Posts on Nov 2015

Top Ten Employment Law Myths

Over the last decade or so, I’ve heard many of my clients and friends tell stories about how they “know their employment rights” – and, invariably that “knowledge” comes back to bite them in the proverbial posterior. The problem is, most of them have learned what they know from Law & Order, Boston Legal and (I shudder to think of this one) Ally McBeal.

In contemplation of our favorite courtroom dramas, I offer the following summary of the top ten Employment Law Myths.

1. Wrongful termination

If you live in Montana an employer can only fire you for just cause. Otherwise, your employer can fire you for any reason or no reason at all. On the whole, employers don’t have to have a good reason to terminate employment, and they certainly aren’t required to give you a reason.

2. Retaliation

Another common misconception is that an employer can’t “retaliate” against an employee. There is no law prohibiting an employer from retaliating against an employee for reporting or objecting to policy violations, ethical violations, bullying, or general crappy behavior. There are certain protections that apply if an employee does something that puts him or her in a legally protected category. Examples are, objecting to discrimination, making a worker’s comp claim, or taking Family and Medical Leave.

3. Breaks

Believe it or not, there is no federal law that requires employers to offer any work breaks for anything, even meals. Many state laws do require work breaks, but it’s not a majority, and no law requires bathroom breaks – but that gets into the realm of health issues and OSHA likely applies. If the employee is a nursing mother, she’s entitled to an unpaid break to express breast milk, assuming the employer meets certain size standards.

4. Hostile work environment and harassment

Another common misconception is “hostile work environment”. This, on its face, is not illegal. Harassment is not illegal. Bullying is not illegal. That said, however, hostile work environments or harassment based on race, age, sex, religion, national origin, disability, color, taking Family and Medical Leave, whistleblowing, or some other legally-protected status is illegal. Employers are free to play host to any type of terrible work environment they care to – so long as any discrimination is not based on a protected class.

5. Free speech and online speech (the Facebook myth)

Only government employees have free speech protections, and even those are limited. Employees may be fired for their speech either in the workplace or outside the workplace if they work for a private employer. In certain limited situations, speech is protected: (i) for speaking on behalf of coworkers in order to improve work conditions, or (ii) for objecting to something illegal.

6. Privacy (Email, Phone, Paper & Internet)

I’ve seen this one more times than I care to remember. There is no law giving employees any privacy protection in their work emails, documents or internet usage. If an employer is going to listen into or record phone calls, there are some legal restrictions (which are too complex to cover here). Your take-away here is that, as an employee, you should never assume anything you do at work, about work or on an employer’s computer, phone or network is in any way private.

7. Discrimination

This one is, hands down, the most common misunderstood aspect of employment law. Discriminating against you for being you is never illegal. Favoritism, nepotism, being a complete a$$hole are not illegal. Protection from discrimination based on a protected class, that is to say discrimination that is based on age, race, sex, religion, national origin, disability, color and/or genetic information, is illegal.

8. Right to your HR file

There is no federal law requiring private employers to allow employees to inspect or make a copy of their own personnel files. Some states do require employers to allow employees to look at their files, and fewer still allow them to copy items in their files. In most instances, the only way for an individual out what’s in their HR file is to file a suit and demand it via Discovery – or to subpoena it in unemployment or other proceedings.

9. Right to work

Right to work does not mean an employer can’t require the signature of a non-compete agreement or restrict an employee’s ability to work for competitors after they leave. There are state-based exceptions and guidelines (which, again are too complex to cover here). What right to work does mean, however, is that employers can’t make employees join a union in order to work there. If your company tells you that signing a noncompete agreement is meaningless or that it won’t be enforced, they are lying to you.

10. Individual liability

I’ve heard many a bitter ex-employee talk about this one. As much as it may give you joy to sue your boss personally, you probably can’t. Most Federal and State laws simply don’t allow it. The one exception is wage and hour violations. Some state discrimination laws do hold supervisors liable for violations. But what’s the point? Unless they’re rich, they’re probably what we call “judgment proof” and you likely wouldn’t be able to collect anyhow.

