Employees at Practice Fusion got nothing as execs pocketed millions
cnbc.com
cnbc.com
There was even a second market offering to let Ryan sell enough shares to pay his taxes and maybe buy a nice house in South Park.
I don't feel bad for the engineers, since they were generally exposed to enough information that they should have been able to call bullshit. I feel bad for the customer success team, who were often given a tenth of the amount of shares as engineers but would still frequently talk about retiring when we IPO. Hopefully the exec bonuses will be voted down, and there'll be a class action lawsuit.
This is a problem that faces a lot of startups. We should all be more wary of information that's given out, and be more demanding of transparency. Learn a less from all of us PF employees: the more a company talks about their IPO, the less likely it's going to happen.
> There was even a second market offering to let Ryan sell enough shares to pay his taxes and maybe buy a nice house in South Park.
Who was buying the shares from Ryan in this secondary market?
> This is a problem that faces a lot of startups. We should all be more wary of information that's given out, and be more demanding of transparency. Learn a less from all of us PF employees: the more a company talks about their IPO, the less likely it's going to happen.
I generally agree, but no matter how much information is given out, if the last deal is done secretly and with bonuses and pre-arranged values, there is no amount of information that can protect you from that.
I don't remember who was buying, but I think it was literally on "Second Market" before they were acquired by NASDAQ (iirc)... I wanna say that was in the summer of 2015, and was the only official liquidity opportunity that was offered for employees, at least in the last few years that I was aware of. I know some of my colleagues got out with sharespost sales, but those were only the ones who had enough shares qualify for that sale (which, again screwing the lower compensated employees, wouldn't be the customer service teams).
In my mind, there's two things that should change: first, and most importantly, we need better protections for employees in these kinds of situations; second (and a distant second, but still salient since it's the only thing that you really can do to protect yourself), people should be more wary. I totally agree that you can't protect yourself from these kinds of deals done in secret. But, you can look for the kinds of warning signs and stay away.
I know people who were laid off during one of the multiple rounds of layoffs, and still went back to buy their shares. That's some strong Kool-aid, and it makes very little sense to me why one would do that in this context if they weren't being given some strong misinformation.
Doesn't have to be rules, just a guide and companies who comply and those who don't.
For an example how this could work, see the CFA and GIPS. Every big asset manager is in compliance with GIPS. Every reputable startup should choose whether to be compliant with best practices for equity for employees.
That word has already gotten around and is one of the main reasons for ageism in the industry - the only people who will work for startups are those who haven’t been burnt or wised up yet.
This is an interesting thing to consider. If you look at the current president of YC (sama), at least from an outsider's perspective, he's the beneficiary of exactly the type of behavior you're trying to get away from. Based on his company's exit, he is now a VC, but his company was acquired for essentially what it raised, meaning the employees' stock was likely worthless. I have absolutely nothing personal against sama, but let's remember that YC doesn't exist as a charity, it's a business.
I cant imagine one measure increasing salaries and efficiency more than allowing employees to trade stock.
But let's also remember that the people running YC are adults, fully capable of telling right from wrong, and fully capable of being held responsible for their actions. Being "a business" is no more of an excuse for their actions than "following orders" is.
man...fuck this shit hard...this is just straight up deceiving people
Wow. $700 * 300,000,000 shares outstanding (according to the screenshot someone else posted) = $210,000,000,000. That was... optimistic.
I want to ask this without sounding like it's an indictment: do most honestly offer their empathy with similar conditions?
Interestingly, if someone wrote "I don't feel sorry for fast food workers, they had enough info to learn a skill and earn more," that usually strikes a nerve with a lot of people. But software devs getting nothing?
That said, getting fleeced sucks and most likely it is similar to why people who know better fall for most scams - they think they can beat the system. They know it is false information but they think they are good enough to still come out ahead and the other sucker is going to take a hit. Sometimes they are right but most of the time they are the sucker.
I've been at a startup that handed out split stock options like candy while the CEO was planning on using his majority control to transfer all IP to a separate entity.
