
If founders treated their investors the same way they treated their employees - whack
https://software.rajivprab.com/2020/08/18/if-founders-treated-their-investors-the-same-way-they-treated-their-employees/
======
seibelj
Valid reasons to work for a startup:

\- You are a cofounder.

\- You have little experience and you are using this to break into the
industry, and get experience on many different technologies ("wear many
hats").

\- They are working on a very specific problem or using a specific technology
that you strongly desire to work on and it's difficult to do it anywhere else.

\- You want to work a certain way (remote, on the beach, whatever) and they
are willing to go this route.

Invalid reasons for working at a startup:

\- Getting rich off stock options.

\- Making a lot of money in salary.

\- Work / life balance.

\- Stability.

~~~
lkbm
Main reason: it's more fun.

I could be a cog in a giant corporate machine, or I can have a measurable
impact where I work.

I can stay in my lane and do my specific job tasks, or I can run around
putting out fires and helping wherever help is needed.

I mindlessly build the specific design product handed me, or I can guide my
own work in accordance to the needs of our customers and the business.

I can follow policy and fill out forms when making any decision, or I can just
do what's right because who has time to write policies and look over approval
forms?

tbf, tech is relatively good at a lot of these. As I understand it, Facebook
gives a fair bit of latitude to engineers, and Google used to be famous for
their 20% time. But the longer a company exists, and the bigger it gets, the
more bureaucracy and controlling it'll get. Every big disaster means a new
policy on how to prevent future disasters.

I think pg wrote an essay stating that the most valuable skill in an early
startup employee is "helpfulness" (maybe not though -- cursory search didn't
find it). You do what needs to be done.

This is roughly your "wear many hats" point, but more than just different
technologies, and not just being new. If you just want to have a well-defined,
steady, sane-every-day job, a startup is terrible. If you every want to say
"that's my job", a start-up is terrible. If you're the sort of person people
will come to for help with whatever comes up (and enjoy being that), start-ups
can be great.

~~~
bquinlan
_> I could be a cog in a giant corporate machine, or I can have a measurable
impact where I work._

I think that point can support working for either a big company or a small
company depending on what type of impact you are looking for.

I've worked for startups in the past and have had a huge impact _on the
startup_ but almost no impact on the outside world because the startups just
weren't tackling very visible problems.

Now I work for Google and I have basically _zero_ impact on Google i.e.
basically nothing that I can do will ever move the dial in terms of Google's
revenue, etc. But I've worked on several projects that have had a big impact
outside of Google. For example, I was on a small team (3 people) that
developed the Python 2.7 runtime for App Engine (this was a while ago) and I
was on another small team that implemented the server-side infrastructure for
the Google Home. I also developed the screensaver for Chromecast - which is a
tiny tiny project - but still millions of people love it.

~~~
filleduchaos
> I think that point can support working for either a big company or a small
> company depending on what type of impact you are looking for.

For a lot of people, "I want to have an impact where I work" is more about
their own ego and sense of importance than about impact on other people's
lives. This is not a value judgment, by the way - wanting to feel like more
than just another faceless disposable drone is a valid desire.

~~~
brailsafe
I'd argue that people conflate "having an impact" with "creating a product"
rather than "having an impact" with having visible prestige. I used to think
the former, but not after having experience interacting with people who want
to be middle managers of middle managers. Those people want power and mostly
don't care about impacting anything outside revenue increases that can be
easily tied back to their name.

~~~
acjohnson55
I would suggest that you've had experiences with bad middle managers. I say
this all the time, but I only began to appreciate middle management when I
became a front-line manager. An effective middle manager makes a whole boat
full of people feel secure and strategically focused. They figure out how to
leverage the strengths of their front-line managers and senior-level ICs, and
how to fill in gaps. They know how to manage upward towards the executive
layer, to acquire resources and summarize a great deal of complexity.

------
nostrademons
So founders _do_ treat some of their investors like this - look at every ICO,
and a lot of dumb overseas money, and a good number of friends/family/fools
rounds. And conversely, there are _some_ employees that they treat with kid
gloves, who basically get the investor treatment. Look at executive hires.

The difference is basically two letters: "No". Most institutional investors
have the ability and inclination to say no to a deal. Many executives - or
even high-level FAANG engineers - have the ability and inclination to say no
to a deal. Your average engineer a couple years out of college does not, or if
they do, they don't understand the power of declining a job offer. Start your
negotiations with "no". Be curious and open to opportunities, and show a lot
of enthusiasm during the interview process, but whenever you feel you're
treated unfairly, _walk away_. People will stop treating you unfairly.

