OnLive assets acquired by newly formed company
techcrunch.com
techcrunch.com
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.
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 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.
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!
(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.
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.
Sure they can, if that's how your vesting contract is written. You get fired, your un-vested options are gone.
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.
http://framethink.files.wordpress.com/2011/06/lee2.pdf
http://framethink.wordpress.com/2011/06/24/how-employees-get...
You may get more money, but your reputation is fucked.
Morally i find this way more infuriating than Yahoo suing Facebook.
Nobody came out a winner in this deal.
Gaikai was bought for 380m, i just don't get how OnLive can be worth less than the 50m investment.
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.
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.
The real problem is having employers providing insurance at all.
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.
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.
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.
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.
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.
Citation needed?
(Also, btw, it's "moot", not "mute")
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?
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.
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.
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?
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.
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...
Revision history here http://www.crunchbase.com/person/steve-perlman/diff/8/9 at 4:59pm by 24.6.50.198
Onlive declared a "variation of bankruptcy" to get out of employee liabilities.
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
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.
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.
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).
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).