Do you understand legalese? If you think of establishing your own company or work for a startup company, being able to read legalese should be part of the training.
This story from The New York Times describes the fate of many startup companies that grow into something that could become profitable: They get acquired and some people get very rich while others get a black eye, financially.
How the financial structure of a company can turn out this result can be confusing to people whose background doesn't include many years of "reading the fine print". It is even confusing to people who often write "the fine print" - so don't feel bad if you think it is difficult. Cynical people might even jump to the conclusion that reading is made difficult on purpose.
The irony is that the people who get very rich - the investors - will no longer be stake holders while the people who get the black eye - the "we couldn't care less about how you feel" message - are the people the company wants to keep. They are the carriers of the intellectual property that the new owners are trying to make a business of. What a wonderful way to start a new collaboration...or not.
So what are traps one should look out for?
You know the feeling when somebody has taken a picture using flash in a dark room? Very bright - and you can't see anything for the next seconds.
Company evaluation often works like a "flash": Wow! We are worth over a billion!! Aren't we great!!!
But "market value" is never really what the company is worth on the market. It is more like the price somebody paid for a small fraction of the shares multiplied with how many shares are issued. If all the shares were in the market, the price probably wouldn't be quite the same. So question what "market value" means.
While it stokes one's ego to have a super high evaluation, until there is cash on the table, it is like Monopoly money. The downside of a high evaluation is that any options and shares granted to employees has this value for tax purposes. And wouldn't you prefer to buy shares or get taxed at a lower value?
Another common "flash" is that you get for example 20,000 shares. Wow! 20,000 shares! Mike who works for Acme only got 15,000 shares.
The number of shares is not important. What is important is how big a part of the company you get. If your 20,000 shares are out of 200,000,000 shares total, you have 1/10,000 of the company. If Mike got 15,000 out of 150,000 he owns 10% of the company.
That said, 1/10,000 of Google is still more than 10% of most startup companies. So have that in mind as well.
As described in the article, some people have common stock and some have preferred stock. (You definitely would prefer to have this kind of stock.)
The name means that owners of this type of shares get preferential treatment if/when the company is sold or listed through an Initial Public Offering (IPO). What kind of treatment depends on when they put in the money and what their investor agreements say.
Investing in startup companies is a risky business. That is why the investors want their money back with a hefty interest. The successful investments must make up for the ones that fail - and that is still 60-70% of startups.
As an employee, if you have all your investments in just one stock - the company you work for - you should watch out. It is the proverbial "all eggs in one basket" scenario. Financial investors don't have all their eggs in the one basket for good reasons.
It is important to read all agreements if you are offered common stock in the form of options or as stock grants. And I mean read, not browse through them. Read so you understand what they mean - and keep asking questions until you do. Employees in Tech companies should supposedly be good at math and reasoning; this would be a good time to employ such skills.
Reading the contracts may require getting an independent attorney involved but if colleagues split the bill, it might not be too expensive. A company counsel is serving the interest of the company, not necessarily the employees, and may not be the right person to ask even if it is a place to start.
If you need to borrow money to pay tax on granted shares or to exercise a stock option, will the bank be willing to lend you the money against the shares and no other collateral? Banks have attorneys as well who may be able to read the contract you think of signing. Even if in the end they don't lend you money, they might explain why they are hesitant. Are you "a solid paper"? What do they think of your company?
Finally, if you find that the company officers are not willing or able to answer your questions, is this really a company in which you want to place your investments?
Remember, it is easy to grant stock options if they really are worth nothing.
But are people who get rich while not looking out for their employees worth working for?
A couple of good to read articles on this difficult subject can be found here and here.