I've been at a startup where the executive team buried a clause in the equity agreement that would allow them to forcibly buy back all shares, where the sum valuation of the company was how much money was deposited into a single, explicitly defined bank account.
I've seen a non-compete agreement that stated the employee was not only barred from working for competitors for five years, but working in the entire industry altogether.
It's amazing the depths of greed you can find when you read the fine print.
Too bad that's probably not enforceable. But sure it sounds serious when you don't know no better.
He was a lawyer.
When I pointed out the bank account valuation to the CEO of that startup, he said, "that's not what that says." I informed him that I had run the agreement through two lawyer friends who had confirmed my interpretation.
Listen up, prospective employee: if your founder makes several million, you’ll get zilch. If founder makes tens of millions, you might get enough for a modest car. If your founder makes over $100 million, you might have enough for a down payment on a house. Then you can go to the next startup and work super hard all over again to try to mint another mega-millionaire.
I’m also wondering whether giving significantly more equity than usual to employees would deter potential investors, even if their own share of the cake remains the same (i.e. only by diluting the founders).
Employees have agency. Founders don't have some magical power over you with which to screw you. You choose to work for them in exchange for money, stock, whatever. If stock is a sizable part of your compensation, you probably should be asking a lot of questions about it. How many shares will I get? How many shares do you have? How is the company doing? What are the future plans? When am I going to get liquidity? Do your own accounting. If they won't give you the information you require, don't join! If the company isn't hitting its benchmarks, leave! There are lots of other companies out there to join, including many publicly traded ones so you'll always have the full financials (and liquid stock).
If you do your homework and are serious about continually evaluating the company at which you work, you will not get screwed. Your time is the investment, and every 3-6 months you should re-evaluate whether the company is the best place to work. You don't owe the company anything! They need to keep proving to you, quarter after quarter, that what compensation they are giving you is worth you continuing to work there. Are you guaranteed to be successful? Of course not. Being an employee of a startup is risky, and you might make the "right" move that ends up not working out. Just from this article it seemed to me there were many clear warning signs this company wasn't all it was cracked up to be, and some employees didn't evaluate the company's trajectory properly and ended up getting screwed. It's a lesson learned but I'm sure many of them could have pointed out in retrospect where they went wrong.
And I'll also add that being a founder sucks, and being an employee is comparably much easier. First, getting companies off the ground is really really hard and founders have to do that themselves. As an employee you can look around and join a company that already is showing some traction, saving yourself a bunch of time and frustration. Additionally, as an employee you can and should leave if the company starts falling behind its benchmarks and you think there are better opportunities elsewhere. As a founder you can't really do this, you basically have to stick it out until the end.
So basically, being a founder isn't any better or worse than being an employee, they are different paths with different expectations, and each one of them has to be done with care to get the most out of it.
If I asked the founder for all of the financial documents the company has signed so I could know it's obligations, I can't imagine that a majority of the founders/CEOs would say "sure here you go". And even if they did, the cost of a lawyer to go over all of that paperwork to make sure you didn't miss anything would be expensive.
Financial literacy is a very important skill. Yes, startups are complicated. To be an informed employee you need to deeply understand how stock options work, you need to deeply understand how startup financing works, and it wouldn't hurt to have a general understanding of business. And look, if you just want to be a software engineer, then you don't have to learn these things, but then you can't complain if you get screwed. Or take a job at a publicly traded company and use the stock price as a proxy for how the company is doing.
And as for the availability of the documents and financial information, the main ones you care about are: revenue, expenses, total burn and cash in the bank. Any company that will not reveal those is being shady, full stop. These figures should be so top of mind the CEO or CFO should know them off hand without even having the look. A good company will share all of these with the full company every month or quarter, because they are really important indicators of how the company is doing and what the overall strategy should be.
You don't need a lawyer. You are not auditing the company, you are just getting a sense for the company's trajectory. Your job is actually really easy. If things are going well that is normally obvious. Revenue going up. Burn going down. Fundraising rounds at higher valuations. If these things aren't happening or you suspect something shady is going on, leave! You don't need to break the case, just get a better job at another company that is doing better.
