- October 17, 2020
- Posted by: Stratford Team
- Category: Markets
Tanium cofounder and CEO Orion Hindawi.
AP Photo/Jeff Chiu
- Tanium, a hot cybersecurity startup valued at over $9 billion, recently exercised the right to buy back employees’ equity in the company for $8.10/share — whether they wanted to sell or not.
- The buybacks came about a week before Tanium announced a $150 million funding round that brought its valuation up to over $9 billion. That round came only months after Salesforce Ventures made an separate investment that reportedly totaled at about $100 million.
- Since September 2018, Tanium has placed a clause in its employment contracts allowing it to execute this kind of buyback within a year of an employee’s departure from the company, the company said.
- Rachel Pepple, vice president of global brand and communications, told Business Insider that the company works with an independent third party to come up with a “fair market value” per share for the buyback from former employees. She also said the buybacks were unrelated to its funding rounds.
- The company has recently made tender offers to buy shares from current employees at prices higher than the “fair market value,” Pepple said: $12.95 per share last year, and $11.40 per share this year.
- “This is not the standard for venture capital backed companies,” attorney and stock option expert Mary Russell told Business Insider. One former Tanium employee affected by the buyback calls it a “gut punch.”
- Visit Business Insider’s homepage for more stories.
Like many startups, cybersecurity firm Tanium offers its employees equity in the company as part of their compensation packages.
Unlike many, if not most of its peers, however, Tanium places a clause in at least some of its employment contracts that allows it to buy those shares back within a year of an employee’s departure from the company, according to four people with knowledge of the situation.
What’s more, two former employees say that Tanium recently exercised this clause to purchase their shares, regardless of whether they wanted to sell.
The clause in question says that the company reserves the “option to repurchase all or a portion of the Shares” issued to employees for up to one year after the employee leaves the company, according to a copy of the document reviewed by Business Insider.
In the last week of September, Tanium sent emails to some former employees saying that it would buy back their shares at $8.10 each: “The company hereby informs you of its bona fide intent to exercise the Repurchase Option,” the email reads in part, according to a copy viewed by Business Insider.
“‘Surprised’ was my initial reaction,” one of the people affected told Business Insider.
“I had not heard of that happening before. To me it felt like a gut punch. One of the reasons for working for the company is dangling the carrot of eventually going public or eventually getting acquired so employees would monetarily benefit from that,” the person said.
Rachel Pepple, vice president of global brand and communications at Tanium, told Business Insider that the buybacks were part of a regular process at Tanium. Every three months, Tanium works with an unnamed independent third party to evaluate a “fair market value” for its shares, and then decides whether or not to exercise the buyback clause.
“We go through that exercise every three months. It doesn’t have to do with external factors. They give us what they believe is fair market value for shares, and we go out and offer former employees buybacks,” Pepple said.
Tanium announced a $150 million funding round the week after the most recent buyback notice
Tanium, which describes itself as a “unified endpoint management” platform, counts Salesforce Ventures and Andreessen Horowitz as investors, and has raised over $900 million. Its most recent round gave it a valuation of over $9 billion, up from the flat $9 billion at which it was valued at the time Salesforce Ventures invested just this past June.
Notice of the most recent buyback reached employees came about a week before Tanium announced on October 5th that it had raised $150 million in new funding from investors including Fidelity Management & Research Company, Baillie Gifford, and clients of T. Rowe Price.
The buybacks are “not related to funding rounds at all,” Pepple said.
Pepple says that the clause was first added to employee contracts starting in September 2018, and that it’s exercised its buyback rights twice in 2020 thus far. She also says that any former employee with eligible shares got the buyback notice.
Tanium says that it pays a premium for shares held by current employees
Notably, the $8.10 fair market value paid out under this most recent buyback is less than the $11.40 that Tanium offered to buy shares from current employees in a tender offer earlier this month, a source said.
That price, in turn, was lower than the $12.95 per share it offered current employees in a tender offer last year. SharesPost, a third-party exchange of equity in private companies, currently values shares in Tanium at about $11.40 (though Pepple says this price is inaccurate).
However, Pepple drew a distinction between these share buybacks, which apply to former employees, and tender offers, which generally involve paying current employees a premium over the fair market value. She said that while the buyback price is set by the fair market value as determined by the third-party firm, the Tanium board of directors determines the price per share for purposes of tender offers.
“There is absolutely an incentive to treat our employees well,” Pepple said. “Tender offers are one way we have done that in the past including the $12.95 tender offer and more recent tender offer at $11.40 a share.”
‘This is not the standard for venture capital backed companies’
Stock options and other forms of equity-based compensation are an important part of the startup ecosystem, enticing early employees with the promise of owning a slice of what could be the next big thing. Those shares can lead to a big payday down the line, with major events like Facebook’s IPO or the sale of GitHub to Microsoft often minting new millionaires (or, sometimes, even billionaires).
Clawbacks, however, are less commonly seen in venture capital-backed startups, says Mary Russell, an attorney who counsels individuals on their equity compensation at Stock Option Counsel, P.C. She says that the ability for a startup to buy back the shares held by former employees against their will greatly diminishes the value of a startup equity offer, even if a fair market value is paid.
“This is not the standard for venture capital backed companies,” Russell told Business Insider. She also said: “People joining are expecting to take a cut in cash compensation in exchange for equity. Since they’re making an investment in the equity in that way, it wouldn’t make sense for them to have a clawback. That changes cost benefit analysis.”
A dramatic example came in 2011, when Microsoft bought Skype for $8.5 billion: employees of the then-startup reportedly found that their stock options were worthless because of a clawback clause in their contract.
It’s not the first time Tanium has found its stock option practices under the spotlight. Bloomberg reported in 2017 that Tanium fired employees right before their stock vested, in turn protecting the majority of voting power held by CEO Orion Hindawi and his father, cofounder David Hindawi.
A company spokesperson denied this at the time: “We investigated this allegation, and the data confirm that there is no pattern or practice of terminating employees based on their vesting cliff date.”
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