
Who pays when startup employees keep their equity? - tanoku
https://gist.github.com/jdmaturen/5830b83c1425c4767f7e1bd4c9561718
======
chollida1
There was a PE firm that came around about 4-5 years ago trying to raise money
on this very premise.

Their thesis was that

\- startups would remain private longer.

\- employee's lost their options when they leave

\- longer periods to go public means more employees return options to the pool
which means employee option pools can be smaller

\- longer private periods leads to more rounds raised which benefits investors
over employees as the former can participate on each round to keep from being
diluted

\- exits would come eventually and the investors would always have superior
terms, I believe that they were working under the assumption that investors
would never have mandatory black out periods after IPO so they could
essentially participate in the opening day IPO pop.

This is one of the coolest and most maddening things about finance. Every time
you think you've come to a big realization, usually you find out that someone
else came to the same conclusion many years ago and has been making money
"arbing" it out ever since.

~~~
wyman
Where are all these secondary market companies "arbing" it out on employee
stock option liquidity? The market should be HUGE, both for locked-in
employees, and for buyers who want a small discount on hot startups.

This would totally solve the 90-day exercise period problem for the employees,
without requiring company goodwill.

Some companies like ESOFund, 137 Ventures, EquityZen can do deals without
company involvement, with a non-recourse loan with limited upside/downside, or
a forward contract with cash delivered today, and the certificate held as
collateral until IPO, when it is transferred.

There are increasingly share restrictions (which some consider unenforceable)
on sales/transfers, loans, etc. First-hand knowledge online is scarce and
lawyers give unclear answers due to the novelty of these deals. Can the
company find out? Intervene? Sue? Are they likely to? Do we need a public case
and TechCrunch headline in order to find out what the outcome is? How
different is self-financing vs. a rich relative vs. angel vs. a marketplace
investor?

Ask HN thread:
[https://news.ycombinator.com/item?id=12034716](https://news.ycombinator.com/item?id=12034716)

Edit: It seems like I misunderstood, and the investors are investing in the
company itself, not buying employee shares on the secondary market. The major
point still stands though.

~~~
rbcgerard
Usually the major problem with buying employee shares on the secondary market
is information asymmetry - the company is not going to provide the buyer with
any information, therefore unless the buyer is intimately familiar with the
inner workings of the company (I.e. An investor, or incredibly well plugged
in) they really have no idea how the company is doing (despite being a "hot"
company) which in turn makes it incredibly difficult to come up with market
clearing prices

~~~
wyman
That's definitely true - so basically, the buyer is more averse to buying
especially considering they are essentially investing in the dark, going off
of public news or hearsay? For some of the most-fundraised private companies
e.g. Uber, Airbnb, Stripe etc. I figure many would be satisfied with the last
private round valuation or a small discount, and the loss/market inefficiency
here (5-10%) would still allow most deals to work. However, as a seller, your
pitch, especially for less-well-known companies, would be much more difficult.

------
shon
It's interesting to see the popular response to this thread being one where
people think employees are better off with salary over options.

This seems crazy to me as I have watched many close friends cash out options
from companies including Google, Yelp, Apple and Pandora and buy houses (some
with cash), start companies, become investors and/or take long sabbaticals
with the proceeds from their options. With salary there is a clear upper bound
and the tax on W2 income is simply the worst. I would say that at least in the
Bay Area, options are a good bet and much better bet based on what I've seen.

Startups are always a gamble for everyone involved. But outside of the
financial industry, where 6 and 7 figure cash bonuses are common, I think
options are superior to other forms of compensation if you're trying to
optimize for gaining a "life changing amount of money" in less than say 10
years. High salary could only compare if you are very good at minimizing tax
and maximizing the money making potential of your salary though investments
(requiring additional work). But if you're going to have to invest anyway, why
not work for a company you believe in and have a chance at influencing the
company's success as well as your own?

~~~
Retric
A single person making 100k+ has a ~90% chance of saving enough in 10 years to
retire in a cheap location. That _is_ a life changing amount of money.

~~~
dpark
I'm not sure why you think single is a _positive_ if you're trying to save.
It's far more cost effective to be married to another high-income earner.

Living in a cheap location is also not everyone's dream. It would be life
changing for me to retire to Costa Rica, but it would not be a positive
change. I live in a pretty expensive city (Seattle) because I like it here.

~~~
Retric
If X, says nothing about if not X. Dual income no kids @ 200+k can be a great
way to save a lot of money. But, you have far less control over your spouses
spending and willingness to relocate.

