If You're Working For Stock, Read the Fine Print

cratermoon writes with a story of interest to anyone interested in working at a start-up, or compensated even partly in company stock: "Former Skype guy Yee Lee finds out that for people working at companies controlled by private equity firm Silver Lake, 'vested' doesn't mean what you think it means, and gets no money from the stock options he thought he could exercise. '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."' Fortune also has the story." Some of the commentary on the confusing language surrounding the stock grant says the company was doing nothing out of the ordinary, but it seems that's because opaque language is the norm.

Comments

The profit is the profit

[alphatel]

You are the employee and you cost money. The profit is already money and therefor that is what is protected. If you want to assure you will be protected, read what you sign. Everyone wants to keep their slice of the pie. Every slice costs money. And even worse, lawyers will be making a piece from each part of the action.

Re:The profit is the profit

[bughunter]

I am the employee who generates value for your company. If your staff isn't generating more money than it costs, then either you're a poor manager, or your business plan has already accounted for that and hopes to recoup the losses later. If you want assured profits, then you need to compensate the employees who generate the wealth.

Yes, you steer the ship, but the employees are the engine, the sails, the hull, and the bilge pump. Without us, you'd be steering a canoe instead of a battleship. Take care of us like you'd take care of your ship, or else sooner or later you'll be swimming with the bankruptcy lawyers. (I hear they have dolls' eyes.)

...opaque language is the norm.

[John Hasler]

It wouldn't be if you people would quit signing things you don't understand.

Re:...opaque language is the norm.

[v1]

The 11-page stock option agreement he signed looked to him like boiler plate and suggested a typical "one-year cliff" at which point 25 percent of his four-year option grant would vest. The only mention that the company had the right to buy if he left in less than five years came in a single sentence toward the end of the document that referred him to yet another document, which he never bothered to read.

It's easy to tell someone "be sure to completely read what you sign", until the day someone sets a 45 page or otherwise excessive amount of fine print in front of you, summarizes it, and asks you to sign it. Try buying a house. If you're really going to read the entire stack of morgage papers, you're going to need a few days. And there's no chance in hell you're going to catch anything shady like the above unless you have a lawyer there the entire time, and you can bet that's going to be an expensive few days.

This one pulled a double-shaft on him... the offending bit of legalese wasn't even in the document he signed. It was something like a "this agreement also includes stipulations covered in a different document". He couldn't possibly have caught that even with a lawyer reading over his shoulder, without taking a break and doing research and chasing down the additional paperwork (that he wasn't even provided with at the time of signing) that it was binding him to. That's about as far into "dirty pool" as fine print can get.

Re:...opaque language is the norm.

[betterunixthanunix]

If you're really going to read the entire stack of morgage papers, you're going to need a few days

Heaven forbid someone take a few days to read and understand the terms of such a large loan and purchase. It's not like people spend a large fraction of their lives repaying a mortgage. It's not like people might have to deal with the mortgage rate changing on them a few years down the line.

And there's no chance in hell you're going to catch anything shady like the above unless you have a lawyer there the entire time, and you can bet that's going to be an expensive few days.

We're not talking about buying a laptop, we are talking about buying a house. Yes, I would want to have a lawyer look over the contract before I agree to repay hundreds of thousands of dollars to the bank.

the offending bit of legalese wasn't even in the document he signed

So he should have either asked for the document that the contract referenced.

He couldn't possibly have caught that

Yes he could have, if he had actually read what he was signing. He did not read it, he just assumed that he could work at Skype for a year or so and then jump ship, like he had done nine times beforehand. Why are we feeling sorry for this guy?

Re:...opaque language is the norm.

[Kenja]

I purchased a house. I read everything I was asked to sign. Yes it took time, but the responsibility of understanding what you sign is on you and not the contract issuer. "I didn't read it" is not a defense that will often stand up in court, so actuly spending a little time reading is your best bet. And given the amount of money involved in a job or house, why wouldn't you be willing to spend the time?

Re:...opaque language is the norm.

[Culture20]

If you're hiring someone, and he says "let me call my lawyer", don't you get a knot in your stomach, like maybe this guy likes to sue a lot? Who calls their lawyer over an ordinary job contract (I've actually never signed a job contract; I've just been given confirmation of what I'll receive in return for my work)? Maybe he's planning on suing this company once he's hired? Maybe he's planning on suing this company for not hiring him? Maybe he's planning to slip and fall in the meeting room?

Re:...opaque language is the norm.

