Ed The Serial CEO Gets An Options Shock

Ed is feeling troubled since the sacking of company co-founder and CTO Pat Cook. It’s not his conscience which is worrying him. It’s not the loss of Pat’s contribution to the business. It’s not the bad feeling caused by forcing Pat out. And it’s not even the brutal way the sacking was handled.

 

‘What worries me is how we could buy back Pat’s founder’s stock at such a low price’, Ed writes in his diary, ‘I decided the best person to ask about this would be the lawyer at our lead VC investor.’

 

‘I gave the lawyer a bell and asked: “I saw the cheque for buying back Pat’s founder’s stock and was surprised how little it was for. After all he’s been building the company for six years and it’s now worth a lot. How could his shares be worth so little?”‘

 

‘The lawyer replied: “That’s because all employee stock options, including founders’ options, contain a clause by which the company retains the right to re-purchase stock options at their original strike price.”‘

 

‘”The strike price being?” I asked’.

 

‘ “The price at which the options were originally granted,” said the lawyer.’

 

‘”So any subsequent appreciation in the value of the company isn’t reflected in the value of the stock option?”‘

 

‘”No”, said the lawyer.’

 

‘”So though Pat ran revenues up from zero to over $100 million, he didn’t stand to gain by that?”‘

 

‘”Only if he had cashed out at an IPO or sale of the company. Until then the shares were only worth the strike price”, said the lawyer.’

 

‘A nasty thought struck me: “Does this apply to my stock options?” I asked him.’

 

‘”Yes Ed”, he said, “it applies to all employee stock options. You are an employee”.’

 

‘”So anyone with stock can be kicked out and their options are pretty well worthless?”‘

 

‘”Yes Ed, ” said the lawyer, “that’s the way it is.”‘

 

‘”And who gets Pat’s stock?”, I asked.’

 

””We do, the VCs collectively do”, replied the lawyer, “it should be worth a lot of money to us when the company IPOs – so that was a very profitable exercise you accomplished in terminating Pat.”‘

 

‘Bastards. Total bastards,’ writes Ed in his diary entry, ‘by hook or by crook I’m going to hang on in here for the next 305 days to get my IPO moolah.’

Tags: co founder, lawyer, pat cook, six years, worries

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4 Comments

  1. David Manners
    February 08, 2010 13:41

    Thanks, FP, that’s much appreciated.

  2. FP
    February 08, 2010 13:32

    Having suffered from exactly this scenario, I have some advice: Walk away from any such Option Agreement and be sure to state your reasons in writing to the Board. Do not be tempted to convince yourself ‘it won’t happen to me’. You are investing your time and expertise into a venture and the odds of success are already against you even without such a clause…..do not compound your risks. Tell everyone you meet who’ll listen and if we all do that then the ‘bastards’ will be forced to think again. Finally, it is only ignorance of the facts that allows this shameful practice to continue so educate yourself and those around you. On that note ‘three cheers for Mr Manners!!!’

  3. David Manners
    January 26, 2010 18:52

    Yes JG I’m sure the compulsory repurchase at the strike price clause is only employed by the more unscrupulous breed of VC, but the ousting of founder/CTO/COOs is by no means unusual. We had an example in the UK not so long ago.

  4. JG
    January 26, 2010 12:47

    To be fair, more usually the senior position needs filling again later on, and requires a hefty chunk of stock to attract the right person, so the stock rarely stays with the VCs.
    Also without the CTO the Company may *appear* less valuable, so VCs & CEOs don’t do this willy nilly.
    Not saying your scenario is impossible though.

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