
What you need to know about employee stock options - barretts
https://medium.com/p/c4ac448850b7
======
birken
There are a couple key omissions (though there are many -- this is not a
particularly substantive article):

\- When you are joining a company, the first question you should ask is "How
many outstanding shares are there?" All you really care about is the % of the
company you are potentially getting and the current value of the company.

\- The AMT is a _big_ deal that can heavily impact your life when you exercise
options. There is no point in getting to the details here, but if you happen
to be lucky enough to be working for a company that has gone up significantly
in value, the AMT can be an expense to consider when exercising options. It
can also indirectly affect: a) Whether or not financially you can leave a
company (because if you leave you are forced to exercise your options) or b)
If you should exercise your options early for smart tax planning

\-----

Kudos to the author for trying to inform people, but if you work for a
successful startup and have questions about stock options, do not listen to
this article at all and talk to an accountant!

~~~
greghinch
_" All you really care about is the % of the company you are potentially
getting and the current value of the company."_

Respectfully disagree: what you care about is strike price, share price, and
quantity. Percentage _can_ be a good indicator, but ultimately, those 3
figures are what will determine your payout. As a hypothetical, getting 10% of
a company with a strike price just shy of the share price on exit is still
pretty worthless.

~~~
georgemcbay
The share price for the types of companies this article focuses on is
generally unknown (as anything other than wild ass guesstimates) at the time
this would be a concern for new employees. Percentage of ownership isn't
unknown and thus may be more useful, but ultimately neither is a guarantee of
anything since either way you can be virtually wiped out by future dilution if
you're just a common share pleb, which is by far the norm for non-founder
early employees.

------
varelse
Nothing about liquidation preference, which can make these options absolutely
worthless even in the midst of a seemingly successful acquisition.

[http://venturebeat.com/2010/08/16/beware-the-trappings-of-
li...](http://venturebeat.com/2010/08/16/beware-the-trappings-of-liquidation-
preference/)

I was once at a startup that was offered a $100M buyout. This would have
netted me maybe $200K except that the liquidation preference obliterated all
profit for the founders and employees. So instead, the CEO chose to ride the
thing into the ground. He went on to make the big bucks at his next gig
though.

~~~
JonFish85
Sounds like the founders took some pretty poor funding...

~~~
hef19898
But I, well how do I put it, have to smile a little bit about his actions.

By the way, learned yet more about these things in this article and the
venturebeat-link.

~~~
barretts
Agreed, that VentureBeat article is very useful.

------
njudah
"You don’t owe any taxes until you sell the shares."

This isn't true; if you exercise - and don't sell - your options, you will be
subject to the AMT. (Alternative Minimum Tax). During the original Internet
bubble (and bust) this caused significant hardship for many people. Tip -
don't take tax planning advice from random blogs.

~~~
dasil003
Yeah, pretty irresponsible for an article that says "all you need to know".
You absolutely need to know the ins and outs of this if you have a significant
number of options on a company with an increasing FMV. You own AMT on the
paper gains between your strike price and the current FMV. However this _only_
applies if you don't sell the shares. If you sell the shares before the end of
the _calendar_ year then the AMT calculation is nullified and you just pay
taxes on your actual gains.

In a dotcom bubble scenario this can make the difference between owing
millions of dollars of taxes _despite having never seen a dime_ and owing your
standard income tax on actual profits.

~~~
barretts
That's a fair point, I didn't really take AMT into account. Feel free to leave
a comment on the post, it's useful information.

~~~
cubes
Wait, what? You didn't take AMT into account? Because I have colleagues that
AMT has nearly bankrupted, and who spent _years_ having their wages garnished
by the IRS because of it.

Feel free to edit your post so as not to send people to the poor house.

