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I've seen a lot of questions and discussions about agreeing to take some portion of your salary as stock options when starting a job, but the situation I'm in now is that the company wants to reduce everyone's pay and give them the equivalent value in stock options instead, in order to save money.

The company isn't profitable so right now it's totally reliant on getting new investment in order to keep going. For obvious reasons, it's difficult to get venture capital right now, so last week the CEO announced that in order to extend their cash runway to the middle of next April, they wanted to cut everyone's salary and give them stock options instead.

It's a private company so there isn't a stock price, so they're calculating the value of stock options based on the last price that investors bought stock at, which was 2 years ago. One of my problems is I have no idea how to tell if this is an appropriate evaluation.

The change was originally described as voluntary and we've been asked to sign something to agree to this measure but there's been mixed messaging as to what will happen if we don't. One email we were sent said that if we don't agree we'll be fired. We were also told though that the company could make the change without our agreement after a consultation period. I can't find much information about what that entails on the web.

It's a good company and I'm sure the people in charge aren't trying to screw us over but some aspects of this plan don't sound right to me. There's a lot of things I don't really know about the situation and I'd be grateful for any answers to any of my questions:

Is it reasonable for the company to try this kind of thing? I understand why they need to save money but my gut says this is dodgy

Is it legal for them to effectively demand that employees invest in the company under threat of termination? Since it's a private company there's no stock price so I don't know if it could be considered stock price manipulation but it still doesn't seem right.

Can they enforce this change of contract after a consultation period? If so, what exactly does consultation entail?

How should I evaluate the deal being offered? I have no idea how much the stock is worth. It's a good company with some good technology, but I don't understand much of the science behind the technology so I only have what people inside the company say about it to go on.

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  • How long have you been employed by the company? If the answer is "less than two years", they can terminate your employment without needing a reason anyway. If it's "more than two years", this is a legal question and you need to be talking to a lawyer (or maybe Citizen's Advice in the first instance). – Philip Kendall May 4 '20 at 12:47
  • Talk to a lawyer and take your contract with you. – Solar Mike May 4 '20 at 12:49
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    There are a few different questions here. Strict legal theory is more appropriate on Law while financial questions are more the domain of Personal Finance & Money. Basic, general questions on these topics are appropriate here but as-written this is too overloaded to answer and we'd basically be guessing. A simple "can stock options replace salary?" would be answerable. So would "how do I push back against changes to my compensation?". But this questions is rather unfocused for a site like ours. – Lilienthal♦ May 4 '20 at 13:57
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    @Lilienthal: While you are right about the "multiple questions" thing - I think OP's problem is partly making precisely this analysis (i.e., dividing the problem into those questions). So I think the question has merit. As usual, we can (and did) dissect the general problem, and briefly address the individual parts. If OP needs more information on the sub-problems, they can and should ask separate questions on appropriate sites. – sleske May 5 '20 at 7:31
  • You can't enforce anything. You can ask and hope for the best. – Cris May 5 '20 at 9:19
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This does sound like a difficult situation, and you may need to find a new job. To address your individual questions:

Is it reasonable for the company to try this kind of thing? I understand why they need to save money but my gut says this is dodgy

In general, this is at least not totally unreasonable - asking for pay cuts is not necessarily unreasonable. However, that will not help you - you need to decide whether it is reasonable for you.

Is it legal for them to effectively demand that employees invest in the company under threat of termination? Since it's a private company there's no stock price so I don't know if it could be considered stock price manipulation but it still doesn't seem right.

I also do not see any manipulation (and at any rate, that's not a workplace question, so off-topic here). And giving employees the choice between a pay cut and termination is also not inherently illegal - unless it is clearly done to put pressure on specific employees or groups. The company has a legitimate interest to save money, and both renegotiating employees' pay and laying off employees are legal ways to do this. This of course assumes that the company is legally allowed to lay off employees (which is a different question and will depend on many factors - generally, in the UK, you are protected if you have worked for your employer for more than two years).

The article Can my employer force a pay cut and expect me to keep working full-time during the coronavirus crisis? discusses this situation and comes to a similar conclusion.

Can they enforce this change of contract after a consultation period? If so, what exactly does consultation entail?

No, they probably cannot unilaterally change the contract (there are some exceptions, but that is lawyer-territory), consultation period of not. They can, however, lay you off, as explained above.

