Israeli data storage company Infinidat is being sued by its own employees. According to a report in Calcalist, the plaintiffs have Infinidat of diluting their shares and the value of possible future stock options.
So Startup Nation does have a dark side too.
Agroup of 29 both past and present employees filed the lawsuit just last week a lawsuit filed last week against Infinidat over the handing out of stock options. The company’s founder Moshe Yanay, Goldman Sachs, and the entire board of directors are named in the suit.
So what exactly is the accusation here?
Stock options are just that: An offer of stock which can be sold by the recipient under certain terms and conditions at a certain date. When the option is realized, the recipient can stand to make a lot of money if the company’s stock went up in value over time. No capital gains taxes are assessed, but income taxes must be paid as the options are considered as salary for work done.
Well high tech firms offer stock options as an incentive to employees. The idea is the longer that you remain with the same firm, instead of jumping ship for a better offer, the more money you can eventually make. This is because you get more stock options the longer you stay with the same company and you need to wait a specified amount of time before exercising them.
And the company has the added benefit of tying its employees’ personal financial success to its own, in turn incentivizing harder work.
But it’s a little more complicated with startups. What happens with the stock options in a company which has yet to have an IPO and is still raising funds.
Do the options of pre-existing employees lose their value if there are more investors who each own a piece of the company? In some cases, yes. As new investors are brought in old investors and employees may see their share of the company diluted. You may have owned 5% yesterday, but now your share is only worth 3% of the company.
But if the employees had guaranteed contracts ensuring that their options would constitute a minimum percentage value of the firm no matter what, then there would be no dilution of the value of the shares. This is what the Infinidat employees claim.
They have also charged that the company failed to make the required reports to the Israel Corporations Authority about the dilutions.
So what do they want? The suit seeks the restorations of their stock options agreement retroactive to 2014 and other compensations.
Infinidat has called the plaintiffs’ claims groundless. In a statement it said, “The company can only regret that people who benefitted from the company and its activity have chosen to sue it with an idle claim the goal of which is to cause the company damage and to place invalid pressure on it. This is all being done in an attempt to receive benefits they aren’t entitled to.”
Infinidat was founded in 2011 by a team of storage industry experts focused on returning business value to customers by eliminating the compromises between performance, availability, and cost, at multi-petabyte scale for enterprise storage.