That's part of it, but not all of it. Total number of outstanding shares (including warrantable shares!) can change the complexion of things a lot. And then there's the question of preference -- deals that a company made years ago can make for a big difference in share value.
Unless a company has an incredibly clean cap table, a rank-and-file employee will never really know how much their shares are worth until they are either worthless, or have a cash-in-hand buyer. What you're talking about is the general case of "things are moving in a pretty good direction", and that's important. But to really gauge value of a stock option is much, much more complex (and is constantly changing!). Even if an employee were able to come to a reasonable estimate of common stock value, one bad month can wipe that away (an emergency $5m round to make payroll? a loan backed by stock? a long-term lease backed by stock?).
No, it isn't. It's reality.
"Founders don't have some magical power over you with which to screw you. "
They absolutely do. They have the power to dilute your share to nothing, and they have the power to make special deals which cut you out of receiving anything.
"And I'll also add that being a founder sucks"
That doesn't change a damn thing. That doesn't excuse for one second the shenanigans that founders pull to screw over their employees.
Seriously, this idea that we're entirely in control of our own destiny, which has the side effect of blaming the victim over the whole thing, needs to end.
This is an exaggeration. Founders/officers don't have the power to dilute the common shareholders "down to nothing" unless they believe it is best for the shareholders. All officers have a fiduciary duty to the shareholders, and can be sued if they violate this.
People get confused because in cases like this the company sells for $100 million and the investors get something, the founders get something and employees screwed. Then they take to leap to say employees ALWAYS get screwed! The truth is, if your company raises $150 million and sells for $100 million, its a fire sale. If you are an employee, you are never going to get anything in a fire sale, so you had no reason to expect anything in the first place. As an employee, you will only get paid with equity if the company grows REALLY REALLY BIG. If the company isn't growing, or isn't growing fast, employees not get anything. This isn't a scam, this isn't some founder trick, its just the way companies work. If the company isn't growing REALLY REALLY FAST, leave!
Yes, it is sleazy for the founders to be showing a document with a "what-if" valuing the company at 5B when it ends up selling for 100M. But as an employee you must be able to differentiate between a 5B company vs a 100M company, that is literally a 50x difference. If you can't, how can you possibly complain?
No, it's not. We're literally in a comment section about that very thing happening.
"If you are an employee, you are never going to get anything in a fire sale, so you had no reason to expect anything in the first place."
Bullshit. The leaders of the company got quite a bit, so no, it is not unreasonable to expect those that are actually doing the work to get something.
You are trying to excuse these shenanigans as perfectly acceptable, and all it's doing is coming off as saying that employees should just shut up and deal. But you're not giving anyone any reason why they should agree to these shitty terms; why they should bust their ass just to make some founder rich while they get stuck with nothing.
And then you have the absolute gall to blame this on the employees, saying that it's their fault they didn't leave in time. As if it's somehow their fault that the founder was a scumbag who fucked them over? And as if that the vast, vast majority of startups aren't doing the exact same thing?
You have no defense for any of these actions. The blame rests solely on the founders who sold out those that worked hard for them. And I really, really, really hope that these stories get around, so that it makes things incredibly hard for scumbag founders to try and deceive hard working people into working for worthless equity.
It is unreasonable to expect it, because that isn't how the law works. The employees can complain and file lawsuits all they want, but they'll probably lose. It's a fire sale with retention bonuses for the officers by the acquiring company. That is all very standard stuff that the courts of law will not overturn as unfair unless there was some fraud that goes beyond what was written in the story. A founder selling a very optimistic viewpoint of their company's future is not against the law.
But guess what, if you are buying that viewpoint and trusting the founders, that's on you. As an employee you have the power to do 2 things: not join companies run by sleazy people and quit companies that are going poorly. If you don't exercise either of those options, you are leaving yourself wide open to be screwed.
And look, if you want to sit back and tweet at how horrible these founders are, go for it. I do think bad behavior like this should be called out as a massive signal to any future employees not to work for companies started by these sleazeballs. But don't talk about how silicon valley is a rigged game that employees cannot win. Silicon valley right now is a fucking gold rush for employees. There are lots of great companies out there paying lots of money to software engineers who take the time to find them. This company was not one of them, and the employees gave up a lot of value working at some shit-ass company instead of finding a good one.