Still, to avoid any ambiguity, if they ask for / announce the change of contract, you should refuse in writing. If you do not object and continue to work, that may count as a (silent) agreement (that is also mentioned in the article above).

How should I evaluate the deal being offered? I have no idea how much the stock is worth. It's a good company with some good technology, but I don't understand much of the science behind the technology so I only have what people inside the company say about it to go on.

Well, realistically, you cannot. If the stock is not traded, then it is quite likely that you will not even be able to sell it, as there are various rules and pitfalls about selling/buying stock that is not publicly traded (again, this depends on details, such as your company's legal setup). And without knowing all kinds of company internals, you cannot meaningfully judge their financial future.

IMHO you should push back on that point, and ask for some other compensation, for example deferred payment, or a reduction in hours. But again, they may decide lay you off instead.

Best of luck, and keep looking for alternative jobs, just in case!

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    It's important to note that in the UK the company has the option to furlough employees due to COVID. If they decide to do it then they pay the employee nothing, the employee is barred from working for the company but also received 80% of his salary from the government during this time. That is likely the option they will give employees who will refuse to take the cut, rather than firing - a lot less fuss. And OP will still have the 20% cut and, as a bonus, likely a very rocky future with this company. – Tymoteusz Paul May 4 '20 at 13:21
  • also, you're not protected in the UK if the company is running out of money - they can terminate non-operational roles – bharal May 4 '20 at 13:25
  • From the article you've linked to "If you do not object in writing, it is possible that you will be held to have agreed to the proposed variation simply by continuing to turn up for work." - Might be worth amending your answer to "Can they enforce this change of contract after a consultation period?" – Gamora May 4 '20 at 14:00
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    @Bee: Good point, added. – sleske May 5 '20 at 7:24
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This isn't strictly going to be an answer to the question, but instead some things you should do if you are considering accepting this.

  1. Have a lawyer look at the contract. Sometimes contacts like this are a very bad deal for the employee, whether or not that was the company's intention. Since lawyers are expensive, my advice would be to get together with other employees and hire one lawyer to look at all your contracts and share all the results. (The contracts are presumably the same, and if they are not that's a red flag).
  2. Make sure the options are redeemable for the missing salary. Sometimes options aren't actually redeemable in practice, especially for a company with few shareholders. And the company value can go down as well as up. It would be a good idea to have the contract specify when they can be redeemed, and set a minimum value of the salary you are giving up.
  3. Make sure the company is covering the taxes on the options. If you have given options worth 15,000 pounds, the tax man will treat it as if you had been given 15,000 pounds and you will be expected to pay tax on that. This can mean you are suddenly getting a large tax bill, without any actual cash to pay it with. Make sure you and the company have done the calculations and taken that into account. I have seen people lose money on options they were given free because of this.
  4. Make sure that the options are worth something similar to (and preperably more than) the missing salary. An option to buy 15000 pounds of shares is not worth 15000 pounds.
  5. Consider if you will have enough money to exercise the option. Remember that an option merely allows you to buy shares - you still have to find the money to buy the shares when you want to, especially difficult given your reduced salary.
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  • that last point is gold – bharal May 4 '20 at 22:38
  • The last time this happened to me, tax was Charged and calculated wHen the options were exercised. – gnasher729 May 5 '20 at 6:24
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    @gnasher729: Tax treatment of stock options is complicated, highly dependent on the type of options (and your jurisdiction), and also changes with time. So anything can happen :-). – sleske May 5 '20 at 10:00
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Is it reasonable for the company to try this kind of thing?

To me it seems as reasonable as can be, the alternative is to plug fingers in ears and hope that everything will be alright. Seems that they are being extremely upfront about the financial situation the company is in and that without cuts it likely will simply not make it, and then the layoffs will be much wider.

Is it legal for them to effectively demand that employees invest in the company under threat of termination?

You are taking a salary cut and are given company stock options as compensation. It's not investing in the company, in the way you are phrasing here, and if you preffer I am sure they will accept to just give you the cut, without the options.

But the real question is

is it legal for them to ask for employees to take pay cuts?

Yes, absolutely. It is also legal for them to fire staff when the company is in financial hardships, as long as they follow the procedure. But what will more likely happen is that they will furlough people who will refuse to comply, and then figure out how to fire them if they so desire. And putting people on furlough is very much friction-free, and definitely easier than firing people outright.

