As always the main rule you need to live by is value the equity at zero and you'll be (maybe) happy. Short of being a founder (and thus not really being offered equity) I have never treated these things as anything beyond a minor on paper "bonus". Given you'd be lucky to get anything more than 1% even as a first employee I find them next to worthless as early stage motivators. Which is how everyone seems to play it - "we're all in this together" - mmm. As long as the salary is market rate I ignore equity altogether.
This advice is often given but it's easier said than done. Let's say you work at a unicorn for 3 years and in that time it goes up 10x in VC fantasy land valuation. On paper you have a lot of money and the company reasonably might go public a couple years after you leave.
Let's say you're granted about a year's salary in shares when you first join so you've vested $100K for a round number. When you leave that equity is worth $1 million. Now, you have to come to the table with the $100K to exercise and probably another $200K to pay the tax man. If the company goes belly up, you lose $100K outright and are stuck with a $200K tax credit that you get back in $3K per year deductions for the rest of your life.
Or, you could have exercised the shares as you vested and paid a bit less in tax with the lower 409A valuation..but you're still maybe looking at a $100K total tax bill.
Do you take the risk or not? Or do you end up locked in for a few more years of handcuffs while waiting it out?
It'd be really hard for me at least to walk away from this situation with nothing..so then I have to value the equity as something. And if I want to treat it as 0 it'd be really tempting to wait a few years and see..which again means the equity is worth something to me.
"Let's say you're granted about a year's salary in shares..."
Please use correct terminology. You're given options to purchase shares, or you're given shares outright. The former is what most people are accustomed to: options to purchase shares at a discounted price. The latter, know as a "stock grant," does not require the employee to purchase the shares - they've been granted to the employee.
Both of these things tend to come with a vesting schedule: you don't get to buy all your discounted shares when you start working on day 1, nor are granted shares handed to you because you showed up on the first day.
"Granted a year's salary in shares" would mean there's nothing to buy because those shares are yours.
Also note that RSUs and options are taxed differently. When you're issued a block of RSUs, you almost always do a section 83(b) election, declaring the RSUs as ordinary income. When you sell them years later, the difference in value is then taxed at the lower capital gains rate, rather than the income tax rate.
However, this means you take the tax hit when you receive RSUs, unlike options, where you're taxed when you exercise them. This can be good or bad, depending on the value of the shares, the vesting schedule, etc.
The proper way to do this for a non public company is to settle the stock for RSU based on the vesting schedule AND an exit (IPO/acquisition). This way you don't technically own the stock and have to pay taxes until there's liquidity. I believe this is how a lot of the bigger unicorns are issuing RSUs now.
That article is terrible, please do not use this to make decisions. Just about every "downside" he lists could also apply to an option grant. All equity grants will come with an agreement and restrictions on whom you can sell them to and under what circumstances, whether options or RSUs. Worse, he goes on for quite some time about how little upside you have with RSU. That has NOTHING to do with the RSU itself- it comes because companies that issue them typically do not have much growth left in them, not because it is a RSU vs an option. The differences between them are...
1. Tax treatment (A RSU counts as income when you receive it, an option counts as income when you exercise it and get stock. Remember, many people recommend early exercising options anyway for preferable tax treatment, though this can lead to taking a loss on taxes if the shares wind up worthless. If you are forced to exercise a large block of options when they are still illiquid, you will have a very large one time tax bill, which may be much harder to deal with than smaller ones each year)
2. Risk (For options, you have to dish out cash from your pocket to actually receive stock, which is more risky than if you don't. Until exercise, the two choices are similar)
In general, I would prefer options with a long exercise period, but I may prefer RSU to options with a short one...
So are options. Options at a public company can typically be exercised and sold as an atomic operation from the owner's perspective, with the exercise price (and taxes) being extracted from the sale's proceeds.
I was of the impression that typically a portion of your RSUs are used to handle the income tax from receiving them immediately, so you simply receive less RSUs as opposed to the full amount plus a big initial tax bill. That seems to me like a good way to offset the risk that the RSUs could be worthless in the future.
Yes, the company issuing the RSU's must pay the taxes for you. They do that by selling a portion of the shares to cover the tax (which at least where I've been works out to a bit above 40%).
Not quite -- they must WITHHOLD the tax. You have the option for them to sell the shares. If you'd rather, you can send them a check for the tax bill and hold all the shares.
Care to give a citation there? I'm quite certain you are wrong; there's no reason your employer can't withhold X% of your RSU at vesting time for taxes. In practice all this "really" means is they don't give you the full amount and send the equivalent dollar amount to the IRS instead.
It seems like this would be a very costly alternative for a company since it would essentially be a commitment to buy back 30-40% of outstanding RSU's at the equivalent price (current 409A valuation?). Over time I'd imagine this would become a major drain on cash reserves.
Google, Facebook, Netflix etc. can do this easily since they can just sell the RSU shares on the public market. It's the illiquidity of the shares that makes this option costly for private companies.
Correct. "Withholding" is something that companies do when they're legally required to, such as withholding taxes from your salary. When you receive a grant of stock or options, the company is not as far as I'm aware obligated to withhold anything. It's the employee's obligation to pay whatever taxes they owe. I have never heard of a company doing this, and I'm not sure there is any tax provision for it like there is for withholding from salary.
The common practice of immediately selling whatever percent of shares is required to pay taxes on them is something that employees are choosing to do, supported by the trading firms that help implement vesting schedules and stock sales. Employees are allowed to keep all of their shares and pay tax on whatever next interval is required instead, if they wish. One can only follow this practice of selling shares immediately to cover tax if the company's shares are liquid, i.e., the company is a publicly-traded company with an IPO.
I suppose in theory one could receive stock in a private company, and sell shares on the secondary market to cover taxes, but with private companies you can't take it for granted that (i) you'll be allowed to do that at all, or that (ii) there will be a buyer for those shares at all, or at a price you're happy with. With a publicly traded company, it is taken for granted that there's always a buyer for the shares, and at a price that is commonly known and accepted.
Companies do this so that their employees don't get into tax trouble. There were cases when the employees failed to sell the shares needed for taxes and later on the share price crashed and the employees were stuck with big tax bill. Like what I said in my other comment on options, the granted shares are regular income at market value; and if you don't sell enough and later have losses the losses would be capital loss. Unless you have other big gains to offset you can use only $3000 a year to offset your regular income.
You _may_ be able to perform an early exercise on ISOs and perform an 83(b) election at the same time. I've done that twice now .. the first time worked out very well. The second time I'd anticipate will work out quite well as well.
> You _may_ be able to perform an early exercise on ISOs and perform an 83(b) election at the same time. I've done that twice now .. the first time worked out very well. The second time I'd anticipate will work out quite well as well.
Be careful. If your total grant (not the amount your exercising, but the total amount that will vest over four years) is worth more than $100,000, the amount in excess of $100,000 will lose ISO treatment and be treated as NSOs. So if your grant is worth $500,000, and you early-exercise a single share, $400,000 will be automatically converted to NSOs.
This is an IRS rule, independent of your company's terms.
I've wondered about this before--what is the meaning of the _worth_ of options for ISO treatment? Suppose you have ISOs for five shares, with a strike price of $1: the company goes public, becomes Berkshire Hathaway, time passes, and the stock is now worth $101,000 per share. You exercise one option and immediately sell one share. Do the other four shares remain ISOs?
I've never worked anywhere that would let you purchase before vesting. You accept a new position that came with 20,000 options vesting over 4 years with a one year cliff. At the end of one year, 25% of your shares (5,000) are now vested and you may purchase them. The company might have a valuation for them that's higher than your purchase price, but they are still typically worth "nothing" in that you can't sell them (assuming you're at a startup that's not yet publicly traded.)
Now the remaining 75% of those options might vest monthly over the next three years. "Vesting" does not impart value. It's not indication of whether you're going to make any money at all. Vesting is an instrument used to make sure you stay on with the company for an appropriate amount of time before you're allowed to own part of the company at that discounted rate.
Point: no, you cannot exercise options at grant time, you can only exercise once vested.
Treat is as a lottery ticket. A good friend joined a late startup company in 1999, and in 2000 he was worth 40 million, of which he managed to cash out 10 million before the stock crashed. But that was in the days of IPOs, now the investors prefer to keep the rise in equity to themselves. So you chances of winning the lottery are much less.
You basically just said, totally straight-faced: "Don't do it man, it's not worth it! My friend thought he was worth $40 million but was never able to cash more than $10 million out."
That is literally the structure of your comment. You said, don't do it, you mentioned your friend as for why not, and the punchline to his sad story is he only cashed out 25%, or $10 million, of what he thought he had.
By positioning this as your example of a loss, I don't think you could have made a stronger argument for doing it if you had tried. Anyone who has $10M is set for life and independently very wealthy: they're rich. They could fly every two weeks for thirty years, for example (780 trips) staying at a four star hotel every day of that entire time (100 euros * 365 * 30 years still gets to only $1M). I mention these because they're luxuries. He's loaded.
You missed the second part: "But that was in the days of IPOs, now the investors prefer to keep the rise in equity to themselves. So you chances of winning the lottery are much less."
The second part was basically "but that was during a different time when such a thing was possible" and the not-too-subtle implication is that it's not possible anymore. You know, since startups aren't IPO-ing to nearly the degree that they used to. If at all.
Hence the "it worked for him then, but probably wouldn't work for anyone else, now"
It's not just "aren't IPO-ing" - the rapid sale described is often banned today under agreements where shares can't be offloaded for a certain period after the IPO, so that the banks backing the offering can make their money.
This lockup normally affects everyone who had shares pre-IPO -- investors, founders, and employees -- when did it not exist? It played a large role in making people sad when the Internet Bubble burst, for example.
That's pretty crappy. Another way to prevent anyone but the founders and investors from capturing any value from the IPO.
Instead of selling your shares right after the IPO, couldn't you trade options on those shares in a way that closely simulates selling the underlying equity, and stay within the agreement?
It's definitely crappy. I'm not sure what rules the founders operate under, but it's definitely something investors and underwriters push. Nominally it's to control liquidity, and it does do that, but it does so specifically by handing all early returns to a few of the shareholders. It's not hard to imagine other systems that would, with a bit more work, manage liquidity while letting everyone access the market.
On the options - I'm honestly not sure. I don't think it's barred by contract (since that's about managing actually control and share movement), but I don't know what options trading looks like for newly-IPO'd stocks.
Many agreements explicitly ban just-post-IPO sales these days. His point is that the $10 million in profit would have evaporated if not for a rapid cash-out which is often illegal to perform today.
You're right, but there's a better way to think about the $10 million, called the "safe withdrawal rate".
If you're 65, a good rate is 4%. This means that if you invest your $10 million in a diversified mix of stocks and bonds, and you withdraw 4% per year, then there's a very good chance that you won't run out of money before you die. See: Trinity Study [1]
If you're younger, you should probably use a more conservative rate of 3.5%. That's still an annual return of $350,000, for the rest of your life.
According to your rate of $110 USD per night, you only need to spend $40,000 per year to live in a four star hotel.
First class flights seem to cost around $3,000. You could fly twice a month for $72,000 per year.
Then you have $238,000 left over for food and entertainment. (And hopefully some charity.)
I think we're talking about after-tax money; unless you live somewhere that has a wealth tax, once you've paid all your taxes on income (wages or capital) then you're free and clear.
Common retirement strategies, like a 401K, differ taxes until withdrawal. So taking out 4% of your portfolio every year upon retirement would in fact incur taxes. Since a 401K is massively tax advantaged in your highest earning years it only makes sense to maximize this portfolio while you can thus delaying, but not avoiding taxes, until a later date when you'll likely pay much less on the income.
The issue is not that investors prefer to keep the rise in equity to themselves.
The issue is that in response to Enron's collapse, Congress implemented The Sarbanes-Oxley Act. This makes IPOing massively more expensive since you have to go through a bureaucratic nightmare first. One established, the costs of continuing may be controlled. But coming into compliance is a headache that people want to avoid.
There is an alternative. Vest and buy the shares as soon as possible. This way, your taxes stay low, and you don't actually pay that much for the shares.
You aren't risking hundreds of thousands of dollars, only maybe 10s of thousands.
Not really if you join a unicorn, as this article was about. Unless if your grant is relatively very small, in which case you're not getting much benefit to joining the unicorn in the first place, at least in terms of possible stock upside. If you join a unicorn and your grant is anything less than $100k then you're getting a raw deal. (Again, at least in terms of stock upside, there may be other reasons to join.)
I walked away from a unicorn, a few years ago. If I had stayed - and somehow survived the effects it was having on my mental health - I might actually be a millionaire now.
Instead, I bought a fee thousand dollars worth of shares - only what I could afford. They IPOed at 10x, and I made a down payment on a house.
But that was a rare case: I had some extra savings, the company was clearly succeeding with clear intent to IPO. And even so, I had to wait four years for a payoff.
well, I developed a kind of generalized anxiety - I think it came from the long hours in a fairly large and crowded open-floorplan office - it was just way more constant social contact than I'm comfortable with. I guess if it was stress, it was stress from trying to perform while conforming to an environment that I found profoundly uncomfortable. Also there were nebulous culture mismatches that made me feel like I had to put on a fake persona to fit in.
Most countries have sane tax codes that say you only owe taxes when there's a liquidity event for you. The US is exceptionally bad in this respect of taxing illiquid paper profits, and of onerous lockup periods (SEC rule 144).
An investment of mine that yielded 5X exit transaction ended up being 1.3X for those reasons, and I was lucky - if it closed a couple of months earlier, I would end up with 40% loss and a useless tax credit.
Australia is even worse in that you owe tax on the options, before any event of any kind has occured. I think that they're pushing through legislation now in order to make it more US-like and allow founders to offer these worthless lottery tickets to potential employees :)
I Canada I can defer paying the (income) taxes on the options exercise until 'deemed disposition', which unfortunately also includes going bankrupt. And the possibility to count the capital loss against the income is severely restricted.
The whole premise of a startup in any stage hiring a technical employee and granting them $100k worth of stock options will never happen.
Typically you are granted X number of options. You are never told what the outstanding # of shares are and typically the shares themselves are valued in pennies. The idea is you think to yourself "well, it's 10k shares worth about $5k at the current valuation, but if they IPO and it does what google does...I'll be a millionaire!" You never take in to account that the likelihood of you joining a unicorn like google is near 0% and not taking in to account the time frame of such an adventure, the opportunity cost, dilution and other tricks companies play on their employees before IPOs and acquisitions like reverse stock splits.
And the likelihood of a startup valuation increasing 10x in 4 years (typical vesting schedule) after dilution is extremely extremely unlikely to the point that it is time wasted even entertaining the outcome of such a scenario.
> The whole premise of a startup in any stage hiring a technical employee and granting them $100k worth of stock options will never happen.
That's a false assumption. If they raised $1M seed at a $6M cap, that's 1.4-1.7%. I just pulled up AngelList and there are a number of seed companies offering that along with a decent salary. Taking the $6M to $60M is the risky piece and that's going to be hard, but opportunities to try are definitely available.
> You are never told what the outstanding # of shares are and typically the stock are valued in pennies.
If the CEO is unwilling to tell you when you ask, walk away.
I have literally, personally, gotten an offer that that included options denominated in the current share price in dollars, and it was a little over $100k.
Standard procedure in the valley is about ~$100k in options at present valuation. Granted this is typically calculated without adjusting for the lower valuation of common stock, but the presumption is that in an IPO-like liquidity event the common and preferred stock valuations would be basically the same.
> And the likelihood of a startup valuation increasing 10x in 4 years (typical vesting schedule) after dilution is extremely extremely unlikely to the point that it is time wasted even entertaining the outcome of such a scenario
You don't care about relative growth with options, just the difference between strike price and sell price. A '10x' growth of 0.01 to 0.10 only gains you 0.9 per option; a 2x growth of 5 to 10 gives you 5 per option.
Which is also why looking at your grant as '$100k worth' is silly. Look at how many units you have, and how the price might change, not what the strike price is right now.
I always ask what the valuation is, and they'll usually tell you after some back and forth of "why are you giving me a job offer with a value that I don't understand? You wouldn't keep the salary a secret, so why are you keeping the value of my options secret?"
The good news is that there are a couple new firms that aim to address this exact issue. The firm I work for is called the Employee Stock Option Fund (ESOFund) and we aim to help employees exercise and cover the taxes associated with the exercise (on a non-recourse basis - meaning you don't have to pay us back if the company fails). In exchange, we split the future profits. If you use us, it is a risk-free way to exercise with a chance of significant profit in the future!
Each of our deal is custom tailored to the specific situation. In the situation above, we would help provide the 300k upfront and then we would negotiate terms. We aim to take less than half of the ultimate proceeds, but that ultimately depends on how the company exits. We don't require any transfer or pledge of stock and as a result, we take on a lot of counter party risk. We aim to price it in such a way where it is a good deal for the both of us. As you can imagine though, the deals that cost more money upfront requires a high payoff in the future. The other advantage we offer is that we can move extremely quickly. While other firms might take a few months to decide, we've closed deals in less than 24 hours before.
Or, like one of the companies I worked for, you could exercise your options, wait for a large Fortune 500 to buy them up, but then get told that your bylaws have a special provision that if the sale doesn't clear a certain amount, everyone's common shares are liquidated.
As in we got zero. Nothing. And this software is still in use in a major product.
So no, please don't trust options or exercised shares at any private company to be worth anything.
You want to get paid? Negotiate salary and laugh in their faces when they offer you options.
Everyone wants to believe it won't happen to them and that their company must be special since they work there. But sadly this happens to brilliant people all the time.
Cash is king. Realize you don't understand finance much less finance in an opaque, illiquid company.
Say it 3 times: "Cash. Is. King.".
Max out your 401K and negotiate a company 100% match if you can. Start a private investment account and a savings account and distribute to them every check. Keep doing this. Maximize all this before you become Johnny Wall St. with your illiquid stock options. They're as useful as a penny stock as not as liquid.
Buy some of them if things look bright but classify the investment as your "highly speculative" class of investments and thus ensure they are a small part of your portfolio.
If you ignored the options at the start and got the market rate salary as the OP suggested, then you can just wait it out. That's the point of getting market rate up front.
I think what the OP was really trying to avoid was working for 1/2 market rate for years, and then ending up in your scenario.
So I never understood - it seems like it would cost you 200k to buy something worth a million. Arent there people/institutions out there that would cover the 200k cost in exchange for maybe 300k worth of stock?