SPACESHIP!

In the spring of 2000, I wrote a paper for my Space Law class. The title of the paper was “Beam Me Up Scotty – There’s No Intelligent Life Down Here!” It was an analysis of the applicable law in a “first contact” situation. (I know, pretty dorky, right?)

But I’ve a lifelong love of things sci-fi and this week’s news gave me renewed hope that space travel might be a commonplace occurrence in my lifetime.

A new law expected to pass presidential approval this week would exempt private spaceflight ventures from a wide range of government oversight. H.R. 2262, which has been passed by both the House and Senate (they’re currently “resolving their differences”), would exempt private space travel ventures like Blue Origin, SpaceX and Virgin Galactic from federal regulation for the next eight years. The bill helps ameliorate their fears that close oversight by the FAA or other government agencies will seriously slow innovation.

In general, I’m all for government oversight, but I’m willing to set that aside in this instance. SPACEFLIGHT people!

There appears to be a second benefit in H.R. 2262, primarily for private space exploration ventures. In addition to expanding the lifespan of the International Space Station into the 2020s, it will also give commercial firms the rights to resources they extract from asteroids and other space bodies. This is huge news for companies that plan to mine for rare minerals on asteroids.

Under the new bill, the FAA will still have some oversight to regulate commercial space travel, such as issuing rocket launch licenses.

In all honestly, I’m probably much more excited by this stuff than I ought to be, but given that I carry around what is effectively a Star Trek communicator in my pocket, and I can access all the knowledge of humanity on that device with a few simple commands – I’m disappointed that I can’t Uber myself a flight to the moon yet. Here’s hoping that it happens soon!

Give Us Your Money And Go Away!

Today we’re going to talk about classes of stock. Boring right? (Okay, there really isn’t anything clever I can say here that will instill you with a burning passion to learn about classes of stock, but I’ll try to keep it simple, brief and pithy – and maybe you’ll take something useful away with you.)

Yesterday, I received an email from Square, Inc. You know them. They make those little things that plug into your mobile devices so buyers and sellers can transact credit card purchases at conventions, pop-up clubs and the renaissance festival. The email offered me a chance to “own part of Square” through purchasing some Class A common stock in their upcoming initial public offering (IPO), since I’m a current user of their product. (My wife and I use Square all the time in our indie film production company, Cavegirl Productions.)

Being the kind of guy that I am, I clicked on the link to their draft prospectus. Here’s what I focused on, and what this post is about:

We have two classes of authorized common stock: the Class A common stock offered hereby and Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and conversion rights. Each share of Class A common stock is entitled to one vote. Each share of Class B common stock is entitled to ten votes and is convertible at any time into one share of Class A common stock. After the completion of this offering, our existing stockholders will continue to hold all of our issued and outstanding Class B common stock and will hold approximately 99.1% of the combined voting power of our common stock. As a result of their ownership, they will be able to control any action requiring the general approval of our stockholders, including the election of our board of directors, the adoption of certain amendments to our certificate of incorporation and bylaws, the approval of any merger or sale of substantially all of our assets, and certain provisions that impact their rights and privileges as Class B common stockholders.” (emphasis added)

Interesting no? The Class B, which is not offered, gets all the power and control, and the Class A gets to “own a piece of Square” – for what that might be worth.

The bottom line here is that most of the people who are going to “bite” at this offering probably haven’t read the prospectus – and may not understand that they don’t have any real way to participate in the company’s governance. What’s actually happening here is that the company’s Board, controlled by the venture capital firms that invested in Square (Victory Park Capital) are maintaining control of the company and all decisions it makes.

Your takeaway? If you’re going to buy stock, make sure you read the d**m prospectus!

The Option Pool Shuffle Pt. 2

Today’s post continues our discussion of the “Option Pool Shuffle.” Last time we discussed the two general approaches – VC friendly and founder friendly.

