You're suggesting that having classes of shares is unconscionable?
If the idea of preferred shares shocks your conscience, you should spend a lot more time studying how startup financing works (at a nuts and bolts level) before taking the plunge and working at one.
There have been several comments on here lately that make me realize how few people actually understand how equity works in startups. I mean, if people are shocked to learn about preferred stock, what would they think about participating preferred?!?
I guess this is really something you only learn when you are the one signing the financing docs.
It's not so much the fact that they are preferred stock but that you could argue that the stock is re-purchased at what could be considered to be less than market value.
Imagine if you will a publicly traded company that repurchases preferred shares, right before the company agrees to be acquired, for substantially less than the post acquisition valuation. You bet there'd be law suits....
Nonetheless your point stands, if you are considering acquiring preferred stock (whether purchased with cash, other equity, or hard work) you should do so with your eyes wide open.
That's because employees generally can't negotiate the terms of stock grant (exceptions to the employee stock option contract are often board-level decisions), but every venture funding deal is heavily negotiated with lawyers on both sides.
Generally, a company wants to get the best deal with the most lax terms possible, and will try to accomplish that. The preferences given to investors are part of the market pricing of an investment deal. You can no more declare that investors shouldn't have liquidation preferences than you can declare that they should price the deal 50% higher.
>> You can no more declare that investors shouldn't have liquidation preferences ...
Not suggesting that. In fact, I have no objection to any clauses or terms that are negotiated in the original funding, although employees don't always have access to the terms in these agreements. However, these negotiated terms merely form an upper bound to what employees actually get.
There are a variety of situations in which the investors end up with more than the original agreement would suggest, and employees end up with less. Some of them are discussed here: http://news.ycombinator.com/item?id=2958766
Founders sometimes end up with an outcome similar to the investors, but more often an outcome similar to the employees. Employees expect that their interests are aligned with the founders, and that founders will protect them, but this is not always the case.
If the idea of preferred shares shocks your conscience, you should spend a lot more time studying how startup financing works (at a nuts and bolts level) before taking the plunge and working at one.