
Startup Equity For Employees - abstractbill
http://www.payne.org/index.php/Startup_Equity_For_Employees
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bobp
By my experience (I've gotten job offers from a few startups), most startups
(especially after their series A) offer employees (at least engineers) a
miniscule amount of equity (a small fraction of a percent). Even if these
companies would have great exits (tens of millions), their engineers would
hardly get enough for a down payment on a house in the Bay Area.

Summary: don't expect the equity you get from working at a startup (unless
you're a VP or an executive) to be worth much. Google-like events where many
employees got rich are few and far between. If you do work for an existing
company, I suggest looking at salary more than equity as a means of making
money. The difference between making 120k vs 80k over 4 years is 160k -- more
than you're likely to get from options, and less risky.

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dkokelley
Very good article, but it's incorrect in some areas.

 _"Companies raise money by selling new stock after the board of directors
authorizes the sale to investors. Those new shares are created out of thin air
by the company, and will dilute all of the current stockholders."_

These shares are not created out of "thin air" as the article states. When a
corporation is formed, it requests and is granted a certain number of shares
by the state in which it is created. These are the _authorized_ shares. At
this point, the company may sell shares from their authorized pool of shares.
The shares that are sold to raise money are called the _issued_ shares.

This is the point of error. The shares are not created out of thin air, but
are rather moved from the authorized shares to the issued shares pool.

Additionally, the company may decide to buyback some of their shares from the
people who they sold the shares to. Shares that are repurchased are called
_treasury_ stock. The shares that are not repurchased are considered
_outstanding_. Only the issued and outstanding shares have any voice in the
company. Authorized and treasury shares can not vote.

To recap, here is a quick diagram:

Authorized

|-Issued

|-- _Outstanding_

|--Treasury

Outstanding is highlighted because that is the only category that has an
influence on voting and percentage of ownership. For most young companies, you
won't have to worry about the other classes of stock, but for medium+
companies, it's a good thing to understand going into a negotiation for equity
compensation.

~~~
payne92
I'll concede that 'thin air' is probably an oversimplification, for the
purposes of this essay.

My point is that the company sells new shares up to the amount authorized, to
raise money. In my experience, the authorized number of shares is a minor
point; the board/majority shareholders will increase it if it's ever a
limiting factor.

Before those shares are sold (issued), they don't really exist -- nobody votes
them, they're not compensated if company is acquired, etc. Hence, the
simplified "thin air" description.

~~~
dkokelley
Sure, for the purposes of the essay it works fine. I just didn't want people
to misunderstand the process of dilution. This site is geared towards hackers
- many of whom are or will be founders. They will have to deal with
significant ownership and dilution between investors and other founders. I
thought it was a good idea to clarify how stocks work for them.

Also, the board of directors can't exactly increase the number on their own.
They have to get permission from the state to do so, since it could have an
effect on ownership. If I had a 49% stake in a company, the 51% couldn't
authorize and issue themselves more stock to keep me from getting control, but
they could dilute my ownership by bringing stock out of treasury or issuing
stock from their authorized amount.

A last note, I believe that most companies issue stock compensation directly
out of their treasury stock, so if you'll be getting a good deal of ownership,
it will probably be from that stock pool. Take that into account to figure out
your ownership percentage.

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johnrob
"My Advice: politely ask for the shares outstanding, or for what percentage
your share offer represents (then confirm the approximate shares outstanding).
If the company won't provide you with this necessary information, it's
unlikely they're going to be straight with you on other issues; go work
somewhere else."

The number of jobs just shrunk by 90%.

~~~
marcus
Not really, offering you a number of shares but refusing to tell you the
number of shares outstanding is like offering to pay you 100,000 a year but
not being willing to tell in which currency the 100,000 are. Might be in GBP
(about 200k USD) might be in Yens (about 1000 USD)

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tptacek
This article advises employees to exercise their shares as soon as they are
vested as long as they're bullish on the company. I know several people who've
been fucked over doing this. The thing you need to remember is, your private-
company common shares grant basically no enforceable rights.

~~~
dcurtis
Care to elaborate?

You can't say you know someone who was "fucked" by doing something, and then
not tell us what fucked them-- that's teasing!

~~~
ardit33
simple scenario: when you join your company gives you 1000 options valued at
$1 per share (at the time of issuing), vesting in 4 years.

Assuming after 2 years, you decide you want to exercise the options that are
vested, so you pay your company $500 to get your 500 shares.

Company start going down the tube, and folds out, or is selled at fire price.
You end up with basically worthless paper on your hands. So, instead of
earning money, you lost. Imagine, that instead of $500 that was 5000, 50000.
It is a lot of money.

There are also tax implication, depending what kind of taxing schedule you
choose. You can find yourself actually paying taxes, for those shares at the
time of excercising, yet when you want to sell, they are worthless.

Double ouch. Also, one thing to consider is that when you exercise options,
you have buy those shares. If your company is iliquid (not gone ipo), it might
take a long time when (if) you are able to sale them (either it goes IPO, or
the company is sold). So, you are tying a chunk of your money, in these
shares.

So, as always, buyer beware. Do your own math when it comes in cases like
this.

~~~
tptacek
Put aside the company failing, which is an obvious risk that you already knew
about.

Assume the company does moderately well, and is sold at a premium.

There is nothing that practicably prevents the company from diluting shares at
that point and distributing the new shares among current employees, to the
disfavor of everyone who left.

In fact, that seems to happen regularly. Companies get sold, and non-employee
non-VC stockholders get nothing because of how the deal is structured.

~~~
dcurtis
Ah, makes sense. Thanks.

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tptacek
Liquidation preferences are _always_ important, regardless of size; if your
prospective employer has taken 5 and is only doing 1-2 in revenue, prefs will
still keep you from making more than a token amount. They also often have
multipliers attached.