When on furlough the company will stop paying you anything, instead gov will pay 80% of your current salary, and that's all you are going to receive. You will also be barred from doing any work for the company during that period, and as I mentioned above, this is very likely going to impact your relations in a negative way, as you would be making the same amount by accepting the pay cut but also delivering your work.

How should I evaluate the deal being offered? I have no idea how much the stock is worth.

Those are stock options, not stocks, you are being offered which is a very important difference, see for example: https://seedlegals.com/resources/shares-vs-options-whats-the-difference/

And how much are they worth? They are likely worthless now, otherwise, they wouldn't be throwing them onto employees, and raise the cash from investors instead. But if you stick with the employer for the long haul and the business booms, they may result in quite a nice payday.

But I wouldn't hold my breath, out of all the startups I worked with, almost none of the stock options have ever paid up. Instead look at it as something that, maybe, one day will repay you for the pay cut.

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  • What distinguishes this from investing in the company? At the end of the day, the OP's situation will be equivalent to taking 20% of their salary and buying company stock with it. They are invested. – Nuclear Hoagie May 4 '20 at 19:47
  • @NuclearWang he is not getting stock, at all, just options. And those are not purchases, it's a bonus from the company for the employee, no actual purchase of them is happening. – Tymoteusz Paul May 4 '20 at 19:55
  • Still not seeing the difference, both stock and options are investments - holding a stock option means you paid something up front to have the opportunity for later gains (i.e. you already paid something, in this case, it was 20% of the salary). The employee isn't making any purchase, but that's only because the employer is taking 20% of their salary and doing it for them - if the OP agrees to this, they are effectively agreeing to spend 20% of every paycheck buying company stock options. – Nuclear Hoagie May 4 '20 at 20:14
  • @NuclearWang because you are focused on the end result, not on the route. The company is not buying stock options with employees' money, they are cutting their salary, right there and then. They are also giving the employees stock options. End result may be similar to the employee just buying the options for 20% of salary, but it is not the same process, with legal and tax nuances to follow. – Tymoteusz Paul May 4 '20 at 21:31
  • @NuclearWang: To directly address your question - what distinguishes this from investing is that when investing, you typically choose to buy an asset that seems likely to be profitable. This situation is more like a pay cut + a gift of uncertain value. But this is really a word game... – sleske May 5 '20 at 7:29
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The only question worth answering here is this one - How should I evaluate the deal being offered? Briefly for the others, it is legal for them to do this, and it is reasonable too. Equally legal and enforceable would be redundancies/furloughs and also pay cuts without stock options.

Interestingly, if staff agree at this company, arguing to VCs that that employees believe enough in the company to value the stock at some given level is probably going to be presented as an argument as to the health of the company.

The most worrying thing you note is that they run out of runway in a year with a 20% cut, which would mean that, assuming staffing is 100% of costs, that your runway actually evapourates in January/February.

Technically, good leadership tries to keep enough runway to last 1.5 years, so this would imply that something is off at your company. It could be that their projections about covid's impact are very (perhaps too) high, but it could also be that they've miscalculated revenue projections and expanded too fast.

Either way, you're probably looking at a down round, where the company is valued at the same/less than the previous round. This would also capture why VCs are reluctant to invest, because even at the best of times why invest in a down round?

What this then means is that your options are unlikely to be fairly priced now, given they're using the last round valuation. You should be actively looking for new work, and also paying attention to the data your company is sharing about revenue/annual reports, because this is important (and also, to me, 100x more interesting than writing code).

You won't be able to work out a fair value - it is very hard to determine that, but you can ask for the cap table of your company, and revenue projections, and then do so light work to come up with your own estimates. IF they share this with you is another thing, of course.

What you can do

You should be looking for new work, although that might be a little tricky to find but it's good to be on the lookout. You can also look to see how you can help your company grow at this time, and a crisis is always a good time to grow because there are opportunities everywhere.

Note

Tech isn't important, sales are. Sales really indicates if the tech is actually providing some tangible value. Tech is cheap/free (see github), so it's "goodness" is very very hard to even evaluate in any meaningful way.

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You need some professional legal advice.

The first thing I see is that you are not being offered stock (equity), but rather a stock option. An option is the "permission" to purchase a stock at a specific price at a later date. If the stock goes up, you do well. If the stock goes down, you have nothing.

But either way, with an option, it is nothing until it is exercised.

On the surface, I would be very leery of this offer, but it takes real legal knowledge and skill to navigate these things properly.

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