
Dear Unicorn, Exit Please - smullaney
http://techcrunch.com/2015/07/23/dear-unicorn-exit-please/
======
scurvy
Allowing employees to make 83B elections on their options immediately after
starting would help this situation a lot. Most companies don't "allow" you to
do this. I've heard conflicting things on the subject. Some say the company
has no say in the matter and it's purely in the IRS' court (exercise and
notify IRS). Others say the company must allow you to do it.

Second, the bogeyman of "letting some strange interloper see our books" is a
myth. Every company's share plan that has share restrictions, also does not
confer disclosure rights to common shareholders. That is, you have no right to
see the books if you're a common shareholder in these companies. It's not the
same with public equities as it is with this new round of startups. It used to
be that case that you exercised 1 share of stock upon hitting your cliff. That
way you could see the books and see what's really going on. The powers that be
(Hello YC) have instructed their companies to remove disclosure rights as a
workaround.

The myth that "having lots of shareholders increases costs too much" is also
just a myth. Any company with a valuation north of a few mil can afford a
finance team (or person) to keep track of registered shareholders. There are
services that do this for you. We're talking about companies worth billions of
dollars, not the corner bakery worried about the cost of flour because any
rise might drive them out of business.

~~~
jalonso510
It's not a matter of a company choosing to allow an 83(b) election. It's a
personal tax election that you make by mailing a filing in to the IRS and you
can do it without the company's involvement or permision.

The problem is that 83(b) elections just aren't applicable unless (i) you own
stock, not options, and (ii) that stock is subject to vesting.

Longer explanation: When you buy something, if you are paying less than the
fair market value for that thing, then the spread is taxable income to you.
Typically this spread is calculated at the time of the sale, so if you're
buying shares at $0.0001 per share and they are currently worth $0.0001 per
share, you'd think there would be no problem. But the IRS says that if shares
are subject to vesting then the spread is actually calculated at the time that
the shares vest. So a common case would be that you buy shares now for
$0.0001/share, next year you hit your cliff and a bunch of shares vest, and at
that point the price has gone up to say $0.001/share, and you would then owe
taxes on the difference between $0.0001 and $0.001 per share. The 83(b)
election gets you out of this trouble by letting you say at the very beginning
that you want to be taxed on all shares up front, so the spread is calculated
on day one, and is 0, and there's no tax liability.

So if you own shares and they are subject to vesting, either by a purchase of
restricted stock or an option exercise, then yeah, make an 83(b) election and
you can do that with or without the company's permission. But if you just own
an option that you haven't yet exercised then an 83(b) election just doesn't
apply and it's not something the company chooses to allow or not allow.

~~~
mahyarm
With vesting options, can you still exercise all of your options all at once
even though you haven't vested yet?

It's just you have to return the unvested stock when you leave?

~~~
jalonso510
It's up to the board at the time they make the grant. Some companies prefer
not to allow early exercise to save the minor administrative burden, but it's
employee friendly to allow it so lots of places do. Your option paperwork will
mention it if you have this right.

------
birken
I think that if you held a secret poll of founders of these companies, the
majority of them would say they don't want this to change. Retention is really
hard, and this is an incredibly powerful retention device at a fast growing
company.

As an employee though, you can always vote with your feet. When considering a
job at a startup, you should go over the stock option plan and ask hard
questions. Remember... the founders (generally) don't have stock options. So
sometimes founders at small startups don't even know the implications of the
stock option plan they've created, and might be open to changing it if it
means the difference between hiring you and not hiring you.

And for the larger companies that have thought about it, you can always pick
the ones with more employee friendly plans. The higher the initial value of
the company when joining, the harder it is to exercise options if you can't
sell the stock immediately (because you have both a high exercise price and
taxes on gains). So this can be a non-trivial difference between compensation
offers at bigger companies.