~~~
smattiso
The problem is that some people need money and can't say no. That's why
anybody works for minimum wage...

The executives and investors and FAANG engineers have all made good money and
seen decent RSU terms, you can't pull the wool over their eyes. Someone who is
just getting into tech may be allured by a 50k salary and "1 MILLION
OPTIONS!!!!" (There are ten trillion in the option pool).

I think engineers would do well to know that you are a COST CENTER to the
business and the people who run it. They need you to make their product so
they can make money but they hire you begrudgingly. You are in their power and
they want to take advantage of you by paying you the least they can (shady
options awards) and working you as much as possible (why did you slip on this
feature you story pointed!!!).

Put yourselves in their shoes and you would do the same. Starting a successful
business is all about customer growth and making money. If you aren't directly
responsible for a part of that then you are a cost. Make sure you are getting
paid what you are worth because nothing in this world gets built without great
engineers, but the system is run by people who want to have power over you. Be
careful.

~~~
chii
> The problem is that some people need money and can't say no.

If they need money, and this is the best offer they got, then what's the
problem with accepting it? They are still better off than not accepting it.

~~~
smattiso
No problem with that. The problem I have is with selling people bullshit
golden promises of wealth when that is mathematically impossible given the cap
table. Just don't even offer equity at all at that point so employees aren't
deluded.

At this point I know what I'm doing enough to not get burnt by these types of
scams, and when I was an engineer I was lucky to basically work for FAANGs the
whole time where they are very charitable to employees. But when I was 23 I
didn't have the knowledge to evaluate pre-ipo equity and some startups prey on
this information imbalance to delude people.

------
mdorazio
Always absent in these kinds of essays/posts is the reason _why_ startups are
able to get away with this. If it didn't work, obviously the options games
would have stopped a long time ago. A lot of people don't want to admit that
there's a small army of young, naive employees who are enamored with startups
and are perfectly willing to sign up for below-market salary and extremely
unfavorable options terms in exchange for "the startup experience". And
importantly, this small army is constantly renewing itself. Repeatedly
bringing up how much the game is rigged doesn't really do much to change
anything.

~~~
a13n
Options aren't a game. They're preferable to employees, for tax reasons. If
startups gave employees shares, then employees would have to pay taxes on
those shares, even though they're illiquid - so you're paying taxes on
something you can't even sell!

Options solve this problem well, by delaying the tax burden until the equity
is actually worth something. If it ends up worth nothing, you don't exercise
your options and you don't pay any taxes.

~~~
actuator
I doubt that's the reason. Like some FAANGs do with stocks, can't you always
deduct a part of RSUs as tax liability and add the remaining into the
employee's account?

~~~
wskinner
You're probably getting downvoted because you're making confident-sounding but
wrong claims. I posted a top level comment that should resolve all your
confusion:
[https://news.ycombinator.com/item?id=24202814](https://news.ycombinator.com/item?id=24202814)

~~~
actuator
I think my phrasing was wrong, it was more of a question. Edited it. Thanks.

------
brd529
Bravo bravo bravo! This piece neatly encapsulates all the problems with ISOs.
The biggest one is mentioned at the beginning - information asymmetry. I don’t
really understand why most companies, especially small ones less than 100
people, can’t be transparent about their cap table with employees.

I do think the culture around 90 day exercise Windows is changing. Here is a
list of companies with extended windows [1]. At this point I would never join
a company with 90 day windows.

[1] [https://github.com/holman/extended-exercise-
windows](https://github.com/holman/extended-exercise-windows)

~~~
alecbenzer
AFAIK the 90 day thing was more of a legal thing than something the companies
themselves wanted to enforce?

