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Comment by kabdib | Hacker News Reader

I made a bunch of money from ISOs at large, established companies.

I made zero (well, negative, really) from startup stock options, even before things got really shifty in the 2000s. One startup that I left, that is now a billion dollar company, simply decided to "extinguish" the shares I bought a few years after I resigned. I was probably cheated, but it's not worth the effort to go after them and they know it.

Treat startup options as wastepaper. You might get lucky, but it's really, really unlikely.

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I would be really curious if someone could shed some light on how a healthy company could simply decide to "extinguish" exercised shares. Like how exactly would they go about doing that, and do you have examples I can read up describing where and how this happened?

I would understand if that happened when the company is in trouble (e.g. valuation dropping below the last preferred valuation, so preferences kick in, or as a result of the company having to honor very high liquidation preferences), but otherwise?

The only couple very shady cases I know about where Facebook with the Brazilian cofounder (with a complicated legal process where they reincorporated the company into a new one or something like that) and Skype with the employees (who naively signed a clawback clause in their agreement stating that the company could repurchase shares in the future at the original grant value even if their price skyrocketed, or something similar).

In all the other cases I know about where employees got screwed, it was because the company saw its valuation plummet and the investors preferences kicked in, in one way or another, so "extinguishing" common shares in that case is "expected" and more similar to a public company declaring bankruptcy and seeing the shareholders being wiped out while the bond holders can generally recoup something, since they have "preferred" terms inherent in the nature of the bonds.

It happened to me recently, here's a couple of snippets document I received:

The TLDR is "The majority of the board has already approved the decision of eliminating common stock and distributing excess payments to two founders and the product lead"

Each holder of Preferred Shares is entitled to receive cash merger consideration in exchange for the cancellation of his, her or its shares pursuant to the terms of the Merger Agreement.

Each holder of Common Shares will not be entitled to receive any merger consideration in exchange for the cancellation of his, her or its Common Shares.

In case interested, here's the full redacted disclosure -- docusigns followed very shortly after: https://pastebin.com/q6q7XMvF

Hold on a second (and thanks for this!).

If I read your document right, it says:

  The Company expects that the proceeds available for 
  distribution to the holders of Preferred Shares,
  including the full release of the Indemnity Escrow Fund, 
  will be approximately $0.5816 for each Preferred
  Share (the “Estimated Per Share Consideration”).

And in another portion, it says:

  before any distribution or payment of merger consideration 
  is made to holders of
  Common Shares, the holders of Preferred Shares are entitled 
  to receive $2.66 per Preferred Share (the
  “Liquidation Preference”).

And

  The holders of
  Common Shares will not be entitled to receive any merger 
  consideration in exchange for the cancellation
  of their Common Shares because the maximum potential merger 
  consideration payable to the Stockholders
  pursuant to the Merger Agreement is less than the aggregate 
  amount of the Liquidation Preference.

Does this indicate that the company sold for an amount low enough that not even the investors recouped their original capital (selling shares at $0.5 instead of the $2.66 they were at least worth according to the liquidation preferences, so overall a significant "failure")? Because if that's the case, it seems completely normal to me that common shares were nullified and it's fundamentally different than saying that shares were extinguished for "no reason" (i.e. out of pure corporate greed), like I interpreted GP's comment.

If not, this is instead a horror story.

Yes that’s correct, I don’t think anything nefarious happened. The big bummer, though, is I had $0.01 shares and paid AMT at a much higher valuation and expect it to take a few decades to claim back the loss. Was my first time working with ISOs and didn’t know about 83b’s

Yes, that indeed sucks. Out of curiosity, how much AMT credits are you able to recoup each year? I understand it completely depends on your tax situation since it's basically the spread between regular liability and AMT liability, but just to get an idea, is it to the tune of $1k/y, $5k/y, $10k/y?

I, like you, have a good amount of AMT credits from a previous employer, and will just start next year to try to recoup them more seriously (since in the years before I was always affected by AMT even without ISOs, due to California income...).

My CPA said the maximum I can do is $3,000/year, I'm also in CA :)

mmm, as far as I know $3,000/year is the maximum capital loss (from schedule D) that you can claim against your income. But that has nothing to do with your AMT tax credit, which you should have generated the year you exercised ISOs (form 8801).

The AMT tax credit you can use every year should be limited to the difference between your regular income tax and AMT income tax each and every year (if positive). You keep going like this until you extinguish it.

For example, for tax year 2018 I had ~$10,000 of capital loss carryover (from unrelated stock sale), and ~$40,000 of AMT tax credit carryover (from previous ISOs).

