This season’s finale of Silicon Valley provided Richard with only the briefest moment of victory before he once again faces losing Pied Piper. First, the arbitrator rules that because Richard used a Hooli computer while developing Pied Piper, under the invention assignment provision of Richard’s employment agreement with Hooli, Hooli would have the right to Pied Piper’s technology. However, because the employment agreement also contained unlawful non-compete provisions, the arbitrator held that the entire employment agreement was unenforceable, including the invention assignment portion. Therefore, Hooli had no right to Pied Piper’s technology, and Richard won! In the meantime, the Pied Piper team triumphs by successfully livestreaming the condor cam video to 200,000 viewers—including Laurie, the head of Raviga Capital. Laurie is so impressed with the technology that once Hooli loses the arbitration, Raviga buys out Russ’s stake in Pied Piper. Raviga now controls three of Pied Piper’s five board seats: Russ’s two seats plus the seat filled by Monica as Raviga’s designee. However, Laurie is also underwhelmed by Richard’s performance as CEO. After gaining control of the board, Raviga promptly votes its majority control to remove Richard as CEO of Pied Piper.
But Pied Piper is Richard’s company isn’t it? Could the Raviga-controlled board really fire Richard as CEO? Unfortunately for Richard, the answer is likely yes. The board of directors hires—and fires—the CEO. Silicon Valley’s history is littered with tales of ousted CEO’s – Steve Jobs from Apple, Jack Dorsey from Twitter, and Andrew Mason from Groupon to name a few. Thus, once Raviga gained control of the board, it gained the power to replace Richard.
How will these board room maneuverings end? We will have to wait for next season to find out, but here are some thoughts on the legal issues that could impact that outcome:
Taking a page from some other famous founders (Zukerberg and Brin, for example), Richard could have included a class of special founder’s shares in the company’s certificate of incorporation. Special classes of stock can help founders protect themselves, but they require advanced planning and founders need a strong negotiating position to impose them on investors. These classes of stock have been referred to as “golden shares”, “founder’s preferred” or “special preferred”, and they provide founders supervoting rights in specific situations, special conversion features and a defacto level of control. Creating non-voting common stock through a post-IPO stock split, as Google did in 2014 and more recently Under Armor, can also be used to retain founder control. Once created, non-voting common stock can be distributed to employees or used to raise money, without diluting the founders’ control over the pool of voting stock. In addition to a special class of stock, founders can negotiate for supervoting at the board level. This means that the board members representing the common stock have multiple votes per director, which can allow founders to retain control of board decisions without bloating the size of the board. Finally, all of these measures can be combined to help founders retain control of their companies through multiple rounds of funding and IPO.
Unfortunately, for Richard, founders have to be in a fairly strong negotiating position to insist on any of these measures and to maintain them through multiple funding rounds. Except for a brief period during the first episode of this season, Richard has never been in a strong negotiating position vis-à-vis his potential investors. Like many founders and CEO’s, it appears he is vulnerable to being replaced by his investors. In fact, while Pied Piper hasn’t made any public announcements about Richard’s fate, the company is quietly taking steps to acknowledge Richard’s changed position. In a move reminiscent of Back to the Future, the company has faded-out Richard’s picture on its website and removed the link to Richard’s profile.
If Richard is no longer CEO, what does that mean for his equity? Most founder’s stock is restricted for a period of three to four years after issuance of the stock (25% vested after 1 year of service and the remaining 75% vesting monthly for the remaining 2 – 3 years). Pied Piper should have the right to repurchase Richard’s equity, or a portion of that equity, at a de minimis price if Richard ceases to be a service provider to Pied Piper. What does that mean? Well, it depends on how Richard’s stock purchase agreement defines “service provider”.
Serving as CEO definitely counted as being a “service provider,” but if Richard is deposed as CEO, what else can he do to ensure his stock continues to vest? Taking a role as CTO, VP of engineering or even as a regular employee would work, but this might be a very hard thing for Richard to stomach after being CEO! What if Richard just continued to sit on the board; would his stock continue to vest? It turns out that there isn’t much consensus on whether board membership counts as being a “service provider” for vesting purposes. On the one hand, it probably isn’t in Pied Piper’s best interest to continue allocating large amounts of stock to a founder who is no longer making much of an active contribution to the company. On the other hand, Richard invented and contributed Pied Piper’s core technology. The board may have decided that Richard isn’t the best person to be CEO, but it seems unfair that he should lose most of his equity stake in Pied Piper as a result. Some stock grants solve this problem by explicitly stating that the founder’s stock continues to vest as long as the founder serves as an officer, director or employee. Without this type of explicit provision, however, there is no assurance that Richard’s stock will continue to vest if he simply “retires” to a board position but no longer works at Pied Piper.
We’ll have to wait for next season to see how Richard and Pied Piper fare, and whether Richard can make a comeback or find an alternate role that revives his image and preserves his stake in the company.