Also, even if you don't move having 500+k / person in the bank is life
changing. The median bay area house is 635,000$ which becomes affordable while
saving money. Dual income with a 1+ Million down payment and you can actually
buy a nice place.

~~~
dpark
In general conversation, "if X" often says a lot about "if not X". "If you're
a white male on America, you have entrenched institutional benefits" actually
does imply something about non-white/non-males. It implies that non-white/non-
males do not have the same entrenched institutional benefits. General
conversations do not follow the rules of prepositional logic.

When you repeatedly refer to being single, you imply that it's the better way
to save, whether you intend that or not. And when someone asks about it,
brushing off the question by pretending they should have applied rigorous
logic to the statement is somewhat... let's say silly. Ability to control a
spouse's spending and willingness to relocate are legitimate answers that you
make weaker with the attempted logical refutation.

Having 500k in the bank also isn't really life changing if your plan is to
spend it on a house. With a high income, you could theoretically save for
10ish years and buy a pretty nice home outright. You could also just take a
loan out immediately and live in the same home for those ten years, acquiring
equity and tax benefits along the way.

Saving to buy outright or mostly outright only makes sense if you are either
extremely risk averse or you believe that non-real assets will appreciate much
faster than real assets over the medium term. Right now you can get a super
jumbo loan at less than 4%. If you want buy a million dollar home and have a
million dollars in cash, it's really not a given that you should buy the house
in cash. That implies that you believe the stock market will do worse than,
say, 3% (reduced due to tax advantages of mortgages and disadvantages of
capital gains) for many years.

~~~
Retric
The glaring exception for dual incomes as I said was you can't control your
partners behavior. That's a major caveat and derails the conversation. You go
from stuff you can do, to some sort of theoretically ideal couple. In most
areas the major savings is being socially acceptable to share a bedroom with
someone and being a 1 car family. But, in SF you may already be sharing a
bedroom limiting the savings.

Further a 100k income simply can't afford to buy a 900k place. 900k * .06 =
54k/year + taxes + repairs + insurance + utilities. Put a 500k down payment on
that and suddenly it's a 400k place and much higher taxes. Now you might be
able to swing 900k that with a roommates, but again not having them is a major
life change.

~~~
dpark
> _in SF you may already be sharing a bedroom limiting the savings._

I mentioned that in another fork of this thread but was being facetious.
Adults do not generally share a bedroom unless they're in a sexual
relationship. Sharing a bedroom platonically is not a reasonable thing to
expect people to do to save money. Sharing an apartment, yes. A bedroom, no.

> _Further a 100k income simply can 't afford to buy a 900k place. 900k _ .06
> = 54k/year + taxes + repairs + insurance + utilities. Put a 500k down
> payment on that and suddenly it's a 400k place and much higher taxes. Now
> you might be able to swing 900k that with a roommates, but again not having
> them is a major life change.*

Your numbers don't make sense. First, if you're paying 6% on your mortgage,
you're overpaying by a ton. Assuming you even try to get a decent rate, you're
looking closer to 3% once you factor in the tax advantages. Second, if you can
save 500k in 10 years, you're saving close to 50k/year _plus_ paying for
housing. So it's a lie to claim you cannot afford 54k/year in house payments.

~~~
Retric
Interest is only part of the cost of a loan you also need to pay principle if
you don't have a large down payment your interest rate increases. Feel free to
calculate a 900k home w/ 0.8% property taxes and insurance.
[http://www.bankrate.com/calculators/mortgages/mortgage-
payme...](http://www.bankrate.com/calculators/mortgages/mortgage-payment-
calculator.aspx)

You do get to deduct interest, but you lose out on the standard deduction you
can also play a lot of games with savings. Things like not taking a car loan
because use can pay with after tax money saving on the loan _and paying less
for the car._ Financing your own credit card saves money where if your house
poor debt is just a fact of life etc. You can also more safely have a high
deductible health insurance.

Also, you get interest on savings so your not saving 50k per year to get 500k
in 10 years.

~~~
dpark
I'm quite painfully aware of what a $1MM mortgage costs with taxes and
insurance. The point is that if you can save enough to put down half of that
in 10 years, you could swing the cost of the mortgage today. When you talk
about saving, you have to remember that 1) you still have to live somewhere,
and that's definitely not free, and 2) home prices are generally increasing
over time so you probably need to save more than you think. On the subject of
the standard deduction, you're right that you'd lose that, but with a jumbo
mortgage, you'll still come out ahead for many years.

Interest on savings is negligible. If you take the highest money market rates,
you'll get just north of 1%. If you stick the money in a 5-year CD, you'll get
2% and lower liquidity. Meanwhile the housing market is rising faster (how
long that's sustainable is unknown).

I'm not sure what you're talking about with the car loan. If you think it's
worth having a cushion of cash in the bank (I certainly think so) so that you
can do things like buy your cars in cash, then saving for 10 years so that you
can dump all the money into the house is a _terrible_ idea because you've just
lost your cash cushion. (Your best bet for saving on cars is to just buy fewer
of them anyway.) For the high-deductible insurance, you only need a few
thousand in the bank to take the risk out of that. You need enough cash on
hand to cover your deductible. After that it basically looks like any other
insurance plan. And certainly, a larger cash cushion makes copay/coinsurance
easier to handle, but that's not specific to high-deductible insurance.

If you think you should live far beneath your means as a general rule, I can't
argue with that. There's no compelling argument for why you should spend all
your money if you have the option to save. It insulates you from risk and
allows you to retire sooner if that's your goal. But if you are living far
beneath your means so that you can just dump all your savings into a house in
10 years that you could afford today with the same income, I think you're
wasting your time, especially in a market like SF where home prices are
increasing so rapidly.