~~~
brd529
It's true that a company can't issue ISOs if the termination window is more
than 90 days, they have to be NSOs instead. IMO the downside of the NSOs (pay
tax immediately upon exercise instead of at next year's tax deadline - ISOs
don't actually change the amount of tax that is due, just the timing of when
you pay it) is small compared to the very real risk that your options will go
poof if you don't have the cash to exercise and pay tax if there is a
termination event.

~~~
rsanek
Startups can easily opt to convert ISOs to NSOs after the 90 days -- but of
course, they typically do not.

------
motohagiography
This is perfect.

I looked at working for startups as though I were an investor, because while
an investor is putting maybe 1/30th of their fund into a company, I'm putting
%100 of my time into it and it will be my sole source of income and wealth,
which means I have way more to lose as an employee than someone who YOLO'd a
few million of hedged, other people's money into it. As an employee, my
risk/reward has fixed upside (+lottery tickets) and an asymmetric downside
that includes opportunity cost.

Most people are just doing jobs, and that's how they manage, but money is made
in direct inverse proportion to how much physical work you do. If you are
doing work, you are rarely providing as much value as someone delivering just
the value of yours and others' work. Arguably, the most value is provided by
people who do the breadth-first search for opportunities than the depth-first
search for technical "solution" leverage. A company needs both, but as the
post implies, figure out if you would invest in a company before deciding to
work for them.

------
laser
I think startups would have a lot easier time recruiting great people if they
offered Stock Appreciation Rights [1] instead of typical options. I didn’t
even know SARs existed, they’re so non-standard in the startup industry, until
as a founder considering an open-ended hiring offer for the first time I
desperately looked for some legal upside compensation system that wouldn’t
screw me in all likely scenarios. Stock would mean tax bill upfront with high
chance of failure. Options would likely expire before I could securely
exercise and liquidate to cover costs.

I ultimately decided to stay the founder course, but glad to have found what I
think is an acceptable compensation structure. Even if requiring it adds
friction to deals until docs are standardized, at least people should know
it’s an option. I’d be curious to understand if anyone has found a downside,
except to the investors that build these anti-employee systems to arbitrage on
knowledge asymmetry.

[1]
[https://en.m.wikipedia.org/wiki/Stock_appreciation_right](https://en.m.wikipedia.org/wiki/Stock_appreciation_right)

~~~
a13n
One downside here is that SARs are taxed as ordinary income. This means you
might end up paying 30-50% taxes instead of the 15-20% long term capital gains
rate you'd pay on ISOs, RSUs, or selling shares from exercised NSOs.

~~~
foobiekr
Also, I don't think there's a secondary market option for SARs or similar.

------
goatherders
I was employee ~150 at a company that essentially had it's exit event with a
massive GE investment a couple years ago. DUring that investment, employees
were required to sell their stock/options. To the credit of the VP who hired
me, the result was exactly as he had told me: "when this company has it's
event, you'll likely get enough off your options to put the kids through
college or for a big down payment on a really nice house. But the only people
who will sniff 7 figure paydays are the VP/C-suite and the only person getting
rich(er) is the CTO/founder."

------
a13n
It's interesting that this post is falling off the front page so quickly. At
the time of writing it has 537 points and is 8 hours old. There are many above
it with much fewer points, that are much older (eg. 127 points, 12 hours).

It makes me wonder if YC intentionally penalizes posts like these, because
ideas like these make it harder for their portfolio companies to hire
employees.

~~~
pyrophane
I believe it penalizes articles that have a large number of comments relative
to votes.

~~~
laser
That doesn't hold explanatory power in this case, look at the points,
comments, and age. For "Modeling a Wealth Tax", "Canon's Cloud..." and "If
founders treated...":
[https://www.dropbox.com/s/vk1i2q8mlbs5x2s/Screen%20Shot%2020...](https://www.dropbox.com/s/vk1i2q8mlbs5x2s/Screen%20Shot%202020-08-18%20at%205.12.58%20PM.png?dl=0)

I'm also suspicious, although most suspect as sibling comment to yours
suggests, that it's likely something automated rather than malicious. Perhaps
there's too few comments?

------
cs-szazz
This hits home. I'm a fairly early employee at a unicorn, with no exit in
sight. I've talked to the cofounders about extending my exercise window, and
got the response of "We can probably do that when the time comes". Of course
if that turns out to not be the case, well then I'm now stuck leaving behind a
huge portion of my equity to cover the taxes, assuming I can sell to cover.

Love that this seems to be getting more popular, hope it becomes the norm for
companies in the future.

~~~
steindavidb
Hi cs-szazz. I remember being in your situation; it's frustrating because you
can't Google for answers. Here is advice I was given when in a similar
situation.

