Let's say you're granted about a year's salary in shares when you first join so you've vested $100K for a round number. When you leave that equity is worth $1 million. Now, you have to come to the table with the $100K to exercise and probably another $200K to pay the tax man. If the company goes belly up, you lose $100K outright and are stuck with a $200K tax credit that you get back in $3K per year deductions for the rest of your life.
Or, you could have exercised the shares as you vested and paid a bit less in tax with the lower 409A valuation..but you're still maybe looking at a $100K total tax bill.
Do you take the risk or not? Or do you end up locked in for a few more years of handcuffs while waiting it out?
It'd be really hard for me at least to walk away from this situation with nothing..so then I have to value the equity as something. And if I want to treat it as 0 it'd be really tempting to wait a few years and see..which again means the equity is worth something to me.
Please use correct terminology. You're given options to purchase shares, or you're given shares outright. The former is what most people are accustomed to: options to purchase shares at a discounted price. The latter, know as a "stock grant," does not require the employee to purchase the shares - they've been granted to the employee.
Both of these things tend to come with a vesting schedule: you don't get to buy all your discounted shares when you start working on day 1, nor are granted shares handed to you because you showed up on the first day.
"Granted a year's salary in shares" would mean there's nothing to buy because those shares are yours.
However, this means you take the tax hit when you receive RSUs, unlike options, where you're taxed when you exercise them. This can be good or bad, depending on the value of the shares, the vesting schedule, etc.
1. Tax treatment (A RSU counts as income when you receive it, an option counts as income when you exercise it and get stock. Remember, many people recommend early exercising options anyway for preferable tax treatment, though this can lead to taking a loss on taxes if the shares wind up worthless. If you are forced to exercise a large block of options when they are still illiquid, you will have a very large one time tax bill, which may be much harder to deal with than smaller ones each year)
2. Risk (For options, you have to dish out cash from your pocket to actually receive stock, which is more risky than if you don't. Until exercise, the two choices are similar)
In general, I would prefer options with a long exercise period, but I may prefer RSU to options with a short one...
Google, Facebook, Netflix etc. can do this easily since they can just sell the RSU shares on the public market. It's the illiquidity of the shares that makes this option costly for private companies.
The common practice of immediately selling whatever percent of shares is required to pay taxes on them is something that employees are choosing to do, supported by the trading firms that help implement vesting schedules and stock sales. Employees are allowed to keep all of their shares and pay tax on whatever next interval is required instead, if they wish. One can only follow this practice of selling shares immediately to cover tax if the company's shares are liquid, i.e., the company is a publicly-traded company with an IPO.
I suppose in theory one could receive stock in a private company, and sell shares on the secondary market to cover taxes, but with private companies you can't take it for granted that (i) you'll be allowed to do that at all, or that (ii) there will be a buyer for those shares at all, or at a price you're happy with. With a publicly traded company, it is taken for granted that there's always a buyer for the shares, and at a price that is commonly known and accepted.
You _may_ be able to perform an early exercise on ISOs and perform an 83(b) election at the same time. I've done that twice now .. the first time worked out very well. The second time I'd anticipate will work out quite well as well.
Be careful. If your total grant (not the amount your exercising, but the total amount that will vest over four years) is worth more than $100,000, the amount in excess of $100,000 will lose ISO treatment and be treated as NSOs. So if your grant is worth $500,000, and you early-exercise a single share, $400,000 will be automatically converted to NSOs.
This is an IRS rule, independent of your company's terms.
That said, they're not really worth anything to you until they're vested, of course.
Now the remaining 75% of those options might vest monthly over the next three years. "Vesting" does not impart value. It's not indication of whether you're going to make any money at all. Vesting is an instrument used to make sure you stay on with the company for an appropriate amount of time before you're allowed to own part of the company at that discounted rate.
Point: no, you cannot exercise options at grant time, you can only exercise once vested.
Treat is as a lottery ticket. A good friend joined a late startup company in 1999, and in 2000 he was worth 40 million, of which he managed to cash out 10 million before the stock crashed. But that was in the days of IPOs, now the investors prefer to keep the rise in equity to themselves. So you chances of winning the lottery are much less.
That is literally the structure of your comment. You said, don't do it, you mentioned your friend as for why not, and the punchline to his sad story is he only cashed out 25%, or $10 million, of what he thought he had.
By positioning this as your example of a loss, I don't think you could have made a stronger argument for doing it if you had tried. Anyone who has $10M is set for life and independently very wealthy: they're rich. They could fly every two weeks for thirty years, for example (780 trips) staying at a four star hotel every day of that entire time (100 euros * 365 * 30 years still gets to only $1M). I mention these because they're luxuries. He's loaded.
Hence the "it worked for him then, but probably wouldn't work for anyone else, now"
Instead of selling your shares right after the IPO, couldn't you trade options on those shares in a way that closely simulates selling the underlying equity, and stay within the agreement?
On the options - I'm honestly not sure. I don't think it's barred by contract (since that's about managing actually control and share movement), but I don't know what options trading looks like for newly-IPO'd stocks.
If you're 65, a good rate is 4%. This means that if you invest your $10 million in a diversified mix of stocks and bonds, and you withdraw 4% per year, then there's a very good chance that you won't run out of money before you die. See: Trinity Study 
If you're younger, you should probably use a more conservative rate of 3.5%. That's still an annual return of $350,000, for the rest of your life.
According to your rate of $110 USD per night, you only need to spend $40,000 per year to live in a four star hotel.
First class flights seem to cost around $3,000. You could fly twice a month for $72,000 per year.
Then you have $238,000 left over for food and entertainment. (And hopefully some charity.)
The issue is that in response to Enron's collapse, Congress implemented The Sarbanes-Oxley Act. This makes IPOing massively more expensive since you have to go through a bureaucratic nightmare first. One established, the costs of continuing may be controlled. But coming into compliance is a headache that people want to avoid.
Not sure high stress and wacky work environments are very productive outside of sales. I'll leave it at that.
You aren't risking hundreds of thousands of dollars, only maybe 10s of thousands.
Instead, I bought a fee thousand dollars worth of shares - only what I could afford. They IPOed at 10x, and I made a down payment on a house.
But that was a rare case: I had some extra savings, the company was clearly succeeding with clear intent to IPO. And even so, I had to wait four years for a payoff.
Now I work from home and I'm much happier.
An investment of mine that yielded 5X exit transaction ended up being 1.3X for those reasons, and I was lucky - if it closed a couple of months earlier, I would end up with 40% loss and a useless tax credit.
The US used to have a steady IPO market but that has dried up in recent years. I have read that 2017 might brighten things a bit, but we'll see.
The biggest problem is SOX: going from a private company to public (something I've done twice, now) is a pain, and can take a year to implement all the regulations (you may even need to change source code, and also commit processes). It's even worse on the accounting/business side. More importantly perhaps, it's expensive: you don't want to take your company public unless you can afford the hit to productivity and cash flow.
According to the WSJ, that's why there aren't more IPOs these days.
A security nightmare, but time and time again we've seen you don't need good security to make a lot of money.
Typically you are granted X number of options. You are never told what the outstanding # of shares are and typically the shares themselves are valued in pennies. The idea is you think to yourself "well, it's 10k shares worth about $5k at the current valuation, but if they IPO and it does what google does...I'll be a millionaire!" You never take in to account that the likelihood of you joining a unicorn like google is near 0% and not taking in to account the time frame of such an adventure, the opportunity cost, dilution and other tricks companies play on their employees before IPOs and acquisitions like reverse stock splits.
And the likelihood of a startup valuation increasing 10x in 4 years (typical vesting schedule) after dilution is extremely extremely unlikely to the point that it is time wasted even entertaining the outcome of such a scenario.
That's a false assumption. If they raised $1M seed at a $6M cap, that's 1.4-1.7%. I just pulled up AngelList and there are a number of seed companies offering that along with a decent salary. Taking the $6M to $60M is the risky piece and that's going to be hard, but opportunities to try are definitely available.
> You are never told what the outstanding # of shares are and typically the stock are valued in pennies.
If the CEO is unwilling to tell you when you ask, walk away.
You don't care about relative growth with options, just the difference between strike price and sell price. A '10x' growth of 0.01 to 0.10 only gains you 0.9 per option; a 2x growth of 5 to 10 gives you 5 per option.
Which is also why looking at your grant as '$100k worth' is silly. Look at how many units you have, and how the price might change, not what the strike price is right now.
I think what the OP was really trying to avoid was working for 1/2 market rate for years, and then ending up in your scenario.
But if something happens on your way from the bank to the stock sale, guess who still has to pay back all that money.
As in we got zero. Nothing. And this software is still in use in a major product.
So no, please don't trust options or exercised shares at any private company to be worth anything.
You want to get paid? Negotiate salary and laugh in their faces when they offer you options.
Cash is king. Realize you don't understand finance much less finance in an opaque, illiquid company.
Say it 3 times: "Cash. Is. King.".
Max out your 401K and negotiate a company 100% match if you can. Start a private investment account and a savings account and distribute to them every check. Keep doing this. Maximize all this before you become Johnny Wall St. with your illiquid stock options. They're as useful as a penny stock as not as liquid.
Buy some of them if things look bright but classify the investment as your "highly speculative" class of investments and thus ensure they are a small part of your portfolio.
You need to be pretty savvy to marshal the whole process and understand the contracts, though - it is not turnkey.
But, you're right, some start-ups are explicitly putting in an explicit "consent" clause into the ISO. Which I think is unfair, and kind of BS - certainly if such a clause were valid, that would drastically reduce the value of non-publicly-tradeable shares, and it would be nice if the IRS agreed =)
If you aren't at the company, it will be extremely ordinary for some funding event to dilute you to nothing. And you will have absolutely no say in the matter, because you're an outsider who, and this will be a direct quote, "isn't moving the company forward."
For most of us where startup equity comes with a real valuation of zero (i.e. anything but the Uber or AirBnBs of this world) - I think you're a lot better off ignoring it entirely.
> to walk away from this situation with nothing
This is where I think you are healthier having at least a market rate salary. Then you've not walked away with nothing - you've been a regular employee and happy with your lot and ready to move on.
$100k isn't much money. If you've taken stock in lieu of $15-$20k/yr salary, $100k is pretty easy to make up (especially considering that many bigger, established companies also pay bonuses and have a better structure for vacation and such).
>> anything but the Uber or AirBnBs of this world
Personally those are ones I'd be really, really scared of having stock in. They've boxed themselves into a corner: they have precisely one positive exit scenario: IPO. At their current valuations (2x and more of their competition), there's no reasonable path to acquisition. And if they continue to take investor money, those late investors are taking care to protect themselves (whether it's multipliers, last-in/first-out, etc). Employees are absolutely last in line to get the scraps unless things go crazy.