Yes, it's my understanding the company will sometimes offer ways to finance the options purchase such as cashless exercise, or promissory note. Alternatively you can taking out a loan (anything from a general loan, to a specialize 'options exercise loan'). Cribbed this answer from the longer form one here: https://www.quora.com/How-am-I-supposed-to-afford-my-stock-o...
There's a growing secondary market for illiquid shares of private companies; I would look into that before letting the options lapse. There a few market-making websites as well as VCs that specialize in this.
You need to be pretty savvy to marshal the whole process and understand the contracts, though - it is not turnkey.
Most unicorns disallow this nowadays to prevent the headache Facebook had when IPOing (very explicit you cannot transfer shares without the companies consent clauses in contracts). Some do controlled tender offers which allow employees to sell some shares, but these happen at the behest of the company, not the employee.
Yes, but ROFR doesn't necessarily hurt you - it just slows down the deal. Also, the VCs who do this also structure the deal in certain ways to make the ROFR price unclear and therefore negotiable.
But, you're right, some start-ups are explicitly putting in an explicit "consent" clause into the ISO. Which I think is unfair, and kind of BS - certainly if such a clause were valid, that would drastically reduce the value of non-publicly-tradeable shares, and it would be nice if the IRS agreed =)
I was at a start-up -- that I co-founded, so I take some of the blame here in not realizing what another co-founder was baking into the cake, but at least I can warn others now -- where the company interpreted "right of first refusal" as "the person trying to sell shares must hire an outside auditor to determine FMV," and refusing to answer any further questions about whether the auditor would actually be given access to the company's books.
On paper you have a lot of money and the company reasonably might go public a couple years after you leave.
If you aren't at the company, it will be extremely ordinary for some funding event to dilute you to nothing. And you will have absolutely no say in the matter, because you're an outsider who, and this will be a direct quote, "isn't moving the company forward."
For me personally, if I was in that position I would stick it out for however long it takes. I cannot imagine having enough liquid assets to be happy to risk $100k like that. I am also of the opinion that even if I did amass such value in equity that there's a high chance I'm going to get screwed on whatever the book value of it today is tomorrow when I actually cash out. If it's so bad that I need to run not walk out of the building then I'd have to just make peace with binning it off.
For most of us where startup equity comes with a real valuation of zero (i.e. anything but the Uber or AirBnBs of this world) - I think you're a lot better off ignoring it entirely.
> to walk away from this situation with nothing
This is where I think you are healthier having at least a market rate salary. Then you've not walked away with nothing - you've been a regular employee and happy with your lot and ready to move on.
>> I cannot imagine having enough liquid assets to be happy to risk $100k like that
$100k isn't much money. If you've taken stock in lieu of $15-$20k/yr salary, $100k is pretty easy to make up (especially considering that many bigger, established companies also pay bonuses and have a better structure for vacation and such).
>> anything but the Uber or AirBnBs of this world
Personally those are ones I'd be really, really scared of having stock in. They've boxed themselves into a corner: they have precisely one positive exit scenario: IPO. At their current valuations (2x and more of their competition), there's no reasonable path to acquisition. And if they continue to take investor money, those late investors are taking care to protect themselves (whether it's multipliers, last-in/first-out, etc). Employees are absolutely last in line to get the scraps unless things go crazy.
After IPO, there's the lockup period, during which there are earnings results (I believe 2?). If those don't go really well, a downturn in stock price can wipe out employee shares pretty quickly. If I'm an employee of either of those two companies, I'm a little nervous.
> $100k isn't much money. If you've taken stock in lieu of $15-$20k/yr salary, $100k is pretty easy to make up (especially considering that many bigger, established companies also pay bonuses and have a better structure for vacation and such).
I'm not sure I follow. If I agree to be underpaid by $20k a year say then I'm not sure how I'd then on reduced salary save up $100k after tax and to the extent I wouldn't "miss it" in exercising the options. If a company is paying bonuses etc I'd rather get the market rate salary to begin with and ignore the stock. I may be heavily misunderstanding your first sentence though :)
The lockup period post IPO is an excellent point - and probably further fuels my cynicism around low percentage stock options as anything but a gamble.
Nope, I think I mis-understood what you were saying :) I thought you had said "risk $100k" meaning $100k worth of on-paper gains, not $100k of cash to gamble on stock. My mistake!
You divide 100k by 3 to account for the risk, and by 4 again to account for the vesting schedule (usually 4 years).
The shares are worth at most 8k in salary, that is if they're somewhat liquid. (which they are definitely not for startup and far away IPO).
If you took a $20k drop in salary for that, you've been not only screwing yourself at this job but also for ALL your future jobs, because future companies will try to downplay you based on your current salary.
You are not going to get a year's salary in ISOs. You're not. At typical ISO strike prices (i.e. prices on the range ones of dollars), that would be an a lot of options. A company is simply not going to do that. It's much more likely you'll get something like half your salary or even less in ISOs (of course vesting over 4 years). This doesn't matter if the company IPOs with a 10x multiple of the strike price, but then again, the company has to have a major liquidity event.
The uncertainty around the current valuation (which everyone has due to the infrequency of material events), the uncertainty around the likelihood of a major liquidity event, its size, and its type make ISOs incredibly hard to accurately price. If anyone says they can do it accurately, they're lying.
What makes you so sure? Say the company is valued at $300M when you join. $100,000 worth of ISOs is 0.03% which is not unreasonable if you're an engineer from say employee 5 to employee 50 or so. Now, the company becomes a unicorn valued at $3B which is 10x.
I believe It's only a $3K per year income deduction if you have no other capital gains to offset it with. If you have future capital gains of $200K, it can make that go to 0 and you wouldn't have to pay tax on it.
> "Or do you end up locked in for a few more years of handcuffs while waiting it out?"
The golden cuffs _will_ click if you stick around any time at all and have even slightly bad luck: Maybe you burn out before vesting, or the company blows an acquisition that would've fit your schedule and your payout/life goals.
Waiting around after you hear the click becomes a losing game. Find another one to play, it's a big world.
I think it is a lot more than 20% to pay the tax man since the gain on the exercise is considered regular income. This could be a big problem if the stock is still illiquid on the day of exercise. And if you later couldn't get the private valuation price the loss is capital loss and only $3000 per year can be used to offset regular income.
It's much worse in late stage startups where expiration means use em or lose em.
It comes down to a gamble. With your numbers, a big one.
But until that choice is forced on you, I say wait. There's no reason for an early exercise. Even with slight tax advantages I'd rather call that the cost of minimizing my risk.
This reads like a Faustian bargain. I've seen this sort of stuff happen over and over to my colleagues, it was worst in the late '90s and early '00s. As much as I wanted to work for a startup once in my life, I learned that the only way to do "startup" is if you are the founder. Practically everyone else is along for the ride.
The US used to have a steady IPO market but that has dried up in recent years. I have read that 2017 might brighten things a bit, but we'll see.
"The US used to have a steady IPO market but that has dried up in recent years. I have read that 2017 might brighten things a bit, but we'll see."
The biggest problem is SOX: going from a private company to public (something I've done twice, now) is a pain, and can take a year to implement all the regulations (you may even need to change source code, and also commit processes). It's even worse on the accounting/business side. More importantly perhaps, it's expensive: you don't want to take your company public unless you can afford the hit to productivity and cash flow.
According to the WSJ, that's why there aren't more IPOs these days.
It would behoove everyone to learn the basics of the terms you are getting stock. I have been through it and know. It will take you a couple afternoons of casual reading to nail it down. But to save you some time let me give you a template for the type of stock option deal you want and you don't want.
Don’t want
1) 409A valuation price is already in the multiple dollar range.
a. Why : You can’t afford to exercise do to tax burden
2) No acceleration – e.g. in the event of sale or IPO your unvested shares DON’T fully vest.
a. Why: You should be rewarded for taking the risk position. Negotiate acceleration or what is known as ratcheting if you are a very early employee.
3) Stock buyback rights – The company has the right to buy back all your shares if you leave the company before a liquidity event
a. Why: This is a prison sentence and a total gamble as you really own nothing until an event.
4) The company is past its 3nd round of funding. In all but rare cases your percentage ownership will be so low at this point it is not worth it.
WANT
1) 409A valuation price is in cents and the stock option plan has an early exercise option.
a. Why: You can file an 83b election with the IRS and pre exercise all your stock for a few hundred dollars. Because the strike price is the same as the value you will owe 0 tax. In addition you start the clock on long term capital gains as soon as the stock does vest according to the vesting schedule. This is how all the big boys make their money. As they vest you actually own them and are free to leave the company at any time with what has vested.
2) Acceleration or ratcheting – In situations like the company gets bought, IPO or management wants you gone and you have unvested shares they must accelerate your vesting schedule. You own them and can go anywhere you want.
3) The company is in seed or series A and you own at least 0.5%+ of the company.
a. The company’s founders do not want to take series C unless they absolutely have to. Ask them!
In short, you will only be rewarded by taking the risk of wasting your TIME in an early stage that has potential with a good founding team. And never forget the freaking 83b election!
> 1) 409A valuation price is already in the multiple dollar range. a. Why: You can’t afford to exercise do to tax burden.
The value of one share isn't meaningful. You should calculate the exercise cost of the whole grant (based on the last 409A) to see whether early exercise + 83(b) would be a good option.
> 2) No acceleration – e.g. in the event of sale or IPO your unvested shares DON’T fully vest. a. Why: You should be rewarded for taking the risk position. Negotiate acceleration or what is known as ratcheting if you are a very early employee.
Acceleration is nice, but why would you insist on it? I'd happily trade it for (substantially) more options. If there's a liquidity event and your options have a substantially positive spread, that's already a positive outcome, so in the interest of minimizing risk, I'd rather improve the scenario where you want to leave before a liquidity event.
> 4) The company is past its 3nd round of funding. In all but rare cases your percentage ownership will be so low at this point it is not worth it.
You should simply calculate your percent ownership (while accounting for liquidation preferences), rather than using the number of funding rounds as a proxy.
2) That is an acceptable nego tactic if you can get it. And by all means you should go back and forth to get as many as possible. But after that you still want acceleration as the terms of your un-vested options are subject to change when ownership changes. Even if you stay with the new company.
4) True, this is just generic advice and usually by the 3rd round your % is going to be VERY low. But of course always consider actual % taking TSO into account.
This is what should have been in the article. The only other thing I wish I knew was that I could early exercise 6 months before the 1 year vesting cliff at my company (it was in the stock agreement, but I didn't comprehend what it meant due to how it was worded).
Would've gotten it with zero tax, by 1 year there was a valuation event that made it non-zero.
This is excellent advice. For what it's worth you really need to know the total number of outstanding shares to appropriately assess the 409A valuation. The stock could split later.
The article is not about early stage companies though: If a company has 20 employees, yes, chances are that the value is zero. But imagine you are joining one of those companies that aren't public, and have a large paper valuation: hundreds, if not thousands of employees, plenty of brand recognition and all that. Chances are that you are still paid in a way that resembles what Google or Facebook do, except instead of RSUs for a company that is publicly traded, you will probably get options, instead of a 100K+ salary premium over working at Google.
So that's the question you have to think about: Is it really sane to think that, say, two million bucks of Palantir options are worth exactly as much as what you get by joining a tiny 10 person startup that a very uncertain future and a far lower ceiling? Would RSUs with a dual trigger also be worth zero?
If this is really the case, everyone joining one of those companies is certifiably insane, because life is not that different from a bigger tech company, the hiring bar is not any lower, and in a publicly traded tech company, stock compensation is often quite large and very real. If that's not the case, then we need to understand those options a lot better than we do in tiny companies, and understand what happens if our stay is just a few years, while the company will remain private for longer, precisely because we expect the company to IPO at some point, making the options be worth something.
"Treat as zero" is bad advice. "Treat as 10x or 50x cheaper than they say it is" - that's good advice. The difference is that 10x more equity solves a lot of problems with equity, and it's not what you'll be gunning for if you think its value is zero.
Right, because it's better to be paid $X/year and have 0 stock options than it is to be paid $X/year and have Y stock options, and no sane person would prefer the latter or negotiate for a Y large enough to be worth something even if the startup doesn't "make it" but is sold for 5x less than they tell you the IPO is going to be. And a company that has already got $200M invested into it is just as likely to fail to grow in value as a 1-person startup operating from a dorm room - it's always a 1 in a million lottery ticket. Only after IPO do RSUs suddenly gain value from 0 to something.
Given loss aversion and human talent for rationalising their sunk cost, do you really think you'll be able to accurately value those options? Treating them as worth 0/ε is a good heuristic, it'll give you the right decision basically every time.
The frame reality however is that the mythology of the windfall is part of the sell and a motivator for many. People _want_ to believe. And secretly in their heart of hearts they do believe.
Not in the reality, which they are likely smart enough to determine by reading their paperwork, and running the scenarios–even if they are treated properly, which seems increasingly rare...
...in the fantasy.
The fantasy is part of the sell. It is part of the glamor (sic) of being able to present yourself to others as _working in a startup in the Bay Area_.
IMO companies with integrity would _actively_ tell people up front what to expect (zero) and to explain why they offer equity anyway.
Were I interviewing, the company that led with that kind of honesty would stand out, regardless of its size or prospects.
I'm always amused how employees are encouraged to think of their stock as zero-value, which founders and investors keep 85% of this "zero value" for themselves.
Founders and investors have favorable terms -- they can take money off the table in the former case, and have liquidation preferences in the latter. So their stock has non-zero value, though it may not be as much as the paper valuation suggests.
Great perspective. It's not that equity itself is zero value. Otherwise, how would founders be able to afford MacLarens? It's employee equity that should be thought of as very low (or zero) value.
Right. It's quite the opposite of GP's sarcastic remark: founders want their employees to value their equity highly so they don't have to pay them as much. The advice in this thread is contrary to this. But yes, I've seen founders be stingy with equity during negotiation using this type of "logic," so the GP's point still stands.
Those are three totally different things. The kinds of stock/options and decision making power for an employee, a founder, and an investor are completely different.
Same goes for standard bonuses, even yearly ones. Pretend you're not getting one until after the money is in your bank account. Expecting them will lead to unhappiness, I've seen it happen to too many people. It's crazy how sad & upset some people can get over huge checks of "free" money, when they expected more than what they got. And of course it's dangerous to spend it before you get it. Bonus plans can and do change after the profits are made, bonus pools can and do dilute and/or shrink unexpectedly, people who didn't help can and do figure out ways to jump into the pot after it gets big, management can and does change their minds and decide to invest or allocate profits. I've watched all of these things happen, and the only way to enjoy it all is to negotiate your compensation as if bonuses don't exist, wait to think about bonus money until it's in hand, and then consider yourself lucky when extra money arrives.
This would be true ... but only because people don't understand how to leverage and negotiate using their power. Engineers have historically been unable to organize large movements and work together. The size of most of these unicorns is still under 2000 people, with less than 4-500 engineers. This means that if you really want to you can "lead a revolt"
Think about it -- any engineer at these companies can easily leave... but imagine if half the engineers left. The company would go down in flames. People need to work together to have companies pass policies that allow them to have longer periods to exercise.
BTW anyone that understands corporate law needs to understand that the fact that you "must" exercise your options by exorbitant amounts is simply a (very dirty) retention tactic. The company can choose not to buy back your unexercised options at par-value for as long as it wants. The fact that it is "policy" to buy un-exercised options is complete bullshit.
"The company can choose not to buy back your unexercised options at par-value for as long as it wants."
That's usually not right for incentive options. Check your option agreement. Most will say that the stock option automatically expires or converts to a non-qualified option if not exercised within 90 days of termination without the company having to decide to do anything.
What you are describing is more commonly associated with restricted stock, where the employee "owns" the shares, subject to the company's right to buy them back at par in certain situations.
It is a legal rule that the company decided to impose in it's corporate charter, they can amend it to be whatever they want. It's arbitrary and not a fundamental part of US/State corporate law (like say race discrimination or workers comp). If they wanted to put a law in that you need to spin in circles and tap dance or else your stock automatically gets reclaimed they could create a clause in their charter for that too. This is what people need to understand: Rules change because people wake up and push for them to be changed.
Lawyers have created all sorts of bullshit to protect the employer and that has become engrained as "best practice"
No, this is a provision in the agreement that's driven by the tax code and IRS regulations. It is required if you want the option to be an incentive stock option. It's not arbitrary.
You're right that you are free to to negotiate a different exercise window prior to accepting your stock grant (and a lot of more progressive companies are offering this). You just can't, under current tax law, get the sometimes beneficial ISO treatment with a longer window.
You are right -- it's not as black and white as I described.
That being said -- It seems like with some "legal engineering" it can certainly be ameliorated (as was demonstrated by Pinterest). My main point is that if people push for their rights then it will incentivize companies to do the legal engineering that is necessary.
At the risk of sounding like I'm self-promoting, we developed a Compensation Model at Qbix that is arguably much better than equity for both the worker and the company.
The model is simple and helps us compensate people for contributing to our products in a way that is consistent with our philosophy: People live lives. Companies build products. Platforms should be free for anyone to contribute.
The core ideas are that you partner per project and you compensate people for their actual effect on your bottom line. All the incentives seem to line up correctly and we use it with our own developers. It is also a good model for anyone just starting out with an idea.
That would work for most employees. Founders know much more about their company and don't offer equity if things go well.
Equity is a good bargain right before the next funding round — when cash balance is low and founders pay with shares.
In this case, the question is how much the stake is worth now. Ask founders the share price of the last funding round. That's the closest market valuation you can get.
Exit conditions (exercise window, sale restrictions) are a must-know, but secondary. An employee can borrow to exercise options and then sell the shares. His company would love to buy shares/options back because they'll have to consolidate equity upon IPO/sellout anyway.
In general, companies go through so much dilution and uncertainty that worthwhile equity stakes start at 5-10% for early-stage startups.
>> Equity is a good bargain right before the next funding round — when cash balance is low and founders pay with shares.
I don't think that's true in general. If it's right before the next funding round, that's when terms can change to wipe you out (whether it's a down round or multipliers). I guess on-paper it can look good ("oh the valuation just increased 5x overnight!"), but it can do some pretty nasty things to your options' "value".
Exactly. I have participated in two of these, one of them were options, the company got purchased but in the 2008 aftermath they sold it for cheap. The next company issued "growth shares", was worthless. Both sites are gone. They paid a good salary though.