------
JonFish85
Best thing to do: forget about them. If and when the time comes, you'll know
what to do. Glance at when they expire, mark it on your calendar, and when
you're within a year or so of that date, if you're still in business, consider
it. More often than not, they'll be worth little to nothing (especially once
you factor in any taxes that come along with them). Don't waste time or energy
trying to figure out how much they're worth, because it'll change a thousand
times before you actually do anything with them.

~~~
pkaler
> Best thing to do: forget about them. If and when the time comes, you'll know
> what to do.

That is terrible advice.

If you work at a startup then compensation will be a mixture of salary and
equity. You should know your worth and negotiate your number when joining a
startup. You should understand the details of the last financing: how much was
raised? who were the investors? how long is the runway? what were the high-
level economic terms of the deal?

You should ask around to see what is fair market terms for the options you
should receive. You should do a search on angel.co/jobs and look at
comparables.

Read Venture Deals by Brad Feld and Jason Mendelson even if you are not a
founder. Founders and investors know this stuff. If you are naive going into
your employment you may end up being screwed out of upside.

Get your papers straight.

~~~
JonFish85
Sure, use it as part of your negotiation up-front, keeping in mind that 2% of
$0 is still $0. If things go incredibly well, with a ton of luck, maybe you'll
get something. Maybe it's part of your compensation, but it's a pretty useless
part: you can't spend it for many years (usually at least 4, assuming you can
sell after they all vest), and it's not guaranteed. You get the percentage of
the scraps--after the VCs have taken their cut, and the founders have taken
theirs. Call it compensation if you want, and certainly it's good to have some
skin in the game, but there's no good reason to really follow it that closely
after you've signed on with the company.

Once they're in your employment contract, forget them. Stick them in a file
cabinet someplace marked +4 years and see where things go. In that time, there
will (probably) be more rounds of funding, which will dilute your shares.
Things will change: valuations, personnel, perhaps executives. Don't waste
time re-calculating your options all the time, it's an exercise in futility.

------
jaredhansen
Useful, but a far better and more complete guide is here (via dweekly):

[http://www.scribd.com/doc/55945011/An-Introduction-to-
Stock-...](http://www.scribd.com/doc/55945011/An-Introduction-to-Stock-
Options-for-the-Tech-Entrepreneur-or-Startup-Employee)

~~~
alain94040
Yes, title is highly misleading. "Everything" you need to know? More like two
things you need to know, and I won't mention these other 5 that are actually
more important.

Basically bad advice.

~~~
barretts
It's a jump to go from saying it's not "everything" (which it isn't, and which
I don't claim in the post) to saying it's bad advice. From my experience
helping friends who had no idea how to manager their options and whether to
exercise them and even how much they're worth, this information would have
been very useful. What do you think would be better?

~~~
zwily
The exclusion of AMT from the discussion about exercising ISOs was pretty
egregious. A _lot_ of people seem to get burned by that.

------
gjm11
I am increasingly of the opinion that seeing "medium.com" in the URL is an
excellent predictor of a mediocre lightweight article. (Just as seeing
"physorg.com" in the URL is an excellent predictor of a recycled press release
that's usually less informative than the original press release -- but I've
beaten that drum enough already.)

------
couradical
Everything you need to know except taking an 83b election? That doesn't seem
very comprehensive. If you're serious about getting out someday - keeping an
extra 10-20% of your exit seems prudent to me.

~~~
jeremybencken
_When a startup grants stock options to its key people...83(b) has no bearing
on any of them except for one special case. If options are granted to key
people who are given the right to exercise them early..._

[http://www.grellas.com/faq_business_startup_004.html](http://www.grellas.com/faq_business_startup_004.html)

~~~
couradical
Fair enough, I wasn't thinking only options grants, but rather equity as a
whole.

------
the_watcher
Always drives me crazy when friends join startups and talk about their
options. Them: "They gave me 5000 stock options!" Me: "What's the strike
price? How many shares are outstanding?" Them: "What?"

~~~
danielweber
I have to share my war story of trying to get prospective employees and
offering them 2000 shares, 0.1% of the company. Only to find out they
someplace else that offered them 50,000 shares, because 50K > 2K.

