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French Startup Sleazes

This post is a warning to Paris’s abundant startup techies: you can’t always trust your employers! Disclosure: the techie here is my son Nick.

Keep reading for a variety of tricks used by unscrupulous startup owners to deny you your promised options.

Nick was denied the benefit of the options he was granted by his startup founders: Arthur Waller,  Raphael Théron, Khalid El Guitti and Felix Blossier.  These are the sleazes of the title, and if you question my opinion, please read on and form your own. Their company was called PriceMatch.

In December 2012, Nick started working for this group of young “Polytechniciens,” alumni of l’Ecole polytechnique, one of France’s “grandes écoles.”  Working on a pricing app directed to hotels, and with the founders being recent graduates and having little real practical experience, they needed an experienced software coder.

Nick, with his years of Silicon Valley training, including about 18 months working at Apple, on top of his thirteen years being raised in Paris, was perfect for them: truly bilingual, and a top-notch software coder. He started working for them in September 2012.

  *      *      *

Warning 1: delay.

It was a typical start-up story, almost banal. As is the norm for a US coder, Nick asked for options, or the French equivalent (in this case, “BSPCE, or “bons de souscription de parts de créateurs d’entreprise”), up front, and was offered 1.5% of the company vesting over two years. Actually providing for the option grant, documenting it, took Pricematch a while. But in March 2013 Nick was given a draft contract covering the first year, and sent it straight to me to review: there are advantages to having a dad who is a startup lawyer!

Warning 2: creepy contract clauses. 

The draft only covered the first year of the offered two. It would have been easy to cover both offered years in the same contract, as they did in a later draft that they prepared (after he had signed this one, I think). Not great, but hey! I was glad that they were at least expressing an intention to sign for the one year.

Another clause was more worrying. It included language which allowed PriceMatch to buy back the options at will and at almost zero cost. This would have completely negated what the options were supposed to be giving Nick, which is a share in the increase in value of the company. Startup options are a relatively recent development in France, and so I simply deleted the clause, hoping that it was a mistake, and sent the draft back to Nick with a few other corrections.

In light of what followed, this buyback clause was more likely Pricematch’s first attempt to deny Nick any real benefit from his options, while at the same time seeking to keep him working hard by pretending that he had been granted them.

Warning 3: early termination.

PriceMatch fired Nick in ______________, before his second year of vesting. By that time, he pretty much expected that, which didn’t make it any easier to stomach. He had already completed the basic architecture of the company’s code.

He did still have the one year of vested options which the contract had given him. Options vest in their holder over time, and vesting means that their owner can now exercise them, meaning pay the stated exercise price to buy the underlying shares.

Typically, maybe 99% of the time, a terminated employee will not exercise, because the chances of being able to resell the shares after exercise are very low. Only if a startup is acquired or has an IPO do the options pay off.

Pricematch probably expected Nick to walk away without exercising. That may well have been the principal reason that he was terminated, again to deny him the benefit of his options, the benefit of his bargain with his employer.

You have to be a poker player to exercise. Nick is. He took the unusual step of exercising his options within the exercise period, paying 450 Euros. He explained to me that the stake seemed low to him, and worth the bet.

I walked him through the exercise process: cashier’s check for the exercise price, and a registered letter sending the check and informing PriceMatch that he was exercising. He complied 100% with the Option Agreement.

The goal was to give PriceMatch no outs, no way to deny him the shares that he was buying. We failed to meet that goal, because of the extraordinary steps that PriceMatch then took to deny Nick the shares that he had purchased by exercising his options.

     *      *      *

How Pricematch denied Nick the Benefit of his Bargain.

1.                   This is where the real sleaze started. First came months of silence from PriceMatch. It was as if he had not exercised at all. PriceMatch must have thought that they were rid of his options when he left the company, and his exercise likely surprised them.

As a shareholder, Nick was entitled to be informed of material developments in the company, and to participate in financings. But when there was a material development, a one million Euro financing round including Partech Ventures as an investor, he only heard about it from a buddy who was still at the company. No notice; no right to participate.

Of course, Nick was very pleased to hear that a VC had validated PriceMatch. It likely meant that his shares had increased in value, even though he could not yet sell them.

In fact, he did not yet own the shares because of PriceMatch’s convoluted machinations, which now became almost ridiculous. I would have said laughable, except that it’s not funny when people cheat you out of what is yours.

The long and convoluted process of PriceMatch that followed finally succeeded in denying Nick the benefit of his bargain. It occurred in stages.