[TheRaven64]

Same here. I don't think it took more than half a day to read everything. The contract of sale was only 3 pages, the mortgage agreement was 4. The leasehold agreement was the longest, but since I was also buying the freehold, making the leasehold agreement an agreement between me and myself, it was somewhat moot (yes, British law is weird). I read it anyway though, just in case.

When you're borrowing an amount of money that's measured in multiples of your average income, and buying something that costs even more, you'd be absolutely insane to sign without reading it in detail.

Actually, the contract my publisher uses for books is a bit more complex than any of the bits of paperwork that I had to sign for my house, and I've never received one of those without sending back a load of complaints about it and getting it amended. I'd expect to do something similar with any contract of employment.

If I were hiring a CxO, I'd put a clause in the middle of their contract saying that they could be fired for any reason within the first 10 days and would have to pay a $100,000 fee to cover the costs of hiring a replacement if this clause were invoked. If they didn't object to this, I'd fire them on the first day - I wouldn't want someone who didn't read contracts and understand the implications of the terms in a senior management position.

Re:...opaque language is the norm.

[pugugly]

It's not like people aren't trained to read legal papers . . .

Oh, wait, that kind of training takes 8 years and $100,000 dollars. People actually *aren't* trained to read and interpret legal papers, that might be why corporations hire lawyers to create contracts in which important legal information is hidden on other papers not made available at the time of the signing of the contract, completely ignoring the concept documented under the Uniform Commercial Code saying that a contract involves coming to a 'meeting of the minds'.

Sorry - I'd have to say this should be brought to a court. A contract does involve a meeting of the minds, and the company *knew* this addenda was entirely relevant to that meeting of the minds and took positive steps to hide that fact.

"In criminal law, a fraud is an intentional deception made for personal gain or to damage another individual; the related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud is a crime, and also a civil law violation."

As a potential member of a jury pool, does putting such relevant information in a document not available at the time of the signing of the contract strike you as being either accidental or forthcoming?

Pug

Re:...opaque language is the norm.

[Slashdot Parent]

Actually, if you're buying a house like most people, which is via your local association of Realtor's contract and Fannie Mae/Freddie Mac mortgage paperwork, there is probably no point in having an attorney review it. Those documents have been reviewed by more attorneys than you could ever count, and none of the terms are negotiable (with your lender, anyhow).

Now, it may still be worth a few hundred bucks to have an attorney attend closing with you, especially if you are an inexperienced buyer, to make sure nobody pulls anything shady with you. But you can be sure that the attorney is not going to read your off-the-shelf documents line by line.

Come to think of it, a banker that I've used for a few transactions tells a funny story about a buyer who brought an inexperienced attorney to closing. The attorney started going through the standard mortgage docs with a fine-toothed comb and started crossing stuff out, rewriting clauses, etc. After 20 minutes of this nonsense, the banker asked the attorney if she could speak with him privately.

They left the room and she said, and I'm paraphrasing here, "These terms are set by Fannie Mae and are not negotiable. If you don't cut this shit out, the bank will simply decline to fund the loan, and your client will lose his interest rate lock and potentially lose the house. I suggest that you advise your client to sign the agreements without modification, or you are going to become an extremely unpopular attorney with our client." Yeah, so the attorney changed his mind right quick about trying to negotiate the time-tested, court-tested docs.

"confusing"

[superwiz]

"Confusing" language often means open to interpretation (ie, ambiguous). Anyone who thinks they may have a claim because the language in their contract can be read in multiple ways is probably well-advised to talk to a lawyer and sue.

Been there, done that

[mark_reh]

I worked for a startup, was given stock options, then the company went public. After about a month my options were worth about $1M on paper but I couldn't exercise them because that would have diluted the company founder's share value as they busily unloaded their shares. In the end I wrote a check for $24k to the IRS and ended up with nearly worthless options while the company founders cashed in and took their millions off to another startup to repeat the process.

If you're working for stock options you're going to get screwed.

Re:Been there, done that

[hedwards]

Even in cases like Microsoft where the management team isn't trying to screw people over it can still happen. I remember a few years back they stopped granting options because they had so many options outstanding and most of them could never be exercised due to the strike price.

And really companies shouldn't be granting options, the fewer options there are the better. If a company wants to tie an employees benefits to the stock price, just give them actual shares in the company. Options themselves just muddy up the waters and make it much harder to figure out what the company is really worth.

Re:Been there, done that

[CodeBuster]

If you're working for stock options you're going to get screwed.