When I filed my taxes, I was able to claim $3,000 of those capital losses against my income (thus generating a $7,000 capital loss carryover for 2019) and $5,500 AMT tax credit to offset my final tax liability (thus generating $34,500 of AMT tax credit carryover for 2019). As you can see, I used both the capital loss carryover AND the AMT tax credit, they're two different beasts.

I didn't use any CPA and did all of this by myself (+ TurboTax) since it seemed straightforward (and admittedly I might have studied a bit too much how taxation of stock options works). If you find that I'm horribly wrong, please let me know, but it's not the first time I find a CPA being not informed in this kind of stuff (not saying yours is), which can be costly since, if you don't claim the credit in a timely fashion, is just lost from an IRS point of view (the forms are pretty mechanic and always refer to "last year carryover").

In particular, I don't understand how your company going belly up can generate capital loss for you, since you said you had an exercise price of $0.01 per share, so it seemed to me the money you lost was because of the AMT, hence the $3,000/year limitation is like apple and oranges and definitely not a ceiling of how much you can claim each year on the AMT credit.

Thanks so much for this info! I'll look into it!

In germany, you can sell those claims to firms. Which then make use of it. Can't you do it?

Sorry to hear that. On the subject of AMT, one of my accountant friends, on the side, advised to simply not report and not pay the AMT on the phantom gain of exercised options, but instead pay the AMT plus penalty when exercised option stocks actually pay out in the future. Reason being that in case of things not working out, the company is out of business and the stocks worth nothing, no point to look at the phantom gain. In the case of a home run, the large gain should cover the AMT and penalty.

Of course you need to be prepared to pay the AMT and penalty whenever the IRS comes after you.

Wait, I'm not getting the rationale behind this and it seems very dangerous advice.

Whether the company goes out of business or becomes the next Google, your AMT tax liability in the year you exercise the ISOs remains the exact same, it's not that your stocks becoming worthless years later can retroactively change (i.e. diminish) what you should have paid in AMT the year you exercised. In fact, you need to pay it because it will create a different cost basis for your shares for AMT purposes, you do need that calculation on your forms. So, your "no point to look at the phantom gain" is something I don't understand and I suspect the IRS doesn't understand either.

Hence, you're going to have to pay the original AMT liability + the hefty penalty regardless, either way. At that point, why not just paying it the year you legally owe it and then slowly recoup it over the years with AMT credits?

What you're proposing is like saying "I bought and sold TSLA and realized $100k of capital gains, but I'm not going to pay taxes now because there's a chance in 5 years TSLA will go to $0, and so the capital loss will offset the gain I owe this year". It doesn't work that way at all and there's no way you could come out ahead adopting this strategy, and it's the exact same thing when you talk about AMT. Yes, the law is draconian because with ISOs you don't effectively have liquidity, but it's still the damn law and it's clear that ISO exercise is an AMT taxable event.

Without even entering in the debate that consciously not paying taxes that you know are owed is effectively tax fraud and could get the IRS pretty pissed on top of just penalties.

If you leave me the contact of your friend, I'll be happy to reach out and confront him/her directly on the matter.

That's a very common end result for startups, usually goes by the name "sad exit".

Your common shares were worthless because after the preferred got paid, there was nothing left over. This is very, very common (no pun intended.)

This is what startups pay a lawyer to do. It's not that hard: restructure the company ownership in a long document with complicated terms. Get the employee to sign it and voila, early employees are screwed. The only real response is just not signing, but they will tell you the company will die if you don't do it, and you probably will just take it rather than fighting. At least I did.

But signing something without not understanding it is too naive.

So, assume I already left the company and exercised a big bag of common options and so I have a decent amount of common shares. If they tell me to sign something that looks shady I just say: "No, it looks shady".

What then, can they do?

Send to lawyer's office to pressure you.

It doesn't take a lot of imagination to see that this can happen. People are generally naive, and there are just a few that will resist and fight.

Especially if you depend on the money the job pays now and you can't pay a legal battle while searching a new job.

This. Stated another way, you need to make a decision in the very small timeframe about the tiny chance of success in the far away future, versus guaranteed success (your next paycheck) in the very close future.

Very few people also have their own lawyers, although pretty much everyone involved in a startup should have one.

This is one of biggest recent learnings. If you go to start up, make sure to understand also the legislation around labor, private contracts and equity. You will be dealing with people personalities much closer than in a big co.

Threaten to shut down the company. Then your shares are worth zero.

I believe I am the kind of person who would just say "Go ahead, shut it down if that's the only alternative. If you would like me to sign a deal to restructure the company, then I'll happily do it, but the company needs to pay me a one time cash bonus that reflects the value of the shares that I am forfeiting".

I am not naive enough to believe it would work, as they would probably find a way to screw me regardless, but my stance would be firm.