~~~
Retric
The car comment is people see 0% interest loans for a car and think they are
not paying interest. However, if you have cash for the car out of pocket you
can pay a lower purchase price. Because it's money saved you don't pay taxes
on your 'earnings'. Which means it can be a very high ROI investment vs. that
loan. Not that you should be buying a car but sometime over 10 years a new /
used car is reasonable.

Also, I am basically assuming your going to get raises over time. So your
initial 100k salary might be 150k in 10 years. Thus ~35k savings in your first
year + 4% net interest (inducing things like that car loan) and cost dollar
averaging etc and 4% more savings next year = 500k at the end.

As to housing prices, they might go up or stall. But, because your not in the
market you can time things to buy when the market dips. Further, rent control
means renting is divorced from increasing housing price changes so you gain a
lot of the upside with fixed payments even if prices increase without the
downside. Further, if prices fall you can rent somewhere else.

The truth is people are rarely going to do this, but people are also rarely
going to hit big money from a startup.

~~~
dpark
> _The car comment is people see 0% interest loans for a car and think they
> are not paying interest. However, if you have cash for the car out of pocket
> you can pay a lower purchase price._

This is all hypothetical and a really bad plan for increasing your overall
wealth. Car manufacturers are the ones who subsidize the loans. If you see a
0% loan, it's not the dealer who's giving you that, so it's entirely likely
that paying in cash will save you nothing. Those 0% loans are also for new
cars (I've never seen them for used cars) and if you need to save a few
dollars, buying used will do far more for you anyway.

> _Thus ~35k savings in your first year + 4% net interest (inducing things
> like that car loan)_

You can't just assert 4% interest and hand-wave it away with "things like that
car loan". That's double the interest you'd get on the best 5-year CDs. So
somewhere you need to account for that extra 2% interest and how it's going to
compound for 10 years. You aren't buying a car every year even if that somehow
would double your effective interest. Also, if you buy a car outright, it's
presumably coming out of that 35k anyway. So no, your numbers still do not
work.

> _As to housing prices, they might go up or stall. But, because your not in
> the market you can time things to buy when the market dips._

Good luck with that. Timing the market is a really bad bet. There's no
guarantee that the market will dip during the next 10 years. It could maintain
growth for 15 years, or plateau after 5, or crash in 1 year (while you're
still saving) but rebound and keep growing for another two decades after that.
There's also no guarantee that it won't dip 20% as soon as you decide you're
buying at the bottom.

> _Further, rent control means renting is divorced from increasing housing
> price changes so you gain a lot of the upside with fixed payments even if
> prices increase without the downside. Further, if prices fall you can rent
> somewhere else._

Lots of places don't have rent control. Also, rent control might help your
rent stay "low" (it's definitely not actually low in the bay) but it won't
make buying more attainable. Again, if you want to rent because you think it's
a better strategy than buying, go ahead. But renting while you try to save a
half million in cash to buy a house seems like a really bad strategy. Saving
aggressively is generally a good idea. If your goal is homeownership, though,
saving to buy in cash has not looked like a good strategy since the government
started incentivizing mortgage loans.

~~~
Retric
Nothing says you need to buy in exactly 10 years. If your in a rent controlled
apartment you get to ratchet down if things get cheaper or stay out. Get a
great offer somewhere else, move without the overhead of selling at a huge
loss. It's effectivly a hedge.

As to ROI the car thing saves you around 6% meaning you need less than 4% from
everything else to average out. Other options including dividend stocks are
very likely to provide 4+% over 10 years ex Coca Cola. Is that 100% well no,
but you can also make well over 4%. 450k or 650k is not a major issue vs.
being yet another person who pasts on HN 10 years in startups and nothing to
show for it.

