Considering those assumptions, and any other further examples you might provide, where does the equity go when you fire someone before they’ve vested? If your startup explodes in the first 11 months, would it be smart to fire those first few employees who ate up all the equity and just hire new ones for a pennys worth of equity? We could even assume no one would find out about it or care, it’s only a few employees.
Questions
If you fire your first employee (5% equity) before any vesting, where does the equity go?
25 answers from the community
A· Jul 21, 2014
Vesting usually means the company is entitled to buy back the equity at the "low low" price that was sold to the employee should the employee leave before vesting (you technically can't "give" equity - it has to be exchanged for something - usually money - a small amount). So the equity goes back to the company and the company owns it (its the same when large companies do stock buybacks - except they buy it at the market rate). If the employee departing were given options instead of shares, then those unvested options are merely cancelled.
Yes you could pull a dick move like that and many startups have. Though there might be repurcussions that I'm not aware of.
A· Jul 22, 2014
OP here, but what happens to everyones % ownership of the company if you have 2 founders, a VC, and 10% employee pool? You've just released 5% of the employee pool by firing employee #1, does it just go back into the employee pool, or does the VC also get a portion of that dilution back? If a founder owns 33% of the company, do they get 33% of the 5% equity?
A· Jul 22, 2014
Nobody gets anything extra. The stock goes back to the company as of the employee never existed.
A· Jul 22, 2014
So it goes back to the employee 10% pool? Or it just disappears? Doesn't that mean everyone is essentially de-diluted?
A· Jul 23, 2014
Nobody is diluted. Just go to a startup event, there's tons of corp lawyers lurking around and ask them.
A· Jul 30, 2014
It goes back to the employee pool, if it was assigned out of there. If it wasn't, then you need to read your RSA negotiated with the investors. In our case it goes back to the employee pool, in many other cases it goes back to the company and reduces everyones dilution.
A· Jul 22, 2014
1) The equity that's not vested would just revert to the company. 2) If you plan on pulling a dick move like that, better be sure it's a big exit, cause it will be the last time you'll ever get to try. If you think that it won't come out, you're ignorant. And once it does, no one will partner or work with you ever again.
A· Aug 4, 2014
Altucher has an interview with Noah (I left 100M when I was fired by Facebook) Kagan. Noah says it was pretty common for early FB employees to be f**ked that way.
A· Jul 22, 2014
Also make sure the firing is legal but damn this is shyster. <em>head shake</em>
A· Jul 22, 2014
You're assuming that you're a bigger asshole than your employees. ( likely a safe assumption in this case ) If you're wrong, they might decide to sue you for various things. They might claim that you didn't enter into the agreement in good faith, they might claim that they were fired for discriminatory reasons, they might even call your mother. What would your mother say?
A· Jul 22, 2014
Mark Pincus, the founder of Zynga did this. It gives you a bad reputation, and you'll never have trust with your employees ever again. Don't let greed consume you.
That 10% option pool is meant for employees, not for the founders to carve up for themselves the moment an acquisition or IPO gets near.
A· Jul 22, 2014
Mark Pincus and the skype guys got away with it though. Here's the deal if you pull this off you poison the company culture. Everybody there will know you're a dick. But if you think that's ok then yeah you might be able to get off with this move.
A· Jul 22, 2014
I'm the guy you're replying to. The whole point of giving stock to early employees is to reward them for taking the risk of working at a startup.
Typically startup employees get paid below market wages and they take on a greater risk working for a startup since that startup might not exist for very long if they fail, whereas it's less risky working for Microsoft, Apple, or another well established company that won't go bankrupt anytime soon.
Those companies also pay better on average than a startup would. So, early employees agree to take on that extra risk and reduced pay in return for stock from the option pool, which if the company succeeds, will benefit those employees.
Taking that stock back from them is the most asshole thing a startup founder can do; and it will definitely tarnish his or her reputation for the rest of their lives.
I never worked at Zynga but I would never want to work for Mark Pincus or any other founder who has done something similar; we in the startup community read and remember the articles about incidents like that, so it's next to impossible to hide such bad behavior.
A· Jul 22, 2014
Marc pincus and the Skype guy look very happy and rich and have lots of twitter followers and are doing other deals so it looks like the repercussions are none.
A· Jul 22, 2014
I would definitely work with Pincus. I'd just be always looking over my shoulder. Having a huge exit gives you credibility and I'd take that over a Joe Schmoe though I'd prefer to work with someone cool like zuckerberg lol
A· Jul 22, 2014
Have a read of this.
http://m.wikihow.com/Spot-a-Sociopath
I worked for one a while ago at a startup. Once I worked out what was going down with the bait and switch from the inside; I was off.
A· Jul 22, 2014
Fire em!
You are going places! What's your LinkedIn?
A· Jul 22, 2014
hehehehehehe OP here. Relax!... this question has nothing to do with my ethics. I would never do this. It was just a question that I had thought about and couldn't find a great answer on using google, so I thought some of you might have a better perspective on what happens on the cap table.
A· Jul 22, 2014
I read on HN that courts in the US usually rule that the employee keeps the stock if fired at month 11 of a 12 month vesting period.
Also, what a horrible dick move.
A· Jul 23, 2014
I was at a startup for 6 months where I had 5% but was obviously let go before any vesting (due to a cliff). I don't see what everyone is so upset about. The cliff is there to protect the company if they make a bad hire, or if a founder walks away early in the game.
A· Jul 23, 2014
The OP was referring to taking advantage of a cliff just to screw an otherwise decent hire to claim back that now valuable piece of equity.
A· Jul 27, 2014
This really depends on the reason an employee would need to be fired. The reason almost every ESOP has a 48 month vest with a12 month cliff is that if the employee cannot produce value and cannot be led to produce value in that time frame that you do not want fired employees as your shareholders.
The question: Is he being fired for cause or because he is close to vesting?
A· Aug 13, 2014
If you magically found cause to accelerate those employees through your formal disciplinary procedure JUST before their vesting date, then they'd sit on the sidelines to see if the company became worth anything, they sue the fuck out of you.
Whenever you're considering letting employees go, remember it's peoples lives your dealing with.
If they deserve to be fired (i.e. they're dicks, lazy, wastes of space) then sure, go through the disciplinary procedure and maybe even pull a few tricks to get them out the door faster ("Hey, here's $20k if you sign this and get lost").
But if they dpn't deserve to be fired, and your motivations are purely to be an asshole, then expect everything thats going to come of it. You'll have a shitty culture, shitty PR and as soon as that extra equity is worth anything, they'll come at you with a big reputable law firm who will happily work on a success fee because they all want to have an Eduardo Saverin case in their history book.
A· Oct 17, 2016
hilarious how many of these comments say that's a "dick" move. this is business grow up, no one is entitled to anything other that's what's in the contract
A· Dec 15, 2016
So - sure, this is a dick move if done in bad faith (e.g., you secretly know you're facing a liquidity event that requires nothing but your existing IP.)
But on the flip side, as a founder, if you know you have some guy that's destructive to morale, doesn't lend any domain-specific expertise, or hasn't pulled his weight, that vesting cliff is there for a reason. That's your sign that tells you where to kick them off the bus. It's not a promise of employment - it's a date on the calendar that says "Contribute!"