

Do early employees ever receive actual equity as opposed to mere options? - pain_perdu

I understand that any equity would almost-certainly be &#x27;vested&#x27; equity but someone told me today that it is unheard of for employees to received anything other than stock-options. Is this really the case? When you look on AngelList at companies offering 0.5-2% equity for certain key positions, are they referring to options or actual equity? Finally, for extra credit, if anyone cares to explain how either employee equity or options might be affected by dilution that would also be most interested to read.&lt;p&gt;muchas gracias!
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zaroth
There's no such thing as 'mere options'. Options are the right to purchase
shares as a certain price. The price is typically set at the current FMV of
the shares to avoid any tax implications. Vesting schedules may apply. Make an
83(b) election.

Stock grants are possible, but you would owe regular income tax on the FMV
regardless of whether the shares are actually liquid, or will most likely end
up worthless.

Your shares (or options) dilute exactly as you would expect. The company can
issue as many new shares as their Bylaws allow and their stockholders vote
for, and your percentage goes down. More importantly, inquire about
participation preferences of preferred shares, which will have a liquidation
preference; you do not want participating preferred, only participation on a
as-converted basis (these are the investors shares, not yours). That means in
a sale investors either get their share of a liquidation preference, or the
share price, but not both.

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phaus
How did the laws get so complicated? Common sense would dictate that the best
way to handle equity is to have people given equity retain the percentage in
the company (that they were promised) and just multiply their shares to
reflect any new shares that are issued. To a layman like myself it just seems
like all of these additional ways to manipulate the stocks were created for
the sole purpose of fucking people out of money. Am I right, or is there
actually a reason for doing things like this?

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rmah
No offense, but that's not common sense, it's naivete. Strong anti-dilution
rights causes many problems. Most commonly, it makes it very difficult to
attract new investors.

Also, your math ("just multiply their shares to reflect any new shares that
are issued") doesn't work. Try it on paper and you'll see why :-)

~~~
phaus
I didn't really explain myself very well, because as I said, I'm just a layman
when it come to the subject of stock options and equity. My post was mostly a
question. I wasn't trying to say that the new shares shouldn't detract from
the overall value of each share, clearly no matter how many there are the
company will still only have 100% of it's value to distribute amongst
shareholders. Unfortunately, that's the way I sounded.

What I'm really trying to understand, is how a person can go from owning a
significant percentage of a company, to having his shares become worthless,
even if the company is worth quite a bit. It seems like any system of
regulations or laws that allows something like that to occur must be
fundamentally flawed.

I've taken some economics classes, but they don't really delve into issues
like this. Can anyone recommend a good resource for learning how this works?

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prostoalex
Yes, in the form of
[http://en.wikipedia.org/wiki/Restricted_Stock_Unit](http://en.wikipedia.org/wiki/Restricted_Stock_Unit)

Signing up for a straight RSU/stock deal is rarely advantageous for a private
company employee - stock grants are issued (and taxed) at vesting time, while
ISOs are taxed at exercise time.

You control the latter, but not the former, and the risks of getting stuck
with not very liquid private stock and pending tax bill with stock grants
outweigh the benefits of not having to pay income taxes on their appreciated
value. Generally the only companies even offering stock/RSU grants are those
with either high liquidity in private markets or with public offering in
pending mode.

Employee equity is diluted with each new financing event, as typically new
stock is issued to support the round. Sometimes investors would insist on
preferred stock with liquidation preferences, which doesn't necessarily dilute
the employees, but creates interesting situations if the company is to be
sold.

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phaus
I haven't worked for a start-up, but from hanging out on HN for a few years I
can tell you that equity not necessarily common, but not really rare either.

One thing to keep in mind, is that most start-ups fail, and most successful
start-ups don't turn the early employees into millionaires. I've often heard
the advice that you should just look at any equity/options offered as a bonus,
and negotiate for a fair wage. At the very least you should go in
understanding that you are potentially giving up income for equity that may or
may not ever be worth a lot of money.

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ablerman
For dilution information, smartasset has a decent calculator that lets you
play with it.
[https://www.smartasset.com/infographic/startup](https://www.smartasset.com/infographic/startup)

