The only reason I'm not still claiming my $3,000 a year is that we had some gains that could be offset by those losses in 2007 and 2008. Of course there are the much higher fees to have your taxes prepared.
I agree with the Times that it is the non-executive employees who get the worst of it, both because it may be the only investment they have (other than their 401k) and they may not have any experience in managing risk.
For example, the article mentions, and my own experience mimics, that the executives are in a bind when it comes to discussing company performance and prospects. Legal risks abound if they mislead and existential risks abound if they demoralize the company. It would be especially problematic when the company has started the IPO process as Good had.
Then there is the greed factor that comes in on everyone's part. The board turns down an $825M offer because they feel it is their duty, given they expect the company is worth more than that. Employees don't cash out some of their holding at $3/share expecting a bigger IPO lift. Both angry because nobody came from the future to tell them, hey this is the best offer you are ever going to get for this stock, take it. And so they "ride" the value down and get angrier and angrier but its hard to know at whom.
When this happened to me, I was holding 10,000 shares of Sun stock that had been $60 a share in 2000, that was going down and down and down. It later reverse split 3:1 (so down to 3,333 shares) and sold for $9.50 a share to Oracle or about $32,000. I was really angry at myself for "losing" so much money. Of course it wasn't that I had "lost" the money, I never had it, it was all on paper, I just hadn't converted at the time because I was hoping to convert when it was even "more". Or put another way, my greed kept me from selling something which could have paid off my mortgage at the time.
Quoting from the article:
>Employees had little idea that an outside appraisal firm had valued Good at $434 million and the common stock at about 88 cents a share as of June 30, according to investor documents and legal filings.
It just sounds to me like the greed on management's side trumped anything the employees may have had.
Thanks for your story. I was part of a startup which sold as well. One employee was left with a tax burden to pay off, and I broke out even ($0 from sale, no tax). The founder took home money though......
I think it's important that people hear these stories when deciding what their personal reasons are for joining a company.
It is an easy trap to fall into, you're in your own future looking back with more information than you had then, and you are seeing how you could have acted differently for a much better result. And then you beat yourself up for not acting differently. But the truth is it isn't your fault.
But the learning is, be more mindful of choices (and non-choices) and their future financial impact. It is much easier (and desirable) to see the "success" scenario, than it is the "failure" scenario, but if you work it out and sell half when you have the chance, then you reduce future outcomes to "only capturing half the value" and "giving up half the gain". Both of which are more tolerable than "losing all value".
According to the article:
-June 30: outside firm values common stock at $0.88
-'Late July': Board knows they only have 30-60 days of cash
-'August': Some employees buy common stock at $3.34/share
The point is to know that there is information that you can't know which could swing the decision either way, and information you do know which could be true or false. And then objectively looking at your choices and deciding how much risk you're willing to take and then owning that decision, no going back later and beating yourself up for it because of something you didn't know.
As a startup employee, you need to be mindful of opportunities to convert your non publicly traded stock (or options) into cash. And then decide when (and if) those opportunities arise, what to do about it.
While some folks advise people to exercise their option when it vests so that later when they sell it they can get long term capital gains treatment, I advise them to not do this. My advice is based on looking at the four scenarios:
1) Don't exercise your options, stock is worthless
Total win, you didn't lose any money in the process.
2) Exercise early, stock is worthless
Total lose. AMT tax paid which can only be recovered $3,000 per year, money paid to exercise is all lost.
3) Don't Exercise, stock is worth 10x what you paid for it
Partial win, you get to pay for exercising the stock and the tax out of the proceeds of exercising and selling it, but you are taxed at the ordinary income rate and if you get into a high enough tax bracket a lot of deductions get taken away.
4) Exercise early, stock is worth 10x what you paid for it
Total win, you sell your stock and pay a minimum of tax on it.
Three "win" scenarios, and 1 total lose scenario. You remove the total lose by not exercising your option which leaves you with two "win" scenarios but not winning as much as you might have (lower risk, there is no "lose" scenario)
I came to the conclusion early that the only way a trader could be happy is if they bought at the very bottom and sold at the very top. Otherwise there was always a lingering sense of regret. The only way you could have done that is if you can see the future, which is obviously impossible, but your sense of regret doesn't think about that.
After that realization, I decided that I make my selling decisions based on best knowledge at the time of sale, and not to regret selling for higher later on, because it would be impossible to know if it went up further or not.
I remember when Blackberry was in its patent fight with NTP and they made them some insane offer and NTP turned them down, much to the shock of Blackberry. I remember one of the Blackberry lawyers saying, "I'm not sure what they're waiting for, the offer we gave them would give every employee of the company $40 million dollars."
It was a total PR stunt to show the company's employees they were getting screwed by the owners.
When you got the stock, was it issued as option grant, or actual stock grant?
What would your advice be to people who hold most of their "investment" in a single companies stock?
> What would your advice be to people who hold most
> of their "investment" in a single companies stock?
A lot of people I knew in the dot com boom sold their stock and bought houses. That converted a fluctuating value asset into something they could live in regardless of its "value". They looked like geniuses in 2001. When we sold the company I had helped start I took a chunk of the proceeds and put it into a separate account to help my kids college education. (it wasn't a 529 but simply a named account that my financial planner helped set up).
Doesn't have to be fancy, putting proceeds into and S&P500 ETF is simple, low cost, and the S&P 500 has out performed a lot of single company stocks. (and underperformed some to be honest but you are trading future value against risk).
While working at Boeing, their EPP allowed you to purchase Boeing Stock, or invest in a managed fund. This was post 9/11 so their stock was hurting, so I invested 90% into their stock.
These days in the startup world, folks are given Restricted Options, which don't offer a lot of flexibility.
Even with a public event, employees have a 180 day lockup period before they can sell any vested options.
> Even with a public event, employees have a 180 day
> lockup period before they can sell any vested options.
I had a friend who worked at one of the early e-retailers. During the lockout period she was a multimillionaire (on paper), and by the time it ended her options were under water. It made me wonder if you could give up part of your potential payday for a little certainty.
I mean, the details of the article are all fine and dandy and interesting (no sarcasm, there's nothing wrong with the facts and they're at least worth a story), but the headline and framing seem to imply that there's some sort of alternative?
The only problem unique to the tech-unicorns here is exercising stock options when you can't pay for the taxes. Don't do that.
The cost is relatively trivial compared to a programmer's salary - about £200/yr. Unfortunately you can't claim it against tax in the UK.
One of the main reasons the car companies stumbled are unions. The whole thing has degenerated to insanity squared.
For example, GM had a clause in their contract requiring them to not fire employees displaced by technology or automation. In other words, if you improve your workflow and process and can do the same work with 25 people instead of 100, you can't fire the people you no-longer need. All incentives to innovate in process and technology very quickly evaporate with such insanity in place.
They reportedly had thousands of people show up for "work" every day drawing 95% salaries and full benefits only to go to this building, read the newspaper and drink coffee all day.
Unions had their day and reason to exist. I am not proposing they need to disappear. However, they need to mutate into something that works towards a mutually beneficial and sustainable ecosystem.
By pushing for, and obtaining, ridiculous grants, they create short term apparent gains and HUGE long term losses as thousands of people lose their jobs when they industry they worked in simply crumbles under the weight of onerous arrangements that cause them to lose the ability to compete and remain financially viable. In fact, if you look at Detroit, one could argue the unions went beyond costing people their jobs and companies their ability to compete, they actually succeeded at destroying a whole city.
