August 2019 Archives

So your company got bought-out

My company got bought-out in February, and it caught me by complete surprise. The sort of surprise where it wasn't even anticipated so I had no contingency plans on the back-burner.

I was under the completely mistaken impression that we worker-bees would catch wind of something like that before it's reported to the world. But no. Due to SEC rules regarding insider-trading, everyone in the company will get told 5 minutes before the press-release drops embargo (and that drop will happen outside of trading hours). The savvy insider may notice some pre-acquisition activities; a coworker thought he recognized the beginning stages of another funding round, for instance. For a publicly traded company, the biggest clue is an unexpected insider-trading blackout.

Here are a few of my biggest anxieties, answered.

Will I get any money from this buy-out?

That depends 100% on the details in your Stock Options plan. If you are already a share-holder, you will get some of the money. That always happens.

Thing is, many people don't go into the funny money vaporware of private company options unless an IPO is in the offing. Why would you? They're not liquid, and have tax-consequences. You do as a hedge against an acquisition. This mechanism is why twitter threads like this happen:

Company X got bought-out for $750 million, and all I got was fifty bucks.

That was because the person posting it bought 10 shares of stock on a lark, just to have an in. Meanwhile their friend in the other desk came away with a couple hundred thousand; all because that friend put $10K into funny-money vaporware stocks and got lucky.

That's the only way to guarantee you get money.

There is another, but it depends on the details in your stock plan. Read it. If there is text in it like:

In the event of [various things, including a buy-out], all vested options will immediately be owned by the recipient.

you'll get more. This is an acceleration clause, and is one way that companies can either make them less of a takeover target (the preferred investors will get less money in a buy-out, so the price has to be higher for them to get the return they need), or set things up to reward their workers. If you have a clause like this in your options plan, you don't need to buy stock as a hedge, since you'll get it in a buy-out.

Whether or not tax is withheld from this pile of cash is up to the parties involved.

Should I panic-buy all of my vested options?

This has tax consequences either way due to how stock-options are taxed. If your options are $0.50/share, and the buy-out price is $15.00/share, your capital gain is $14.50/share. You'll potentially owe taxes on that difference. I say potentially because this is why you need a tax professional to figure it out. You'll still get a $30 for each dollar spent, but the IRS may clear their throats at you if you handle it wrong.

If you have an acceleration clause, definitely do not. You'll get the money anyway, and it'll make your taxes easier (no capital gain to figure out) to just wait for the cash to show up. It might be withheld at your W2 rate, or it might be held at the Supplimental Withholding rate (22% for most folks).

If you do not have an acceleration clause, consider it. But also consider your tax-year and when they tell you to expect to see the money. If you panic buy the day before Christmas and they tell you that the money will show up in May you'll potentially owe cap-gain on all those shares before you have the money in hand from the buy-out. This could be a bankrupting event.

What happens to my job?

That's out of your hands. You'll get an offer for a new one, or not. Since there is usually time between announcement of the buy-out and the closing of the deal, you will have some time to get a temperature reading about whether or not your job might be on the chopping-block. You're in luck, though. Recruiters know that people flee companies getting bought out, so there will be lots of people looking for you.

A lot will depend on how your current company is doing. If this buy-out is a relief, expect some head-count reductions. If this buy-out is a surprise of synergy, you're probably safe.

What happens in a year?

This depends on how hostile the buy-out is. For the tech marketplace, a friendly buy-out will see roughly the following changes.

  • IT and HR will be among the first merged into the parent company.
  • Sales is likely next, because the smaller company is getting a much larger salesforce out of this deal, and that's how the parent company supercharges the smaller company's product offerings.
  • Design and Marketing may or may not get merged or eliminated, it depends a lot on whether or not the parent company is allowing the merged organization to keep their brand identities.
  • Engineering will be largely untouched, at least for the first year. Too many other parts of the company to make efficient.

Years two and three are where Engineering will see the biggest changes. For a tech company, Engineering is where the crown-jewels are polished and set; you don't fuck with that until you have the rest of the org settled.

Recession is coming

A recession is coming. As someone whose career has endured two big ones, I want to prepare you, the person who hasn't lived through one yet, for what will come.

General Expectations

There are three broad trends that will impact the tech-industry pretty hard.

  • VC will stop, or become very dear.
  • Customers won't have money either, so they'll buy less of your stuff.
  • Bond issues (what companies do when VC can't fill a need) will become very expensive.

If you're aware of how your company makes and spends money this should scare the pants off of you. You don't need to read the rest of this.

But for the rest of you...

Do we know what kind of recession it'll be?

