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OnLive assets acquired by newly formed company (techcrunch.com)
119 points by il on Aug 17, 2012 | hide | past | web | favorite | 75 comments

This article is bullshit. The CEO of a company cannot "take back" or "wipe out" your right to purchase stock, aka stock options.

More likely what happened is that the company sold for equal or less than the outstanding preferred stock overhang. Another way of saying this: OnLive's investors got all the money (they raised $56MM) and the founders and employees got ZERO for their common stock.

A stock option is a binding CONTRACT to purchase stock (typically common stock when you're dealing w/ employee stock options) at a set price. If a company is acquired and the price of common stock is below the "strike price" of the employee stock options then the employee has a valueless option to buy stock for more than it's worth.

Oftentimes in an "exit" that's just shy of bankruptcy, common stock holders will get nothing and investors will get all the proceeds, often at pennies or nickels on the dollar.

So... Did OnLive screw its employees? Highly unlikely.

You're arguing the wrong details.

From what I understand the legal corporate entity that employees had options in essentially ceased to exist before employees had a chance to exercise their options. And, that corporation ceased to exist because it built no effective value, so employees had underwater options with no logical incentive to exercise in the first place.

Summarized as 'your options are now gone'.

If the company ceased to exist, then it died in an asset sale and the founders got nothing while investors got cents on the dollar.

If the company was acquired and common stock holders cashed out in a positive way, then it was a proper acquisition and OnLive was required to disclose its stock optionees and the buyer would have been required to set aside cash/stock in escrow to pay them out. Otherwise yes they would be subject to liability and lawsuits, which would be dumb to expose yourself to.

This is a thing that happens. Be careful who you pick as your business partners.

Employment contacts can have a buyback option for any stock you own as soon as you leave the company at the original price or private 'fair market value' valuation price to avoid the '500 shareholders' problem as you churn through employees. If the '500 shareholders' problem doesn't exist in this case actually (I don't know myself), then they'll definitely use it as an excuse as to why they have it.

You effectively don't own your stock, and it doesn't let you move on after a year or two to something else and still keep the stock if you think the company will go somewhere.

I think skype did this to screw their employees out of their stock.

Before you start with a company, ask if they have this kind of clause!

That's a pretty rare clause in startups, which is why people wanted to hang Skype (and Silver Lake Partners) so much over it. It's apparently fairly common for management in PE-led turnaround deals, but I've never heard of it in startups except for the Skype deal.

(What shocked me was that a16z was in on the deal as well, and as far as I can tell, had no problem with it. I would have expected better.)

I think it is exceedingly unlikely such a clause is in OnLive employment agreements. Steve Perlman is a particularly honorable entrepreneur who has been involved in startups longer than a lot of HN users have been alive. He has nothing to gain by tarnishing his reputation like that.

Much more likely this was just a company which ran out of money, has debts and liquidity preference far in excess of assets, and thus all common stockholders, including optionholders, are wiped out. Those who continue in a successor entity might get new options for future work.

Many contracts have a 'if you are let go, you lose unexercised equity' clause. At least all of mine have over the years.

You typically have 90 days to exercise. The question is whether it would make financial sense in this case, only insiders would know.

Mine have always had "you have 30 days to exercise your options after you quit or are let go for any reasons". Which is more common?

> The CEO of a company cannot "take back" or "wipe out" your right to purchase stock, aka stock options.

The folks who thought they had options at Skype found out that there were secret addenda to the option grant that let them swindle you out of your options when you leave.



We don't know enough yet. A company cannot take back options, but laying off all employees would save them from having to give the unvested portion. This could easily halve their stock liability to employees, depending on a bunch of factors of course. Now of course if they are being sold for a low price the options are likely useless regardless due to VC liquidation preferences.

Minority stock owners can easily be wiped out by bastard moves of insiders. The management can issue 8 zillion new shares of stock.

It's probably illegal, but once things are going down the tubes at a small company the stakes are usually too small for it to be worth it to the minority shareholders to bother with lawyers.

> The CEO of a company cannot "take back" or "wipe out" your right to purchase stock, aka stock options.

