Ruminations on the electronics industry from David Manners, Senior Components Editor on Electronics Weekly.
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