After my experience with startups I have become completely intolerant to corporate greed and injustice, so these days I am purely in a business transaction with my employer and I know exactly what to expect and when to expect it (which is why I get paid in RSUs rather than stock options). I like to think I wouldn't fall prey to this sort of petty begging.

It's better than the alternative of giving in. Shutting down / reopening the company takes $$ and I still think you'd have a decent lawsuit against the new startup.

But the new startup wouldn't yet or might not ever be worth anything and so you just gave up your steady paycheck for a chance to sue for a small percentage of possibly nothing.

They usually don't need your signature anyway. They'd just say no and move on. The vote of the majority of the shareholders, or often, just the majority of the preferred shareholders, are enough.

But then it makes wonder, why would anyone get themselves into startups anyway? Especially when you consider the relatively low compensation and high risk.

A few reasons:

* Access to decision makers

* Greenfielding a product

* Excitement / fast pace

* Novelty

* Great learning experience before launching your own venture

It's not for everyone, but I've interviewed dozens of developers who only want to work at startups for these reasons.

And for founders, obviously there's the upside of owning a business, the status of being funded, the ability to be your own boss and the potential for massive impact and wealth.

Oftentimes, the conversation is more like, "Sign this or we're shutting down and starting a new company."

But yeah. It does go down that way more often than many people know.

In fairness though, one thing I think a lot of people don't realize is that someone must've gone to bat for employees when documents like that show up. I can pretty much guarantee you that the greedy bastards in the room wanted to shut down, or layoff, and reorganize with just the employees that they needed.

Someone in the room had to say, "Hey guys, let's try this!" And that someone took a real risk at being seen as "not a team player" so to speak. (It was likely someone powerful. What I've seen is that it can be everything from a powerful VC of the religious variety, all the way to your more idealistic founder types.)

See Zynga, cancelling options prior to IPO: https://news.ycombinator.com/item?id=3220819

Sure, that is incredibly shady, and doesn't deserve any sort of justification.

But, for the sake of the discussion, I'm purely focusing on common shares that the employee already owns, which means vested options that were already exercised.

Zynga's shady practice was affecting unvested options.

'Extinguishing' aside, there are ways to essentially devalue shares, simply by offering up a lot more, at a low price to current investors, thereby washing away the relative value of old shareholders.

Once investors do this, they can take control of a company, and even issue new equity to current employees to keep them happy.

This is a tricky thing in normal scenarios because obviously the shareholders getting wiped out might sue, unless they are 'in on the deal' and coughing up more money. There are legal obligations around valuation as well, it can't be 'made up'.

But if a company is effectively bankrupt, then the board can basically nullify old shares by making them worth 'near zero' and issuing new shares cheaply.

I should add that this happened to me as an employee of a fairly large telecom startup.

The common term is 'washout round' [1] and this practice is not entirely uncommon.

[1] https://www.investopedia.com/terms/w/washoutround.asp

On the other hand, I once worked for a large well known company that actually gave me a pension. I can't remember what it was, but I think something like 5-10% of my total compensation went into this pension plan, which was essentially a mutual fund (although you could opt for long stock in the actual company instead). It took 3 years to fully vest. I stayed 5. When I left they sent me a letter literally saying that they thought the cost for me to hire a lawyer to get my money back would be more than the amount of money I could retrieve so they were going to keep the money. By that time I was already so annoyed with them that I concluded they were right: it wasn't worth my effort to extract a few tens of thousands of dollars from them (hey, this was a long time ago -- salaries were a lot smaller then ;-) ). Six months later the company dissolved under allegations of accounting fraud. The upper management actually got the bankruptcy court to allow them to use the entire pension fund as "retention bonuses" so that the company would have a chance of succeeding under their illustrious reign. That was an eye-opener. I had a few friends who had worked there for 20 odd years and were counting on that pension. Eventually I think they were able to sue the bankrupt company to get a portion of the money back. Of course, none of the fraud allegations went to court and the executives retained their retention bonuses (after having done nothing to save the company).

Hindsight is 20/20, but seriously. If you want to save money for pension, it must be something you control. Having your pension funds in the same company that pays your salary, is putting all the eggs in one basket.

If they really want to pay you 10% in pension, they can pay to a fund in your name with some terms about when and how they can be used.

I totally agree. I was pretty young at the time. It was one of the experiences that taught me to ask for the salary that I want.

I had a former employer do something different but similar.

They sold all the products to another company, paid all of the proceeds out as a bonus to the execs and big investors, and left the holders of the common stock (ie, employees who had bought their options) with a worthless, empty shell. Thanks for working hard and buying shares in the company!

What stops ordinary companies from doing this to ordinary shareholders?