YES! Let this be a warning to all techs and other employees who are offered shares in lieu of pay or other benefits. The lawyers and private equity guys will screw you over. Actually, its worse now than in the past because fewer deals ever go fully public due to the Sarbanes Oxley reporting regulations and bullcrap; who needs it? What VC would want to deal with all of that when the company can instead be sold to a private equity firm, a hedge fund perhaps, with most of the profit still intact? If nothing else, remember what they say in Hollywood: "a share of the net profits is a share of nothing." cash money on the barrelhead...accept no substitutes.

Private options can be diluted on a whim

[Anonymous Coward]

I was in a startup, had a ton of stock options. CEO sold the company, but just before doing so... he granted himself a million options at a penny strike price. This diluted the shares so that anyone else made $0 because they were worth less than the strike price everyone else had. This was all after working there for years and putting in a lot of OT, and creating a product that gave the company real value it would not have had otherwise.

True story. I opt for cash now, and will take options if they give them but do not consider them as part of my compensation no matter how much my bosses try to give them to me in lieu of increases.

Re:Private options can be diluted on a whim

[HungryHobo]

I think there's some old quote along the lines of the guy who owns 20% of the company owns exacty as much as the guy who owns 80% wants him to.

Options without an utterly ironclad shareholders agreement are worth exactly zero.
Even with one they're barely worth more.

Re:Working for stock options

[Rakishi]

Next time read the article, this has nothing to do with the difference between stock options and stocks. It has everything to do with the difference in the stock option contracts between companies.

Specifically, the issue is that normally stock options once vested (ie: you can exercise them) do not expire after an employee leaves a company. In this case they did and the language of the contract did not at all make that clear.

Re:Working for stock options

[93 Escort Wagon]

Next time read the article

Now, now, let's not get too carried away.

Winning at all costs?

[DoofusOfDeath]

, "You've got to be in it to win it.

If that's his attitude, perhaps his former employees should kill him and steal his possessions. If "winning" is all that really matters, that is.

Re:Winning at all costs?

[GreatBunzinni]

What strikes me as odd in that astonishing comment is that, without the stock option (which was instrumental in keeping those same brilliant people employed at that company), what else is there to "win"? The paycheck, which everyone can easily get from any company, or only the shaft which they are giving to their loyal employees? In fact, thanks to this dick move, does anyone believe that working for skype, or any company which private equity firm Silver Lake comes close to, is now something to dream about? Obviously not. They just demonstrated that skype managers are filled with contempt regarding their employees and that private equity firm Silver Lake is there just to screw even their mothers if it makes them a penny richer.

Another thing that strikes me as odd is that, according to the public statement, one of the reasons they did that is to stop employees from leaving their job. This is terribly insulting, even to the most hardcore neoliberal capitalist out there. This is sociopathy. They are actually stealing their employees income with the expectation that if they are poor enough they will be forced to stay in a job they hate because, being so poorly paid, if they quit their job they will face the risk of bankruptcy. Talk about grade-A psychopaths.

Re:Winning at all costs?

[tompaulco]

I worked for a company that used another means to force employees to stay. They paid 25% of your income as bonus. Every quarter, your bonus was as regular as clockwork, except they would vary it by a dollar or two, probably because it would be legally considered part of the paycheck if they paid you the same amount. The hook was that they paid it once a quarter. This meant you couldn't count it as income, so you couldn't qualify for the home loans, or other things that you might have if it was all salary. Also, since it was bonus, apparently most lamebrain accountants think that means you need to withhold taxes at the single white rich dude percentage, which means that 40% of the dollars that you earn on January 1st of this year won't be available for your use for another 18 months. But the final coffin nail was that if you quit, at any time, you could guarantee that they weren't going to pay you your bonus for the quarter, so at least for your last quarter you ended up working for 75% of industry standard wage.
The owners of the company sold out to a large corporation for a huge sum of money, and didn't bother to negotiate any kind of retention bonuses for the employees. In fact, everyone had to redo the paperwork as if they were just starting with a new company, vested profit sharing was lost, vacation days were set back to zero. The company was built on the labor of hundreds of employees who put in many, many hours of overtime with the promise of being rewarded with a piece of the pie when the company became profitable, but it was all a lie.
My advice, tell them thank you for the generous stock options and other benefits, value them at zero (because that is what they are worth) and ask for whatever compensation you are desiring all in salary.