Much like risking buying a house for the market to drop 40% in 10 years.

~~~
dpark
I think the core problem causing disagreement here is that you are not
consistent or clear with what your goal is. Do you want flexibility? Low risk?
Then rent. Do you want to own a home? Then buy. But decide what you want and
then figure out how best to get there. You're starting with the assertion that
the goal should be 500k in the bank but then abandoning that goal at some
arbitrary point in the future when you'll suddenly dump that into a house.
What do you actually want? Half a million in the bank as a safety cushion?
Then you should not put that into a house at any time. Do you want a house?
Then you probably shouldn't wait until you've saved an arbitrary half million
dollars.

I don't know where you're getting the 6% number for buying a car in cash.
That's definitely not going to happen. You could get a car loan at a better
rate than that from a bank and pay the dealer in cash. Bankrate.com is showing
me a rate below 3% for financing a new car over 5 years.

Your belief that you can do better than 4% in the market is exactly why it
does not make sense to save and buy a house in cash. If you have 500k in cash
and have the option to dump it into a house or dump it into the stock market,
and you believe the stock market will perform significantly better than real
estate, then you are wasting money by dumping it into the house. If you
believe you can get, say, 6% in the stock market, then taking out a mortgage
at 4% lets you earn 2% extra each year.

~~~
Retric
Reading though this thread I have been justifying my statements and backing
into an odd corner.

Buying a house was an example of a life changing thing you could do with 500k
even with a six figure job. And no you can't buy a house at 100k with zero
savings in the bay.

Sure, that's true long before you randomly hit ~500k, but that was chosen as a
'good' return from joining a startup that does not become Google as a non
founder.

PS: As to returns, if you can't get 4+% retirement get's a lot harder. 1.04 ^
40 = 4.8x So, 10% is not even close to cutting it. At 2% forget about it. Best
of luck.

~~~
dpark
You're right that you cannot buy a house with $0 in the bank, pretty much
regardless of what you make. No one is likely to give you a mortgage with $0
down, and if they do, it's going to be a bad deal for you.

Back on topic, we did go down an odd path specifically about the house. My
initial point really boils down to _what_ you want to do with the money. It
could be very life-changing to save $500k in ten years and retire somewhere
cheap. If you're just going to buy a house, it's really not that life-
changing, both because you can do that without 500k in cash, and because
owning a house is really not that different day-to-day from renting.

I'm not clear what you mean when you say "10% is not even close to cutting
it". If your retirement goals depend on a >10% return, you're likely to be
disappointed. The S&P 500 has only been ~5%/year for the past 10 years, and
that's before accounting for inflation. It wasn't doing so hot before that,
either, with ~4%/year over the last 20.

------
timcederman
There is a downside to RSUs. Say you work for a private company with a high
valuation, e.g. AirBnB at $25B, and you are granted 0.01% equity over 4 years.
That means you are vesting $2.5m of RSUs over 4 years, and these RSUs are
taxable at that amount. Typically for folks earning over $150k/year in base
salary, particularly if married, even half as much will put you into AMT
territory, and you will end up paying a significant chunk of cash each year in
taxes (even if RSUs are withheld for taxes, because the withholding cannot
account for things like AMT).

Options with extremely long exercise windows helps obviate this tax burden and
allows the employee to decide when/if to improve their tax position by
exercising ahead of a liquidity event.

~~~
cloudjacker
You know the simple solution to this is that companies withhold the amount of
RSUs from you that would be taxed, when they vest.

Its almost like so simple of a solution that reporters won't touch it.

edit: nevermind. even the company cant pay the tax with their illiquid RSUs so
its still a problem, and a bigger problem if the share valuation increases,
pre-IPO

~~~
timcederman
In this case they are still withholding, but the withholding doesn't cover
enough because of AMT and other reasons.

~~~
bogomipz
I am curious what is the purpose of this withholding strategy then? I am not
familiar with this. Doesn't sound great to me, at least with a quarterly
vesting schedule you can generally go and sell them on the secondary market.

~~~
timcederman
Because it's impossible to know each employee's tax situation, and better to
withhold too little than too much. In most cases it works out, but early
employees and executives can easily be affected.

------
buttershakes
This is very interesting. Options are really an unappealing mechanism to
incentivize employees. I feel like they prey on people who really don't know
any better, and don't understand the tax implications or the possibilities
around future dilution.

As a rule of thumb I discount face value of options by as much as 70%, that
generally doesn't go over very well with people trying to convince you to
accept them in lieu of cash.

The single trigger RSU is a very hard sell though, as we can see from this
example it hurts both Investor and Founder equity stakes, unless people start
balking at options (which they should) it won't fly.

~~~
jusben1369
Quick question. Do you work for a startup now with options? Or, have you in
the past? I'm trying to work out if people who object to options would ever
join startups. Or, if they're appetite for risk is too small to be a potential
candidate.

~~~
buttershakes
I have started multiple startups, and joined others at various times. I've
also professionally traded options. I have a huge appetite for risk, but the
risk/reward isn't there for most early employees who are getting paid less
cash in exchange for options. You just can't take them at face value. I would
say many early stage employees aren't taking appreciably less risk than the
founders themselves, but at a fraction of the upside.

