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Venture Capital Startups

At Booming Toptal, No Stock for Employees or Investors

Toptal, a service that connects companies with freelance software engineers, is a Silicon Valley success story. Founded in 2010, it soon attracted funding from well-known investors including Andreessen Horowitz and hired scores of employees who were promised stock if things went well and the company raised more money.

And things did go well. So well, in fact, that Toptal has grown at least 30% annually for years—hitting almost $200 million in revenue last year—while breaking even or making a profit, depending on the year. But Toptal has not raised any more money since its seed round in 2012. It hasn’t needed to. As a result, even though it looks like a typical venture capital funded company, all of Toptal’s stock is in the hands of one person, co-founder and CEO Taso Du Val. Even Du Val’s co-founder and colleague for eight years, Breanden Beneschott, has no shares.

The Takeaway
• Toptal stock owned entirely by CEO
• Some ex-employees, shut out of equity, feel tricked by CEO
• Seed round investors backed company with convertible notes

The story of how Toptal employees and investors have so far ended up without any equity in the company is a cautionary tale as venture capital continues to pour into Silicon Valley. For co-founders and employees, it is partly a story about the consequences of not fully understanding employment contracts.

For investors, it offers a lesson in the risks of backing startups with convertible notes, loans designed to convert to equity at a later date, typically during a future financing round. The arrangements often rely on implicit expectations that startups will reward early investors and employees by raising money and sharing the wealth through share grants. But unwritten rules only work when everybody plays by them. 

Du Val told The Information in March he disagrees with the Silicon Valley startup practice of taking multiple funding rounds even if a company doesn’t need the money. In an email to The Information this week he said he doesn’t plan to raise more money, and share the company’s equity, because Toptal, which stands for “Top Talent,” can “grow sustainably without the need for additional capital.” That leaves unanswered the question of how to reward investors and early employees for the risks they took.

More than a dozen ex-Toptal employees told The Information in interviews they feel tricked out of stock in a company that Du Val has said publicly is worth more than $1 billion, based on the price investors have told him they would be willing to pay for its shares. However, the former employees have no recourse because their employment contracts state that they would receive shares only if Toptal took a new equity investment after its seed round. These ex-employees also say some former colleagues, especially those who are based outside the U.S., didn’t join Toptal to reap stock payouts and consider themselves well paid and lucky to be able to work from anywhere.

Anna-Chiara Bellini, a former engineering director who left Toptal in 2017, realized after almost four years at Toptal that the stock grant in her contract—0.02% of Toptal’s shares, if the company took an equity investment—might never materialize. Bellini, who worked for Toptal from Italy, said she managed 10% of its more than 400 employees prior to her departure.

“It felt like there was no consideration for people who were loyal to the company,” she said.

Also empty-handed are Toptal’s early investors, which include Andreessen Horowitz, Quora CEO Adam D’Angelo, early Facebook employee Lucas Nealan, and Gigster co-founder Roger Dickey, all of whom are listed on Toptal’s website. They collectively gave Toptal $1.5 million in seed funding seven years ago, entitling them to around 15% of Toptal’s stock under one condition: if Toptal, currently structured as a limited liability company, took in additional venture funding and converted into a corporation.

Of the seven Toptal investors contacted by The Information, five didn’t publicly comment for this article while two others didn’t respond to a request for comment. “We are not commenting on this,” said Margit Wennmachers, a partner at Andreessen.

Two investors said privately they are upset by the situation but unsure of what to do. “Silicon Valley runs on the trust that people aren’t going to do something like this,” said one of the investors.

Du Val rejected these complaints in his email, saying the investors were sophisticated enough to know what they were getting into. “We have heard from one or two investors that they would like to, in essence, rewrite the terms of their investment...which Toptal has not seen a reason to agree to,” Du Val wrote in the email. 

Similarly, he said he could understand if former employees were disappointed by not getting any equity in the company, but said that wasn’t the same as being duped. “There is a difference between a former employee coming to not like the compensation arrangement they struck with Toptal versus claiming those terms were something other than what they were,” he wrote in the email. “[I]f there is any misunderstanding, I can only assume it comes from [current or former employees’] desire to have a deal better than the one they actually had with Toptal.”

Du Val also said one of Toptal’s early investors previously asked for its money back and Toptal paid it, though he didn’t disclose the name of the investor. He said he wants to pay back all the investor notes, but cannot do so unless they ask for the money back. 

‘Geo-arbitrage’

Du Val founded Toptal in late October 2010, while he and Beneschott, former neighbors in Palo Alto, were developing the service, according to a Florida state court lawsuit Beneschott filed in July. The idea for Toptal came while Du Val and Beneschott were working on startups and struggling to hire engineers because they had to compete with the bigger wallets of Google and Facebook, Beneschott previously wrote in a blog post.

Toptal’s growth since its founding has made it a leader among a group of software companies including publicly traded UpWork and younger startups like Turing and Andela that help companies find and hire engineers, designers and project managers to work for them remotely. Du Val told The Information that he spends half his time in Europe and half in the U.S. The company has no office; all its employees work from different locations around the world.

