VC Option Shenanigans
My company is being acquired by a public company (both US based). When we were all hired, our employment contracts stated we'd be granted x number of stock options. I'll say 250,000. That was 3 years ago for me. Also both the company and employee signed these documents.
Now they never actually got around to granting those options to us, setting up a plan, or giving us a strike price. Our contracts only say we'll be given those options nothing about vesting, strike etc.
The acquiring company is buying us for a little less than our investors put in lets say $50M. So the VC's take is that our options are underwater. What's weird is they sent around a letter asking us to give up our rights to the options in return they'd give us $500. They seem "very" intent on getting all of us to sign this document to the point of sending people here to make sure we understand it and should sign it.
My take is that they think there's a liability here or they're trying to squirm their way out of paying us any money based on the sale. It was never written down but we were told the strike price would be less than $0.10 a share and I'm sure they're selling for higher.
So my question is, does anyone out there with more experience have any idea why they'd be so intent on getting us to sign these documents?
Venture Capital Acquisition Stock Options
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Options are "options to purchase shares" not shares themselves. @ .10 / share 250,000 is worth more than $500. – Jim Galley 12 years ago
2 Answers
So there's no strike price, is there a vesting schedule? It may be that you were automatically granted them without having to do anything.. if that's the case, I'd wager there are tax implications.
Regardless, usually when a company is acquired, the acquirer wants to own 100%. When it comes down to it, each of you has a (small?) claim on a chunk of the company and your options complicate that. 100% ownership may even be a requirement of the deal.
You need to talk to an attorney on the terms of your contract asap.
Generally, investors will have some form of preferred shares which means they get their money back before anyone with common shares (aka employees). If the acquisition price is for less than the investors put in, they're very unhappy but happier than if they completely lost the investment.
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I think Casey got it right, although I have a hard time thinking that there are tax implications. It's very unlikely that the company actually owes you guys anything. But, in theory you could sue the company on the original letter and CLAIM that you're entitled to something. While it's very unlikely that you'd win, it does give you a chance to mess up the deal. The $500 is probably just for the value of not having to worry about that. – Chris Fulmer 12 years ago
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The Feds and at least a few states can tax options as soon as they're granted *depending* on a few criteria. I don't know the criteria though, so I only included one line on it. Here's some more info: http://www.irs.gov/taxtopics/tc427.html & http://www.salary.com/Articles/ArticleDetail.asp?part=par414 – Casey Software 12 years ago
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Good Advice. Also review this [gigaom article](http://gigaom.com/2011/06/05/5-mistakes-you-cant-afford-to-make-with-stock-options) & this comment http://gigaom.com/2011/06/05/5-mistakes-you-cant-afford-to-make-with-stock-options/#comment-629016 regarding tax implications (and other issues) – Jim Galley 12 years ago
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Employee stock options in private companies are almost never taxed on grant. At minimum, that's because the option is typically non-transferable and subject to vesting, both of which mean that it does not have a readily determinable value. Without that value, there's no taxable compensation. Can't speak to what all of the 50 states do. There may be tax on exercise, but it won't be any more than the tax paid on the $500, and may be less. – Chris Fulmer 12 years ago
The answer to your question ....to get you out of the to ownership, 100 percent.
The real issue is the value of the options upon grant and the share value upon grant. In many instances the value of the options is recognized on grant under Code Sec 83 ...recognize the value of he shares at fair market value on grant, enabling cap gain treatment later. Usually great in instances where value is low.
The issue for the VC/investor is that they cannot provide control of the enterprise until contingent claims -yours -are settled...you have bargaining power!
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