Sure they can, if that's how your vesting contract is written. You get fired, your un-vested options are gone.

I think the most heartbreaking thing about all of this is the lady in the comments who said her husband just lost his job and she's pregnant with health complications. This is ridiculous, if someone bought OnLive, they just bought a publicly tainted company and apparently it's EA (a company that is no stranger to being dicks).

Steve Perlman should be publicly shamed, that's the only way to prevent this. These greedy people should be scared to do this in the future.

You may get more money, but your reputation is fucked.

Morally i find this way more infuriating than Yahoo suing Facebook.

The company ran out of money, went bankrupt essentially, and thus common stockholders got wiped out. Silicon Valley doesn't tend to punish people for failing at business -- it's not clear from anything I've seen that the company did anything immoral. It would be nice to retain enough cash to pay out some severance to employees when you shut down, but other creditors have rights too, and you can get sued if you do more than the minimum. Maybe putting it into employment contracts is worthwhile.

I agree it is a shame her health insurance is tied to the employer -- that's a major problem with the US health care system, and why I have personal insurance (rather than taking insurance from an employer). Fortunately, her husband should have a new job if he wants one before the end of the week.

Because if he just shut down the company instead, his employees would totally have it made. There's no happy way to do a fire sale, which is what this looks like.

Well somebody got a lot of money, we will find out later who, but definitely not the one who needed it the most. And please USA, get your health care fixed. It is so sad to read these stories all the time. You are the richest country on earth.

From the sounds of it, 'a lot of money' is probably both an overstatement and also a value significantly less than 'money they invested into the company'.

Nobody came out a winner in this deal.

If the CEO was going to get nothing which I strongly doubt, he should have just quit. Nobody would taint their reputation for zero return, Steve Perlman definitely would have made something out of this - it might not be a lot of money but I can almost bet that it is a hell of a lot more money than those who were fired and shafted received.

I think someone needs to orchestrate some kind of small-scale campaign to smear Steve Perlman from ever running any kind of company in the future.

He's been working on this for over a decade. It's a bit unfair to assume that his motivations are purely monetary and reputational.

The company build up value (patents etc.) and the employees get zero of that. Maybe the VC's are the problem, when they dictate terms when they have a higher preference than the employees (what is unjust to begin with), but also a CEO who allowed that. In this case he got nothing either, but has still some responsibility.

Gaikai was bought for 380m, i just don't get how OnLive can be worth less than the 50m investment.

Hopefully they don't try to screw them out of COBRA continuation coverage.

Unfortunately COBRA ends when an employer shuts down its health care program (bankruptcy, etc.)

Wait, what? That is insane policy.

It is logical, in that it is "employee allowed to continue on group insurance from employer when leaving company". If the employer shuts down or shuts down the insurance, there's nothing to continue.

The real problem is having employers providing insurance at all.

Luckily this sort of thing rarely happens. The reason is that you need great engineers to trust you if you want to succeed. By founding a startup you are taking great personal risk, but your employees are also taking some of that risk with you. Most startups pay (very very) below market salaries, and bring employees up to parity with a much less terrible place to work (very few very bright people would prefer to work in at a big company), and by giving out options.

I suspect that the CEO and other high level managers at this company will have serious trouble recruiting the next time they want to start something new, because they now have nothing to offer. Nobody is going to trust their promises, stock options they issue will be seen as basically worthless (since everyone will think they are likely to be screwed out of them), so they will have to pay market rates (which is probably 2x-6x what startups generally pay in total compensation).

If I were a founder of a company, and I were faced with this choice, I would probably rather let the company fold than cash out (or in this case probably just not go under) while leaving employees behind. Failure is rarely punished in the valley, but nowhere is dishonesty or double dealing more likely to be recognized and rejected.

More likely scenario: the company company is about to go bankrupt and finds a buyer. The buyer says: We will pay your investors $.50 on the dollar in exchange for all your assets and IP. We don't want any of your people as part of the deal because we want to shake things up, install new management and dramatically reorganize the Business because the way it's been running to date sucks. Like, seriously, you drove it into the ground. That said, we reserve the right to rehire some of them after the deal closes.