How is this, in any imaginable reality, good?
A couple of articles:
This one covers other issues:
From the Forbes article:
"A worker might be able to retire in his early 50s and collect an annual pension of $37,500, paid wholly by GM. By 2008 there were 4.6 retired GM employees for each active worker. Did anyone think this was sustainable?"
It's called "killing the golden goose".
You earn a union by not treating your employees well, if you knew the history of the labor movement in the 30's you'd better understand how things got to be the way they are, and why the relationship is adversarial, instead of cooperative.
If your employees are trying to unionize its because of longstanding grievances held by a significant minority if not majority of your workforce - grievances that have either not been meaningfully addressed, or can't be aired, because there is no workable mechanism to air them. It's not just pay (though often is primarily pay - we'll put up with all sorts of shenanigans for a big paycheck) if often as much about working conditions and esprit de corps as it is pay.
If you don't want a union, pay your employees well (well above market), or have a great working environment and instill a sense of pride and appreciation in your management - and make it clear you value their contributions as well - it's this balance of pay and working environment that keeps a workplace healthy and union free.
The car companies stumbled because they had a high cost structure and they ziged when the market zagged - while the union contributed to the high cost structure, they had nothing do to with changing market conditions.
Third option seems to move the jobs out of the country, which is what happened to highly unionized manufacturing sector.
The elephant in the room is the migration strategies the employer starts exploring when faced with an added cost (offshoring, moving to a right-to-work state, increasing automation, switching from vertical integration to third-party contractors).
Going to China isn't, as some like to put it, due to greedy executives. It's actually due to responsible executives who are left with not choice but to go to China. As competitors stared to offshore many, many years ago, companies who did not were left with significantly greater cost structures and unable to compete.
I had exactly that problem 15 years ago when my competitors started to manufacture products in Korea while I was manufacturing in the US. And it wasn't just about labor costs. Our supply pipeline can be incredibly expensive. Our costs are higher every step of the way, the more you "touch" a component or assembly the more cost increases. The same electronic components --same part number, same manufacturer, not clones-- can cost five or six times less in China due to supply chain advantages.
Sometimes I feel folks who push unions in the US and think they are good for workers truly don't have a clue. All one has to do is try to manufacture something, anything, in the US to start understanding why we can't think 1930's mentality will continue to work. Even something as seemingly simple as a dog leash is almost impossible to manufacture in the US on a competitive basis. People just don't get it.
News flash: We are nearly one hundred years away from the 30's. Just because things made sense then (and they absolutely did) does not mean they make sense today.
What I am putting on the table is a verifiable mathematical fact. No opinions here. Fire-up Excel and do the math. Not sustainable. And that's the point. I didn't say unions need to evaporate, I said they need to mutate into something that truly works for a sustainable common goal. Today, for the most part, they do not. And we all pay for it in one way or another.
I'm not trying to justify the adversarial relationship the UAW takes with the big three - but as the old saying goes, it takes two to tango, and for a long time, neither side was willing to change the status quo. Not all unions are the same, many have what could more be described as a partnership.
I don't have much in the way of sympathy with the Big Three however, they rather than really negotiate when times were good, they agreed to absurd contract provisions - a little pain now, can save a whole lot of pain later.
The reason GM as you pointed out had 4.6 pensioners for every worker, is General Motors used to be a much much larger company - in 1970, GM had 395,000 UAW workers, in 1998, 210,000 and in 2007 had around 75,000, today (February of 2015) it has around 50,300. So in, 1998, it was roughly 1/2 its 1970 size, 2007, it was around 1/5th - today its around 1/7th.
1/5th is awful close to the 1:4.6 ratio you pointed out.
As far as the 20 years and you're out provisions? I have a friend who worked for GM for 20 years, he has - bad hearing, bad knees, bad ankles, bad feet - plus 15 years of exposure to chemicals in the paint booth - then another 5 of working in a stamping plant. He earned every dime of his pension, and paid for it with ill health, and a diminished quality of life for his remaining 20-30 years on the planet, because essentially he's a man in his early 40's with a body of someone 15 years his senior.
I have a couple of friends who own air conditioning and heating companies. They do very well now, yet they both started with one beat-up truck crawling in attics by themselves to earn a living. Years later they have employees and do well. They have both gone through surgeries of all kinds due to the punishment they subjected their knees and bodies to during their years crawling in attics doing duct work.
I know graphic artists who have had multiple surgeries on their wrists due to carpal tunnel injuries.
Carpenters who have lost fingers due to unfortunate accidents. And musicians with permanent Tinitus due to playing in loud environments for twenty years.
I spend my days working in front of a computer, probably 80 hours a week. There are consequences to that as well.
I guess the point I am trying to make is that all activities come with consequences. Yet not one of these people were forced to take and keep these jobs. Let's not blame employers for providing work people take freely. I am not justifying negligence in the case of unsafe working conditions. That is a criminal matter.
Would he have stayed on without the great pay, benefits and pension? probably not, not enough financial reward for the work, he's smart enough to do anything he decides he wants to. That on some level is the price of doing business - or was at least for a long time - the UAW gave concessions to save the Big Three in the form of a two tier wage structure, which the big three appear to be willing to gradually eliminate the two tier structure - or at least bring them closer together now that they are financially healthier.
The thing is, I'd bet money though, if if I looked into it, you'd find autoworkers in each company (or anyone doing heavy assembly like that to be similarly well paid, relative to their local wage).
If a programmer's union formed it would probably be a trade union more similar to the NFL Players Association, or the Writers Guild of America, than a labor union for relatively unskilled workers. The NFL, Hollywood, and TV have obviously not been harmed by doing deals with these unions.
Ah, yes. The unions got GM to become lazy with quality and innovation in the 60's and 70's when GM had 60%+ market share.
Ah, yes. The unions forced automobile manufacturing management to take huge pay packages.
Ah, yes. The unions with their silly demands for a 40hour work , and sick leave (which the majority of Americans still don't have)
Read something other than wall street journal and forbes to get better info about unions.
For example, try to answer the question about how GM can survive, grow and innovate when it has nearly 5 retired employees for every one current employee. And, every single one of those retirees is drawing a huge percentage of their salaries as their pension, for life, as well as enjoying tremendous paid benefits.
The problem here is the divide between people who have business experience and those who do not. Any small business person understands, without having to run any calculations, that having the cost of a position multiplied by 6 (because you are paying 1 active worker and 5 retirees) is utterly unsustainable. Or that, installing a series of automated welders while not being able to lay off 50 people is a formula for bankruptcy.
Do you hire a gardener, cleaning service or pool person? Imagine having to continue paying them 80% of their monthly fees after they retire. And then you have to hire a new service to do the job.
Now you go out and buy a robotic lawn mower, vacuum or pool cleaner.
And you can't fire them.
You have to continue paying those service providers for a service they will not be performing because their contract says so. Forever.
Get the point?
We can engage in the fallacy of attacking the source all we want, yet, it is impossible to attack the math, which is the point here. These arrangements are mathematically predetermined to result in the destruction of companies and jobs unless Superman comes down from the skies and brings with him a supernatural solution of some sort.