After IPO, there's the lockup period, during which there are earnings results (I believe 2?). If those don't go really well, a downturn in stock price can wipe out employee shares pretty quickly. If I'm an employee of either of those two companies, I'm a little nervous.
I'm not sure I follow. If I agree to be underpaid by $20k a year say then I'm not sure how I'd then on reduced salary save up $100k after tax and to the extent I wouldn't "miss it" in exercising the options. If a company is paying bonuses etc I'd rather get the market rate salary to begin with and ignore the stock. I may be heavily misunderstanding your first sentence though :)
The lockup period post IPO is an excellent point - and probably further fuels my cynicism around low percentage stock options as anything but a gamble.
The shares are worth at most 8k in salary, that is if they're somewhat liquid. (which they are definitely not for startup and far away IPO).
If you took a $20k drop in salary for that, you've been not only screwing yourself at this job but also for ALL your future jobs, because future companies will try to downplay you based on your current salary.
If they ask who made that restriction, link to this post.
The uncertainty around the current valuation (which everyone has due to the infrequency of material events), the uncertainty around the likelihood of a major liquidity event, its size, and its type make ISOs incredibly hard to accurately price. If anyone says they can do it accurately, they're lying.
The golden cuffs _will_ click if you stick around any time at all and have even slightly bad luck: Maybe you burn out before vesting, or the company blows an acquisition that would've fit your schedule and your payout/life goals.
Waiting around after you hear the click becomes a losing game. Find another one to play, it's a big world.
It comes down to a gamble. With your numbers, a big one.
But until that choice is forced on you, I say wait. There's no reason for an early exercise. Even with slight tax advantages I'd rather call that the cost of minimizing my risk.
But why shouldn't I just come to the table with $10k and taxes, exercise those shares, then use the profits to buy up the remaining shares?
1) 409A valuation price is already in the multiple dollar range.
a. Why : You can’t afford to exercise do to tax burden
2) No acceleration – e.g. in the event of sale or IPO your unvested shares DON’T fully vest.
a. Why: You should be rewarded for taking the risk position. Negotiate acceleration or what is known as ratcheting if you are a very early employee.
3) Stock buyback rights – The company has the right to buy back all your shares if you leave the company before a liquidity event
a. Why: This is a prison sentence and a total gamble as you really own nothing until an event.
4) The company is past its 3nd round of funding. In all but rare cases your percentage ownership will be so low at this point it is not worth it.
1) 409A valuation price is in cents and the stock option plan has an early exercise option.
a. Why: You can file an 83b election with the IRS and pre exercise all your stock for a few hundred dollars. Because the strike price is the same as the value you will owe 0 tax. In addition you start the clock on long term capital gains as soon as the stock does vest according to the vesting schedule. This is how all the big boys make their money. As they vest you actually own them and are free to leave the company at any time with what has vested.
2) Acceleration or ratcheting – In situations like the company gets bought, IPO or management wants you gone and you have unvested shares they must accelerate your vesting schedule. You own them and can go anywhere you want.
3) The company is in seed or series A and you own at least 0.5%+ of the company.
a. The company’s founders do not want to take series C unless they absolutely have to. Ask them!
In short, you will only be rewarded by taking the risk of wasting your TIME in an early stage that has potential with a good founding team. And never forget the freaking 83b election!
The value of one share isn't meaningful. You should calculate the exercise cost of the whole grant (based on the last 409A) to see whether early exercise + 83(b) would be a good option.
> 2) No acceleration – e.g. in the event of sale or IPO your unvested shares DON’T fully vest. a. Why: You should be rewarded for taking the risk position. Negotiate acceleration or what is known as ratcheting if you are a very early employee.
Acceleration is nice, but why would you insist on it? I'd happily trade it for (substantially) more options. If there's a liquidity event and your options have a substantially positive spread, that's already a positive outcome, so in the interest of minimizing risk, I'd rather improve the scenario where you want to leave before a liquidity event.
> 4) The company is past its 3nd round of funding. In all but rare cases your percentage ownership will be so low at this point it is not worth it.
You should simply calculate your percent ownership (while accounting for liquidation preferences), rather than using the number of funding rounds as a proxy.
4) True, this is just generic advice and usually by the 3rd round your % is going to be VERY low. But of course always consider actual % taking TSO into account.
Would've gotten it with zero tax, by 1 year there was a valuation event that made it non-zero.
So that's the question you have to think about: Is it really sane to think that, say, two million bucks of Palantir options are worth exactly as much as what you get by joining a tiny 10 person startup that a very uncertain future and a far lower ceiling? Would RSUs with a dual trigger also be worth zero?
If this is really the case, everyone joining one of those companies is certifiably insane, because life is not that different from a bigger tech company, the hiring bar is not any lower, and in a publicly traded tech company, stock compensation is often quite large and very real. If that's not the case, then we need to understand those options a lot better than we do in tiny companies, and understand what happens if our stay is just a few years, while the company will remain private for longer, precisely because we expect the company to IPO at some point, making the options be worth something.
Not in the reality, which they are likely smart enough to determine by reading their paperwork, and running the scenarios–even if they are treated properly, which seems increasingly rare...
...in the fantasy.
The fantasy is part of the sell. It is part of the glamor (sic) of being able to present yourself to others as _working in a startup in the Bay Area_.
IMO companies with integrity would _actively_ tell people up front what to expect (zero) and to explain why they offer equity anyway.
Were I interviewing, the company that led with that kind of honesty would stand out, regardless of its size or prospects.
(Note that Google RSUs, unlike Uber's, are convertible to cash immediately upon vesting.)
It's only true because the market allows them to do that. The reason those unicorns lowball on salary is because they can.
If workers keep saying "yes, I'll take tulips in lieu of salary," the market will adjust and pay lower salary.
If workers say "nope, it's a good market out there, I either want salary or very good protections against dilution," then they'll have to pay market wages.
To me, saying "always value the equity at zero" is exactly the same as that. Like, "always value the relationship at zero."
It's not sane advice in my personal experience, especially at the tiniest company sizes.
Think about it -- any engineer at these companies can easily leave... but imagine if half the engineers left. The company would go down in flames. People need to work together to have companies pass policies that allow them to have longer periods to exercise.
BTW anyone that understands corporate law needs to understand that the fact that you "must" exercise your options by exorbitant amounts is simply a (very dirty) retention tactic. The company can choose not to buy back your unexercised options at par-value for as long as it wants. The fact that it is "policy" to buy un-exercised options is complete bullshit.
That's usually not right for incentive options. Check your option agreement. Most will say that the stock option automatically expires or converts to a non-qualified option if not exercised within 90 days of termination without the company having to decide to do anything.
What you are describing is more commonly associated with restricted stock, where the employee "owns" the shares, subject to the company's right to buy them back at par in certain situations.
Lawyers have created all sorts of bullshit to protect the employer and that has become engrained as "best practice"
You're right that you are free to to negotiate a different exercise window prior to accepting your stock grant (and a lot of more progressive companies are offering this). You just can't, under current tax law, get the sometimes beneficial ISO treatment with a longer window.
There's a nice summary of the situation here: https://news.ycombinator.com/item?id=9254299
That being said -- It seems like with some "legal engineering" it can certainly be ameliorated (as was demonstrated by Pinterest). My main point is that if people push for their rights then it will incentivize companies to do the legal engineering that is necessary.
The model is simple and helps us compensate people for contributing to our products in a way that is consistent with our philosophy: People live lives. Companies build products. Platforms should be free for anyone to contribute.
The core ideas are that you partner per project and you compensate people for their actual effect on your bottom line. All the incentives seem to line up correctly and we use it with our own developers. It is also a good model for anyone just starting out with an idea.
You can find the details here:
Equity is a good bargain right before the next funding round — when cash balance is low and founders pay with shares.
In this case, the question is how much the stake is worth now. Ask founders the share price of the last funding round. That's the closest market valuation you can get.
Exit conditions (exercise window, sale restrictions) are a must-know, but secondary. An employee can borrow to exercise options and then sell the shares. His company would love to buy shares/options back because they'll have to consolidate equity upon IPO/sellout anyway.
In general, companies go through so much dilution and uncertainty that worthwhile equity stakes start at 5-10% for early-stage startups.
I don't think that's true in general. If it's right before the next funding round, that's when terms can change to wipe you out (whether it's a down round or multipliers). I guess on-paper it can look good ("oh the valuation just increased 5x overnight!"), but it can do some pretty nasty things to your options' "value".
After I left, 18 months later, the company sold and my options would have earned 10x the $34k of the strike price. I.e., I would have made $300k if I could see the future. I just find it painful that at that moment, all your time is effectively worthless, and only the $34k would have counted for anything, even though I gave far more than that in extra hours.
Needless to say, I am somewhat hesitant to put in too many extra hours anymore and almost never work weekends or holidays.
That's ~25K/year so if you would've worked a regular 40 hour week, 20 hours of contract work at anything more than $35/hour would have put you ahead. And you would've still had weekends, nights and vacation.
"Under capitalism, man exploits man. Under communism, it's just the opposite." which seems to be attributed (without any sources) to John Kenneth Galbraith:
I've also seen it as "Under capitalism, man exploits man - under communism it's the other way around." I always assumed it was a translated Russian proverb, along the lines of: "No truth in the news and no news in the truth" (Major Soviet papers were "Pravda" (the truth) and "Izvestia" (the news).
superqd mentioned he would have made $300K more (i.e. in addition to the fixed salary he was earning) if he had bought the options. I assume that after paying for taxes, he would have still made $200K. Since he worked for 8 years, this is indeed $25K of additional income for every year. If he worked for $35/hour for 40 hours/week for say 50 weeks in a year, his total income would have been 35 * 40 * 50 = 70K. How is this better than his original job which was probably paying him say $80K or greater than $80K as fixed salary every month? It sounds like it would have put him behind by at least $10K. What am I missing?
There are many good reasons to join a startup but if the financial motivation is the main one then it's probably not the best route.
(1)Other than a feeling that I'd joined the Witness Protection Program when I fled after an engineering walkout.
(2)Offset by literally years of damaged self-esteem. Pedigree is heavily overrated - with one exception, all the famous people were pretty awful.
Enjoy your personal time, leave at 6PM, turn off work email/slack/anything and do things that make you feel better as a person.
Sure there is always the possibility of landing work at a unicorn that is worth billions, but I think the problem is that many of us are too willing to give up parts of our lives in the hope of some very unlikely return. Either the industry needs to figure out how to value time as an asset in a meaningful way, or crazy startup-hours need to stop.
Yep, that's exactly what your management was counting on.
The only reasonable expectation should be 40 hours a week.
