I'm getting screwed with my stock options | Hacker News Reader

I'm getting screwed with my stock options

152 pointsconcernedmitch85 comments

So, I joined a startup 1,5 years ago. 2 non technical founders, a half baked product with no revenue at all, built with a freelancer. Joined remotely from a EU country, as a contractor with shit money and 10% equity in options. Fast forward to today, we got seed funding, are 17 people, and the founders want to take 4 points out of my 10 points to extend the options pool. They are each giving 4 points as well. The issue is, that in my situation 4 points represents 40 percent of my options, whereas in their case more like 10% of theirs. Talking undiluted percentages here.

I don't know what to fucking do. I'm "c level", but I'm feeling helpless. Also, we've set up an office here, and hired some people, so quitting and leaving feels like a bad option.

Also related question. I'm thinking of exercising my existing vested shares as soon as possible, but I'm not aware of possible legalities. Startup is US based, I'm EU based.

Experience + feedback much appreciated.

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How about "I appreciate your desire to have more stock available to give new hires. You've proposed that I give up 4%, which is 40% of my allocation. I'm amenable to giving up 1%, which is 10% of my allocation and equal to the portion which you're willing to give up, and lets us bring in a whole new engineer."

If they counter offered, I might give up another 0.5% in return for "OK, you guys can have 1.5%, but in return the company rescinds your repurchase right with regards to 3%." (i.e. We accelerate vesting.)

This is a negotiation. Nothing you say results in you owning less than 6% of this newly valuable company, right? No need to agree to the proposal in front of you just because it is in front of you.

This is not sage advice.

First, percentages are meaningless. The OP needs to quantify what's at stake in absolute terms. If he has justification to negotiate or otherwise take action to protect his interests, he should do so based on an understanding of the dollar amounts involved, not percentages. When you negotiate around percentages, it's very easy to win the negotiation but lose money.

Second, the scenario described is a huge red flag. The OP's company raised capital from investors. Ostensibly the options pool was addressed as part of the funding. The OP's post suggests that the options pool was way too small but instead of expanding it (and diluting everybody), which is typical, the company's founders and the OP are forfeiting a portion of their piece of the pie, which is not at all typical. Why?

The OP needs to understand the true state of his employer's equity structure. What you refer to as a "newly valuable company" could just as easily be a cap table disaster. If that is the case, negotiating around percentages won't save the OP from a bad outcome.

It's not just present dollar amount, it's expected dollar amount, so percentages are quite important in case the has high expectations.

Where did I state that the OP should only determine present dollar value? I simply wrote "The OP needs to quantify what's at stake in absolute terms." Percentages are meaningless unless you have some idea of what x% of something is worth, whether today or tomorrow. As I wrote, it is possible to win a negotiation around percentages but lose money. I could fairly easily give you 25% of a company and structure the equity so that upon its sale, you netted next to nothing.

On this note, please recognize that figuring out what's at stake requires the OP to take an even bigger step back. The OP indicates that he was given a 10% equity stake in the company in the form of stock options when he was a contractor.

As a contractor, he would only be able to receive non-qualified stock options. The tax treatment of these is almost always less favorable to the recipient than incentive stock options, which can only be granted to employees. Now that the OP is an employee of the company, he may need to consider that the structure of his equity is sub-optimal. If there's justification for a negotiation here, the structure of the OP's equity could be just as important as equity amounts.

Further complicating matters is the OP's status, as it sounds like he's a nonresident alien. Cross-border tax issues can be very complicated and at a minimum, the OP should understand the implications of transactions involving his equity.

Bottom line: simply jumping into a negotiation over percentages is putting the cart way before the horse. The OP should seek the counsel of a qualified attorney and tax professional before he tries to address his concerns directly with the company.

You've got some good talking points, but it could be stronger:

"I agree we need more stock available to give new hires."

"It seems like you guys are giving up 10% of your total options which sounds fair to me. I'd like to contribute 10% of my options too. So that gives us a 9% options pool. If it makes more sense to have 12% options then maybe the two of you could each contribute 5.5 points."

You could also ask for a salary bump to compensate for the reduced equity.

Great advice. Always have acceptable alternatives in mind. For instance, propose that they accelerate vesting on your remaining options 50 cents on the dollar. So if they want you to give up 2% they would instantly vest 1%. The term here is "single trigger". Point being, be creative and try to work out a deal. A 4% starting offer isn't unreasonable.