~~~
iaw
I think what's challenging in the current environment is that the most vested
employees came on to a set of implicit promises made in the early stages of
the company about long-term exit strategies. A decade ago the idea of a
unicorn was unheard of so the equity grants seemed to have a closer date of
execution than it was in reality.

~~~
birken
The truth is that most companies in the unicorn zone will probably have some
sort of stock sales plans set up that go through the company. It isn't black
and white between private/no liquidity and public/full liquidity.

However, the private market liquidity is always controlled by the company, and
that can create artificial boundaries on timing and volume, which can be
trouble if an employee wants to leave on their own schedule.

~~~
mahyarm
It's often only %10 of vested equity, once every one or 2 years.

Also remember that if your $5mm company becomes a $1b unicorn after 4 years,
and you got %0.5 at the start, then through dilution your %0.5 stake can
become a %0.05 stake. Which means you get $500k / 4 years = $125k/yr in stock.
But you cannot sell that stock, so it would of been better to go work at
apple. It's very rare that a startup will pay better for an employee better
than the big cos.

~~~
birken
Your dilution math is pretty pessimistic. Even if you are diluted by 30% 5
times (which would be extremely uncommon for a company that grows so
successfully), you'd go from 0.5% to 0.1% of the company in your example. More
realistically, you'd probably expect to have around ~%0.15. So now you'd be
looking at 1 or 1.5MM in a probably still-growing company, which compares much
more favorably.

Yes, as I noted above I do agree that volume constraints are an issue and are
pretty annoying. Even in the examples where you get to hold options for 7
years, you wouldn't get the ability to sell at the "peak" (if you think there
is one) unless the company was public.

There are many things you have to take into account when valuing stock
options, and from a purely compensation basis I agree that
Apple/Google/Facebook are going to be tough to beat.

~~~
mahyarm
I was using dilution math from my personal experience.

------
ryan-c
I worked at a company for about five years. It became a unicorn while I worked
there and I saw the value of my initial grant increase tremendously (something
like 35x) over the years. I was significantly in debt and very nearly out of
savings when I started there, so early exercise, while available, was not
affordable to me. By the time I had money to exercise my shares, the potential
AMT liability plus lack of liquidity made it unrealistic to do so. If I left,
I'd lose it all. I ended up feeling held hostage by loss aversion. It was not
good for my mental health. Feeling stuck can make an otherwise awesome job
terrible.

I was _very_ lucky - when I left I was able to just barely cover exercising
everything by liquidating my non-retirement investments and savings, then sell
enough on the secondary market (which took many nerve wracking months) to
cover the AMT bill, pay myself back and set aside enough to pay the tax bills
for selling shares.

Very much "Silicon Valley Problems", and I don't expect much, if any, sympathy
- especially since I had a good outcome. I'd just like to see the AMT rules
changed to make it easier on employees who don't have the luxury of liquidity.

~~~
robotresearcher
Cash is very cheap right now, and has been for several years. Is it difficult
or expensive to obtain loans to cover these expenses against the shares
themselves?

~~~
mahyarm
It's very difficult, and not recommended unless they are ESO fund style loans,
where you don't pay anything if the stock goes to zero. People did similar
shit as getting HELOC loans in the dot com bubble, and it did not turn out
well for them at all.

Cash is cheap for a few large banks and other organizations rolling in money.
Not for the middle class / upper middle class employee.

Capital losses are only allowed to offset your normal taxes by a small amount
in the USA.

Also companies drag their feet in getting you the proper documents that you
might be missing. It can take months and those 2-3 months later, ESO isn't
interested anymore. It's happened to me.

------
scurvy
Another glaring issue that the article doesn't mention is option lifetime.
Most options have a lifetime of 7 years from grant. Companies are delaying
going public longer and longer. There's a very real chance that early
employees can't sell shares, don't have the money to exercise their shares,
and will watch their options expire from old age because the company thinks
it's cooler to be private. This is a very real scenario; one that I'm about to
face.

~~~
s73v3r
Have you tried speaking to someone at the company about it?

~~~
mahyarm
You'll get a loan program, with the loan due in full at the end of employment.