I get a yearly cash bonus and I treat that with the value of zero. I don't budget and/or plan it before I get it because there's a chance it's lower/higher than last year or non-existant.
Why should a company offer a market rate salary and equity if the equity is valued at 0? Should companies just not offer equity in that case? Seems like a waste if it is not valued at all.
Assuming equity is worthless the base salary has to be north of 200K to match the market rate (for low level software engineers) for public tech companies. In most Unicorns that's definitely not the case. In fact when I interviewed for Uber they explicitly said that their base salary is low compared to Google/FB but they make it up in equity.
Is the market rate really >$200k for "low level software engineers"? I know a lot of them, even some that are working at Google, and my impression is that $200k is quite high for someone in that category.
It is very high, of course, but this is HN, where everyone knows some friend's roommate's brother who makes $200K at Google--therefore $200K must be the going rate for software engineers everywhere in the valley. I highly doubt that there is a significant number of engineers outside these few outlier companies making those figures.
At Google, assuming what I saw was representative, 220+ k$/yr in total comp (salary + bonus + RSUs) was the standard last year for one promotion up from new grad (SDE IIIs).
(Note that Google RSUs, unlike Uber's, are convertible to cash immediately upon vesting.)
The point is that an entry-level engineer can make $200K at e.g. Uber (think $120K base + $80K equity), so for a newish company (with near-worthless equity, per the advice in this thread) to match that, they would have to pay $200K base.
> In most Unicorns that's definitely not the case.
It's only true because the market allows them to do that. The reason those unicorns lowball on salary is because they can.
If workers keep saying "yes, I'll take tulips in lieu of salary," the market will adjust and pay lower salary.
If workers say "nope, it's a good market out there, I either want salary or very good protections against dilution," then they'll have to pay market wages.
By "low level software engineers" do you mean low level in the sense of relatively low experience or low level in the sense of working on embedded systems etc?
Where are you living where entry level software engineer salaries are north of 200k? I'm in the bay area and base salaries for software engineering with a bachelor's degree range from 90-115k from what I've seen (generally with some stock options and bonus potential added on top but I've never met anyone who's come even close to 200k starting out)
He's talking about total comp, not just base salary. If you're looking at total comp, there's many many late stage unicorns and large public companies that have comp packages north of $200k for entry level engineers straight out of college. I've seen comp packages for many of these companies.
In total compensation, sure. But base salary that high is unlikely. Consider also that Uber isn't public, so the non-salary comp isn't worth anything yet.
And if you consider every day of a romantic relationship as just a one-night stand with them (by coincidence the same person as the night before but no matter, that's just a coincidence), then you'll never be hurt if they cheat on you or even outright leave you. You can never be hurt!
To me, saying "always value the equity at zero" is exactly the same as that. Like, "always value the relationship at zero."
It's not sane advice in my personal experience, especially at the tiniest company sizes.
This has caused me some level of sadness in the past. I worked for a startup (started 6mo after founding with only 20 people and stayed for 8 years to 200+ people and 50million in revenue). During a number of phases, I worked for months at a time giving up weekends, late nights, holidays and even vacation time to get product out the door and beat the competition. I racked up 50k options, mostly all for less than a dollar a share strike price. What was painful to me, was that when I left after 8 years (I grew weary of it all, especially management) I had 90 days to pay $34k to get my options or lose them. That was painful cause I didn't have the extra $34k I could just throw away (had no idea when they'd sell), but hated the fact that none of the thousands of extra hours I worked (I kept track) counted for anything. One could argue I was paid a decent salary. Only on paper though, since my effective hourly rate was 3/4 what I'd have made at a non-startup working a regular 40-50 hour work week (i.e., I had to work more hours to make the same pay I could have gotten for fewer hours at a non-startup).
After I left, 18 months later, the company sold and my options would have earned 10x the $34k of the strike price. I.e., I would have made $300k if I could see the future. I just find it painful that at that moment, all your time is effectively worthless, and only the $34k would have counted for anything, even though I gave far more than that in extra hours.
Needless to say, I am somewhat hesitant to put in too many extra hours anymore and almost never work weekends or holidays.
8 years of weekends, late nights, holidays and vacation for a net of $200K after taxes?
That's ~25K/year so if you would've worked a regular 40 hour week, 20 hours of contract work at anything more than $35/hour would have put you ahead. And you would've still had weekends, nights and vacation.
Yeah, that's the calculation that bums me out too. It's one of the reasons I am somewhat loathe to ever put in too much "extra" time anymore. I enjoy being a part of a startup for more than just the lottery ticket aspect, I enjoy creating things from scratch, etc. But the days of burning the candle at midnight are gone.
"Under capitalism, man exploits man. Under communism, it's just the opposite." which seems to be attributed (without any sources) to John Kenneth Galbraith:
I've also seen it as "Under capitalism, man exploits man - under communism it's the other way around." I always assumed it was a translated Russian proverb, along the lines of: "No truth in the news and no news in the truth" (Major Soviet papers were "Pravda" (the truth) and "Izvestia" (the news).
Can you explain the calculation to me? I am interested to understand the calculation so that I can perform similar calculations when I have two opportunities to choose from.
superqd mentioned he would have made $300K more (i.e. in addition to the fixed salary he was earning) if he had bought the options. I assume that after paying for taxes, he would have still made $200K. Since he worked for 8 years, this is indeed $25K of additional income for every year. If he worked for $35/hour for 40 hours/week for say 50 weeks in a year, his total income would have been 35 * 40 * 50 = 70K. How is this better than his original job which was probably paying him say $80K or greater than $80K as fixed salary every month? It sounds like it would have put him behind by at least $10K. What am I missing?
A very similar calculation is why I left a startup recently and went into contracting. In many cases the realistic best case scenario from working at a startup isn't as good (financially speaking) as the non-startup alternatives.
This leads many people to extremely optimistic assessments of what the future worth of the startup may be (worth > $1billion)
There are many good reasons to join a startup but if the financial motivation is the main one then it's probably not the best route.
I've worked for three startups, each fairly well-known at least at some weird level. Two early stage and one immediately pre-IPO. One of the early ones netted me nothing(1), while the other gained me ~$10K when they went public(2). The third was quite lucrative, and was the least demanding - by far - of life tradeoffs.
(1)Other than a feeling that I'd joined the Witness Protection Program when I fled after an engineering walkout.
(2)Offset by literally years of damaged self-esteem. Pedigree is heavily overrated - with one exception, all the famous people were pretty awful.
Yeah, it's the fact that time isn't regarded as an asset being contributed is what burns my mind. For the salary I received, I think there is a reasonable expectation from the company's point of view that they get 40-50 hours of work. Anything beyond that, in my humblest of opinions, is me investing in the company. There is a logistical problem in accounting for this, obviously, and I'm far from naive on this and other points, but the underlying point remains.
I worked my ass off at a startup, sleeping under the desk, weekends. The usual. At one point I needed a break and informed them that I was taking a break. Two months cycling through Europe.
When I came back, they'd moved and I had the best cubicle reserved for my return. They missed me but only because I forced the issue.
Sorry I don't follow. So you came back, and the company had moved but they reserved a cubicle for you at the new office?
What does you forcing the issue have to do with them missing you?
Interesting work and stock. I was partially vested and I could/should have looked around.
Don Knuth said something (about TeX): never spend more than 2 years of your life on something. I've broken that rule several times but I'd counsel following it on startups, especially someone else's startup.
Sounds like a good rule. One that I happen to have followed when it comes to work and broken when it comes to studying (which I know consider mostly a waste of time).
I don't recall the Stockholm captives being well paid, free to leave at any point, with medical benefits and stock options doing interesting work with some decently cool people. Gotta Wikipedia cite on that, skipper?
I have a similar experience -- albeit only 2 years -- when I left I was faced with $30k (pre-tax) and didn't have the money and was actually in debt. Not to mention the battle scars: anemic, overweight, depressed, and cynical. Luckily I've recovered now and started my own company. In addition to a 10 year exercise window I try to educate our employees and potential employees on this matter and to be as transparent as possible.
I now also regained my stamina to work hard and long hours but I know where my red line lies and take it easy when necessary. I also make "enjoyable work" for myself and our employees a priority. Call it naive or stupid but life is too short to slave away without enjoying the day-to-day of it.
I think an important point would be to ensure a meaningful work-life balance is maintained. Many folks may contribute "too much" time believing that extra time is going to somehow count in someway other than in simply getting product out sooner (though not necessarily of high quality). I was in an environment that was somewhat pressurized, to say the least.
I'm in a somewhat similar situation to you, but on the upward slope. If you don't mind, what was the breaking point for you? How did you approach your recovery? How much time and effort did you put into getting your business off the ground? How do you manage to combine enjoyable work with delivery (nowadays it is the mantra - everything has to at least help provide value for customer)? How do you handle employee's failures and your own?
I have started to think about these points a lot.
Given I basically have a coworking workshop (it's a 3 friend little webdev company), there is a lot to consider.
Solving and handing over of my current obligations, dedicating to my shop, or starting a new one my way, or finding a new place to soak in more experience (I'm 32, but somehow my brain still works well enough to quickly absorb new stuff).
It got exponentially harder to get out of bed and get to work. I just had to quit because I couldn't show up. I didn't give anytime to interview or find an offer. I was also in a weird situation with regards to immigration. So it was reckless but goes to show how much I had to leave.
>How did you approach your recovery?
Joined a big company, got myself on a path to be comfortable financially, took every weekend off. Picked up hobbies, coded for fun. Worked out, visited doctors, changed my eating habits -- got healthy.
>How much time and effort did you put into getting your business off the ground?
Part of 2015 and 2016 I started working and growing on an old side project of mine until got to a point where I knew I could raise money for. I quit in April 2016 and worked like crazy for a month to raise enough money to hire a couple of engineers, get to feature complete, and start selling (which is what we're still working on now). I wrote about it here: https://amasad.me/2016
>How do you manage to combine enjoyable work with delivery (nowadays it is the mantra - everything has to at least help provide value for customer)?
If you're building a startup it's one of the hardest thing you'll ever do so in my opinion you need to align the mission, the product, and the market you're going after with what you care about. Whether that social good, tech, or business. Given that, it's builtin the company that you should enjoy what you're doing. Then hire people that enjoy that too and it all (seems) to fall into place naturally. To sum up, you're in a position to design your ideal work environment -- do it! (You may fail, but that's better than being stuck with something you don't care about).
>How do you handle employee's failures and your own?
I'd be lying if I said I don't push myself and others around me to be the best they can be. You just need to give feedback regularly so that there are never no big surprises (this is something that you can learn by being at one of the good big companies) and always be kind.
Oh you are the guy/one of the guys who made repl.it! I saw it on HN couple of years ago, it's an awesome product, congrats! I hope you succeed with it.
Don't sweat getting older. My theory is that the capacity to learn doesn't really degrade much if it's used regularly, and that the real issue is that incentives change for older demographics.
Did you consider using something like ESO Fund to finance the exercise of your options? If so, why did you decide not to use them?
Assuming they're willing to do the deal, if your alternative is letting the options expire worthless, it seems like a no-brainer to take a loan with no recourse unless there's a liquidity event. You wouldn't have made the full $300k, but at least a solid portion of it.
The story I related was at my previous company from about 4 years ago. I had never heard of ESO Fund until this moment. Thanks for the info, I will definitely look into that (I currently have a lot of options at my current startup).
You are correct! Our pricing depends on a bunch of factors including how much money it takes to exercise the shares and what we think the company can exit at. We aim to take less than half the proceeds. Sometimes if the exercise cost is higher and the exit isn't as high as we anticipate, we may end up taking more than half. For the most part, our business is a referral business and happy clients means they will refer their friends/co-workers.
If you are working for a small company, be a founder, not as an employee. Many folks mistake small companies as startups. Startup is a place where exponential growth happens. From what I see, this is a just a small company which had regular growth. Run if you don't see exponential growth.
But there's the opportunity cost and extreme risk in investing in something you have very little information on. Hopefully you're maxing your 401K and personal savings/investments before this.
In the end though it might be wise to hedge a bit and at least buy some of your options as you go if you believe the company is worth something eventually.
Yeah, it wasn't the case that I couldn't have come up with the $34k at all, it's that it was asked of me in the first place given that I'd already put in far more than $34k of extra hours and had no shares to show for it.
I worked for a "startup" that was going on 10 years old, $190 million in funding and was still not profitable.
I was stunned by just how many of the long-time employees had no understanding of stock options. One was actually flabbergasted to learn that each funding round was creating new shares and diluting the value of existing ones; he thought the founders were selling their own shares to raise the money!
The ignorance was due in part to the company being in a region where startups and stock options are not common. Another big factor was willful deception by the founders, who had been promising to start the IPO process for three years, and frequently estimated that their IPO valuation would be equivalent to Facebook's.
Why didn't you exercise any of the options during the 8 years you worked there? I'm not trying to blame you, but it seems to me like you took the low-risk (short-term cap gains, exercising near an exit event) approach. You lost the compensation by not exercising, but you didn't have to give up any of your own money (free time though, which does suck). You said your salary was decent so you could have exercised at least some of the options to get different tax treatment fora riskier play.
Fair enough, but you could not have known that your options would not go underwater either. At the end of the day, options let you become an investor on the cheap. Hindsight is 20-20. I think the only nice way to do it is a long window for exercising options. Lets you benefit from your hours and also protects you from the risk if it goes south.
Yeah, I get that and realized I could have easily lost money too. It's not that it was painful to me when the company sold, though it did bug me then too, but at the moment of my exit interview and I was given the reminder that I could purchase within 90 days. It was in that moment that I really didn't like that my invested time had no value. Granted, it wasn't the first time in my life I realized this, it's just that I had never invested so much before.
I get your point but I think a clarification is useful here:
the risk for gp was not "options might get underwater" but rather "stock is too illiquid".
Options are underwater if the strike price is less than the current market price; shares in private companies might not have an actual market price but you can estimate them. Underwater options still have >0 value since there's a non-zero chance the stock price will decrease before the expiration date -- of course, if the expiration date is close by and the strike price is much higher than the current price, the option value might be very close to 0. Still, you practically never exercise underwater options (there are some rare exceptions not very relevant here).
In grandparent's case, the issue is not underwater options; they are about to exercise the options and get stock.
At the time they left the company, the stock price was presumably way above the ~$1 strike price. They could have bought (say) $60k worth of stock for only $30k, making a profit on paper. The problem is, as the article says, you have to pay taxes on capital gains AND that stock is illiquid (you can't easily sell it if at all).
I'm sorry this has happened to you. I hope it can serve as a warning to other HNers that companies are not your friends, and that it's never worth investing yourself like crazy in it as an employee. Any employer will throw you under the bus as soon as possible, and possibly has already planned that in the contract you signed. That applies to three person startups all the way to gigantic multinationals.
Enjoy your personal time, leave at 6PM, turn off work email/slack/anything and do things that make you feel better as a person.
Very much this. There is a bit of a lie we all participate in at many companies of nearly every size, though sometimes much more so at small startups. The lie is that we are all on the same team and all in this together. In reality, the team are those who actually own the company by virtue of the money they've put in (i.e., investors). Time is regarded as a non-asset, regardless of how much you invest into the company. So everyone else is there to help the real team succeed, and in so doing, hopefully get a little money yourself. Now, sure, I hope to find rewarding work and such, but I also choose riskier startups because of the potential upside (though likely small).
Sure there is always the possibility of landing work at a unicorn that is worth billions, but I think the problem is that many of us are too willing to give up parts of our lives in the hope of some very unlikely return. Either the industry needs to figure out how to value time as an asset in a meaningful way, or crazy startup-hours need to stop.
Seeing it from afar, it's worse than that. Seems to me it's full of temporarily embarrassed Zuckerbergs that also happen to be blind to the reality of the world.
Or you just charge a good salary, since after all if one is to be an employee, let's keep things good for everybody. To the owners, this is your company, and for us, hell if you want to build a rocket to the moon I'll help but this is my fee.
If you think about it it is quite odd to give free labour to a company because you have shares (or some derivative of shares) in that company AND you are working for them.
Because you may also have lots of shares in companies in an aggregate fund (e.g. in a a pension) but you aren't working for free for those companies.
However people do get caught up in the emotional 'but I own a bit of it', and I think companies exploit this.
Yeah, the golden handcuffs really did shackle me emotionally. I couldn't part with the extra money to pay for the shares, even though I really wanted to leave the company much sooner. So I stayed since that was the only way I'd be able to keep the shares.
While employees may irrationally put in too much effort because of their perceived ownership value, the comparison to slivers of ownership of publicly-traded companies.
One person can make a difference in the value of a 20-person company, and if that person has a 1% stake in the company it can be rational to work longer hours to make that happen.
On the other hand, there is very little that a shareholder of a public company can do to materially affect the bottom line of that company. And as the owner of perhaps .000001% of that company, that person would see very little financial benefit from such effots.
You do realize that this is the exact premise of risk and reward? That company could have been the next Google, Facebook, Amazon, etc, and in those 800-ish days you would have given up for weekends over 8 years you could have earned more than all of your ancestors probably have ever earned in their entire lives. All in a fraction of your single life.
And yet, we still get posts like this one, and comments like yours, that make it seem like somehow the employees are the ones who are getting shafted.
Could equity deals be a little more clear and fair? Sure, absolutely. Maybe make the window for options something more like 6-12 months. It's entirely subjective. But when the "make or break" lifecycle of a startup is 5 years, waiting 6 months to make a critical hire because you have options tied up in people who don't even contribute to the organization anymore is detrimental AND unfair to the current employees.
It shouldn't make you sad that you couldn't exercise your shares. It should make you sad that you didn't work more effectively the capitalize on your options sooner.
I realize I could have attempted to exercise sooner, but that isn't quite the point. The part that really bugs me is the fact that time is undervalued (or non-valued). If I have a high value asset, my time, that I contribute towards the success of a company, it's value goes severely underappreciated by management and the board. That's the problem. If person X puts in money, and person Y puts in time, the time is regarded as a non-asset. Now, you might be tempted to say, "but you got paid", and I did. But I put in far more time than would be required somewhere else. That is, I put in extra time, a non-fungible unrecoverable asset, into the company and had nothing to show for it. Asking for more payment (for the options) is the equivalent of asking me for more time, which I had given plenty of already.