2.                   After the long silence, the next step was asking Nick to sign a 22-page “Contractual Undertaking” before his shares were awarded to him. This was sent to us in the summer of 2014 (how time flies!) by a lawyer at Debevoise Plimpton in Paris, and was hopelessly complicated and hard to read, even in English. I tried, because the sleaze that I had removed in the initial Option Agreement suggested that there might be more buried in this Undertaking.

But even if I did find the time to read through this Undertaking, it announced that Nick would then be required to sign a 34-page Shareholders Agreement, which I would also have to carefully read through. Ridiculous! I didn’t have the time for careful review of all that.

Plus, the Option Agreement did not require Nick to sign anything before receiving his shares upon exercise. He had already done all that he needed to do.

3.                   Faced with Nick’s refusal to risk signing his rights away by signing this “Contractual Undertaking,” PriceMatch then denied that the Option Agreement was enforceable, meaning that they denied that Nick derived any benefit out of it.

That was pretty ballsy, considering that the signed version had already circulated freely, and that they had taken the trouble to prepare this 20-page Undertaking for Nick because of his exercise. It was also total sleaze.

Each of PriceMatch’s steps in denying the Option Agreement’s enforceability boggles my mind: such bad faith!

Step 1. They pointed out that while the contract had been signed, the individual pages had not been initialed, which is a formalist French legal requirement. Of course, Nick had no idea that the pages were supposed to be initialed. Pricematch could easily have told him.

That they did not do so and then used the omission against him made me suspect that this was a setup from day one. Perhaps their lawyers gave them tips on how to argue that this contract was unenforceable under formalist French law.

Step 2. The next PriceMatch position could have resulted from another lawyer’s tip. Remember my review of the Option Agreement draft? I sent the draft to Nick redlined to show the changes, so that he would be able to see what I’d changed.  PriceMatch and Nick then signed this draft including the redlined changes.

Changes too in a French contract are supposed to be initialed, another formalist legal requirement. Rather than saving the changes before signing it, a very simple move in Word, PriceMatch signed it with the changes still redlined, and then argued that this proved that the contract was not enforceable.

Sound like a setup to you?

Step 3. Another argument raised by PriceMatch was based on the erroneous date on the signature page of the Agreement. I let this date pass in my review, figuring that they would correct it before it was signed. That’s what people do, honest people. I emailed the revised draft to Nick on March 10, 2013, and it was signed soon after. But the signature page said that it was signed on January 28, 2013.

This was impossible, of course, given that Nick wasn’t sent the draft until March: see above email! The date was likely when a similar agreement was signed by a PriceMatch founder. But that didn’t stop PriceMatch raising the point, suggesting again that they were always setting up a legal position that there were problems with this Option Agreement.

Step 4. PriceMatch’s final argument against Option Agreement enforceability was that its shareholders had not authorized it.  The Agreement itself said that they had done so at a March 5, 2013 shareholders meeting, which is mentioned in the Whereas clauses on the Option Agreement’s first page: “the shareholders at a meeting on May 5, 2013 granted 45 BSPCEs to Nicholas Stock.”  Later, they stated that such a meeting had not in fact taken place. One fo their arguments: it was after the date on the signature page!

When PriceMatch signed the contract, they told us that a shareholders meeting had taken place; when they wanted out, they told us that it had not.

*      *      *

So here’s what happened here. Let’s look at the big picture.

PriceMatch’s founders had a good idea and needed sophisticated coding help to implement it. Nick provided that help, but pushed six months later for the options that he was promised when he started work.

In order to retain him and keep him working beyond those first six months, PriceMatch signed an Option Agreement with him, which it looks like they never had the slightest intention of honoring.

From day one, it looks as if they were setting up legal arguments that would deny him the benefit of the options in the unlikely event that he exercised them after being fired.

But he worked on and worked hard until the founders decided that they could go on without him, which he would not have done if they had not granted him those options.

So techies, beware! Being promised options is one thing, obtaining the benefit of them quite another, if you’re dealing with founders like these.

Are you?

And let’s look finally at Nick’s lost (stolen?) benefit here. PriceMatch was eventually acquired by a sub of PriceLine. We don’t know for how much, but we do know that PriceMatch was contemplating accepting a $9 million investment not long before it was acquired. Supposing that the acquisition was for a total of $10 million, and it could have been significantly more, then Nick’s 3/4 of 1% of the company was worth about $75,000. The shares cost him about $500.

Now you’ve read the story, what do you think: is “sleazes” the right word?