

Ask HN: Is this a bad situation? - paperworker

I am employee #1 at a well-known web company. I started some months ago, but have yet to receive a contract. Furthermore, the equity (1%) I was offered verbally and in the offer letter vanished from the contract and was replaced with a sale bonus. Something about tax liability... Anyhow, am I mad, or is this a bad situation? I am a technical employee with a very solid background and experience, but am also receiving below market rate for my level/role. What should I do?
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patio11
I was employee #4,256 (sequential badge numbers!) at a major Japanese megacorp
and didn't get a contract until well after I had passed the point of no return
on the job offer. Not having a contract yet is bad only to the extent that you
believe it to bad. (Americans are taught that paper is magic, but it is merely
one dispute resolution tool among many, including exercising persuasion,
social ties, and reputational capital.)

Run the math on whether the difference between the bonus and the equity
matters to you. If it does, time to negotiate. Simply say "I took this job in
consideration of the fact that you offered me a package with X, Y, Z, and 1%
equity. Your letter indicates that 1% equity may be infeasible for legal
reasons. I think we can come to a mutually beneficial resolution which
compensates me adequately and addresses your concerns. The sale bonus you have
proposed doesn't quite get us there. What else can you offer me?" (Feel free
to give suggestions, but talk topics, not numbers. First rule of negotiation:
the first guy to give a number loses. Which is good news for you, because you
have already heard one number. I can guarantee you, you won't get any worse
than that!)

~~~
wlievens
"First rule of negotiation: the first guy to give a number loses"

It is not possible to stress this enough. People should print this out in 72pt
font size and hang it over their bed.

~~~
deyan
As a matter of fact this is incorrect. There is a ton of research to suggest
that whoever makes the first step and proposes and initial scenario, comes out
with a better outcome. That is because the first number thrown out frames the
discussion. Of course, it doesn't have to be a number, it could be a
negotiation for something else, but the rule and research apply just as well.

~~~
patio11
There is some research by behavioral economists about price anchoring. Like
most research in behavioral economics, it is very useful at predicting the
behavior of college students in novel circumstances. Many of the rest of us
will have considered our likely market value prior to arriving at the salary
negotiation, perhaps via extensive research or receiving competing offers, and
thus not be unduly influenced by the first number we hear.

("$20,000? Holy cow! That's more money than I've ever had in my whole life!
I'll take it!" -- not what I said in response to what my professor thought I
would consider a very tempting offer.)

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grellas
Potentially bad indicators.

The tax issue may be real but workarounds include giving you a grant of
options exercisable at current fair market value, which gives you the
opportunity to get the 1% equity without taking any immediate tax hit (you
would have to pay more for the equity at the time of exercise than founders
did at the beginning, and your ultimate tax consequences would be more
complicated than you would have gotten through a simple early-stage grant of,
e.g., restricted stock with an 83(b) filing, but you could still profit
significantly in a success case).

Can't comment on your specific situation but, over the years, I have
frequently seen "string out" situations where companies used people while
never intending to follow through on their promises. Legal remedies in this
situation are limited in a practical sense, with fraud being very hard to
prove (especially where proving intent to defraud is a requirement and where
the written offer letter does not contain the item you claim they represented
they would give you) and with such cases often taking a six-figure sum, and a
year or more of miserable fighting, to process through to verdict.

On the other hand, many startups are notoriously slow to document things when
the founders think of the legal stuff as simply being a process of "papering"
things they know they all agree upon.

The important thing here is to push to get the equity grant documented in some
form as quickly as possible. This will flush out the company's intentions now,
when your risks are less, as opposed to later, when you might be so committed
as to be trapped. Tax issues do come up in this context but have never stopped
any early-stage deal (in my considerable experience with this issue) where the
parties truly desire to implement it.

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SamAtt
I say run for the hills. A lot of the posts here parse tax law or try other
ways to understand why the equity would be switched to a bonus.

My opinion is much simpler. If verbal promises are being broken this early in
your relationship you shouldn't take a job that specifically asks you to make
sacrifices based on being invested in the company's success.

To me it's as simple as that. The very fact that you're asking yourself these
questions is the best warning sign.

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pg
If you've been working there for months and they verbally offered you equity,
that should be set up by now.

There are ways to grant equity without causing tax troubles for the recipient.
If there weren't, how could the employees of any startup get equity?

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yummyfajitas
Leave unless they pay you market rates.

They are not treating you as employee #1 of a startup. Therefore, you should
treat them the same way you would treat Big Employer.

