Tech Startups Ask Workers To Trade In Salary for Stock (bloomberg.com) 96
Business is booming for Medal.tv as house-bound users flock to the gaming startup, making it one of the rare coronavirus success stories. Half its employees are still taking salary cuts in the wake of the outbreak. From a report: In return, the 33-person company is offering those employees restricted stock units which will vest over one year. The company intends for employees to be able to sell those shares when Medal eventually closes its next round of financing. Timing on that: to be determined. "If everything goes well, not only does the company save money and slow down its cash burn, but the employees that exchange their salary for stock will have a bigger payout during our Series B round," said co-founder Pim de Witte.
Medal is among a growing number of startups offering stock-for-salary trades to preserve cash as the tech industry reels and economic uncertainty mounts. Medal, which lets players clip and share snippets of games on social media, has doubled its user growth rate since shelter in place orders started. The company said while high earners were "strongly encouraged" to take the deal, the pay cut and stock option swap was voluntary. It's a move that only works for "employees who believe in the financial outlook of your company," De Witte said.
Medal is among a growing number of startups offering stock-for-salary trades to preserve cash as the tech industry reels and economic uncertainty mounts. Medal, which lets players clip and share snippets of games on social media, has doubled its user growth rate since shelter in place orders started. The company said while high earners were "strongly encouraged" to take the deal, the pay cut and stock option swap was voluntary. It's a move that only works for "employees who believe in the financial outlook of your company," De Witte said.
That's entirely bogus. I hope the law can stop it (Score:3, Interesting)
Make the company sell stock to make payroll. The government can buy it, and claim equity
Re:That's entirely bogus. I hope the law can stop (Score:5, Insightful)
Yeah, don't trust this nonsense.
Re:That's entirely bogus. I hope the law can stop (Score:5, Informative)
If they are trading immediate cash for restricted stock that vests in a year, that's really b.s. under the circumstances. That stock should vest IMMEDIATELY just as the cash is good immediately. The only stock or options that shoudl reasonably be subject to vesting is the extra sweetener for retention, not the stock that's in lieu of earnings. These employees are getting screwed... and they will probably get screwed more if the company does not facilitate IRS 83b elections (which if you don't file them within 30 days of being GRANTED the yet-unvested stock, you can wind up getting screwed as that stock vests, because you'll now owe income tax on it, without the CASH to pay the tax bill)
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If they are trading immediate cash for restricted stock that vests in a year, that's really b.s. under the circumstances. That stock should vest IMMEDIATELY just as the cash is good immediately. The only stock or options that shoudl reasonably be subject to vesting is the extra sweetener for retention, not the stock that's in lieu of earnings. These employees are getting screwed... and they will probably get screwed more if the company does not facilitate IRS 83b elections (which if you don't file them within 30 days of being GRANTED the yet-unvested stock, you can wind up getting screwed as that stock vests, because you'll now owe income tax on it, without the CASH to pay the tax bill)
In return, the 33-person company is offering those employees restricted stock units which will vest over one year. The company intends for employees to be able to sell those shares when Medal eventually closes its next round of financing. Timing on that: to be determined. "If everything goes well, not only does the company save money and slow down its cash burn, but the employees that exchange their salary for stock will have a bigger payout during our Series B round," said co-founder Pim de Witte.
I would MAYBE consider taking the deal if it was the exact same stock that Pim de Witte holds. Although let's be honest, what's the likelihood this start-up (which looks like the bastard love child of Twitter and Twitch, you just share clips of gameplay footage) will even have a Series B round of funding anyway? More than likely, If I worked there I would be brushing off my resume. Is Rockstar hiring?
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Thats not how startups work though, in an early stage startup you are pretty much always going to get less salary than at an established public company in exchange for stock options (which might never be usable). In this case they are granting RSUs which can be cashed out at a funding round. To me that is a lot nicer than options in a company that might never be bought or go public. Sure you are taking a risk that there will be no series B round or that the value of the stocks will be low but thats the ch
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Sorry, but what? Stock options in lieu of salary?
No. If I'm taking a risk and accepting lower pay, I want equity, Actual stocks. Not options.
The options are nice too, but those are a success measure. The risk and lower pay needs directly rewarding, and options are not the answer.