Or, we pretend all is well, grab some tax money to continue propping them up and shift the problem forward to another generation. Which is exactly what we've been doing with both unions and government programs.
I'm still not sure about the value of unions, but I think it is an area that should be explored with a modern mindset.
The problem is that American unions succeeded at entering into a destructive feedback loop where union management had to justify their existence (and huge salaries) by always grabbing more and more for the membership. Even to the point of the ridiculous examples I laid out from the automotive industry.
This seems to be a common failure in both government and organizations such as unions: Past a certain point it is nearly impossible for management to go to their members and say something like "We need to stop asking for more on pensions, salaries and benefits because we are going to cause damage to the future viability of this company".
Why? Because of pandering or populism. There's always a sick would-be leader who will step in and counter that with gifts-a-plenty while vilifying the guy who proposed moderation or, the unthinkable, cut-backs and concessions in order to ensure things remain viable for the greater good.
That's the mechanism that has turned a lot of unions (not all) in to agents of destruction rather than responsible participants in an ecosystem. Union members are NOT bad people. They, like anyone else, would like to live better, earn more and retire well. They trust and follow the people they hire to represent them, the union leaders. This leadership, high on power and, yes, in cooperation with incompetent company executives ultimately fails their membership by creating situations where the company's own survival becomes mathematically impossible.
You know, what's interesting about this is that down-votes fail at masking reality. We have an entire city, if not a state, to serve as evidence for the sheer destruction caused by the combination of bad union leadership when combined with incompetent corporate management. Had these companies not been bailed out to the tune of billions of dollars Detroit would have cratered under the weight of an utterly unsustainable equation.
Ok, sure, but what do you do when you have all of this equity vested on paper and either 1) you get fired, or 2) you want to leave the company?
Tech employees need to wake up about common vs preferred shares, and that the former are worthless. They are NOT worthless because they are "lottery tickets" and most startups fail. They are worthless because they are designed, as a financial instrument, to be fake equity with no real protection from dilution and liquidation preference.
The most insulting aspect of common shares is that engineers get talked into pay cuts on the premise that they get these options, essentially being asked to invest a portion of their potential compensation into the company, but are then told they don't deserve to be given real equity because they aren't "real" investors.
I understand that from a founder's perspective, asking someone to give you millions of dollars is significantly more challenging than asking someone to take a 30% pay cut, so it's easy to give strong preference to the former. But, supposedly and debatably, it's also difficult to recruit talent, and it's going to be significantly more difficult as employees increasingly realize that Common ISO's aren't "lottery tickets" they are "toilet paper". So either startups are going to have to re-invent these equity packages, or the talent will flock away from the VC companies and towards companies that can pay salary. Of course, the VCs have a huge playbook to flood the market with more talent to (taking $100 mil taxpayer money to fund the same bootcamps they invest in to work for the same companies they hire via Obama's tech talent shortage program, for example), so who knows.
You've muddled orthogonal concepts together here.
1. Common shares are not worthless. In general, just ask any founder who's had a successful exit. Founder shares (unless purchased along side financial investors for hard cash) are always common shares; if your straw man were correct, then there would be no wealthy founders.
2. Liquidation preference is a negotiated term which does have a rational basis for existing. Whenever you're putting in a larger proportion of the company's cash than the ownership you're buying, it is crucial to have protection against someone essentially liquidating the company for the cash. Say investor X is putting in $8 into a company that has $2 in the bank, but X is only buying 10% of the company. If the company is liquidated for that $10 tomorrow, X gets back $1 and the common stockholders get $9. (There are other protections against a perverse liquidation incentive, too, but this is the economic one.)
3. The "real protection" from dilution is raising reasonable tranches of capital at a monotonically increasing series of valuations, which valuations actually correspond to a clearing price between bid and ask. Three key items here: "reasonable tranche," "monotonically increasing," and "clearing price."
a. Reasonable tranche: raise reasonable sized rounds, because huge rounds create weirdness (lopsided power, outsized compensatory "asks" by investors, etc.).
b. Monotonically increasing: needless to say, down rounds are the big dilution problems. Sometimes they happen because life isn't perfect and problems come up. Sometimes they happen because the company screwed up and raised too much at too high a valuation previously.
c. Clearing price: if the company and investor actually agree on the "true" valuation then it's easy. If they still try to force a deal where the company wants a crazy "optical" valuation that the investor doesn't really see, then you'll get layering-on of sweeteners to make the effective valuation much much lower than the notional, but all kinds of terrible side effects may accrue.
1) Ok, Google/FB common shares were worth something. Those are extreme outliers in exits, and had ethical founders. But founders have another option if they drive the common share value to nothing - retention bonuses. They can say, ok we will make all the common shares worthless, but you can just give me a huge package as part of the aquisition. So employees can't rely on founders looking after common shares out of self-interest. If you read the article, it looks like that's extremely similar to what happened in this case.
2) All these financial experts can figure out a way to protect their necks without leaving the employees necks under the axe.
3) Real protection would also be voting rights, which generally preferred shares get a lot more of, and then less tangible things like invitation to board meetings, something mere employees accept is absurd to expect. As long as employees agree to sacrifice compensation while being told they're not investors and don't deserve to be treated like one, they're getting hoodwinked.
Those people all made an entire career's worth of money, or more, all at once* and with capital gains tax treatment to boot. (* well, after an earnout / lockup)
They also exclusively held common shares.
The deciding factor is whether their exit value was a meaningful multiple of the invested capital. If you raise $100 M and sell for $100 M then it's hardly fair to expect a windfall. If you raise $50k and sell for $5 M it's very fair to expect a meaningful personal outcome.
The important distinction is employee vs founder. You mention founders in your comment.
Founders typically would hold a double-digit percentage of common shares.
Employees that might get offered 0.1% if they are an early hire, or less assuming later stage (discounting exec hires here, because the OP of this thread was about engineers).
Founders also typically got their common shares at a very low valuation - let's say they were issued pre-money, then their value to the tax man might be $200K (of a 2M pre-money valuation), but with a vesting schedule that makes them tax efficient.
Employees typically get their common shares at a higher valuation, post money, with a 200M valuation. Their 0.1% is also worth $200K to the tax man.
See how this is different?
Liquidation preferences are not the default in startup financing. They show up when money on better terms is not available.
Any management team is free to walk away from a term sheet that has liquidation preferences spelled out towards a term sheet that has VC buying common shares with no downside protection whatsoever, if such term sheet exists.
How do you allocate the pie fairly?
How how do you ensure that risk is properly rewarded?
Edited to add: your item 1 overlooks the fact that founders hold a much larger piece of the company than any post-founding employee. An exit that makes a founder wealthy may do nothing more than compensate an employee for the salary difference.
of course this is HN so that's entirely reasonable because founding a company is a massive risk but being employee number 5 at a company that might go under in 3 months is fine.
Part of the issue at question is whether it's worth it for employees to bet on founders having done (and continuing to do) the right things with regards to investment. So when assessing the risk/reward of equity over cash, an employee now has to not only examine the marketability of a company's product and sales, but also whether they can trust the founders, board, or whoever to be responsible with equity dilution and valuations.
Given the huge variety of unknowns (and very high risk of dilution or lack of a liquidity event), as a non-startup-employed observer I have to say I'm very confused as to why startup employees take effective pay cuts for stocks.