A 4% starting offer isn't unreasonable.

::boggle::

From the description given, it sounds like there are two suits running the show with control of the business and the overwhelming majority of the financial interest. I'm assuming from context that the OP is the technical guy who dug the cofounders out of a mess when their initial outsourced product development was not of an adequate standard, and did so in return for only a 10% stake and poor immediate compensation. Apparently this got them to the point where they could start hiring more staff and taking serious investment.

It sounds like the OP was probably already shortchanged on both the equity and the direct compensation. I don't see any way a 4% offer is anything but a cheap shot/insult in this scenario.

> I'm assuming from context that the OP is the technical guy who dug the cofounders out of a mess when their initial outsourced product development was not of an adequate standard, and did so in return for only a 10% stake and poor immediate compensation

I'm making fewer assumptions.

And more importantly, I've learned that in a negotiation, being "insulted" by the first offer doesn't help me in negotiating an ultimate agreement. I think a counter-offer will get you a lot further than righteous indignation.

The opening offer reveals that the other parties are either naive or trying to take the OP for a ride. Either way, they've probably already forfeited any benefit of the doubt they might otherwise have deserved in negotiations.

That's not righteous indignation, it's just knowing who is sitting on the other side of the table when you're negotiating, and hopefully ensuring that you protect yourself accordingly in any final deal you agree on.

It's totally unreasonable, even as a starting offer. These guys just signaled that they are not serious people.

TBH I'm surprised OP didn't ask for 50% after seeing how crappy/amateur the entire operation was, and how bad his compensation was.

BTW OP, did you get a signed agreement? were there any clauses that might be relevant to this?

He shouldn't be giving up any of his shares. At all. He should be demanding more options. In all likelihood - he's the reason the business exists. They would have nothing without him.

They would have nothing without him.

The trouble is, that probably isn't true. They might have had nothing without him before, but now they have 16 people left without him, and presumably by now some of those other people are technical as well.

So, his relative importance may already have been reduced from "indispensable" to "valuable technical leader", and his personal negotiating position is getting weaker all the time as the business grows. He may have to give up something of value now to consolidate his position for the long term, but if he's been suckered already then consolidation may be the best course of action that is still available to him. Of course even a somewhat reduced but secured stake in the business may still work out very lucrative if the company is successful at its new scale and funding. The real question is how much influence he has left to give up as little as possible while securing the rest.

Unfortunately it all depends on his bargaining position right now. It might feel good for the rest of us for him to take one for the team and stand up for his rights, but it could lead to him having a worse outcome if those rights are beyond his bargaining position.

That's a pretty terrible sentiment. Unless you know something that wasn't told in this thread, why would you think that?

Not really. They could let him go and find someone else (or promote internally) for much less.

Sounds about right. I would even bump it up to 2% (even 8% is a HUGE allocation for what it sounds like you have done). And improve your tone dramatically.

Definitely talk to a lawyer, one who knows about startups. NOTE: the lawyers for your startups represent the company, so don't talk to them - find your own lawyer.

Other than that, AFAIK what you mention is not typical. Option pool should not be created by "taking" options from employees, but rather by issuing new shares which dilutes everyone equally. You should bring it up and ask that they create the option pool by issuing new shares which will at least indicate to them that you know what you're talking about and perhaps reduce their inclination to screw you.

Also, what was your vesting schedule? If it was four years, you should have already vested 3.75%, which you can exercise anytime. If they take 4% of the remaining, you're left with just 2.25% to vest over next 2.5 years, which is just wrong.

Also: before you begin negotiation, do understand your BATNA - Best alternate to a negotiated agreement. In other words, what will you do/can do if there is no mutual agreement. This will tell you if you're overall in a strong position or weak. This will include any advice you get from the lawyers, your employee agreement, etc.

This makes the most sense here. Nobody creates new option shares by "giving up" shares - you issue new shares which create the option pool.

Do you actually have a contract for your ESOP? It's common to not have one in the early stages since they are expensive to create.

Maybe your founders don't really know what they are doing wrt to options - many don't.

