<story><title>Skype’s Worthless Employee Stock Option Plan: Here’s Why They Did It</title><url>http://techcrunch.com/2011/06/26/skypes-worthless-employee-stock-option-plan-heres-why-they-did-it/</url></story><parent_chain></parent_chain><comment><author>grellas</author><text>Options can be tricky enough for employees to handle even in standard startup scenarios (see recent thread here: &lt;a href=&quot;http://news.ycombinator.com/item?id=2623182&quot; rel=&quot;nofollow&quot;&gt;http://news.ycombinator.com/item?id=2623182&lt;/a&gt;).&lt;p&gt;You have to earn them out over time before they might have any value at all. You have to pay real money to get illiquid stock in a company that might easily fail. If the paper value of the stock is high, owing to recent funding rounds, you will have to pay ordinary income tax on the spread between your exercise price and the then fair market value. If you have ISOs, you may avoid ordinary income tax but may easily get hit with AMT. After you pay for the stock, and any associated taxes, you hold common shares that stand in the back of the line on any liquidity event, meaning that you might get nothing even in a liquidity event should the proceeds not exceed the value of the liquidation preferences held by preferred stockholders or should the acquisition be structured in a way that primarily rewards those who get bonus/retention packages with the acquirer and leaves others with essentially nothing.&lt;p&gt;As if this all were not risk enough, Skype now comes along with a vehicle by which you lose the value even of that illiquid stock you thought you had bought - and paid for, and paid tax on, and whose value you ran the risk of losing in case the company went nowhere - at the very time when the wild success case strikes. This is the essence of a rigged game. The company fails or plods along uneventfully: it has no obligation to buy back anything from you; you took the risk and lost. The company succeeds: it has the option to rob you of your equity value by getting it all back at a strike-price cost that is a tiny fraction of its now vastly appreciated market value. This is what they call &quot;heads I win, tails you lose.&quot;&lt;p&gt;This is not equity ownership. It is merely the illusion of ownership - an ownership that comes with all the risks of buying stock (the cost, the tax risk, the economic risk) and none of its benefits. As this piece points out, legally, you might be able to frame things this way and maybe this is the custom and practice in private equity deals (it can even make sense in an individually-negotiated deal with a senior executive who knowingly accepted the risks involved). But it is not legal to offer it up in materially misleading terms, which seems to have happened here. And, whether technically legal or not, no one wants to play a fool&apos;s game - once exposed as the stink bomb that it is, this particular PE ploy should hereafter die the death that it richly deserves.</text></comment>
<story><title>Skype’s Worthless Employee Stock Option Plan: Here’s Why They Did It</title><url>http://techcrunch.com/2011/06/26/skypes-worthless-employee-stock-option-plan-heres-why-they-did-it/</url></story><parent_chain></parent_chain><comment><author>patio11</author><text>I once heard some advice worth remembering from a lawyer: do not sign contracts on the basis of trust for the counter party, because they are your counter party &lt;i&gt;today&lt;/i&gt;.  For long-term contracts, when you actually have a dispute several years down the road, you may be dealing with a totally different set of actual people.  People change jobs.  Companies get bought.  Cultures and personalities drift over time.&lt;p&gt;Your contract will not, ordinarily, adjust itself just because the guy who promised that Odious Clause X was boilerplate that would never be held against you has left the company and been replaced by Scrooge McStealYourEquity.  Don&apos;t give Scrooge the opportunity.  Get exactly what you expect to have happen to you written in the contract.&lt;p&gt;P.S. Relatedly, your discount rate is probably too low, and you probably overestimate your odds of a liquidity event &lt;i&gt;and&lt;/i&gt; the upside potential.  Your employers will act to encourage this.  Get paid in cash as much as possible.</text></comment>