Every time one of these is written, it comes off as if the 90-day window is something startups came up with to try and screw employees.
A reminder that the 90-day window is a requirement by law in order for options to qualify as Incentive Stock Options, and receive favorable tax treatment for employees [1].
If you want to do 10-yr exercise, that's fine, but until the law is changed those will be NSOs and not receive that special tax treatment and will be taxed on exercise instead of on sale.
An increasing number of startups issue their grants such that they qualify as ISOs if exercised within the 90-day window but automatically convert to NSOs 90 days after departure (with the actual exercise deadline dependent on employee tenure), so that the employee and their tax advisors at time of departure get to decide how to handle the tradeoff of more time for reflection vs better tax treatment.
What's more, if an employee gets more than $100k of exercisable options in a year - very possible especially in cases where early exercise is allowed - only $100k of those are treated as ISOs. There's no way in which the tax law privileges a short post-termination exercise period for the excess above $100k.
Last, some companies use the same options plan both inside the US and outside, including my two most recent employers. Most employees working outside the US, with some exceptions like US citizens and green card holders, wouldn't have to care about this US tax law nuance.
Yea I looked into this when we were forming our options plan after I read Sam Altman's article arguing for it. It's not as common as you might think yet.
We have one of the big name corporate law firms that most VC-backed startups use, and when I asked about this kind of setup they hadn't heard of it before. Path of least resistance was to just do a regular ISO, especially since early team members are usually experienced startup people like us that are used to ISOs anyways.
Would love to revisit it in the future and see if we can enact this sort of plan, although in our case since we're in the web3 space, the equity might not matter as much as the tokens (which don't get favorable treatment either way atm).
I agree it isn't the most common, but I did just work for a company that put this policy into place last year I think, so it's growing. It's certainly not something where a startup which wants to do it needs to break new ground, at any rate.
There was a talk that's been shared on here from Ben Horowitz where he explicitly pitches the 90-day window as a way to screw employees. That's probably where the perception comes from:
> The second way to handle it - no companies do this, which is why I actually really like this post that he wrote - is you can say up front, " Look you are guaranteed to get your salary but for your stock to be meaningful, these are the things that have to happened. You have to have vested. Two, you have to stay until we get to an exit. Untile the company makes it. You've got other money." Finally, the company actually has to be worth something. Because 10 percent of nothing is nothing. The reason we set the policy this way is we really value people who stay. So don't join this company if you are going to join another one in 18 months because you're going to get screwed. Our policy guarantees you're going to get screwed.
At this point, I'm surprised when other people are surprised that founders and investors work together to screw employees. "Work", in the corporate sense, is the same sort of exploitative, morally vacuous, might-makes-right dominance hierarchy that humans have been forming for thousands of years. We haven't evolved beyond that garbage yet.
No, a16z is very explicit about their views. This is not from Ben but from the current managing partner:
> A 10-year exercise window is really a direct wealth transfer from the employees who choose to remain at the company and build future shareholder value, to former employees who are no longer contributing to building the business/ its ultimate value.
I hate that article. It's not a direct wealth transfer. Using that logic you could argue _anything_ is a direct wealth transfer. Why not claw back bonuses and even salaries too while you're at it?
I'm a founder. If someone works with me for three years then has to move on, they've earned their equity. I want them to keep it and root for us from the sidelines. It's sweat equity, not "stay until a liquidity event" equity. Especially with founders themselves starting to more aggressively take money off the table using secondaries (which aren't always offered to their employees).
Also, if you're a founder, note that your lawyers will almost certainly towards 90-day windows (and your investors might too). It might take some work to get something more employee-favorable.
I read that as you're supposed to loyal right up to the point the company decides to lay you off and you better not think that you have any freedom once you sign on because we will retroactively screw you. The percentages in the typical option pool are not going to move the needle anyway and those employees that served the company early on took far greater risks than those that did so later and probably were paid much less too. So as far as I'm concerned they are well entitled to their stock.
Totally. It’s really fantastic that a16z is transparent about their values. It’s safe to assume other VCs share these beliefs but choose not to disclose them.
What will never cease to amaze me is that the likes of a16z while reaping billions on hardly any work at all will go to extreme ends to deny others what they simply earned through usually very hard work.
When we were raising our series C, a potential investor (which we did not go with) wanted a requirement to cancel/claw back all _vested_ and _early exercised_ options that employees who had worked for us had and to put in place a buy-back-at-exercise-cost-or-cancel for current employees.
That is absolutely ridiculous. I'd love to know which investor that was so I can avoid working with them, if you could let me know I'd be very grateful (mail in profile). If not, I understand. Kudos for making the right call anyway, and that VC deserves to lose each and every deal they look at.
Out of curiosity, what did the cap table look like when they suggested that? Was there a good chunk of equity floating around your current/former employees?
I know some VCs have dilution/ownership thresholds and they might have been trying to find a way to get in on your raise without bending their own rules. But it is really offensive to your employees, I know if my company did that I would walk.