I think this is a good point. If you're going to take options in lieu of part of your salary, they should for fairness be options on preferred shares, because you're effectively contributing cash.
Of course, nobody gives employees options on preferred shares.
So were you the only one working longer hours? And if you felt so undervalued, why didn't you ask for a raise at any point over those 8 years? Perhaps your work ethic is why you were given the options in the first place?
It seems like you're whining about something that you had complete control over, and chose not to exercise.
people make companies and the rules.
you are a person and agreed to this and acted as if you agreed.
you took a bet and it didnt come out financially the way you want. you probably learned alot about startups and what works and doesnt tho.
Well, yeah, the only person I was angry with was myself. The rest of my emotions at the time were mostly of frustration and sadness with a system that undervalues an asset I had invested (my time above and beyond).
A lot of times a company will have a decent idea of what their exit is, based on how much money is in their market, or how much similar companies have sold for. When that's the case, you need to ask.
1/3% (and that's generous) of a potentially $1B dollar company might seem like a lot, but after 10 years of dilution how much will you really have left? If your options dilute by 1/4 (also generous), you've made about an extra $80k a year, and that's not even with taxes subtracted. And don't forget the likely higher salary, raises, bonuses, stock grants, and medical care you get at a big 4 company.
It's possible that you can be be assured to make no extra money working for a startup, even with all the extra risk, depending on how those factors play out.
I think the point is employees under estimate the risk involved. I could make a start up that pays people in literal lottery tickets but I'd be unable to hire anyone because prospective employees can easily see it's a bad deal. Not the case for start ups.
It has always baffled me the way founders treat employees and investors so vastly asymmetric. Ive been involved in rounds close enough to see how just the "hint" of a potential investment and all the numbers, financials, cap tables are sent in one big email to their analyst, while some early employees (who controversially have worked just as hard as the founders) have no clue who owns what and whats going on.
I get it without money we can't build anything, but without good employees everything else is multiplied by 0. The math in the article is unique to the U.S but I think the "essence" behind it is quite universal.
What stops founders from offering a company wide "vested Share vs. Cash" with an equal cap for everyone on each new round ?
For e.g founders planning to sell 10% of their own share while raising round in the so called "Take money off table", all employees get the 'right' to exercise the same option, hence instead of dilution to the new value its straight selling the value they created ? what are the arguments against this ? For the investors its the same, and if the cap of how much of the vested % you get to sell is kept realistically low it should not risk decreasing the value of the private stock.
while i agree with Jaymzcampbell as an employee you're better off with dropping the "hope" the paper value of what you own means anything, however its contradicting to the popular piece of employee incentive tool that is quite essential in acquiring& keeping good talent.
I think we need to coin a new term like: "early employee valley of death" [1]
Post founding, there's this time period where the early employees are expected to work pretty much like founders (long hours, wildly high expectations), but with a greatly reduced salary and the promise of large option grants.
This unfortunately places the employee in a really bad negotiating position with respect to salary increases, etc. as their starting point was so bad. I've been in this spot and a couple years on had to _fight_ just to get a market rate.
Yes totally agree with this. I've been there, but with my eyes open.
It's still a good experience being employee #1 or #2, as long as one doesn't expect any financial upside for it. Therefore, the key is to put a time limit on your involvement.
I've noticed the same thing. Early employees are the ones responsible for building the product, without whom there would be nothing to sell, and yet they get stiffed when more money is raised and shares are diluted.
When I joined a startup I was promised that more options would be issued and we wouldn't get diluted from future rounds, but that never happened. As employee #22 I received options that equaled 0.05% of outstanding shares, and by 2 years later, I was down to 0.015%.
>I was promised that more options would be issued and we wouldn't get diluted from future rounds,
I understand you're only relating your previous misunderstanding but to others reading this, they need to realize that it's unrealistic for employees not to be diluted.
The founders' ownership will get diluted. The investors also get diluted. Therefore, employees are not special in this regard. Getting diluted is supposed to be a Wonderful Event because it means the smaller ownership percentage is worth more.
E.g. Larry Page's ownership of Google Inc got diluted from 50% in 1998 down to 16% in 2004. That smaller 16% was worth ~$3 billion around the time of the IPO.[1] If Larry insisted on "no dilution", no VC would invest money to help the search engine grow and therefore, he would own 50% of a worthless company.
In other words, you can't look at dilution in isolation; it has be combined with the (hopefully increasing) value of the shares.
It wasn't a misunderstanding. I specifically asked if our options would be diluted in the next fundraising round and the founder said NO, they would be increasing our options to compensate for the additional issued shares.
>I specifically asked if our options would be diluted in the next fundraising round
I guess I don't understand what motivated you to ask about dilution and then believing a promise of no dilution since you're supposed to get diluted over time as the startup reaches maturity. Everybody is supposed to get diluted.
If a founder promised me "no dilution", I'd have to conclude either...
1) he doesn't understand the mathematics of selling equity (e.g. to maintain your 0.05% ownership, it has to come from someone else's shares since ownership % comes from a finite pie)
2) he does understand math, but he's a dishonest crook and therefore will tell you anything
3) he's mentally ill
4) he's absurdly generous of which I'd ask the same question 5 different ways to double check the more likely possibilities #1 through #3 again.
Because it was my first startup and despite days of research into how options work, I clearly still didn't understand it all. So I trusted his answer. I had no previous experience or knowledge that would have led me to believe that they wouldn't follow through with the promise to grant additional options over time.
Your company does not 'promise' you compensation - they have a contract for that.
If you were to have some kind of special 'non dilution' clause in your equity position (which by the way, no founder would reasonably agree to), then you should have it in writing.
But it's moot. One or both of you was obviously struggling with how all of that worked, because giving employees anti-ratcheting clauses is not something that should really be done. In fact, it should be avoided if at all possible even with investors.
> ... and then believing a promise of no dilution ...
He expected to get diluted. But he was also expected to be able to offset that dilution by being issued new options. Which would be a perfectly sensible thing for the company to do for a valued employee.
The typical mathematical mechanism that offsets dilution is the increasing price of the shares.
E.g. 16%(diluted) of $20 billion equals $3.2 billion whereas 50%(undiluted) of $0 equals $0. (I assume Larry Page loves the power of dilution.)
Basically, you own less percentage of a more valuable company.
>Which would be a perfectly sensible thing for the company to do for a valued employee.
But it would be nonsensical if the employee's diluted ownership is worth more. They are supposed to be worth more after a dilution because that means another new investor valued the company at a higher amount and bought a piece of the company. That piece of equity to sell comes out of the founders' share, the investors' share, and employees' share. It comes from everybody's share. Don't get mislead by dilution -- it's the total value of shares that matters.
Protecting an employee's fixed ownership percentage might come into play if there was a down round where the company was valued less than the previous round. The founder might then do something extraordinary such as dip into some of his own shares and give them to a valued employee to make up for the loss on share price. That would be an unusual remedy that's done on an adhoc basis. It's not something that's typically spelled out during hiring negotiations so I wouldn't think that scenario would have been the context of OP's question.
Many people incorrectly think of "dilution" as a synonym for "bad". If you work from that flawed premise, you end up asking financially naive questions and become susceptible to unrealistic answers from crooked/incompetent founders. In the spirit of the thread's title, learn to understand that dilution is normal and a good thing.
"I understand you're only relating your previous misunderstanding but to others reading this, they need to realize that it's unrealistic for employees not to be diluted."
It's only unrealistic because of greed. There's absolutely no valid reason this has to happen.
When I joined a startup in 2000 I tried to be prudent and get the relevant financial information. It was virtually impossible. Even after exercising a few shares they wouldn't do it. I probably could have sued them but that would have cost a lot of money. When they raised more money they would also not tell us anything about the terms and the resulting dilution.
You just have to hope for the best and if it doesn't work out you get lectured by some smartasses that it's your own fault.
Yeah. There are a lot of naive people out there, and in particular, "young" is virtually synonymous with "naive" (through no fault of the young people directly, they simply haven't had the experiences yet).
Like the other lies the moneyed interests tell, the belief that it takes a fresh young generation to build good products and that's why the oldest guy in a random SV startup is 26 is pure propaganda that they're hoping you won't see through. People take this bait and go out and work for a free room in an apartment shared by 6 other "founders" and a laughably small basic living stipend that doesn't even equate to minimum wage.
Maybe a few hundred of these people have actually ended up getting rich? And they're "founders". How many early startup employees are doing well right now anyway? How much have Dropbox's first 50 gotten, for example, and how does that contract with dhouston's take-home? The early employee race is really baseless.
It's a fool's game, and people realize that after a couple of years, and then go work at a real company, where they can at least collect a market salary and where prudence and experience aren't plainly mocked and discarded [because these attributes threaten the people at the top].
There's this mug's game where you are treated as belligerent for wanting access to the essential data to value your shares, and stupid if you value your shares at zero.
You flatly cannot build a company without capital.
On the other hand, you might be able to build a company by treating good employees badly, because the employees are either a little naive or they really do value working at your cool startup over money.
You might also be able to simply build a reasonably successful company with not very good employees (in fact this is most companies)
Lots of companies start with minimal capital infusions. The VC roulette is not the way that sustainable companies have been built, historically speaking. Atlassian is a recent example of a bootstrapped tech company that IPO'd.
I personally believe that in a fair world, the people actually producing the value would be allowed to collect most of it, and the people who grease the wheels would collect an appropriate gratuity. However, I acknowledge that we instead live in a world where the people with cash set the rules, and their interest is in preserving and growing their power (which means keeping themselves much richer than everyone else).
Considering VC only really started in 1970s, it is easy to say that it's not the way companies have been built historically. That said, Atlassian is more an exception than the norm. Most really big, successful tech companies took VC or PE money during their history to help them grow (Google, Facebook, LinkedIn, Cisco, Apple, Microsoft, etc.).
I'm bootstrapping now and I'd generally agree with the statement you quoted.
It's expensive and near impossible to find cofounders/enough-"bootstrapped"-help to make building a tech company from scratch feasible, never mind go to open market and get enough customers for the business to be worth running. A "small" 250k check would solve almost all of my issues right now.
So the conclusion is that the people who actually build the thing don't matter, so the company should feel free to fuck them at will. So why should anyone ever work at a startup that isn't guaranteeing them market rate compensation? And don't say the "experience", because that can be gotten anywhere else.
Any truly angry employee can fuck over a business far worse than an investor. Sure, the rare investor with industry swaying clout is dangerious, but low level employees can cripple any technology dependant company immediately with a few minutes effort.
I agree. I worked for one startup which got bought. The founders made money. All of the employees lost money.
One of the founders reached out to me a few years later, asking me to join his new startup as employee #2. I said "yes", but only if I made 10% of what he made. The answer was "No". OK... maybe 1% of what he makes? "No".
Thanks, but no thanks. If you admit that you're not going to share the benefits, I have no reason to get involved.
>> I worked for one startup which got bought. The founders made money. All of the employees lost money.
I think this is far more common than you'd think. Take YC for example. I'd be really curious to compare SamA's outcome vs. employee #5's outcome (for example). Even when companies "fail", founders do just fine for themselves via acquihire, and it's generally not tied to their stock (acquirer values stock at $0, pays off investors, employees get retention bonuses of ~$50-100k over 4 years, founders get quite a bit more than that).
Yeah, most of the time, there is an expectation that employees will be employed at a market salary and remain content with that. There are not many ways around this. If you don't want to be a wage slave, it's hard to wage slave your way out of it. Just have to save until you can start something on your own, rinse and repeat until you strike it big.
The systems are always going to be biased to the people who have the most money. You may realize you're getting a terrible deal, and their deal is much better. That's not an accident, and asking them to fix it is just going to cause suspicion and anger, especially if you blow past their facially spurious justifications for this ("I'm taking a lot of risk here!!!"). The real answer is "I have more money than you, so I can set the terms to favor myself".
I'm not necessarily saying there's anything wrong with that per se. Consider the flip side. You've promised an employee that he will make 10% of what you make that year, even if it means you're tithing that to him directly. You make $10M. Your employee makes $1M. Is your employee going to stay employed, or is he going to leave immediately and use that $1M to start something that will make him $10M next year, or even just to buy a fancy house on the beach and invest from home without having to pull a 9-5 every day? Making your employees too prosperous can really hurt your company, because everyone will quit when there is no longer a financial imperative to work together.
Honestly, in my experience company loyalty in employees has less to do with outside financial incentives and much more to do with internal transparency and mutual respect at all levels of the company than compensation.
One of the main problems with the current startup culture is that everything is overly commoditized. For something to be considered a unicorn it has to fit a model, have a certain amount of growth, a certain amount of revenue, a certain number of employees. This hurts a lot of companies's success because it forces them to adhere to a model that's designed around a totally different organization, ironically the same thing that created "Startup Culture" in the first place.
I would and have much preferred working at companies where I liked my coworkers managers and reports rather than ones where I was simply paid more.
> Making your employees too prosperous can really hurt your company, because everyone will quit when there is no longer a financial imperative to work together.
This is not a problem for law firms, medical practices, consultancies, investment firms, or management in any public company. Your argument is just that employees who are in shitty, exploitative jobs will take the money and run, so try to exploit them harder by paying them less. Are you really "not necessarily saying there's anything wrong with that per se"?
Not every job that requires financial incentive to motivate work is automatically "shitty" and "exploitative". There are a lot of things that we really need to get done, that people wouldn't do if their paycheck didn't depend on it. I would say that probably 85% of the white-collar workforce feels that way about their job, and darn near 100% of the blue collar.
We're talking about getting paid something on the scale of millions of dollars here. I don't know about you, but most people I've met wouldn't keep working if they came into that kind of money, at least not the way that a regular worker works. They'd update to mimic the work-styles of the elite.
There's a reason that law firms, medical practices, hedge funds, etc. tend to be small. Each professional is essentially a free agent, hopping aboard on someone else's infrastructure for a limited time and more-or-less free to call their own shots, including going to another practice or starting their own if they're unhappy. There's a lot of lenience in scheduling, work hours, etc., and it's a very ad-hoc thing, because everyone knows that it's a free association based on goodwill and not based on mandate.
These high-level professionals decide to leave the office at 2pm, take every Thursday off for golf, and go on long vacations regularly. They just tell the people who are waiting on them that their needs are going to have to come later. They will also take long, self-financed sabbaticals.
Just think about the types of companies you listed and ask yourself if things would work out if every company afforded such luxuries to all of their workers. Normal people don't, and indeed can't, have access to those luxuries or nothing would work anymore (at least not until we get more stuff automated).
It's hard enough to get normal workers to collaborate when their paycheck depends on it. Take away that incentive, and suddenly everything looks like open-source; without the financial incentive and the threat of lost stability if a product has poor reception, people do the fun stuff, and leave the hard stuff for someone else to worry about somewhere down the road.
Like law firms and medical practices, teams of developers break apart and most projects can't sustain more than 3-5 like-minded major contributors (because there's little incentive to keep people around and get them to deal with necessary compromise; if people don't like what's happening, they just leave).
Also like law firms and medical practices, it suddenly becomes very difficult to get the help you need in either a cost or time efficient way.
The 9-5 is a different lifestyle. And we need people who work 9-5 more than we need people who close their practice down to go out to Tahoe for 1.5 weeks every time there's a bank holiday.
I'm saying there's not necessarily anything wrong with people who have more money being able to set the rules of the transactions they're involved in, necessarily. I do think they sometimes set rules that are bad, but my point was that the fact that such a group exists is not bad in and of itself.
Removing the general need to trade labor for financial stability is a disaster at a massive scale, and on many different layers. There is a path out of wage slavery, and anyone is free to choose that path and attempt to earn their way out. But a lot more people are content with the work-a-day grind than one might think (not content enough to do it willingly, but not discontent enough to put in the work necessary to escalate outside of it).
In a utopia, everyone would help everyone out and contribute their skills, knowledge, and resources free of charge, just because they saw a need for them. If literally everyone agreed to do this literally all of the time, we'd be in fine shape. But we don't live in such a place, so the need for financially-motivated human labor will continue to exist until we can teach robots how to replace 100% of it.
> We're talking about getting paid something on the scale of millions of dollars here. I don't know about you, but most people I've met wouldn't keep working if they came into that kind of money, at least not the way that a regular worker works. They'd update to mimic the work-styles of the elite.
The context is early-stage startup employees, not white-collar accountants and blue-collar janitors who you are presumably outsourcing to other companies because they perform functions that are not essential to your business. The profits shared by people working for these outsourcing firms are not great because the profits of these outsourcing firms are not great. Your argument is that the profits shared by early-stage startup employees should not be great even when the profits of the firm they were instrumental in building turn out great. How is that fair and why should anyone agree to work with you on those terms?
> These high-level professionals decide to leave the office at 2pm, take every Thursday off for golf, and go on long vacations regularly. They just tell the people who are waiting on them that their needs are going to have to come later. They will also take long, self-financed sabbaticals.
You should really make friends with people who are lawyers, doctors, and in finance. I have friends in all these fields and your idea of these peoples' working hours is a deluded fantasy. They usually work around 50-60 hours a week and rarely take vacations.
I don't want to address the rest of your rant except to say that you should think about why you go so far out of your way to rationalize what to most people is obviously unfair behavior.
>Your argument is that the profits shared by early-stage startup employees should not be great even when the profits of the firm they were instrumental in building turn out great.
Firms that resell blue-collar labor are often very profitable. I'm not sure why you think they're not.
>How is that fair and why should anyone agree to work with you on those terms?
It's a marketplace, supply and demand is going to dictate these types of arrangements. There are many more adequate employees who want to work at an early-stage startup than there are early-stage startups hiring employees.
I'm not saying anyone should agree to work under these conditions, but as long as they do, others have to remain competitive.
I don't personally think it's fair. I think early-stage employees should get a much larger slice of the pie than they typically do. But I'm also not going to indulge the fantasy that being a non-founder and/or non-investor can lead to riches; it may have happened once or twice, but it's very unlikely to happen to you. In almost all successful startups, already an infinitesimally small quantity, the founders and investors get the proceeds from the exit and the employees are lucky to see a bonus check for $5k.
>You should really make friends with people who are lawyers, doctors, and in finance. I have friends in all these fields and your idea of these peoples' working hours is a deluded fantasy. They usually work around 50-60 hours a week and rarely take vacations.