I've seen countless friends get burned in various ways believing they would be getting rich soon from their options and then fizzle. Either through the company just never having a liquidity event or being sold for less than previous valuation rounds.
The worst is I've seen people reject job offers that were far superior in cash compensation because they had a recent big option grant. A friend of mine stayed on at a place even though he didn't get a cash raise but instead was given some options that vested over a few years in addition to the options he already had, some of which were vested. Did it not ring a bell that a company that can't give him cash but can instead offer compensation out of thin air in the form of options is in trouble?
And then there are the golden handcuffs were an employee is scared to leave because their options have too high a fair market value and their tax costs would be considerable. Further limiting their career growth.
I've seen the other side too where friends have taken home a really nice pay day after liquidity - but it is the exception and not the rule.
I recommend joining young companies that are willing to pay you a lot of cash for your exceptional ability and experience (execution is critical at this stage across the entire company from engineering to sales) and maybe take it easy on the option grants. Some stock is fun but don't count on getting rich on it.
I've turned down more startup jobs than I can count. When I interview at a startup, I thoroughly research their market, their competitors, their product, and their business model. I ask questions about how they came up with the idea, and how they know other people want it, and what questions they asked when they did their market research, and how the idea has evolved in response to new information. How did the team meet? What's the company culture like, and what do they value? I ask about financials - are they profitable? What's their runway? What's their revenue and revenue growth rate? Is it recurring revenue or revenue for one-off contracts? What's their churn rate? I ask about funding - who is their VC? How many rounds have they taken, what's the preference overhang, how many more do they anticipate taking? (And then in my head, I'm running over the financials to see if this squares with their growth & revenue plans.)
If they're cagey about this, I walk. Some companies are, and that's their right, and I'm not going to work for them. Others are very impressed that I'm doing this level of due diligence, because it shows that I view my time there as an investment, and will invest the same level of diligence and effort into the job itself.
Equity compensation itself is not the problem. Equity itself is great for employees - they have an information advantage over every other shareholder of the company (including the VCs), and if they're an early hire, they can have a meaningful effect on the value of that equity. But to take advantage of this, they need to do due diligence as if they were an investor - they are, after all, they're investing their time, which is far more valuable than a VC's money. Equity is much more highly levered than salary - its value depends on how events play out, not just on what you've agreed beforehand - and so you should make sure you have enough information to make a reasonable guess at its value before accepting it.
In Good Technology's case, just look at Crunchbase:
There are red flags galore for startup employees there - the funding history started with a Series E in 2005, with the company supposedly founded in 1996. That's the time to ask about the company history, which the article says started as a startup that bought Motorola Mobility's business. Every funding round since then was either private equity or debt (!!), along with a secondary sale.
If I saw just the Crunchbase investment history and heard that it was a startup that purchased a spun-out portion of Motorola, my immediate reaction would be "This isn't a startup, this is a mature private company with a business model that requires large infusions of cash." (I've actually been burned in the public markets by a similar company - mature companies should not need regular cash infusions.) And I'd value the company accordingly - most likely, I wouldn't take the job there at all, but if I did, I'd assume that salary and experience is all I'm going to get.
tl;dr: Agents exist when it's hard to get a job. It is not hard to get a job in software right now. If your company mistreats you, you figure that out pretty quickly and move on to a company that doesn't mistreat you. There's no need to pay anyone to make that happen; in fact, you can get paid a significant amount more just by asking around.
You hear about stories of startup employees getting screwed because the software engineering labor market (particularly for startups) is expanding rapidly now, and so there are a large number of employees who have no experience in the industry. These people are easy prey for a good salesman who wants to make their sham company seem like one of the winning startups. But it takes only a couple months for most smart employees to catch on, and move to another job.
My first couple tech jobs were at startups where I was paid below market rate. The first one had some serious shenanigans going on when it went down in flames; the second had no shenanigans, it just wasn't going anywhere. But I left, and my compensation very quickly caught up with and then surpassed what I thought possible. I probably ended up significantly better off, financially, by taking the hard knocks early and learning the lessons myself rather than paying an agent 10% to handle everything for me.
As they say, "when someone with no experience does business with someone with lots of experience, the person with no experience gains some experience."
This is not an accurate heuristic for "how good is a company doing." There are many legitimate reasons you'd want to pay someone in stock instead of cash.
> And then there are the golden handcuffs were an employee is scared to leave because their options have too high a fair market value and their tax costs would be considerable.
This is definitely something to consider. If your options agreement allows you to early exercise you can avoid all of the tax penalty and remove the golden handcuffs if you exercise immediately (before you have realized a gain) and file your 83-b with the IRS. If it doesn't allow early exercise you probably don't want anything to do with it.
> I recommend joining young companies that are willing to pay you a lot of cash for your exceptional ability and experience (execution is critical at this stage across the entire company from engineering to sales) and maybe take it easy on the option grants. Some stock is fun but don't count on getting rich on it.
I'd recommend learning as much about business as possible, and consider working at a startup an investment, and you an investor. If you aren't comfortable investing then you shouldn't be working in startups. There is basically no reason to work at a startup if you aren't favoring the equity ($, work-life balance, perks etc. are all going to be better at BigCo).
I've been with 5 startups over the last 15 years. Each had developed good, commercially-viable, revenue-generating tech. But, in all cases, instead of going IPO, each was acquired. And, usually they were acquired by other investors' or board members' companies (sometimes at a loss). I would love to know the actual statistics for how many 'ground floor' developers get rich on options, but I'm guessing that it's very few.
Startup culture is cool - I love it. They give me piles of money to experiment and develop new stuff and build new products. If you have an 'inventor mindset', like a casual work culture, and like to see shit get done, it's a great way to go. But, unless you're a founder or very early employee, make sure you negotiate for market-rate compensation with reasonable working hours.
Of course, this all depends on the specific company and its board, but generally the options game is a scam. I've made a decent amount of money over the last 15 years - enough to retire on. But, very, very little of that was from a big startup cash-out. Instead, I just negotiated my salary and benefits effectively, saved a ton, and invested as much as I could.
Compound interest is your friend; your employer's stock options? not so much.
This x 10. I wish people realized this more often.
Holy shit is that even legal? It seems like a giant conflict of interest.
I'm not disagreeing with you, per se, but I do marvel at the sheer volume of information young engineers are expected to grok these days...
There's this scene in "the big short" where Eisman is talking to the credit default swap sales guys from one of the big banks. He's never traded credit default swaps before so he knows that he is at a disadvantage. He asks the sales guys, "How do I get f*cked in this deal?" And then he sticks around until they explain the scenarios to him. That's a really good lesson about financial securities. There are so many embedded options that each have a different payout scenario. You need to understand what are the potential future scenarios and how do they impact your position.
It did cause some interesting tax issues for people when we were bought, but I don't think I'd sign any other set of terms now.
But then, the founders were very classy.
Having an acceleration clause isn't anything out of the norm though. I negotiated an acceleration clause if upon we took qualified investment of a certain dollar amount.
The first is "what the founders have, but less of it." It's very difficult for the founders to make a boatload of money off the company without also compensating you. These have some sort of value - if the founders want to make $10MM off it, you're getting something like $100K.
The second is everything else. There's an obvious incentive to screw over the "founders don't have this" class of equity, so I value these at zero. This includes the vast majority of stock options.
Democrats and VCs have a very tight nit relationship.