Not yet. The crystal-ball at this stage is suggesting two different kinds of recession:

  • A stock-market panic. Sharp, deep, but ultimately short since the fundamentals are still OKish. Will topple the most leveraged companies.
  • The Trump trade-wars trigger a global sell-off. Long, but shallow. Will affect the whole industry, but won't be a rerun of the 2008-2010 disaster.

If the market is jittery about the trade-wars, a Trump re-election might be the trigger.

Beware of October. While 2008 was a summer recession, the dot-com bust, and the two before it were triggered by a crash in October.

What about twitter? They don't make money. Will they fail?

No, their service is way too valuable. What will happen is that new investment will be incredibly hard to get, making improving shareholder value really hard, which in turn will incentivise them to cut costs. That means layoffs. That means they'll invest even less in safety tools.

It means they may enter and leave bankruptcy several times. Once the corner of the recession is turned, they will be bought by a company that does make money. Possibly an old-guard tech corp like Microsoft or Cisco.

This pattern will follow for any company that depends on continuous investment to remain operational.

What about Uber? They don't make money.

Uber's business model is to break the taxi industry with the support of the stock-market. When the money supply dries up, they'll need to turn a profit. This means layoffs. It also means they'll pull out of their especially unprofitable cities. It will mean rate increases. If they fall as far as bankruptcy, expect big rate increases.

People will learn what Uber/Lyft's true costs are by the end of the recession.

Will my private company fail?

The biggest change will be that living on the runway will become extremely expensive. Any investment will cost larger portions of the company, which means employees will get less in a merger or in an IPO.

If your company can actually get into the black (not on the runway), you're in much better shape. You won't be hiring as fast or at all, but you're much more likely to continue to have a job.

But if you can't get off the runway, and can't earn investment? In the early stages of the recession this will be bankruptcies, layoffs, no-notice shutterings, and sadness. In later stages, when profitable companies start bargain hunting, it will mean buy-outs.

What about my stock-options (private company)?

If your company makes it through the recession, expect them to come out highly diluted.

If your company doesn't make it through the recession, you'll only get paid for the shares you exercise. And even then, you may not get much at all.

What about my RSUs (public company)?

Expect the stock price to tank. That $100K grant, vested over four years? May only be worth $60K by the time it is fully exercised. This is exactly the risk you take by agreeing to be compensated through stock. Your company doesn't owe you the difference between promised and actual value.

The bottom line: start budgeting your year on your salary only, not your stock exercises.

What about my bonuses?

Most bonus programs I've seen have some component in company performance. Expect that to be negative for a few years. Which means expecting to get under, to well under your bonus targets.

If the bonus program isn't suspended entirely. This can happen, especially if they're getting shareholder pressure to cut costs.

What about my benefits?

They'll stay the same for at least the first year. If the recession drags on, you may see some changes. The first to go will be 'wellness' benefits like gym memberships. Next will be continuing education benefits, expect to have to self-finance conferences work previously paid for. Expect work-paid travel to be cut way down. In the second or third year expect to have to cover more of your health-care premium.

There are whole benefits that were standard during the first dot-com boom, and went away after the crash and shareholders demanded more value. It took years for some of them to come back. It happened after the 2008 crash, and it will happen again this time. This will impact even the FAANG companies.

What does bankruptcy really mean?

It means someone outside of your company is holding your company to certain cost targets. Depending on the chapter, this may have power to break employment agreements; capitalism is about creditors getting paid.

Sometimes the court overseer can force the sale of the company to another company. The rules for this are very different than free market sales, it could be the only thing you get out of it is to still have a job. And maybe not that.

Bankruptcies are no fun.

What if I get fired?

You'll get some kind of severance. How much depends on a lot, like whether or not your now-ex company is in bankruptcy. In the early stages, it'll be some cash and an offer to cover your medical expenses for a few months. In a bankruptcy termination, your severance will be the last paycheck and nothing else.

Start building your emergency fund now while the money is still good. If you end up coming to work one morning and can't get past the lobby? You'll be so much happier if you did.

What if I don't work in the bay area? Am I completely screwed?

This will matter less than you think -- hiring in the Bay Area will slump or stop -- but will hit areas that aren't Bay Area, NYC, DC Metro Area, even harder. All areas will have very illiquid if not frozen hiring markets. For the first time in many tech-workers experience, the tech hiring market may become a buyers market. Our salaries are the way they are now because it's been a seller's market for over a decade.

This means that offers will be lower than you'd expect, and your annual raise may not happen. Tech salaries dropped during the dot-com crash. They dropped, for a few quarters, during the Great Recession. The Bureau of Labor Statistics tracks this stuff. It can happen again.

There seems to be a consistent pattern of infrastructure usage for cloud-based startups running on the Silicon Valley pattern of startup growth.