They certainly want you to think that's the case. I'm not going to say that everyone in these professions works a certain way or another, but there are many who have a lax working schedule (admittedly, I don't know any who close their practice for 1.5 wks every time there's a bank holiday, that's called "hyperbole"). I know this because I have friends who are doctors, lawyers, and in finance.
>I don't want to address the rest of your [essay] except to say that you should think about why you go so far out of your way to rationalize what to most people is obviously unfair behavior.
I went out of my way to discuss because you seemed like you wanted to do that. This is a discussion forum, after all.
I couldn't agree more. After I first realized this asymmetry back in the dot-com 1.0 days, I stopped wanting to be an employee and started founding companies. I did take a couple senior VP jobs where I fully understood the equity I was getting and was OK with it.
If you want the large exit, you're either a founder or an investor. It's been that way for as long as I can remember.
Exactly. Equity should balance out the risk and opportunity cost of joining a start-up vs. an established company, NOT compensate for a below-market salary.
Just to play devil's advocate - as a founder, I've both made money and lost money. Some of my ventures were self-funded to failure and I had to write off hundreds of thousands of dollars. I repeatedly remind my family that my worst case is not a year of unemployment with zero income but rather a year of business failure with a painful amount of red ink. One or two experiences like that and you become very aware of the line between people willing to risk their time and money vs. people only willing to risk their time. If you really want to make the leap from employee to co-founder, you can probably do it - but need to bring money to the table or at least offer to work for much less than market (or even zero) in salary, which good founders will typically respect and overvalue since it reflects extreme personal commitment to them and/or the business.
If I'm not being paid market rate, I am being given equity, and I'm expected to work the typical startup bullshit hours, then there is absolutely no way you can say I'm not risking both money and time.
Interestingly, one person's time can be worth more than another person's money. For founders, this is sometimes factored in, but usually not for employees, even when they take a reduced salary. At best, if you are taking a 100k job for 50k, you are, in the eyes of most founders, only investing 50k in the company. But if you are putting in beyond 2k hours that year, anything beyond that is an investment and can be worth far more than the extra time put in by founders themselves. Such invested time is usually completely unrewarded, it's assumed to be "factored in".
> But if you are putting in beyond 2k hours that year, anything beyond that is an investment and can be worth far more than the extra time put in by founders themselves
It's not just the time, but the experience and skill of one person can be immensely more valuable than someone else's experience and skill.
The relationship is always and rightly asymmetrical between founders and employees. What's dishonest is offering shares that can be diluted, can't be transferred, and have no voting rights with the understanding that they are any more than shares in the current company bonus scheme. Employers should just pay a competitive salary and bonus. And employees should wise up - if they want a piece of the action they need to take founding level risks and put a lot of skin in the game.
No idea. It's so hard to find information on and no one, especially the valley rags are interested in reporting on it. I'm curious as to why the community thinks that is.
The chances of it getting through within the next few years, is 100%, in my opinion. There will be numerous opportunities to fix this particular problem, along with all the other items getting targeted when it comes to tax & regulation reform. It has wide bi-partisan support, and the tech industry is the largest lobbyist force on earth now, as such it'll be a matter of how soon rather than if.
One counter point... think about who is lobbying for changes. If it's primarily founders/executives at startups, know they do not stand to gain from removing these golden handcuffs. This bill will make turnover higher and hiring more expensive.
It's a double-edged sword. It also means that it will be easier to hire people away from the start-ups. Google/Facebook/Amazon, even Oracle, must be getting a lot of "nos" from start-up people who'd be interested, but are going to hold out for a year or two more (and who aren't quite valuable enough to buy out).
I think that will solve a lot of the headache around stock options. Exercising options could still be cost prohibitive depending on price and quantity but at least there wouldn't be any tax burden until a liquidation event. There would still be issues around percentage and dilution but that isn't something the government can or should solve in my opinion.
The tax bill will come due when the employee leaves the company; so this doesn't really help a lot.
Has a few caveats that make it inapplicable to early employees too.
Interestingly, it seems like it applies to stock, not just options, which if it didn't come due when you left the company, would be great since it would mean that startups could stop dicking around with options for tax reasons and just issue RSUs.
I think I misread the bill, the part that I saw was "The employee may defer the inclusion of income from the stock until the year that includes the earliest of the dates on which... the employee becomes an excluded employee", I'll go update my original comment.
Still, the conditions when the tax bill is due are unclear, e.g. what does "seven years have passed after the rights of the employee in the stock are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier" mean?
If you read the bill [1] (it's quite short), there are a couple of gotchas, but not too many.
1 - Don't go work for your brother's startup. As a family member of certain C-level employees, you're ineligible. Some C-level employees are also excluded.
2 - Early employees that get more than 1% of the company are excluded.
I'm usually among the first to complain when I see the Republicans advocating policy that I find foolish, but it's certainly not the case here. This is sensible policy that corrects a decades-old problem in Silicon Valley and, for that, I support them in this legislation.
3. If my equity could be valuable, will it be diluted before I can get paid?
4. If not diluted will it ever be liquid?
5. If there is liquidity will I be able to participate? Or only founders/investors.
6. If employees are able to extract real dollars, will I be forced out, laid off, constructively dismissed in advance to reduce what I could take home.
All I see is a succession of methods to keep me on a treadmill chasing a carrot. Until the startup is large enough to take away the carrot.
This perception is hurting startups as a whole. Because you will not be able to convince early stage talent to work for equity. It is not enough to tell engineers 'well you should learn more about equity so you can't get ripped off so easily.'
Your funnel is so spot on it hurts. I made it all the way to number 6, and boy let me tell you, it was a shit show. People being strong armed left and right, people suddenly not showing up to work, and management offering a memo like "Larry has decided to pursue something different in his career."
my experience exactly at the company I worked at for the last 3 years (I'm somewhere else now, and enjoying it much more so far).
Management at that company began to systematically harass, exclude, and demoralize early employees (I was #4) until most of us left. I still haven't got a straight answer, but my best guess is that fear of a down-round was taking over and the founders were eager to claw back some of the equity they had tied up in option grants to early employees, so they could try to protect themselves from the consequences of the impending down round.
> The working conditions at Silicon Valley companies are often the best in the world
I'd take regular, sane hours and the ability to have a life over worthless perks like ping pong/foozeball tables and customized snacks. I can bring my own snacks, buy my own lunches with as long as I have a decent salary and that really doesn't bother me. The only real perks in a startup are more control over what you are building as a team, the challenges you get (or have to, depending on your outlook) to face, and the ownership you feel in the immediate product and it's future development. You sacrifice everything else for that.
Ping pong tables are huge time sinks imo. And some other perks like that. A company where I interned just after college had a lot of perks. A great cafeteria where you could get anything for free, a gym and some pool and ping-pong tables.
End Result: People used to spend at least 2-3 hours of the day in gym/playing ping pong/partying in the cafeteria. Also they used to smell(cause they went to gym but were too lazy to wash up) in the meetings. Then if you needed someone's help then you had to wait until they came back from "play area". And no one used to complain about such a huge waste of time, cause no one wanted to be that guy who shut down the "cafeteria". Needless to say, they ran out of millions of dollars in 2 years, and Founders are in court for said "pocketing" the investors money.
Personally when I see the phrase "working conditions" I immediately think of hours worked, aka "work/life balance." And from everything I've heard, hours at Silicon Valley companies are far from the best in the world.
Either the author ascribes a much different meaning to "working conditions" than I do, or my perception of those working conditions are way off base.
This is all true. I moved to San Francisco to join a startup as an early employee. The biggest surprise was when I had to empty my savings (and borrow a lot of money) to exercise my stock options. I filed an 83b election so that I didn't have to pay any taxes immediately, but $20,000 was (and still is) a huge amount of money.
I had no idea it was so expensive to join a startup. At least, if you want to avoid golden handcuffs for the next 10 years. I'm extremely glad that I made the decision to exercise my options. I left after 2 years because I couldn't stand working there anymore, and I had vested most of the shares that I had exercised.
If golden handcuffs had forced me to stay, I think I might have had a mental breakdown, and I don't think my marriage would have survived.
My former startup is now a very successful unicorn, and I'm starting to hear talk of an IPO in the next few years. I think my shares could be worth somewhere around $5 - $10 million. This is absolutely life-changing money for me, seeing as I could happily retire with $500k.
Sometimes I can make it a whole day without thinking about it, but it feels like I'm just burning time until I can finally cash in these shares and never worry about money again.
Don't spend the money before you have it in your account. It's easy to get lured into the idea that the paper money is real ("worst case, it's worth 25% of that and it's still millions!"). There are still so very many things that can wipe that out, if not to zero, to something that isn't even close to life-changing money.
Easier said than done, but really the best thing to do is focus on your current work / life. Keep saving, keep working hard, enjoy yourself the same way you have. Don't get a fancy new car that you normally wouldn't get because "soon it won't matter". Don't drain savings, don't live a lifestyle you think you'll be able to afford soon, don't shop for houses, etc.
I haven't let it affect decisions like buying a new car. I've been looking at some houses, but just for fun.
I've been working on some of my own startups since I quit this job. I needed to keep my burn-rate low, so I lived in some very cheap countries in South America, South-east Asia, and/or Europe. Basically the "digital nomad" thing, except I didn't move around very much.
And then I somehow managed to find a long-term client, where they only need me to work 4 hours per week, at $150 per hour. This supports a very high standard of living in my current country, so I'm extremely happy with this arrangement. I stumbled into this completely by accident, and I never even knew it was possible. So now I'm thinking that this is a pretty good backup plan, and I've started to put down roots here.
I know this particular gig won't last forever, but I certainly don't want to go back to full-time employment. 20 hours per week would be hard enough.
I do need to keep working hard on my own projects. I still haven't been able to build something that generates passive income. Not even regular income.
I try to make a lot of time for fun projects and hobbies that don't make any money. Things like art and music, and making things. I know it's possible to have a career as an artist or a musician, but I don't think I'm that lucky. I wish I could really pour all of my energy and time into those things, instead of also spending time trying to monetize various apps and websites.
I might try Patreon. I already have some pretty popular YouTube videos, so I think there is an audience for the kind of projects that I love to build. That's what I would be doing if I was retired, so maybe Patreon can help me to do that right now. I might try to set that up when I finish my next project.
I'm about to embark on almost the same path you did, leaving my job and moving somewhere cheaper to reduce burn rate while working on my own projects.
Would you mind if I picked your brain on which countries/cities you'd recommend? I've found info online (e.g. internet speeds listed on nomadlist) to contradict my real world findings, so would be great to get some first hand info.
Can you email me at hello.hnthrowaway@mailhero.io? If you'd prefer me to get in touch another way let me know. Or even a reply here would be hugely useful.
$20k to $5-10m is incredible. That implies 250-500x valuation growth (for example you joined at series A with $20m valuation and the company is worth $10b), which means you hit a unicorn within the unicorns!
Was the company QSBS-eligible when you exercised? There are huge potential tax savings there.
Your shares were NSOs, correct? There are weird potential issues with 83bs and vesting ISOs.
It's worth thinking through how to factor your paper money into your investment portfolio. You could model it as $0 and have an otherwise standard asset allocation (e.g. whatever WealthFront recommends for your risk profile). Alternately you could include it as a huge illiquid stake in a US tech company -- as if your portfolio was 80% in GOOG -- and mitigate your overexposure in the other 20%. Or something in between.
Yes, I was very lucky. I was actually one of the first few employees, and I joined about a year before they raised their series A. Now they are a unicorn, and hopefully on their way to an IPO.
I don't know if I would say I joined a "unicorn within unicorns". Every unicorn has at least 10 early employees with the same story, and according to this list [1], that's at least 1,850 people.
I don't think the company was QSBS-eligible. At least, I've never heard that acronym while reading through all of the paperwork. And yes, the shares were NSOs.
I don't really have an investment portfolio, apart from these shares. I've been working as a part-time freelancer while I try to build my own startup ideas, so I'm not really saving for retirement. The IPO should only be a few years away, so I'm just going to wait and see what happens.
If everything falls apart, I'll try a few more startup ideas. If those fail, my backup plan is to spend 4 years working full-time, living frugally and saving as much money as possible, and then retiring in a country with a very low cost-of-living. I can save around $130k per year as a remote software engineer, and I only need $500k to retire comfortably.
QSBS is a tax thing, not a specific company thing. On the face of it (tech company, exercised very early) it seems like you'd be eligible. The company lawyers should be able to tell you the QSBS eligibility period (something like "options exercised before MM YYYY, when TECH CORP's gross assets exceeded $50 million")
Been there, done that. A startup I had exercised my options in was bought out by a company that was "talking about an IPO in the next few years".
That was several years ago.
The execs and VCs in the original startup got almost all the money in the liquidity preference. Ironic because I did "rock the boat" when I joined by attempting to ask for a better share class. 23 year old me asking for preferred shares lol. It failed.
The bigger company doesn't seem to be in IPO mode anymore. But I have shares of it, with a notional value 1/8th of what I paid to exercise my options.
> Sometimes I can make it a whole day without thinking about it, but it feels like I'm just burning time until I can finally cash in these shares and never worry about money again.
I can relate to that too, for other opportunities, its always good to look forward to something.
I had something similar - except we sold our company to another company, part cash part stock. Over the years we heard through the press that that other company was doing very well, so figured our shares were gaining some real value. Then out of nowhere they sold to an even bigger company, cool... but for a pretty disappointing number, and I got like 50k. The press was all BS to try to drive more funding/etc.
The US really does have a lot of problems with their tax system to be honest.
For a country whose citizens outwardly hate tax, you'd think they would have one of the best, most straightforward, and fair tax systems in the world. But instead you have one of the most convoluted, loopholey, broken systems in the world.
Whereas in countries where taxes aren't as "hated" (Europe, Canada, etc) they don't pay a cent to file taxes, have less loopholes, it is less complicated, and overall fairer.
If I was an American I'd hate tax too, but you guys made it that way. Why does it still cost money to file taxes anyway?
> Why does it still cost money to file taxes anyway?
It doesn't, but because of the complexity of the tax system most people either use a tool like TurboTax or an accountant, to file for them; that costs money.
And the reason it exists, the lobbying of special interest groups for exceptions to taxes. If you can convince people in government that you deserve a break b/c what you're doing benefits society somehow, there's a tax loophole waiting for you too!
And now, there is the multi billion dollar industry that depends on this complexity and doesn't want it simplified. This is a huge waste, we waste money individually that could be spent on actual goods, and the IRS/government waste money needing to audit all the people who decided that maybe they did deserve a tax credit that perhaps they did not.
Roughly 62% of Americans are homeowners[0]. Somewhere between 50-75% of Americans have children[1][2]. If you're in either situation, you're likely unable to file a Form 1040 EZ. While the full Form 1040 is only 2 pages long, the instructions for it are 106 pages long[3] - and when you complete your 1040 you declare, under penalty of perjury, that you filled it out accurately.
Those people may not technically need an accountant, but to do their taxes without assistance would be foolish.
Neither of those situations is particularly difficult to handle. My mother has all of those things and to this day she still files a traditional paper 1040 like she has for the past decades. And she's not college educated or especially bright. She just does it because an hour of her time is worth more than the nearly $200 all-in costs of doing a state and federal return with TT.
The IRS could go towards a model where they assume a standard deduction and verified dependents, and issue a refund based on that. Then let people file an amended return with itemized deductions if they wish.
The tax code in the US can be very complicated, but the for the vast majority of wager earners, it's pretty straight forward. The complications come on the business end of things.
You could use this phrase to describe a lot of advertisements and products. However, these ads work on many people and they are made to feel like if they need it. Considering the argument they make is that with TurboTax you could get more money back than without using it, I am not surprised many people buy this tool and use it.
Basically, politicians want to be seen as "doing something about the problem" for any problem you could think of. And the tax code is their preferred mechanism. So we have a huge mortgage interest deduction which is supposedly to encourage homeownership, deductions for home office expenses, the alternative minimum tax which is supposed to prevent millionaires from not paying taxes, and on and on. Most of these rules don't really do what they're supposed to do. For example, Warren Buffet pays very little tax, despite all the AMT's complexity. Tax breaks for homeownership just get reflected in the price of homes, serving to make them less affordable, not more.
Democrats oppose reducing taxes on principle. And Republicans talk a lot about reducing taxes, but usually find more interesting things to do once they're actually in office. Special interest groups of all kinds lobby heavily for their own distortions of the tax code, and the average voter has little idea what is going on.
The people who get hurt the most by all this are the middle class. The very poor have nothing to take, and generally pay either no or very little tax. The very rich have professionals to handle all this.
It's pretty funny. You get the same tax load in most of canada compared to california, yet the tax laws have far less gotchas like these and you get universal health care.
The canada gotcha's are:
1. Everything is more expensive.
2. Housing is overpriced in employement metros except alberta.
3. You get paid a lot less than the USA anyway.
4. Canada's stock market is pretty much flat compared to the USA in the past decade.
Sometimes just raw amounts of money overcomes a lot of these kinds of issues.
That article brings up ReadyReturns in CA, which it appears has since been rolled into CalFile. Just moved to CA last year: anyone have experience with CalFile vs a paid tax preparation to share?
I lived and worked in the UK for decades and never did my own tax return. When I moved to the US, the UK taxman spotted this, calculated that I had overpaid my taxes for that year and sent me a refund automatically.
I guess the reason why it's not done this way in the US is a combination of the general mistrust of government, and the lobbying from companies like Intuit to keep the tax system as complex as it is now.
I have to be nice about HMRC (the UK tax agency) as they were actually responsible for me making a chunk of money by refusing to make on a call on some options we'd been granted as the result of a ratchet agreement (which we'd actually tried to get removed from our first VC investment agreement!).
They wouldn't make a decision on how things would be taxed until after our IPO - so we were able to exercise the options and sell the shares to cover the worst case tax scenario.
After the IPO nice tax man said that the best case rules applied and we got to keep the money that would have been used to pay our tax bills.
"We are a member of the Free File Alliance, a consortium of private sector companies that has entered into an agreement with the federal government. Under this agreement, the member companies provide online federal tax preparation and filing services at no cost to eligible federal taxpayers, and the federal government has agreed not to provide a competing service.... However, future administrative, regulatory, or legislative activity in this area could harm our Consumer Tax business."
The lack of auto filing is not the core issue with our tax code. The ridiculous complexity is. I want auto filing but the tax code could be drastically simplified without the government directly competing with TurboTax.