"But don't talk about how silicon valley is a rigged game that employees cannot win."
Why not? This is not the first story we've heard of this, and it won't be the last. In fact, I'd say stories like this are far, far more common. So yes, I will keep beating the drum that the game is rigged, until it isn't. Because it absolutely is, and you have to be incredibly blind, or benefitting from the rigged game, to claim it isn't.
Stuff that amounted to, "Oh, we extinguished those shares, sorry about that," when the corporation was worth several billion.
This stuff is broken. You are far better off working for a mature company with decent management; if you are any good, you won't necessarily have "fuck you" money at the end of ten years, but you'll probably be ahead by several million dollars, and the value of "several" might be pleasantly surprising.
And some of that 300k/year difference is coming from growth of invested savings, not just W-2 income.
I haven’t been on the market in a while, seems like I fell behind the times.
How much is the company worth? What is the number of shares outstanding.
Both of which they wouldn't give me. I told them the stock was worthless, that I wanted a 25k pay bump, which they granted.
Years later they ended up getting acquired for a hefty sum (950+ million) and people who were in the employee 5-50 range and worked there for 8+ years literally only received enough for a good used honda civic. Only two people in eng made over a million, 1.5 and 6, but that was only because they were managers that kept the cattle inline.
I currently find myself in a similar situation, where the books look dire but the executives keep saying that we're so close to profitability. I'm 85% certain that my stocks will be worth nothing, but I stick around because I still see an ounce of promise. Am I just a sucker?
If you've already exercised and paid AMT, try to invest your other savings and if you need to take a loss you can offset it against those capital gains.
While it might not be something you're passionate about, I would also add that reading about startup law, discussing with your peers, and knowing your rights, and even asking (getting in writing) the terms of the investment rounds, is invaluable and certainly something you should do if you want to understand your full package.
A good reason to stay would be a lot of cash. Or modest cash but a lot skill-learning and/or connection building to open more doors for you next year. Subpar cash plus lottery tickets is not a good reason to stay.
There are some unique skills you can only pick up at startups, namely: 1) running a startup skill, learned from founders 2) running entire product rather than one small piece (larger companies will not let you run the whole product until you “prove” yourself) 3) understanding fundamentals of business, which will slow you to pick better startups to work for, or to make one.
It's one thing to be nearly profitable like Amazon was for many years, where current income was going into investment for the future; if a need for profitability arose, investment could be toned down and margins would appear. It's another thing when the current costs are slightly more than the current revenue, but decreasing spending immediately will also decrease revenue immediately. The later situation could be ok, if there's some realistic medium/longer term cost savings or revenue growth plan that is likely to be finished before the money runs out.
Startups that have revenue but not profits are judged a lot harsher in the market right now than they used to be; certainly they're judged harsher than startups with no revenue. If your stock makes your total compensation good/acceptable only if there's a big exit and the required exit is much bigger than is realistic, you're not well compensated -- unless you're getting something else out of it.
Can you elaborate on the benefits of this? I exercised ~10% of my vested options at my 1 year cliff, but I have not received any additional communications. I looked into requesting specifics from the company because they're "A Delaware Company", but apparently the law says that "curiosity" is not a valid reason.
I think you need to be careful to make the purpose to assess the fair value of your current holdings, as the purpose has to be "a purpose reasonably related to such person’s interest as a stockholder". Assessing the value of your unexercised options isn't in the interest of your current holdings. If they push back on this, "why do you want to know the value, you're not planning to sell are you?, etc", then say you need it for estate planning, which is reasonable enough.
In other words, assume the stock will always be worth zero, and then make your decision to work there based on that assumption. Will you be happy doing what they want you to do for the salary they are offering if you know the stock will be worth nothing?
The answer isn't always no. Sometimes you'll get to work with amazing people, or on a really hard problem, or get a lot of responsibility you couldn't get at a big company. All of these intangibles might be worth the pay cut.
