You would no doubt be surprised. High risk lending is a thing in the Bay Area at least, I attended one of the VC lunches and at my table was a person who did that for a living for hedge fund. Sort of like really really big payday loans, but with worse terms.

He mentioned that one of the most unusual notes they had written was backed by obligations on future projects by the CEO of the company, so if the company folded and the CEO went on to start a new company the hedge fund could convert that defaulted note into a percentage share of the next company. Very creative stuff.

What are the chances the CEO will disclose those terms to prospective employees of his new companies? Near zero?

That's a serious landmine for employees who get part of their comp as stock options.

Edit: edited to reflect what I actually wanted to say (future companies instead of current company)

Absolutely but once you're in the situation where you are securing high risk debt financing you're employees should already reset the future value of their stock to $0. While I don't know if it is a hard and fast rule, it has been true in my experience over the last 30 years in the bay area that when a company is doing this sort of move to survive it has never left any value in the common stock.

I actually meant the employees of future companies of that CEO. Poorly drafted comment on my part.

Yup, it is always a good idea to research the CEO/Founders of a company you are considering joining to see as much of their history as you can. And if you see that they sold their previous company at firesale prices ('or undisclosed amount, not material to the acquiring company') you know that they missed their execution target that time. So a conversation with them is in order.

I have declined a number of offers over the years when my research into the CEO showed they were not the people who could get a company over the finish line, and have generally been pretty accurate in the eventual fate of those companies. Correlation isn't causation, but the CEO is the biggest win/lose variable in the mix.

Why would you disclose it to employees? Do employees receiving stock typically get to review term sheets and ownership schedules before accepting an offer?

I'm sure it would come up in future investors' due diligence but I'm not sure it's information they're required to disclose to employees.

Any employee who wants to value stock (and options) in a private company at more than zero should get that.

They won't give it to you of course, which is why employees should always value illiquid private company stock at zero.

I wasted 20 years at startups chasing stock options. Pre-IPO stock options are stupid. Don't waste your time.

I bet it would be framed as an investment by the bank. Could even look good from a large enough distance.

Generally, collateral - often including stuff owned not by the company, but pledged extra by the owners.

Also e.g. "Proceeds from a planned stock sale must also be used to repay the debt." - so they're betting that the company won't fold until a stock sale and it will manage to sell at least a $5+ million of stock; a reasonable "greater fool" bet can be made here when you earn a tidy profit if someone else pays for the company and lose the money if it turns out that you're the last one in the line and there's no greater fool than you.