~~~
chris11
How successful have you been in negotiating your options? Have you negotiated
significantly more options/money or different terms?

~~~
buttershakes
I've been fairly successful at it. Most companies are willing to put up with
some negotiation. I've gotten a lawyer to go over the options agreements on
more than one occasion, usually money well spent if you don't understand all
of the contract intricacies. I think how much people are willing to put up
with is directly proportional to how valuable you would be to the company,
your skill set, experience etc. If you are easily fungible or at least the
perception is that you are than your ability to negotiate some of the finer
points will suffer.

I think most early stage employees, especially ones who are ultimately going
to be injecting the IP of the company on which it's future value will be based
should be very aggressive about options and salary packages. Having seen both
the bad and the good, I definitely gravitate towards being cautious when
getting startup offers. I also think we need to educate people more about
this. I recently asked a potential employer about the strike price, and he
said I was the first person to ask that question. I think that says a lot
about how weak the understanding of early employees is.

------
wtvanhest
Equity is one area where I would encourage YC to get more involved. We need
someone to step in and lobby the government for tax treatment of options that
reflects their economic reality to early stage employees. We also need to
encourage companies to use a 'standard' stock option agreement which is well
known by everyone so that equity offers can be compared across companies.

If you take equity from an early stage company that has also raised a ton of
money with a liquidation preference, what are your chances of getting paid
out, even on a big exit? That question is basically impossible for most people
out here to answer.

~~~
cubano
It wouldn't be very hard to collect existing data points and come up with a
rough approximation, would it?

I would think enough data now exists to allow such an analysis to have some
idea of those numbers.

~~~
wtvanhest
I doubt it. The past 5 years have been somewhat unique in that companies were
given lots of cash with liquidation preferences and 'fake' valuations.

A good example are T Rowe Price's 'unicorns':
[http://www.marketwatch.com/story/uber-airbnb-and-other-
unico...](http://www.marketwatch.com/story/uber-airbnb-and-other-unicorns-
have-valuations-cut-at-t-rowe-price-2016-04-15)

If UBER IPOs for any less than $12.5Bn, what will the early employees get?
Probably not much compared with the value they helped create. Right now, that
looks impossible, but who knows what will happen?

My point is that there is not a historic president for what has happened in
the private markets and I would do anything I could to cash out of equity if I
held it in a unicorn and I was liquid.

I would love to see YC step up and encourage founders to issue employee
friendly stock options.

~~~
wtvanhest
*precedent not president

------
codeonfire
Is the presumption that founders and investors are not trying to screw
employees? I genuinely can't tell from the article. I thought it's just common
knowledge that they will try to screw employees at every chance. With options
it was different strike prices for management/ founders vs employees. With
RSU's it is weird vesting schedules and forcing forfeiture situations.

~~~
iaw
This comment isn't very productive.

Some high-level valley participants are definitely bad actors but the bulk of
them are just normal people in positions of power.

~~~
codeonfire
Normal people that like money. If this article is about how equity
compensation can be improved, then that is a fairly messed up world view and
kind of insulting. Employee equity compensation is always designed to explode
or have no value. Workers are sick of the schemes. Just pay cash. Companies
don't want to and never will improve equity compensation. A better solution
would be a law that requires a cash value of granted options or RSU's to be
reported to workers which would require a look at sale-ability, strike price,
volality, expected employee turnover, etc.

~~~
ericd
Actually there's a big movement to making options exercisable well after
employees leave. So, no.

Startups don't have enough cash to compete in terms of pure salary with the
leverage that the Googles of the world have. And stock can turn out _very_
well for employees, I've seen it happen at a fairly good rate. You just need
to make sure you're getting what you're worth, risk adjusted.

~~~
madgar
There's a "movement" in the sense that people are writing blog posts. Fewer
than a handful of name-brand startups are putting any money where their mouth
is. Any there's huge VCs trying to hold the line and keep anyone from changing
the industry standard practice.

------
calcsam
The barrier to entry of this stock option tweak: it requires an informed
populace, ie, us.

If you are a founder with reasonable engineer cred and announce differentiated
stock option terms, ie, Adam D' Angelo at Quora, there's a reasonable chance
that engineers considering joining your company will be encouraged by your
effort on this.

If you're someone else, and your company offers this, many experienced
engineers, not unreasonably, will value their equity packages at zero
regardless of what you do. Many others, such as new grads, will not know
enough about stock options to understand the distinction you're drawing.