Re:Working for stock options

[techsoldaten]

Something tells me, if I were to ask you to read that document, you would not understand it yourself. In all likelihood, your lawyer would not have advised you about the possible implications of that clause since it is simply something that is not done.

People working for me have left to go to Google several times in the past, we had one black week once where 6 guys left within days of each other, all heading for Google. Not all of them are with that company anymore, and I have heard tell of the offers they received. $120k in stock options granted the first day, with a relatively short vesting period (I think it was about a year, but can't remember exactly).

This is the way things are supposed to work in Silicon Valley. I am never keen on options, I was granted a good number of them in the 90s and saw a lot of value vanish overnight when the bubble burst. But you should be able to lose value based on performance of the market, but an option is an option. It does not make sense that you are contributing to the growth of the company based on this compensation, and that it can be stripped from you.

Buyback clauses like this are almost certainly non-enforceable, especially since the employee has to pay taxes on the options during the time of his / her employment (at least in California). It would be like saying that the company has the right to take back your paycheck, they are measured as compensation and should rightfully belong to the employee without additional considerations.

I have a strong feeling this is not going to stand and we will be hearing about this matter for a long time.

I honestly thought this was common knowledge

[tgd]

I'd say at least half the companies I've received options from had clauses just like this. It may not be par for the course with private venture-funded companies, but it sure is close.

You should always assume that options or common shares of private companies are going to be worthless to you. Never include them in your compensation evaluation. Even if you are in a company that lets you keep options without buyback if you leave, you still have common stock and they can play games and absorb the equity event's value entirely or almost entirely in the preferred shares. Or they can recapitalize the company prior to acquisition, re-issue stock to existing employees and investors and cut the rest out.

Making money off an equity event in a private company is like winning the lottery. Pretty nice if it happens, but you're not being rational about it if you think you're going to win just because you played.

Re:Working for stock options

[Hazel Bergeron]

Why am I supposed to feel sorry for someone who failed to read and understand the terms of the contract that he signed?

Empathy block - check.

Assumption that all humans are perfect rational entities - check.

Supremacy of the business contract - check.

Internet Libertarian Warrior mode engaged!

Re:Working for stock options

[symbolset]

The article isn't about feeling sorry for him. It's about being aware that this has happened so that others potentially impacted by similar terms can evaluate their positions. Something like a sign on the beach that reads "Some swimmers recently eaten by sharks."

Contracts are 1-way only if you don't negiotate

[Spril]

When I bought my house, I read through everything, and there were three places where I requested changes to the contracts. In each case, they made the change on the spot. When I was hired for one job, I said the non-compete agreement was insane, pointed out where, and the boss tore it up on the spot. Once I was hired, he asked me to help re-write it to something more reasonable. If you don't read before signing, you're still responsible.

Stopped basing decisions on stock options

[theshowmecanuck]

I stopped including stock options into what I consider adequate compensation for a job a long time ago. I look at the dollar salary or hourly contractor pay as the only factor in judging compensation. Stock options are a nice to have, but in the end I never count on them paying off. I've been around when stocks fall below the price they were when I started somewhere (companies can gain market share but fickle markets do funny things... e.g. they've maxed out the market so can't grow any more but even though they are making the same profit year over year we don't think they are worth as much since they can't grow as fast as before.... etc etc etc) or when companies want to put clauses like this into the package. So I don't let them wow me with phrases like, "but we offer great stock options" when talking to the recruiters. I prefer the "show me the money" conversation. Now-a-days I believe "stock options" are just a way to pay you less and to try to rope the naive into staying at shitty companies.

Re:Working for stock options

[pla]

Just because some companies offer options contracts that work in the manner you expect does not mean that every company does.

Because redefining commonly understood words - and making you hunt down those definitions with no reason to suspect they've changed - Counts as nothing short of a "lucky he didn't go postal" level of sleaziness.

I want to pay you a million dollars a year to work for me. See my non-attached 300 pages of fine print for the definition of "dollar".

Re:Working for stock options

[haystor]

When you exercise options, you have a tax obligation between your strike price and the current price of the company. So if the option is at $1/share and the current price is $100 a share, he owes tax on $99 a share. Now, if he has a side agreement that he has to sell them at exercise price, he has to sell them at $1 a share, enabling him to take a loss as soon as the actual sale goes through.

This sort of confusion was really big during the .com boom/bust. People would exercise options to get a lot of stock when the price was high but then they *wouldn't* sell them. They would end up holding them and the company might go bust or lose 90% of its value. They would have a massive tax burden and the underlying stock would be worthless to cover it.