\- Find the other people at the company in your situation (size of grant, type
of options). Share your learnings with each other. Consider getting
professional advice, the Bay is full of attorneys and CPAs for whom this is a
familiar situation.

\- If you're at a unicorn, you probably have co-workers who are veterans of
other unicorns and have been through this before. Ask them for advice (or an
introduction to their source of professional advice)

\- As a group, consider asking your board to arrange a limited second market
sale to cover exercise costs and taxes. Many institutional investors are happy
to buy a little extra stock, especially if it helps with keeping senior staff
happy and focused on the right things.

\- If you're going to be doing anything involving stock without board approval
(like trying to build some kind off house-of-cards, pseudo-legal collateral
package for a loan shark) you really need to hire an attorney.

\- if you only have options, you might not be a shareholder. Your rights and
access to information might be different once you've exercised a share.

\- You can't extend the 90 day exercise window on ISOs, that's a federal law
thing. The company can convert to NSOs to extend the window, but the setup for
that conversion is complicated and expensive.

~~~
cs-szazz
I think you hit the nail on the head, it's frustrating because there's no
clear answers, very little resources on the topic.

I'm actually in Canada, so I'm not sure on the ISO -> NSO distinction.

I do think your advice about coworkers is good though, I know of a couple
other early employees in my position (similar grant sizes, also unable to
afford to fully exercise). I've often considered what would happen if all of
us decided to push for an extended window (and convert to NSO's)

As for the secondary, I don't actually want to sell. I want the ability to
wait until there's liquidity to sell, and do it on my terms. Selling now
significantly reduces future upside. What I'm really trying to avoid is
getting stuck at one company because I can't afford to leave in the future.

I do appreciate your advice though, always good to chat with someone who's
been in a similar situation!

------
seibelj
I missed over $1 million in options when one of my former companies was
acquired. I still made good money but nowhere near the same. I was pretty sure
it was going to sell, but I didn't know how long it would take (over 1 year
for sure) and nothing in life is guaranteed.

If I had exercised all the options I would have had over $300k in paper gains
for a tax bill. Instead I exercised 10% of what I had the ability to exercise.
This is one major reason I will never work at a startup again unless I am the
cofounder.

~~~
sky_rw
Depending on the size of the startup at the time you join, I found it fairly
easy to negotiate an extension to the exercise window. Likely because so few
people even bring it up.

~~~
seibelj
There was 0% chance of that occurring as the CEO was a total shark. You would
be shocked at how much of the cap table he retained vs. all the crazy funding
shenanigans that happened. Very astute player of the game, he did very well. I
will invest in his future companies but never work for him again.

~~~
eli
Why is it ok to fund that behavior if it’s victimizing people?

~~~
seibelj
I was an employee not a cofounder. I agreed to the terms. He will do anything
to succeed. I invest money in people who succeed. That is my opinion about
where I will place investments in hyper-risky early stage startups. The
biggest jerk in this whole thing is the USA tax code / IRS that made me pay
taxes on paper gains.

------
shehryarrr
That 90-day expiry window is the most archaic bullshit. Can't come up with
200K cash? Too bad, and thanks for all that hard work and long hours you put
in.

~~~
kentonv
FWIW it's rooted in US tax law. Unexercised Incentive Stock Options (ISOs) are
required to expire 90 days after an employee leaves.

The way some companies get around it is that, after 90 days, they replace the
expired ISOs with nonstatutory stock options which, as their name implies, are
not recognized by the tax code. Tax code is complicated but NSOs are
ultimately worth maybe 10%-20% less than "equivalent" ISOs.

But, at least until recently, there wasn't standard paperwork for doing this,
so the only companies that did it were those willing to innovate on their
stock plan. I think a lot of founders weren't trying to screw their employees,
but their lawyers weren't comfortable going off the beaten path.

But I think that excuse is fading now. Enough companies have done it to
provide precedent.

My circa-2015 startup looked at this and fretted a bit but ultimately
sidestepped the problem by giving everyone restricted stock instead of
options. That's only really possible at the very early stages when the 409(a)
valuation is nearly zero. But for anyone joining a seed-stage startup today,
that's what I strongly recommend: Ask for restricted stock, and if the
purchase cost is non-zero, ask them to comp you for it as a signing bonus
(which is "free" for them since they're buying the stock from themselves).
You'll have to pay income tax on the value but that should be pretty small
(maybe you can even get the company to "gross it up", but that's real dollars
for them). Then you'll never have to worry about exercising stock options or
paying AMT. Don't forget to file your 83(b) election within 30 days.

~~~
chris11
> NSOs are ultimately worth maybe 10%-20% less than "equivalent" ISOs

I'm at a company that gives NSOs. Can you explain what you mean when you say
that NSOs are worth less than ISOs?