This is the sanest comment on the thread by far. You and your lawyer need to a) demonstrate to the co-founders that you understand how options pools are usually created, and b) understand by what mechanism the co-founders intend to dilute you disproportionately to themselves (see btown's comment for some ideas). The good news is that you are already probably 37% vested, and they have chosen to co-locate their operations with you, so you should be in a strong position to negotiate.

When OP says that want to "take" his options, I think he means "dilute" his options. I'm not sure how they plan to dilute shares unevenly, but I believe it can be done. The simplest case I can think of is granting themselves a portion of the new shares but I'm guessing it's something more complicated like issuing more new shares from one class or pool, than from others.

The instant your partners know you're involving a lawyer is when the relationship becomes adversarial (possibly permanently). This is not the lawyer moment. The lawyer moment is "after a lot of discussion, these guys refuse to do what me and the rest of the world thinks is fair". Has there been a lot of discussion?

Get on a call with them ASAP. Tell them you think that pro-rata is both what's FAIR and WHAT IS DONE 99.999% of the time in these circumstances-- and mention that you've done a lot of research. Say, "Guys, obviously any two of us can impose a decision on the third, but I trust you guys, so I'm assuming you're doing this because you think it's normal/fair. How about this: I pay for a few hours of a high-end startup lawyer's time and we can get a sense of what's standard-operation-procedure here is? It seems like we might have different opinions about what's fair. I'd propose we appeal to a knowledgeable 3rd party. Is that cool?" If they agree, add: "If this experienced startup lawyer says that pro-rata is what's done virtually all the time in these circumstances, can we agree to go that route?" And see what they say. Just keep saying you trust them and ask questions along these lines. Eventually they'll either agree or it'll come out that they feel that you haven't earned your 10%.

Understand: If things get ugly, they can fire you (wait-- are you vesting? If they fire you after 1.5 years, you lose most of your options). Once they fire you, they can dilute you and other people who are not with the company somewhat easily. Your job here is to be friends and to maintain/earn trust (and to not get taken advantage of!). NEVER THREATEN until there's nothing left to salvage. If you're a fabulous negotiator, you can HINT that you're willing (and financially able) to lawyer up.

I just want to point out: There's a difference between lawyering up for advice, and hiring a lawyer to be your front man during the negotiations. OP can talk to a lawyer to examine his contract(s) and gain advice on what the potential options available to him are according to the law and those contracts. The company does not need to and should not know anything about this level of involvement.

In fact I bet the other parties have done the same already.

The guy has no business trying to learn how to be a diplomat when he's already tasked with a day to day job for the founders. If it's gotten this far in the conversation (posting on HN) then the situation is clearly bad, at least on one end. Given it's a situation with unfair dilution, the assumption is that all stakeholders are well aware of the dilution results and are OK with what is being proposed. They are founders, after all, and SHOULD know what they mean by asking for this. Also, don't think for a minute they don't already have attorneys queued up on their end.

I would say this is EXACTLY the time to have an attorney get involved to take a look at the documentation and render an opinion. If the situation is ugly, they may fire him if he protests, but that also gives rise to a reason to question the cause for termination. Given the contractual agreement between the parties, a termination event may provide an avenue to compensation for unfair termination, especially when seeking legal council could be shown as the reason for termination.

When in doubt, lawyer up and be cautious of making blaming statements that aggravate the other party. You may want to end up working with them in the future. Or not, depending.

Saying that may make you feel better, but Tony seems to have the better argument. You absolutely can be fired for lawyering up what the founders intended to be a pro-forma restructuring of the shares. You will probably have no recourse when that happens. Assuming you're vesting, like most employees (and founders!) are, getting fired will cost most of your shares.

Talking to a lawyer: good.

Bringing a lawyer into the discussion with the founders: bad.

While these practical considerations are interesting, I think there is another observation worth making as well.

If you really can be fired without cause or notice and at the loss of most/all of your interest in the business, you have no cards and anything you do is a bluff.

If you really are dealing with cofounders who are are willing to push you out of 40% of your interests without offering much of anything in return as soon as the going gets good, then you have no reason to trust they won't push you out of the remaining 60% the day before any lock-up expires.

In that case, your best options may be either to lever the practical value that keeping you on board has right now to get a better, more secure deal immediately -- one where you won't be vulnerable to being kicked out arbitrarily and without proper compensation in the future -- or to assume you're going to get screwed when your lock-up ends and leave now.