If you do decide to offer RSUs for the reasons the authors cited, you may want
to follow the example of Henry Ward at eShares and put together some good
presentation materials to explain the benefits of this course. Otherwise,
you're making an expensive choice for little benefit.

~~~
a_small_island
>"If you are a founder with reasonable engineer cred"

Can you expand on this? Are you of the mind that engineers should only trust
other engineers?

------
danieltillett
I have always thought that companies should work out the salary of a new
employee in all cash then once the parties are happy allow the employee to
trade in whatever percentage they liked for equity. If you value the equity at
zero why should the company give it to you and if you value it very highly why
should they give you cash?

~~~
21echoes
Because startups are, effectively by definition, equity rich and cash poor.
Trading $100k/yr in ISOs for $100k/yr in cash across 10 employees increases
your cash burn by $1M/year, which is make-or-break for a lot of startups.

~~~
danieltillett
But this doesn’t work if the employees doesn’t value the ISOs. If I want to
hire you to come and work at my startup and you will only come if I pay you
$200K then I either have to give you $200K cash or cash and some number of
ISOs that you value at 200K as a package. If you don’t value the ISOs and I
offer you 100K cash and ISOs that I consider are worth 100K then I have just
offered you 100K. My value does not equal your value and me pretending is does
not make it real.

The nice thing about cashing out equity like this is it signals your true
valuation of the company, both to yourself and the company. Just giving
options on top of cash tells nothing.

~~~
21echoes
Of course, no one is saying that companies and employees have to value ISOs
the same, but no one is saying employees who value ISOs at zero should be
working at a startup either

------
powera
The assumption that every employee leaves after 3 years and keeps none of
their equity is absurd. I don't see any value in that example at all.

~~~
te

      > 3 year employee tenure
      > 100% loss of potential equity when employees leave the company ...
      ...
      > You can also see that only the employees hired in year 8, 9, 10 
      > (the final 855) have any shares at the end of year 10. Quite bizarre!
    

Yes, quite the mystery indeed.

------
kriro
I like the basic idea and it's nicely presented however conceptually I'd favor
a model where the employee gains come primarily from the losses of later stage
investors and not early stage investors (and founders).

"""Within the investor class the earlier investors lose more. Year one
investors go from 3.2% to 2.3% about a 25% loss, pretty much the same as
founders. Year ten investors go from 9.0% to 8.7% about a 3.5% hit."""

So basically I'd like to work from sort of the reverse of this but I assume
it's not very likely due to the investment horizons etc. Basically I suppose
late stage investments should be a good chunk more expensive.

------
abalone
This is clearly a shot at Kupor's infamous A16Z post where he claims employees
who stay suffer a LOT more dilution (80%) when employees who leave keep
100%.[1] But this poster's model puts it at just 5%.

There's clearly wildly different assumptions at play here. Can someone smarter
than me spell them out? One that jumps out is the assumption here that no
employee stays past 3 years. Isn't that a pretty high attrition rate for a
pre-IPO startup?

[1] [http://a16z.com/2016/06/23/options-
timing/](http://a16z.com/2016/06/23/options-timing/)

------
ktothemc
Wouldn't RSUs open employees to a different and more punitive tax regime
(income tax) than options (which would fall under capital gains if you
exercised early enough)?

~~~
superuser2
I believe if you hold your RSU-granted stock for 1 year, you can pay capital
gains tax on it instead.