~~~
kentonv
_Obvious disclaimer: I 'm not a tax specialist. You should not rely on tax
advice found in an internet comment. I probably got some stuff wrong below._

When you exercise an ISO, it is not considered regular taxable income. It is
as if you legitimately purchased the stock on the market for that price. No
tax is due until you sell. If you sell immediately then you pay regular income
tax on the gain. But if you hold it for at least a year, then you pay long-
term capital gains rate, which maxes out at 20% (vs. 37% for regular income
tax).

When you exercise an NSO, the gain is considered income and is immediately
taxable at regular income tax rates, whether you sell it or not. If the
company is not public, then you can't sell share to pay the taxes, so if
you're going to exercise NSOs, you'd better do it either before the valuation
has gone up much (in which case you end up paying mostly long-term capital
gains tax), or wait until after IPO (and pay regular income tax). Since
investing in startups is very very risky, exercising early probably isn't the
right choice for most regular people.

Extra complication: The US has two tax codes that exist in a sort of quantum
superposition. Each taxpayer must pay whichever tax bill is larger of the two.
The above describes the regular tax code, but there is also Alternative
Minimum Tax (AMT). Under AMT, ISOs are not special; they are treated like
NSOs. But, the maximum tax rate under AMT is 28% rather than 37%, and doesn't
kick in until higher income levels. So if you exercise ISOs before the company
has gone public, but after the valuation has raised significantly over the
exercise price, you might again have trouble paying the taxes. But if you
manage to pay them, and you manage to hold for a year, your overall gain will
probably be 10%-20% more than what you would have gotten with NSOs.

Extra extra complication: Let's say you exercise your ISOs before IPO and you
manage to pay the AMT. Years later, you sell the stock. Is your capital gains
computed based on the ISO exercise price, or the valuation at exercise? BOTH!
Under regular income tax, you owe capital gains on everything since the
exercise price, but under AMT you already paid for the gains between the
exercise price and the valuation at exercise. If you don't want to get double-
taxed you have to learn what it means to take a credit for a timing-based AMT
adjustment. This is well beyond the point where Turbo Tax gets pretty
unhelpful and you probably need to get a CPA, but in the Bay Area there are so
many rich clients that a decent CPA will charge thousands (maybe tens of
thousands) of dollars to do your taxes. Have fun!

All that said, if your plan is to exercise-and-sell in one action sometime
after IPO, then I think ISO vs. NSO doesn't make much difference.

~~~
deanmoriarty
You got everything right, but in my experience TurboTax handles the AMT credit
just fine. I personally recouped 6 figures of credit carried over across
multiple years, and TurboTax always automatically calculated the usable credit
every year, and when I ultimately sold the exercised shares it also properly
computed the different AMT cost basis, allowing me to recoup even more that
year due to the higher spread.

I would still recommend folks to properly understand what it is and how it is
calculated so they can double check the numbers, but that really applies to
pretty much every tax form.

~~~
kentonv
I guess it's gotten better. I remember a time when they asked you to please
just enter a number for your timing-based AMT adjustments without even giving
you a hint what that is. Admittedly that was a long long time ago.

------
colinrand
A few things I have noticed missing from discussion of why/why not to join a
start up is prestige and lineage. Early engineers from start ups that get
traction carry an aura of prestige (warranted or not is a separate question)
that they were witness to 'something special' that happened.

Second is lineage. Like it or not, cohorts of engineers often stick together
and create informal networks that help populate their careers with better
opportunities in the future. Going through the crucible with a team is a great
way to form bonds that can last decades.

~~~
dpeck
The first part I’d say is even less likely than a big payout. That is only
going to be true if it’s at a very well known consumer brand or just within a
very specific niche

------
codingdave
The last time I got hired into a startup with options, they didn't tell me
what percentage of equity the options represented, they just said, "You get
50K." I didn't even ask for any more details because their choice to give
numbers instead of a meaningful metric made me think to myself, "OK, so I'm
deciding whether to take this based solely on salary, and anything else is
just a future bonus, not a deciding factor." I did take the job, but never
banked on the options.

To me, failing to give you all the information isn't a deal-killer on a
potential job. But it should flavor your approach to the job, and help you
decide exactly how committed you are to the work.