There is an income threshold: $64,000 for 2016, which the IRS says covers ~70% of tax payers.
If you make less than that, the "Free File Alliance" let you submit a simple federal return for free using their software. They may try to upsell you on various things and may charge for a state return too.
Above that threshold, your only free options are the paper forms or the "Free Fillable Forms" online. The latter option is really simple. It will copy some numbers from place to place and does some basic math, but beyond that it is very similar to filling in the paper form--it won't help you optimize your return or anything like that.
We citizens have very little say in the machinery. That is the biggest problem we face these days. Regular people have no agency at all and there is a sneering elite that runs things from the coasts who believe everyone else is a sheep to be sheared for them.
More than half the population lives on the coasts. Most of them are "regular people", too.
The problem with our tax code is the same as the problem with the rest of our laws: pandering politicians push through complex and expensive trash because it makes either their constituents or their donors happy.
For taxes specifically, normal people have complex taxes because of the dozens of deductions and credits that hide the handouts (to the wealthy and the poor alike) built into the system. In a sane tax code, there would be no standard deduction or mortgage deduction or earned income tax or alternative minimum tax. There would be a set of tax brackets (adjusted to compensate for the loss of all the complexity) and very little else.
Of course in a sane system, the government would just file your taxes and send you a statement along with a refund or a bill. They have all the relevant information with the exception of some itemized stuff they can't know about, but they could just eliminate that and simplify.
And once again we reach the conclusion that corporate lobbying and donations are the "root of all evil" in American politics, and everything is broken because of it. Larry Lessig has been right all along when he said this needs to be fixed before anything else [1]. Because once this is fixed, everything else should be a lot easier and a lot more in tune with what the People want [2].
It's just so easy and so cheap for corporations to buy votes right now. Why wouldn't they do it, when the upside is billions of dollars and there's no penalty for it? They can literally buy a vote with a few thousand dollars "donation". Set a limit of $200 (maybe $500 for presidential candidates) political donation per year per person and imprison (6-36 months) anyone who dares to do it any other way, fast and furious, no matter who he is, wealthy billionaire or former president. It's the only way to escape this corruption in the system.
Also, I think the U.S. would need a special agency whose sole mission is to look for this type of corruption. In this case, "mission creep" and the purpose of maintaining their jobs would work in the People's favor. The more the agency would do (catch corrupt donors or politicians), the more it could justify its existence. Similar agencies have seen a lot of success in Europe, trying to catch corrupt politicians.
Reformers have been begging to "fix the broken system" regarding lobbying for hundreds of years in this country. Lobbying as a legalized form of bribery is a deeply-ingrained part of the political and economic system the US is rooted in, or in other words it's another dimension of capitalism. Academics and journalists have been writing about this for two centuries and not once has substantial change occurred.
They're lobbying for the government to stay out of the auto filing business, not to keep the tax code over complex. I think the government should auto file but simplifying the tax code would be a huge improvement without that.
This is true in the US as well. And until the 409a rule, it was also exactly how you state. After 409a, private companies are required to speculate at their current value, and this sets the difference between your strike price and that at which you purchased the stock. It's this difference which is taxable. The US was trying to fix something that didn't exactly have a problem, making sure people are being taxed on profits, I think this was misguided.
The unintended consequences are exactly what is spelled out in this article, people with less means cannot exercise stock b/c of two reasons, the cost and then the tax, actually raising the cost on illiquid assets.
This is broken, and causes the type of self imposed entrapment described in the article. If this is a big deal to you, contact you congresspeople and ask them to "fix" or so that the tax is only due on liquidation of the stock.
Just to clarify for those who may be less familiar with Canadian tax rules: Canadian-controlled private corporation is exactly what it sounds like and has special tax rules (including lower tax rates) in Canada.
I interpret the parent as referring to options in a corporation that is not a CCPC rather than options in a private corporation controlled by non-Canadians.
Taxes on income (share value - option strike price) become owing on option exercise.
If the company is not a CCPC and the value of the options at grant-time were less than the share value, you may qualify for a 50% deduction (bringing it in line with capital gains), subject to some conditions (arms-length dealing, etc).
If the company is a CCPC, you can defer the taxes until the shares are sold. If sold within 2 years, you pay full income tax. If sold after 2 years of holding, a 50% deduction applies bringing it in line with capital gains. CCPC status of options are grandfathered in so if the company loses CCPC status, your options continue to qualify.
Keep in mind that going bankrupt/company sale are forced sales of your shares, which could hit you with a big tax bill and since that tax bill is income (not cap gains), the capital losses of the sale cannot be used to offset it!
CCPC employees should also look at the lifetime capital gains exemption (LCGE) of $750000 to reduce taxes on the capital gains following exercise, and the allowable business investment loss (ABIL) which can be used to halve the tax owing in the downside case. In theory, the 50% deductions mentioned above and the ABIL stack to reduce the tax owed to 0.
The problem with all of this stuff is that when you exercise, there is no way to know what deductions you will qualify for under various hypothetical scenarios.
It feels like tax laws just aren't set up to deal with the notion of illiquid shares and fairy tale valuations.
Not, the 50% income deduction also applies to non-CCPC shares if the circumstances are right, which brings the income tax down to approximately capital gains... which at least softens the blow a bit.
Are you sure this is true? That when a public company such as Google gives you shares as part of your employment it is not considered income and taxed that way?
I've worked at several small startups, in the range of seed to C-rounds. Except for the one that I've was co-founder, I never knew when/how to ask or negotiate options things. It always felt like something that was supposed to happen at 'other companies' and not the one I was applying/negotiating to work at.
I know I should in theory ask to see the cap table, but it seems awkward and if shown it right then I'm not sure I'd entirely know how to read it properly (along with the terms), or how to immediately negotiate from it.
Stock options have been frequently presented to me as just a standard piece of paper offered, and not a thing for negotiation. It feels easier and less scary to haggle on salary (which I do quite well at generally).
Is it even reasonable to ask for twice as many options when I'm negotiating? Or is that like asking for double the salary and not reasonable?
Is it reasonable to ask for a bonus (at an A-round startup) in terms of options after being there for a year?
I really doubt any startup would let you see the cap table as a prospective employee, ahead of being hired full time.
It's better to ask what percentage of the company your X amount of shares would be. Company A could offer 1,000 shares and Company B could offer 10,000 shares but you have no idea what amount of ownership that actually is for either of them.
I've always assumed an investor would want to see the cap table prior to investing (is this true?), but thought it odd that such is hidden from prospective employees. Both are investing, just in different ways.
Our waterfall / payout / fully diluted ownership / strike price / last round price is part of our offer package. I can't imagine joining a company without that information.
That's awesome, and pretty cool that you all eat your own dogfood. Think it sends a nice statement considering your product and hope more companies offer that to employees in the future. I'm a customer and big fan.
I've managed to negotiate options by just saying I wanted more, but the company was pretty keen on hiring me, so it worked.
People have been sketchier about showing me a cap table. I didn't think of it at the time, but maybe asking for an anonymized one would have helped since it felt like some of the resistance was because it would have names attached. I ended up just asking if there were more liquidation preferences in there for investors and getting an answer that there weren't, but in hindsight I'm sceptical that there wasn't at least a 1x preference in there.
In terms of reasonableness; companies/founders will have some idea of how much they value options at; it will almost certainly be higher than you value them at, after all paying you more $$ from the investment money is cheaper than diluting themselves. You can probably get a sense for how valuable they see them by just asking them about the possibility of trading off salary vs equity.
In my experience, startup owners vastly over-estimate the value of their equity since they do not price any risk into it.
[EDIT]: I was looking for a job recently and a startup gave me a ridiculously small offer in two variants and they saw 35k of options over 4 years (i.e. 8.75k options/yr) as equivalent to 15k in salary. I'm sure that felt right to the founders since they're growing, etc, but that's a clear over-valuation in their head.
- You probably won't have a 10 year horizon if you are joining a company that is now a unicorn. You likely will if you found a company that later becomes one.
- Sarbanes-Oxley is a big villian here. It pushes the cost of legal compliance through the roof for public companies, forcing companies to delay IPOs until revenue is higher. In addition to delaying liquidity events, it prevents small traders from owning stock in companies that are ramping from ~100m valuation to ~1b, which is why there are so many unicorns now. This hurts normal investors big time, and helps people with access to private markets. (source: friendly neighborhood VC)
- the article doesn't go into AMT, where the IRS forces you to knowingly overpay tax when you exercise ISOs, then (slowly) pays it back over the years.
SOX exists because investors were tired of being defrauded by the people running the companies. While SOX might make it more onerous to go for an IPO, it's still a good thing for public markets.
I suspect the real reason companies stay private for so much longer is not because SOX-compliance is too expensive, but because companies can take advantage of private investors in ways that they cannot get away with in public markets.
> Sarbanes-Oxley is a big villian here. It pushes the cost of legal compliance through the roof for public companies, forcing companies to delay IPOs until revenue is higher.
SEC compliance costs are significantly higher than SOX for public companies, why not complain about that instead?
Neither the few hundred thousand dollars for SOX compliance or the million dollars for SEC compliance are significant pressures on the IPO scene right now. Wider availability of VC cash, better strategies for repeatedly going to that well, and big investment deals for private companies with large public companies (i.e. the Uber/Lyft model) have changed the market pressures so that IPOing isn't as valuable as it once was.
The most poignant line is near the end: "It's really tough to ask these [questions] without sounding obsessed with money, which feels unseemly, but you have to do it anyway."
Basic due diligence on a startup offer is asking for # of shares outstanding, last company valuation, strike price. Advanced due diligence is talking about things like extended exercise windows, secondary sales, and liquidation preferences.
Unfortunately, basic due diligence is rare enough that if you do ask a potential employer the latter kind of question, there is a risk of coming off as overly mercenary.
The way of talking to potential employers that I've seen work is to ask questions in increasing complexity, sharing your conclusions along the way, and signalling why you're asking these questions.
After you ask the basic due diligence questions, you can share the math you're doing on stock value various exit scenarios (a good base assumption is to assume an exit at the current valuation).
That typically lays good groundwork for having "advanced" due diligence conversations about an extended exercise window and shows you're serious. In contrast, if the company isn't willing to share valuation or total share numbers, this is a huge red flag as it prevents you from doing the basic math.
This is a tool I built giving engineers the questions they need to ask, in order to do that basic math on what their stock is worth: http://www.optionvalue.io/
This is exactly right. If a company offers you shares or options as pay for your work, they're asking you to be both an employee and an investor. If the company's executives become skittish or sullen when you ask questions any sane investor would ask ("what's my upside?"), that's a red flag. Be careful.
> The correct amount to value your options at is $0.
Agreed, but ...
Try to negotiate a deal such that the employer gives you a one-time sign-on bonus which, after taxes, will pay for the early exercise of the offered equity, and get the employer to give you the paperwork for filing 83(b) election.
This values the equity at $0, but prevents drastic financial implications (at least for the initial grant) should it actually become worth any real money.
This is exactly what we do at my startup: our options are early-exercisable, we pay a bonus equal to the strike price, and we set up the 83(b) paperwork for you. (We don't gross up the bonus, so you will owe taxes on the strike price, but so far that hasn't been a problem for anyone; early-stage strike prices are manageable.) Are other companies doing this as well? It does seem like the sane approach.
Thanks for validating that this scheme is not crazy!
I have a follow-up question though. Every time a new employee joins, you are essentially shelling out the cash equivalent of their equity's FMV. This way, the offered equity is twice as expensive for you - once as equity itself, but then again as the cash bonus. Has this caused problems for your cash position? Is it sustainable as Scalyr grows into higher valuations?
It's cash-neutral for us. Suppose a new hire gets 10,000 options with a strike price of $1.00. (These are not real numbers.) They will pay $10,000 up front to early-exercise the options. We give them a bonus of $10,000. Net cash impact to us: zero. (As I noted, there is some cash impact to the new hire, as they will have to report $10,000 income and pay taxes on it.)
We've lost the opportunity to earn a little money from the new hire by selling them stock at a nonzero price. But that's not an opportunity we want.
As we grow into higher valuations, the tax impact may become an issue. We might have to start grossing up the bonus. Also, if someone leaves before they're fully vested, all this has to be unwound and I'm not certain of the tax implications there. We haven't worried much about that because at this stage no one is leaving. :)
IANAL, but I do not believe you can file an 83(b) election for options. You can only file an 83(b) for NSOs or restricted stock. I am not sure if, post-exercise, the options become "owned options" or "restricted stock" and how the IRS views the difference between the two.
Some companies allow you to "early exercise" your options before they vest. If you do that, you'll certainly want to file an 83(b) election for that exercise, when the spread between strike price and fair market value (FMV) is $0. If you don't file the 83(b) and the FMV goes up, each future vesting period will be subject to taxation.
And all startup employees are expected to know all these rules? Before I joined a startup I spent days researching all the rules about options and I still didn't quite understand all the nuance.
But wait, there's more... Let's say that you decide it's too risky to early exercise in year 1, but by year 3 things are looking pretty good and you early exercise all your options.
Let's say your strike price is $0.20, and now the FMV is $0.75, and you're exercising all 10,000 of your shares, including 2,500 that haven't vested yet. When you exercise, you file an 83(b) so that you get taxed (AMT) on the full $5,500 spread in year 3, even though you don't technically own those year 4 shares yet.
Then, you leave or get fired 3 months later. Pursuant to the early exercise agreement, the company can repurchase 1,875 shares at your $0.20 strike price, giving you $375 back. Unfortunately, AFAICT, there's no way for you to reclaim the tax you paid on the $1,031.25 spread for those 1,875 shares; you just eat it.
Yeah, this stuff is complicated, and sadly it seems to fall to each startup employee to educate themselves.
Section 4.03 of IRS bulletin 2012-28 (https://www.irs.gov/irb/2012-28_IRB/ar12.html) states, "If property for which a § 83(b) election was filed is forfeited while substantially nonvested, § 83(b)(1) provides that no deduction shall be allowed with respect to such forfeiture. Section 1.83-2(a) further provides that such forfeiture shall be treated as a sale or exchange upon which there is realized a loss equal to the excess (if any) of (1) the amount paid (if any) for such property, over (2) the amount realized (if any) upon such forfeiture. If such property is a capital asset in the hands of the taxpayer, such loss shall be a capital loss."
I'm not an accountant nor a tax expert. My layman's understanding of that clause is that (1) the amount paid was $375, and (2) the amount realized was $375, so the buyback nets $0.
Could the nonvested shares somehow be defined as "a capital asset in the hands of the taxpayer" with a cost basis of the FMV at exercise time, even though they're not technically property of the taxpayer yet? Perhaps it depends on the specific terms of the early exercise and the buyback?
It is also important to evaluate the likelihood of liquidity events and vesting schedules on the decision (if available) to file an 83(b) election. You may be paying tax on something you never get.
It's still tough from a liability standpoint as the loan needs to be 100% recourse for tax reasons, so you have to pay it all back even if the company goes under. With high valuations this might be a lot of money. You are therefore investing more in an underversified portfolio increasing an already high startup risk.
I may be wrong, but I think that in order to early exercise the underlying Option Plan has to allow for it which isn't always a given these days for some reason.
Early employees usually get hosed, and I wouldn't sign up again unless comp was at least equivalent. The best large companies are much better run than they were 20 years ago, generally pay much better, offer a fair chance of stock appreciation (and it's liquid!) while offering more opportunities for professional growth. I speak from a lot of experience.
True story: I was the first employee at a startup that raised > 15M from top investors and sold to a big SV company for several multiples of the total investment. I left before the company sold, but had low single digits of ownership. Terms of the sale: investors were made whole, founders made 'house-changing' money (low millions each) + really nice salaries. Common stock was zeroed.
Granted, the founders probably had to work hard to sell the company, but as an early employee, I took quite a few risks as well and the reward was definitely asymmetric.
worked hard, sure, but if the sale was for multiples of what was invested it's hard to see any argument for screwing early employees (aside from, because we can and we like more money for ourselves instead of these people we never expect to see again)
I was so naive when I joined my first startup. When we were purchased, it came to light that the main guy never got around to signing my stock option agreement. He is a fucking mensch and signed it after the fact.
At my first startup, the share option terms and conditions had a clause allowing the company to arbitrarily change any condition in the contract. Of course we signed it and didn't think much about it. At the IPO this clause was very predictably used to extend all the employees'[1] vesting schedule to many years after the IPO event. By that time the options were worthless because the company was acquired in a fire sale.
[1] Naturally by "employee" they didn't include the founder or members of his family who worked there.
That sounds like it wasn't a contract in the first place. Doesn't it have to in some way bind both parties to be considered a contract?
I would almost think that a lawyer would be able to convince a judge that that "contract" was written so adversely that the "arbitrary change" clause should be struck, since the rest of the contract is essentially illusory if it remained.
Sure, but if it got into a courtroom, the judge would probably be apt to rule in favor of the party that didn't write the contract, so I would guess that rather than invalidating the entire contract, they would strike that provision. Not a lawyer though, so who knows.
I think I left when I was 25 or 26, and I was in no position financially or otherwise to start legal action. That was 20 years ago and you live and learn.
Wow. Did they implode while the employees gave them the finger as they walked, or did it take a while? (This matters a lot to the remaining shareholders, since there is usually a post-IPO lockup to protect new investors).
Seriously, I can't figure out why this doesn't immediately escalate into noisy public events that tank the stock before the founders cash out (e.g., strike / unionization).
I helped an ex of mine work through the negotiations of an executive pay package. Everyone that's been around upper-management is fully aware of this and works clauses into their contracts to prevent it. It's such crap.
That is an interesting thought! I wonder if he did undertake some risk. I just emailed him, as I never properly thanked him. Maybe if he emails back I'll ask.
Also he negotiated a year off of our traditional 5-year vesting (at the time anyway) in the salt mine that is Microsoft, though he was never to take a position there himself.
I see no end to liquidity event horror stories. I'm so lucky.
I haven't seen many start-ups that didn't break the law in some way or another. Sometimes out of sheer ignorance and other times out of expedience. Hell, Airbnb and Uber are built on breaking the law.
Great post and I totally agree. I recently talked to my financial advisor about my current company and we went through all the numbers for various pricing scenarios (of a public offering) over the next 4-6 year, at various valuations. From his point of view, he encourages me to stay the course - quite the opposite from most of the tech friends I know (most usually don't stick around after a few years).
