Term Sheet — Tuesday, August 19

By August 19, 2014Bitcoin Business
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Random Ramblings

Early startup employees usually take stock options in lieu of higher salaries. It’s a transaction covered in optimistic capitalism, with the employee betting that today’s worthless paper eventually will be valued higher than a few thousand greenbacks. And so the employee goes to work, in an effort to realize that vision.

But there is a big catch.

If the employee leaves the company after his options vest, he often is required to exercise the options within a few months or else they are terminated. And exercising the options can create a big up-front tax bill.

The capitalist solution to this, of course, is for the employee to exercise the options and then sell some of the stock – either on the secondary market or back to the company – to cover the IRS demands. But many of the hottest startups are refusing to cooperate.

We discussed this back in June with Uber, which was preventing secondary market sales and, instead, was conducting regular tenders at below-market rates. That seemed pretty hardball, but we’re now learning that many companies aren’t offering tenders at any price – thus leaving ex-employees stuck between a rock and a hard place.  

Pinterest, for example, restricts all employee stock sales on the secondary market and has not launched a tender offer for employees since October 2012. A future tender is not currently scheduled, although a spokesman says that “we are constantly evaluating ways for employees and former employees to get liquidity, including facilitating non-recourse loans and another secondary offering.” AirBNB also doesn’t do regular buybacks, even though its revenue profile more closely mirrors Uber than Pinterest.

Many of these startups also resist efforts by third-parties to offer loans in exchange for equity.

I honestly don’t know what the proper solution is here. There are legitimate reasons for startups to prevent their shares from hitting the general secondary market and, in some cases, there isn’t a huge amount of cash available to buy back stock. On the other hand, an ex-employee who spent years helping to build value shouldn’t be forced to either give up their options or going in hock to the IRS (particularly if the company is a unicorn that can easily raise new venture capital). Nor should he be shackled by golden handcuffs when his original handshake was gilded by straw.

So I ask you: What should be the market standard solution?

• Google IPOversary: It has now been 10 years since Google went public, and my colleague Miguel Helft has a good piece up about how the company has managed to maintain its quirky culture. Two related notes:

(1) I wrote at the time that VC backers Kleiner Perkins and Sequoia Capital were making a huge mistake not selling at least some of their combined 45 million shares (18.6% of the company) at the $85 IPO price. For context, Google stock opened trading today at a modest $586 per share (not adjusted for recent stock split). This is why I don’t give stock advice.

(2) I’ve been hearing some talk lately about how certain VC firms are passing on certain Bitcoin-related investments, due to competition concerns by existing Bitcoin-related portfolio companies. The idea is that even though a Bitcoin startup may not today compete with the prospective investment, the industry is so nascent that future competition is entirely possible. So I reached out to some veteran VCs to find out if early Internet entrepreneurs expressed similar concerns 25 or 30 years ago. I’ll have a larger piece on this soon, but here is a part of John Doerr’s reply where he talks about search engines (bringing us back to our original subject):

"There was Yahoo! vs. Infoseek vs. Alta Vista vs. Inktomi vs. Northern Light vs. Excite vs. Google. We backed Excite, asked about Google (Excite had tried to acquire them). Excite objected to our investment, we discussed further, Excite acquiesced and we went ahead. Thank God."

• In market: OpenView Venture Partners is seeking around $250 million for its fourth fund, according to an LP source. The Boston-based VC firm yesterday disclosed the fundraising plans – sans dollar target – in an SEC filing. It had raised $200 million for its third fund in 2011.


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