And, no, it's not the case that I'm better off without these people.

~~~
the_watcher
That's an aspect I have to admit I didn't consider. What do you do if your
prospective employees simply don't understand options and don't ask the right
questions when getting offers? 2,000 shares of 10000 outstanding is much
better than 50,000 out of 1,000,000,000. Many highly intelligent people I know
simply have never had this explained to them. Maybe the solution is if you are
giving them a great deal that you think can compete with any other reasonable
offer, you make sure to explain thoroughly what it means and how to evaluate
competing offers?

------
fizx
This is a terrible article. It makes no mention of 83b elections or AMT, and
contrary to the article, you will pay taxes on exercise.

Real advice: Research "83b elections" heavily before joining, negotiate well,
and if the company is succeeding as well as, say Nest or Pinterest, start
shopping for an accountant to tell you more.

~~~
matthewmcg
For incentive stock options, at least, you can't make an 83(b) election.

------
vladimirralev
This is very far from "everything". There are many startup scams out there
right now that would appear legit according to this guide. I've seen startups
that delay valuation, so that you pay higher prices for stock. Sometimes you
are outright asked to actively improve the perceived value of the company so
that that more you work, the more money you will end up paying to buy the
stock later. It is important to know that startups are legally required to
give you strike price no lower than the valuation, but they are actually
allowed to give you any price higher than the valuation without disclosing it.
There are a ton of subtle ways the founders can screw you over if they want.
If they don't have your back 101%, the options are worthless. Anyone with
financial background would laugh at what some developers are asked to sign.

------
WalterBright
Don't ask for advice on the internet. If there is real money involved with
stock options, engage a CPA tax accountant to help, now. Really. If you just
lazily let things slide, you could find yourself in a deep hole due to the tax
rules. (One friend of mine paid no attention and found out he owed more to the
IRS than his net worth.)

It's like if you've got a medical problem - go see a real doctor.

------
wooster
Flagging because this isn't even close to everything you need to know, and the
treatment of ISOs is overly simplistic.

As others have mentioned in the thread, David Weekly's guide is a much better
resource.

------
mahyarm
You know all of this financial ruining AMT bullshit and brain damage with non-
liquid start up stock would disappear if the stock options didn't expire in a
few months when people leave.

I'd much rather sacrifice what ever special treatment ISOs get and the %5 tax
difference from long term capital gains in exchange for a far less risky form
of compensation. Whats even worse there is nearly zero upside and all downside
for this amount of risk for the employee.

------
mrgreenfur
If you've got them, here's the trick: \- hold your shares for 1 year and pay
cap gains tax instead of: \- selling shares before 1 year and paying income
tax

~~~
prostoalex
If the stock appreciated enough to make the LTCG trick worthwhile, it
appreciated enough to generate AMT liability at the point of exercise.

------
trustfundbaby
>There are lots of ways that your stock options might become “non-qualified”
stock options, though. If you exercise them less than a year after receiving
them, or sell them less than a year after exercising them, you could owe a ton
of money to Uncle Sam. At this point, it’s best to call your accountant.

I wish they'd gone into this more ...

------
BigBalli
I feel like it's a bigger picture than what is described. There are more
options and details to each: [http://giacomoballi.com/paid-at-startup-salary-
equity-shares...](http://giacomoballi.com/paid-at-startup-salary-equity-
shares-vesting/)

------
eqdw
So....... how bout them NSOs and the tax I'll owe on them?

Clearly it wasn't _all_ I need to know

------
kitcar
Anyone else getting "Please sign in to view this" ?

~~~
fintler
It loaded the article right away for me. Chrome Mac 28.0.1500.95 here with
Ghostery and Adblock running.

------
coin
Grrr, why disable pinchzoom?

------
michaelochurch
A good start, but I want to add more.