I'm not a CPA.

~~~
URSpider94
But, you have to pay income tax on the value of the shares at the time when
they vest, i.e. become non-restricted. You have zero control over that vesting
schedule, and thus the tax bill, and you likely wouldn't have a liquid market
for the shares before an IPO.

Any gain post-vest can indeed be long-term cap gains, if you hold the shares >
1 year.

------
payne92
While the dialog around various equity-based incentive compensation mechanisms
is good, this article is off base in SO many ways:

>>With an often high strike price,

Only an issue at the later stages of companies (note: this writeup argues RSUs
"from the beginning").

>>a large tax burden on execution due to AMT,

Only if you are exercising later in the company stage, when the fair market
value has (usually) gone up. If you are bullish on the company, it's generally
best to exercise as you vest, for this very reason.

Also, exercising as you vest gets the timer going for (a) cap gains treatment
(much better tax rates), AND, a possible Qualified Small Business Stock tax
exclusion (5yr holding, significant tax break).

>>and a 90 day execution window after leaving the company many share options
are left unexecuted.

This is MUCH less of an issue if you are exercising as you go along (see
above).

If you you have just left a large unicorn private company, there are often
secondary buyers for the stock. You could exercise and sell some stock to them
to cover your exercise cost.

Regarding RSUs, you __HAVE TO PAY TAX AS YOU VEST __. For a private company,
you 're just replacing one potential problem (AMT with option exercises) with
a very specific actual problem (steady tax liability as without liquidity).

RSUs are a very useful compensation tool, but you can't declare them
unilaterally better. ALL equity compensation forms require some "user
sophistication", including options and RSUs.

If you don't understand how to optimize your situation, get advice from
someone who does!

------
dman
I wish companies adopt the same "what have you done for me lately" mindset to
investors as they do to employees.

------
abalone
Hold up. This post proposes using "single trigger RSUs" instead of options,
claiming that taxes are deferrable to a liquidity event. But according to
this[1], FICA taxes are still due on vesting. So RSUs would still have
immediate tax consequences, potentially very expensive for unicorns.

Are there actually any startups offering RSUs?

[1] [https://www.acc.com/chapters/wisc/upload/The-Rise-of-
Restric...](https://www.acc.com/chapters/wisc/upload/The-Rise-of-Restricted-
Stock-Units-1.pdf)

------
bitwize
Taking equity instead of cash is like asking the company to denominate your
salary in Bison Dollars. Worth a lot IF the plan for world domination goes off
without a hitch but until then...

------
nfriedly
The last startup I worked at went through a merger. In the process, they
created a new company and gave all employees stock in the new company, on the
same vesting schedule as the options had been on in the previous companies.

They organized things and provided help to ensure that all US employees were
able to make a Section 83(b) election for our stock in the new company as soon
as it was created. (This means we paid taxes early based on the current value
(zero) instead of potentially paying much larger taxes in the future.)

------
trhway
reminded how 10 years ago upper class was trying to initiate grass roots and
steer protests against options expensing. They failed and as a result we have
RSU pretty much everywhere instead of options. The startups are the last
bastion, and i think with the modern "who needs an IPO with such great C round
(and related caching out for chosen ones)" approach, people will start to get
the picture and the RSU will come there too.

~~~
mason55
The problem with startup RSUs is that you are taxed when the RSUs vest. If
there is no liquidity (which is the case for most startups) then you're paying
taxes on RSUs which you can't sell and may never be worth anything.

~~~
rrdharan
This is not always the case. The grant may be structured such that you don't
actually have the shares in your possession even after vesting, you just have
a claim on them that will be honored at IPO or change of control. This though
means you can't dump them on SharePost/SecondMarket etc. even after they vest.

------
jedberg
This is where having a lobbying group would be helpful -- this really needs to
be fixed through policy.

We need to get the tax law changed so that RSUs are taxed on liquidity instead
of vesting. Then you'll still avoid the corruption the tax is supposed to
protect against (paying an executives millions in what was previously untaxed
compensation through RSUs in the 80s) but still allowing them to be given as
startup equity compensation.

~~~
iandanforth
Can you go into a bit more detail on what counts as liquidity? Can I sell on a
secondary market? Can a bank let me guarantee a loan based on my current
units? Can non-liquid units be transferred to my next of kin tax free?

~~~
jedberg
These are all details that would have to be worked out, but the gist of it
would be that you shouldn't be taxed on it until you're able to sell it. But
I'll give it a shot:

> Can I sell on a secondary market?

Sure, and then you get taxed on the money you made, where your basis is $0.

> Can a bank let me guarantee a loan based on my current units?

That's tricky because it would be a way for people to work around the law.
What if we made you pay tax if you took out a loan with the stock as
collateral?

> Can non-liquid units be transferred to my next of kin tax free?

Seems like it would be reasonable to allow that. The value would still be $0,
but when it became liquid, your next of kin would have to pay taxes on the
value with a basis of $0, which would make it not a good workaround for estate
tax since you would save money if you transferred it under the $5M lifetime
limit.

------
spullara
I can imagine that there would be other consequences to the change. For
example, I could see anyone on the edge around their 1 year vesting cliff
would be fired to avoid parting with their equity. It would probably also push
down the amount of equity offered because of the increase in value. Further,
some companies are already doing this, vesting could be back loaded with the
majority vesting in the later years.

~~~
delphinius81
There are companies that already let people go before their 1 year cliff (or
do other types of restructuring that results in the vesting period to reset).

However, I think it would be appropriate to give fewer options as a
consequence of this change, since the options would be a more realistic part
of the compensation package when you have a longer-period of time to determine
if you want to exercise them.

I could definitely see the 1 year cliff going away too, else you'd have people
collecting 25% of their options at various places and moving on to other
companies each year. Eventually one of those companies will do well and your
"work" investment will pay off. You can do shotgun investing with your
employee options.

But a lot of this misses the point that your company's growth is entirely
reliant on a productive employee base. If you back load vesting or start
firing people right before their cliff, or do any other practices such as
this, why would anyone choose to work for you?

------
rdl
Is a single trigger RSU somehow different in trigger than single trigger
options? I've always been told that single trigger, at least for the majority
of engineering, means your company won't be purchased.