Du Val said the company quickly became profitable. Part of its business relies on a model that some ex-employees and Toptal investors call “geographic arbitrage.” It’s a scenario in which Toptal pays an engineer in a relatively poor country a locally competitive wage while charging customers in wealthier countries a much higher price—sometimes double what the engineer is paid, according to a former Toptal executive. Du Val disputed this characterization. He said many customers are matched with engineers located in the same state or country, and added that exploiting pay differentials was not the motivation for starting the company.

Du Val is a colorful figure who shares social media updates on his disco DJ skills, which he practices while traveling in Europe. He’s known as a demanding boss, and former colleagues say he has publicly berated managers for perceived mistakes, and offers repeated warnings to employees that anything said during conference calls is confidential. He also configured the Slack messaging app at Toptal to call out employees for spelling and grammatical errors made while using it.  

The story of how Toptal employees and investors have so far ended up without any equity is a cautionary tale.

Du Val’s control of Toptal’s equity became a problem early on for employees who expected the company to raise more money and give them stock. And it was a recurring issue for Beneschott, who claims Du Val created Toptal LLC without his knowledge, just before they launched the service. Beneschott said in his July lawsuit that Du Val verbally promised him 17% of Toptal’s shares, if the company succeeded and raised additional capital. As Toptal’s longtime COO, Beneschott was a big factor in the company’s success, colleagues say. 

Instead, Du Val fired Beneschott in November 2018 after Beneschott allegedly expressed frustration over Du Val’s continued ownership of all the equity, tried to rally colleagues to oust Du Val as CEO, and borrowed more money from Toptal than Du Val had authorized, according to a federal lawsuit Toptal filed against Beneschott on Monday in Florida. In the dueling lawsuits, each co-founder alleges the other was dishonest about his use of Toptal’s money. Beneschott had no comment for this article.

Ex-employees and investors say they would now own Toptal stock worth hundreds of thousands or even tens of millions of dollars if the company had taken outside funding at a valuation of hundreds of millions of dollars or more.

“I was told the conversion [of Toptal into a corporation] would happen in a number of months,” said Aaron Diek, who is based in central Texas and says he worked for Toptal in 2014 and 2015, when Toptal said it was generating $80 million in revenue per year. “I asked on a number of occasions, and the answer [from Du Val] was always ‘it’s coming, it’s coming.’ He was very good about never locking it down to a particular date.”

Oregon-based Scott Ritter, Toptal’s former director of client success who says he was one of the company’s first sales employees, stayed at the company for almost eight years. He hoped he would obtain a percentage of Toptal’s shares as described in his employment contract. Ritter, who left Toptal at the end of last year, said he expected to receive stock worth almost $2 million, based on calculations he and another senior salesperson made.

Mary Russell, a lawyer who specializes in stock options for tech workers, advises her clients to avoid terms like those in employment agreements used by Toptal, which do not guarantee equity awards. “It's up to the individual [employee] to push back to be sure they will have the necessary protections before signing the offer letter,” she said.

Du Val in the past indicated he might be open to taking further outside investment, though not on typical terms. In 2016, he published a note to potential investors on Toptal’s website, writing that the company has no board of directors and that investors would get none of the rights venture capital investors typically get, such as preferred stock with more rights than common stock owners.

Du Val told The Information earlier this year that many entrepreneurs raise venture capital to “satisfy their ego” and without understanding potential downsides. “We’ve understood as a company basically how to invest capital and how to allocate capital appropriately and manage a company privately. I believe you can build more enduring companies over 20 years, 30 years, 40 years” that way compared to companies that raise a lot of money, he said.

Sour Note

Convertible notes and a similar, increasingly popular contract known as a “simple agreement for future equity,” or SAFE, increasingly have been used to help startups raise money faster. But Mike Heath, a startup financing lawyer at Gunderson Dettmer, said the instruments carry the “baseline assumption” they will eventually convert to equity. “The rationale is, people will deal fairly with one another. That doesn’t always happen,” he said. 

The type of convertible note investors used to back Toptal has become common in Silicon Valley, even though some venture capitalists, including prominent early stage investor Fred Wilson, say they can cause unintended problems for founders, employees and investors. 

Toptal’s convertible notes seven years ago capped the company’s value at $10 million or $11 million, depending on the investor. Under the terms of the notes, if Toptal later took equity funding at a higher valuation, early investors would still get a percentage of Toptal’s shares as if Toptal’s value had not changed: The $1.5 million in that early funding round would give those investors about 15% of Toptal in any subsequent equity funding.

In a new twist on that funding arrangement, some hot young startups have issued “uncapped” notes. Rather than convert at a preset valuation, those notes convert at the next valuation at which the company raises money. So, in a funding round at a very high valuation, those early investors, who put in relatively little capital, would end up with a very small percentage of the company.

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One of Heath’s startup clients is in a situation similar to that of Toptal. The startup, which he did not name, raised seed money through convertible notes and does not need additional capital, leading to friction with at least one of its investors. The investor’s only hope for an equity stake is that another company will buy the startup, at which point their funding would turn into stock, he said. In the case of Toptal, at least two of the convertible note agreements used in its funding and reviewed by The Information did not state that the funding would turn into stock in the event of an acquisition. 

Heath said the Toptal investors’ only option, other than waiting for Du Val to agree to an equity funding round, is to ask for repayment of the original loan, with interest.

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