When I came back, they'd moved and I had the best cubicle reserved for my return. They missed me but only because I forced the issue.
No small thing on a place parent presumably spent a lot of time.
Don Knuth said something (about TeX): never spend more than 2 years of your life on something. I've broken that rule several times but I'd counsel following it on startups, especially someone else's startup.
I now also regained my stamina to work hard and long hours but I know where my red line lies and take it easy when necessary. I also make "enjoyable work" for myself and our employees a priority. Call it naive or stupid but life is too short to slave away without enjoying the day-to-day of it.
I have started to think about these points a lot.
Given I basically have a coworking workshop (it's a 3 friend little webdev company), there is a lot to consider.
Solving and handing over of my current obligations, dedicating to my shop, or starting a new one my way, or finding a new place to soak in more experience (I'm 32, but somehow my brain still works well enough to quickly absorb new stuff).
It got exponentially harder to get out of bed and get to work. I just had to quit because I couldn't show up. I didn't give anytime to interview or find an offer. I was also in a weird situation with regards to immigration. So it was reckless but goes to show how much I had to leave.
>How did you approach your recovery?
Joined a big company, got myself on a path to be comfortable financially, took every weekend off. Picked up hobbies, coded for fun. Worked out, visited doctors, changed my eating habits -- got healthy.
>How much time and effort did you put into getting your business off the ground?
Part of 2015 and 2016 I started working and growing on an old side project of mine until got to a point where I knew I could raise money for. I quit in April 2016 and worked like crazy for a month to raise enough money to hire a couple of engineers, get to feature complete, and start selling (which is what we're still working on now). I wrote about it here: https://amasad.me/2016
>How do you manage to combine enjoyable work with delivery (nowadays it is the mantra - everything has to at least help provide value for customer)?
If you're building a startup it's one of the hardest thing you'll ever do so in my opinion you need to align the mission, the product, and the market you're going after with what you care about. Whether that social good, tech, or business. Given that, it's builtin the company that you should enjoy what you're doing. Then hire people that enjoy that too and it all (seems) to fall into place naturally. To sum up, you're in a position to design your ideal work environment -- do it! (You may fail, but that's better than being stuck with something you don't care about).
>How do you handle employee's failures and your own?
I'd be lying if I said I don't push myself and others around me to be the best they can be. You just need to give feedback regularly so that there are never no big surprises (this is something that you can learn by being at one of the good big companies) and always be kind.
Good luck with your workshop.
Assuming they're willing to do the deal, if your alternative is letting the options expire worthless, it seems like a no-brainer to take a loan with no recourse unless there's a liquidity event. You wouldn't have made the full $300k, but at least a solid portion of it.
Because you may also have lots of shares in companies in an aggregate fund (e.g. in a a pension) but you aren't working for free for those companies.
However people do get caught up in the emotional 'but I own a bit of it', and I think companies exploit this.
One person can make a difference in the value of a 20-person company, and if that person has a 1% stake in the company it can be rational to work longer hours to make that happen.
On the other hand, there is very little that a shareholder of a public company can do to materially affect the bottom line of that company. And as the owner of perhaps .000001% of that company, that person would see very little financial benefit from such effots.
A 1% option seems more like the poker game ante, but you need to keep putting more in (time, effort or even cold hard cash) to stay in the game :-)
However, and I don't know how to put this more kindly, but I can't help but wonder if you understood how options work while employed at the company?
A simple technique to avoid having to quickly come up with a lump sum is to set aside enough money to excercise your options as you accumulate them.
In this case putting aside $4,250/year earmarked for exercising your stock options would have allowed you to save the $34k required.
In the end though it might be wise to hedge a bit and at least buy some of your options as you go if you believe the company is worth something eventually.
I was stunned by just how many of the long-time employees had no understanding of stock options. One was actually flabbergasted to learn that each funding round was creating new shares and diluting the value of existing ones; he thought the founders were selling their own shares to raise the money!
The ignorance was due in part to the company being in a region where startups and stock options are not common. Another big factor was willful deception by the founders, who had been promising to start the IPO process for three years, and frequently estimated that their IPO valuation would be equivalent to Facebook's.
Options are underwater if the strike price is less than the current market price; shares in private companies might not have an actual market price but you can estimate them. Underwater options still have >0 value since there's a non-zero chance the stock price will decrease before the expiration date -- of course, if the expiration date is close by and the strike price is much higher than the current price, the option value might be very close to 0. Still, you practically never exercise underwater options (there are some rare exceptions not very relevant here).
In grandparent's case, the issue is not underwater options; they are about to exercise the options and get stock.
At the time they left the company, the stock price was presumably way above the ~$1 strike price. They could have bought (say) $60k worth of stock for only $30k, making a profit on paper. The problem is, as the article says, you have to pay taxes on capital gains AND that stock is illiquid (you can't easily sell it if at all).
And yet, we still get posts like this one, and comments like yours, that make it seem like somehow the employees are the ones who are getting shafted.
Could equity deals be a little more clear and fair? Sure, absolutely. Maybe make the window for options something more like 6-12 months. It's entirely subjective. But when the "make or break" lifecycle of a startup is 5 years, waiting 6 months to make a critical hire because you have options tied up in people who don't even contribute to the organization anymore is detrimental AND unfair to the current employees.
It shouldn't make you sad that you couldn't exercise your shares. It should make you sad that you didn't work more effectively the capitalize on your options sooner.
Of course, nobody gives employees options on preferred shares.
It seems like you're whining about something that you had complete control over, and chose not to exercise.
1/3% (and that's generous) of a potentially $1B dollar company might seem like a lot, but after 10 years of dilution how much will you really have left? If your options dilute by 1/4 (also generous), you've made about an extra $80k a year, and that's not even with taxes subtracted. And don't forget the likely higher salary, raises, bonuses, stock grants, and medical care you get at a big 4 company.
It's possible that you can be be assured to make no extra money working for a startup, even with all the extra risk, depending on how those factors play out.
What stops founders from offering a company wide "vested Share vs. Cash" with an equal cap for everyone on each new round ?
For e.g founders planning to sell 10% of their own share while raising round in the so called "Take money off table", all employees get the 'right' to exercise the same option, hence instead of dilution to the new value its straight selling the value they created ? what are the arguments against this ? For the investors its the same, and if the cap of how much of the vested % you get to sell is kept realistically low it should not risk decreasing the value of the private stock.
while i agree with Jaymzcampbell as an employee you're better off with dropping the "hope" the paper value of what you own means anything, however its contradicting to the popular piece of employee incentive tool that is quite essential in acquiring& keeping good talent.
Post founding, there's this time period where the early employees are expected to work pretty much like founders (long hours, wildly high expectations), but with a greatly reduced salary and the promise of large option grants.
This unfortunately places the employee in a really bad negotiating position with respect to salary increases, etc. as their starting point was so bad. I've been in this spot and a couple years on had to _fight_ just to get a market rate.
1 - Hat tip: Gail Goodman and the long slow SAAS ramp of death - http://businessofsoftware.org/2013/02/gail-goodman-constant-...
In the end they ran out of money and all the employees got laid off, getting nothing.
Here I am though, working for another startup. This one actually makes money, though.
One of the founders reached out to me a few years later, asking me to join his new startup as employee #2. I said "yes", but only if I made 10% of what he made. The answer was "No". OK... maybe 1% of what he makes? "No".
Thanks, but no thanks. If you admit that you're not going to share the benefits, I have no reason to get involved.
I think this is far more common than you'd think. Take YC for example. I'd be really curious to compare SamA's outcome vs. employee #5's outcome (for example). Even when companies "fail", founders do just fine for themselves via acquihire, and it's generally not tied to their stock (acquirer values stock at $0, pays off investors, employees get retention bonuses of ~$50-100k over 4 years, founders get quite a bit more than that).
The systems are always going to be biased to the people who have the most money. You may realize you're getting a terrible deal, and their deal is much better. That's not an accident, and asking them to fix it is just going to cause suspicion and anger, especially if you blow past their facially spurious justifications for this ("I'm taking a lot of risk here!!!"). The real answer is "I have more money than you, so I can set the terms to favor myself".
I'm not necessarily saying there's anything wrong with that per se. Consider the flip side. You've promised an employee that he will make 10% of what you make that year, even if it means you're tithing that to him directly. You make $10M. Your employee makes $1M. Is your employee going to stay employed, or is he going to leave immediately and use that $1M to start something that will make him $10M next year, or even just to buy a fancy house on the beach and invest from home without having to pull a 9-5 every day? Making your employees too prosperous can really hurt your company, because everyone will quit when there is no longer a financial imperative to work together.
One of the main problems with the current startup culture is that everything is overly commoditized. For something to be considered a unicorn it has to fit a model, have a certain amount of growth, a certain amount of revenue, a certain number of employees. This hurts a lot of companies's success because it forces them to adhere to a model that's designed around a totally different organization, ironically the same thing that created "Startup Culture" in the first place.
I would and have much preferred working at companies where I liked my coworkers managers and reports rather than ones where I was simply paid more.
This is not a problem for law firms, medical practices, consultancies, investment firms, or management in any public company. Your argument is just that employees who are in shitty, exploitative jobs will take the money and run, so try to exploit them harder by paying them less. Are you really "not necessarily saying there's anything wrong with that per se"?
We're talking about getting paid something on the scale of millions of dollars here. I don't know about you, but most people I've met wouldn't keep working if they came into that kind of money, at least not the way that a regular worker works. They'd update to mimic the work-styles of the elite.
There's a reason that law firms, medical practices, hedge funds, etc. tend to be small. Each professional is essentially a free agent, hopping aboard on someone else's infrastructure for a limited time and more-or-less free to call their own shots, including going to another practice or starting their own if they're unhappy. There's a lot of lenience in scheduling, work hours, etc., and it's a very ad-hoc thing, because everyone knows that it's a free association based on goodwill and not based on mandate.
These high-level professionals decide to leave the office at 2pm, take every Thursday off for golf, and go on long vacations regularly. They just tell the people who are waiting on them that their needs are going to have to come later. They will also take long, self-financed sabbaticals.
Just think about the types of companies you listed and ask yourself if things would work out if every company afforded such luxuries to all of their workers. Normal people don't, and indeed can't, have access to those luxuries or nothing would work anymore (at least not until we get more stuff automated).
It's hard enough to get normal workers to collaborate when their paycheck depends on it. Take away that incentive, and suddenly everything looks like open-source; without the financial incentive and the threat of lost stability if a product has poor reception, people do the fun stuff, and leave the hard stuff for someone else to worry about somewhere down the road.