On a side note, I haven't used it in a long time, but why all the hate on Jira? I mean, I remember it does everything including making my breakfast for me, but is it really that bad? I don't remember it being that bad, but maybe others would like to chime in on why they like/dislike it?
JIRA is what you make of it. My comment is that it requires a ton of gardening to keep it useful. You probably need 1 person for every 5-10 devs who has JIRA-wrangling as a primary responsibility that eats a significant chunk of their time. Part of this is the nature of project management, but part of it is that JIRA's workflows for basic tasks like "close as duplicate" or "do this action on all issues linked to issue X" are terrible and require way too many clicks. In shops that don't properly allocate people to this task, it's extra debt that just piles up and becomes a mess, so I could definitely picture some of the hate being as a result of those experiences.
The author may also be using "JIRA" as a proxy for a heavily pre-planned waterfall culture with a big emphasis on time tracking, doing what you're told, fake-metrics success theatre, etc. (cf. https://hackernoon.com/12-signs-youre-working-in-a-feature-f...)
I hate it because it feels incredibly crusty. Nothing seems to update without hitting F5, there's annoying amount of jargon and poorly named fields everywhere, and in my company it's also tied into everything from client billing to asset management, presumably because it's sold as something that does everything including breakfast, and all that noise seems to permeate into every ticket type (I can't search for a ticket type or field anymore, there are over 400 types so the autocomplete is useless, I just ask PMs to make them.)
I'd love to see us move to Phabricator (https://www.phacility.com/phabricator/) but the problem is it's developer oriented and there's already man-years invested in that Jira monstrosity, it'd be a tough sell and probably just end with us spread out accross both...
JIRA isn't a tracker, it's a tracker construction kit.
If you put the legos together right, it's great. If you build a turd with it, it's gonna suck. That aside, it's slow and gets in your way a lot. IMO it's the way to go though.
JIRA is not that bad. It was pretty stagnant for a while but they've been improving it. I think JIRA is an invaluable knowledge capture tool, particularly when you're tracking down a difficult root cause and you want to keep a bunch of people in the loop.
Jira is not fun. The things about it that make it suck is that it's used for employee time tracking in a round about way. Most teams can get by on a simple issue tracker (like github issues or buganizer), but once you get bigger, you need something that manages everything like JIRA, which eventually becomes part of you justifying your existence at a big company.
I'd highly recommend checking out alternatives. The one that impressed me (for a particular situation) the most recently is Clubhouse. Compare based on your needs. Enterprise needs with established products are not the same as a startup, as you know or will soon.
Yes, some companies prefer / require / demand self-hosted installations. Some do it for logical, financially responsible reasons too.
Numbers-wise (measured on a 'per company' basis), I would tend to disagree with the 'most' part of your sentence. Aren't there are many more 'smaller' companies happy to use hosted services as compared with companies that require self-hosted ones?
I left a startup after 2 years. I was offered a contract job that had a gross salary that was twice my startup salary. Even after taking into account the cost of benefits (health, vacation, 401k, etc), I would still make about 60% more net.
I did some math and even if the company sold for a decent amount in the future, my shares wouldn't have been worth the amount in pay I would have lost between then and the liquidity even. So, I started up my own LLC and started doing consulting/contracting and I've never felt happier.
I feel like I'm in control now and I don't have to beg someone for a raise or worry about why I'm getting screwed in the next round of funding.
It's really unfortunate that most startups appear to be set up with ISO shares. The company I am at now is an LLC and distributes RSUs, which meant when I joined I was able to file an 83/b form which minimizes my tax impact.
At my last company, I exercised options. I owe the IRS tens of thousands of dollars due to AMT this year (not that it was unexpected, as I did heavy research beforehand).
Can anyone shed light why companies aren't set up to distribute RSU's (and allow employees to fill out an 83/b form within 30 days of being granted?). Is it not preferrable to investors for some reason?
The worst part of the AMT and exercising ISO shares at a startup is that it is nearly impossible to make an informed decision on whether or not to exercise (and how many shares to exercise). You can't possibly know your tax liability until next tax season when all your tax forms come in.
Last year, I called maybe 5 different tax accountants for advice on how to estimate what my tax impact would be for exercising shares and got 5 different answers. This stuff is COMPLICATED.
Finally just got TurboTax and plugged in some guesses of my deductions, etc and got some type of estimate. Filed some 1040ES's last year to minimize the penalty and hopefully will get close.
Another sad fact is how few people at startups are even educated on the subject. While one can argue it is up to each employee to do their own research, I think it is in startups ethical interest to have their CFO team give an overview of the stock plan and what kinds of things employees may want to ask their accountants about.
RSUs for early employees makes a lot of sense. The problem is that by granting RSUs, you're effectively forcing the employee to accept taxable property as it vests. For folks that want to early exercise anyway, that's fine (more efficient than paying the company for the options and dealing with the AMT stuff!).
But as you get even a little bit down the line, and your company valuation goes up, that's real liability for the employee. Said another way, not everyone early exercises their options, so some folks would prefer not to definitely owe taxes.
A lot of these later stage companies (like say Dropbox, and famously Facebook pre-IPO), start blending towards RSUs for exactly this reason though. Shares are nicer than options, but you need to be cognizant of the tax implications (I believe, but haven't experienced it, that even Dropbox does RSU withholding, so employees aren't left figuring out how to pay the IRS thousands of dollars for their illiquid shares).
Disclaimer: I'm not a tax professional, lawyer, accountant, or any of that (like you, I just wish at least early employees would get RSUs).
>The company I am at now is an LLC and distributes RSUs, which meant when I joined I was able to file an 83/b form which minimizes my tax impact.
The usual impediment to this is venture funding. VCs generally don't like, and often can't invest in, LLCs so companies are forced down the corporation route.
If you ever wanted confirmation of this, suggest to your company that instead of "unlimited vacation", which is really vague and hard to understand, the company give 8 weeks vacation that doesn't accrue or roll over year to year.
Interestingly, that's not legal in California. Vacation is a form of earned income, and must accrue and be paid out at separation. (You can cap accruals, but vacation accrued must be paid, and can't expire.)
There's a legal workaround to that, though: reduce the next year's vacation allotment by the amount of unused vacation the previous year. Raytheon uses this trick to implement their use-it-or-lose-it PTO policy.
Even if it doesn't, do you have the money to pay the lawyer(s) enough to get it that far? And is it something you care enough about that if you were offered $25k to drop it, you would reject it?
That's what we did, at my partnership. Except that was 1998-2006 and we only provided 5 weeks that don't roll over. I used 4 weeks one year. The rest of the years I barely got over 3. Personal choice though.
See, people say that, but I have yet to see that in practice. I worked at a unicorn with an unlimited PTO policy and it worked out very well for everyone. It was very comforting to know I could just tell my manager "hey, I'd like to take 2 days off next week to go on a ski trip, is that cool?" and not have it count toward a timer.
Is it possible I would have gotten more days under a fixed policy? Maybe, I didn't really count and neither did they. But who cares? It's not like x amount of vacation days makes me more relaxed, it's knowing that I can take one that relaxes me.
Having fixed vacation days kinda stresses me, as now I have to worry about not using them all throughout the year, or have to worry about not wasting them.
Bottom line, I think successful vacation policies depend on company culture, not fixed or unlimited days. You can certainly have fixed days and still have a culture that frowns upon using them.
IMO, the amount of vacation you're actually permitted to take culturally is completely orthogonal to the vacation policy. I've worked in places with a fixed # of vacation days where it was absolutely unacceptable to actually take those days.
Yeah, been there, done that, got the t-shirt. Bad management. The "unlimited" vacation policy is a trap, too. I don't go to places that offer that, it's a litmus test. Nowadays I do contracts and it's such a simpler model--you get paid for the hours you work and don't get paid for the hours you don't work. It's perfect for me.
Any days you accrue past the cap disappear though.
If you accrue 15 days a year, work for 3 years, and never take a vacation day, you are paid for 3 weeks and lose 6 weeks of compensation, almost 4% of your pre-tax total over that period (assuming no raise for simplicity).
Apparently, "forward exercise" (also called an 83(b) election) isn't something The Fine Article's author has ever heard of. Nearly every one of the tax consequences this article bemoans could have been avoided, with just that one move.
Yes, it means you need to have the cash on hand, but honestly, taking out a bank loan to forward exercise your option grant would probably be orders of magnitude cheaper than wrestling with the 409a valuation or AMT or any of that garbage — especially for very early stage employees.
And it starts the long term capital gains counter earlier, too.
Yes, you can. I did precisely this. I even had to take out a personal loan to cover some of the costs, as the value was just starting to ramp leading to the IPO.
In the end, I paid hundreds of dollars (or perhaps a thousand?) in interest, but it paid off handsomely as the spread between short term and long term capital gains is large enough to make it worthwhile.
Exactly. Imagine you were talking with a very early-stage company (say, to be employee number < 10), with a ~1% grant, at current dilution.
It would be so profoundly painful, financially — and in so many different ways at once — to exercise at any other time but immediately upon hire (or at a minimum, in advance of any subsequent liquidity event), in that circumstance.
> It is a common misconception, but a Section 83(b) election generally cannot be made with respect to the receipt of a private company stock option. You must exercise the option first and acquire the stock before you can make a Section 83(b) election, and you would only make a Section 83(b) election in that instance if you exercised the option and acquired unvested stock (if the stock acquired on exercise of the stock option was vested, there would be no reason to make a Section 83(b) election).
I see the current cold climate as the direct result of companies now taking a long time to sell or go public. The frameworks setup for early employees to make good on their loyalty and hard work were designed during a time when companies would only stay in startup mode for 4 to 5 years max.
Now that companies are planning on 10+ years to IPO or sellout, they aren't changing their employee incentives to match expectations. No one wants to work for free, or cheap for an entire decade at one company.
I actually applaud Snap Inc. for pushing ahead with an IPO early on in its lifetime. It's going to make millionaires out of all its early employees and start a 2nd wave to startups in LA that San Francisco hasn't had since Facebook and Twitter.
People in SF are still waiting for AirBNB and Uber, Lyft, Stripe, Github, etc, these companies are turning over employees already that should have minted local millionaires ready to start the next wave.
"The correct amount to value your options at is $0. Think of them more as a lottery ticket. If they pay off, great, but your employment deal should be good enough that you'd still join even if they weren't in your contract."
Totally agree with this and I think it's the core of the whole piece. I tell everyone who asks about options the same thing before getting in to the details.
I've been sucked in to paying money to exercise my stock options after I left a company. On paper I could pay off my house today... except I'll most likely never see that money.
Nowadays I ignore equity and look at the bona fide package they offer and how enticing the challenge they have can be and decide based on that. Equity promises just don't fall in the balance anymore.
This. I would also optimise on cash compensation. Stock options are a nice to have but the windfall is ultimately very hypothetical since most startups fail.
Don't fall for the stock options trap if you are an employee: you are just as fortunate (or not) with a lottery ticket.
Obviously if you are a founder it's a different story...
What's even more frustrating is that the startup in question is actually doing pretty well for itself. It just doesn't have a liquidity event in the near future. On paper my stock looks really good right now but is just out of reach.
When I joined zenefits they offered me 500 shares before raising the 500MM round.
Then after the 500MM round they were 5000 shares.
When I was negotiating my offer, I didn't budge on getting a market rate salary and in the end, I got it.
Why? Because they did some hand wavy arithmetic and told me my 5000 shares would be worth 500K at some point. Yeah no thanks. As employee #500, I knew better.
What happened? I hated it there. Left after a year. Company lost half of its valuation.
Moral of the story: don't compromise your salary for equity, even for a unicorn. The only exceptions are if you are truly an early employee. If you're not sure whether or not that's you, then it's not you.
Even then you aren't safe, I saw them fire other engineers for no other reason other than they had too much equity.
Careers are messy. Even the people who WERE one of the early employees and got a shitload of equity eventually got their salaries adjusted.
"If the company sells for a more modest $250M, between taxes and the dilution that inevitably will have occurred, your 1% won't net you as much as you'd intuitively think. It will probably be on the same order as what you might have made from RSUs at a large public company, but with far far more risk involved. Don't take my word for it though; it's pretty simple math to run the numbers for a spread of sale prices and dilution factors for yourself before joining, so do so."
This is key when you are thinking about joining a startup. If you can land a job at $BigTechCompany that pays a bonus and RSUs that refresh every year, it's likely a much safer bet and will have much lower risk.
Hiring is the primary source of dilution at new companies. Stock packages have to come from somewhere.
Also, equity rounds reduce your percentage ownership, but (usually) not the current value of the stock you hold. If a $100M company raises $100M, the number of outstanding shares doubles. However the company is now worth $200M (the cash in the bank counts towards valuation). Now, your 1% share is a 0.5% share, but it is still worth $1M. If the company spends the $100M without growing, then the funding round was a mistake, and your shares are now worth $0.5M
So, spending money lowers the value of your stock. Issuing shares lowers your upside at a fixed future valuation. If management knows what it is doing, raising cash should increase the chances the company grows, and so should hiring.
(these calculations are oversimplifications, but the intuition is right)
> Hiring is the primary source of dilution at new companies.
Is that true? Generally don't companies set aside ~5% of the company for employees? Even the first 5 employees probably get a combined total of less than 10%, whereas the first investors probably get 10+%.
> The correct amount to value your options at is $0. Think of them more as a lottery ticket.
This is trivially false. Lottery tickets are not worth $0. Take that into account when evaluating this commentary.
Basically, 90 day exercise windows are evil and the source of great pain. However my view is the author is folding in a bunch of anxiety around the general risk of startups. They seem to imply that a primary reason for delaying an IPO is employee retention. This is a poorly supported theory. Golden handcuffs are not a great retention tool as a poorly motivated employee is minimally productive. Rather the primary reasons to stay private are higher valuations afforded by the private market and less regulatory oversight.
Look, if you can get an awesome RSU offer from a super solid public company then go for it. But don't buy into the implication here that startups barely offer better deals. Do look for an extended exercise window since companies are staying private longer these days. But generally speaking you're going to get a significantly bigger chunk of options in a startup than a mature company, with commensurate risk. Do it if you believe in the startup and handle the uncertainty. It is not the same as a lottery ticket; you can improve the odds with your own labor.
Imo it's the unspoken truth in our industry that nowadays the real opportunity costs aren't held by the founders nor investors but by (non-junior/experienced) employees.
It comes down to a very strong but important question: why should anyone work for your company
There's a simple solution to this. Just, don't take any salary that's below the highest market rate you can get. The second you start taking "equity" as compensation, you're putting yourself at extreme risk, needlessly. If you take a 10K salary cut for options, it's the equivalence of taking the higher salary and investing 10K in that single company. No self respecting financial advisor would ever tell you to take 10K or More per year and invest it in 1 single company - especially if it's the very same company your actually working for! That's just compounding High risk ontop of already high risk.
Even if you wanted to do this, you don't need to be an employee of a company to do that. Just join some venture Seed fund that you can invest your 10,20,30K per year, etc. Your chance of success is approximately the same, but at least you won't loose your job when it doesn't work out.
And, if your just out of school, or have no other options, then by all means go work for the start up. In this situation your not giving up a higher salary to do so.
And always make sure you have work/life balance - the company won't do that for you, you have to make it happen.
Yeah I had 1,000 shares of yahoo in 99, then you had IPOs but the price crashed so rapidly I lost my shirt before I was able to exercise and the shares never recoverd it took me 8 years of hard work to pay off the huge tax bill.
I've recently left a company and am within my 90 day window to exercise my options.
It feels much more like playing roulette than making an investment. I have no idea if there will be a liquidation event at all, nor do I know how much that'll end up being if I can hold on for that long. Oh, and I'll be paying taxes on those shares all along the way (assuming the value goes up, which is another uncertainty).
The odds of coming out on top are not in my favor -- and I've chosen to not exercise my options. I came to this decision based off
a) plainly looking at the odds -- the company isn't going to be a unicorn no matter what bullshit the founder and investors are spouting
b) given a non-unicorn style exit, the cash these stocks would earn me probably wouldn't be significant anyway.
We live in an age where not only are investors letting themselves be taken for a ride, but the employees are as well. I'm now concerned with salary exclusively in my negotiations -- I can take an that extra $XXk per year and put it into the stock market with more reliable results.
About trying to find an answer to: “Does the company's leaders want it to be sold or go public? And [ ..] time horizon” I think it’s impossible to find the right answer. I worked in a startup where every year the founders would tell us that next year we’d go to IPO. Then that year comes, and they wouldn’t: one year it was another company’s big IPO that had sucked the market dry, one year it was that valuations were low, one year it was that the cost of IPO was high, and on and on. I don’t think the founders were intentionally lying, but this question in advance, was not the right question because no one knew the answer. This question basically only begs for an answer to please the audience. So instead I think you have to look into the market and stats of that year as a whole to guesstimate where the company may be headed.
Let me save you some reading: bargain down the options and go for the increased salary instead. I suppose that's not true if you're planning on staying long enough until you can exercise them, but I've been very happy doing that at the last few places I've worked at.
I had 26,000 share in a company TouchCommerce that got bought out by Nuance for about $250-million. I netted about $9,000.
What did I learn? Start your own company is best. second best is to license a trademark or a patent to the startup to ensure that you are square in the center of the equity pie. YMMV
Just to expand on this more, there are some reasons why this is. The biggest one is that even if you have all cap-table information available at the time of your offer (which you almost certainly don't), you don't have to be told when things happen (bank loans, bridge loans from investors, terms of new investments, new employee hires, expansion of the employee pool of stock, more shares issued to officers, new stock classes and more).
And that is just as an employee; you can't possibly be on top of all of this information without being a C-level employee, and if you're constantly asking for updates on this, you're probably not doing your regular job. Even so, you may not be privileged to some information (investors getting more shares issued if target revenue numbers aren't hit, for instance). And you definitely don't get a say in any decisions that affect this (unless you're a C-level employee, again).
When you are leaving the company, there are so many ways you can get screwed. Regardless of the 90 day exercise window, unless the company is on the very precipice of IPO-ing, you're never going to find out the terms of new investments / bank loans / (see above). And honestly, the easiest segment of people to screw over are the former-employees. The company can issue new classes of shares to current employees that render former employees' stock worth effectively $0. The company has nothing to lose; current employees are happy because they get a bigger slice of the pie, investors are happy because they didn't have to give up anything; the only people upset are the people who aren't around anymore.