Re: That's entirely bogus. I hope the law can stop (Score:2)
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No. These are options, which are not stock. There is an important difference.
If I hold equity in a company, I own part of the company. I likely have voting rights, I share in dividends, I have an immediate stake in the business.
If I have share options, that merely means that at some point in the future I may be able to acquire equity in a company. May.
May not.
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This is not financial advice. With that said...
I'll counter your 'no' with a No that includes explanation instead of (incorrect) statements.
First, they're already listed as RSU's in tfa. RSU's are stock *grants* with restrictions - the stock is yours* as long as you meet the restrictions/conditions. 1 year continued employment from tenure date in this case.
*yours except you have to pay income taxes on this when they vest. Commonly this is done by selling a portion to cover the taxes
Options OTOH are an .
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Re: That's entirely bogus. I hope the law can stop (Score:1)
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So what you're saying is: it is worthless...
Actually no. You can still buy/sell/trade shares of private companies. It's done all the time, just not on eTrade against public market pricing.
What it's worth though...that's the rub. Your market is much smaller and entirely private.
it's gambling (Score:5, Insightful)
I only saw options work once, that was Qualcomm. Too bad I was a consultant, not an employee.
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Reverse stock splits don't screw anyone, taken as a basic financial operation. They concentrate stock value into a smaller number of shares. There may have been other issues which happened at the same time that actually screwed people. What was the exact scenario?
As for getting laid off just before you vest... yeah, that's screwing people.
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There are all kinds of machinations they can do as they negotiate the funding round. Unless you are getting a stated percentage share of the company, non-dillutible, then the restricted shares are worthless. Firing someone before they vest is a pretty common game as well.
Since the shares are restricted, you essentially have no say in the business until they vest. Everything can (and will) change. Not in your favor.
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Yeah, I thought I was having a stroke when I read the title. "Were the last 25 years all a dream? Is it really 1995?"
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I would take the money instead. I was given restricted stock options in the late 90s. The strike price was higher than the price the shares were trading at and I could exercise the shares for 5 years. Was not worth it since I ended up making about $1,500 over five years.
The are RSUs (restricted stock units) not options. You get given stock, not an option to buy at a given price, so there is no strike price. If the shares halve in value you get half the money, not none.
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Depends on the market conditions and the company outlook.
I got a batch of Options for my bonus once upon a time. I exercised them just before they expired and made about triple what my RSU bonus was in the years following the options grant. Mind you, there were unique market conditions and they stopped giving options because, at the time if issuance, they were underwater/worthless. Years later the company and market overall was doing quite well.
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Having worked for a started up as well, I would not trust my options there any further than I could spend them immediately. I certainly would not trade in dollars for them.
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Same. I've had my company dilute or inverse-split, and friends have had their company divest valuable IP/divisions, or implode due externalities: Recession, running dry, CEO fuckery, or just pissing off the wrong giant tech competitor. So, my lessons of a career in computers and tech? Stock Options are a Lotto ticket. -- folks gambling on stock options need to treat it like money they'll never see. Get paid enough to live comfortably, and if the the options vest profitably, consider it good luck.
Ironical
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What these companies are asking for are 0% unsecured loans. There may be unsecured tax liabilities when these vest if the are not worth the electrons needed to display on your screen. I have no problem with thee except that are asking you to risk your salary and give them a zero percent loan with no collateral or benefit to
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Even vested stock is subject to screw jobs. Check out a law book, O'Neal's "Oppression of Minority Shareholders", and see just how vulnerable you are without a strong shareholder's agreement.
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So you think that if someone gives you a dollar for 10 dimes, they are ripping you off?
Re: it's gambling (Score:2)
If those ten share are preferred and the replacement share is not, then you have lost value.
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More like it's the mid 1960's. They take your 10 silver dimes, and give you a piece of paper called a silver certificate that says it's good for $1 worth of silver coins. Then soon after they decide that the silver certificate can no longer be redeemed for silver coins, but is just a piece of paper valued at $1 of fiat currency.
Tax Break! (Score:1)
If you have the savings to pull this off and faith that your company will weather the storm, this would be a fantastic deal. It gets around all of those pesky wage taxes, converting it to a nice small capital gains tax (please correct me if I'm wrong).