Like law firms and medical practices, teams of developers break apart and most projects can't sustain more than 3-5 like-minded major contributors (because there's little incentive to keep people around and get them to deal with necessary compromise; if people don't like what's happening, they just leave).
Also like law firms and medical practices, it suddenly becomes very difficult to get the help you need in either a cost or time efficient way.
The 9-5 is a different lifestyle. And we need people who work 9-5 more than we need people who close their practice down to go out to Tahoe for 1.5 weeks every time there's a bank holiday.
I'm saying there's not necessarily anything wrong with people who have more money being able to set the rules of the transactions they're involved in, necessarily. I do think they sometimes set rules that are bad, but my point was that the fact that such a group exists is not bad in and of itself.
Removing the general need to trade labor for financial stability is a disaster at a massive scale, and on many different layers. There is a path out of wage slavery, and anyone is free to choose that path and attempt to earn their way out. But a lot more people are content with the work-a-day grind than one might think (not content enough to do it willingly, but not discontent enough to put in the work necessary to escalate outside of it).
In a utopia, everyone would help everyone out and contribute their skills, knowledge, and resources free of charge, just because they saw a need for them. If literally everyone agreed to do this literally all of the time, we'd be in fine shape. But we don't live in such a place, so the need for financially-motivated human labor will continue to exist until we can teach robots how to replace 100% of it.
The context is early-stage startup employees, not white-collar accountants and blue-collar janitors who you are presumably outsourcing to other companies because they perform functions that are not essential to your business. The profits shared by people working for these outsourcing firms are not great because the profits of these outsourcing firms are not great. Your argument is that the profits shared by early-stage startup employees should not be great even when the profits of the firm they were instrumental in building turn out great. How is that fair and why should anyone agree to work with you on those terms?
> These high-level professionals decide to leave the office at 2pm, take every Thursday off for golf, and go on long vacations regularly. They just tell the people who are waiting on them that their needs are going to have to come later. They will also take long, self-financed sabbaticals.
You should really make friends with people who are lawyers, doctors, and in finance. I have friends in all these fields and your idea of these peoples' working hours is a deluded fantasy. They usually work around 50-60 hours a week and rarely take vacations.
I don't want to address the rest of your rant except to say that you should think about why you go so far out of your way to rationalize what to most people is obviously unfair behavior.
Firms that resell blue-collar labor are often very profitable. I'm not sure why you think they're not.
>How is that fair and why should anyone agree to work with you on those terms?
It's a marketplace, supply and demand is going to dictate these types of arrangements. There are many more adequate employees who want to work at an early-stage startup than there are early-stage startups hiring employees.
I'm not saying anyone should agree to work under these conditions, but as long as they do, others have to remain competitive.
I don't personally think it's fair. I think early-stage employees should get a much larger slice of the pie than they typically do. But I'm also not going to indulge the fantasy that being a non-founder and/or non-investor can lead to riches; it may have happened once or twice, but it's very unlikely to happen to you. In almost all successful startups, already an infinitesimally small quantity, the founders and investors get the proceeds from the exit and the employees are lucky to see a bonus check for $5k.
>You should really make friends with people who are lawyers, doctors, and in finance. I have friends in all these fields and your idea of these peoples' working hours is a deluded fantasy. They usually work around 50-60 hours a week and rarely take vacations.
They certainly want you to think that's the case. I'm not going to say that everyone in these professions works a certain way or another, but there are many who have a lax working schedule (admittedly, I don't know any who close their practice for 1.5 wks every time there's a bank holiday, that's called "hyperbole"). I know this because I have friends who are doctors, lawyers, and in finance.
>I don't want to address the rest of your [essay] except to say that you should think about why you go so far out of your way to rationalize what to most people is obviously unfair behavior.
I went out of my way to discuss because you seemed like you wanted to do that. This is a discussion forum, after all.
If you want the large exit, you're either a founder or an investor. It's been that way for as long as I can remember.
But if we're talking about "Well you make market rate if you value your options like XYZ..." then yeah, that's BS.
But when people take equity instead of compensation at BigCo, they are quite literally risking money + time.
It's not just the time, but the experience and skill of one person can be immensely more valuable than someone else's experience and skill.
i.e. "completely ignored".
When I joined a startup I was promised that more options would be issued and we wouldn't get diluted from future rounds, but that never happened. As employee #22 I received options that equaled 0.05% of outstanding shares, and by 2 years later, I was down to 0.015%.
I understand you're only relating your previous misunderstanding but to others reading this, they need to realize that it's unrealistic for employees not to be diluted.
The founders' ownership will get diluted. The investors also get diluted. Therefore, employees are not special in this regard. Getting diluted is supposed to be a Wonderful Event because it means the smaller ownership percentage is worth more.
E.g. Larry Page's ownership of Google Inc got diluted from 50% in 1998 down to 16% in 2004. That smaller 16% was worth ~$3 billion around the time of the IPO. If Larry insisted on "no dilution", no VC would invest money to help the search engine grow and therefore, he would own 50% of a worthless company.
In other words, you can't look at dilution in isolation; it has be combined with the (hopefully increasing) value of the shares.
1. Company needs to raise money
2. Company issues new shares
3. Board realizes "oh shit, this is a lot of dilution"
4. Board decides "okay, who is important enough to keep around" and issues stock grants to those special people to undo their dilution.
Founders and VCs have seats at the board table, and so are always important enough to get grants. Employees do not, especially after exit.
So the two choices left are
a) employees have no protection against dilution, therefore no protection, therefore shares are worth zero, or
b) employees are given protection against dilution.
You can say "b" is never going to happen. That's okay. It means that "a" and it's obvious conclusion happen.
I guess I don't understand what motivated you to ask about dilution and then believing a promise of no dilution since you're supposed to get diluted over time as the startup reaches maturity. Everybody is supposed to get diluted.
If a founder promised me "no dilution", I'd have to conclude either...
1) he doesn't understand the mathematics of selling equity (e.g. to maintain your 0.05% ownership, it has to come from someone else's shares since ownership % comes from a finite pie)
2) he does understand math, but he's a dishonest crook and therefore will tell you anything
3) he's mentally ill
4) he's absurdly generous of which I'd ask the same question 5 different ways to double check the more likely possibilities #1 through #3 again.
If you were to have some kind of special 'non dilution' clause in your equity position (which by the way, no founder would reasonably agree to), then you should have it in writing.
But it's moot. One or both of you was obviously struggling with how all of that worked, because giving employees anti-ratcheting clauses is not something that should really be done. In fact, it should be avoided if at all possible even with investors.
He expected to get diluted. But he was also expected to be able to offset that dilution by being issued new options. Which would be a perfectly sensible thing for the company to do for a valued employee.
The typical mathematical mechanism that offsets dilution is the increasing price of the shares.
E.g. 16%(diluted) of $20 billion equals $3.2 billion whereas 50%(undiluted) of $0 equals $0. (I assume Larry Page loves the power of dilution.)
Basically, you own less percentage of a more valuable company.
>Which would be a perfectly sensible thing for the company to do for a valued employee.
But it would be nonsensical if the employee's diluted ownership is worth more. They are supposed to be worth more after a dilution because that means another new investor valued the company at a higher amount and bought a piece of the company. That piece of equity to sell comes out of the founders' share, the investors' share, and employees' share. It comes from everybody's share. Don't get mislead by dilution -- it's the total value of shares that matters.
Protecting an employee's fixed ownership percentage might come into play if there was a down round where the company was valued less than the previous round. The founder might then do something extraordinary such as dip into some of his own shares and give them to a valued employee to make up for the loss on share price. That would be an unusual remedy that's done on an adhoc basis. It's not something that's typically spelled out during hiring negotiations so I wouldn't think that scenario would have been the context of OP's question.
Many people incorrectly think of "dilution" as a synonym for "bad". If you work from that flawed premise, you end up asking financially naive questions and become susceptible to unrealistic answers from crooked/incompetent founders. In the spirit of the thread's title, learn to understand that dilution is normal and a good thing.
It's only unrealistic because of greed. There's absolutely no valid reason this has to happen.
You just have to hope for the best and if it doesn't work out you get lectured by some smartasses that it's your own fault.
Like the other lies the moneyed interests tell, the belief that it takes a fresh young generation to build good products and that's why the oldest guy in a random SV startup is 26 is pure propaganda that they're hoping you won't see through. People take this bait and go out and work for a free room in an apartment shared by 6 other "founders" and a laughably small basic living stipend that doesn't even equate to minimum wage.
Maybe a few hundred of these people have actually ended up getting rich? And they're "founders". How many early startup employees are doing well right now anyway? How much have Dropbox's first 50 gotten, for example, and how does that contract with dhouston's take-home? The early employee race is really baseless.
It's a fool's game, and people realize that after a couple of years, and then go work at a real company, where they can at least collect a market salary and where prudence and experience aren't plainly mocked and discarded [because these attributes threaten the people at the top].
You flatly cannot build a company without capital.
On the other hand, you might be able to build a company by treating good employees badly, because the employees are either a little naive or they really do value working at your cool startup over money.
You might also be able to simply build a reasonably successful company with not very good employees (in fact this is most companies)
I personally believe that in a fair world, the people actually producing the value would be allowed to collect most of it, and the people who grease the wheels would collect an appropriate gratuity. However, I acknowledge that we instead live in a world where the people with cash set the rules, and their interest is in preserving and growing their power (which means keeping themselves much richer than everyone else).
Many successful companies are bootstrapped.
I'm bootstrapping now and I'd generally agree with the statement you quoted.
It's expensive and near impossible to find cofounders/enough-"bootstrapped"-help to make building a tech company from scratch feasible, never mind go to open market and get enough customers for the business to be worth running. A "small" 250k check would solve almost all of my issues right now.
It made it through the house and was approved by senate finance committee but is now stuck in a bill about retirement savings legislation.
Even finding information about the bill on the web or twitter is incredibly difficult.
Please tweet, blog, etc and call your senators to support!
*Not me, I'm not in the U.S. =p
So, the devil here is in the details: https://www.congress.gov/bill/114th-congress/house-bill/5719
The tax bill will come due when the employee leaves the company; so this doesn't really help a lot.
Has a few caveats that make it inapplicable to early employees too.
Interestingly, it seems like it applies to stock, not just options, which if it didn't come due when you left the company, would be great since it would mean that startups could stop dicking around with options for tax reasons and just issue RSUs.
I don't see where this is the case. In fact, it's against the spirit of the original proposal. Can you point to where you read this?
Still, the conditions when the tax bill is due are unclear, e.g. what does "seven years have passed after the rights of the employee in the stock are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier" mean?
1 - Don't go work for your brother's startup. As a family member of certain C-level employees, you're ineligible. Some C-level employees are also excluded.
2 - Early employees that get more than 1% of the company are excluded.