~~~
trevelyan
I think this is the wrong advice. If the company is losing money or is a cash-
strapped startup it isn't going to want to pay lawyers and accountants extra
cash to restructure the business just to hire a developer. And the developer
#1 position is critical enough no-one is going to want to screw them over
lightly.

If he's a new employee he should give his company the benefit of the doubt for
a short time. And use the time to demonstrate his value. The thing to avoid is
a drawn out process where it isn't clear what constitutes a reasonable
timeframe for getting this problem solved and so it always gets pushed back.

So get the milestones figured out. If now is not a convenient time, when is a
convenient time? When you've been employed for three or six months? When the
company hits major development or business milestones? If you can't get an
oral commitment on this front I'd be concerned enough to look elsewhere.

~~~
yummyfajitas
They won't screw him over lightly _while they are still starting up_. Once
they get larger, and the equity he should have gotten becomes worth something,
it becomes considerably easier to replace him.

Further, I'm concerned that they are not being honest with him (1% equity,
oops maybe not). That doesn't mean he can't do business with them, but he
should heavily discount the value of future promises.

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jason_tko
Irregardless of whether or not you're happy with the current or future offer,
I would be very concerned about the management.

Not being able to openly and honestly communicate the parameters of your deal,
which is their responsibility if they're doing the hiring, is a very bad sign
and doesn't bode well for the future of the company.

Especially when they realise they've given you an incorrect deal, or a deal
they can't do, or whatever - the solution is not to quietly update the
contract and push it across the table and hope you don't notice. The solution
is of course to sit down and openly discuss the situation to make sure
everyone you understand exactly what is going on, and why, then allow you to
make your decision based on this new information.

If none of the founders are able to do this, or want to do this, this is a
major red flag.

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fuelfive
The tax liability thing could be real. Has the company received a valuation in
the time since you started working? Let's say that you took a series A with a
5M post-money valuation. Then, your 1% would show up on your tax returns as
$50,000 of income. What I would do is ask the company to take the tax hit on
my behalf. IANAA, so YMMV.

~~~
sachinag
This might be true. However, getting a 409a valuation done costs only a few
hundred these days. Just Google for it and you'll see a bunch of ads.

~~~
grellas
A credible 409A valuation these days (i.e., one that will withstand auditor
scrutiny) will still likely cost $7K to $10K. Companies can get them more
cheaply but, unless done right, these can be potential landmines waiting to go
off precisely at the times when the company is most succeeding and it needs to
bring in outside auditors (e.g., at the time of acquisition). Be cautious
about cutting corners here.

~~~
sachinag
Agreed on a better 409A post-funding. But for a pre-funding valuation number
for employees 1-5, $7K is difficult, especially when the valuation of the
company is likely to be south of $250K.

~~~
grellas
Agreed that an expensive 409A valuation is not needed prefunding but would add
that, in most cases, companies simply skip it altogether in the prefunding
stage. While 409A applies to companies at all stages, it is difficult for the
IRS to second-guess prefunding valuations. More importantly, 409A applies to
"deferred" compensation and, in practical terms for startups, this means
options - options are not used nearly as much in the prefunding stage as is
restricted stock or outright grants (neither of which vehicles are subject to
the 409A requirements).

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run4yourlives
If you have a problem with what you are getting paid or otherwise compensated,
they are the people you need to talk to, not us.

You already have a value that you consider to be fair, and clearly you aren't
receiving that. They need to know that you feel this way, exactly.

They may agree and choose to improve your situation, or they may disagree.

If they disagree then the choice is yours: accept their view unconditionally,
or end the relationship and move on. Unfortunately, not everyone can always
come to an agreement, but most employees use the fear of losing a job to
accept things that they should never consider.

