Page 34 - Delaware Lawyer - Fall 2022

FEATURE
Candle at Both Ends
Anat Alon-Beck and John Livingstone
Burning the
A new threat
More than 120,000 tech employees in the U.S. were laid off in 2022. These employees’ stock options are now on the table.
tostockholder While some employees might lose
to do so. They provide capital to the firm in return for equity, but also put their eggs in other baskets by investing in other firms and other markets. Em- ployees, on the other hand, are forced to put all of their eggs in one basket — the firm’s basket. In private firms, they are faced with limited liquidity and lim- ited capital, compounded by restraints on negotiating power. Pure outside in- vestors get diversification of risk while employees do not.
Thousands of employees may need to decide on whether to exercise their options or dispose of them.3 They may find that their options are prohibitively expensive or risky to exercise due to high pre-IPO unicorn4 valuations, liquidity constraints and tax concerns.5 Informa- tion is key. Without access to informa- tion, employees cannot accurately value their holdings and may not understand that the value of their options is likely to diminish if there are down-rounds, certain types of nontraditional investor groups join the firm in later rounds with special preferred terms and conditions, or perhaps even a fire sale in the future.6
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inspection rights
their options entirely, others, the
so called “lucky” ones, might have 30 to 90 days to exercise their vested options or enjoy accelerated vesting. These “lucky” employees will have to make an investment decision—do they exercise the options and pay taxes on profits that might never materialize? Or do they dispose of their options entire- ly? Employees are investors in the firms that they work for; they need to make an investment decision but may not be able to make an informed one. Unfor- tunately, there is a lack of information on the worth of their options, current valuation of the tech company or cer- tainty about its future.1
So tech employees are not only employees; they are stockholders and stock-option-holders. This is not a rare occurrence, but rather common prac- tice. In the U.S., tech founders have a long history of splitting the pie with two types of investors: employees and outside investors.2 The main differences between these two types of investors are diversification and negotiating power. Outside investors are usually diversified and have the significant capital necessary
32 DELAWARE LAWYER FALL 2022