~~~
rosywoozlechan
I never even think about options. They're a non-factor when deciding to work
at a startup or any company. I don't even know why they bother to give them
out. As an alternative to tiny options they could opt to give people a bonus
on acquisition or IPO or find some other incentive to keep talent. I'm
honestly more interested in 401k contributions.

------
readams
Don't forget: Even if they are a unicorn, they won't IPO for 15 years and
you'll be trapped because you can't afford the taxes to leave the company.
Imagine working for Palantir.

------
Bailin
> Investor: So, 0.1% of your ($10M) company works out to $100,000

Isn't that actually $10,000, or is there some startup valuation math that I'm
not aware of?

EDIT the article has since been updated with new numbers, and the math now
works out as expected

~~~
drcoopster
Read the rest of the article.

~~~
Bailin
I did before I posted, and the rest of the article didn't explain that
disparity at all.

That being said, it looks like the article has been updated to use new numbers
now.

------
StreamBright
Some of these problems are coming from the reason that many of the startups
are unicorns, with other words pyramid schemes.

[https://www.forbes.com/sites/forbescommunicationscouncil/201...](https://www.forbes.com/sites/forbescommunicationscouncil/2017/05/22/startup-
unicorn-or-corporate-ponzi-the-telltale-signs/)

[https://www.linkedin.com/pulse/how-tech-startups-behaving-
ne...](https://www.linkedin.com/pulse/how-tech-startups-behaving-new-age-
ponzi-schemes-kirti-dixit/)

------
bjornsing
This is the first “employee perspective” criticism of equity incentives I’ve
read that makes perfect sense. Hat off for that! :)

Sadly in the country where I’ve founded startups (Sweden) the government
mandates that the terms must be really shitty, or there are immediate tax
consequences that somebody has to swallow.

~~~
C1sc0cat
Strange Sweden has a strong private investor culture possibly employees should
be lobbying for a change in the law.

------
wskinner
For those in the comments who are confused about how various equity
compensation schemes work, the best guide I'm aware of is
[https://www.holloway.com/g/equity-
compensation/about](https://www.holloway.com/g/equity-compensation/about). It
covers all the common types - RSUs, NSOs, ISOs, 83b elections, and more.

~~~
htrp
This is a great resource.

Only annoying thing is the constant prompt to login with your social accounts.

------
nautilus12
This hits me right in the tendies. How many times have I had this conversation
to no avail

~~~
mdnahas
I think I had this conversation word-for-word with one company. I told the CEO
my salary demand and he could pay me in cash or in stock at the previous
valuation (which had happened a week earlier, so I knew the price and that
they had cash). He just kept blowing smoke at me. I decided I couldn't work
for someone who lied to me (or, perhaps, believed his own BS?).

------
rexreed
The oft-cited quote is that it's very, very, very rare to make money working
as an employee at a Startup. The farther you are away from the founding team,
the harder it is. And 99 times out of a 100 even the founding team doesn't
make anything, if there's an upside exit at all.

If you want to work at a startup as a non-founder employee, go into it knowing
that you're taking the risk and getting little of the potential upside reward.
If the pay is good and you like the company and the work, then do it. But any
stock options will be mostly meaningless.

I wish Founders would just let Employees participate in seed stage financing
and be in with the same terms as early investors if the employees want to
truly risk it.

~~~
Shorel
Your last sentence is key. I think it was a way of financing enterprises some
centuries ago. Why is it no longer accepted?

~~~
rexreed
Yes it's a curiosity.

I mean it makes sense. Let's say your salary would be $120k plus $30k in
stock. Rather than giving you stock as options, you could just be given that
stock as equivalent value (subject to a vesting schedule) and on the same
terms of the Seed Round. No money out of pocket... am I missing something?

------
blobbers
This is so true, and incredibly frustrating. I joined a start up as the first
employee, and the amount of equity they gave me was ridiculous. I got blinded
by the notion of them raising a large amount of money and hiring at a rapid
pace; the reality was they failed to raise an A round, then diluted employees
despite giving a better valuation for their seed "friends and family" round.

When confronted just talked about how that was the business. Was super
frustrating. Once I realized how the CEO operated, I left. I waited for my 1
year cliff though.

------
eximius
This thread has reminded me of a concept (whose term I am struggling and
failing to remember) that is as important, if not more, than what is
traditionally thought of as the cap table.

In the case of a sale, investors with <this term> would get their money back
(possibly at an inflated ratio) before the rest of the money from the sale is
distributed via equity.

This is important because it means that even if you get favorable stock terms,
you might still be screwed (or at least disadvantaged) if there is no money
left after this money is paid out.

Can anyone remind me of the term?

