This is under appreciated outside executive levels. Start-ups are staying private longer. Most companies allow employees to sell their private shares (subject e.g. to a right of first refusal). Some, however, insert language requiring board approval for transfers. These shares trade at a steep discount, if they trade at all, and generally serve to give preferred stockholders a first crack at the exits.
You are investing a couple years of your life in this. That's probably investing a couple hundred thousand dollars of opportunity cost vs a job at large tech company.
You have plenty invested. You'll do well if they do well. Spend your liquid investments in something diversified.
- sincerely, a moderately lucky person who has joined 3 companies before employee 15
There are major benefits beyond tax savings. If you quit before a liquidity event you can easily keep the vested equity without worrying about paying taxes on unrealized gain.
If you wait, you get substantially more information. A company that makes it to a Series A has a much higher chance of succeeding, and you'll typically know that in your typical tenure of 1-3 years as a junior dev.
If you want to spend $10k cash on buying startup equity, at least call yourself an angel investor and go find a company that's willing to issue you a note that converts to preferred stock. It's too easy for a company to have a couple of missteps and wipe out most of the common stock value, even much later.
If you can't afford dropping $10k to buy your equity then you can't afford taking a $10k lower base salary -- let alone a $100k lower base.
If options, then I've only ever heard of doing an 83b election in concert with early exercise, so that you are effectively making the election on a stock grant.
I'm not sure whether you can choose to do within 30 days of every tranch of vesting. I've never heard of this, but I'd be interested to know whether this is actually possible.
Unless you exercise early, in which case it does.
Disclaimer: I am neither a lawyer nor a CPA. This is not tax advice.
According to , you have to pay the company for your shares in order to not be at substantial risk of forfeiture . I understand that to mean that you need to both be granted and vested in the equity within the same 30 day period in order for it to qualify for 83b election. The timing doesn't work if your grant vests over a period years, hence the need to early exercise.
> If options, then I've only ever heard of doing an 83b election in concert with early exercise
> The timing doesn't work if your grant vests over a period years, hence the need to early exercise.
Am I being unclear or are people just not reading what I'm writing? Also not sure where these downvotes are coming from. Definitely open to correction, but I've yet to see how it's possible to elect 83b on an option plan with vesting, if you can't / don't opt for early exercise.
You can (and should) think carefully on whether or not to actually early-exercise your shares, based upon the cost and prospects of the business.
You may also have or be able to negotiate getting an explicit put option at the same price, too. That is, if you can buy shares at 20 cents a pop, you can also sell back to the company any shares you bought at 20 cents also at 20 cents. (NB: put-call parity proves that the value of "call + cash required to exercise" exactly the same as "underlying security + put at same strike", so you have exactly the same amount of value. Well, so long as the assets don't yield dividends, at which point American options that allow early exercise have the same value as European options that don't, and start-ups generally don't pay dividends.)
I was employee #1 with a substantial equity stake, and my lawyer has found half a dozen ways I could be screwed. By default these contracts are incredibly one sided, but they don’t have to be. And as a rule in a startup if you can be legally screwed out of your money, you will be.
EDIT: The linked site does have great advice and is vastly better than just about anything else on the topic you can find on the internet. Just remember that there will be a _lawyer_ on the other end, and they know this stuff much better than you do. It's better to retain a lawyer on your end as well, especially if the amount of equity is non-trivial.
The questions, I think, have to come down to:
* Do you trust the team? Did you check references? That includes that of their investors.
* How tolerant are you of risk? The biggest risk with startups is, of course, that equity will be worth zero. The contract risk you're talking about is comparatively marginal. People get screwed by contracts, yes, of course. It's worth being wary. But for every startup engineer screwed by contracts, 20 have been screwed by investing years of their lives into companies that fell over and died. Keep perspective.
I am very sympathetic to employees minding their rights in these equity transactions. I don't think equity is a particularly good deal for employees most of the time. But I've noticed a pathology with some people who are super microscope-and-tweezers about these kinds of contract terms. It's not always a great look. Better instead to be someone who can look at the total package (maybe with input from your lawyer) and make a snap decision: do I believe in this opportunity, for me, or not? Obviously, the bigger problem in our field is that people want to believe way too much.
The legal wrangling, for most engineers, isn't going to do anything to improve the bottom line. Leaving and picking better companies, on the other hand, might.
Make a spreadsheet, add probabilities of how things will work with current IPO timelines (+10yrs), chances of exit at each startup stage, the loss your getting from investing the same amount of cash working at bigco in ETFs, projected career growth, cost of living, etc.
