
What I Wish I'd Known About Equity Before Joining a Unicorn - yossorion
https://gist.github.com/yossorion/4965df74fd6da6cdc280ec57e83a202d
======
jaymzcampbell
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.

~~~
econner
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.

~~~
djb_hackernews
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.

~~~
rgbrgb
> 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.

------
superqd
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.

~~~
pinewurst
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.

~~~
superqd
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.

~~~
pinewurst
In startups, man exploits man. At other employers, it's the other way around.

~~~
asanwal
Isn't the other way around still man exploits man?

~~~
pinewurst
That's the point. :)

~~~
e12e
To expand, it's a play on:

"Under capitalism, man exploits man. Under communism, it's just the opposite."
which seems to be attributed (without any sources) to John Kenneth Galbraith:

[http://www.quotationspage.com/quote/810.html](http://www.quotationspage.com/quote/810.html)

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).

~~~
conjectures
Enjoyed the sovietology fact :)

------
adhambadr
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.

~~~
michaelbuckbee
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.

1 - Hat tip: Gail Goodman and the long slow SAAS ramp of death -
[http://businessofsoftware.org/2013/02/gail-goodman-
constant-...](http://businessofsoftware.org/2013/02/gail-goodman-constant-
contact-how-to-negotiate-the-long-slow-saas-ramp-of-death/)

~~~
mason55
It's pretty common advice that you want to be the last founder and not the
first employee for this exact reason.

------
rrhyne
Really surprised how few people know about this legislation to fix the tax
laws that cause one of the biggest issues with options.

[https://www.gop.gov/better-way-startups/](https://www.gop.gov/better-way-
startups/)

It made it through the house and was approved by senate finance committee but
is now stuck in a bill about retirement savings legislation.

Even finding information about the bill on the web or twitter is incredibly
difficult. Please tweet, blog, etc and call your senators to support!

~~~
roadnottaken
Wow, did not know about that. What do you think the chances are it gets passed
in the forseeable future?

~~~
adventured
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.

~~~
rrhyne
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.

~~~
mseebach
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).

------
johngalt
The equity payday funnel looks bleak.

1\. Will this company succeed?

2\. Once it succeeds will my equity be valuable?

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.'

~~~
iamcasen
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."

~~~
Balgair
Name and shame?

------
taternuts
> 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.

~~~
dceddia
Came here to quote this.

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.

~~~
drstewart
So 4 hours a day in a sweatshop is better working conditions than 8 hours a
day in Google?

K.

------
luckystartup
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.

Can anyone relate to this?

~~~
JonFish85
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.

~~~
luckystartup
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.

~~~
hellohnthrow
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.

------
fermigier
Should have been titled "... in the USA" as tax rules are very different in
other countries.

For instance, in France, you only owe money to the taxperson when you sell
your shares, for a profit. If you sell for a loss, this is tax-deducible.

~~~
Someone1234
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?

~~~
mahyarm
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.

~~~
mattm
Salaries are lower than the US to boot.

------
tibbon
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?

~~~
mikemac
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.

~~~
tibbon
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.

~~~
dahart
Yes, investors ask for cap tables. Always, in my experience.

------
hedora
I'd add a few things:

\- 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.

~~~
mywittyname
> \- Sarbanes-Oxley is a big villian here.

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.

------
calcsam
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/](http://www.optionvalue.io/)

~~~
OliverJones
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.

~~~
elastic_church
> If the company's executives become skittish or sullen when you ask questions
> any sane investor would ask

Kind of weird because they all do, and engineers are pretty inept at anything
finance.

------
mavelikara
> 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.

What does HN think about such a scheme?

~~~
snewman
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.

~~~
mavelikara
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?

~~~
snewman
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. :)

~~~
poikniok
This is unrelated to anything but just wanted to say how awesome your Topcoder
results were, you are a legend!

------
AnonMcThrowAway
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.

~~~
gmarx
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)

------
TheLarch
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.

Character buys a unique, abiding respect.

~~~
rwmj
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.

~~~
Spoom
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.

~~~
danielweber
Assume you are correct and it is not a contract.

That doesn't mean the employee gets stock options. The contract granted the
stock options. With no contract, there's nothing.

~~~
Spoom
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.

------
equalarrow
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?

~~~
mikepurvis
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...](https://hackernoon.com/12-signs-youre-working-in-a-feature-
factory-44a5b938d6a2))

~~~
apercu
Exactly. Jira UX is terrible (it've very hard to find things) and closing a
ticket that was a mistake is at least 3 steps.

------
Osiris
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.

------
k2xl
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.

~~~
boulos
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).

