Comment by ghshephard | Hacker News Reader

Comment by ghshephard | Hacker News Reader

Parent Full thread

Absolutely zero surprise on my side. VCs, and acquiring companies are always looking to maximize their return, as legally as possible during an M&A deal, even (sometimes particularly) if that means screwing over employees who are no longer with the company.

I actually like the honesty of this quote:

"Silver Lake declined to comment. When asked about Lee’s situation, Skype spokesman Brian O’Shaughnessy said, “You’ve got to be in it to win it. The company chose to include that clause in the contract in order to retain the best and the brightest people to build great products. This individual chose to leave, therefore he doesn’t get that benefit.”"

Most people will look at it and say "What an Asswad" - but at least he's not being a hypocrite. That's precisely what everyone in the M&A team is _thinking_ they just aren't _saying_ it.

This is another take on what Oracle did when they bought Oblix (I had just left Oblix in 1999) Oracle gave MegaBonuses to all the existing employees and executives, two of the founders, and paid absolutely nothing for the common shares. The acquisition price was still $100Million plus, but there was only enough money to cover the preferred options + liquidation preferences in the "on the record" purchase prices. Effectively, they wiped out all the employees who were common shareholders, but no longer with the company (or were part of the 15-20 out of 100 who were laid off during the acquisition) while taking care of the VCs and the acquired employees. (As a side bonus, they called the money they gave to the acquired employees "Retention Bonuses" - which resulted in the top people having to hang around for another year)

Lesson to be learned: When you leave a company, and it is still private - if they are Sold, instead of going public, there are probably any number of ways that you will get wiped out if you are no longer with them - possible exception if you are a founder with a significant percentage of the company, and you might be able to raise a stink for minority shareholder rights. Then you'll get a "consulting bonus" to shut you up.

This story is more common than not.

In my experience it's very rare for employees with vested stock to get ripped off in an acquisition. Usually the amounts involved are so small that it would not be worth the bad publicity.

Curiously enough, one of the consequences of the rise of YC-like investors is that it will no longer be so easy to pull the sort of trick you claim Oracle pulled. We get common stock, so you can't screw the common sharedholders without screwing us, which most people would think twice about.

That, single handedly, has to be one of the strongest reason I could ever think of someone wanting to work for a YCombinator company. In particular, because YC doesn't take very large portions of the common stock, they wouldn't be able to leverage their position into a "Consulting Fee" agreement with the acquirer, so their _only_ recourse is the documentation surrounding the common.

You can rest assured that if you put your 4+ years into a YC company, and it gets sold while you are no longer with it, your interests and YCs will be aligned. With a YC company, your vested common stock actually _means_ something when you leave the company. (Or, at least it means you and YC will get screwed equally - and as PG rather ominously said, that is something "which most people would think twice about." :-) )

I respectfully disagree with PG on how rare it is for employees who've left a company to get zeroed out or severely diluted compared to the ongoing-employees in an acquisition deal. I've heard enough anecdotes to convince me it is far from "very rare."

Like O'Shaughnessy said: "You’ve got to be in it to win it."

Nit: Employees don't vest stock. They vest options.

Nit: Some employees vest stock. Some vest options. Companies are different. I've been in a multitude of startups. Two were stock, one was options. For example, the current startup grants restricted stock units.

It happened to me twice. Maybe I'm just bad at picking companies. :D The frustrating thing was the silence, once they'd decided to screw people over. All of a sudden HR is incapable of answering email.

In my experience, HR is often staffed by "phone people", not "email people".

It happened to a friend of mine (almost exactly the way 'ghshephard spelled out). In fairness, partly because of hearing that story, I didn't buy my vested options when I left my last startup; those options paid out when the company was later acquired.

Was this is US-based company? The way I understand ISOs in the US, they must be exercised within 3 months of leaving the company ("The option may be granted only to an employee [..], who must exercise the option while he/she is an employee or no later than three (3) months after termination of employment" -- http://en.wikipedia.org/wiki/Incentive_stock_option).

