> So people who work for a start up aren't taking risk?
Not at all like the risk of putting in a big chunk of your own money. When you lose it, it's gone. Too bad, so sad.
Employees have the lowest risk position. They get first claim on the money owed for their paychecks and there are many legal protections for that. The investor is frequently last in line, and gets nothing if the company bankrupts.
> described in the article is deeply unfair
My reading of it was slightly different than yours. If the company hadn't gotten the overhang investment, they would have gone bankrupt and the employee would have lost their job sooner. If the overhang wasn't offered, the investors would not have invested. There was no path for the employee to cash in the stock - unless the value of the company was larger than $100m. But it wasn't.
I have no problem with employment where money is exchanged for time. But that wasn't the case.
The employee got paid for time in the form of money and stock. You are conveniently ignoring this part.
If the stock is worthless, why offer it? The answer to me is obvious, they are being deceitful.
As stated, the SECs' mission is so that people who deal with securities don't engage in deceitful behavior, since deceitful behavior removes trust from market participants which creates friction and increases costs and decreases participation.
The argument that people's rewards, one who put in $50 in cash and another who accepted an offer that resulted in a decreased earnings of say $50 avg should be treated differently is anti-meritocratic. Both risked $50. If the employee wasn't accepting a decreased earnings potential, why offer the stock? You can't have it both ways.
Just as the company would have failed if the investors didn't invest, it would have also failed if the employees left when they saw trouble. Many extensively won't because they have shares. That's why the shares are offered in the first place. To motivate the employee. But it turns out many times those offerings are done in a deceitful manner; the people offering stocks to employees many times know those stocks are extremely unlikely to be worth anything, yet they make a concerted effort to make it appear as if those stocks are worth something.
Investors are protected from deceitful security offerings. Surely you think that's a good thing? Why not apply to all parties?
Literally all I'm arguing for is a more honest (and therefore meritocratic) code in our system when handling the exchange of time for securities, especially in the face of a large liquidity event.
It wasn't worthless when it was offered, the overhang deals did not come until much later, and it did not become worthless until the company sale price was agreed upon. The stock would still have been worth something if the sale price was higher than the overhang.
Getting stock does not mean it can be diluted by further stock issuances. There is no deceit there.
> Literally all I'm arguing for is a more honest (and therefore meritocratic)
Honesty has nothing to do with meritocratic. For example, the person next to you on an airplane surely paid a different price. It's neither dishonest nor meritocratic. It is what both parties agreed upon. Each person has a different level of risk tolerance and desire for money.
Everybody in a startup gets a different deal based on their ability to negotiate, what they want, their risk tolerance, and the desire of the company to get them on board.
If you agree that both put in $50 worth of something, then why does one get something while the other nothing? How is that honest? The employee was investing time for the stock, the investor fiat.
The employee was offered 1% of the company.
Reasonable, everyday people will understand that to be 1% of all money that comes in on a sale after paying legal fees and bond holders.
The rest of the convoluted mess, while legal and negotiated and something I understand, is done in a way that is taking advantage of the information and power asymmetry of the two market participants. Just as stock swindles happened in the late 1800s.
Honest markets do create more meritocratic markets, as market participants can engage without the friction of complete distrust. Courts and systems to create trust are essential. If you don't understand that concept, then we likely won't ever agree, I think it's a pretty basic concept in capitalism and economics. It's like people who don't believe in supply and demand, if you can't agree on something so basic, then all subsequent points will be going off a different basis.
As stated in my earlier reply, look at the stock market and how it was for investors in the 18th century when there were little to no rules protecting investors and therefore there was massive friction from dishonest market participants.
Your argument can be boiled down to 'caveat emptor'. Which is an argument that lacks intellectual cohesiveness when you are simultaneously supporting the legal structure that removed such a situation from the average investor and which has allowed our markets to develop and become fully capitalized as market participation soars when honest behavior is enforced.
It amazes me that someone can honestly argue against providing time investors with the same protection as fiat investors.
No, they weren't. They were offered stock. Stock can always be diluted by future stock issues.
> Reasonable, everyday people will understand that to be 1% of all money that comes in on a sale after paying legal fees and bond holders.
People who accept stock options and don't bother to learn about them have only themselves to blame. The information isn't hard to come by, it's all over the internet.
> It amazes me that someone can honestly argue against providing time investors with the same protection as fiat investors.
They do have the same legal and system protections. They got what they agreed to.
> Courts and systems to create trust are essential.
Yes.
What you're discounting, however, is the role of risk. Risk is always there. The larger the risk, the more potential returns there are. If you try to legally define the risk and legally force two disparate risks to be the same, the result will be all kinds of market distortions.
You argue that the risk of the employee and the investor are the same. They are not, or they would be priced the same. Is it really right to interfere in the negotiations other people are freely making?
I think your argument is at best disingenuous. People leading startups know that people taking stock as a good part of their equity know that the vast majority of startup employees actually don't know how stock equity works in those circumstances. They don't like it when they ask for more cash comp, and it's to the benefit of the company founders that regular employees don't understand. It's also the case that people should educate them.
But like we make laws controlling how real estate loans work to protect people from shysters, we should probably have a lot more required documentation for companies that offer stock in pre-ipo companies.
If this was market based, you'd be right. But if it is legislative based, then this is the definition of circular logic. Given that the structure of preferential stock is legislative based, it is circular reasoning.
I count risk based on what percentage of a person's net worth and potential earnings are tied up in the securities.
That renders a different perspective of risk than just raw numbers which is what you seem to be going off of.
Your argument can be boiled down to 'caveat emptor'. Which is an argument that lacks intellectual cohesiveness when you are simultaneously supporting the legal structure that removed such a situation from the average investor.
> Which is an argument that lacks intellectual cohesiveness when you are simultaneously supporting the legal structure that removed such a situation from the average investor.
Not exactly. The courts are there to enforce the contracts, and protect against fraud. They are not there to protect people from making ignorant decisions and failing to do things like read the contracts they sign. They are not there to remove risk.
Some people say that free markets don't work unless there is perfect information on both sides. This is incorrect. Imperfect information is called risk and is always priced in. The overhang in stocks comes about because investing in the company is perceived as extremely risky.
As a practical matter, it was, since it wasn't liquid and had no security against changes which would eliminate it's theoretical value before it became liquid.
It could have become worth something with the right set of future conditions, but those obviously did not materialize.
Not at all like the risk of putting in a big chunk of your own money. When you lose it, it's gone. Too bad, so sad.
Employees have the lowest risk position. They get first claim on the money owed for their paychecks and there are many legal protections for that. The investor is frequently last in line, and gets nothing if the company bankrupts.
> described in the article is deeply unfair
My reading of it was slightly different than yours. If the company hadn't gotten the overhang investment, they would have gone bankrupt and the employee would have lost their job sooner. If the overhang wasn't offered, the investors would not have invested. There was no path for the employee to cash in the stock - unless the value of the company was larger than $100m. But it wasn't.