There's a lot of advice to value your options at $0. I'm curious how people do the math when considering moving from a big company with RSUs that are liquid at vest to a startup (doesn't have to be a unicorn). Big company RSUs can be a big part of your annual total compensation. Do thinking about a "fair market salary" do folks consider that their base + risk adjusted RSUs? Seems like the best advice I've seen here that might be applicable would be to negotiate down equity in favor of base comp. especially if you consider that equity will likely be granted as bonuses during your tenure.
Multiply your RSU quantity by the company's current stock price and consider them part of your salary when comparing. If your company's stock is not very volatile, they're pretty much equivalent to cash, since you can (and some would argue you should) sell them the day they vest, converting them to cash.
Don't forget RSUs usually fully vest (stop coming in) after a few years, so if you're looking at an offer where you get 25% of your salary in RSUs that fully vest in 4 years, then keep in mind you're looking at a 25% pay cut after 4 years. I'm told some companies issue "evergreen" equity to counteract that problem, but I've never seen it in practice.
FWIW, at LinkedIn evergreen grants are fairly common but not guaranteed. That's prior to the MS acquisition though which has a reputation for being less generous with equity.
This seems to remain the best way to motivate employees from the founders' eyes. Everyone loves the idea of striking it rich, especially young workers just out of college, even if it's unlikely to happen.
I guess the question is, do you want to motivate, or do you actually want to reward? Cause equity seems pretty good for motivating without having to actually pay out.
Interestingly I've had the opposite experience. I work in the crypto space. My monthly comp is a combination of bitcoin, and some units of the crypto token that we invented that will power the app we are developing. When I first signed on, the token was not yet released, but the plan was for it to be minted and released on crypto exchanges way before our app is actually complete. This allows people to speculate on the future success of our app. Once the coin is out there, we have no control of it, it becomes an independent asset that anyone can trade without our approval or knowledge. This makes the coin perfectly liquid with an actual value.
Since when I first signed on, the token wasn't out yet, we had to negotiate a value for it. The value we agreed on ended up being much lower than the actual value when it was finally released. This created a strange situation. My monthly salary, which was at one point a combination of money (bitcoin) and some pie-in-the-sky uncertain token, simply became money + money since it was all liquid. I was therefore getting paid much more than expected, and more than another engineer of similar skill would require. This creates pressure on the founders to consider letting me go - even though I was a critical component of getting it to where it was. The psychology when the equity is not liquid seems very different. Even if a company's valuation starts to become much higher than expected, the fact that there still has to be an unlikely far-in-the-future liquidity event for any of it to be worth anything, significantly changes the dynamics. But when your engineer is simply getting paid quadruple market value in real liquid money, thoughts start to materialize that they can simply exchange me for 4 other engineers.
> depending on the company you join, they may have restricted your ability to trade private shares without special approval from the board
If your shares have this restriction they are practically worthless. Also be wary of sneaky language on page 40 of a random document signing away your ability to sell--have seen this from otherwise-reputable Silicon Valley names.
Not familiar with the US tax system but does the concept of "growth shares" exist over there? They're a fairly standard thing in the UK and negate most of the income tax and social security issues mentioned in the post. You're just left with CGT to pay on an eventual sale (and there are ways to reduce even that). Also, because they're shares there's no 90 day problem on leaving, you're awarded them on a simple vesting schedule and that's that.
Bonus: the IRS recognises them so American employees of UK companies can enjoy the tax benefits too.
"Your options have a strike price and private companies generally have a 409A valuation to determine their fair market value. You owe tax on the difference between those two numbers multiplied by the number of options exercised, even if the illiquidity of the shares means that you never made a cent, and have no conceivable way of doing so for the forseeable future."
This is either incorrect or I'm misunderstanding it. The purpose of the 409a valuation is to set the strike price of the options. The strike price is the fair market value of the common stock.
Also, to parrot everything everyone else is saying, equity should be valued at zero. Out of the 200 or so 409a valuations I've performed, there might be 10 companies where I would consider the equity to be valuable in the long term.
I think the problem is if you exercise the options after another financing round when the 409a will be higher. You then likely owe AMT on the difference of that value and your strike price.
I believe he means that future 409a valuations that happen after the one that set your strike price change the amount of tax you would owe if you exercise.
>"Private markets do exist that trade private stock and even help with the associated tax liabilities. However, it's important to consider that this sort of assistance will come at a very high cost, and you'll almost certainly lose a big chunk of your upside. Also, depending on the company you join, they may have restricted your ability to trade private shares without special approval from the board."
It is true that you might lose a big chunk of your upside by going to a secondary market but if the alternative is to leave the ISOs on the table it might not matter.
Also firms that provide a secondary market will give you a loan to purchase those shares if they line up a buyer for you so you don't have to come up with this money on the spot yourself. SharesPost does this.
I've really appreciated how Quora handled stock options, especially in contrast to all these horror stories. Quora uses 10-year exercise periods[1], and provided me with a spreadsheet regarding what the outcome for me would be given some valuation and dilution (with some example outcomes from other companies of similar size). The last round of funding allowed employees to liquidate some of their options/stock as well.
This is correct. To put some concrete numbers on it, I'm in my 6th year at a startup. In 2016, I spent $6,400 to exercise ~50,000 options that had a total FMV of ~$60,000. This is going to add over $7,000 to my 2016 taxes due to AMT.
If you're single and your income is over $115K, or if you're married and your total income is over $150K, there will be tax implications for exercising your options, unless you exercise them when the spread is $0.
That's not quite how AMT works. AMT is not added to your taxes, it's an entirely alternative tax system (hence the A in AMT). You'll pay the larger of the two values (AMT vs ordinary tax), and given the taxation rates, you may not have made enough to actually trigger AMT. The rate for AMT is lower than ordinary tax, and there's an exemption for the first $N (where N varies based on several factors).
I understand how AMT works; these numbers are from actually calculating my 2016 taxes. With the exercise, I'm paying over $7,000 more than I otherwise would have.
Well, you MAY owe AMT; it's not certain, and depends on your specific financial situation. Also if you pay AMT then you are eligible for an AMT tax credit which can offset the taxes you have to pay later on when you sell the shares.
I think the bottom line is that ISOs are far better than NQSOs in terms of your own tax liability.
This is also what I found when I researched this a couple years ago. I'm a little concerned that TFA and most of the comments here seem to have it the other way around ("do I need to go file an amended tax return?"). But indeed, according to [0], "The tax benefit is that on exercise the individual does not have to pay ordinary income tax (nor employment taxes) on the difference between the exercise price and the fair market value of the shares issued (however, the holder may have to pay U.S. alternative minimum tax instead)."
I have a question: I know for sure that my company is going to IPO this year and I plan to stick around to see it happen. By the time it happens I will have about 30% of my options vested which I could choose to exercise.
Is there any reason why it might be advantageous to exercise early? My current plan is just to see how the IPO goes and then consider exercising at that point - it means a lower risk for me because I'll know exactly what they're worth and if they're even worth buying.
You would begin to qualify for long term capital gains which is taxed lower than the higher end of your income, presumably. You can sell your stock 6 months after it goes public so if by then you qualify for a long term capital gain (1 year holding an asset) you get taxed at this advantaged rate. If you will likely make a substantial amount of money (100k+) this could be a lot of money you save.
Of course you assume the risk of being an investor and you could lose money if it all goes south!
If you exercise early and hold it for an year before selling them for cash then you pay less tax.
The way I see is options only make sense when you have the following aligned.
1) Employer grants options.
2) Every pay check you save enough for strike price and estimated tax hit.
3) Exercise early when the price is low (assuming IPO will happen while you're still employed)
4) Sell when IPO or later when price is good after one year or more of exercise.
Or may be sell in bits to stay under the aggressive tax rates.
On the same topic, https://www.scribd.com/doc/55945011/An-Introduction-to-Stock... has detailed advice on what to do as a startup employee in the section about options. (tl;dr: early exercise, 83(b) election, ask for nonstatutory stock options instead of incentive stock options).
> Your options have a strike price and private companies generally have a 409A valuation to determine their fair market value.
Is this exactly accurate? My understanding was that you owe gains tax on the difference between the 409A and (strike price + wages traded for options).
In other words, if you take a $1000 / month cut for one year in exchange for options, you get to add $12,000 to your cost basis for the purpose of calculating gains taxes.
IE, if you are paid $5000 / week and you can optionally take $1000 of that as options, and you do so, why doesn't that $1000 become part of your cost basis?
That's just one of the problems with the whole stock options tax rules. You really have to pay to play (triple taxation!), and it makes the golden handcuffs so much more more worse. You see a lot of people doing short term sales because they can't afford to hold onto the stock for a year and take the AMT hit.
I have never heard of using salary to buy options instead of just having a fixed salary and fixed options package.
This sounds like it might be a way to dodge the taxman (but you paid income tax on the $1000/month, so maybe not), or maybe your employer is trying an experiment with compensation packages.
"The 'you' of today needs to protect the 'you' of tomorrow."
Amen. Don't ever be afraid of looking out for your own financial interests. If you aren't, you are at a disadvantage. Anyone who makes you feel "unseemly" for minding your own benefit (which tends to be a lot of people) is either naive, a stooge, or someone else looking out for their own best interests.
What's the benefit of doing it this way, as opposed to selling some of their own shares from a previous round to the funding VC, or on the secondary market? Is it just a cleaner deal this way?
I don't think it's actually that common, and typically used with really hot companies.
A few reasons: it makes the new investor more competitive to the founders if there are others vying for the investment, but it also prevents selling too early.
If you have $5M in the bank, you'll be more likely to try to go for the home run rather than sell to facebook for $3B (which was rebuffed by the founders of snapchat).
Makes sense - it's sort of a psychological exploit to make the deal more enticing. Of course founders can always sell their shares on a secondary market, but it's much harder to turn down $5M cash.
Cashless exercies aren't really an option pre-IPO.
This ends up creating a regressive tax on people that don't have cash laying around for early exercising.
People with more cash on hand can exercise before the stock goes up, so they pay much lower taxes, but they pay them earlier, and lose more if the company tanks.
Accepting equity instead of cash is like asking for your paycheck to be denominated in Bison Dollars. If they want to add some options on top of my salary for the full amount I'm worth each year, that's one thing. But options in lieu of part or all of one's salary is tantamount to a cut in pay.
Options work the same way. Your equity in Bronygram could be worth millions if Bronygram's world-domination schemes go off without a hitch and if they IPO. But those are big ifs, and when you're employee #7 or even #107, you really can't assign meaningful value to those stocks, because they are simultaneously worth "zero" and "a fuckton", and the wave function hasn't collapsed.
This is the natural consequence of founders keeping board control.
Remember all those evil VCs who ousted founders, meddled in companies, and endlessly pushed for bigger and bigger risks in the hope of a massive one in a million IPO?
Turns out some of that was good for employees. No one who makes decisions needs liquidity events like they used to.
I remember interviewing at one of the biggest Unicorns and a recruiter told me "we pay lower salaries, but we make up for that with generous stock options" to me it sounded as, "we don't want to pay you much, so here is some over bloated Monopoly money to keep your dumb ass happy"
When pre-ipo options are granted, is the company required to tell the number of fully diluted shares outstanding? Without the denominator it is impossible to estimate the value. If they refuse to tell it or are secretive, does the employee have any recourse?
Why don't companies fight the IRS to allow the tax from exercising stock options of non-public companies to be deferred till the stocks are traded. After all if there is no real gain why be taxed on theoretical gain?
This is the reason I have declined couple of unicorn offers. I treat equity portion as 0. Especially, options. I will rather work for public companies, who can actually compensate using liquid RSUs that let me buy nice things.
Maybe I'm naive but when someone is paying me with equity which I can't really sell to anyone else but him, I want him to buy them back, to the money I would have gotten if it were actual pay.
Are there any stats about the average return on the options handed out? It seems most people have a few fail stories, or an unusual success story... not much of a sample size to go on.
Wow, I've started working in a startup and this is really helpful to understand some processes and to start speaking the same language they speak. Thank you!
The discussion here is about what happens when you quit. If you didn't exercise your options early, then you quit, the usual term says you have 90 days after you've quit. Pinterest and others have recently been highlighted for making much longer arrangements (years after quitting). If yours says the repurchase right doesn't kick in until 5 years after your employment is terminated, that's unusual and good for you!
Pre-IPO, you can't sell some of the resulting stock to cover the tax and cost of exercising (unless you have some special deal where the company or investors will buy back the stock)
Many people went bankrupt in 1999 because they exercised without considering tax implications, and then held the stock while it tanked.
so what happened in the last 10 years? Low interest rate venture capital (basically rich peeps trying to get richer using even richer peeps monies) have caused a market discrepancy which is now showing signs of major correction.
Now VC funded folks who were told they could be the next Zuckerberg have finally figured it out-your life is being commoditized into hedged call options for the rich with high probability of recouping their speculative bets. Your time is always going to be cheaper than a VC's and they've figured out a way to make it even cheaper at your expense and for their own gain.
People are figuring out their stock options aren't actually worth much and that they've just spent a huge chunk of their life helping the rich get richer with the illusive dreams of becoming the next Larry Page or Zuckerberg.
It's almost identical to the ebb and flow of workers in startups. Following this logic, we can clearly see these zombie unicorns are not going to be able to monetize like they've been able to raise money. We will see the rise of bootstrapped companies fighting each other to gobble up the vacant marketshare.
The worst that can come out of this is loss of economic productivity (VC investments have yielded economic returns for the 0.1% at the expense of the rest).
And of course lot of Venture Capital partners finding out their portfolio of 10 variants of Uber or Tinder is going to need more money to keep their share valuation high as capital is drying up due to global uncertainty.
They might not be able to buy a Lamborghini SV Roadster and a penthouse in downtown Vancouver. The world's smallest violin for the rich is always expensive and at great costs to society. Kevin O'leary worshippers call wining and dining "free market forces". A free market that serves less than 1% of the population with none of the benefits trickling down to the rest.
> Worse yet, by exercising options you owe tax immediately on money that you never made. Your options have a strike price and private companies generally have a 409A valuation to determine their fair market value. You owe tax on the difference between those two numbers multiplied by the number of options exercised, even if the illiquidity of the shares means that you never made a cent, and have no conceivable way of doing so for the forseeable future.
Is this a rule that should be changed? Why can't these just be capital gains taxes owed when you sell?
Never work at a startup. A book could be written about the pervasive amount of bullshit and lying that exists in startups. Many of the people enfolded in these vehicles are no longer passionate about tech, but rather passionate about money.
I would never work for a start up or a startup environment. A book could be written about the bullshit and lying that goes on in some of these companies.
I am just an engineer. I don't understand a lot of the terms and concepts necessary to understand the linked article. I tried going through the Wikipedia articles for the terms I was interested in but I don't think I can make sense of it all without a kind teacher to help me out. So here I am turning to you, HN, to be my teacher. Here are the questions I have. If one of you could answer just one question from this list, it would help me a lot. I am sure it would help other people like me.
While answering, please quote my entire question with the Q<number> so that people don't have to scroll up and down to correlate the answers with the question.
Q1. Quote from article: "Your options have a strike price and private companies generally have a 409A valuation to determine their fair market value. You owe tax on the difference between those two numbers multiplied by the number of options exercised." My question: What is strike price? If I have accumulated say $30K worth of options, but I can afford only $10K, can I buy only $10K worth of options while leaving the startup?
Q2. Quote from article: "Due to tax law, there is a ten year limit on the exercise term of ISO options from the day they're granted. Even if the shares aren't liquid by then, you either lose them or exercise them, with exercising them coming with all the caveats around cost and taxation listed above." My question: Say I get buy ISO options for 30000 options for $30K from a startup while I leave the startup in 2017. Say, that startup still remains private in 2027. What are my options? Am I going for a total loss of $30K? If the startup hasn't gone IPO, how can I possibly exercise my 30000 options in 2027? What does the article mean by "exercise them" in this case? Does "exercise" mean buy the 30000 options for $30K or does "exercise" mean selling the options for a possibly larger price after the startup goes IPO?
Q3. Quote from article: "Some companies now offer 10-year exercise window (after you quit) whereby your ISOs are automatically converted to NSOs after 90 days." My question: How is NSO different from ISO? When the article mentions that NSOs are "strictly better" does it mean that I don't have to pay a penny to buy the NSOs but they remain in my account for free?
Q4. Quote from article: "Employees want some kind of liquidation event so that they can extract some of the value they helped create" My question: What are the events that count as liquidation events?
Q5. Quote from article: "Even if you came into a company with good understanding of its cap table" My question: What is the cap table? Why do I need to know this number? Can you explain this with some examples?
Q6. Quote from article: "New shares can be issued at any time to dilute your position. In fact, it's common for dilution to occur during any round of fundraising." My question: How does additional funding dilute my position? If I bought 30000 ISO options at say $1 per option, and I can sell it one day for say $2 per option, I am still making money. Why does it matter if additional funding occurred between buying and selling?
Q7. Quote from article: "If the company sells for a more modest $250M, between taxes and the dilution that inevitably will have occurred, your 1% won't net you as much as you'd intuitively think. It will probably be on the same order as what you might have made from RSUs at a large public company, but with far far more risk involved." Can someone show some approximate calculation for this? This is what I see: 1% of $250M is $2.5M. Say I lose 30% in tax I am still left with 0.70 * $2.5M = $1.75M. Can one really earn $1.75M from RSUs? The RSUs I have got at large public companies are of the order of $10K to $50K only.
Q8: Quote from the article: "Tender Offers". Can someone elaborate this? Can a startup force me to return my options in exchange for tender offers? Or is it a choice I have to make, i.e. to keep the options or go with the tender offer?
Q9: Quote from the article: "How many outstanding shares are there? (This will allow you to calculate your ownership in the company.)" How? Can you provide an example to calculate my ownership? Can you also provide an example of what that ownership means for me, if the company is sold for say $200M? Can you also provide another example of what that ownership means for me, if the company goes public and the price of each stock option is $10 after it goes public?
Q10: Quote from article: "Have there been any secondary sales for shares by employees or founders? (Try it route out whether founders are taking money off the table when they raise money, and whether there has been a tender offer for employees.)" What does this mean? How does it affect me?
Could you explain why this is practical advice and how it addresses any of the points on the article about long-term equity dilution and liquidation deferral?
Sure. The article is about the problems that one faces if given stock options. If instead you get stock certificates then you don't have those problems.