It's a good idea to negotiate at this point rather than caving to the (probably very bad) deal being offered as an opening gambit by the cofounders, but the bottom line is that if they can fire you whenever they feel like it and you have no airtight contractual right to compensation if they do, nothing else you negotiate now actually has any value at all.

(Edit: Obviously if you opt for the "apply leverage" option then you do it nicely. I'm not talking about lawyers-at-dawn and threatening to walk if they don't meet your every outrageous demand or anything silly and confrontational like that. But I think it would be perfectly reasonable to expect solid guarantees that your remaining interests will retain meaningful value in exchange for whatever you are willing to give up here, such as accelerated vesting and a condition that if they let you go early then there's something in it for you.)

That doesn't make sense. You have at least one obvious card, which is that the board wants you to continue working for the company. If they didn't, instead of trying to claw back some of your equity, they'd claw back most of it by firing you.

That doesn't make sense. You have at least one obvious card, which is that the board wants you to continue working for the company.

That's true of any good employee, whether or not they were on board early and received a stake in the business.

However, the value of that card will progressively decrease to near zero over time whatever you do. Like any good poker player, you want them to pay to stay in the game before they know what your hand will be worth if they call you.

Put another way: Two years down the line, with 100 people on board and another funding round in the bank, any one senior technical person will almost certainly be expendable to the business and everyone will know exactly how much his options/diluted options/low preference shares are worth if he doesn't have proper safeguards to guarantee his position.

I'm not saying that bringing a lawyer at this point is a good (or bad) decision, I have no idea. But can they really fire him? If OP is in an EU country and they've setup an office there, aren't they under the jurisdiction of said country for employment purposes?

If so, it might not be so easy. I don't know labor law across the EU, but here our labor courts don't like companies who fire people for exercising their rights.

I don't know labor law across the EU, but here our labor courts don't like companies who fire people for exercising their rights.

That is certainly the general attitude around Europe, encoded in law to various degrees depending on where you are.

However, it's worth keeping in mind that most of those laws are meant to protect the little guy from being fired unreasonably and winding up with no income but still rent to pay.

The maximum levels of compensation available for wrongful dismissal tend to be relatively low compared to the levels you're talking about as a founder/early employee/investor in a company that becomes successful. It seems to be implicitly assumed that anyone dealing with bigger numbers will know enough to make suitable contractual arrangements that protect their own position explicitly.

I've had the opposite experience. I once was offered an unfair equity package from cofounders of a startup. I (and two others) wrote up a document voicing our unhappiness and the reasoning behind it.

And they ended up agreeing with us. While the offer they first came up with was not fair to us, they honestly hadn't realized it (they had a lot on their minds, it was the first solution that came to them, and they simply proposed it).

We did not poison our relationship. They agreed that our solution was more fair (it involved each of them getting less equity and each of us getting more, by the way). And, in the end, the company had a (modestly) successful exit.

We are all friends to this day.

OP: If it's unfair: write down why it is unfair and what you would propose as a more fair agreement. Only if and when they reject that should you involve an attorney. But there is absolutely a chance that they will realize your solution is better.

You were fortunate to have good people who shared your position. It doesn't sound like OP has this, so I'd still suggest consulting with an attorney before doing anything. That doesn't mean he has to get the attorney involved in direct conversations, or even mention he has one.

Employment laws between the US and EU are vastly different and firing the OP may not be a readily available option to the founders.

You definitely want a lawyer, but on the face of it, this is an aggressive move by your partners. The start of a fair negotiation would be equal pro-rata dilution. So if it was 45/45/10, and you want to make 12% in the options pool, you should get diluted 12%, just like them.

That would mean they'd go down to 39.6% and you would go down to 8.8%.

Since you're remote and the company is growing, I would personally expect real problems on the horizon.

Finally, exercising your options is most likely a good plan; options often expire after someone leaves.

He can exercise his options. Which means he needs to pay money right now to own actual stock of company. Which is unsellable without a buyer.

Strike price might be really really cheap, though, if he got options before they had funding.

It's a little harder for them to screw you out of ownership than out of unexercised options. But just a little.

I don't know how US stocks work but in EU at least if the shares already have a bigger valuation you will need to pay taxes at the point when you exercise your options.

Assume positive intent. They might not be out to fuck you -- they might just not have thought about it from your perspective.

