Fairness, one way or the other, is hard to quantify here. CEO's get compensated a lot more than other employees, in a lot of different ways; you could just as easily argue that isn't fair either. Besides, at the bottom, the CEO is taking on debt that could find him/her bankrupted if the company fails. I don't think it would be responsible to even offer that facility to all employees. It might not even be legal, if the employees are not accredited investors, though I'm not sure about that.

I should add that I don't have any knowledge of who pushed for the deal, and how it was set, but I doubt the CEO strolled in and just asked for the loan. I'm assuming it was part of the compensation package that was proposed or negotiated by the board and their comp consultants.

The CEO won't go bankrupt.. these loans are backed by the stock as collateral. But there should be a law that all such plans and purchase agreements are available to all employees if available to the execs.

Regular rank and file employees should also ask for this provision when negotiating their employment offer. Try to negotiate a deal such that the employer gives you a one-time sign-on bonus which, after taxes, will pay for the early exercise of the offered equity, and get the employer to give you the paperwork for filing 83(b) election.

I had posted about this earlier here: https://news.ycombinator.com/item?id=13426949, which lead to a lively discussion. At least one founder - Steve Newman of Scalyr - came out and said that this is how his startup handles equity compensation (minus the tax cover). More people should ask and get this style of offer.

> The CEO won't go bankrupt.. these loans are backed by the stock as collateral.

I couldn't actually find this out through a google search. What happens if the market rate does not allow the lender to recover the principle? I thought you'd still be liable for the remainder. It's just that they can force a sale if they want to.

This isn't an ordinary debt from a 3rd party; it's a contract with the company - they can put whatever terms and restrictions they like on that contract, including no other recourse for the debt other than proceeds of the sale of that stock, or it's forfeiture.

If the company forgives the debt, doesn't the IRS treat that as income?

Possibly, But there's a difference between a debt being written off (uncollectable) and forgiven. There's also capital gains losses that might offset potential income; the accounting for all of these cashless transactions is complex - that's what the accountants and lawyers are for :P

Allan who also responded is fairly inline with the answer to this -- except one key point: the company can write whatever they want into the contract regarding recourse, but the IRS will only recognize the loan as legit for tax purposes if it has a liability associated with it beyond the stock as collateral. This liability to the key execs will be reflected as a line item on the company balance sheet. And even if the company doesn't aggressively pursue the debt (which they can sue for), you're still on the hook to the IRS for the reason scurvy mentions below.

Are you suggesting it's unfair that different employees get different compensation deals, presumably based on their value to the company?

    > but is it fair?

Is a question for the shareholders and board to ask.

It might be more accurate to think of it as an exploit. There are all sorts of ways company financial structures can be abused - this is just one of them.

It's not really about fair, or founder vs. employee. It's a liquidity thing. The following is an example I totally made up, but it'll sort of give you an idea of how it could work.

Say you found a company, the company is still private, and you outright own shares worth a billion dollars. Selling private shares is a pain in the butt. You can do it, if you find a buyer, but it can be a lot of work.

Now let's say you want to take $25 million off the table. While you can't easily sell your shares, you can borrow against them. Any bank will lend you the money, because you're securing the loan with your billion dollars worth of stock. The risk of your stock collapsing from one billion dollars to zero is fairly low. The stock can drop 97.5% in value and still be enough to cover the loan. If you default on payment, the bank simply seizes your stock.

Now let's say an employee joins the company when the stock is valued at $5/share, and that employee gets 100,000 shares. The stock goes up to $20/share. The employee's stock is worth ($20 - $5) * 100,000, or $1,500,000. The employee wants to borrow against those stock options. Before that can happen, they need to be actual shares. The employee needs to spend $500,000 just to own the stock. If the bank will loan money that is worth up to 10% of the value of stock in a privately held company, you couldn't even take out a loan big enough to buy the all stock in the first place. You could maybe buy a few of the shares, but if the amount you want to borrow is too small, the bank simply won't bother, because it's too much work.

That's not the right example in this case. Here theranos gave the CEO the loan to buy the shares. Do employees get the same deal?