Inheriting Stock Options for a pre-IPO Start Up
June 25, 2010 12:27 AM   Subscribe

Going with my mother next week to a meeting with the management team and surviving founders of a start-up company my dad founded. She's trying to figure out how to value the company shares he left her as part of her estate planning, hence the meeting.

My dad started a clean/green tech company with several of his coworkers back in the early 90s. It's 15 years later, my dad's been dead a year, and as part of the family trust he set up to cover my mom's living expenses includes his pre-IPO shares in the company.

Several of the other founders have also passed away and at this point management are people we don't know too well. They've kind of dropped my mom out of founder/shareholder communication since my dad died (which makes her feel snubbed). She's asked for a meeting to find out how the company is doing, partially because it is a legitimate issue her financial planner has brought up given the stock left as part of the trust.

Besides making sure my mom stays focused on business and leave her personal feelings (that the remaining staff are cold towards her since they weren't friends with my dad) out of the discussion, I also want to be prepped for the questions I should be asking them. It gets a little tricky because we're finding them to be slightly paranoid and evasive about any information. My dad used to get internal/confidential e-mails about financial and technology developments, but those have stopped since his death. They seem to be purposefully vague about everything because they're worried about their IP and also not saying anything about the stock value that could be misconstrued. Unfounded because my mom doesn't want to sell the stock and besides, I did the original due diligence for the patents, so I already know what their technology is.

tl;dr - Just to make sure my bases are covered, but what should I be asking them for in terms of the stock and overall financial performance/long term projections? Like I said, they're purposefully vague and I don't want to say/do anything to alienate them. But I do want to make sure that any financial information my mom has a right to, we make sure she gets.
posted by gov_moonbeam to Work & Money (8 answers total)
You mention "and as part of the family trust he set up to cover my mom's living expenses includes his pre-IPO shares in the company. " -- has she sold any shares? Or is the original position intact? And specifically what percentage of the firm does she own? What scale of investment did your father make?

You'll have to establish specifically what class of shares she owns and how they fit into the firm's capital structure. She may, because of her position as founder, have enhanced voting rights, for example. Have the shares been paying any distributions i.e., dividends or other payouts?

There are two ways to play this: do it yourself and get a professional.

If you don't have a proper finance / business background it would be very tough, but I'd start by establishing specifically what class of shares your mother owns and specifically what percentage of the firm. You need to understand what voting and other rights she is entitled to, as well as any distributions that have been made / should have been made. You need to see minutes for all shareholder meetings going back three years, as well as audited financial reports. I'm suggesting looking back at least three years so you've got some idea of relative performance and how decision making has evolved and changed over time (i.e., before and after your father's death). This is just the start; the answers to these question may snowball into any number of different directions.

The second way is probably best under these circumstances: get a CPA involved to raise these questions on your mothers behalf. If they won't communicate the financials with the CPA get a Solicitor to press the issue. Letters initially, just so there is a record of your (very reasonable under the circumstances) queries.

The company may be doing much better financially than you're aware of, the shares your mother owns may have far more control over the company than either of you are aware of, and its important that you protect your rights.

Finally, under no circumstances should you mother make them aware she doesn't want the shares. Your goal is to realise fair value for this equity position; if they know she wants to unload they'll accommodate her wishes, and more than likely not at best price.
posted by Mutant at 1:26 AM on June 25, 2010 [1 favorite]

I would get your financial planner to find someone who can value the shares, that's your only way of accurately knowing their value. Then, you either have to figure out whether the company's worth the stock or if you should find someone to take the shares.
posted by parmanparman at 1:27 AM on June 25, 2010

The first thing, is to be clear on whether you own shares or options. They're not the same thing.
posted by pwnguin at 1:30 AM on June 25, 2010

A founder of a company is not likely to own options.

She should definitely get a CPA to accompany her, and the CPA should talk with the company's CPA as well as internal financial people. She needs someone who can be appropriately pushy.

One thing that she should demand is a copy of any communications (the "e-mails about financial and technology developments") that have been sent to others and not sent to her since her husband's illness and death.

She should be aware that many companies have shareholder sale agreements that will force a sale in the event of death. She needs a copy of any such agreement.

(I presume by "pre-IPO" you mean that the company has not gone public but is expected to in the near future. In that event, professional assistance is even more important. This is not a job to do yourself.)
posted by megatherium at 3:32 AM on June 25, 2010

Two points:

(1) A founder can have options in addition to an original equity grant. I don't know if that's the case here, but it's not unheard of.

(2) All of Mutant's advice is correct. The most pertinent part of his advice is: do you have the requisite financial and accounting background to make sense of what the management team tells you? I get from your post that you're an attorney of some kind (you make reference to having done due diligence on patents for the company); not all attorneys have the requisite financial and accounting background. If you don't have this background, retain the services of a qualified CPA or attorney to represent your and your mother's interests.
posted by dfriedman at 5:41 AM on June 25, 2010

I'd try to stick to the financials, and yes bring a CPA or someone else who can audit the business. Treat this like a business investment because at this point that is what it is, instead of money you've invested your father's time and expertise for 15 years, and now you're trying to find the value of that investment.

I disagree with megatherium about demanding communications you mother is not part of the management team and really doesn't have a place making management decisions. She should try to be a silent partner, monitoring this as an investment, not a company she's active in. Doing so would likely sour the relationship.
posted by bitdamaged at 6:35 AM on June 25, 2010

Ask for a copy of the corporate by-laws so that you can find out about shareholder rights and procedures. Or have your lawyer or CPA do it. Though in my experience, corporate by-laws are generally easy to understand (unlike say, a credit agreement).
posted by mullacc at 9:09 AM on June 25, 2010

Thanks! We're going to have a founders meeting and shareholders meeting so before those happen, my mom is meeting with her CPA to review the paperwork they've sent us. The company isn't earning a profit yet, but we definitely want to make sure she realizes any investment (mostly time and patents) that my dad put into that situation.
posted by gov_moonbeam at 9:43 AM on July 2, 2010

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