I'm usually among the first to complain when I see the Republicans advocating policy that I find foolish, but it's certainly not the case here. This is sensible policy that corrects a decades-old problem in Silicon Valley and, for that, I support them in this legislation.
1. Will this company succeed?
2. Once it succeeds will my equity be valuable?
3. If my equity could be valuable, will it be diluted before I can get paid?
4. If not diluted will it ever be liquid?
5. If there is liquidity will I be able to participate? Or only founders/investors.
6. If employees are able to extract real dollars, will I be forced out, laid off, constructively dismissed in advance to reduce what I could take home.
All I see is a succession of methods to keep me on a treadmill chasing a carrot. Until the startup is large enough to take away the carrot.
This perception is hurting startups as a whole. Because you will not be able to convince early stage talent to work for equity. It is not enough to tell engineers 'well you should learn more about equity so you can't get ripped off so easily.'
Management at that company began to systematically harass, exclude, and demoralize early employees (I was #4) until most of us left. I still haven't got a straight answer, but my best guess is that fear of a down-round was taking over and the founders were eager to claw back some of the equity they had tied up in option grants to early employees, so they could try to protect themselves from the consequences of the impending down round.
I'd take regular, sane hours and the ability to have a life over worthless perks like ping pong/foozeball tables and customized snacks. I can bring my own snacks, buy my own lunches with as long as I have a decent salary and that really doesn't bother me. The only real perks in a startup are more control over what you are building as a team, the challenges you get (or have to, depending on your outlook) to face, and the ownership you feel in the immediate product and it's future development. You sacrifice everything else for that.
End Result: People used to spend at least 2-3 hours of the day in gym/playing ping pong/partying in the cafeteria. Also they used to smell(cause they went to gym but were too lazy to wash up) in the meetings. Then if you needed someone's help then you had to wait until they came back from "play area". And no one used to complain about such a huge waste of time, cause no one wanted to be that guy who shut down the "cafeteria". Needless to say, they ran out of millions of dollars in 2 years, and Founders are in court for said "pocketing" the investors money.
Personally when I see the phrase "working conditions" I immediately think of hours worked, aka "work/life balance." And from everything I've heard, hours at Silicon Valley companies are far from the best in the world.
Either the author ascribes a much different meaning to "working conditions" than I do, or my perception of those working conditions are way off base.
I had no idea it was so expensive to join a startup. At least, if you want to avoid golden handcuffs for the next 10 years. I'm extremely glad that I made the decision to exercise my options. I left after 2 years because I couldn't stand working there anymore, and I had vested most of the shares that I had exercised.
If golden handcuffs had forced me to stay, I think I might have had a mental breakdown, and I don't think my marriage would have survived.
My former startup is now a very successful unicorn, and I'm starting to hear talk of an IPO in the next few years. I think my shares could be worth somewhere around $5 - $10 million. This is absolutely life-changing money for me, seeing as I could happily retire with $500k.
Sometimes I can make it a whole day without thinking about it, but it feels like I'm just burning time until I can finally cash in these shares and never worry about money again.
Can anyone relate to this?
Easier said than done, but really the best thing to do is focus on your current work / life. Keep saving, keep working hard, enjoy yourself the same way you have. Don't get a fancy new car that you normally wouldn't get because "soon it won't matter". Don't drain savings, don't live a lifestyle you think you'll be able to afford soon, don't shop for houses, etc.
I've been working on some of my own startups since I quit this job. I needed to keep my burn-rate low, so I lived in some very cheap countries in South America, South-east Asia, and/or Europe. Basically the "digital nomad" thing, except I didn't move around very much.
And then I somehow managed to find a long-term client, where they only need me to work 4 hours per week, at $150 per hour. This supports a very high standard of living in my current country, so I'm extremely happy with this arrangement. I stumbled into this completely by accident, and I never even knew it was possible. So now I'm thinking that this is a pretty good backup plan, and I've started to put down roots here.
I know this particular gig won't last forever, but I certainly don't want to go back to full-time employment. 20 hours per week would be hard enough.
I do need to keep working hard on my own projects. I still haven't been able to build something that generates passive income. Not even regular income.
I try to make a lot of time for fun projects and hobbies that don't make any money. Things like art and music, and making things. I know it's possible to have a career as an artist or a musician, but I don't think I'm that lucky. I wish I could really pour all of my energy and time into those things, instead of also spending time trying to monetize various apps and websites.
I might try Patreon. I already have some pretty popular YouTube videos, so I think there is an audience for the kind of projects that I love to build. That's what I would be doing if I was retired, so maybe Patreon can help me to do that right now. I might try to set that up when I finish my next project.
Would you mind if I picked your brain on which countries/cities you'd recommend? I've found info online (e.g. internet speeds listed on nomadlist) to contradict my real world findings, so would be great to get some first hand info.
Can you email me at email@example.com? If you'd prefer me to get in touch another way let me know. Or even a reply here would be hugely useful.
$20k to $5-10m is incredible. That implies 250-500x valuation growth (for example you joined at series A with $20m valuation and the company is worth $10b), which means you hit a unicorn within the unicorns!
Was the company QSBS-eligible when you exercised? There are huge potential tax savings there.
Your shares were NSOs, correct? There are weird potential issues with 83bs and vesting ISOs.
It's worth thinking through how to factor your paper money into your investment portfolio. You could model it as $0 and have an otherwise standard asset allocation (e.g. whatever WealthFront recommends for your risk profile). Alternately you could include it as a huge illiquid stake in a US tech company -- as if your portfolio was 80% in GOOG -- and mitigate your overexposure in the other 20%. Or something in between.
I don't know if I would say I joined a "unicorn within unicorns". Every unicorn has at least 10 early employees with the same story, and according to this list , that's at least 1,850 people.
I don't think the company was QSBS-eligible. At least, I've never heard that acronym while reading through all of the paperwork. And yes, the shares were NSOs.
I don't really have an investment portfolio, apart from these shares. I've been working as a part-time freelancer while I try to build my own startup ideas, so I'm not really saving for retirement. The IPO should only be a few years away, so I'm just going to wait and see what happens.
If everything falls apart, I'll try a few more startup ideas. If those fail, my backup plan is to spend 4 years working full-time, living frugally and saving as much money as possible, and then retiring in a country with a very low cost-of-living. I can save around $130k per year as a remote software engineer, and I only need $500k to retire comfortably.
Under certain circumstances, QSBS (Qualified Small Business Stock) rules will significantly decrease your tax burden.
Been there, done that. A startup I had exercised my options in was bought out by a company that was "talking about an IPO in the next few years".
That was several years ago.
The execs and VCs in the original startup got almost all the money in the liquidity preference. Ironic because I did "rock the boat" when I joined by attempting to ask for a better share class. 23 year old me asking for preferred shares lol. It failed.
The bigger company doesn't seem to be in IPO mode anymore. But I have shares of it, with a notional value 1/8th of what I paid to exercise my options.
> Sometimes I can make it a whole day without thinking about it, but it feels like I'm just burning time until I can finally cash in these shares and never worry about money again.
I can relate to that too, for other opportunities, its always good to look forward to something.
For instance, in France, you only owe money to the taxperson when you sell your shares, for a profit. If you sell for a loss, this is tax-deducible.
For a country whose citizens outwardly hate tax, you'd think they would have one of the best, most straightforward, and fair tax systems in the world. But instead you have one of the most convoluted, loopholey, broken systems in the world.
Whereas in countries where taxes aren't as "hated" (Europe, Canada, etc) they don't pay a cent to file taxes, have less loopholes, it is less complicated, and overall fairer.
If I was an American I'd hate tax too, but you guys made it that way. Why does it still cost money to file taxes anyway?
It doesn't, but because of the complexity of the tax system most people either use a tool like TurboTax or an accountant, to file for them; that costs money.
And the reason it exists, the lobbying of special interest groups for exceptions to taxes. If you can convince people in government that you deserve a break b/c what you're doing benefits society somehow, there's a tax loophole waiting for you too!
And now, there is the multi billion dollar industry that depends on this complexity and doesn't want it simplified. This is a huge waste, we waste money individually that could be spent on actual goods, and the IRS/government waste money needing to audit all the people who decided that maybe they did deserve a tax credit that perhaps they did not.
Very few people actually need an accountant or even TurboTax to do their taxes.
Those people may not technically need an accountant, but to do their taxes without assistance would be foolish.
The IRS could go towards a model where they assume a standard deduction and verified dependents, and issue a refund based on that. Then let people file an amended return with itemized deductions if they wish.
The tax code in the US can be very complicated, but the for the vast majority of wager earners, it's pretty straight forward. The complications come on the business end of things.
You could use this phrase to describe a lot of advertisements and products. However, these ads work on many people and they are made to feel like if they need it. Considering the argument they make is that with TurboTax you could get more money back than without using it, I am not surprised many people buy this tool and use it.
Democrats oppose reducing taxes on principle. And Republicans talk a lot about reducing taxes, but usually find more interesting things to do once they're actually in office. Special interest groups of all kinds lobby heavily for their own distortions of the tax code, and the average voter has little idea what is going on.
The people who get hurt the most by all this are the middle class. The very poor have nothing to take, and generally pay either no or very little tax. The very rich have professionals to handle all this.
The canada gotcha's are:
1. Everything is more expensive.
2. Housing is overpriced in employement metros except alberta.
3. You get paid a lot less than the USA anyway.
4. Canada's stock market is pretty much flat compared to the USA in the past decade.
Sometimes just raw amounts of money overcomes a lot of these kinds of issues.
I guess the reason why it's not done this way in the US is a combination of the general mistrust of government, and the lobbying from companies like Intuit to keep the tax system as complex as it is now.
They wouldn't make a decision on how things would be taxed until after our IPO - so we were able to exercise the options and sell the shares to cover the worst case tax scenario.
After the IPO nice tax man said that the best case rules applied and we got to keep the money that would have been used to pay our tax bills.
Thank you HMRC!
Here's their lobbyist's disclosure form. It says "Oppose IRS government tax preparation" right there in Box 16.
Their SEC disclosure says essentially the same thing. Grab it from here: http://investors.intuit.com/financial-information/annual-rep... Specifically, on page 10 of the 2016 version:
"We are a member of the Free File Alliance, a consortium of private sector companies that has entered into an agreement with the federal government. Under this agreement, the member companies provide online federal tax preparation and filing services at no cost to eligible federal taxpayers, and the federal government has agreed not to provide a competing service.... However, future administrative, regulatory, or legislative activity in this area could harm our Consumer Tax business."
I'm totally fine blaming them.
If you make less than that, the "Free File Alliance" let you submit a simple federal return for free using their software. They may try to upsell you on various things and may charge for a state return too.