Ok, I will say this: this was a former entrepreneur at a very high profile perceived-brand-as-tier-1 guy running the independent capital investment arm of a very high profile company.
As some sibling comments: We are raising, and I would be interested in knowing who that investor was so as to avoid them. Please email me/dm me if you feel comfortable (see profile). Regardless, I am glad you did not go with them.
Yes if there was a clawback clause that could be triggered for some excuse, and presumably there was. For instance: you left the company. Depending on the clause you could be forced to sell back to the company at the issuing price or the fair market price on the day that you left.
It was NOT in our boilerplate. The discussion around this was his “secret sauce” concept. It was ridiculous and we turned it down.
They were big investors in a few very high flying super flops in the 2010s. It has always made me wonder if the employees at those companies would have been screwed had the companies been everything the tech press ckaimed they were.
(I know you're not arguing for this view, but) I just don't understand this perspective. The whole point about compensation is that it is explicitly a transfer of wealth, and through any transfer some people are going to "lose" money (on gross, but perhaps not lose money on net).
That is, can't I make the same argument about being paid at all above the legal minimum? "Taking a higher-than-minimum salary is really a direct wealth transfer from the employees who choose to remain at the company to former employees who are no longer contributing to building the business/its ultimate value."
The logic being that if a current employee takes a higher salary, then that reduces the valuation of the current (and future) company, which is a wealth transfer from future employees (who own some small share) to the current employee who may leave? From this argument a16z's position seems absurd...
Except those employees have already earned those options.
So it's a direct wealth transfer from people who have earned something, to institutional shareholders, most of whom are investors.
It's odd because Ben seems like a nice guy.
This reminds me of a kind of Thiel/Musk/Bezos ego thing, where otherwise rational and reasonable people do these couple of things where they delude themselves into the rationality of their decisions. But that 'character flaw' is actually a competitive advantage for an otherwise reasonable person.
Yeah, because fuck those workers who try to make a free market work for them once in a while. Don't they realize that market talk is only a way for their social class superiors to justify doing whatever they want, and that it isn't for them?
That's what always seemed like bullshit to me. If you want to have a 4 year cliff to discourage job hopping, then give people a 4 year cliff. Why try to weasel them into it?
I see no reason to screw employees who job hop. It seems like if 1/10 as much effort was put into making your workplace pleasant, you'd have fewer people leave.
I always permit early exercise, which is specially good at the earliest stages when the common options are worth little, even less than a cent pre funding
That is, you can exercise your options whenever you want, even your first day at your job. What happens is the company can buy them back when you leave, but that ability goes away by the same amount as the regular vesting schedule. So if you leave the company after two years the company buys back half your stock, but there’s no tax impact (and by then you’re in the LTCG regime). Big win, easy to do, so why doesn’t everybody do this?
Is there some nuance as to how this is set up? The company buying back the stock when you leave seems particularly interesting: if the valuation has changed in between when you start and when you leave, the company either buys the stock back at the new, higher price (in which case you make some cash on unvested stock) or the company buys it back at the original price, and from a tax perspective you are selling it to them priced under fair market value and the company owes taxes on that I think? Is there something I’m missing?
I've been part of such an approach in the past. The way it worked there (and I imagine would everywhere) is that you exercise your full options, thus turning them into RSUs. You then give the company options on your RSUs at current valuation and the percentage of your RSUs that are covered by the options reduces on the vesting schedule.
Nothing so complicated. Not turning them into RSUs, simply exercising the options to buy ordinary common stock with the company's right to repurchase expiring every month (or whatever the option vesting schedule would be). Repurchase is at the purchase price paid by the employee so nobody owes any taxes.
The point is that whenever you leave you have the same number of shares either way, but this way you pay for them at par (and with 83(b) owe no tax until you sell) and get the LTCG clock started right away. If you pay when you leave you have to pay tax on the delta
This is much friendlier to the the employee, at least when the purchase price is quite low. And why wouldn't I want that for my team?
I've done this with half a dozen companies at least; I don't know why everyone doesn't. The change to the option plan is quite standard and the law firms all know it.
There is nuance, though - adversarial shareholders can bring a company down. It happens often enough with bona fide investors; but when you have a disgruntled employee (or one who quits to go work for a direct competitor), who has the same information rights as any other shareholder, but basically no skin in the game (if they exercise one share), things can get really nasty.
There are many reasonable ways to deal with it, including “right of first refusal”, some kind of custodian/escrow, FMV+x% forced sale that can be called by the company, allowing only substantial sale to 3rd party (or an employee with 2000 shares could sell one share each to 2000 different people, and all of a sudden you get regulated as a public company) etc.
I am all in favor of sharing ownership with those who shared the risk and the burden, but the governing laws weren’t written weren’t written for this, so it needs to be taken account in the specific agreements.
This is one of the most minor concern I can imagine for a startup.
>I am all in favor of sharing ownership with those who shared the risk and the burden, but the governing laws weren’t written weren’t written for this, so it needs to be taken account in the specific agreements.
