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Startup Employees Invoke Obscure Law to Open Up Books (wsj.com)
424 points by ojbyrne on May 24, 2016 | hide | past | web | favorite | 171 comments

Interesting. My options agreement has a clause called "Waiver of Statutory Information Rights" in which I waive my inspection rights of the company stock ledger, a list of its stockholders, and its other books and records, and the books and records of subsidiaries of the Company provided under Section 220 of General Corporation Law of Delaware until the first sale of common stock to the public.

Is this waiver clause enforceable?

EDIT: Let this be a lesson folks! Always have an attorney review your options grant contract.

Thank you so much. I appreciate that you took the time to find this and reply to me.

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.

"Thank you so much. I appreciate that you took the time to find this and reply to me."

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"

FWIW, although I am not a lawyer, I do not read that the same way you do, to say that the waiver is unenforceable. Rather, it says that the corporation cannot unilaterally take away the right of inspection. That does not mean you cannot give up the right in exchange for something. In fact it strongly implies that you can as long as the waiver is "clearly and affirmatively expressed."

Could the option grant itself be consideration for the waiver? IANAL.

'Clearly and affirmatively expressed' meaning in terse legalese, 6 point font, on page 16, section 2, sub section iii of document #8 of your HR welcome package.

This seems to say that only persons holding shares can make a request under section 220. So if you aren't vested in any of your shares, you aren't holding any, and therefore can't make this request? IANAL (obviously).

There's a difference between unvested shares and options.

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.

> 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").

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?)

You were given a certain number of GOOG shares that vest over a 4 year period. That is your vesting schedule. You typically do not "buy" your RSUs as an employee. They are granted to you and thus are subject to ordinary income tax. A company's founding team will "buy" the RSUs as part of the initial capitalization of the company. Young companies may have RSU sales to employees rather than a grant (one could argue that this is a small financial optimization).

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.


You might like the section of the article beginning "Some companies are now pushing employees to waive their right to inspect the books as a condition for receiving stock awards, says Richard Grimm, an executive compensation attorney."

Is this going to be the fate of every worker protection law? Why even bother making it a law, if the company lawyers will simply sneak a waver into the mile-long employment contract, buried between the NDA and the promise that you will help train your H1B visa replacement?

Good protection laws likely have stipulations that they cannot be overridden by other agreements. Some laws don't even hold if such conditions aren't included, such as unreasonable anti-compete clauses. Best to always talk to a lawyer :)

Some countries in continental Europe have amazingly pro-employee legislative environment. I know several people who don't read the fine print of of the work contracts, because they know that any clause that gives disproportionate advantage to the employee without due compensation will be considered predatory, and thrown out in an instant if it goes to the court room.

Is this going to be the fate of every worker protection law?

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 don't have good alternate options for earning your income, they can always shaft you one way or another.

If you have good alternate options (eg another startup trying to hire you etc), you can demand better conditions.

Much of the stuff you sign when you take a job is unenforceable. But they have you sign it anyway, because you remember signing and think "what's the point in talking to a lawyer?"

Thanks for calling that out. I missed that. Its odd, because our company opens the company books to us whenever we'd like (its public on a dashboard). Its the list of shareholders it appears they're keeping private.

this is actually not always ideal. If you have visibility to the company books SEC rules about insider trading apply to you even if you have no advantage by looking at the books. For public companies any employee who can see any financial or revenue information is not allowed to trade stocks outside of 14 day window after the announcement of quarterly report. Not sure what the rules are about this for private companies

For a private company, for the people we're talking about, the answer is generally that they practically can't trade at all, so you're not losing anything by looking at the books.

That has odd intersection with the Delaware law in the OP.

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?

There are other reasons to value your shares, other than to buy or sell them. For instance, to pay taxes.

> For public companies any employee who can see any financial or revenue information is not allowed to trade stocks outside of 14 day window after the announcement of quarterly report.

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?

So educate the employees about those rules. Don't try to force them to waive their rights.

So does DannyBee's link imply that this is not actually possible? I'm confused here.

You could sell one share to a third party in a private transaction. They could then exercise their inspection rights.

If they told you what they saw and you traded based upon this would this not constitute insider trading?