Let them know that you think it's unfair because you're diluting much more than them proportionately.

Help them understand that you're in this for the long run (even if you're not sure, founders want to hear that: stability in senior team is something they value) and you want to be incentivised. Many founders tend towards underestimation of problems and overestimation of their own abilities, and they may interpret seed money as an opportunity to replace you. You were a guy who joined when they didn't have access to the hiring market. Now they have money they will have a bit more access.

As much as I support the power of positive thinking, someone should never make assumptions about anyone's feelings - good or bad. You should assume all possible outcomes and state what you want for yourself. If you have legal precedent for defending what you want for yourself, you should use it.

The OP's language makes it seem like the relationship is already strained and he is isolated from the founders ("half-baked", "shit money", "feeling helpless") while still wanting to continue with the company. This negotiation is wrapped up in two things: 1) the financial issues and 2) the OP's value to the company. I think point 2 is the trickier part. Others have already suggested a few ways that the financial issues could be resolved, but he also has to get his relationship with the founders into a better state. If the relationship stays strained, it's only a matter of time before the next issue sets this whole process off again. Especially when we're feeling isolated, rearranging our own mental state often starts the process of claiming the power to fix the relationship.

Let's say they negotiate and his equity stake is cut back to 8.5% while the others give up 5.25% each. His narrative of the negotiation could be, "They tried to screw me again and I barely held on" or it could be "They gave up more money, I gave up a bigger proportion." Even though the finances don't change, the first response maintains the status quo while second response starts the process of reclaiming the relationship.

(Sorry for the male pronouns if you're not a male, OP. Writing he/she is annoying and I'm lazy.)

> Assume positive intent.

Hmm. You could assume intentions, but since you don't know their intentions, it shouldn't affect your decisions much.

What you're looking for is an anti-dilution clause. There may be one in the stock option agreement that prevents this. If not, whether they can do it is going to depend on the stock option agreement and the laws of the state where they are incorporated.

I believe the best advice for you is to find a lawyer in the state where the company is incorporated and hire them.

It sounds to me like you've already gotten a raw deal on your ownership, and they think they can just walk all over you. Dilution at the time of funding should affect everyone the same, and if they want 12 percent for an option pool, then everyone should get diluted fairly (every share should lose %12 of its ownership). I believe anything else might be considered fraud, depending on the terms of the agreement.

You can exercise your vested shares whenever you like (under most agreements) and the only legalities I can think of are the tax implications.

On the other hand, it is standard advice in the venture-backed startup world to NEVER give an anti-dilution clause - I've heard the words "never give an anti-dilution clause to anyone unless they're God, and even then he'd better be giving you a term sheet worth its weight in gold." Unless you were aware of such a clause, it's unlikely that it's in there. At the end of the day, without a clause like that, the parties with the controlling stake in a company can issue shares to whomever they want - I'm assuming that they're issuing shares to themselves and not to you in order to implement this options-pool extension, and not literally taking away your (vested) common stock - now THAT would be illegal. My understanding is that there are some SEC regulations that prevent them from just distributing shares to a few people, but these are hard to enforce, and you'd need to basically sue your cofounders without a guarantee of success (e.g. what Savarin tried to do at Facebook).

Without an anti-dilution clause, early investors can be stomped all over by later investors.

NB: I'm not disagreeing with your arguments for why anti-dilution clauses are bad. But minority shareholders are otherwise relying on the trust from the board, which has every incentive to screw them over, so it's a no-win situation.

This is not strictly true. Early investors usually have pro-rata rights.

I've heard a lot of claims of things being standard advice (not picking on you, just this is commonly used expression) where the thing in question isn't standard, and is actually harmful or detrimental (or more specifically, highly biased in favor of the person handing out the "advice")

All of the "advice" I've seen from Venture Capitalists have been self serving rationalizations that almost never are really "standard" terms as much as they would like them to be.

For example, in one company I worked with, every employee had an anti-dilution clause. This didn't keep the VCs away.

> I believe the best advice for you is to find a lawyer in the state where the company is incorporated and hire them.

The value of this advice depends on the value of the options; but I agree. You need a lawyer to represent your interests separately from the company. It sounds like there are a few different stakeholders here: OP, the other employee shareholders, and the investors. If there are other employees who are being similarly diluted, maybe try to join up with them.