--What fraction of the company's outstanding shares is that? --How many of those shares are some kind of preferred shares? --What was your premoney valuation in your last financing round, both total and per-share? --How much money did you raise, in return for how many shares?
Or you can ask to see the capitalization table, which if not fraudulent, will answer these questions.
Then you will have some idea of the potential value of the shares you have.
These are reasonable questions for you--for any investor--to ask. They are asking you to invest the one thing they can't pay back: your time.
What if the hiring founder doesn't want to answer these questions for a mere underling such as yourself? In that case, assume a potential share value of zero and make your decisions accordingly.
That’s your cue to walk: it won’t be the last time they try to scam you and you’ll never be less committed to staying at that company.
Thats why it should not be in the hands of anyone but the stock owner what he can or cant do with the shares. That way, when they send you a spreadsheet showing you will be a millionare, you go to see how much the shares are actually being sold in the market and worst case scenario, you buy some without being an employee!
That has too be a joke right? They are arguing that the terms that will lead to only the executives and founders getting a cash out are necessary in order to align their incentives to achieve value for stakeholders.... who will receive nothing in the sale?
Seems like the only thing this bonus structure is incentivising is their orchestration of a quick and dirty last minute exist so they can get their bonuses while the rest of the company burns down. Hopefully it will get voted to hell, and a new structure will be put in place where the key employees don't make a dime until the ensure that all stakeholders make money.
The sale doesn’t get voted to hell because the voting shares (i.e. preferred stock) have liquidation preference and get paid back first, in some instances multiple their initial investment, before the rest of the pie is sliced.
Interestingly, the recently passed tax reform bill seems to make this type of loss less likely - though it would seem to be too late for these employees.
https://www.towerswatson.com/en/Insights/Newsletters/Global/... (see section Private Company Equity Grants)
They didn't take real gains, they took illiquid paper gains and paid AMT (Alternative Minimum Tax).
Example: Strike price was $1 / share, "on-paper" price was $20 / share. Employee had 20,000 shares, with a "paper" gain of $380,000. They had to pay the taxes on those gains even though the stocks were not publicly traded and therefore illiquid.
> How else would you do it
The same way every other investment works: Tax the gains when the asset is sold.
Yes, I do. I think the whole notion that you pick and choose when to realise gains invites abuse.
This article explains the dynamics well: https://www.recode.net/2016/1/19/11588918/gilt-groupe-is-a-c...
In this case, one of the controversies is that company leadership may not have taken such a low sale price (given that they initially had offers of more than twice that) had they not been compensated with personal payoffs outside of the equity structure.
There's always the "they knew they could lose it!" line but if the leadership was lying internally and externally, I hope they get sued into oblivion.
I mean, it generally should be (in the sense that you exercise to sell) but some people don't realize that.
There is an exception around taxes for ISOs that recently became useful with the AMT change in the new tax law, but even in that case you often can't sell the share after you've exercised it without permission from your private company (which you are very unlikely to get).
(Obligatory: I am not a lawyer, and none of my comments should be construed as legal advice.)
But there is a much simpler way to prevent this from happening altogether: let employees trade the shares they got from openly in the market. That way, you would get a market signal on stocks on startups and shady deals like this would get whistleblowed on the market long before they are signed.
But: Somebody's paying $100M for this company. That's much less than the company was hoped to be worth, but it's still a huge chunk of change. The buyer is trying to get something for that investment. That means they need the company to perform in some way. Maybe just shut down in an orderly fashion while they monetize the client list in some manner, but for $100M, I'd guess that they want to operate the company somehow.
For that, they need the cooperation of the senior managers. So they pay them to cooperate. It kind of sucks, but you have to give the managers of the company some incentive to stick around and help you do whatever it is you want to do with the company instead of saying "Fuck you we're out of here."
If it helps, I'm certain that $750k - $7M was much smaller than the payout those execs were hoping/expecting to get from a more successful outcome.
I'm not sure how much cooperation I'd want from "senior managers" who managed to manage a company in to 1/7th of what it was valued at. If it was intentionally fraudulent... you want those people around and making decisions still? If it was incomptence... you want those people around and making decisions still?