See what the SEC has to say about insider trading.[1] You can usually sell to another insider, which in this circumstance would seem to be anyone who has at least one share and thus an equal right to examine the books.

It's selling restricted stock that's the big problem. You can do it, but it's complicated, and there are waiting periods.

[1] https://www.sec.gov/news/speech/speecharchive/1998/spch221.h...

I don't know. But even if it did, you might want this information for non-trading reasons like "how hard should I be looking for a new job?"

> Always have an attorney review your options grant contract.

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?

Honestly, if they're willing to put this clause in there in the first place, it's unlikely that they'd be willing to negotiate it for anyone but high-level hires. And that's iffy. They apparently have a very strong desire to keep their financial data private, so the most likely outcome would be rescinding your offer if you state that it's a deal breaker.

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.

>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.

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.

Not really, unless there's a reason for a more thorough background check/investigation. My thinking was that such a situation would be the sort of thing people would talk about. Investors would be upset if a leak harmed their interests, founders would be pissed about a betrayal, other companies would talk about it as a "this is why we need that clause" anecdote, reporters might stumble on court filings, etc.Word gets around, and in a lot of ways, the startup/tech communities are still small despite their size.

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.

In all of my past experience, terms like these in employment agreements are "take it or leave it" and not subject to negotiation. I once tried the "let's strike it out and see if they notice" thing, and the next day got a very clear and terse "Sign it unmodified or GTFO" from Legal. I've never heard of anyone successfully negotiating anything besides normal things like salary and vacation, but it may happen from time to time.

I've done it on almost every one of my employment contracts (didn't do it on the last one because it was entirely reasonable). I'm fairly choosy about what I strike out, though. For example one contract I had stipulated that I should compensate the company for any losses they incur if they terminate my employment. This is clearly unreasonable and I struck it out. They complained and I offered to GTFO if they really thought that the clause was that important to them. It turns out it wasn't.

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.

> I have my employment contract here and this isn't in one of the termination clauses..."

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.

[IANAL] Kind of. At-will means you can fire for nearly any reason, but you can't fire for the _wrong_ 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.

> 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.

> Would it have made you reconsider the offer?

Yes. You're hiding crucial information for valuing a piece of my compensation.

Well, the clause plus the likely refusal to remove it implies that your options shouldn't be considered as particularly valuable.

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.

> Would it have made you reconsider the offer?

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.)

I am not an attorney, but have been around tons. One thing you learn in Law 101 is that a contract that is antithetical to a law, or in other words enforces something illegal, is null and void, or perhaps that clause or section of the contract is null and void.

Good thing to learn more about or ask an attorney about.

Yes, This was demonstrated in the Silicon Valley HBO show. Hooli had the employees sign a contract which could not be enforceable legally. The episode where Gavin Belson is in a arbitration hearing room surrounded by a bunch of Hooli lawyers and gets his ass handed over to him by the arbitration judge. David beats Goliath in the court of law.

I don't remember actual details but I am pretty sure someone here can shed more light on this.

Wow, that bites. Clearly the invocation of law works if these clauses are showing up. I wonder if we'll reach a point where the "tech shortage" gets bad enough that engineers can negotiate clauses like this out of agreements they are asked to sign.

even Delaware corp in CA seems to be subject to CA law and it doesn't seem to be waivable (IANAL of course)



IANAL but my understanding is options and just that, an option to buy stock later. You don't actually own any stock until you exercise size your "option" to buy the stock

Any recommendations for attorney to review employee option contract?

Seems like this might make a great productized consulting offering.

Edit: this looks like it: http://lawgeex.com/

Adam at bierlegal.com is my lawyer and I can't speak highly enough of him. He's really really good and will explain things to you in a way he knows you've understood.

At the time I signed my options agreement, I didn't have the resources or time to engage an attorney (regretfully).

I don't have any recommendations, but would love for recommendations to be provided by a reply to this comment.

Call your local bar association; they can refer you to an appropriate lawyer. Have him review your current contract, and keep his contact info for reviewing any future contracts. Cost me about $200 last time I did this.

Large companies are less likely to let you change parts of the contract, but if a startup wants you they may.

