I might sound stupid, but how is it that a company can put restrictions on sales of it's stock after those slices of ownership are already allocated and granted to individuals?
One common way is to make a contract term stating that the company gets first refusal (at a minimal valuation) on all sales as a condition of exercising the option.
Employees with private company shares have very few actual rights; this is almost part of what defines "private companies".
It's not a stupid question. There are a lot of misconceptions about employee startup stock; it is, to an extent greater than commonly imagined, really just a glorified profit sharing plan.
This is the same as any large company giving equity but requiring a vesting period. The reason you give equity vs. cash is to create an incentive for an employee to want their company to succeed. If the large transfer fees are in place to limit shareholders so they can stay under the 500 mark then it's a bit shady. If your shares are vested per the agreement you signed, it should be your right to sell when you want to without a substantial fee.
Not so. Your (hypothetical) employee stock agreement, which you were required to sign as a condition of being issued stock options, stipulates that your shares are not transferable, intended for personal investment and not resale, and that your exercise of those options is conditioned on a series of terms that ensures the company can prevent you from selling them.
The reason for this is that your (hypothetical) company isn't trying to create a broad market of investors in its equity. Rather, it's trying to express an incentive that allows employees to share in the upside of a liquidity event at the company.
This issue is distinct from vesting. Even after you've vested, the company is unwilling to yield control of who owns its shares. The company is fine with you parting ways and retaining your upside interest (in fact, it's happy you did!), but not fine with you selling the package that gives you that interest.
For obvious reasons, the story is totally different at public companies.
I think (from other comments) you're implying that ISO/ESO options are contractually non-transferable (and can't be executed by non-employees), but that no similar contract governs actual restricted shares. Not convinced this is the case; with restricted stock, your shareholder's agreement probably allows the company to keep you from selling your shares.
I have a fundamental question. How are these companies allowed to trade off the market? As whole point of free/open market(stock market) is to have companies follow the regulations and guidelines protected by someone like SEC. Are these protected? Or just blind bets on the company? How does one protect insider trading/rigging - if at all it is relevant?
They operate under exemptions from registration offered to accredited buyers of companies that don't solicit investments; even then, it's a bit of a legal high-wire act.
That sounds like a lot of risk from the investors' point of view. I know these companies are awesome and good but should we be worried about god knows who is doing what trade. If these are not bound by rules, it is so easy to rig the stock price.
The vast majority of startup employees don't (and never will) qualify for secondary markets; most (all?) of the companies being traded here are IPO-quality already.
Startup employees shouldn't be joining companies in the expectation of being able to sell private shares.
They probably shouldn't be joining as employees. Without the expectation of capital gains, they're better off (in terms of pay, benefits, working for non-asshole managers) working for established companies. Or doing it on their own.
they might not qualify to be an accredited investor to be a buyer, but I didn't know there were any restrictions on being a seller there? I've got the impression that all FB employees who had vested stock were able to sell...
There are contractual restrictions on employees selling their stock; accreditation isn't the issue. Though, for what it's worth, the major secondary markets won't help make a market for tiny companies anyways.
There might be, but judging by numerous reports of FB and likes employees selling their stock left and right there didn't seem to exist any restrictions at those places. That's the whole point of starting to restrict those deals now, don't you think?
First, there are almost certainly restrictions on Facebook employee stock. I don't know what they are, because I don't work at Facebook, but the boilerplate employee stock contract restricts sale entirely (or gives the company first refusal on sales at a minimal static valuation); anything employees are allowed to do with Facebook stock constitutes something Facebook went out of its way to allow.
Secondly, my point isn't about Facebook. I'm responding to Alain, who indicates that this is the start of a worryingly anti-startup-employee trend. But it isn't. Virtually the entire marketplace of startup employees works for companies with far more restrictive policies. You simply cannot normally sell your (private company) employee stock. The companies you're hearing about that do allow it are --- not too much of an exaggeration --- epsilon from IPO already.
I'll rephrase my statement that it's "anti-employees".
If you go by currently admitted practices, then it's completely fine. But if you raise your standards to figuring out what the future should look like, I'm hoping that 10 years from now, people will wonder why such restrictions were ever in place. Because really, why, at a fundamental level, can't an employee who has vested some shares, not sell them?
If I told you that you couldn't spend the cash salary I'm giving you, you'd think I'm crazy. So, if the employee has earned the stock, why is it restricted? I understand the nitty-gritty SEC issues, but fundamentally... why not?
Even if the SEC registration rules were thoroughly relaxed --- which they won't be any time soon, and which we could spend a thoroughly engaging several hours debating (plus side: rational market for startups, downside: hedge funds gone wild), it wouldn't matter.
That's because we're talking about closely held private companies. There is more to being a private company than simply not having public shares; in particular, private companies are typically very careful about who they permit to hold equity, because:
* Company shareholders can more easily sue the company
* Shareholders may be entitled to information the company doesn't want to disclose (the big one being: revenue)
* Shareholders may have enough control rights to foul up investment and M&A activities, which competitors and bad actors might want to exploit.
I'm sure there are other reasons too.
Long story short: even if there were no SEC regulations, it doesn't seem likely that everyone's employee stock would suddenly become transferable. Employee stock isn't transferable because companies don't want it to be; they use options to express "incentive interest in a future liquidity event of the company", not to distribute ownership of the company to the broader market.
Closely held companies have a simple remedy to all of those - they force you to litigate to exercise your rights. The company invariably has the resources to bury an employee.
That may be so, but it's orthogonal to the issue at hand. Employees aren't prevented from selling their shares only because of stupid SEC regulations, but also because most companies don't want their equity resold.
Envision any legal future you want, and companies will still find a way to express that employees should share the upside of an acquisition, but cannot distribute company equity to outsiders.
Can I just say, real quick: for all I know, there's a trend in the valley right now towards giving employees unrestricted common stock on exercise of their options. I think this is crazy --- unrestricted stock once allowed me to imperil a deal at a prior employer --- but who knows? All I can say is that every startup I've worked at or known people working at, employee stock was heavily restricted.
Forgive me for stating the obvious, but if companies only issue stock that isn't transferable, why not simply issue options? Issuing non-transferable stock seems like two things that accomplish the same goal, namely: to express "incentive interest in a future liquidity event of the company".
They do issue options. However, for tax reasons (and I'm sure other reasons), employee stock options have to expire within a set number of months after termination.
I don't think right of first refusal ever applies to vested stock. Assuming you have stock, not options. Once its vested, its yours. The amount of abuse that management can do to your vested stock is balanced by that right of ownership.
Google [employee "stock option" "first refusal"] for a bewildering variety of contract terms that express this requirement. The share is indeed yours, but it's subject to whatever terms you agreed to in your employee stock contract, and to whatever terms are in the company legal documents.
I'm talking about the (common?) stock you receive after executing (and presumably paying for) your vested stock options. I really don't think we're talking at cross purposes. Does your employer allow you, contractually (employment or company bylaws or whatever), to resell your shares?
Absolutely agreed on most parts of second point - the mentioned companies are quite far from being start-ups for quite some time now. But not quite IPO-ready either, didn't FB delay it's own for at least couple of years?
I would even argue so far that when a start-up starts participating in those secondary markets it's not a start-up anymore. Your stock can be had by almost anyone (with at least $1000000 that is) without much due diligence etc.
Even if it did, would it matter? It is $2500 per transaction. I am sure it would only take 2 or 3 transactions for him to sell $100M worth of shares since there are so many people hot on being in at the floor (what they think is the floor) of the IPO which will inevitably happen just like it did with Google.
