Stock ownership in private companies?

[SavingWithBabies]

So back in 2014 I worked for a unicorn in San Francisco. I left after a bit over a year and I exercised my stock options. Unfortunately, they didn't offer early exercise back then so it pushed me into AMT. I think I paid about $4k USD to exercise the options to buy the stock and then I paid the IRS another $4-8k on the difference between the option price and the estimated market price.

Now back to the startup -- their business model was based on their users advertising products online. The most aligned site to do this on was Facebook. However, the users were ingenious at figuring out holes in the Facebook advertising system. For example, they might choose to make a product that said something like "It's a <last name> thing. You wouldn't understand." Then they would go to Facebook and make a targeted advertising group with everyone they could find that has had a last name of <last name> (ie Smith). This was very effective. Facebook didn't like it though so eventually the users had to do things like make groups that were 90% with <last name> and then 10% just some other Facebook users so they didn't get detected by the algorithm. So it was game of cat and mouse.

The best thing about all of this was the unicorn startup was responsible for hosting the product that was for sale and fulfilling the orders. The users created the products (think printable items like shirts) and the users did the advertising (both managed and paid for it). So there was little risk to the startup besides copyright issues. The startup did juice the system by paying for retargeting ads (ie show the ad again to those that didn't convert on the first impression).

Eventually, Facebook grew tired of the cat and mouse game. Because all the links went back to the startup, they decided to just rate limit the ad rates for the startup website. So what we saw was a strong up and to the right graph of growth that just went sideways one day. Just leveled off. I should probably have started with that as it was a bit of a mystery for a while.

So back to the stock options. When this happened, the unicorn faced a bit of a crisis. They couldn't raise their next round of venture capital because the growth tailed off. Here is where I hesitate to share too many details but basically a very wealthy and well connected family which had one of the sons working at the startup and others in very prominent SF Bay Area startup organizations in lead roles (Y Combinator) backed a "down round". Basically, they agreed to invest but unless you also invested (and you needed to be an accredited investor to do so -- I was not), you would be left with 1/13 of your original shares.

Today, that startup is still going. They have integrations with very popular mainstream sites that people use every day. I still technically have shares in this company but I have no insight into it.

So this is what I take out of this story:

- that 13 to 1 reverse split unless you invest as an accredited investor is very unfriendly to regular startup employees -- just one more way to get screwed
- early exercise best of course (already knew that of course but lesson really learned)
- exercising options is always a gamble/risk

What I'm left unsure about is:

- what rights do I have a stock holder in a private company?
- will my shares ever be worth anything?
- do I have any right to know about the current valuation?
- who keeps track of me and how do they find me? I mean, I'm online in various places but there is no registry to keep track of me let alone if I die and it would go to my inheritors (seems messy)

A long time ago, I read this super long running probate thread on FatWallet finance. I realized this topic might not be as interesting but it seems like one of those things that is just going to take time to play out. So I figured I'd post about it here. Partly as a cautionary tale but mostly just out of interest in the topic and I figured others might be interested too or have similar stories. I'll keep this updated as things happen but nothing really has in years so it might be a while.

[WFJ]

This story identified the magic of the US public equity markets where one can turn billions of paper value in stocks to cash in an instant. Private securities are like estimating the price of a Beenie Babie or a 1952 Topps complete set, the value is what someone will pay you today that has the cash in hand. When I've owned a portion of a business, I've always asked for a payment plan from the business to divest all shares/ownership before leaving, agree on some amount, take payments for 5 years and move on. One time got a great deal, one time not so much.

[chenda]

I learnt today most of South Korea's biggest companies like Samsung are all privately owned by a few ultra wealthy families. Its a sort of hitech feudal society.

Samsung's owner is apparently dead and has been for many years. But they pretend he is still alive to ensure price stability.

[jacob]

The strike price of the options should have reverse split by 1/13 as well.

This situation is not something I'm overly familiar with. In the one situation, I know, the company would allow people to sell the shares back to the company once a year at a fixed price the company would offer. I wouldn't presume you have any right to know about the "current valuation" (value IS NOT price, and it's likely not something they calculate daily much less would be willing to reveal) but surely they would reveal the last offer if asked. I would also not presume that anyone is keeping track of your whereabouts or would ever go looking for you or your heirs, but your name would likely be in their registers. It's conceivable that it would be possible to sell your options or shares to another person either inside the company or via pink sheets. My first step would be to write HR, investor relations, or the CFO in that order.