------
j_baker
At most private companies, stock options aren't worth the paper they're
written on. Unless of course the company sells, in which case they're worth
slightly more than the paper they're written on. And besides that, to exercise
them you usually have to pay a pretty hefty sum. I generally don't consider
equity as a part of my compensation package when I work for a private company.

~~~
ryandrake
Best response so far. Your equity compensation is worth what you can currently
sell it for. If you can't sell it, it's worth nothing. You should consider it
an extremely fortunate and lucky turn of events should your equity become both
liquid and in the money--you shouldn't expect it as a given.

~~~
bkjelden
This just seems too black and white for the current environment, though.

A seed stage startup? Sure. But if Uber made you an offer tomorrow, would it
really be prudent to value the equity at $0?

~~~
ryandrake
I would truly, honestly treat that equity as I would a portion of my
compensation being paid with lottery tickets. Unless there's a liquid
secondary market for it, it's not worth anything to me.

~~~
lberger
I would, honestly not be able to treat it as lottery tickets and would
rationalize it into the compensation at a higher rate than it is probably
worth. Just being real.

------
tpiddy
This trend also makes startups just less attractive as destinations for
employees. My experience is that startups that have started to scale still
don't have as much compensation as larger more mature companies.

Employees join for a number of reasons but stock compensation is one of them.
This compensation has always been risky and hard to value but it is now
becoming risky, hard to value and even if the company succeeds the
compensation won't be realized for a very long time.

------
redwood
The honest reality of unicorn'hood is also that your post-IPO performance is
almost assured to be flattish (on average) with potential for swings in either
direction of course. So when you look at the delta between your strike price
and your actual _potential_ future IPO price -- that is really probably the
net of the win you can hope to achieve... and often it's not as good as you'd
hope.

~~~
tptacek
I think the idea is that if you're an employee with a bunch of vested options,
those options capture a big chunk of the real upside of the company. IPO
buyers might get modest returns, but the reason for that is the amount of
value baked into those internal shares.

------
drallison
Stock distribution and stock rules are traditionally skewed towards the
investors and upper management; the technical team traditionally gets short
shrift and is subject to constraints and limitations which favor the other
folks. Stock grants and stock options are very different. Founders shares
usually get treated very differently.

Going public has significant downsides and substantial on-going costs (for
example, reporting), but it is one of the few ways value can be taken out of a
company by shareholders. I wish there were another way.

------
BrainInAJar
I prefer to negotiate away my worthless options in favour of a higher salary.

------
joshjkim
Missing from the article: the fact that employees are discouraged from seeking
buyers because there is an unspoken implication that this means the employee
is "losing faith" or "believes less" in the company, or is getting ready to
leave.

If the party line is: "hey, we are going to be a billion dollar company!" and
then one employee says "hey, I want to sell at this $100M valuation", even if
the $100M is a solid upside from the employees strike price the next natural
question for the founder is: "hey, why would you sell at this valuation if we
all know we are going to unicorn?"

Lots of people are reasonable and could understand many good reasons to sell
at that point, but in high-growth culture those are not always appreciated.
Sure, employee can/should suck it up, but it still makes it more challenging.

Generally, I think this is why company's should more regularly organize
secondaries, it removes this dynamic to a certain extent.

~~~
s73v3r
""hey, why would you sell at this valuation if we all know we are going to
unicorn?""

Because I want to buy a house with a fire pole.

