Startup company employees, many in the tech world, need to be aware of a model that financiers and insiders of (typically Delaware) business corporations use to misappropriate contributions employees have made, in the form of foregone salaries, cash spent to convert employee stock options into common stock, or the acquisition of common stock by non-insiders. At least two courts have passed on this scheme, and each has denied any relief to the disappointed employees. The absence of judicial recourse for this form of minority-shareholder oppression enhances a potential employee’s need to understand the scheme before stepping into it.
Three Problems for Startups
Relevant to our discussion, new tech startups have three challenges: (1) they need highly skilled and dedicated employees to develop, improve, and sell their new products for revenue; (2) they need to conserve cash, particularly given that sales may be less than the research-and-development costs, rent, salaries, sales commissions, and other expenses; and (3) they need access to capital, i.e., cash. Problems (1) and (2) can be addressed by figuring out a way to underpay highly skilled employees, while problem (3), which is most critical, is that which motivates insiders to implement the stock scheme we describe below.
Underpaying Highly Skilled Employees
The startup can underpay highly skilled employees by using what appears to be a win-win compensation model of aligned interests. With this model, the startup pays...
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