The biggest reason for this is that retaining a lawyer allows you to remove yourself from the situation and continue to be effective in your job. Let your lawyer have the nasty arguments and keep yourself out of it.

Be careful executing your options if you don't trust the company. Execution might not substantially improve your rights as a shareholder. It will, on the other hand, involve you surrendering your own cash. There are startup horror stories of early employees executing and getting zeroed out at acquisition.

(I say this as someone who listened to those horror stories, refused to execute options, and lost a low six figure return as a result. I don't regret the decision though; on the other hand, if I had ponied up thousands of dollars and gotten zeroed out, I probably wouldn't be able to live with it.)

Can you explain more about how they can screw you over when they get acquired?

I know of multiple startups where the acquisition price was exactly the price necessary -- down to four significant digits -- to pay off the VC companies that made up 3 of the 5 sitting board seats.

I myself exercised a (small!) amount in a company that got acquired and my shares all went to $0 because other shareholders got preferential treatment. (This company earlier made a point of the fact that there were no investors with preferential treatment, but either lied about that or somewhere along the line they got desperate and gave preferential treatment. In either case, the stakes were too small to bother suing.) At least I could claim a capital loss.

Let's say you raise $10m in preferred rounds and proceed for a few years, but it's not working. You eventually find a buyer that will acquire/acqui-hire your company for $5m.

That $5m is not split evenly, it's distributed to the highest priority share classes first (after potentially paying off certain debts, notes, etc). So your Seed, Series A, etc will get paid out of the $5m – nothing is left for common.

Common is the last to earn money, and options are part of the common class.

So they want you to contribute as much as an initial founder? Well, then they should give you as much equity as an initial founder, say like 30% and then you'll happily give 4% to extend the option pool. That's the upper bound you should start negotiating.

Otherwise it should be prorated, and you shouldn't give more than 1%, otherwise you'll be contributing more than the founders and that doesn't make any sense.

I've experienced shitty moves like that from people who usually wants you to contribute and behave like a founder with a majority share without giving you such a share. I can understand the idea, some people fall for this, but it has no rational justification and the real issue is that the work/trust relationship may end up being damaged beyond repair.

I'm seeing a lot of comments focusing you on your percentage of the share pool. One area where you can really take a hit is share priority. At each funding round the company can issue a new, higher priority of shares, and even let previous participants who buy into the new round get their existing shares upgraded to the new priority. You can be sitting on your X% shares (whatever X ends up being) and find out when your company is sold that you're getting $0 because there was no money left after servicing the priority shares. This effect can be greatly magnified if some of the money was paid in with an interest clause, with that value also taking priority over your own share of the company. You're remote, and you're a code monkey. You don't have to assume your company is out to screw you, but don't assume they'll work hard to try and take care of you. You most certainly need a lawyer in the corporation's state, and one who specializes in this area of the law. Good luck! It can be rough out there.

You should talk to a lawyer, primarily to find out where you stand. It is very hard for a tiny startup to properly issue options internationally, and you may find that you don't own options in an enforceable way, or have huge tax problems, or any number of other things.

Once you've settled that, have them explain what they're trying to do and have a lawyer interpret it for you. Normally employee option pools (and any kind of dilution) are expanded by issuing more shares. That would dilute everyone equally. To dilute people at different rates, the company would actually need to issue a bunch more shares (diluting everyone even more) and then grant options to the other guys. As far as I know, judges look on that very unfavorably. The startup's lawyers should be advising against that.

Despite what other commenters are saying, this probably isn't a negotiation. It's likely just incompetence on their part. Your first priority should be understanding precisely what position you and the company are in, and then evaluating from there.

I run Lawdingo.com, a place to get connected to lawyers for advice or services. We charge $30 for advice calls, but if you email me (nikhil@lawdingo.com) we'll cover that cost, and we can get you on the phone with a startup lawyer today.

Your partners either a) know what they are asking you to do is unfair and are asking you anyway, in which case they are assholes, or b) don't know what they are asking you to do is unfair, in which case they are idiots. This is a no-win situation, time to cut your losses and move on as quickly as possible.

Have you, you know, TALKED TO THE REST of the founders? I don't think they are out to get you and in the process distract the startup or get terrible press.