------
chrisco255
Why isn't it easier for employees to sell shares of private companies?

~~~
joshjkim
It's getting easier with companies like sharespost.com but securities
regulation generally discourage the sale of private company stock in any
"open" (aka. public) way - this is ostensibly to protect buyers of stock from
investing in risky assets that they know little about and for which there is
little public information.

Buyers are generally hesitant because they want to get financial info and
other private data to make an analytic investment decision. Given that VC-
style investment are more normalized now and they aren't as based on
fundamentals, investors are definitely more willing to invest without private
financials BUT really large asset managers (who spend 99% of their funds on
public stocks with their expansive disclosures) will not tolerate this,
limiting the market. Besides, they are getting common stock, which sucks
compared to the other investors who get preferred stock.

Companies don't usually want this to happen because they don't want a
shareholder (who has voting and other legal rights) that they don't know or
trust, and who is not aligned with them in the way that employees and VC are
(supposed to be..ha).

The solution growing in popularity tries to deal with all of these by having a
company organize a secondary offering, like what pinterest does (palantir does
it too, twilio recently did, so do a bunch of companies). Usually this means
the company knows the buyer (sometimes an existing investor) and basically
gives them the info they would give a VC, except the investors buys employee
shares rather than new stock - sometimes this will be asked for an investor
when they are doing a preferred stock deal, and the investor will agree as an
additional "company favorable" term. Important to note here too, that USUALLY
the biggest sellers in these deals are the founders, so while it's a very nice
thing for them to do for their employees, there's some healthy self-interest
there as well =)

~~~
scurvy
It's damn near impossible to find a buyer without financials. Unless you work
at a unicorn that raises money on hype, you're going to have a really tough
time.

------
netcan
Ultimately, I think that the interests of employees will not make a company
decide to go public, unless it's already borderline.

To solve this, it seems like a more likely path is longer exercise windows,
more liquidity in the markets for stock and/or options. If we're talking about
"unicorns" like AirBnB, Uber and such, I imagine there is a demand so if a way
for buyers and sellers to come together existed, it could work.

There are some advantages companies would be forgoing, but it's not like going
public just to let employees cash out.

------
7Figures2Commas
> _This is why companies with skyrocketing valuations are particularly
> dangerous for employees._ Shelling out tens or hundreds of thousands of
> dollars is hard enough for most. You can imagine needing to pay millions of
> dollars to acquire your options when you don’t have it.

Huh? The exercise price for options is established when employees are granted
stock options, which almost always occurs at the beginning of employment.
Employees can calculate the total cost of exercise based on the information
contained in the Notice of Stock Option Grant. You can and should ask for this
information before you join a company.

If you are granted 100,000 options with an exercise price of $0.20, you know
that the total cost of exercise (assuming full vesting) will be $20,000. The
company's valuation could increase fifty-fold and it wouldn't affect the cost
of exercise.

Companies with skyrocketing valuations can be _precarious_ for employees who
join late, but here too employees can calculate everything up front and they
should take into concern liquidity risk when evaluating what their options are
really worth.

~~~
nemo44x
Capital gains taxes. When the "fair market value" of the company increases
away from your strike price, when you exercise your options you have to pay
tax on the difference between your strike price and the fair market value. And
it will be a short term capital gain so it isn't cheap. If those .20 options
of your have a fair market value of 5.00 now, you will owe tax on 4.80 of
capital gains. 4.80 * 100,000 is 480,000.00 and a tax rate of about 40% on
that means you will owe $192,000.00 in taxes to exercises $20,000.00 in
options. So you will need around $210,000.00 to get out.

And even after that you're holding a non-liquid asset which could be diluted
to nothing or the company could simply fail and you can't dump the stock.

~~~
ryandrake
Then, simply don't exercise your options--you won't have any taxes to worry
about.

~~~
sulam
As the article states, you typically have 90 days after leaving a company to
exercise your options or you lose them entirely. Yes, that avoid taxes, at the
risk of eliminating any potential upside.

~~~
ryandrake
You have a choice though. The exercise price + taxes is the price you pay for
potential upside. Not willing to take that risk? Just walk away from your
options and pay nothing.

~~~
nostrademons
If that's the truth and the employee's best guess as to the company's outcomes
are that their options will either be worth nothing or the taxes will be too
expensive to afford with the cash available to him, the employee should
rationally value any option grant at zero. Startups may find it a little hard
to recruit employees if everyone starts valuing options at zero. This isn't in
anyone's interests.

~~~
ryandrake
That's my argument exactly. Employees should value illiquid stock options at
close to (but not exactly) zero. They're assets that have potentially huge
upside, but also the risk of ending up worthless, cannot be sold now, and have
no guarantee that they will ever be sellable. A rational decision maker would
value such an asset at close to zero.

