Technology start-ups have long wrestled with a conundrum of how to reward their employees. Many of their workers are compensated with lucrative piles of a start-up's stock, but cannot cash it in because the shares do not trade publicly.
So private companies such as Pinterest and SpaceX are increasingly arriving at the same solution: They are giving employees some controlled opportunities to sell their start-up shares - but in return, workers now must agree to more explicit restrictions on what they can and cannot do with their remaining stock.
This type of bargain was recently struck at Airbnb, the online room rental start-up. In July, the San Francisco-based company offered employees an opportunity to sell a percentage of their Airbnb stock as part of a deal that let investors buy those shares, according to two people who spoke on the condition of anonymity.
In exchange, Airbnb employees had to agree to prohibitions on their remaining stock, including more categorical language that they could not trade or sell the shares, these people said. While Airbnb has long had a blanket restriction preventing workers from selling or transferring shares, it recently detailed these rules point-by-point, these people said.
The move illustrates how Silicon Valley start-ups are honing their approaches to employee shares. The young companies often give out stock to attract workers, who see the shares as a potentially rich payday when the start-up eventually goes public or gets sold. But as more Silicon Valley start-ups have delayed an initial public offering or sale, the companies have felt increasing pressure to return cash to employees.
Some tech workers have found ways to sidestep rules against selling their private company shares because plenty of third parties, who are desperate to own stock of high-valued start-ups like Uber and Airbnb, will buy the shares in transactions on the side. But the start-ups typically loathe such sales because the deals can create a dispersed and jumbled shareholder base, which can lead to liabilities like shareholder lawsuits.
All of this has led to highly valued tech start-ups reaching a compromise by letting employees cash out with restrictions.
"These deals will hopefully help employees get liquidity while giving companies some control over the Wild West market that has developed for employee shares," said Rich Wong, a venture capitalist at Accel Partners, who has followed the issue. Airbnb declined to comment on its employee share sale. The company's latest fund-raising values it at about $30 billion, triple its valuation two years ago.
Other start-ups have created company-approved programmes for employees to sell their shares. In the first half of this year, Nasdaq Private Market, a firm that facilitates private share transactions, helped 11 closely held companies offer employees opportunities to sell their stock, up nearly 20 percent from the first half of 2015.
Over that period, a total of $544 million of private company stock was sold, more than double that from a year earlier, according to Nasdaq Private Market.
"We've seen more clarification of what's prohibited," Bill Siegel, head of Nasdaq Private Market, said of tech start-ups and employee share sales.
More detailed restrictions on future employee stock sales began to appear in the last few years. In 2015, Pinterest, the online scrapbooking company based in San Francisco, gave its workers a chance to cash out some of their stock - if they agreed to more explicit restrictions on selling, lending or giving others the option to buy the stock, according to documents reviewed by The New York Times.
Such prohibitions do not appear in an older document that outlines Pinterest rules around employees selling their stock. That document said that Pinterest employees had to agree not to transfer or sell their shares without written consent of the company, and they had to agree that the company had the right of first refusal to buy back the shares.
"Over the years we've made some changes to longstanding norms around equity in the interest of employees, including last year," a Pinterest spokeswoman said.
SpaceX, a space company founded by Elon Musk, also added language several years ago that said any violation of its employee stock sale rules could result in the worker forfeiting the rest of his or her shares, according to a document reviewed by NYT. That language does not appear in older stock grant and options agreements that were also reviewed.
SpaceX declined to comment.
Houzz, a home decorating start-up valued at $1 billion, also changed the language about stock sales and transfer restrictions, according to documents reviewed by The Times.
In the past, Houzz said an employee's stock was subject to substantial transfer restrictions and that the company had the right to buy the stock first. But the new language lists specific transfer situations - including transfers "pursuant to domestic relations orders or made for estate or tax planning purpose to one or more 'family members'" - as being forbidden.
"Back in 2012, we adopted the existing transferability language," a Houzz spokeswoman said. "The transferability language applies to all employees and investors that hold or have held Houzz stock or Houzz stock options."
For start-up employees, the more explicit language around stock prohibitions can create downsides, said Mary Russell, a lawyer based in Palo Alto, Calif., who works with start-up workers to evaluate their equity compensation. When employees leave start-ups, they often have the opportunity to buy stock that has been set aside for them at a low price. But if their start-ups have been successful, they also need money to pay taxes that will be levied on the increased value of the stock.
Ms. Russell said it is not unusual for a client to say their private company stock is worth $3 million, but that they need to come up with $1 million to pay for the shares and cover the tax bill. "In the past, the solution has been to find a third-party buyer and sell enough of the stock to cover all of those costs," Ms. Russell said.
The use of more explicit language to cover what is and is not allowed could eliminate the option of raising cash from a third party, Ms. Russell said.
She added that employees rarely read their paperwork carefully. "In some cases a company is simply clarifying its terms, but some are making a black-and-white shift to more restrictive terms," she said.
Mr. Wong, the venture capitalist, was more sanguine about the shift.