If so, perhaps you got lucky :)

Yes; you pay money to exercise the options and receive restricted stock. That's the thing I opted not to do, because friends of mine who did so at another large VC-funded success story got ripped off.

Right, I was confused about "those options paid out when the company was later acquired".

Sounds like you didn't exercise the options and then didn't participate in the sale later.

Yep.

That does not sound like a success story.

Happened all the time in the 1st dot com boom/bust. See fuckedcompany.com, history of ArsDigita, etc. Not sure if it happens anymore. Seems like companies nowadays exit quickly or never, so maybe the issue doesn't arise. If it's a fire sale I'm not sure what the company can really do - the acquirer is going to dictate the acquisition terms.

I think that things like Second Market have the same effect. Because suddenly you risk not just screwing former employees, but also institutional investors, with large legal staffs.

Something similar but less severe happened to me with AirWave, an IdeaLab company, which got bought by Aruba in about 2007, after I left. The company had been through several rounds of expensive failed strategies and ensuing financing in the years before I joined, and so the stock option grants to the employees were quite small, as a percentage of the company. Some of the details are a little fuzzy in my memory now, but I did get paid for my shares: something like a month or two worth of the salary I'd earned during the three years I was there. (I think I wasn't fully vested, but mostly.)

The employees still at the company received substantial retention bonuses. The only one of these bonuses disclosed in the purchase papers I signed was that the president got an additional bonus of perhaps a year's salary, but later other employees told me they got substantial retention bonuses, too.

I don't feel like I got "screwed", exactly. I was a bit disappointed in the quantity, but it was a big improvement over what happened with KnowNow, where I never got back any of the US$6000 or so I spent to exercise my options, as the company's successive VC-approved management teams gradually mismanaged the company into bankruptcy.

It happened to about half the people I work with when we got acquired a few years ago. Options, stock, everything the non-C-level people held was worthless. A lot of unhappy people and a few left over it, even some with single-digit employee numbers. Me, I always asked for a salary increase instead of options and it's worked out great so far. I would think different though if I was in early on something with more upside.

This is an incredible amount of leverage for the non-founder employees of YC-backed startups.

About a year ago Fred Wilson said straight up that common stock is unreliable and not suitable for investors. Since employees get common stock, the only point of leverage they have is their commitment to future employment. Thus buying options when leaving can be a risky proposition - not only is there risk of failure, there is the risk that the company's value gets laundered into retention packages.

I realize that these are two separate stories, but how is someone not "in it to win it" if they get laid off immediately prior to the acquisition?

I thinks its just a feeble attempt to rationalize their evil actions.

I'm really surprised that a senior guy would expect different. I used to have an options contract with similar language, I knew they were worthless.

It even said so at the top of the contract where it said the purpose of the options were retention and not remuneration.

> The company chose to include that clause in the contract in order to retain the best and the brightest people

Because only the best and brightest would understand what it actually meant?

> there are probably any number of ways that you will get wiped out if you are no longer with them

That's why Facebook employees sell their options on secondary markets.

Was Skype reincorporated after acquisition from eBay? Some countries have legislation deeming "artificial reincorporation" to prevent aggressive tax planning and tax avoidance. There are should be something similar to protect rights of employees.

How is that not a breach of fiduciary duty?

The acquiring company controls the offer and structures it to maximize their benefit. The acquiring company does not benefit from paying people who no longer work at the company; they're incentivized to maximize the payout to current employees, in particular to aid retention.

In theory, the board of the acquiree thus has a "yes/no" decision to make, and whether or not it screws non-employee common stockholders, the "yes" decision might be in the greatest interest of the maximum number of shareholders.

It's a lot more complicated than this, but if you want an illustration of why it will cost you 6 figures to lose a court case over this issue, there you go.

Reply on news.ycombinator.com