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Both of those conditions are big IFs in SV.
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only if the RSUs vest immediately, you have to hold them for a year after the vest in order to get to long term capital gains (18% vs whatever your marginal income tax is, 24-32% depending on annual earnings)
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oh yeah and you pay income tax on the value of the stock when the RSU vests but ideally that is a low number and what you sell it at is higher... Its just a slight variation on the crapshoot that is working at a startup
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I figured that might be the case. Thanks for the info.
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Yummy! (Score:5, Funny)
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History repeats itself (Score:5, Insightful)
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I remember this back in the dot.com bubble. I remember how well it worked out too.
Yeah, but I bet this company's employees were just starting elementary school during the boom (and if true, such fact is being exploited by the CEO & BoD).
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That's why it is nice to have institutional knowledge in a salary negotiation. AKA, let the union do the negotiating.
Oh wait. This is Silly Valley, full of DK-sufferers who think their individual savvy beats things like institutional knowledge and power differentials.
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Yup. Thing is that the people working there were still picking their noses and eating paste when Dotcom happened so they have no clue and probably think "that'll never happen here."
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Worked out ok for me, actually.
Because I wasn't an idiot and made them put in the right clauses, so when everyone else cried on the way home because their stock hadn't vested yet, I sold mine back to the company at their nominal value and went home with nice cash in my pocket.
Always take cash. When a company offers stock or cash, take cash. When an airline cancels your tickets and offers vouchers or cash, take cash. Always take cash.
No. (Score:5, Interesting)
No.
They will fold the company as it exists on paper and steal your stock from you.
This is what "On Live" did. They paid engineers in stock options and then when the company took off and the tech was made by said engineers the company folder on paper, reopened without so much as a name change, and stiffed everybody who worked for free.
If you're in demand enough to do this then hire a lawyer and get some guarantees for when (not if) the CEO pulls this crap.
Re:No. (Score:4, Insightful)
If you're in demand enough to do this then hire a lawyer and get some guarantees for when (not if) the CEO pulls this crap.
You can try that but I think there's always going to be a loophole. I think the only way to do it is to find people you trust to work with (not a company, trust people never a company). Trustworthy people won't screw you over and you'll have good friends/connections even if the company fails.
And if you trust someone and they screw you over, then you better recalibrate your trust algorithm.
That's why you hire a lawyer (Score:2)
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If more than one of you is in demand enough (and they are, given that the company offered this to the whole workforce), then why not band together and say "If they don't take it, I won't either, come up with a better offer"?
But that would entail unionising, of course.
"No one will be admitted during the big..." (Score:5, Insightful)
"...CEO 'We're One Quarter/Big Deal Close/Liquidity Event Away From Profitability' speech!"
I've worked for startups with good products and actual revenue streams that it didn't work out for. Shit happens.
With a nasty (hopefully brief) Wuhan Cornavirus recession upon us, cash is king. Take the money, leave the stock options. And update your resume for the almost-inevitable layoff.
Re: "No one will be admitted during the big..." (Score:4, Insightful)
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That's just the thing though. Their product is a download on the net. If anything, they should be business as usual now, if not booming due to more people having more time on their hands and nowhere to go.
The problem is that this IS business as usual for them.
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If anything, they should be business as usual now, if not booming due to more people having more time on their hands and nowhere to go.
Yeah, they've doubled their user growth rate in the last two months.
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Because they don't have a business model.
Well, they do. It's "get big and get bought out by someone who thinks he can make money with this".
The whole pyramid scheme is doomed, of course, if you don't survive long enough for someone to buy you out.
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stock or unemployment (Score:1)
I think the message of TFA is not coming through in the summary here. The choice is not cash or stock, the choice is job or no job. For the companies, it's generally a choice between continuing or shutting down for good. Startup companies run on capital, not revenue, and capital is now unavailable for the foreseeable future.
The reality is that the government programs as currently functioning strongly encourage tech startup companies to lay off or drastically cut the salaries of their employees, for at lea
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A job which doesn't pay, is worse than no job.
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Stock or unemployment? So either no pay and no work or no pay and work?