Companies will often do everything in their power, including running roughshod over their contractural and legal obligations, to prevent employees from selling stock on the secondary market. If they're not total jerks, they will encourage you to participate in "internal buybacks". Unfortunately, these buybacks are run as a service for investors, presenting them massively undervalued in exchange for loyalty.
Regulators have just begun to take interest in the abuse of transfer agency by privately-held companies distributing shares in lieu of compensation. Similar attention should be paid to the information provided to prospective employees at the time of hire, when the decision to accept stock in lieu of cash is made.
* Internal buybacks ("tender offers") were actually all above the current (publicly-listed) stock price. Private valuations can be pretty inflated. I think it's a good idea to take these and diversify.
* My company did use a backchannel to stop me from selling privately to one of their investors before the IPO (at roughly double the current market price). So I think the spirit of your comment is right.
It seems like the anti-equity crowd here will never be happy. They want cash when the company offers equity, and equity when the company arranges for an offer of cash.
Most of your comment is just wrong.
EDIT: Ah yes. Downvotes. On Hacker News you get to pick your own facts. Lolz.
Taking investor's money and building a company that is only worth the value of what the investors put in and then being pissed you didn't get rich in the process is pretty nuts.
If investors are breaking even then employees deserve to at least not be losing out thanks to taxes. Preferably they should get enough return to roughly make up for any salary loss they took in exchange for equity.
If the VCs start raking in cash then employees should too.
The story here is execs made money (6 million for the CEO), VCs roughly broke even, employees got screwed over. That, IMO, is completely immoral and shouldn't be allowed to happen.
I agree with you about the CEO.
1) We need a different term for the "post-money valuation" that VCs place on a company after fundraising. It is not a valuation in the same way that a public company is valued, due in large part to the preferred stock liquidation preference. Employees hear about a $1B valuation and assume that the IPO or acquisition price will be some multiple of that "valuation".
2) We need some tax reform that prevents employees from needing to pay a tax bill with cash for illiquid shares in a privately held company. It makes perfect sense for an employee of a publicly traded company to need to allocate some of their stock grants to tax obligations, seeing as though they can sell those shares at any time. But employees of privately held companies can't sell their stock (usually), and needing to take real dollars to pay a tax bill on those shares is just not the spirit of the law.
If i buy a plot of land work hard to build a house on that land i dont have to pay tax on the increased value of the property until i sell it yet if i work at a company and buy options as it grows i am taxed immediately before i can realize a gain
They could have avoided this by waiting to exercise their options on the eve of the liquidity event. In this case there would have been no risk. But they exercised earlier presumably to start the clock on long term capital gains treatment for the stock they received when they exercised.
They took risk they didn't need to take and they got burned. It's worth keeping that in mind as another aspect to the story.
The advice seems to suggest if their options expire if you don't buy them at a certain point (except for leaving the company, which makes sense), say no and ask for cash. If they can't pay, now you know where you really stand.
If the liquidity event involves the public stock market in any way e.g. IPO, merger, acquisition with a nontrivial part of the proceeds paid in shares of a public company - then you are forced to execise on one hand, and have a lock-up period, usually 6 months, forced by the underwriters or SEC rule 144.
That is, there is a mandatory 6 months wait between the forced exercise and the effective liquidity event.
This applies to investors as well as employees, BTW: I was bitten by this as an investor -- a modest 5X return on investment after 2 years turned out to be less than 2.5X return (still nice), but the taxes were paid on the 5X numbers, and the end result net of taxes was therefore 1.1X -- and it would have been a loss if everything happened in the other half of the year (luckily, I was able to net the gains with the losses because the 6 month lockup was april-october; but had it been october-april, even that wouldn't have been possible).
In two other tax regimes I've operated in, you are only ever assessed taxes in the event you can take money into your pocket. The US system is ridiculously unfair in this sense.
I made the point that they didn't have to exercise when they did, and if they had waited they wouldn't have taken on any risk about the price of the stock they were receiving.
Note how those are not mutually exclusive.
The article refers to "stock grants" and refers to the fact that "Top sales employees were awarded with annual bonuses of 20,000 shares of common stock".
IANAL but AFAIK, receipt of stock grants would trigger an income tax liability on the value of the shares at the time they were granted.
Tax treatment of stock grants and options is very complicated and so dependent on details that it seems somewhat unfair to jump to any conclusions based on assumptions which are almost certainly incorrect.
There are very real tax advantages to exercising early.
If you're primarily interested in making money, or if you love the startup but not the compensation, you should NOT work at that startup.
If you're a good developer, you can get a better deal by working at an established company and simply investing. This has been true for every startup offer I've ever seen. Ever.
I've considered lots of startup jobs because I believed strongly in the companies. Every single time, however, I was able to get a larger chunk of the company by keeping my current job and simply investing.
To give an example, my current job pays about $250k, and one year, I invested $100k of that into a startup, leaving me with ~$150k of salary. This $150k + startup equity was a better deal than the startup was offering in both salary and equity (BY FAR). Plus, equity bought as an investor is much less tax toxic than equity options received as an employee of a startup.
On the other hand, most people who work at startups aren't interested in money. If that's you, that's totally cool!
One of my points, though, is that you are effectively investing $100k in the company by taking a crap deal to work there (e.g., via a $25k pay cut over 4 years of work). For that $100k, you're getting much less than you would get by simply straight-up investing $100k.
- Bay area/NYC or somewhere else?
- how do u deal with taxes, 401K contributions and still have 100K leftover?
I am possibly overcontributing 401K (maxing the 18K allowed by the IRS) and certainly overpaying rent (bay area :[). How the heck does one manage to save/invest 100K even at that salary? As a soon to be father, I need to get my act together asap.
After taxes, $250k becomes $150k. After rent, food, staying alive, some travel, etc., I'm left with about $100k disposable per year. Like most of you, I don't really have nice things, fancy clothes, etc.
I would continue to max out contributions to retirement accounts, though! You can invest in startups via IRAs and Roth-IRAs (I have done it).
> a sum FAR more than almost anyone reading the comment will ever see in their own bank accounts
You're joking right? Engineers make six figures and can easily save $100k if they try. Your retirement account should have seven figures by the time you retire.
To the extent that is true, neither is taking a salary hit on that order in exchange for equity from your employer.
The contention GP makes is that even ignoring the opportunity for diversified investing, from a financial standpoint, getting a job with an established company is strictly better than a startup in most cases, since you can exceed the pay and equity (and equity in the startup) of the startup job with the bigco job.
That the bigco job also gives you the option of diversifying your equity investments to manage risk, while the startup job does not, reinforces, rather than counters, that argument.
That doesn't seem like much in today's hot market, but ask anybody who went through a crash how much a stable job is worth.
If you're not comfortable investing ~100K in a startup, you probably shouldn't join one.
Assuming that the majority of HN readers are software developers, I actually don't think that's true.
While I agree that investing $100k into a company is a big gamble, it's important to realize that's precisely what you're doing if you give up a BigCo job for a startup one with a $25k pay gap and vesting over 4 years.
If a startup has VC backing then there is absolutely no reason for the startup to offer less than market salary. If a startup does not have money to pay employees then founders should raise more. Or sell more. Employees are not VCs. Simple. Also look this way: if start up is not offering market salary, then think this way: how that startup is going to attract talent from established companies (whose expertise are needed if that startup wants to become big).