Single trigger makes sense for legal, accounting, etc who are likely gone in
an acquisition.

Double trigger makes sense overall.

~~~
phamilton
If the premise is that employees can move the needle on the stock price
through their contributions, then double trigger doesn't make sense either.

I recently went through an acquisition where all of our stock was converted
into the acquiring company's stock. It was maddening to see our team continue
to perform well but see the price of our equity tank along with the rest of
the company.

------
efoto
There was a HN discussion ten days ago [1], where several people including
myself were suggesting 83b rule RSUs as a possible solution. Nice to see this
method quantified.

[https://news.ycombinator.com/item?id=11963551](https://news.ycombinator.com/item?id=11963551)

------
55555
I have really never understood the confusion over why this doesn't get
implemented. It has always seemed clear to me that there's not enough demand
for change, and investors and founders want things to stay the way they are.
It's a really, really good deal for them.

------
kazinator
Who pays for this?

Is the following answer somehow too obvious to be true?

When you eventually sell the equity, the stock exchange will hook you up with
counterparties who buy the stock. Those counterparties are who pays you.

------
cloudjacker
Its not "options" vs "RSUs"

There are a wide range of financial products used around the world that would
better fix the tech sectors compensation incentives and nobody is talking
about them.

Think different didn't mean argue about false dichotomies.

It is a total charade for the venture firms to propel the notion that they are
doing employees a favor by even offering stock. "How gracious of us to dilute
our investment at all!"

Dilute the preferred shares with 8% dividend and liquidity preferences!

Offer convertible bonds or other hybrid products!

You can incentivize people in 101 ways, and you guys are debating about two of
them under the assumption that the crowd is right

------
arrty88
i really think Profit Interest Units are the best form of equity for both
employees and employers

[https://www.nceo.org/articles/equity-incentives-limited-
liab...](https://www.nceo.org/articles/equity-incentives-limited-liability-
company-llc)

------
gringofyx
Either way it's a losing game, consider a company like Google - how would they
attract new employees on either scheme given that the company has been around
for 15+ years? The only people who win are those who get in early, or invest
big. Any IPO ultimately results in people earning money who don't "work" for
that money - that means the actual workers lose out everytime.

~~~
dasil003
So getting paid way above market and working at a place where software
engineering talent is highly respected and valued is "losing out"?

I'm sorry but this entitled attitude just grates at me. If you are in SV
getting paid 3-5 times the median household income you already are in the 1%
and you already have all the advantages in terms of upward mobility. If you
want to earn millions _go out and start your own company_ , it is ridiculous
to demand a high salary and a high equity payout. You are not entitled to
anything except what you can negotiate.

There is nothing inherent in software engineering that makes it worth $100k
minimum per head, it is _only_ worth that much if it supports a business that
can earn that much. The fact that SV is one of the bright spots in the economy
of the last decade has really started to go to software engineers heads. If
you believe you are worth more than what you are being offered, the only way
to prove it is to go out and build a business yourself. You can't look at the
1% of the 1% who got a lucky windfall from being in the right place at the
right time, and use that as your baseline for "fairness". Try facing the
economic struggles that 50% of the country is dealing with, and then tell me
how bad Google is screwing its employees.

~~~
gringofyx
1\. Not all employees are paid above market value

2\. Working somewhere that software engineering talent is highly respected is
no measure of fiscal compensation

3\. Those advantages of upward mobility are learnt, or acquired skills that
people work at. There is no opportunity for them to be in the same position as
a 1%er living off their parents money to invest and then continue to get
rich(er)

4\. You imply that employees have the ability to negotiate on-par with any
investor

5\. Your last point about $100k is odd, that's just supply and demand in a
free market - and the sentiment is doubley-odd given that employee salaries
have stagnated since the 70's, SV salaries have been proven to be (somewhat)
rigged, also it is in any companies corporate interests to pay the lowest
possible amount for any resource.

Lastly, your point about the 1% of the 1% is off-topic - and I agree that
they're not necessarily to blame for the widening gap between rich and poor -
but without proper incentives for the 99% to go to work, then that 1% of
wealth could become worthless if society revolts because of the
disproportionate distribution.

My point is simply that alternative vehicles for employee remuneration need to
exist beyond the status-quo that's legally existed for decades.

~~~
landryraccoon
You specifically called out Google in your comment. As a result your arguments
feel odd, since Google has a reputation for high salaries and high quality of
life. If you specifically mention Google as a problem, you must hate the vast
majority of the industry that both doesn't compensate as well and doesn't
offer comparable quality of life. In other words, if you aren't happy as a
software engineer at Google, where would you be happier?

~~~
gringofyx
I did not say Google is a problem, I said that either the current mechanism or
the proposed mechanism would present a problem for companies (such as Google)
when hiring new staff.