I don't know how to tell you, but people don't want to work and just happen to get paid. If that was the case, communism would work great. No, people put up with work because they need that thing called money. Money is a bit like a blowjob, if people could find a way to get it without going through the hassle of having to appease someone else to get it, they wouldn't bother to.
Re: stock or unemployment (Score:1)
Re: stock or unemployment (Score:2)
So if you are not getting paid can you also collect unemployment along with your stocks?
Yeah, no thanks. Pay me. (Score:3)
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Simpsons did it first (Score:1)
They can use the stock as toilet paper:
https://youtu.be/arENYYkYBts?t... [youtu.be]
Sucker born every minute. (Score:2)
I'll gladly give you a dollar tomorrow for a hamburger today.
Been there, done that, lost it all (Score:2)
In 2005 my startup company started having cash flow problems. They started trading "equity" that we never knew we had, for pay. Then they just stopped paying us altogether. They kept saying "Just hold on another week, we have some money coming in!" It didn't. I got out of there as fast as I could, but the company went belly-up, and me with $14,000 in lost pay.
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I got out of there as fast as I could, but the company went belly-up, and me with $14,000 in lost pay.
You sir, managed to take a very long time to say the words, "I quit."
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LOL Not really. Those last several weeks consisted entirely of using up unused vacation time. When the first paycheck was missed, we all gave the company the benefit of the doubt. When the second one was missed, we knew it was over.
Re: Been there, done that, lost it all (Score:1)
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It did.
Putting all your financial eggs in one basket (Score:4, Insightful)
Who will take an pay cut for an union? (Score:2)
Who will take an pay cut for an union?
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Who will take an pay cut for an union?
I could give you a answer, but it won't be a easy thing to do.
Always a gamble (Score:2)
I've worked for several startups. 2 times out of 6 I made money on the stock I was granted.
Here, let me fix that headline for you: (Score:2)
Good luck getting your creditors and the grocery store to accept (potentially) worthless paper.
Re: Here, let me fix that headline for you: (Score:1)
US Bankruptcy Laws (Score:2)
It's all nice and dandy until you find out that once a company declares a bankruptcy, the stockholders are the last in the line to claim the assets of the company, so after holders of claims on salaries, pensions, loans,etc.
I can't be the only one who thought of that (Score:2)
Help yourself to some more stock. [youtube.com].
The Flying Lizards said it best: (Score:2)
Your stock is such a thrill
But your stock won't pay my bills
I want money, honey
bwuahahaha (Score:2)
Sorry guys, that's not how it works.
There are founders and investors - they take risk in exchange for profit. You could potentially gain a huge payout, but you could also lose it all. That's why the game is fair, because for every rich guy out there, there's a hundred who tried and failed. When you go that route, it is more likely you'll end up with the broke ones than with the millionaires.
And then there is employees - they get a salaray in exchange for their work. If the company makes it big, they get a m
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Think of employee stock options at startups as a hybrid between those two. It provides employees a chance to participate in the success along with some of the risk that goes along with it.
It's not a trade-off that works for everyone, but it's not uncommon to make a decent-to-great salary at a startup, plus get stock options. Not all startups are "work for peanuts, live in your parent's basement and hope for the home run".
If I wanted shares in your company, don't you think I would've bought them? You know, with the salary you are paying me? That choice already existed.
No, it doesn't. Unless you are an "accredited investor", you cannot buy unregistered se
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Think of employee stock options at startups as a hybrid between those two.
I know how I'm supposed to think about them. I had such stock options once, back in dot-com days.
The thing is that unless you're like employee #5, the sheer amount of stock you hold is so few that your startup would have to be the next WhatsApp to be a windfall.
No, it doesn't. Unless you are an "accredited investor",
You're right, for companies really in the startup phase, that's true of course.
Yeah, sure, youbetcha! (Score:2)
It's the 90s all over again... been there, done that.
Here's how it works- the grunts get restricted stock options in lieu of cash on the hope that the company will go public. Maybe it will maybe it won't. If it doesn't the options are worthless. If it does, and the stock goes up nicely, you can't do anything about it (but pay a hefty tax bill) because the options are restricted. If it does go up, rest assured, the founders of the company will cash out their shares and disappear, leaving the company to flo