On the other hand, If a startup has no VC backing and you are offered less than market salary you are then you should act as investor / co-founder. That will be definitely less money but it can be a great experience: money is not everything.
From what I've seen, startups almost always pay less than market, but they make up for it in four different ways:
1. Quality of life and work: employees at startups get to touch more things, work on more exciting projects, eat free food, play ping pong, be a part of a tight-knit culture, etc. A lot of people highly value this, and I don't blame them!
2. Employees mistakenly overestimating the value of their options, their probability of success, and the uniqueness of the startup culture.
3. Related to both #1 and #2, hiring employees that don't care about money and/or haven't taken finance 101.
4. Related to #1, #2, and #3: hiring employees that are so excited about the startup that they don't care about the deal they're getting.
I've NEVER seen a good engineer get a better offer at a startup than he/she would've gotten at a large company, but it's certainly possible.
It's not worth 10s of thousands of dollars a year when you can get a lot of that (or all it) at a company that will pay you more.
> then think this way: how that startup is going to attract talent from established companies (whose expertise are needed if that startup wants to become big).
THANK YOU so much for saying this
This cannot be emphasized strongly enough. Even if you suck at investing, take a look at the max fluctuations for Valley's finest - AAPL, GOOG, FB or NFLX. Starting as a very late employee at any of those places with companies well past IPO stage with original equity package pegged at 1.5x-3x the annual salary, with annual/biannual refreshers and occasional performance bonuses yields a very secure future.
Of course, there's a bit of survivor bias here, but employees of a publicly traded company generally have a better idea of the company direction.
For higher-profile deals, though--e.g., Uber--you wouldn't be able to invest such a small amount.
I would be highly skeptical of any startup founder who is going to take money from just anyone. Taking in random investment dollars could come back to bite founders and company in the ass pretty badly. From the time demanded by the investor, to working on subsequent financing rounds, you could really shoot yourself in the foot by doing this.
This is one reason why Angels are more sought after than "friends and family."
> For higher-profile deals, though--e.g., Uber--you wouldn't be able to invest such a small amount.
No. For late stage investments, even if you had the capital, you're beholden to the terms dictated by whomever is leading the round. They're not going to invest large sums of money and want to share rights with just anyone with the cash.
They can give you insight on tech problems/scaling, help with hiring, offer connections, etc. (Basically, most of the things you're looking for from investors besides money.)
A software engineer investing in your company is pretty different than your real estate mogul uncle trying to get in.
The SEC allows companies to sell shares privately, using Regulation D. Regulation D has a number of rules that govern it, such as, you cannot generally solicit your offering (for example: take an ad out in the NYT annoucning you are raising money).
You can raise unlimited funds from Accredited investors (see link). You don't need to provide information (via prospectus) to these investors, as it's assumed they have the acumen to obtain and understand the information to understand the investment being made.
Companies can also raise funds from up to 35 non-accredited investors. However, in doing so, must ensure due diligence that those non-accredited investors can bare the economic burden, are made to understand the investment, etc.
By and large, that amount of work is more than enough to turn some founders away from dealing with non accredited investors.
In certain cases, a pre-seed, initial funding round may come from a "friends and family" round.
The SEC recently passed a law allowing selling shares via Crowdfunding, but because it's fairly new, the risk* to future Venture rounds is unknown, and I'd expect founders to be tepid with adopting Crowdfunding as a viable method to raise money.
* Venture Capitalists (afaik) haven't published an opinion on crowd funding, so founders may inadvertently risk future startup financing rounds if they screw up their capilization table with a crowd funding round.
Thanks to a new law, though, you no longer have to be accredited to invest small amounts.
But the bottom line, I think, is that to do the strategy you suggest, you currently need to be an accredited investor if the startup is not already setup for crowdfunding.
Prior to SECs recent ruling which allows companies to sell shares (aka securities) by crowd funding, companies are allowed to sell shares to Accredited Investors, the definition of which is regulated by the SEC. Further, they can also sell shares to non-accredited investors, but with added due diligence required by the company.
An individual can meet the definition of an accredited investor, without being an "Angel Investor." Angel Investor is a term for someone who is known for, as part of a financial strategy, investing their own money to startups.
Sorry to nitpick, but how exactly does the math work out if the $100k is presumably drawn from post-tax income?
I also want to add that I know of a startup which allowed employees to trade off salary for equity in a way that completely screwed their employees. E.g., they gave their engineers something like either 0.2% and $150k, or 0.3% and $100k.
This implied a valuation of $200 million (since an employee would trade off 0.1% of the company for four years of $150k instead of $100k--for an added $200k bonus, and $200k / 0.1% is $200 million).
At the time, though, the company was selling shares to investors at a valuation of $50 million.
In other words, they were charging employees quadruple the price for equity. I'm thinking about writing a blog post on it.
One of the best jobs I've ever had was at a startup. I was still in college at the time, but they recognized the value I delivered and:
* Paid me a great full time salary even though I was staying in classes
* Let me run a full team, giving early management experience (great for my resume)
* Meaningful equity
No "established" company would have done this. It was a little crazy to do (who lets a college student run a tech team?), but I had a great experience and so did the team. Even if my equity is ultimately worthless, I will still have gained from taking that job.
Moreover, not all startup jobs offer poor equity terms. I've never worked at a startup for less than 1% (often much more than that) and always value my stake at less than half the VC valuation.
Even if I never make any money on a startup, I'll still endorse doing a startup early in your career. Later on, the calculus definitely shifts as mature companies are both more formulaic in their compensation and also offer benefits which become more important with age.
You should adjust, for cost of living, only the part of your paycheck that you will be spending while living in that area.
E.g., supposed SF is twice as expensive as Dallas. If you make $100k in Dallas, and you typically spend $70k of it in Dallas while saving $30k (to spend later in life somewhere else), you would need to make $70k x 2 + $30k = $170k in SF (for an overall adjustment of 1.7) rather than $100k x 2 = $200k in SF (for an overall adjustment of 2).
Then again, if you're planning on living somewhere for the rest of your life, it's safe to assume that whatever money you make in that place, you'll also be spending in that place. Therefore, in that situation, multiplying by 2 would be correct after all.
I live and work in SF at a large company (not Netflix, but something pretty similar). I'm 80% a coder, 10% a manager, and 10% a data scientist, and I love my job. $250k salaries are very common at large companies these days--you just need to stick around and work hard for a few years.
Even if you make $150k, my advice stands, but you should probably invest smaller amounts than $100k, obviously.
$250k is a normal salary for an engineer with say 10 years experience in the Bay Area. It won't all be in a monthly paycheck, some of it will be in bonuses, restricted stock, etc., but it will be bankable and spendable annually, not locked away in illiquid assets (at least at a large company). Companies with long vesting schedules will supplement the early years with hiring bonuses until shares start to mature.
And this is why rent on a 2BR apartment in Mountain View will run you $3000 per month, and a 900 sq ft condo convenient to nothing in particular runs $850,000.
You cant invest 100K in uber right now ....
If that's you, you're an idiot.
At an early stage startup, your shares are essentially free to purchase - especially if you join a company which hasn't had a formal external valuation event (like a fundraise) yet. All your risk is around the startup evolving into a successful business with a high value.
Join a late-stage startup, and most of the execution risk is gone. But the company may already have an artificially high value attached - so you have a lot of risk that your shares end up being worth significantly less than you paid for them.