If they don't want to change this provision, insist on getting all (or most) of your compensation in cash, not stock.

Ie only accept the job, if the cash alone is enough, treat the stock as worthless until proven otherwise.

I have never understood why it should be lawful to waive basic rights like that. The only reason to do so is to hide information from people.

Quote from the article:

"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?

Damages would only apply if the employee had the right to sell the shares, but did not have access to the accounts. If the company only withheld the accounts during the time when insiders were prohibited from selling, then there would be no decision for the employee to make.

My employer told me "Our last round valued us at $XXXX for YYY shares. you have ZZZZ options at $WWWW strike price."

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.

It’s fairly disingenuous to use the fundraising valuation. Investors have a ton of preferences that make their shares more valuable. Probably cut that by a third or ask to see the most recent 409a valuation. Walk through possible exits with dilution, assess the likelihood of those exits, and try to make a calculated guess at the payoff. In all likelihood it is less then working for 4 years at a big company and founders saying it isn’t are selling their book. If they can’t make the follow on valuation gates and see an exit, you probably won’t make anything. Even if they exit at the valuation when you joined, your shares will likely be worthless as senior preference holders get their guaranteed returns.

Without disclosing the complete capital structure, especially debt and stock liquidation preferences and multiples, your company has essentially just misled you (unless there are no preferences and all shares have equal liquidation).

There can be other clauses (in bylaws for example) which can prevent transfers and effectively render your shares worthless.

See [1] for my recent experience with Gusto.

[1]: https://medium.com/@octopoedi/dear-gusto-mission-is-more-tha...

More interesting to me would be "We made -$$ on $$$ in revenue, revenue has been growing at 120% so our runway is xx months"

Not really. The simplest explanation is that you are getting a discount relative to what the investors paid. Investors usually get preferred stock, whereas rank-and-file employees usually get common stock, which has far fewer protections than preferred. They should be able to tell you this if you asked them, though.

what are the cons of being fully transparent re the cap table and other financial details when the startup is small (say under 50 employees)?

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.

Employee's leaving the company en masse every time they realize you only have 3-6 months run in the bank.

It's generally pretty obvious anyways. Perks start drying up and people start getting chastised disproportionately for mildly wasteful actions.

Yes, that makes sense. The question is, is it legal to keep your shareholders uninformed (I guess it is) and for how long (tricky)?

I fail to see giving workers more information about the potential future of their career, so they can adequately plan and change direction if they feel the need as a bad thing. Just pulling the rug out from under them and not giving them a chance seems pure evil.

There's definitely tension. That said, I'll go further than the usual startup qualifiers (e.g. You SHOULD™ be aware of the risks.)

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.[1] 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.


No one forces them to take the gig. If they're smart folks they should have already done the math that "Hm, we're pre-profit, raised $X million a year ago and burn about $15k * Y employees a month... We probably have about Z months left!"

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.

ballpark is nearly uses. The difference between X and 2X is huge and it's very hard to make the estimate tighter, and you don't know what not-profit metrics will impress investors to put more cash into further growth. Many many companies run for 10 years pre-profit.

I think even in your "non-GAAP" metric case, I would hope an employee has an idea of the risks and isn't banking on near-term payouts (months, not years).

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 you're not prepared to take the risk of the company going under, why work for a startup at all?

Completely irrelevant.

How so? Understanding risk is not relevant to working at a risky-by-definition startup?

I agree, but I don't think that is a good reason not to share that information.

No one is likely to share it with potential hired directly for the same reason you aren't likely to outline all the ways you might fail at the position in your job interview.

If employees are concerned about it, they should just ask. Good, ethical companies will be more straight with you than shady ones.

Getting that information should not be dependent on winning the "Not Shitty Employer" lottery.

"No one forces them to take the gig."

The second someone says that, that's a sign they have no actual argument.

Did you have an actual counter argument to share?

You didn't have an actual argument to counter.

It's definitely unfriendly to employees, but is rampant across companies. Gusto, for example, has a clause in their bylaws which blocks employees from selling shares.[1]

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.

[1]: https://medium.com/@octopoedi/dear-gusto-mission-is-more-tha...

And none of that should be allowed.