I would argue that these employees on "(very very) below market salaries" are taking more risk than that hypothetical founder.

They take same uncertainty risk [company failing]. Similar financial risk [unless founder has invested own money]. But. They don't have any control over the company. That results in larger uncertainty risk.

I disagree. Employees are still collecting a salary, and they probably haven't put lots of money into the company up front (although over time they are effectively doing so in the form of lower salary).

Generally founders of startups have taken a leap of faith well before there are any employees collecting a salary. They work full time on the idea for a year or two before they can approach investors, living off of savings or small investments money from friends and family. By the time the first employees are brought in, there is enough money in the bank to pay salary and benefits for a year or longer.

Do I think that most startups under value the opportunity/uncertainty risk that employees take? Absolutely.

I'm not sure, that past activities of founders (or employees) are relevant to risk estimation.

It should be just financial/lost opportunity/uncertainty risks that go into the equation. A particular founder or employee is _going_ to take some risk by joining/or staying with the company.

> very few very bright people would prefer to work in at a big company

Citation needed?

You make a good point. Lots of extremely smart people work for large companies. If you held all variables constant other than company size, I suspect most people would prefer a smaller company, but that is just an educated guess, and in reality company size is heavily correlated to other factors.

Many venture capital firms have done crap things many of times and have had no problems getting deals again and again.

nowhere is dishonesty or double dealing more likely to be recognized and rejected.

Do you know of any examples of that kind of rejection? When Hollywood directors make a movie that bombs, it's common for them to be put into "Director's Jail," where they don't get to make lucrative movies for a long time (see: Michael Cimino), has this ever happened with a C-level? My sense is that these bridges are fireproof.

It's probably a healthy attitude to assume stock options and equity in a startup are worthless anyway. At least they shouldn't factor into any important life choices you make.

If something that you have equity in has no value or little value.. then it's all really a mute point. Remember kids start ups are high risk ventures; your equity can be diluted, and taken away... all legally.

Double-check how soon your options will start vesting before you sign-on, so that you don't get screwed over by something like this.

(Also, btw, it's "moot", not "mute")

How much difference does it really make? If all of OnLive's folks were vested, couldn't they still could have been fired and their shares diluted w/ another round or creepy acquisition terms?

Diluted, yes. Eliminated, no. See other comments in this thread about the "cliff" -- once you're past it, it's harder to get screwed over.

There are an infinite number of ways that common stock (and the associated options) can be rendered worthless in acquisition or winding up a company.

Simplest way is to sell the company for enough to pay off preferred shareholders, and use "personal service contracts" to compensate insiders. They get paid well, shareholders get zero.

Most of them would not stand up to a lawsuit, but if you suddenly have no money coming in, are you going to be willing to pursue an expensive, years long legal process?

It's likely those investors have liquidity preferences anyways. In a fire-sale situation that equity is likely worthless.

I don't find this distinction very useful, and I disagree that it's harder to get screwed over. It's in fact, just as easy.. we're only talking about degree. I think your argument is that instead of your shares being worth zero, they can only be diluted to any positive real number... which brings me little comfort.

There is a distinction.

With dilution the founders, who are more likely than you to have a say in what happens, are also likely to suffer that dilution. However in the incident that happened the founder didn't lose a dime.

Can't the founder be issued a bunch of new shares as part of the dilution? (I mean in theory, not in this specific case.)

In theory, yes. However in practice you generally need signoff from other investors, who are unlikely to be supportive.

Good luck to any typical employee having any chance of getting an exception to a standard options agreement.

Options have primarily been 1 year cliff/4 year vest since forever, and that is unlikely to change.

This is all part of the "fun" of signing on to a startup, and a big part of the reason why you often hear advice advocating to not trade salary for options, or to not be swayed by the potential future value of options in considering your job offer.

Unless you are a "name brand" in your industry and being heaving recruited, you should operate under the assumption your typical options grant will end up being worth between $0 and $5000 at best.