------
adamnemecek
These books on the subject of term sheets are solid

[https://www.amazon.com/Term-Sheets-Valuations-Intricacies-
Bi...](https://www.amazon.com/Term-Sheets-Valuations-Intricacies-
Bigwig/dp/1587620685/ref=as_li_ss_tl?ie=UTF8&qid=1484751040&sr=8-1&keywords=terms+sheets&linkCode=ll1&tag=akhn-20&linkId=87107bd4b2cead32b7b7130e4deb6b92)

[https://www.amazon.com/Venture-Deals-Smarter-Lawyer-
Capitali...](https://www.amazon.com/Venture-Deals-Smarter-Lawyer-
Capitalist/dp/1119259754/ref=as_li_ss_tl?ie=UTF8&qid=1484751094&sr=8-3&keywords=term+sheets&linkCode=ll1&tag=akhn-20&linkId=c31b08f1c34007a6a2d35f251a9deeb8)

~~~
toomuchtodo
Also:

[http://web.mit.edu/tytso/www/OPTIONS-HOWTO/OPTIONS-
HOWTO.htm...](http://web.mit.edu/tytso/www/OPTIONS-HOWTO/OPTIONS-HOWTO.html)

[https://news.ycombinator.com/item?id=2623777](https://news.ycombinator.com/item?id=2623777)

[https://gist.github.com/jdmaturen/5830b83c1425c4767f7e1bd4c9...](https://gist.github.com/jdmaturen/5830b83c1425c4767f7e1bd4c9561718)

[https://github.com/jlevy/og-equity-compensation](https://github.com/jlevy/og-
equity-compensation)

------
chris_7
> fixed PTO

Why on earth is this a downside? "Unlimited vacation" is a scam.

~~~
JonFish85
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.

~~~
secabeen
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.)

~~~
vonmoltke
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.

~~~
iaw
Do you think it would survive a legal challenge?

~~~
JonFish85
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?

------
rosser
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.

~~~
roadnottaken
I don't think you can do an 83b for options from a _private_ company, which is
what the article is about.

~~~
rconti
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.

But, of course, there's always risk.

~~~
rosser
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.

------
jarjoura
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.

------
mikeflynn
"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.

------
xutopia
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.

~~~
edshiro
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...

~~~
xutopia
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.

------
temp246810
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.

Don't compromise on your salary.

~~~
nemo44x
"Don't compromise on your salary."

It's the damn truth. Cash is freedom - cash is king.

------
beat
Startups are a great way to get rich - if you're a founder.

------
tensafefrogs
"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.

------
dandare
> How many outstanding shares are there? (This will allow you to calculate
> your ownership in the company.)

Is it not true that company can (and usually will) issue new shares and dilute
your stake at every investment round? (I am just a layman like you)

~~~
hedora
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)

~~~
JonFish85
> 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+%.

~~~
danielweber
I agree with you. The dilution events happen because something unexpected
happens, not because "we had to hire people."

If people are getting diluted from shares being issued to employees like you,
you have already entered a death spiral.

------
abalone
_> 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.

------
andreasklinger
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

------
pascalxus
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.

------
shams93
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.

------
deedubaya
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.

------
kuchi
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.

------
smrtinsert
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.

------
SCAQTony
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

------
tobltobs
Imho without asking a lawyer, which should be an expert in this field, you
will never be able to understand the value of the offered deal.

~~~
JonFish85
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.

------
lukejduncan
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.

~~~
ryandrake
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.

~~~
lukejduncan
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.

------
altern8tif
What's the better option to motivate employees then? Profit-sharing rather
than equity?

~~~
fullshark
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.

------
tokentoken
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.

------
JumpCrisscross
> _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.

------
pbkhrv
If you are thinking about starting a company AND doing right by your
employees, consider using alternative ownership structures like ESOP
([https://www.nceo.org/articles/esop-employee-stock-
ownership-...](https://www.nceo.org/articles/esop-employee-stock-ownership-
plan)).

------
corford
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.

[https://www.twobirds.com/~/media/pdfs/expertise/employment/e...](https://www.twobirds.com/~/media/pdfs/expertise/employment/employment-
incentive/growth-shares.pdf) is a nice primer if anyone is interested.

------
milfandcookies
"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.

~~~
seepel
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.

------
bogomipz
>"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.

------
rcheu
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.

[1] [https://dangelo.quora.com/10-Year-Exercise-Periods-Make-
Sens...](https://dangelo.quora.com/10-Year-Exercise-Periods-Make-Sense)

------
rcurry
"Worse yet, by exercising options you owe tax immediately on money that you
never made."

For NQSO this is true, for ISO this is false. The exercise of an ISO grant is
not treated as ordinary income.

~~~
roadnottaken
Yes, but for ISO you owe AMT. It amounts to ~28% federal tax rather than ~39%.
But it's still a big number.