Don't companies have to establish (and report to shareholders) the 409a valuation regardless of anything else? Every private company I've had stock in has done a quarterly 409a in order to demonstrate to the IRS that they are fairly valuing options. Admittedly this is a bare number, without any of the supporting material that may be of interest if one wants to do their own valuation, so DE law is still interesting here, but for the sheer purpose of valuing your stock 409a seems to do the job.

Do you know if the 409(a) report is required to be made available to stock holders, or is it something the company can also hide? If the company reports the valuation reported in the 409(a), is there anything else of value in the report which stock holders would benefit from reading/being aware of?

I think the only time you get the 409(a) valuation is when you get the IRS reports after execrcising.

My wife recently needed to know the 409(a) valuation of a company she owns stock in and was able to get it within a couple days. Obviously YMMV, but consider that we pay estimated taxes quarterly -- valuing those shares at least once per quarter is a necessity.

Not having access to this basic information is one of the reasons I left my job last year. When the CEO starts getting really weird about basic questions like "How many people are invested in us? What does the equity pool look like? How much of the company do my options represent?", it's time to look elsewhere. The company had less than 10 people at the time, which made it even weirder--and I'd been there for two years, as the first engineering hire.

I am intrigued by your story.

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?

In the interest of helping fellow devs:

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.

It sounds as though it's not particularly obscure and very very clear why it is part of the law. If you have shares or a right to shares you should be able to see who you are sharing with. Isn't that the very point of this law?

Is this really considered obscure? I'm pretty sure I read about it in a Nolo book on small business.

Anyway, be aware this applies to shareholders. Having an option to buy shares is not the same thing.

While many people may not be able to swing exercising all their shares or a generally-meaningful number of shares, you can exercise one.

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.

It's not obscure. It's pretty well understood by financial markets players, including VCs. I think it's probably not well known by startup employees because it's an issue they've almost certainly never been faced with.

Aren't several SV startups not even incorporated in California leave alone Delware ? Most of them are incorporated in some tax heaven such as Cayman Islands and such ?

Most startups are incorporated as DE companies (most common) or in the state of their founding (e.g. California). This is because the laws in these states are well known and have been tested by a large body of cases that establish precedent. As a VC investor, having a company incorporated outside the US introduces additional legal risk.

I am not a lawyer but this is a fascinating topic... When you pull out the SEC record for the company and it shows a tax heaven address, isn't that address the place of incorporation of the company ? EDIT :And by pull out I mean, purchase the record from SEC. EDIT :Replied to my own post, corrected that.

That awkward moment when the only law that the startup will be tested by will be labor contracts in the state they operate in, and EEOC law at the federal level, and other federal laws

Making their jurisdiction of incorporation completely irrelevant as the VCs push for settlement quickly.

Sure but why add EXTRA legal risk by incorporating in an X-factor state?

It isn't extra legal risk. You simply have legal teams copying and pasting incorporation structures and contracts, now they're about to get all their company's financials leaked.

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.

> 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.

what you say is true, it is just not applicable to 99.9% of businesses. When you have a dispute over capital structure and disclosure to investors, then Delaware will be useful. And you can incorporate closer to when you get to that point.

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.

>As a VC investor, having a company incorporated outside the US introduces additional legal risk.

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.

From the YC-run "How to start a startup" Stanford class:

> 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...)

Before downvoting stillworks, consider that they are just asking a question. Why penalize someone for asking a question? I wish HN had a flagging option for when we think something is improperly moderated.

Because it might not be interesting discussion? Voting isn't to reward/penalize people, it is to surface the best discussions at the top.

Legally you still have to pay your taxes when offshoring or you could be in trouble if the taxman finds out.

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.

I wish I would have known about this back in 2011 when I joined my first California startup. While I did learn a lot on the job, the leadership team was very shady about the value of the company and the shares. I eventually ended up leaving and not exercising my options after the C-level execs were switched out 3 times in 6 months, but having this info would have been great to know.

> I eventually ended up leaving and not exercising my options

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.