The real unicorn, for an employee, is a middle- to late-stage company which has successfully executed, is growing, and ideally hasn't had any formal external valuation events. There your shares are cheap to buy and extremely likely to increase in value.
And, like a real unicorn, it doesn't exist. At least not in today's funding environment.
That's the most annoying part of the entire article, and why I ask for salary rather than equity. Keep your stock, I'd rather pay my bills.
I've seen this in my own life and in many colleagues, friends, and people I've hired. It's not a guaranteed paycheck, but in the bay area getting a healthy equity grant is part of the standard comp package. Without luck, it can be a nice bonus. With some luck it can really move the needle. And with ISO's especially you can choose when to pay taxes on the income.
I know that outside the bay area comp packages are structured differently -- and often less lucratively.
Then holy hell am I glad I don't live in the Bay area. Because, as the article demonstrates, there is zero guarantee that the equity you have will be worth anything. That you'd depend on such a thing to pay your mortgage and send your kids to college? Madness.
And I suppose I should add, "If you want to get screwed over, be an employee at a unicorn startup," based on this new information.
1. Reports vary but the general consensus seems to be lower pay than a Fortune 500 or similar for more demanding hours.
2. If you're offered equity it's an insulting fractional percentage (how can you be offered 0.1% and not let the profanities fly?), and will need to use actual money to exercise the options.
3. There are tons of stories of completely incompetent and/or corrupt founders literally locking the door on employees (Zirtual et al).
4. I'd be remiss if I didn't at least bring up the insane (comparatively) COL of the Bay Area compared to even other large US metropolitan areas.
I'm not going to start railing about VC-istan because I do think the degree to which the system is rigged gets overblown, but if you're going to be involved in start-ups it doesn't make sense to be anything other than a founder, C-level-for-hire employee, or investor IMO.
So when the company isn't doing well, the founder lays themselves off first right? No? Hm, seems like the rank and file employee takes on the risk there...
Not to mention that it's probably a lot easier for a founder to get another job than their employees. Oh and by the way, the founder has been paid more, has gotten more stock and has probably had investors pay for a lot more nice dinners/drinks than their employees.
But yeah, the founders deserve to be compensated much higher because of this "risk", yes indeed.
The risk he endured was literally starving. If it wasn't for us, he very well might have.
Risk is real. And it resides in all places of employment. You have to hedge your bets.
Where you work is so important and yet so many people seem to put such little effort into negotiation, risk assessment, runway, overall comp, etc. etc.
If you're taking equity in place of a market rate salary you better to be absolutely 100% sure you know you're taking a massive risk and forfeiting real dollars for hypothetical dollars that 9.999/10 will never exist.
Note: A great read about equity http://blog.alexmaccaw.com/an-engineers-guide-to-stock-optio...
Anyone implying that owning equity in a company has any guaranteed payout, even on acquisition, is being intentionally misleading, I think.
For most employees who leave their option grants as options, there is nothing to worry about.
When you are given a grant of stock options, you can sometimes ask the company to let you exercise it early, and vest the shares instead of the options. If you do this when the fair market value (FMV) of the underlying stock is the same as when the options are granted, you will not be in a precarious tax situation. However, many people wait a couple years before deciding to exercise their options, and as a result, they need to recognize a paper gain when they exercise later as the FMV is substantially higher. That's what happened here. They exercised later, thinking the stock price would go even higher, and they were wrong, but they had to pay taxes on that higher price.
While it's true they paid a lot of extra taxes, since they never recognized the gains, they can roll that tax credit forward to cover future gains they may get at some other point in the future. I'm not sure how long you can roll these losses forward, but I think it's for a substantial period of time.
Secondly, while capital losses can be carried forward indefinitely, you can only apply ~$3,000 per year (as a deduction, not a credit).
1) you pay the strike, and pray the valuation continues to rise through any IPO, buyout, etc..
2) arbitrage - you pay the low strike, then sell in the secondary market for more, and hopefully realize a one-time profit after cost frictions.
From the article, sounds like most of the afflicted here were playing strategy (1), while there was some window to execute on (2) though many may have not noticed it.
Then what is the difference over just buying the shares outright as opposed to exercising options?
My understanding has always been that exercising options means getting a benefit (the shares) which has a value (the strike price) and you subsequently pay tax on that value.
You base your AMT tax calculation on the difference between the fair market value and the strike price (that's the "phantom income").
When you sell the shares, your realized capital gains is based on the original basis and you may have AMT basis that's different.
If you exercise and immediately sell, AMT doesn't factor in.
Concretely (and picking semi-random numbers): If your strike price is $10/sh, the FMV is $25/share, and you have options on 1000 shares, you'd pay $10K to exercise, get 1000 shares, and have $15K in AMT income to consider.
If those shares later soared to $40 and you sold, you'd have a capital gains of ~$30K ($40K proceeds minus $10K basis minus commissions and fees).
If those shares instead crashed to $0, you'd have possibly paid AMT on the phantom income and you definitely lost the $10K in cash.
You can apply carried forward capital losses against 100% of your capital gains PLUS an additional $3000 in each future year.
IIRC it's only 7 years. For people who do a lot of transaction, that's enough. For employees that get to invest 3-4 years in a company to make a profit on equity, it's actually quite rare to make use of this.
Also, everyone keeps forgetting that even liquidity-event-induced-exercise very often doesn't come with the liquidity that makes it profitable: In the case of a public stock exchange event, the 6-month lock-up period required by SEC rule 144 (and/or the underwriters), the stock can go down 90%, which means you pay 15-60% taxes on imaginary gain, even if you played your cards perfectly. This one also applies to investors.
I've never been a CEO or acquired a company but I think there probably aren't too many worse things you could say to the employees of a company that you've just acquired.
Not only are your share values decimated (literally), you're now working for walking dead BlackBerry assuming you're not soon laid-off.
But if an established company wants to get equity into the hands of its employees now you have a problem. The way the tax law is written, you have basically 3 choices. Either the employee is paying you "fair market value", or you are giving them options with a strike price at "fair market value" and they can hope for future appreciation. Otherwise, if you try to just give them shares, the IRS needs to be paid, and in cash! So, for example, to simply give 10% of outstanding common shares (an illiquid and diluting asset) to your employees, you would have to pay 4% of your company's "fair market value" in cash to the IRS!
The problem is all in how you define this "fair market value" thing. If you sell some VCs equity along with what's basically a note payable (liquidation preference) and then say the "value" of the company is equal to the total raised divided by the percentage equity stake they received, all while totally ignoring the 'note payable' -- that's complete madness! And it's the world we live it today.
If, alternatively, you first subtract off the top of any amount raised the full amount of any liquidation preferences, then only the remainder was divided by the percentage equity stake to arrive at a valuation... For example, raise $10m for a 10% stake with a $10m preference -- then for tax purposes your common stock valuation should still be $0. Now you can grant however many common stock shares you want all day long, and you don't bleed cash to the IRS in order to do it.
Employees would still have to pay the full load of taxes on any gains when they sell the shares. But this fixes a huge challenge of fairly compensating employees with equity without even dodging any fair share of taxes. Taxes should be due and payable when liquid value is actually received, not before.
The IRS does not force these companies to improperly value the common stock. It's just the default position they take because it's cheaper for the company this way.