~~~
plasma
Liquidation preference

~~~
eximius
Ah, yes, I think it was this. The startup I left had unfavorable liquidation
preference seniority for employees (standard) but most of the investors had a
liquidation multiplier.

[https://angel.co/blog/liquidation-preference-your-equity-
cou...](https://angel.co/blog/liquidation-preference-your-equity-could-be-
worth-millions-or-nothing)

------
sambroner
Good read. I like the new story format to rehash the lively startup vs big
tech employment debate on HN.

It could almost use a part 2 to explain aspects of the conversation (how is
the employee making a $300k investment, preferred stock, etc), but I don't
think anyone is missing the joke.

The story format makes it clear _how_ employees are getting a worse deal than
investors. Still, employees receive cash dividends every few weeks (a salary),
isn't that a positive?

~~~
neltnerb
The employees receive "cash dividends" that are typically lower than market
rates for a salary plus the second they leave for a new job they will likely
end up creatively shafted out of the difference in salary they effectively
invested in good faith.

Because they're not working there anymore it's "demoralizing to others" if
they retain the ownership that, again, they invested a part of their salary
for in good faith. You've probably heard that one before.

It is absolutely outrageous to tell an employee that they're getting paid less
in exchange for equity and then turn around and declare that the equity
doesn't count the same as if they got paid market rates and just invested a
portion of their salary.

------
faithfulcat
I have a question on this. I am employed in a startup since the last 3 years.
I already have 100k shares vested (5 year window, 3 years passed). I can buy
them at a low strike price (<$100 for all shares). However, I think that when
I buy the options, I'll have to pay the tax on the amount?

What happens if I don't pay the tax but just buy the options? Will I lose my
options because I haven't paid the tax?

~~~
bialczabub
In the US, any stock held past December 31 of the year in which it was
obtained by exerciing an ISO (the most common kind of startup option)
generates "income" according to the Alternative Minimum Tax (AMT).

AMT is essentially a completely different taxation system that runs in
parallel to regular income tax in America. If the shares you exercise are
worth a good amount, you will probably wind up paying AMT, especially if you
live in a place with high state and local taxes.

After calculating your tax liability for both systems, you have to pay
whichever is larger of regular income tax or AMT. Usually this payment, or
part of it, comes due April 15th of the next year. Your company is not
involved in your reporting and paying these taxes, but it's a federal crime to
either misrepresent your income (which omitting the exercise from your filing
would be) or not to pay the appropriate taxes.

If you haven't realized yet, a lot of this is complicated, so do your own due
dilligence and/or work with a tax professional.

The AMT tax rate is 26% or 28%. The "income" considered by AMT for exercising
and holding is equal to the difference between your strike price and the fair
market value (FMV) of the stock on the day you exercised. FMV is based on a
409a valuation for companies that are still private. For public companies it's
the market price for the stock on that day.

I'm not sure what you mean by your having "a low strike price (<$100 for all
shares). For 100k shares, a strike price of $0.001 would cost $100 to exercise
100k shares.

To make the math easy, I'll give a hyptothetical...

You have 100k vested shares with a strike price of $0.10. The company has done
well for the past 3 years and now has a FMV of $3.10 per share. To exercise
100k shares, you would need to pay $10k. However, if you're still holding
these shares on 1/1/2021, you will have an AMT tax liability due 4/15/2021 of
~28% * ($3.10 - $0.10) * 100k = $84k.

Now it's weird how AMT works, so the above number isn't exactly what you wind
up paying, but it's close. In general, the case stated above implies you would
owe a sizeable amount in taxes if you exercised and held the stock.

People do this if they're leaving a company and their options will otherwise
expire, or if they strongly believe the company will IPO or be acquired soon.
Exercising starts a clock on the stock you're holding. If you hold the stock
for a year after you exercise, your earnings will then only be taxed at the
long term capital gains rate (probably 20%) rather than the ordinary income
tax rate (usually higher than 20%). Earnings are the sale price minus the
strike price (what you paid to acquire the stock or your "cost basis").

The downside of exercising now is 1) you have to pay cash to exercise, 2) you
will generate a tax liability without necessarily having a way to sell your
stock, and 3) if the price of the stock falls, the AMT you paid winds up being
an even greater percent of the value. There is a way to receive credit on
future tax bills for previously paid AMT tax that wound up like this, but it's
complicated and best to be avoided.

The upside is mostly to obtain the a lower tax rate on the eventual sale. Most
employees still with the company who didn't exercise their stock early don't
exercise it until they plan to sell it.

------
fredgrott
I ran into this example recently by some startup in Las Vegas, job said junior
flutter dev at $80k plus corp apt paid oh BUT no relocation expenses paid you
have to move out their with just your clothes on your back and yet they are
still looking past their Aug 1 deadline because they thing they will find a
senior flutter dev on those terms..

------
TedShiller
Well, employees are not investors, even if the author is implying that they
should be the same, or should be treated the same. Employment contracts are
at-will, nobody is forced to agree to compensation.

Of course, if the compensation is horrendously unfair, the top talent will not
accept it.