Bootstrapped (no venture capital) Startup:

Money is a precious, precious thing for this kind of startup. Every penny is accounted for, and cost-saving measures like delete-fests and delaying cost-bearing updates happen a lot. Time is cheap, money is not.

In companies like these, cloud expenses will be purely compute. Why pay extra for Amazon/Microsoft to manage the database, when we can run it ourselves on the same sized instance for much less money?

Early Stage Venture-Capitalist Funded Startup:

This company has runway. Money is a concern, but a distant one thanks to VC. Money is cheap, time is not.

In companies like these, cloud expenses run the board. Why spend time managing a database and replication chains when Amazon/Microsoft does it for you? Why bother running container frameworks, when the cloud-vendor has one of their own that works good enough?

  • SaaS it where possible.
  • If it carries state, PaaS it.
  • Offload as much ops-work as you can.
  • Focus on what the company is good at, and don't bother to reinvent management frameworks for state-containing services.

Mid Stage, Starting To See Scaling Issues Startup Company

This company has been around a while, and their infrastructure is starting to run into scaling problems. Maybe the container framework isn't flexible enough. Or the database offering can't handle multi-region failover well, or at all. Money is always there, time is budgeted, but complexity is not cheap.

Companies that reach this stage are starting to feel the corners of the box that the cloud-provider puts folk into. This is when companies start in-sourcing some of the previously cloud-provider offerings.

  • Implement a novel datastore that isn't offered by the provider, because the new datastore solves more problems than in-sourcing causes.
  • Implement a RDBMS replication framework too complex for the provider.
  • In-source container frameworks because scaling-bugs in the provider are that annoying.
  • Many other things.

Global Company

Can't really be called a startup anymore, much as people would like to. Instead, they get the name Unicorn because of how rare it is for a startup to get to this stage without failing or getting eaten by another Unicorn. They're profitable (for SV values of profit), always hiring, and have been managing complexity for years.

Companies that reach this stage have enough compute going on that the question of, "do we need to build our own datacenters to save money?" becomes a real concern. They have a long history of cloud-provider usage, but that relationship has been proven to be a bit to... training-wheels lately.

  • Keep stuff in the cloud-provider that the cloud-provider is good at (S3 buckets, for instance)
  • Put into your own infrastructure things that are central to the business, and core to the offering.
  • Maintain cloud-provider relationships for peripheral products, development work, and business-automation work (that isn't SaaSed already).
  • Open-source the frameworks and homebrew products that have been used for years internally (spinnaker, kafka, kubernetes...)

Immutable servers and containers

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The immutable server pattern has been around for a long time The whole idea around it is you simplify your change-management procedures by making it very hard if not impossible to change system-state after it is launched. It makes that famous auditor question...

If an engineer Leeroy Jenkins!!!  in a change, how do you ensure your approved state is maintained?

...easier to answer.

They're not allowed to log in at all. That should never happen.

No having to explain your puppet/chef application interval and making sure your config-management platform covers everything an engineer can change on the system.

No having to go over your detective controls to make sure sudo usage is monitored and tracked back to change-requests.

No setting up alarms for detecting changes going unapproved.

Turn off SSH on the box, you just can't do it.

Now, this definitely makes the compliance/regulation processes much easier to endure.

It also has benefits that the Docker side of the tech industry has been talking about for years now.

Which is also true of the immutable-server pattern. If it carries state, it shouldn't be immutable. Because I'm well known for running Logstash, I'll use ElasticSearch as an example of how it could be used with either immutable pattern here (server or docker).

  • client-only nodes: Dockerize/immutable that thing. Carry no state, negotiate with the rest of the cluster to direct traffic. Go for it.
  • ingestion-only nodes: These carry local state, so losing one can lose some transactions. But it isn't persistent across more than a few seconds, or a minute. Safe to immutable-ize.
  • master-only nodes:These do maintain state, but in the sense of being the final judge of what gets committed to the cluster's state. These are safe-ish to immutable-ize, but care must be taken to ensure a minimum number of them are up and joined to the cluster. This makes them more complicated to integrate into an immutable framework (min: 3 isn't quite enough assurance).
  • data-only nodes: Filled to the gills with state. So much state, it can take hours for the cluster to fully recover from a loss. Subject these to your full change-management, detective-controls config.

Databases of any kind should be exempted from immutable-ness or containerization.

It turns out much of my career has been in maintaining state-containing machines. It's only recently that I've started working in architectures that even have logic-only nodes. I don't have the reflexes for it yet, but I do know what shouldn't go into a container.

These are good patterns to follow, but know where they won't apply cleanly and accept that.