Seems people here are talking about lawyering up too fast, without knowing whether a proportional dilution has even been discussed.

Please talk to the founders. It is very possible that they believe this is fair. Calm yourself, let go of resentment, and make an appeal to them. Don't approach thinking they are trying to screw you over.

Definitely talk to a lawyer in the U.S. who works with startups. If they incorporated in the same way most startups with investors do, it's a Delaware C-Corp, and lawyers who work with startups will know the nuances of the vesting and options legalities.

I worked with Scott Walker to incorporate my startup. He's very helpful and takes calls without charging (if you listen to This Week in Startups or Mark Suster's Both Sides podcast you'll hear them talk about him in the ads):

http://walkercorporatelaw.com/

Quitting and leaving is an OPTION. Realize that doing the right thing in a difficult situation will cause you immediate discomfort and probably scare you more than you like. Realize options that you fear the most are probably the best for you.

You must have some sort of contract between yourself and the company or the founders. If there isn't a contract, or it's a bad one, then it becomes interesting from the standpoint of IP ownership. How your shares are tied to the IP ownership is what you want to concentrate on as it is your lever to get what you want. If you find the founders are being unreasonable, use any and all means to defend your dilution up to the point it equals an equitable dilution of all shares by all stake holders.

Don't make blaming statements to the founders, clearly state what you want for yourself in terms of ownership, then go get an attorney and have them look at the documentation. After they give you an opinion on it, prepare yourself for the worst outcome and then restate what you want for yourself again to the founders. If they don't agree, be prepared to make the hard decision.

Best of luck to you!

Having handled things like that badly in the past - the first thing I would recommend is to calm down and think about it rationally as a business transaction open to negotiation.

Also, aren't share option pools handled by (potentially) issuing new shares (in UK terms the difference between issued and authorized share capital) rather than shuffling around existing shareholdings/options?

Agreed on issuing new shares for options pools. This dilutes all pre-existing equity holders equally.

Transferring existing shares can also create tax liabilities - not much fun if you shares look worth a lot in paper but in reality you have little liquid cash to actually pay tax bills!

[NB UK experience]

If an employee owned 4% of the options, would they have to give up 100%? This simply sounds like they are not doing their math right. Obviously, the plan that they proposed benefits them, but propose to them what would be fair based on diluting options by percentage equally. If they want to extend the option pool, the same percentage should be taken out of all option holders.

Shit happens. Refactoring options and shifting things around may suck, but it may have been a requirement of them getting the seed funding. 100% of your options at Zero worth are worse than N% (not a terrible N%) at an actual positive valuation.

I'm not familiar with EU tax rates on short term capital gains in a US market, and would highly recommend spending some of the money you might have spent on a lawyer talking to a reputable financial accountant from your country with experience in this area. In the US you have to set aside a chunk of the proceeds if you do a same day sale when you exercise your options, and are frequently penalized by your state if you don't give them their share at the end of that financial quarter.

There's a lot going on there and I don't think HN is going to give you complete enough advice to rest your mind.

> Shit happens.

This is not the case where you can use 'shit happens' and write this off like it's not a big deal.

When you work mostly for options (which is already pretty much a scam) and receive little to no pay, this is not 'shit happens' this is 'I need to feed my self and my family' type of situation.

If they want to issue out new shares for employees, then they can simply issue new shares. This will dilute the existing shares but not by 40%. More like 11%

They cannot simply take away from you that's your.. Unless they have stated otherwise somewhere.

So just talk with them and maybe you misunderstood something.

1) get RSUs as soon as you can (if it's not too expensive or seed is a convertible note), so that if you leave you're still an owner in the company. 2) they should just add shares to the company to increase the option pool. I'd consider anything else shady.

Sounds like an awful position. I was in a similar place recently. I was second or third engineer (depends if you count a contractor) in a very successful startup when I found that my equity wasn't as promised. I pretty easily found a job where I'd likely make more as cash even if the startup gets acquired for $500 million. You shouldn't tie yourself to a situation where empty promises are all you're working for. I know exactly how it sucks to move on from something you built.

Obviously, you could just propose an equal dilution of everybody in the pool. Or come to them with an outside offer and see what happens.

Are your options on paper? Lawyer is a good idea, and even if you have any informal documentation like emails you should be in decent shape, but having this hard on paper is the only way to be sure. In the absence of an anti-dilution clause, the wording of however you acquired your 10% will help to define the intent and whether you can actually resist the dilution.