~~~
ClumsyPilot
> Employment contracts are at-will, nobody is forced

What is the point you are making here, other than stating the obvious? It's
the same for investment, what am I missing?

~~~
TedShiller
The point was that it's a free market, like it or not. Companies won't treat
investors the same as employees. They never have. If they do, let me know.

------
olliej
yuuuup.

This is the reason I won't work for startups. If you want me to take a below
market rate job then I'm an investor, and you can treat me as such.

I would argue early employees are investing much more, $ for $ than any VC.

------
yalogin
Are these terms for stock any different for even the first 20-30 employees? Or
are they also get the same terms? Why do people say being the first 20-30
employees in a start up is good?

~~~
cybersol
The terms are often the same, but the percentage is more like 1% than 0.1%.
Also the easy way up the management chain is to be a warm body in a rapidly
growing company.

------
borski
Early exercise and ISOs fix a lot of these problems.

------
zebrafish
Isn't this capitalism? Labor and capital are two different factors of
production. If you're willing to take the pay cut and risk associated w/
joining a startup, but are unhappy with the returns, why wouldn't you just
keep your job, invest the $100,000, and get access to the preferential terms
given to capital?

~~~
ahelwer
Good luck investing in private companies with $100k. The only way us serfs can
get access to those opportunities is to chain our futures to the company and
go work for them. Also means we can't diversify our portfolio like the VCs
can.

~~~
icedchai
You can diversify by investing in public markets, where you have actual
liquidity. I've made more off of the Facebook stock I bought after the IPO
than I have from any of the startups I worked for. One did have a "successful"
exit, meaning the returns were positive, though nothing to write home about. I
would've been better investing that money into Apple or AMD. All the people
complaining about their worthless stock options need to realize that
generally, the investors all got screwed, too.

~~~
ahelwer
The whole thesis of VC funds is to invest in many companies and have a few
home runs drive returns. VC-backed companies failing is just the cost of doing
business in a random extremistan world. For programmers it's as you say -
either nothing, or at best "nothing to write home about". Unless you win the
lottery.

~~~
icedchai
Yep, I understand. I've worked for 5 startups in roughly 20 years. Only one
had any real success, resulting in that "okay" outcome. I have more than
enough capital to meet accredited investor status, and wouldn't invest in a
private company again. (I have in the past and know I'll never see that money
again.)

------
rdlecler1
As an investor I don’t ever recall getting a paycheck from a company.

~~~
pb7
How many hours of work do you do for each company you invest in?

------
sharklazer
> Founder: Sure. We’re looking for a $100,000 commitment, and in return, you
> would be getting 0.1% of the company.

Founder: Sure. We’re looking for a $100,000 commitment, and in return, you
would be getting 0.1% of the company on top of $100,000 in pay.

FTFY

~~~
tylerhou
No, the $100,000 commitment represents the opportunity cost compared to a
higher paying job.

That is, if the distinction is between:

1) $150,000 + 0.1%, or

2) $250,000

Picking (1) would equal trading $100,000 for 0.1%.