There are other benefits to working at a startup though. For one thing you might end up on a great team. For another there's far less bureaucracy and process that gets in the way of doing things. For yet another, most of the truly "cool" things are done by startups, and your chance of getting a job doing something intellectually rewarding is far greater there (in my estimation at least). Simple fact is, FANGs of the world have some pretty cool teams, but those teams as a rule have no open positions, so pro tip: don't go to Google thinking you'll work on Brain or autonomous cars at any point in your future, unless you're joining those teams directly. Startups do have open positions every imaginable type of work, tech stack, or field.
But yeah, do consider whether money to fun balance is there, and if it's worth it for you.
Only if that's actually what you'd do with the money. If working for a startup means working from home in rural/suburban Oregon and working for bigco means you're living in SF proper the rent and ancillary costs may make dumping the excess cash into the market unlikely or not particularly lucrative.
That is a (dark) awesome quote.
I'd imagine employee #1 vs #289 asking for a change get different results.
Don't take a job whose comp terms are incompatible with your goals; of course not. But again: be careful imputing intentionality. It's not a "red flag".
You are not asking for anything extra here, you're just asking, de facto, for conditions that would let you value the options part of your compensation at anything greater than zero. You got dinged for it on the base salary after all, and it costs the company very close to zero to give you this paper wealth. If the contract is abusive, you can be sure you'll be treated 100% in line with the letter of the contract and your options are very likely to be worth nothing.
Don't be afraid to offend, this is just business. Don't speak in confrontational tone either though, and be prepared to walk away, just like in any other negotiation. The worst outcome is nothing changes, but you had that to begin with. If you're aggressive, the second move will be an email from the company lawyer telling you the changes you've suggested are out of the question. After that, if you're prepared to walk away, they will agree to a part or all of it.
The net benefit of this is you could introduce numerous improvements into your option contract if you succeed, i.e. eliminate or weaken the clawback clauses, negotiate early exercise, take care of accelerated vesting or option replacement in case of an acquisition (otherwise you could be left with literally nothing after the exit), vastly extend the exercise window (from the default 0-90 days after you leave to many years), negotiate that you get to keep shares if you're _fired_, etc, etc. A good lawyer could write a thick tome on this, and you're NOT going to be able to learn it in your spare time.
If equity is substantial, and you think it might eventually be worth anything, I also advise hiring a tax accountant with experience in such matters. There are different types of stock options, with different levels of taxation (conditioned on your exercise strategy). Under some strategies you could end up on the hook for six-seven figure amounts of tax even though you can't sell your shares, and might never be able to do so.
But for most startups, given the low probability of success and the many ways you can be screwed (dilution, clawback, liquidation preferences, etc) you'd need to have A LOT of faith in your startup (and in the soundness of your options contract) to exercise early.
If you do nothing else, try to negotiate that: a). You're not required to sell _vested_ stock back to the company if you leave / or even get fired, b). You get _something_, preferably full, immediate vesting, in the event of an acquisition, c). Your exercise window spans many years after you leave, so that if the startup does exit you can get something for the vested portion of your option without exercising it before you leave (and potentially exposing yourself to massive reaming by the IRS).
None of the above is a replacement for proper legal / tax advice though, it's merely a distillation of the advice I received that was applicable to my particular circumstances at the time.
82b sign on bonuses are cheaper than the actual cost, since the money is really the employee's marginal tax rate, since early exercise money comes back to the corp.
That is typically around series A or B, which is a lot earlier than the typical switch to RSUs.
In practice, unless the cost is so cheap that doing an 83b is not hard, then an RSU is no different than an option to an employee. The employees will only exercise when there is some sort of liquidity.
No employee is going to have the capital to exercise any other time either, because it's only to get more expensive with AMT as time goes on.
By RSU I mean stock that is granted only when you have met the time requirement as in normal stock options, and when the company is liquid (acquisition or IPO). Cheap stock options that don't expire when you leave also work too.
Before joining any company, you have to realize the opportunity cost. You could work at AAMG and make decent money being part of ~1 trillion companies. OR you choose to join a small startup that has managed to find a product market fit and now needs to scale to realize their potential and ride that wave.
As other comments seem to say. I googled quickly around when joining my first startup and this guide would have avoided me some typical first-timer mistakes.
Edit: looks like it's back.
The Google cache of holloway.com links to https://github.com/jlevy/og-equity-compensation -- perhaps this is the same content as the original post? Can anyone verify?
There are a couple sides to this. No company should or will tell every financial detail to every candidate. On the other hand, if a company has given you an offer and really wants to hire you, yet is very evasive about all the info you need to evaluate your offer, it can be a warning sign; it's likely indicative of the level of transparency you'll get as an employee, too. The 409A is material to understand your stock options, so very fair to ask about before signing.
Also—we'd love more questions like this in the marginal notes in the Guide, so it improves iteratively! If you (or anyone else) wants early access to that feature shoot an e-mail to email@example.com
That said, this looks like a great guide if you're going to go that route.