Unicorn Stock Options—Golden Goose or Trojan Horse?

Abstract

Large privately held startups valued at $1 billion or more (“unicorns”) are grappling with how to deal with employees’ expectations caused by the illiquidity of the shares of stock acquired upon exercise of their options. Until about eight years ago, many talented workers chose to work for a startup company for a lower cash salary combined with a substantial stock option grant and the dream of cashing out for a large sum of money after an initial public offering (“IPO”) of the startup’s stock.

Today, unicorns remain private for extended periods of time, in part, because they are often no longer dependent on an IPO or a trade sale to raise sufficient capital. As a result, they are delaying liquidity events for their founders, employees, and investors, thereby causing their employee stock options to lose some of their allure as a hiring and retention device.

This Article examines a contemporary puzzle in Silicon Valley: Is there a shift in unicorn employees’ expectations that results in labor contract renegotiations? To answer this question, this Article explores the challenges faced by unicorn firms as repeat players in competitive technology markets and offers the following possible solutions. First, it proposes new equity-based compensation contracts, and critiques them. Second, it suggests alternatives to the traditional liquidity mechanisms, and critiques them. Unfortunately, current securities and tax laws create legal barriers to private ordering, which prevent the parties from solving these issues on their own. This Article concludes with proposals to remove these legal barriers to private ordering to allow for the proposed solutions to take hold, accompanied with new mandatory disclosure requirements to limit the risks.