Above that threshold, your only free options are the paper forms or the "Free Fillable Forms" online. The latter option is really simple. It will copy some numbers from place to place and does some basic math, but beyond that it is very similar to filling in the paper form--it won't help you optimize your return or anything like that.
More here: https://www.irs.gov/uac/free-file-do-your-federal-taxes-for-...
The problem with our tax code is the same as the problem with the rest of our laws: pandering politicians push through complex and expensive trash because it makes either their constituents or their donors happy.
For taxes specifically, normal people have complex taxes because of the dozens of deductions and credits that hide the handouts (to the wealthy and the poor alike) built into the system. In a sane tax code, there would be no standard deduction or mortgage deduction or earned income tax or alternative minimum tax. There would be a set of tax brackets (adjusted to compensate for the loss of all the complexity) and very little else.
Of course in a sane system, the government would just file your taxes and send you a statement along with a refund or a bill. They have all the relevant information with the exception of some itemized stuff they can't know about, but they could just eliminate that and simplify.
And once again we reach the conclusion that corporate lobbying and donations are the "root of all evil" in American politics, and everything is broken because of it. Larry Lessig has been right all along when he said this needs to be fixed before anything else . Because once this is fixed, everything else should be a lot easier and a lot more in tune with what the People want .
It's just so easy and so cheap for corporations to buy votes right now. Why wouldn't they do it, when the upside is billions of dollars and there's no penalty for it? They can literally buy a vote with a few thousand dollars "donation". Set a limit of $200 (maybe $500 for presidential candidates) political donation per year per person and imprison (6-36 months) anyone who dares to do it any other way, fast and furious, no matter who he is, wealthy billionaire or former president. It's the only way to escape this corruption in the system.
Also, I think the U.S. would need a special agency whose sole mission is to look for this type of corruption. In this case, "mission creep" and the purpose of maintaining their jobs would work in the People's favor. The more the agency would do (catch corrupt donors or politicians), the more it could justify its existence. Similar agencies have seen a lot of success in Europe, trying to catch corrupt politicians.
The unintended consequences are exactly what is spelled out in this article, people with less means cannot exercise stock b/c of two reasons, the cost and then the tax, actually raising the cost on illiquid assets.
This is broken, and causes the type of self imposed entrapment described in the article. If this is a big deal to you, contact you congresspeople and ask them to "fix" or so that the tax is only due on liquidation of the stock.
Well, unless the options are for shares in a non-Canadian controlled private corporation.
Got bit by that little loophole in my late stage startup when facing options expiration...
I interpret the parent as referring to options in a corporation that is not a CCPC rather than options in a private corporation controlled by non-Canadians.
Options exercised in a non-CCPC are subject to income tax on the difference between strike price and FMV of the shares at the time of exercise.
If the company is not a CCPC and the value of the options at grant-time were less than the share value, you may qualify for a 50% deduction (bringing it in line with capital gains), subject to some conditions (arms-length dealing, etc).
If the company is a CCPC, you can defer the taxes until the shares are sold. If sold within 2 years, you pay full income tax. If sold after 2 years of holding, a 50% deduction applies bringing it in line with capital gains. CCPC status of options are grandfathered in so if the company loses CCPC status, your options continue to qualify.
Keep in mind that going bankrupt/company sale are forced sales of your shares, which could hit you with a big tax bill and since that tax bill is income (not cap gains), the capital losses of the sale cannot be used to offset it!
CCPC employees should also look at the lifetime capital gains exemption (LCGE) of $750000 to reduce taxes on the capital gains following exercise, and the allowable business investment loss (ABIL) which can be used to halve the tax owing in the downside case. In theory, the 50% deductions mentioned above and the ABIL stack to reduce the tax owed to 0.
The problem with all of this stuff is that when you exercise, there is no way to know what deductions you will qualify for under various hypothetical scenarios.
It feels like tax laws just aren't set up to deal with the notion of illiquid shares and fairy tale valuations.
Not, the 50% income deduction also applies to non-CCPC shares if the circumstances are right, which brings the income tax down to approximately capital gains... which at least softens the blow a bit.
Being modestly familiar with legal restrictions around closing offices in France I'd be surprised if the scene there was massive.
I know I should in theory ask to see the cap table, but it seems awkward and if shown it right then I'm not sure I'd entirely know how to read it properly (along with the terms), or how to immediately negotiate from it.
Stock options have been frequently presented to me as just a standard piece of paper offered, and not a thing for negotiation. It feels easier and less scary to haggle on salary (which I do quite well at generally).
Is it even reasonable to ask for twice as many options when I'm negotiating? Or is that like asking for double the salary and not reasonable?
Is it reasonable to ask for a bonus (at an A-round startup) in terms of options after being there for a year?
It's better to ask what percentage of the company your X amount of shares would be. Company A could offer 1,000 shares and Company B could offer 10,000 shares but you have no idea what amount of ownership that actually is for either of them.
People have been sketchier about showing me a cap table. I didn't think of it at the time, but maybe asking for an anonymized one would have helped since it felt like some of the resistance was because it would have names attached. I ended up just asking if there were more liquidation preferences in there for investors and getting an answer that there weren't, but in hindsight I'm sceptical that there wasn't at least a 1x preference in there.
In terms of reasonableness; companies/founders will have some idea of how much they value options at; it will almost certainly be higher than you value them at, after all paying you more $$ from the investment money is cheaper than diluting themselves. You can probably get a sense for how valuable they see them by just asking them about the possibility of trading off salary vs equity.
In my experience, startup owners vastly over-estimate the value of their equity since they do not price any risk into it.
[EDIT]: I was looking for a job recently and a startup gave me a ridiculously small offer in two variants and they saw 35k of options over 4 years (i.e. 8.75k options/yr) as equivalent to 15k in salary. I'm sure that felt right to the founders since they're growing, etc, but that's a clear over-valuation in their head.
- You probably won't have a 10 year horizon if you are joining a company that is now a unicorn. You likely will if you found a company that later becomes one.
- Sarbanes-Oxley is a big villian here. It pushes the cost of legal compliance through the roof for public companies, forcing companies to delay IPOs until revenue is higher. In addition to delaying liquidity events, it prevents small traders from owning stock in companies that are ramping from ~100m valuation to ~1b, which is why there are so many unicorns now. This hurts normal investors big time, and helps people with access to private markets. (source: friendly neighborhood VC)
- the article doesn't go into AMT, where the IRS forces you to knowingly overpay tax when you exercise ISOs, then (slowly) pays it back over the years.
SOX exists because investors were tired of being defrauded by the people running the companies. While SOX might make it more onerous to go for an IPO, it's still a good thing for public markets.
I suspect the real reason companies stay private for so much longer is not because SOX-compliance is too expensive, but because companies can take advantage of private investors in ways that they cannot get away with in public markets.
SEC compliance costs are significantly higher than SOX for public companies, why not complain about that instead?
Neither the few hundred thousand dollars for SOX compliance or the million dollars for SEC compliance are significant pressures on the IPO scene right now. Wider availability of VC cash, better strategies for repeatedly going to that well, and big investment deals for private companies with large public companies (i.e. the Uber/Lyft model) have changed the market pressures so that IPOing isn't as valuable as it once was.
Basic due diligence on a startup offer is asking for # of shares outstanding, last company valuation, strike price. Advanced due diligence is talking about things like extended exercise windows, secondary sales, and liquidation preferences.
Unfortunately, basic due diligence is rare enough that if you do ask a potential employer the latter kind of question, there is a risk of coming off as overly mercenary.
The way of talking to potential employers that I've seen work is to ask questions in increasing complexity, sharing your conclusions along the way, and signalling why you're asking these questions.
After you ask the basic due diligence questions, you can share the math you're doing on stock value various exit scenarios (a good base assumption is to assume an exit at the current valuation).
That typically lays good groundwork for having "advanced" due diligence conversations about an extended exercise window and shows you're serious. In contrast, if the company isn't willing to share valuation or total share numbers, this is a huge red flag as it prevents you from doing the basic math.
This is a tool I built giving engineers the questions they need to ask, in order to do that basic math on what their stock is worth: http://www.optionvalue.io/
Kind of weird because they all do, and engineers are pretty inept at anything finance.
Agreed, but ...
Try to negotiate a deal such that the employer gives you a one-time sign-on bonus which, after taxes, will pay for the early exercise of the offered equity, and get the employer to give you the paperwork for filing 83(b) election.
This values the equity at $0, but prevents drastic financial implications (at least for the initial grant) should it actually become worth any real money.
What does HN think about such a scheme?
I have a follow-up question though. Every time a new employee joins, you are essentially shelling out the cash equivalent of their equity's FMV. This way, the offered equity is twice as expensive for you - once as equity itself, but then again as the cash bonus. Has this caused problems for your cash position? Is it sustainable as Scalyr grows into higher valuations?
We've lost the opportunity to earn a little money from the new hire by selling them stock at a nonzero price. But that's not an opportunity we want.
As we grow into higher valuations, the tax impact may become an issue. We might have to start grossing up the bonus. Also, if someone leaves before they're fully vested, all this has to be unwound and I'm not certain of the tax implications there. We haven't worried much about that because at this stage no one is leaving. :)
Let's say your strike price is $0.20, and now the FMV is $0.75, and you're exercising all 10,000 of your shares, including 2,500 that haven't vested yet. When you exercise, you file an 83(b) so that you get taxed (AMT) on the full $5,500 spread in year 3, even though you don't technically own those year 4 shares yet.
Then, you leave or get fired 3 months later. Pursuant to the early exercise agreement, the company can repurchase 1,875 shares at your $0.20 strike price, giving you $375 back. Unfortunately, AFAICT, there's no way for you to reclaim the tax you paid on the $1,031.25 spread for those 1,875 shares; you just eat it.
Yeah, this stuff is complicated, and sadly it seems to fall to each startup employee to educate themselves.
Not that I would benefit personally. I am still burning through years of capital loss carryover from ZNGA.
I'm not an accountant nor a tax expert. My layman's understanding of that clause is that (1) the amount paid was $375, and (2) the amount realized was $375, so the buyback nets $0.
Could the nonvested shares somehow be defined as "a capital asset in the hands of the taxpayer" with a cost basis of the FMV at exercise time, even though they're not technically property of the taxpayer yet? Perhaps it depends on the specific terms of the early exercise and the buyback?
True story: I was the first employee at a startup that raised > 15M from top investors and sold to a big SV company for several multiples of the total investment. I left before the company sold, but had low single digits of ownership. Terms of the sale: investors were made whole, founders made 'house-changing' money (low millions each) + really nice salaries. Common stock was zeroed.