If you feel there is a lot of potential in the stock, don't skimp on legal fees. I was involved in a bit of a complicated shares (not option) situation and $1500+USD was certainly worth it in the end.

In light of some of the lawyer-equals-adversarial comments above, I should clarify: definitely don't tackle your partners with a lawyer. What I'm suggesting is hire a lawyer you like / you get through a trusted recommendation to read things from your point of view, then give you advice at the present time.

A good lawyer will present things as they stand, but also let you know where the line exists between asking for what is fair and pressing your case more strongly / becoming more adversarial. They will leave the choices to you, but they will inform you well of the spectrum of choices that you have.

It's already stated that their math is flawed, but you can show them by pushing it to the extreme. What if they took 10% of everyones equity. That would leave them with 30% each and you with nothing.

Get a lawyer to look at your past agreements. As others have mentioned, there should be nothing adversarial about hiring a lawyer to look at your agreeements and advise you of your rights and obligations. You need a lawyer to tell you when you can exercise stock. Don't get legal advice from a forum.

When you know your legal situation, keep an open mind about what is best for you rather than what is "fair". If investors want to dilute you more than other founders, going along with the investors may ultimately be the most lucrative option for you.

You should not be asked to give up anything without getting something in return. The options you were offered are compensation for your below-market pay rate. As with any negotiable intrument, the vested and unvested options have a current value. If the founders want to offer them to someone else in lieu of pay, they need to buy them back from you first.

All the people saying "pro rata" don't seem to be distinguishing between options and actual equity. If you have options, you are offered the opportunity to buy equity in the company at discounted rates. Investor coupons. Your equity in the company is the number of shares you have removed from the option pool by exercising vested options.

The founders, who have actual equity in the company, are adding 8% of their company to the option pool, which is already at least 10% of the company, less whatever OP exercised out.

I assume the freelancer was paid in cash. That makes the current structure 40% Founder A, 40% Founder B, and 20% option pool, currently 10% allocated to Employee 1, and 10% distributed among employees 2-15. The proposal puts each founder at 36% each, grows the option pool to 28%, with 6% for employee 1 and 10% for 2-15, and 12% for new blood.

Until someone starts exercising those options out of the pool and into actual ownership shares, the founders are still 50-50 in control of the company. Those options remain just investor discount coupons. They have some value, which can be calculated.

Unvested options are worth less than vested options, because you have to apply a discount rate representing the time you have to wait to use them. The 4% given up are essentially the 4% from the end of the vesting schedule. What the founders could do is take the current value of that 4%, and pay that to OP as cash, or apply that amount towards exercise of vested options. It would replace a larger amount of future options with a smaller amount of current equity, but the current value of the assets remains the same.

You don't need to consult with a lawyer. The founders can do the right thing and pay you what they promised to pay you when you agreed to work for them, or they can reneg. If they don't at least pay you for the work you have already done for them, that's when you hire the lawyer and jump straight into the lawsuit.

What is your relationship like? Any reason you can't tell them the same way you told us?

If they're receptive, you've helped to forge a better relationship. If not, at least you know bailing is the right choice.

Consider having a mental (or physical) flow chart of all of the possibilities before you talk with them so your action can be predetermined based upon their feedback/reaction.

Talk to a lawyer, to know your best options

Would you like to continue here after taking legal route, I may not.

As others have said, the rational thing to do would be pro-rata dilution.

Your real problem though is why didn't they ask for that in the first place. It looks like they want to squeeze you out and you should have a transparent discussion about that first.

They sound like real scumbags if they think your 4 is equal to their 4.

Aside from the option math: how did the company obtain seed funding when, as you put it, the product is half-baked and has zero revenue?

Or has that changed in the last 1.5 years?

I agree with others here, talk to a lawyer. You've worked hard with shit money and 10% equity in the hopes of cashing in your hard work later.

It maybe an LLC, that is why they are talking about giving up their share to new employees and investors.

> 2 non technical founders, a half baked product with no revenue at all, built with a freelancer.

> Fast forward to today, we got seed funding

ugh.

Find someone in that state with the license place LWYRUP and hire them.

http://www.imcdb.org/i303189.jpg

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