~~~
BrandonM
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.

~~~
brndnmtthws
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).

~~~
BrandonM
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.

------
annetee
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.

~~~
nemo44x
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!

------
perneto
On the same topic, [https://www.scribd.com/doc/55945011/An-Introduction-to-
Stock...](https://www.scribd.com/doc/55945011/An-Introduction-to-Stock-
Options-for-the-Tech-Entrepreneur-or-Startup-Employee) 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).

------
jMyles
> 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.

Is this incorrect?

~~~
tdiggity
Salary doesn't come into play when calculating gains taxes in the USA.

In other words, the article has it correct.

~~~
jMyles
Wow. That's terrible. My gains tax for 2017 just went up. :-)

So, what if you work 100% for equity? Even then, you don't get to declare any
part of that?

~~~
ska
Declare as what? It's treated as income - you declare it, and you pay tax on
it.

~~~
jMyles
I meant declare as part of the cost basis.

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?

~~~
tdiggity
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.

------
katzgrau
"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.

------
bcherny
> Founders (and favored lieutenants) can arrange take money off the table
> while raising rounds and thus become independently wealthy

How does this work?

~~~
mikemac
When the company raises an additional round, the new investors build in
provisions that allow the founders to take money off the table.

One example of this is IVP leading a round in Snapchat, and the two co-
founders splitting $10M in exchange for some amount of personal stock.

~~~
bcherny
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?

~~~
mikemac
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).

~~~
bcherny
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.

------
ezconnect
The first use of the acronyms should be defined. It's hard to read write ups
that have acronyms that are not defined on first use.

------
ellisv
I'm a bit surprised cashless exercising wasn't mentioned (although perhaps the
author isn't aware of the option).

Here is a link to a HN discussion on equity compensation from about a year
ago:
[https://news.ycombinator.com/item?id=10880726](https://news.ycombinator.com/item?id=10880726)

~~~
hedora
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.

------
moflome
Confirmation, I think, of many of these observations from the VC/HR
perspective: [https://medium.com/positiveslope/dont-get-trampled-the-
puzzl...](https://medium.com/positiveslope/dont-get-trampled-the-puzzle-for-
unicorn-employees-8f00f33c784f#.1eh9bgttu)

------
Bahamut
I found it funny he slagged on using JIRA, as oftentimes I found startups
using Rally, which is a lot more painful :( .

~~~
rhizome
Never heard of Rally, but it's not an unheard-of coincidence for startups to
use software from sibling companies funded by their investors.

------
bitwize
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.

~~~
Humdeee
The upside is if you hoard enough of this fake money, you may never have to
play a game of Monopoly again where the banker is out of cash.

~~~
emodendroket
And if Bison's scheme to take over the world worked the Bison dollars would
make you totally rich.

~~~
bitwize
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.

~~~
emodendroket
Yes, that was the intended implication.

------
patmcguire
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.

------
akras14
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"

------
KirinDave
"A modest $250M".

Uhh, "modest" is surely 20-50M. $250m is quite a bit even for a fast growing
company.

------
jlj
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?

~~~
rhizome
In the US, I believe the answers are "no" and "no."

------
vadym909
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?

Time for a Bay Area tea party?

------
dmode
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.

------
tehabe
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.

Everything else is just a pay cut.

------
alexee
Is there anyone here who sold pre-IPO equity using companies like
[https://equityzen.com](https://equityzen.com)? Can you describe your
experience?

------
rampage101
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.

------
FruityCode
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!

------
andy_ppp
I really do not see the point of joining a startup; you can earn more money
contracting and it's guaranteed money, not some imaginary future payoff.

------
Kiro
I thought I could exercise my options 5 years after sign date, regardless of
liquidation. Have I misunderstood or do I have some special deal?

~~~
boulos
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!

------
conjectures
Could someone point me in the direction of a good basic introduction to the
mechanics of options, rounds, dilution etc?

------
sybhn
"In the worst cases, you might even have to use JIRA."

that's funny... but seriously, what's the big deal about Jira?

------
Ashish_J_S
Thank you!!

------
brilliantcode
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.

I had a blast not reading the article.

------
serge2k
> 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?

------
princetontiger
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.

------
princetontiger
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.

------
kapauldo
Excellent writeup.

------
foo101
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?

------
intrasight
If you believe in the company, be like David Choe (painted Facebook murals)
and take compensation in stock.

~~~
iaw
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?

~~~
intrasight
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.

~~~
xenihn
Is getting actual stock instead of stock options even a choice?

~~~
lukejduncan
Some pre-IPO companies offer RSUs. Facebook did this I believe