To educate by means of example, consider the following:

Buffy has a lumber company, Stakes’n’Stuff LLC, and she’s managed to negotiate a $2M (2 million dollar) investment on an $8M pre-money valuation by playing Angel Investments and Spike Capital against one another. She returns to Sunnydale excited to tell the rest of the gang that they’ve created a company worth $8M.

Xander, Willow and Rupert want to know what their shares are worth, and Buffy explains that since Stakes’n’Stuff’s outstanding shares are 6M (6 million) – the investors must be valuing the company’s stock at $1.33 a share. She expects the calculation will look something like this:

$8M pre-money ÷ 6M existing shares = $1.33 per share

Unfortunately when they finally get the VC’s term sheet, it lists the share price at $1.00. Willow becomes distraught. The term also includes language to the effect of, “The $8M pre-money valuation includes an option pool equal to twenty percent (20%) of the post-financing, fully diluted capitalization.”

So what happened?

Most VCs will try to control the creation of your option pool in a manner that benefits the VC first. Their pre-money valuation will always include a large, unallocated option pool for new employees. It is essential, as a founder or owner of a company, that you control the option pool and the manner in which it is created.

What Spike actually offered Buffy was not tantamount to an $8M valuation. What the term sheet actually revealed was that Spike Capital really thought the company was worth $6M, but they wanted to add $2M in new options, add that to the “value” and call the total $8M the “pre-money valuation”. Rupert explains that what the calculation actually looks like is:

$6M effective valuation + $2M new options + $2M cash = a $10M post-money valuation; or,

         60% effective valuation + 20% new options + 20% cash = 100% total.

Sneaking the option pool in the pre-money lowers the founders/owners effective valuation to $6M. The actual value of the company Buffy built is $6M, not the $8M the Spike keeps talking about – and the new options lower Stakes’n’Stuff’s share price from $1.33 to $1.00.

VCs benefit from the pre-money option pool in many ways.

First, the VC will make sure the option pool only dilutes common shareholders. If it came out post-money, the option pool would dilute both the common and preferred shareholders proportionally.

Second, the VC-created option pool eats into the pre-money more than you’d think. To the uninitiated, it seems smaller because it is presented to founders/owners as a percentage of the post-money even though it is allocated from the pre-money. Using the example we used above, the new option pool is 20% of the post-money, but is actually 25% of the pre-money!

Third, if Buffy sold Stakes’n’Stuff before a further round of investment, all un-issued and un-vested options would be cancelled. This “reverse dilution” would benefit both preferred and common stock proportionally – even though the common stock holders paid for all of the initial dilution in the first place – and would effectively, upon exit, put more money back in the investor’s pockets!

Moreover, if Buffy had to do a B or C round of investment, the A and B (and potentially C) VCs will all try to play the option pool shuffle against one another. Unfortunately, all the unused options that you “paid” your VC for in the A round will go into the B option – and so on and so one. The shuffle allows your existing investors to avoid playing the shuffle and, over and over again, avoid dilution at the company’s expense.

Welcome to the wonderful world of venture capital funding!

The Option Pool Shuffle Pt. 1

(Credit where credit’s due – this post was inspired, in large part, by an excellent and still relevant post available at Venture Hacks.)

For this inaugural, two-part, blog entry I thought it appropriate to start with a topic near and dear to my heart, and to those of others involved in the startup world – the “option pool shuffle”. Every few months I find myself explaining to a client or friend exactly how venture capital entities (“VCs”) would like to “help” you structure your startup’s employee stock option plan (“ESOP”).

Broadly speaking, you can go one of two routes – VC friendly or founder friendly.

The VC friendly approach provides the VC with a greater share of the company. The share options are allocated first, and then the VC is allocated its shares. The impact is that the VC share allocation dilutes the share option pool and the VC ends up with a greater percentage of the company.

The founder friendly approach gives the VC a smaller share of the company. The VC is allocated its shares first. The impact is that the VC is diluted by the new share option pool, consequently the VC ends up with a smaller percentage of the company.

We’ll examine the ramifications of each type of plan in our next post. Which I’m sure you’ll all await with bated breath.