So their PR firm has put out this statement: http://www.engadget.com/2012/08/17/onlive-confirms/

It feels a bit (actually a lot) strange that they'd dissolve the entire company and lay off everyone to attempt to get out of an agreement for servers or something. It just doesn't add up. Also, why the employee reports aren't saying this... just strange. PR spin at its best?

A "show press release" button? WTF kind of user-hostile information designer suggests...oh wait, Engadget.

i read somewhere that they had INSANE capex spends on the hosting.

opex, I think you mean.

I'm curious who they were using, who negotiated the deal, and what drugs they were on. I heard something like 1800 simultaneous users and $1000/seat/mo.

There appears to be quite a bit of confusion as to what happened here. The TechCrunch article doesn't really provide enough detail, saying only that the staff was fired in order to "reduce the company’s liability" which doesn't really make sense.

I am not a lawyer, but as an investor I have seen this happen before. My guess (no connection to the company, wasn't aware of them prior to today) is that in lieu of filing for bankruptcy, they did an Assignment for the Benefit of Creditors.

But what may have happened is: 1. OnLive recognizes that they're essentially bankrupt. Directors and managers now have a fiduciary duty to maximize the recovery for creditors, not for shareholders.

2. Instead of going through a formal bankruptcy process, the company does an Assignment for the Benefit of Creditors (see a good explanation here [1]). Any price paid for the assets by a buyer above what is owed to the creditors goes to satisfy the liquidation preferences, though it's unlikely there will be much if any recovery of value above the debts owed to the creditors. The value of the common equity is totally wiped out (both common stock and employee options) as the total value of the assets is well below the amount due creditors + the liquidation preferences.

3. A buyer for the assets (the source of money with which to pay off the creditors who now own the assets of the defunct company) forms a new company, call it OnLive Asset Acquisition Corp.

4. OnLive Asset Acquisition Corp purchases the assets (not the stock) of the defunct corporation now owned by creditors. The new acquirer buys the assets so as to avoid any existing/potential liabilities of the defunct corporation from whom it purchases the assets. Imagine there's a company whose only asset is a rack of servers that you wish to purchase. To gain ownership of the servers, you could buy all the shares of the company or you could just buy the servers as an asset with no encumbrances. You would likely do the latter, as buying the stock comes with potential liabilities for past/future money owed or lawsuits. That's likely what happened here, but for IP, etc.

5. The original employer OnLive is no longer operating. The employees are all terminated, as their employer is gone and its operating assets are owned by a new company. The new company may or may not seek to hire some or all of the employees of the defunct company.

6. Even if employees had been able to exercise their options, they were virtually certain to be worthless. There is no way the price paid by the new owner for the assets of the dead company would exceed the debts + liquidation preferences (otherwise the directors wouldn't have liquidated it). Had the employees exercised their options, any cash they paid to do so would have gone to the creditors to satisfy the company's debts and they would have received zero in proceeds.

It's a sad story for the employees, but there are rarely any happy outcomes for a company in bankruptcy.

Again, I'm purely speculating on what happened. But based on the facts disclosed so far, it's not clear that one can conclude that the employees received a specific and unusual screwing by management vs. a typical screwing associated with the liquidation of a bankrupt employer.

[1] http://bankruptcy.cooley.com/2008/03/articles/the-financiall...

The details make it sound more like a PE rescue to me, but I agree that it's unlikely that there is some kind of windfall being withheld - the likely other option probably would have been bounced paychecks.

Good analysis, and Kotaku reported yesterday that OnLive applied for ABC protection and there will be a new company formed with at least some of the employees. http://kotaku.com/5935767/onlive-filing-for-bankruptcy-new-c...

In another thread, the rumor is that they were going out of business, not getting acquired.


Quite splendidly some one has edited - http://www.crunchbase.com/person/steve-perlman his middle name as (The DICK)

Revision history here http://www.crunchbase.com/person/steve-perlman/diff/8/9 at 4:59pm by

Loiks like TheVerge was covering this live and had a reporter stationed outside. www.theverge.com/2012/8/17/3250507/onlive-employees-fired-all-hands-meeting-acquisition-imminent

Onlive declared a "variation of bankruptcy" to get out of employee liabilities.