Yes, I'm oversimplifying, and no doubt there's always other factors to consider, but this thinking bothers me along the same lines as "we needed to pay those large bonuses to keep the CEO around - we couldn't get anyone else as capable and experienced!" while the company is simultanesouly tanking.
But, just because the valuation went down, doesn't mean it's the management's fault. Maybe the old valuation was based on wishful thinking, and over time it sunk in [to everybody] that there are core problems with the product/biz.model/etc that they can't solve. This I've seen multiple times are startups. There's some fundamental problem which is masked by growth. Management keeps hiring people and hopes somebody eventually magically fixes the problem. After ~5 years the company accepts the problem. OR a new competitor emerged, etc.
Even a shitty management team is a management team that keeps the company running.
Yes, it does. The justification for the extremely high salaries and bonuses that execs get is because they are the ones who are "taking risks" and "are responsible for the company." Here, they are literally being rewarded for failure, and at the expense of people who were actually doing work.
Because who else would 'risk' so much - like only getting a $400k bonus instead of an $1m bonus? It takes special character and fortitude to steel yourself for such challenges!
I don't think that anyone in these situations deludes themselves that the management team of a company are paragons of greatness, but doing a sudden replacement of the entire senior management team at a time when the company's morale is very low to start with and where you're certainly trying to make some major changes to the organization is a recipe for disaster. Bringing on new senior management takes time. Coming up to speed on the workings of an even moderately sized company takes time.
[1] - http://a.co/aeI2gqq
I’ll add that for a few companies, when I asked the necessary questions then hiring manager or founder either couldn’t or wouldn’t answer. So, like another commenter’s advice, I valued the shares at zero. This meant sometimes I didn’t join, but sometimes I did. Almost always my zero valuation was accurate, but once I got a pleasant surprise.
Something similar happened at the last startup I worked at. Employees were compensated with stock options over larger salaries. When the company got acquired, I along with every other employee walked away with nothing while the founders became multi millionaires. This pretty much killed my friendship with one of the founders, who later tweeted a picture of himself in a Ferrari and another toasting to his new status as a self-made millionaire. I'm not sure you can get much more obnoxious than that.
The least employers can do is hide it when they throw employees under the bus for obscene amounts of personal profits. Maybe even act a little benevolent about it by saying you plan on donating a portion of it to charity?
If you're not learning then leave.
Instead of charging for its software, Practice Fusion generates the bulk of its revenues through advertising to doctors.
Oh what could go wrong....
Doctors could just use OpenEMR, free and meets most of the regulatory standards.
In fact, due to the various "pay for performance" models out there, a good EHR will make you money (making it easier to prove you are meeting various thresholds for the quality measures in question).
It seems that management acted in it's own interest, disregarding the interest of company's shareholders. Is my understanding correct?
If so, doesn't US have laws against such behaviour?
As long as deals are legal and meet generally accepted ethical standards, it seems that founders and investors have no interest in favoring employees in negotiations that restructure cap tables.
So why do employees make money in a good fraction of successful exits?
So my question is, "So why do employees make money in X% of successful exits, where X is more than 0?"
I think the only reason to go in other than as a founder in a startup is as someone right out of school for experience. Otherwise they have to be treated like any position, on a straight cash comp/benefits basis, ignoring the likely worthless equity scrip. In my experience, the best play is to go in on a contract basis once a startup is in the "burn baby burn" phase and you can bill market rate for all of those hours.
I negotiate compensation on the assumption that anything stock-related has zero value.
Then I just enjoy the other great perks of a startup I care about: influence over technical issues, and camaraderie.
It's a little hard to compare since I've sometimes worked remotely, and with companies headquartered in Silicon Valley, Cambridge (MA), and in less techy regions.
The non-startups were actually located outside of Silicon Valley and Cambridge. If I adjust for the different regions' cost of living, the (salary+benefits) dollar value were about the same across the board.
One caveat: The non-startups in SV and Cambridge gave me stock grants that vested over a number of years. If I'd stayed long enough for them to vest, the total compensation for those non-startups would have been about $7k-10k/year higher (pre-tax) that the compensation I got from startups.