Granted, the founders probably had to work hard to sell the company, but as an early employee, I took quite a few risks as well and the reward was definitely asymmetric.
Character buys a unique, abiding respect.
 Naturally by "employee" they didn't include the founder or members of his family who worked there.
I would almost think that a lawyer would be able to convince a judge that that "contract" was written so adversely that the "arbitrary change" clause should be struck, since the rest of the contract is essentially illusory if it remained.
That doesn't mean the employee gets stock options. The contract granted the stock options. With no contract, there's nothing.
Seriously, I can't figure out why this doesn't immediately escalate into noisy public events that tank the stock before the founders cash out (e.g., strike / unionization).
Also he negotiated a year off of our traditional 5-year vesting (at the time anyway) in the salt mine that is Microsoft, though he was never to take a position there himself.
I see no end to liquidity event horror stories. I'm so lucky.
On a side note, I haven't used it in a long time, but why all the hate on Jira? I mean, I remember it does everything including making my breakfast for me, but is it really that bad? I don't remember it being that bad, but maybe others would like to chime in on why they like/dislike it?
The author may also be using "JIRA" as a proxy for a heavily pre-planned waterfall culture with a big emphasis on time tracking, doing what you're told, fake-metrics success theatre, etc. (cf. https://hackernoon.com/12-signs-youre-working-in-a-feature-f...)
What's a better alternative to Jira though?
If you put the legos together right, it's great. If you build a turd with it, it's gonna suck. That aside, it's slow and gets in your way a lot. IMO it's the way to go though.
Numbers-wise (measured on a 'per company' basis), I would tend to disagree with the 'most' part of your sentence. Aren't there are many more 'smaller' companies happy to use hosted services as compared with companies that require self-hosted ones?
I did some math and even if the company sold for a decent amount in the future, my shares wouldn't have been worth the amount in pay I would have lost between then and the liquidity even. So, I started up my own LLC and started doing consulting/contracting and I've never felt happier.
I feel like I'm in control now and I don't have to beg someone for a raise or worry about why I'm getting screwed in the next round of funding.
At my last company, I exercised options. I owe the IRS tens of thousands of dollars due to AMT this year (not that it was unexpected, as I did heavy research beforehand).
Can anyone shed light why companies aren't set up to distribute RSU's (and allow employees to fill out an 83/b form within 30 days of being granted?). Is it not preferrable to investors for some reason?
The worst part of the AMT and exercising ISO shares at a startup is that it is nearly impossible to make an informed decision on whether or not to exercise (and how many shares to exercise). You can't possibly know your tax liability until next tax season when all your tax forms come in.
Last year, I called maybe 5 different tax accountants for advice on how to estimate what my tax impact would be for exercising shares and got 5 different answers. This stuff is COMPLICATED.
Finally just got TurboTax and plugged in some guesses of my deductions, etc and got some type of estimate. Filed some 1040ES's last year to minimize the penalty and hopefully will get close.
Another sad fact is how few people at startups are even educated on the subject. While one can argue it is up to each employee to do their own research, I think it is in startups ethical interest to have their CFO team give an overview of the stock plan and what kinds of things employees may want to ask their accountants about.
But as you get even a little bit down the line, and your company valuation goes up, that's real liability for the employee. Said another way, not everyone early exercises their options, so some folks would prefer not to definitely owe taxes.
A lot of these later stage companies (like say Dropbox, and famously Facebook pre-IPO), start blending towards RSUs for exactly this reason though. Shares are nicer than options, but you need to be cognizant of the tax implications (I believe, but haven't experienced it, that even Dropbox does RSU withholding, so employees aren't left figuring out how to pay the IRS thousands of dollars for their illiquid shares).
Disclaimer: I'm not a tax professional, lawyer, accountant, or any of that (like you, I just wish at least early employees would get RSUs).
The usual impediment to this is venture funding. VCs generally don't like, and often can't invest in, LLCs so companies are forced down the corporation route.
Yes, it means you need to have the cash on hand, but honestly, taking out a bank loan to forward exercise your option grant would probably be orders of magnitude cheaper than wrestling with the 409a valuation or AMT or any of that garbage — especially for very early stage employees.
And it starts the long term capital gains counter earlier, too.
In the end, I paid hundreds of dollars (or perhaps a thousand?) in interest, but it paid off handsomely as the spread between short term and long term capital gains is large enough to make it worthwhile.
But, of course, there's always risk.
It would be so profoundly painful, financially — and in so many different ways at once — to exercise at any other time but immediately upon hire (or at a minimum, in advance of any subsequent liquidity event), in that circumstance.
> It is a common misconception, but a Section 83(b) election generally cannot be made with respect to the receipt of a private company stock option. You must exercise the option first and acquire the stock before you can make a Section 83(b) election, and you would only make a Section 83(b) election in that instance if you exercised the option and acquired unvested stock (if the stock acquired on exercise of the stock option was vested, there would be no reason to make a Section 83(b) election).
Why on earth is this a downside? "Unlimited vacation" is a scam.
Is it possible I would have gotten more days under a fixed policy? Maybe, I didn't really count and neither did they. But who cares? It's not like x amount of vacation days makes me more relaxed, it's knowing that I can take one that relaxes me.
Having fixed vacation days kinda stresses me, as now I have to worry about not using them all throughout the year, or have to worry about not wasting them.
Bottom line, I think successful vacation policies depend on company culture, not fixed or unlimited days. You can certainly have fixed days and still have a culture that frowns upon using them.
If you accrue 15 days a year, work for 3 years, and never take a vacation day, you are paid for 3 weeks and lose 6 weeks of compensation, almost 4% of your pre-tax total over that period (assuming no raise for simplicity).
Now that companies are planning on 10+ years to IPO or sellout, they aren't changing their employee incentives to match expectations. No one wants to work for free, or cheap for an entire decade at one company.
I actually applaud Snap Inc. for pushing ahead with an IPO early on in its lifetime. It's going to make millionaires out of all its early employees and start a 2nd wave to startups in LA that San Francisco hasn't had since Facebook and Twitter.
People in SF are still waiting for AirBNB and Uber, Lyft, Stripe, Github, etc, these companies are turning over employees already that should have minted local millionaires ready to start the next wave.
Totally agree with this and I think it's the core of the whole piece. I tell everyone who asks about options the same thing before getting in to the details.
Nowadays I ignore equity and look at the bona fide package they offer and how enticing the challenge they have can be and decide based on that. Equity promises just don't fall in the balance anymore.
Don't fall for the stock options trap if you are an employee: you are just as fortunate (or not) with a lottery ticket.
Obviously if you are a founder it's a different story...
Then after the 500MM round they were 5000 shares.
When I was negotiating my offer, I didn't budge on getting a market rate salary and in the end, I got it.
Why? Because they did some hand wavy arithmetic and told me my 5000 shares would be worth 500K at some point. Yeah no thanks. As employee #500, I knew better.
What happened? I hated it there. Left after a year. Company lost half of its valuation.
Moral of the story: don't compromise your salary for equity, even for a unicorn. The only exceptions are if you are truly an early employee. If you're not sure whether or not that's you, then it's not you.
Even then you aren't safe, I saw them fire other engineers for no other reason other than they had too much equity.
Careers are messy. Even the people who WERE one of the early employees and got a shitload of equity eventually got their salaries adjusted.
Don't compromise on your salary.
It's the damn truth. Cash is freedom - cash is king.
This is key when you are thinking about joining a startup. If you can land a job at $BigTechCompany that pays a bonus and RSUs that refresh every year, it's likely a much safer bet and will have much lower risk.
Is it not true that company can (and usually will) issue new shares and dilute your stake at every investment round? (I am just a layman like you)
Also, equity rounds reduce your percentage ownership, but (usually) not the current value of the stock you hold. If a $100M company raises $100M, the number of outstanding shares doubles. However the company is now worth $200M (the cash in the bank counts towards valuation). Now, your 1% share is a 0.5% share, but it is still worth $1M. If the company spends the $100M without growing, then the funding round was a mistake, and your shares are now worth $0.5M
So, spending money lowers the value of your stock. Issuing shares lowers your upside at a fixed future valuation. If management knows what it is doing, raising cash should increase the chances the company grows, and so should hiring.
(these calculations are oversimplifications, but the intuition is right)
Is that true? Generally don't companies set aside ~5% of the company for employees? Even the first 5 employees probably get a combined total of less than 10%, whereas the first investors probably get 10+%.
If people are getting diluted from shares being issued to employees like you, you have already entered a death spiral.
Now VC funded folks who were told they could be the next Zuckerberg have finally figured it out-your life is being commoditized into hedged call options for the rich with high probability of recouping their speculative bets. Your time is always going to be cheaper than a VC's and they've figured out a way to make it even cheaper at your expense and for their own gain.
People are figuring out their stock options aren't actually worth much and that they've just spent a huge chunk of their life helping the rich get richer with the illusive dreams of becoming the next Larry Page or Zuckerberg.
It's almost identical to the ebb and flow of workers in startups. Following this logic, we can clearly see these zombie unicorns are not going to be able to monetize like they've been able to raise money. We will see the rise of bootstrapped companies fighting each other to gobble up the vacant marketshare.
The worst that can come out of this is loss of economic productivity (VC investments have yielded economic returns for the 0.1% at the expense of the rest).
And of course lot of Venture Capital partners finding out their portfolio of 10 variants of Uber or Tinder is going to need more money to keep their share valuation high as capital is drying up due to global uncertainty.
They might not be able to buy a Lamborghini SV Roadster and a penthouse in downtown Vancouver. The world's smallest violin for the rich is always expensive and at great costs to society. Kevin O'leary worshippers call wining and dining "free market forces". A free market that serves less than 1% of the population with none of the benefits trickling down to the rest.
I had a blast not reading the article.
Even if you wanted to do this, you don't need to be an employee of a company to do that. Just join some venture Seed fund that you can invest your 10,20,30K per year, etc. Your chance of success is approximately the same, but at least you won't loose your job when it doesn't work out.
And, if your just out of school, or have no other options, then by all means go work for the start up. In this situation your not giving up a higher salary to do so.
And always make sure you have work/life balance - the company won't do that for you, you have to make it happen.
This is trivially false. Lottery tickets are not worth $0. Take that into account when evaluating this commentary.
Basically, 90 day exercise windows are evil and the source of great pain. However my view is the author is folding in a bunch of anxiety around the general risk of startups. They seem to imply that a primary reason for delaying an IPO is employee retention. This is a poorly supported theory. Golden handcuffs are not a great retention tool as a poorly motivated employee is minimally productive. Rather the primary reasons to stay private are higher valuations afforded by the private market and less regulatory oversight.