I'd argue that it's in the employees' best interest to realistically value the
equity portion of their compensation package.

~~~
sulam
*if that employee doesn't have sufficient liquidity to take the risk.

This is another case in the world where having money helps you make money. I
think most people rationally understand that it often takes money to make
money, but the startup scene is usually portrayed differently.

------
Arzh
Well that's what you get for taking stocks in a private company I guess. I
never do it because it's just dumb. Unless you want to be tied to that company
for ever don't do that. But who knows, I don't live in the same world as you
people.

------
tigger_please
There have already been plenty of exhaustive analyses of this sort of issue:
[https://www.youtube.com/watch?v=bwvlbJ0h35A](https://www.youtube.com/watch?v=bwvlbJ0h35A)

------
api
Unicorns feel like an artifact of making it a little too hard to go public.

~~~
chrisco255
Exactly, no one wants the additional overhead, requirements, and legalities
that go along with going public.

~~~
bkjelden
It's more than just overhead - going public forces you to think in terms of
quarterly earnings reports.

It's very hard for a tech company to thrive in that kind of environment -
capital expenditures required to develop new products or enter new markets
will often not be profitable for several years, and getting the public market
to understand that is impossible.

~~~
api
So public markets essentially make long-term thinking impossible?

~~~
dragonwriter
Well, that's overly binary; it creates strong pressures to focus on short-term
results rather than making long-term thinking impossible. (If enough of your
stock is held by arms-length investors interested primarily in maximizing
short-term returns, it could become impossible for management to manage based
on long-term thinking where that conflicts with perceived near-term optimality
-- since they will be replaced if they do -- but most IPOs don't actually
produce that kind of distribution of stock.

------
s73v3r
"That might sound harsh, but put yourself in the CEOs’ shoes: It’s often in a
company’s best interest to be able to reclaim equity if an exiting employee
can’t afford to purchase his or her shares within 90 days of leaving."

I'm sure it would be in a company's best interest to chain their people to
desks too. We don't allow that, for obvious reasons.

------
michaelochurch
I was hoping that this would be about the term "unicorn", which can't go away
too soon. It reflects the juvenility of the Valley, that people are too
creepy-humble amount money to say "a billion dollars" (teehee!) and have to
hide behind a mythical creature. It also allows VCs to hide the fact that all
they really care about _is_ money (and I don't begrudge them for that _per se_
, but for the dishnesty around it) by making a billion dollars sound like
something other than what it is. (It reminds me of "change the world"
nonsense, because you'd literally have to change the world to make unicorns
exist.) If what you care about is making a lot of money and nothing else, then
just admit it. There's plenty of company on Wall Street for that sort of
person.

Seriously, fuck this "unicorn" shit and fuck that whole culture of juvenilty
that comes out of the polar vortex of immaturity called Silly Con Valley.

Speaking of unicorns, if you want something to hate for the next few minutes,
watch this video:
[https://www.youtube.com/watch?v=bMJIBxtDUHc](https://www.youtube.com/watch?v=bMJIBxtDUHc)
.

------
ajross
While it's no doubt annoying for those involved, I find myself unable to
sympathize much with the woes and travails of those poor stock-holding
employees of private firms with skyrocketing valuations.

Cry me a river, basically. If this is a serious issue that needs to be
addressed, it's at most inside baseball not worth the rest of us worrying
about.

~~~
nathan_f77
Many (most?) readers of Hacker News are founders or employees at startups.
It's very relevant to most of us.

~~~
ajross
The overwhelming majority of readers of Hacker News are not employees of the
balooning private startups being discussed. Their companies have no equity
exchange possibility at all.

Seriously, how many employees are there in the world of companies that could
take "please exit" as serious advice? A few hundred, tops? And these are
hardly impoverished folks to begin with, they could get solid six figure jobs
at established tech companies in most cases. So why are we crying for them?

