I was handed out stock options myself for a company in the past but it wasn't worth it to use them.
C'est la vie
> I mean, unless you have options from a unicorn, those don't amount to much.
Or, ya know, you end up with a company that has good growth potential and those options work out in your favor, which is actually typically the case btw. On average, the market has improved over time. I'm guessing you were burned either b/c the company was high risk (which means you had the potential to do VERY well conversely) or you were hit by the downturn which also affected almost all stock, so not really related to options in that case.
> I have this impression that some misrepresent options with stock
Then some are idiots for agreeing to something they don't understand.
Typically the case? I'll wager that greater than 70% of startup employee options never pay out.
If you don't want to take this risk, choose a different industry. Traditional corporations issue options all the time that pay dividends that consistently net positive value. You may only get a few hundred/thousand per year, but you can depend (somewhat) on the income they generate.
And for a good rest of the other 10%, you'd have been better off investing in something else.
now, if one really is a 'key player' and a 'cornerstone', then equity is where the game's at.
> "Not directly, no. Neither is health insurance, 401k, company provided meals or other benefits, but all of these things are perceived by most to have at least some marginal value."
Stock options are, 99% of the time, worth $0. Perks, benefits, retirement options, all have intrinsic monetary value.
They are also, 1% of the time, worth >$100K.
Some people have a tough time valuing volatile assets and end up making statements like this.. "they're not really worth anything" or "treat them like they're $0". But it's utterly wrong to say they have no intrinsic monetary value. It's more correct to call them volatile assets -- or even more correctly, a risk-free (in terms of capital) option to purchase a volatile asset.
In an existing public company, as someone pointed out, the value of the company should be captured by the stock price, according to the efficient market hypothesis. As such, if the price is just as likely to go down as to go up, this should mean that stock options are merely worthless 50% of the time. Before you get into your ability to choose the sale date (subject to trading windows).
So really, unless your public company ONLY goes down from the date you start (excepting really weird scenarios where it goes up, but is always negative relative to your strike price during trading windows), you stand to make money from your options. Maybe not much, but something. And you can't LOSE money from them, unless you do something stupid related to taxes, or something stupid like buy-and-hold. (buy-and-hold for certain values of 'stupid'; I actually did this once in order to swing a lower tax rate and it happened to work, but I could have lost my proverbial shirt).
absolutely does not apply in private-company stock.
As I mentioned, in a private company, it could well be possible that 99% or 97% or whatever of stock options prove to be worthless.
I've seen so many startups' career pages mention stock options as noteworthy alongside perks. Stock options are like a reservation at a poker table where you're allowed to join the game.
> agreeing to something they don't understand
it's more likely the bling of a startup overshadowing everything and that it's mostly less experienced and young people.
The point of options is to take on some risk in exchange for bigger reward. To do this you can't come in with an employee mentality of wanting to get a market salary and have a lot of security, you need to start thinking like a business owner. It's easiest to do this as a founder where you have true control, but it's also possible to do so as an early employee / late co-founder, but in that case you have convince the founders/board of your value. Taking a lower salary in exchange for more equity is a concrete demonstration that you are thinking about the company's burn rate, and that you believe in your ability to help the company succeed.
None of this is to justify founder's taking advantage of early employees, by all means stick up for yourself and know your value, but recognize that a computer programmer is not worth $100k a priori, you can spend all your time building things which are worthless. The trick with a company is figuring out how to turn that energy into business value. Founders take on the biggest risk of making that happen, and likewise they get the greatest control. Options with a vesting cliff are the mechanism for realizing that value creation, and rewarding an effort over time.
Your ability to succeed with options will certainly be some amount of luck, but to maximize your chances you need an appetite for risk and the desire to build a great company rather than join a great company.
Here's another: Startups can get in trouble for selling stock to people who aren't 'accredited investor' (basically means "already rich"). This is changing, but it's still a problem.
So for instance, an employee that gets a big pile of options in an illiquid stock doesn't necessarily experience a taxable event. This is good for the employee.
If the stock later becomes liquid and worth a lot, the employee can exercise the options and cover any taxes by selling the resulting stock.
So the time I was a founder and got 100k options at 1c I bought the stock and started the capital gains clock ticking (but then lost the $1k when things crashed and burned). But when I got 10000 options at $1, I didn't buy them for $10k, but made $250k when the company went public -but paid tax at my marginal rate (43% in CA).
You have to make choices depending on your circumstances and tolerance for risk
The problem is equity is serving two purposes. On one hand, it represents ownership of the company, the ‘capital’. On the other hand, due to it’s favorable tax treatment, it has become a key component of compensation. Marisa Meyer didn’t start or invest in Yahoo, but she is compensated almost $40m a year in equity, over 90% of her pay package.
When you are evaluating an offer between a startup and a larger company, regarding compensation you need to evaluate the whole package: salary, equity, and bonuses. Startups want to compare only salary and over value their equity. “You’re taking a 50% pay cut from Google, but we are giving you XXX in equity at our last valuation.”
Look at the total pay packages with more realistic valuations such as a 409a for startups, and then examine the probability of different exits and how much you will make. There’s a reason people say employees are learning while founders are earning. An honest assessment of the paydays doesn’t usually bode well for employees at startups. If founders can’t talk to you about this, you probably don’t want to follow them. Most hope you don’t ask the questions and then say things like “What, you don’t believe in the company!” They should be able to sell you on the probability of success, the learning, and everything that will make up for less comp. But don’t let them mislead you about the comp.
A friend of mine works in one of those unicorn startups, and got about a million dollars worth of options at the current valuation. The strike price is about a third of that price. So if she ever wanted to exercise them before the company goes public, she'd have to pony up over 300K (which she doesn't have) and then deal with the taxes. So even if the payday was real, it still means handcuffs until the company goes public, and companies are taking longer and longer before they go public.
So, in practice, regardless of whether her employer will be a successful company in the long run, just being stuck in a job for X number of years before any of that money is real is a big discounting factor.
I think this is a big limitation for those very large startups when trying to hire senior engineers: The risk one takes with RSUs is so much lower the risk with options in a company that has no plans to go public in the next couple of years, it makes so much more sense to work for the publicly traded company.
And I doubt all that many options holders confuse them.
And I strongly suspect that the most common beneficiaries of stock options are not those who make millions off of a unicorn they started working at in the early days, but those who pull in a few tens or hundreds of thousands of dollars from stock options over the years at growth companies.
Not every company is trying to time their IPO for the peak of market speculation and then go out of business a year later.
Since they're apparently worth nothing to you, I will buy all your options for $100.
This makes your plan quite a bit complicated and likely impossible to pull off.
In reality, various contracts could be put in place such that I provide $100 now in exchange for the rights to any eventual profit from his options.
To make them more compelling than stock grants the options have to be ISOs, the spread on them has to be negligible or zero (to avoid a large AMT bill), the exercise cost has to be low enough that you are ok with handing over that amount of money up front, and you need to be able to actually hold the actual stock for long enough (at least 2 years from date of grant, and 1 year from date of exercise, to be counted as long-term capital gains).
Note that on this last point if the company is acquired prior to that date you're likely SOL on the tax advantages. These days I much prefer RSUs. I've twice failed to reap the theoretical tax benefits from ISOs due to acquisition prior to the 2 year window, and I find RSUs much easier to reason about especially once option exercise costs become non-trivial (which is the case if you were to join many of the hot pre-IPO unicorns these days).