Look, if you can get an awesome RSU offer from a super solid public company then go for it. But don't buy into the implication here that startups barely offer better deals. Do look for an extended exercise window since companies are staying private longer these days. But generally speaking you're going to get a significantly bigger chunk of options in a startup than a mature company, with commensurate risk. Do it if you believe in the startup and handle the uncertainty. It is not the same as a lottery ticket; you can improve the odds with your own labor.
It comes down to a very strong but important question: why should anyone work for your company
It feels much more like playing roulette than making an investment. I have no idea if there will be a liquidation event at all, nor do I know how much that'll end up being if I can hold on for that long. Oh, and I'll be paying taxes on those shares all along the way (assuming the value goes up, which is another uncertainty).
The odds of coming out on top are not in my favor -- and I've chosen to not exercise my options. I came to this decision based off
a) plainly looking at the odds -- the company isn't going to be a unicorn no matter what bullshit the founder and investors are spouting
b) given a non-unicorn style exit, the cash these stocks would earn me probably wouldn't be significant anyway.
We live in an age where not only are investors letting themselves be taken for a ride, but the employees are as well. I'm now concerned with salary exclusively in my negotiations -- I can take an that extra $XXk per year and put it into the stock market with more reliable results.
What did I learn? Start your own company is best. second best is to license a trademark or a patent to the startup to ensure that you are square in the center of the equity pie. YMMV
And that is just as an employee; you can't possibly be on top of all of this information without being a C-level employee, and if you're constantly asking for updates on this, you're probably not doing your regular job. Even so, you may not be privileged to some information (investors getting more shares issued if target revenue numbers aren't hit, for instance). And you definitely don't get a say in any decisions that affect this (unless you're a C-level employee, again).
When you are leaving the company, there are so many ways you can get screwed. Regardless of the 90 day exercise window, unless the company is on the very precipice of IPO-ing, you're never going to find out the terms of new investments / bank loans / (see above). And honestly, the easiest segment of people to screw over are the former-employees. The company can issue new classes of shares to current employees that render former employees' stock worth effectively $0. The company has nothing to lose; current employees are happy because they get a bigger slice of the pie, investors are happy because they didn't have to give up anything; the only people upset are the people who aren't around anymore.
Don't forget RSUs usually fully vest (stop coming in) after a few years, so if you're looking at an offer where you get 25% of your salary in RSUs that fully vest in 4 years, then keep in mind you're looking at a 25% pay cut after 4 years. I'm told some companies issue "evergreen" equity to counteract that problem, but I've never seen it in practice.
I think the real advice is don't join a startup (even a unicorn) for the money.
Since when I first signed on, the token wasn't out yet, we had to negotiate a value for it. The value we agreed on ended up being much lower than the actual value when it was finally released. This created a strange situation. My monthly salary, which was at one point a combination of money (bitcoin) and some pie-in-the-sky uncertain token, simply became money + money since it was all liquid. I was therefore getting paid much more than expected, and more than another engineer of similar skill would require. This creates pressure on the founders to consider letting me go - even though I was a critical component of getting it to where it was. The psychology when the equity is not liquid seems very different. Even if a company's valuation starts to become much higher than expected, the fact that there still has to be an unlikely far-in-the-future liquidity event for any of it to be worth anything, significantly changes the dynamics. But when your engineer is simply getting paid quadruple market value in real liquid money, thoughts start to materialize that they can simply exchange me for 4 other engineers.
If your shares have this restriction they are practically worthless. Also be wary of sneaky language on page 40 of a random document signing away your ability to sell--have seen this from otherwise-reputable Silicon Valley names.
Bonus: the IRS recognises them so American employees of UK companies can enjoy the tax benefits too.
https://www.twobirds.com/~/media/pdfs/expertise/employment/e... is a nice primer if anyone is interested.
This is either incorrect or I'm misunderstanding it. The purpose of the 409a valuation is to set the strike price of the options. The strike price is the fair market value of the common stock.
Also, to parrot everything everyone else is saying, equity should be valued at zero. Out of the 200 or so 409a valuations I've performed, there might be 10 companies where I would consider the equity to be valuable in the long term.
It is true that you might lose a big chunk of your upside by going to a secondary market but if the alternative is to leave the ISOs on the table it might not matter.
Also firms that provide a secondary market will give you a loan to purchase those shares if they line up a buyer for you so you don't have to come up with this money on the spot yourself. SharesPost does this.
Is this a rule that should be changed? Why can't these just be capital gains taxes owed when you sell?
Is there any reason why it might be advantageous to exercise early? My current plan is just to see how the IPO goes and then consider exercising at that point - it means a lower risk for me because I'll know exactly what they're worth and if they're even worth buying.
Of course you assume the risk of being an investor and you could lose money if it all goes south!
The way I see is options only make sense when you have the following aligned.
1) Employer grants options.
2) Every pay check you save enough for strike price and estimated tax hit.
3) Exercise early when the price is low (assuming IPO will happen while you're still employed)
4) Sell when IPO or later when price is good after one year or more of exercise.
Or may be sell in bits to stay under the aggressive tax rates.
For NQSO this is true, for ISO this is false. The exercise of an ISO grant is not treated as ordinary income.
If you're single and your income is over $115K, or if you're married and your total income is over $150K, there will be tax implications for exercising your options, unless you exercise them when the spread is $0.
I think the bottom line is that ISOs are far better than NQSOs in terms of your own tax liability.
Amen. Don't ever be afraid of looking out for your own financial interests. If you aren't, you are at a disadvantage. Anyone who makes you feel "unseemly" for minding your own benefit (which tends to be a lot of people) is either naive, a stooge, or someone else looking out for their own best interests.
Is this exactly accurate? My understanding was that you owe gains tax on the difference between the 409A and (strike price + wages traded for options).
In other words, if you take a $1000 / month cut for one year in exchange for options, you get to add $12,000 to your cost basis for the purpose of calculating gains taxes.
Is this incorrect?
In other words, the article has it correct.
So, what if you work 100% for equity? Even then, you don't get to declare any part of that?
IE, if you are paid $5000 / week and you can optionally take $1000 of that as options, and you do so, why doesn't that $1000 become part of your cost basis?
This sounds like it might be a way to dodge the taxman (but you paid income tax on the $1000/month, so maybe not), or maybe your employer is trying an experiment with compensation packages.
How does this work?
One example of this is IVP leading a round in Snapchat, and the two co-founders splitting $10M in exchange for some amount of personal stock.
A few reasons: it makes the new investor more competitive to the founders if there are others vying for the investment, but it also prevents selling too early.
If you have $5M in the bank, you'll be more likely to try to go for the home run rather than sell to facebook for $3B (which was rebuffed by the founders of snapchat).
Here is a link to a HN discussion on equity compensation from about a year ago: https://news.ycombinator.com/item?id=10880726
This ends up creating a regressive tax on people that don't have cash laying around for early exercising.
People with more cash on hand can exercise before the stock goes up, so they pay much lower taxes, but they pay them earlier, and lose more if the company tanks.
Uhh, "modest" is surely 20-50M. $250m is quite a bit even for a fast growing company.
Remember all those evil VCs who ousted founders, meddled in companies, and endlessly pushed for bigger and bigger risks in the hope of a massive one in a million IPO?
Turns out some of that was good for employees. No one who makes decisions needs liquidity events like they used to.
Time for a Bay Area tea party?
Everything else is just a pay cut.
Many people went bankrupt in 1999 because they exercised without considering tax implications, and then held the stock while it tanked.
that's funny... but seriously, what's the big deal about Jira?
While answering, please quote my entire question with the Q<number> so that people don't have to scroll up and down to correlate the answers with the question.
Q1. Quote from article: "Your options have a strike price and private companies generally have a 409A valuation to determine their fair market value. You owe tax on the difference between those two numbers multiplied by the number of options exercised." My question: What is strike price? If I have accumulated say $30K worth of options, but I can afford only $10K, can I buy only $10K worth of options while leaving the startup?
Q2. Quote from article: "Due to tax law, there is a ten year limit on the exercise term of ISO options from the day they're granted. Even if the shares aren't liquid by then, you either lose them or exercise them, with exercising them coming with all the caveats around cost and taxation listed above." My question: Say I get buy ISO options for 30000 options for $30K from a startup while I leave the startup in 2017. Say, that startup still remains private in 2027. What are my options? Am I going for a total loss of $30K? If the startup hasn't gone IPO, how can I possibly exercise my 30000 options in 2027? What does the article mean by "exercise them" in this case? Does "exercise" mean buy the 30000 options for $30K or does "exercise" mean selling the options for a possibly larger price after the startup goes IPO?
Q3. Quote from article: "Some companies now offer 10-year exercise window (after you quit) whereby your ISOs are automatically converted to NSOs after 90 days." My question: How is NSO different from ISO? When the article mentions that NSOs are "strictly better" does it mean that I don't have to pay a penny to buy the NSOs but they remain in my account for free?
Q4. Quote from article: "Employees want some kind of liquidation event so that they can extract some of the value they helped create" My question: What are the events that count as liquidation events?
Q5. Quote from article: "Even if you came into a company with good understanding of its cap table" My question: What is the cap table? Why do I need to know this number? Can you explain this with some examples?
Q6. Quote from article: "New shares can be issued at any time to dilute your position. In fact, it's common for dilution to occur during any round of fundraising." My question: How does additional funding dilute my position? If I bought 30000 ISO options at say $1 per option, and I can sell it one day for say $2 per option, I am still making money. Why does it matter if additional funding occurred between buying and selling?
Q7. Quote from article: "If the company sells for a more modest $250M, between taxes and the dilution that inevitably will have occurred, your 1% won't net you as much as you'd intuitively think. It will probably be on the same order as what you might have made from RSUs at a large public company, but with far far more risk involved." Can someone show some approximate calculation for this? This is what I see: 1% of $250M is $2.5M. Say I lose 30% in tax I am still left with 0.70 * $2.5M = $1.75M. Can one really earn $1.75M from RSUs? The RSUs I have got at large public companies are of the order of $10K to $50K only.
Q8: Quote from the article: "Tender Offers". Can someone elaborate this? Can a startup force me to return my options in exchange for tender offers? Or is it a choice I have to make, i.e. to keep the options or go with the tender offer?
Q9: Quote from the article: "How many outstanding shares are there? (This will allow you to calculate your ownership in the company.)" How? Can you provide an example to calculate my ownership? Can you also provide an example of what that ownership means for me, if the company is sold for say $200M? Can you also provide another example of what that ownership means for me, if the company goes public and the price of each stock option is $10 after it goes public?
Q10: Quote from article: "Have there been any secondary sales for shares by employees or founders? (Try it route out whether founders are taking money off the table when they raise money, and whether there has been a tender offer for employees.)" What does this mean? How does it affect me?