Your Stock Plan: The Most Important Contract You Didn’t Read
The stock plan is something that all employees sign but barely any read. It’s often called an equity incentive plan. Other contracts that are part of it may include the RoFR Co-sale Agreement and any other contracts that pertain to the rights of your shares.[1] The stock plan is the terms of service of the tech employment world where you may unknowingly be selling your soul simply by e-signing one of the numerous contracts you receive when getting onboarded.
The Skype/Silver Lake example is the most infamous of this where employees with fully vested shares, had their shares taken from them. I’m shocked there wasn’t more shaming done of Silver Lake, Silver Lake’s LPs, and Skype. Silver Lake and their LPs made money by effectively stealing shares from the employees who built Skype. If your company has Silver Lake on its cap table, you want to read your stock plan very carefully.
Employees of pre-IPO tech companies often have shares/RSUs they can’t sell or options they can’t afford to exercise that then expire.[2] Things like this still happen all the time but at different levels of severity… it’s insane that investors and companies can get away with this.
Unfortunately, stock plans are not at all standardized
AirBnB — AirBnB might be an “infinite company”, but most employees aren’t allowed to sell a finite number of shares. Until very recently, pretty much all secondary transactions have been blocked by the company. Their stock plan is relatively innocuous but the company refused to acknowledge receipt of transfer. I’m not sure whether this is legal because it seems to go around the intent of the contracts.
Instacart — blocks all secondary transactions for common shares and loans against the options or shares. Check out the extremely strict language they use:
The holder of any security of the Company (a “Security Holder”) shall not, without the prior approval of the Board or any committee thereof, which approval may be granted or withheld in the sole and absolute discretion of the Board or any committee thereof, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, assign, mortgage, encumber or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock of the Company (including Non-Voting Common Stock, as defined in the certificate of incorporation of the Company) that were issued following September 24, 2015, excluding shares of Common Stock of the Company (including Non-Voting Common Stock) issued upon conversion of any preferred stock of the Company (the “Restricted Shares”) that are beneficially owned or owned of record by such Security Holder or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, directly or indirectly, any of the economic consequences of ownership of Restricted Shares, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock of the Company, in cash or otherwise (each, a “Transfer”), other than by means of a Permitted Transfer.
OpenDoor — the company can block all common share transactions. Preferred shares trade freely. The company recently did a one time buyback of investor and employee shares. The company raised at a significant up-round shortly after.
Uber — besides their infrequent tender offers at a discount to preferred pricing, Uber blocked almost all secondary transactions (common and preferred). Investors who wanted exposure purchased the LP interest of SPVs. Uber’s first tender offer was at a significant discount to the round they did, while their last tender offer with Softbank was at a very fair price.
Rubicon Global — blocks all secondary transactions. Has not done a tender or buyback to my knowledge.
Slack — almost all common share transfers were blocked, unless the employees negotiated their stock plan to allow transfers. The direct listing made all shares freely trade-able.
SpaceX — recent employees cannot sell their shares, however the company does frequent tender offers.[3] The tender offers are significantly below what shares would trade at if the company didn’t block all secondary transactions. There are a few groups who are allowed to raise money into SPVs for the tender offers.
Sprinklr — I wrote a post on them. They do allow transfers for common shares, but they have some crazy things in their stock plan along with up to a 180 day RoFR.
Stripe — the company can block secondary transactions, but they’ve done at least one tender offer.
Stripe Atlas — companies blindly accepting the default language allow the board of directors to block all transfers of stock.
Wish — allows all common and preferred shareholders to transfer shares. Due to increased trading volume, the company added a $4,500 fee per transfer, which is high but better than not allowing transfers.
Y Combinator/Clerky — a plurality of YC companies use Clerky for their initial legal docs. The default language is for all secondary transactions to be blocked unless allowed by the company.
I wanted to create a site that rated companies based on how friendly they were to secondary transactions. The idea was to create a Glassdoor for secondary transactions. Where we and eventually a community of experts rate the company’s stock plan legal wording + the company’s in practice friendliness to secondary transactions. There are a few problems:
- Collecting stock plans can be difficult as companies treat them as confidential, which I think is ridiculous.
- It’s not as simple as how friendly their stock plan is as companies can find other ways to block transfers as was the case with AirBnB.
- Different employees may have different stock plans that were negotiated independently. Fun fact: stock plans can be negotiated! In one case, a CFO and CMO joined a company at the same time, and the CFO negotiated a more favorable stock plan, while the CMO had less leverage and accepted a worse version of the stock plan. Founders sometimes have the worst transfer restrictions with co-sale rights.[4]
- Companies may change their policies overtime and treat employees differently as is the case with SpaceX.[3]
The site would be more of a public good than a business. I wanted to encourage companies to be transparent with their policies on secondary transactions. As long as it’s not a loss leader, secondaries can be positive for employees and investors. Spotify utilized the secondary market to assist the company in a direct listing. There were billions of dollars of secondary transactions leading up to the direct listing that enabled management to price the company properly.
If your company blocks all secondary transactions, that sucks. If your options expire shortly after you leave, you effectively have golden handcuffs. They’re golden as long as your options are worth something on paper. In either case, I’d suggest talking to your co-workers about this and having a discussion with management.
The best solution is to have this conversation before signing a contract. The point of a contract is that it comes into play in worst case scenarios, e.g. you fully trust your CEO to let you sell stock when you want to, but the CEO may change their mind or may not even be the CEO in the future. Don’t sign a bad contract… I’ve met too many people who regret the stock plan they signed.
If you’re a company who’s trying to figure out the best stock plan, there are a few options. What’s standard is for options to expire within 90 days after an employee leaving. These are disgusting… this “standard” created an entire loan shark industry where funds will offer horrendous terms to ex-employees to help them exercise their shares; the funds use the exercised options as collateral and get upside on the shares. It should be standard for options to have a 10 year exercise period. Unfortunately, the law for ISOs requires the options to be exercised within 90 days or else they convert to NSOs, which are not as tax advantageous but better than nothing and 100x better than the loan shark funds offering “structured deals”.
When setting up our company, I had lawyers and equity compensation specialists remind me that if we let employee options last for 10 years after they leave, then the employees can leave whenever they want. My response is that if an employee wants to leave, then they should leave. I don’t want golden handcuffs on our people. The company should not have a block on any share transfers.[5] Additionally, companies should assist employees and ex-employees with cashless exercise (it’s not that hard). Companies talk about how much their people matter… it’s time we put standards in place to treat our people with respect.
Notes:
[1] Some employees sign an equity incentive plan that refers to other contracts, which they’ve never seen. Get these contracts!
[2] Options may expire 30–90 days after an employee leaves a company. There are also option plans where options don’t expire for 10 years. Much has been written about expiring options and the trade offs between ISO and NSOs.
[3] For SpaceX, tender offers are done one or two times a year. Early employees of the company had the right to freely sell their shares. If early employees signed up for a tender offer, they signed away the transfer rights of their shares. Some past employees who never participated in a tender offer, still retain the right to sell their shares to investors directly.
[4] Co-sale rights are not something you want. It means that select investors and sometimes the company itself can front-run any buyer you find. Meaning, if you find a buyer of your shares, the company can use your buyer to purchase other preferred/common shares, and your sale won’t go through.
[5] The company should not have a block on any transfers, but they should have a RoFR (right of first refusal) on all transfers to keep control of the cap table and allow value add investors to further increase their stake. This way, the seller gets the same amount of money for their shares, and the company retains control of their cap table.