The 409a valuation is based on the price someone would pay for 100% of the outstanding shares of converted-to-common shares. This is much lower than preferred stock investment price (where the dollars are being put into the company to grow it, not being paid to shareholders to retire). It's even much lower than the secondary market price since that's the price for a small percentage of shares -- try selling them all and the bid/ask would fall to zero.
The price of illiquid common stock must reflect the risk-taking stance of management and the Board. Even having an $800m offer doesn't have to boost the common stock valuation so much because if management is declining those offers and swinging for the fences you can reasonably factor in that risk in the price.
Unless and until an actual IPO, companies should take a discounted future cash flow model based on single-digit future growth to demonstrate the common stock value is absolutely worthless, and everyone should be required to file 83(b).
We know its a lottery ticket, the tax code allows us to value it appropriately. The real problem is companies straight out fucking up their 409a. Common stock shareholders at Good would not be crazy to consider a lawsuit.
I never exercised my options (they clearly weren't worth the strike price I had as a late joining employee at any time that I had vested shares) so no skin off my back, though I do know people who got screwed by exercising options because they left the company prior to the sale to Blackberry and were essentially forced to exercise the shares or just lose them. (I'm all for the trend pushing for much longer windows on this).
I also know a lot of people who came from companies this company aquired who stuck around for the eventual big payout that was much bandied about by much of the C-level management the entire time I was there who basically traded years of sweat equity for nothing (better than walking away in the hole, though!)
I found the article to be a pretty fair writeup of the events and a useful warning to people on the risks of stock exercising prior to liquidity events. This is a lesson I learned the hard way years ago (first dotcom boom), so I didn't get burned this time, and actually really enjoyed my time working for this company because the team in San Diego (which was pretty well isolated from the teams at the Sunnyvale headquarters) was a great group of people to work with, and I was paid pretty decently.
As a common stock holder, you should know that you'll be the last one paid, if at all, because few companies can meet unicorn expectations.
Investing your life savings and/or loaned money into a single stock is always a huge warning sign that you're being foolish.
The employees putting everything they had (and then some) into a single stock from their employer.
I don't know if there was criminal behavior involved but an imbalance of information was in play that cost the employees everything and then some.
A defined benefit plan could have prevented this tragedy. It's funny though. Defined benefit plans are mocked at by large firms but increasingly being used by wealthy individuals/families and their small businesses. Nothing beats government subsidized PBGC insurance for the future retirement plans of America's job creators.
All data is anonymous. You don't even need to be logged in to edit.
What do people think of this?
I'm not a stats person, but it would seem to suffer from both an extremely small potential sample (those who read your post), a self-selection bias (those who gain an advantage by participating, e.g., the aggrevieved), and an outright unsual candidate sample pool (Hacker News).
Perhaps try something like Google Consumer Surveys, and ask a one-two question like: (1) are you currently working for a pre-IPO startup and (2) are your options underwater. Or similar.
The best you'll be able to do is a site like glassdoor, with all the sample bias that implies. But even with glassdoor, I've told a recruiter to go away because their company pays poorly according to glassdoor. The recruiter then whined about glassdoor, but since he didn't provide me with salary numbers, what does he expect?
I've also pondered building a site similar to glassdoor to confidentially discuss outcomes, but the best you'll ever be able to do is anecdata.
"When Good Technology announced Friday that it had sold itself to its long-standing rival BlackBerry for $425 million in cash, it was a moment of triumph for Good CEO Christy Wyatt." -
The fact that the very first action of the acquiring company was to give her enough money to never come back tells you all you need to know about her ability as CEO.
1. No employee equity whatsoever, but a slightly higher salary to make up for it
2. The ability to invest in the the next round
I've worked at a startup and done #1 and #2 above, and it's working out great. I'm very happy to be owning preferred shares.
Aren't you just lowering your risk, while simultaneously lowering your reward?
Eg, let's say you negotiate a 20k/year increase by not getting any stock options. If you spend that 20k to invest in their next round, you'll be paying for preferred shares, rather than common shares. Therefore, you'll be able to afford about 5x less shares than if you were exercising employee grants. Am I wrong?
Sure, you'll get preferred shares, but if the company does very well, your ultimate reward will be less.
Things are only worth what someone else will pay. So if you don't have evidence that there is a buyer eagerly wanting to pay $5/share for the options you are getting for $4/share, don't assume they are worth anything.
Because of dilution math, it's very rare for employees of all but unicorn startups to cash in at anything close to the expected value of the shares. That means that your 50K shares awarded after a $5M series A (on a big pre money valuation) are not going to be worth much if the company sells for $10M the following year.
Founders should set up a chart that tracks the various possible outcomes and lets employees understand what their options will be worth in those scenarios and see what the founder would get in those scenarios. This would allow additional shares to be given to valued employees if the company turns out to be a beautiful white horse but not quite a unicorn.
The thing to be aware of is when the founder has the option of cashing out for $10M and the employees effectively getting nothing. If this happens the investors will have essentially lost interest and will potentially get their investment back but will not mention the deal to anyone again. This is a sort of perverse incentive because the founder will be inclined to deceive employees into thinking a big exit is on the way, while simultaneously negotiating a low millions acquisition and high salary at the acquiring company.
In that scenario, the founder should have to renegotiate so that the most valuable employees get at least 10% of the founder's payout, but employees rarely have (or use) that much leverage with the founder.
According to Crunchbase, Good raised $291M in 4 rounds. Assuming those investors owned 40% of the business, then at $1.1B, common was splitting $660M (preferred would convert). At $425M, assuming 1x liquidation preference, common is splitting $134M, an 80% decrease. I think you could get to the numbers in the article assuming 1x participating or something similar.
This should have been pretty predictable to employees. You will not get rich if your company sells for only 1.4x the total amount invested.
In addition to all the other issues mentioned here, the preferred/common split means that the preferred holders (ie the board) have much different incentives/risks than common - they can afford to "swing for the fences" due to the downside of liquidation preferences.
That's what liquidation preferences and overhangs do for companies that raise 100m+, they eat in the common.
Huge growth is important but it's also important to be smart about it. Selling a part of your company for a bit less if often better than mortgaging the common shares.
edit: Here's a VERY simplified overview: http://www.wikihow.com/Claim-AMT-Credit
- Companies: don't make employees exercise options when they leave the company. I love the new "10 years to exercise" trend that has started to emerge.
- Employees: don't pay taxes or exercise options early to maximize your gains at an eventual exit. It makes no sense - keep the optionality.
Alternative minimum tax, created in 1969 to target 155 high-income households who were using too many tax loopholes. It was not adjusted for inflation, and it did not anticipate rank-and-file employees receiving stock options.
> Is it not possible to structure the compensation so that tax is payable when the shares are sold (capital gains) or on any dividends paid on the shares?
Yes, but this requires the employee to pre-pay for the shares when they are issued.
Normal tax rules do not consider exercising options to be a taxable event, but AMT rules do. You can exercise options resulting in modest paper gains without them being taxed.
In some cases it might make sense to exercise stock options before you can actually sell them (e.g. if you expect the price to keep going up to save on taxes or if you're leaving the company when you typically only have a limited amount of time to exercise or lose those options).
So in these cases you now own the stock and paid taxes on it, but if the stock price falls drastically after that you might have actually paid more taxes than the stock is worth now.