That no one would buy shares in the new company, making it worth dramatically less than the old one

Fiduciary duties - I'm not sure if those are being left out of these anecdotes or there were actual issues preventing the obligations from being enforced.

https://smallbusiness.chron.com/legal-relationship-between-s...

>Treat startup options as wastepaper. You might get lucky, but it's really, really unlikely.

I have a similar story. I've been a part of three startups (two exited, one still going) and the options in all were only worth an eventual capital loss. For my last company, I owned nearly a percent of shares, but they were still worth zero. The only money I got was a cash bonus and stock from the acquiring company as a retention mechanism (I was an executive of the company, rank and file got much smaller amounts). Startups are good for experience, being a big fish in a small pond, etc. but it's marginally better than a lottery ticket if you're looking for a big financial reward.

You got $0 from your equity with ~1% of the company: is the reason the fact that the company turned against its employees, or more that the company exited for less than its last valuation and so there was no other way than make common shares worthless (like in the other conversation parallel to this one)?

Thanks

Is basically fraud, but you need money to investigate it, collect evidence and sue which they fraudster know isn’t worth it for any employee.

>Treat startup options as wastepaper.

I must ask - is there a hint of hyperbole here or are you dead serious? I currently work for a startup, and let's just say... I could've negotiated better on options when I joined. It's been on my mind to bring that up during my performance review.

Is that a fool's errand then? What is your advice when working at startups?

Not GP but I would be prepared as one would in any company, bigCo or startup when discussing compensation. I.e.: Be prepared for a money conversation and have a Plan B ready to execute.

It's commonly stated around here that VCs expect 9/10 of their companies to fail. So yeah, theres a good chance they are worthless. I think lottery tickets are a better metaphor, as they can be worth something. Wastepaper is hyperbole.

I don't think its foolish to ask for more equity as compensation, though obviously I don't know anything about your performance or current compensation. :) In fact, I would recommend negotiating better. Sibling comment has good advice on preparation. I would add talk to an accountant about tax considerations, and talk to a lawyer about the legal aspects of it. The last time I talked to a lawyer, it was ~$120, and that was a somewhat complicated situation. If you don't want to spend that much money on something that could be worth thousands or millions, well... You might end up like a lot of the other posters in this thread, and that is sad.

Seriously, a number of the posts in this thread likely wouldnt have happened, or could likely be resolved had the victim talked to a lawyer. Its like if you were robbed; you call the cops. Some people are saying its not worth it, it costs too much money, etc. If you arent going to call the cops, you can be robbed with impunity. It also means the thieves might grow bold, causing more headaches for the rest of us.

A number of people have said that the company/management told them that talking to a lawyer would be a waste. This is the thief telling you not to call the cops. You wouldn't take legal advice from a thief, right?? At least one person stated that the company "made" them sign something. This is the thief saying you "have" to give them something. If you sign something saying they can take whats yours, then they can. So talk to a lawyer before agreeing. The more upset they get, the more pressure they apply; the more likely it is that you need to talk to a lawyer.

Please, everyone, stand up for yourselves and get a lawyer. There are so many sad stories in this thread. The idea that people making 6 figures, with equity that could be worth that much or more can't spend ~$100 bucks to protect themselves!? It's appalling. Saying that it costs too much, not worth it, it wont matter anyway; that is like Stockholm Syndrome. Ok, that was hyperbole, but seriously, protect yourself.

Edit: EVIDENCE! The cops can't do anything without evidence, neither can the courts. Well, your testimony is worth something, but its better to get it in writing. Consult your local laws, or a lawyer regarding things like audio recordings, recording phone calls, etc.

I had a similar experience. It was a while ago so I don't remember the exact details, but the long and the short of it is the three founders started a new company, moved all the company's assets over to it, then dissolved original company.

I got enough cash from stock options at the last small business to afford to job search for a few months without too much worry, so there is that.

>One startup that I left, that is now a billion dollar company, simply decided to "extinguish" the shares I bought a few years after I resigned. I was probably cheated, but it's not worth the effort to go after them and they know it.

Sounds like an opportunity for a class action lawsuit. If they did it to you, they probably did it to others.

> they probably did it to others.

They all do it to everybody. They're careful to make sure there's nothing/nobody to sue - the stock options are offered by an S-corporation, which then goes "out of business". You can sue the now out-of-business S-corporation if you'd like, but it has no value, being out of business.

It seems fairly rare for large, established companies to issue ISOs (preferring to issue NQSOs or RSUs).

I am not sure how you are the top comment when you are complaining about issues that generally are not relevant to the post, you didn't explain your "extinguished" shares, and you do not explain why it would not be worth it to go after them if they have done something to you...

However, your last comment holds up well and I echo that sentiment.

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