We'll see if that gets them out of class-action territory.

Anything to substantiate the rumor?

Look at the techcrunch comments, someone claiming to be an employee stated that he was let go and lost all his equity.

Onlive employees walking out the front door carrying boxes is pretty convincing to me..

No, them being fired was not in question - them being fired, so that the owner can walk away with all of the money from an acquisition is the substance of the article.

The "owner" in this case is mostly some VC firms who almost always have liquidation preference over employees anyway.

The se kinds of things seem to be more and more common. I hope employees take note and protect themselves when they sign up in new places (read no more cliff agreements).

As an employee, you protect yourself in this case (where the company is failing) through having enough cash compensation, skills, and contacts to have a new job before the day is out.

It's upside cases (like the sale of Skype, Zynga IPO) where you protect yourself primarily by not working for dirtbags. Secondarily, a standard contract, reviewed by a lawyer, could work, but I'd trust Google, Facebook, almost any YC startup, Quora, etc. as employers based on the founders, even if I didn't review the documents. Realistically you're not going to be suing over $100k in compensation anyway.

The nice thing is, within Silicon Valley, the set of bad actor companies with respect to stock is pretty small. Zynga and Skype are the only ones I know of, although in some Acqui-Hire situations, current employees are favored above former employees or investors (like Slide -> Google, or in fact many Google acquisitions).

That wouldn't make a difference. When a company is failing, investors are always first in line to get their money back, and in this case there's a lot of investor money to be paid back before anyone else sees a dime.

If by "first in line" you mean that preferred stock owners are ahead of common stock owners you're right.

But there are other creditors that go before any stock holders. One of the main creditors is wages owed to employees for work performed. It's probably small consolation to people who see their equity wiped out, but I've known of companies during the dot-com bubble that went bankrupt and tried to cheat employees out of even that.

Which is clearly insane.

Employees invest time and skills (since part of their pay comes from options) but somehow investing mere money (and possibly in more than one company) is rewarded with the better stocks.

And this at a time when the valley is nearly the only place one can invest money in honest businesses (that is to say, those that produce actual value, not just live of the actions of the past or sweetheart government deals).

What's a cliff agreement?

A "cliff" refers to a time period that must pass before an employee's options vest. It's typical for startups to offer options with a 1 year "cliff" to keep employees from walking away with equity if they don't stick around.

Say an early hire is offered 4% equity with no cliff. That means that .083% will vest each month, and that early employee could walk away with more than tenth of a point of equity after 2 months, likely before they contribute enough value to the company to justify such equity.

Startup employees should view equity as a bonus anyway, and make sure they're earning a market rate unless they're earning really significant equity, because best case scenario the equity will be significantly diluted before an exit, and more likely, the company won't make it to exit, and the stock options will therefore be worthless.

That being said, if the rumor in the article is true, its still a massive dick move, and it probably also cost the company a substantial amount of money in severance pay.

EDIT: It looks like it's Illegal in california (where OnLive is located) to claw back stock options by firing employees without cause [1]. Therefore, if the rumor is true, then OnLive probably had to pay the employees some cash equivalent of the stock options and get them to sign a termination agreement.

P.S. I'm not a lawyer and have nothing more than a cursory understanding of this stuff. This is definitely not legal advice and you should verify everything I say on your own.

[1] http://www.paulhastings.com/assets/publications/1443.pdf

If your options (1 option = chance to buy 1 share, at a price that's typically fixed when the options was issued) vest over a three year period, it means you would be issued 1/(12*3) of your total options per month, for three years.

A common clause in such a vesting schedule is a "1 year cliff", meaning you don't actually get any options granted to you for the first year of employment. After a year, you get a third (1 of 3 years) worth of options in a lump sum, then the usual monthly amount each month after that.

If you fire employees before they reach their cliff, they don't get any options, and won't benefit at all from any liquidation event / sale / etc.

i think typically you get your full 25% at the end of the first year and then it starts vesting monthly.

It varies. Amazon does every six months after year 1.

Sounds a bit like what happened to GM

OnLive CEO Considered Harmful.

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