This may seem unrelated, but there's a difference between poker and slots.
Both are "gambling", but one has a performance effect and one doesn't: if
you're good at poker, you can make money at it (of course, many people lose).
With slots, there's no skill. If it's viewed entertainment, fine; but don't
think it should take a major place in your lifestyle because it's just going
to lose you money. Playing slots is not a sound financial move. For some (top
~2% of poker players) poker is.

I'll get back to that.

Now... let's say that you're a typical 28-year-old programmer making $120,000
per year in a cushy corporate job. Your financial advisor comes to you, one
day, and tells you that you should invest $30,000 of your annual income in
penny stocks. Not only that, but it's a _single_ and _illiquid_ penny stock,
with tax implications you don't fully understand. Oh, and the company issuing
it is your employer and has about a 20% first-year chance of firing you
without severance ("for performance" because tech startups never do an honest
layoff; they'd rather hurt your reputation than theirs by admitting
contraction) and invalidate your investment (called "cliffing") outright.
That's your financial advisor's proposal: buy illiquid penny stocks from your
boss.

What would you do? You'd fire the fuck out of that financial advisor, that's
what you'd do.

Yet there are plenty of people who'd work for $90,000 (instead of the
$120,000) plus "equity" whose expected value is much, much less than $30,000--
maybe $10-15k at-valuation, from the perspective of VCs who have a much higher
risk tolerance, who also get control of the company and preferred shares in
the deal.

It's a shit deal. Don't take it.

Now, back to poker vs. slots. If you're a founder, your equity holding (which
is likely substantial, unlike typical employee bullshit) is more like poker,
because your performance at your job can have a macroscopic effect on the
company. Your ability and performance directly affect your payoff (of course,
there's a lot of luck, too). You're still gambling in the abstract sense that
everything (even driving) is a gamble, but you're taking bets on yourself,
which any self-respecting person would do.

If you're an engineer or, really, anyone outside of the top O(N^0.25)
executives, you're playing slots because nothing you do will have a real
effect on the macroscopic performance of the firm. You're betting on people
and factors over which you have no influence. Even whether you get that full
that 4 years or are fired first is (let's be honest here) outside of your
control.

Employee equity is a nice-to-have for an otherwise good job paying a market
salary (if not above-market, to account for startup risks) but it doesn't
justify taking the kinds of pay cuts involved at most of these startups.

~~~
nostrademons
The first 10 employees hired (most of whom should be engineers at a tech
startup) have a _huge_ effect on the trajectory of a startup. One bad hire
there will sink the company.

I know Google employees with employee numbers in the hundreds that had a
measurable (and very visible) effect on the success of the company.

~~~
michaelochurch
_The first 10 employees hired (most of whom should be engineers at a tech
startup) have a huge effect on the trajectory of a startup. One bad hire there
will sink the company._

If that's true, then why aren't they given more equity and more respect?

At least in New York, it's a lot more common to hire unproven 22-year-olds at
~60-70k and 0.25% for the first 10 employees. Of course, a couple of those
will turn out to be really good, but that's not a hiring strategy you'd take
if one bad hire could sink the firm, because you're also going to take in a
couple of bozos.

A single bad executive, yes; a single bad engineer, maybe, but founders don't
act as if that were the case.

~~~
nostrademons
And most of those startups fail, right? And their stock options are worthless.
So it's a bit of a self-fulfilling prophecy: most companies fail, and so stock
options are worthless, and so those companies attract mediocre talent, and so
the company fails.

I've found that the best employees look for two major things when evaluating
startups: that there's a market for what they're building, and that the
founders aren't idiots. And the reason for this is that startups are full of
necessary but not sufficient conditions: if any of
market|team|design|engineering|investors are not present, the company doesn't
take off. So a good engineer will look for companies where engineering is the
missing ingredient, and he will take an equity hit if necessary to ensure that
the other elements are present. That maximizes his expected payoff, because
suddenly his 1% is of a potentially huge number that is under his control.