"Hopefully these deals will be one of those rare win-win situations, where employees get their money and companies can create opportunities to invest in a more controlled way," he said.
So private companies such as Pinterest and SpaceX are increasingly arriving at the same solution: They are giving employees some controlled opportunities to sell their start-up shares - but in return, workers now must agree to more explicit restrictions on what they can and cannot do with their remaining stock.
This type of bargain was recently struck at Airbnb, the online room rental start-up. In July, the San Francisco-based company offered employees an opportunity to sell a percentage of their Airbnb stock as part of a deal that let investors buy those shares, according to two people who spoke on the condition of anonymity.
In exchange, Airbnb employees had to agree to prohibitions on their remaining stock, including more categorical language that they could not trade or sell the shares, these people said. While Airbnb has long had a blanket restriction preventing workers from selling or transferring shares, it recently detailed these rules point-by-point, these people said.
The move illustrates how Silicon Valley start-ups are honing their approaches to employee shares. The young companies often give out stock to attract workers, who see the shares as a potentially rich payday when the start-up eventually goes public or gets sold. But as more Silicon Valley start-ups have delayed an initial public offering or sale, the companies have felt increasing pressure to return cash to employees.
Some tech workers have found ways to sidestep rules against selling their private company shares because plenty of third parties, who are desperate to own stock of high-valued start-ups like Uber and Airbnb, will buy the shares in transactions on the side. But the start-ups typically loathe such sales because the deals can create a dispersed and jumbled shareholder base, which can lead to liabilities like shareholder lawsuits.
All of this has led to highly valued tech start-ups reaching a compromise by letting employees cash out with restrictions.
"These deals will hopefully help employees get liquidity while giving companies some control over the Wild West market that has developed for employee shares," said Rich Wong, a venture capitalist at Accel Partners, who has followed the issue. Airbnb declined to comment on its employee share sale. The company's latest fund-raising values it at about $30 billion, triple its valuation two years ago.
Other start-ups have created company-approved programmes for employees to sell their shares. In the first half of this year, Nasdaq Private Market, a firm that facilitates private share transactions, helped 11 closely held companies offer employees opportunities to sell their stock, up nearly 20 percent from the first half of 2015.
Over that period, a total of $544 million of private company stock was sold, more than double that from a year earlier, according to Nasdaq Private Market.
"We've seen more clarification of what's prohibited," Bill Siegel, head of Nasdaq Private Market, said of tech start-ups and employee share sales.
More detailed restrictions on future employee stock sales began to appear in the last few years. In 2015, Pinterest, the online scrapbooking company based in San Francisco, gave its workers a chance to cash out some of their stock - if they agreed to more explicit restrictions on selling, lending or giving others the option to buy the stock, according to documents reviewed by The New York Times.
Such prohibitions do not appear in an older document that outlines Pinterest rules around employees selling their stock. That document said that Pinterest employees had to agree not to transfer or sell their shares without written consent of the company, and they had to agree that the company had the right of first refusal to buy back the shares.
"Over the years we've made some changes to longstanding norms around equity in the interest of employees, including last year," a Pinterest spokeswoman said.
SpaceX, a space company founded by Elon Musk, also added language several years ago that said any violation of its employee stock sale rules could result in the worker forfeiting the rest of his or her shares, according to a document reviewed by NYT. That language does not appear in older stock grant and options agreements that were also reviewed.
SpaceX declined to comment.
Houzz, a home decorating start-up valued at $1 billion, also changed the language about stock sales and transfer restrictions, according to documents reviewed by The Times.
In the past, Houzz said an employee's stock was subject to substantial transfer restrictions and that the company had the right to buy the stock first. But the new language lists specific transfer situations - including transfers "pursuant to domestic relations orders or made for estate or tax planning purpose to one or more 'family members'" - as being forbidden.
"Back in 2012, we adopted the existing transferability language," a Houzz spokeswoman said. "The transferability language applies to all employees and investors that hold or have held Houzz stock or Houzz stock options."
For start-up employees, the more explicit language around stock prohibitions can create downsides, said Mary Russell, a lawyer based in Palo Alto, Calif., who works with start-up workers to evaluate their equity compensation. When employees leave start-ups, they often have the opportunity to buy stock that has been set aside for them at a low price. But if their start-ups have been successful, they also need money to pay taxes that will be levied on the increased value of the stock.
Ms. Russell said it is not unusual for a client to say their private company stock is worth $3 million, but that they need to come up with $1 million to pay for the shares and cover the tax bill. "In the past, the solution has been to find a third-party buyer and sell enough of the stock to cover all of those costs," Ms. Russell said.
The use of more explicit language to cover what is and is not allowed could eliminate the option of raising cash from a third party, Ms. Russell said.
She added that employees rarely read their paperwork carefully. "In some cases a company is simply clarifying its terms, but some are making a black-and-white shift to more restrictive terms," she said.
Mr. Wong, the venture capitalist, was more sanguine about the shift.
"Hopefully these deals will be one of those rare win-win situations, where employees get their money and companies can create opportunities to invest in a more controlled way," he said.
©2016 The New York Times News Service