This is interesting. As a thought exercise, would it be possible to exercise a single option? Based on the broadest reading of this law, that would entitle the employee who exercised to request financial information. Partial exercise would also be an option for those looking to keep some exposure to a former employer but without the capital (or risk profile) to exercise their whole grant

Another link to the same article: http://on.wsj.com/1OKFn27

transparency is good for everyone. It keeps companies honest.

Absolutely, and even companies with transparency as a value often hide terms from employees.

See [1] for my recent experience with Gusto.

[1]: https://medium.com/@octopoedi/dear-gusto-mission-is-more-tha...

That means it's not good for companies.

It's good for honest companies.

and companies control what goes into the employment contracts.

so, I expect future contracts will include clauses for "voiding of employee inspection rights" and not "company transparency".

According to another comment thread, those clauses are not enforceable.

That won't hold up in court.

ok Ken M

This is a meme for people out of the loop about a yahoo comments troll, here's the subreddit https://www.reddit.com/r/kenm . The GP is right in his style. This is my favourite comment by KenM, http://imgur.com/KM6E918

Man, that's funny. Thanks. That guy is an evil genius.

The spirit of this law is very noble. It protects minority owners of companies from abuse by management or majority owners. Are there some unintended consequences, though? Could a competitor buy 1 share from an ex-employee to get access to the corporate accounts?

I suppose that would be possible, but I think that it is very common for private companies to work into their stock agreements that they have right of first refusal for stock sales. Therefore, they should theoretically be able to restrict a competitor from purchasing their stock by simply purchasing it from the seller themselves instead of allowing the sale to go through.

Very likely you need to hold some threshold of stock similar to how certain amounts of stock provide added benefits such as representative voting.

Uhm, if you have been offered 'Stock Options' that means you have invested (sweat) equity, and therefore, I think, that you get to see the books, just as any other 'investor'.

Aren't the articles of incorporation public information? You should be able to find the the percentage of equity that your options represent from this.

Someone please make me an app that automates the process of filing these requests!

this is great for share holders but most employees are option holders.

From what I can tell if you exercise a single option this still applies

true, but how many employees do this? Often the company doesn't not allow them to buy the options and do the 83b election thing.

Transparency begets trust

What's the point of stock options? It's a piece of paper that allows you to buy stock if and when at a predetermined price. This price can be higher or lower, you cannot know beforehand. It's not a replacement for a salary or a stake in the company. I was handed out stock options myself for a company in the past but it wasn't worth it to use them. I mean, unless you have options from a unicorn, those don't amount to much. I have this impression that some misrepresent options with stock.

> What's the point of stock options?

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.

> good growth potential and those options work out in your favor, which is actually typically the case

Typically the case? I'll wager that greater than 70% of startup employee options never pay out.

If you're going to limit the discussion to startups (I did not), then we need to have a different discussion. I imagine all Facebook employees with an employee number less than #1000 are quite happy with their options. As with all things investing related, risk is proportional to reward. So, those 70% that aren't paying off are offsetting the 30% that are paying off massively.

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.

"30% pay out" is not the same as "30% pay out massively"

You misspelled pedantic.

You're pretty optimistic. I was going to guess more like 90% never pay out.

And for a good rest of the other 10%, you'd have been better off investing in something else.

even less than that. if 1 in 10 startups survives the first year and 1 in 100 goes to ipo, stock options are just a trick to underpay engineers.

now, if one really is a 'key player' and a 'cornerstone', then equity is where the game's at.

Or have them taken back if they leave or get fired.

I agree with everything you said except for this part:

> "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.

> Stock options are, 99% of the time, worth $0.

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 a startup, you may be right, though I suspect you chose 99% for hyperbole. Maybe it's more likely 80% of the time or 70% or 98.7%.

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).

> efficient market hypothesis

absolutely does not apply in private-company stock.

Absolutely. That's why I only mentioned it in reference to an existing public company.

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 think this is the case of the startup world ignoring things outside their bubble. At most companies, options are issued are against stocks that pay dividends, vest at a discounted rate (sometimes $0), and are generally net positive. Yes, in the startup world it's basically like a kickstarter for total compensation, but that's "99% of the time" not how options are used/viewed and a specific silicon valley corner case.

> > What's the point of stock options? > > I know it's hip with the kids to be cynical these days, but surely you jest...

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 value of options has nothing to do with unicorn status. If you join an existing unicorn, especially a public company, then your options are no better than a roulette wheel—the valuation already has captured a large amount of savvy knowledge about the future of the company. Also, because it is so big you won't be able to move the needle anyway.

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 one of the points of stock: If you want a stake in a company you have to buy it (it can't just be given to you). A lot of employees don't have the cash on hand to buy stock so companies issue options instead. And even if they did, they'd risk loosing that money. You can't loose money on an option.

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.

Stock can indeed just be given to you via a "stock grant." The value at the time of the grant constitutes income (for the purposes of income tax calculations in the US.)

I don't think the requirement to buy a stake is the same rule globally. I've heard of people who got a stake just for joining with a lower salary but didn't put money into the company, just their work.

I've been offered a stake at a privately funded startup for a lower salary and that's reasonable and realistic. Had they offered me options instead I would have walked away sooner than I did. Trading salary for a stake is a gamble, but doing the same for options is like a quadruple mortgage.

The problem with giving outright shares compared to options is you owe taxes on that. In the taxman view you got something (shares valued via 409A) on which you have to pay taxes even if the shares you got are not liquid.

I don't think becoming an owner is necessarily deferred compensation.

Options have different tax implications than stock.

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.

however if you buy them while they are still valued at the option price you also don't experience a taxable event .... and you can lock in the purchase as a potential capital gain (and possibly pay lower tax when you do sell them) ... the down side is you've invested in something you probably can't get back until when (and if) it goes public.

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

Options are your right to equity or ownership of the company. So you experience some of the upside as well as risk some of the downside.

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.[1] 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.[2]

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.[3] 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.

[1] https://medium.com/the-wtf-economy/what-paul-graham-is-missi...

[2] https://www.google.com/search?q=marissa%20mayer%20compensati...

[3] https://bothsidesofthetable.com/is-it-time-for-you-to-earn-o...

And it gets worse when you consider that there's still a short limit in which you exercise options after you leave, and the company might not go public in a decade.

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.

Not to mention that options can, and do, go underwater at which point they're worthless. I would argue that an option to buy stock at a $15 strike is worth a lot less than 1/16th of a single RSU when the company's current FMV is say, $16, if the company is still private, especially given current market conditions.

You make a great point. I probably wouldn't work for a startup that doesn't extend the exercise period. Fortunately, people are pushing for this and I think it is great for employees. [1, 2] Strong signal that the company thinks about you.

1. http://blog.triplebyte.com/extending-stock-option-exercise-w... 2. http://blog.samaltman.com/employee-equity

I believe you meant to say "confuse options with stock" as opposed to "misrepresent".

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.

Do you have any stock options?

Since they're apparently worth nothing to you, I will buy all your options for $100.

Unfortunately, you cannot buy options, only the underlying stock after the option is exercised. It's likely the strike price will be in the thousands for this grant. Also, the company will likely have the right of first refusal on a sale, which means that if $100 is less than what the stock is worth, the company will simply repurchase its own shares.

This makes your plan quite a bit complicated and likely impossible to pull off.

Obviously, this was merely a rhetorical point.

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.

The point of stock options is that they let the owner of said options participate in the success of the company. If the company is very successful, that participation can be quite a lot of money. If the company is not successful or only moderately successful it's unlikely to be much money at all.

That's argument for equity compensation, but stock options are not the only kind of equity compensation offered. I've earned $0 on all of the options I've had in a bunch of different companies, but I've gotten dollars from RSUs in the past.

Of course, but it's just a bonus like high probability of success when you join a great team with a proven track record. You don't know if the price will be higher/lower and thus it's just that, a bonus at best. If you're expected to take more risks or lower salary, the usual and correct way it to be given a stake of the company.

It's not clear to my why you value stock grants so much more highly than stock options. They certainly can be in some circumstances (though in those cases they come with a healthy tax bill), but for early stage-ish startups there generally won't be a huge difference.

I imagine you know this but the tax advantages for stock options aren't as clear cut as you make them sound.

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).

A stake in the company means I own part of it, usually 5 or 10 percent at minimum to attract technical talent. Options or stocks are harder to quantify.

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