These issues almost never happen and the process for giving employees equity interest is well developed. The standard SPAs always have ROFO clauses and such. There's no need to innovate -- any Vally law firm's standard docs have everything needed.
In the US shareholders of private companies have pretty limited inspection rights: basically public filings and board minutes etc (usually the latter say things like "the CEO presented the last quarter's performance and a discussion ensued"). Preferred investors negotiate more detailed inspection rights.
In 30+ years of running startups in the Bay Area I have never seen any of the things you describe happen (not just my own companies -- never seen them happen). OTOH, at the second company sold (first one I founded) the front desk receptionist made enough to pay off her mortgage and fully fund her retirement. That's the way things should work.
It was not in the US - it was in a country where shareholders in private companies actually have rights - and I was contracting for a company where this was actually used for good: founders tried to screw early employees (already vested and exercised) out of some rights through a restructuring (that was essential for business reasons) - and the employees managed to level the playing field using such an approach. It was good for everyone.
But it could also have been used by a single vengeful employee to effectively stop or delay that restructuring, which would have been bad for everyone.
All I said was that there was nuance. A good lawyer in the relevant jurisdiction would know what it is.
Just a guess, the directors of the company might prefer, from a fiduciary point of view, to invest the cash in capex or sales, rather than re-acquiring options for the option pool.
Although, if you're acquiring at cost of exercise, the stock is probably more valuable than the cash you're paying for it. I could argue it either way, curious how you've valued the opportunity cost?
If your company doesn't have a significant sales+marketing department that can always seem to justify soaking up excess capital in exchange for marginal growth, your technique seems like a no-brainer! Smart idea.
RSUs are pretty awful since you don't have access to the 83(b) exemption and tax is paid at ordinary income rate rather than long term cap gains rate, so RSUs can't offer the same opportunity to build long term wealth.
RSUs seem to make sense to public companies which don't meaningfully have access to all the kinds of compensation available to private companies.
IANAL but RSUs seem like a ripoff for a private company to use them even if the common price is high compared to a standard ISO SOP.
RSUs are terrible for a private company that aspires to go public, because the moment they trigger -- usually IPO + enough volume traded -- the company owes half of them in taxes (regular income taxes). This places a considerable pressure on the stock and causes a crash on the price usually -- as everyone from peon to executive have to sell half of their multi-year "vestments." So instead of the company raising slowly money via the market and the employees getting a good check when they decide to slowly sell, Uncle Sam gets some taxes up front... (And usually due to the likely crash, less than they would.)
Taxes. If you give RSUs, the value of them might get really high in later years, along with the tax burden. And because the RSUs are liquid you can’t sell them to cover tax.
The tax games are dumb no matter if you have ISOs or Non-quals or whatever options.
The standard should be 83(b) elections supported with the company covering cash to exercise (or at least some portion). That makes the equity closer to RSUs, which is more aligned with the desired incentive. VCs / investors should be putting more money into companies to make this work; the employee pool is only typically 10% so it’s a tiny haircut to them.
If I understand it, an 83(b) election allows me to buy stock in the company at the (say) day of employment, and recognise that as income on the same day (ie I buy the stock as I join). Then there is some restriction on me selling it during my employment (not quite vesting but similar).
Which sounds sensible - but I may have misunderstood.
Overall it seems either people are trying to make a simple situation seem complex, or the (US?) tax code is set up badly.
You are exercising options that haven’t vested yet. But because strike and FMV are the same you have no tax liability. So when they beat they become stock and long term capital gains if they become liquid one day.
Here’s the best part - if the company is worth < 50m at the time then you are granted and exercise them, when you sell those stocks one day, you will owe 0 income tax as it’s a “qualified small business stock” - on your first 10m of profit. Wowza’s!
Indeed and I should clarify - it’s not if the company is “worth < 50m” it’s if the company has less than 50m in assets generally. So you could have raised 30m at a 200m valuation and qualify.
That’s essentially a signing bonus. Remember that you will owe income tax on that. So if they paid the option price and 83b’d you then you would be on the hook for taxes (the money they used to exercise) on an asset that could be worth 0 one day.
The company could however pay for exercising and pay the income tax on that cost. Then it would be interesting.
If the VCs put in more cash for this, it’s just going to dilute the existing stockholders (including the employees). The cash is not immaterial. And as another response said, the cash to cover the exercise is taxable income so this idea is really not tax efficient.
Then the startup should explain it. They prefer to say nothing on the topic. So, they typically care a lot about the UX of product users but not about the UX of their employees. Seems shortsighted.
As an anecdote, the company I work for has a 90-day window, but when we were bought out the options were taxed as regular income (it was on our W2) -- there was no favorable tax treatment.
Ha! Really close to a conversation I had with a recruiter back when I was looking. They were promising a ton of equity, and when I asked to see just a high level picture of the finances to make sure basics like the amount of runway were reasonably long I was met with an awkward pause. It's really strange that companies not only expect you to take a massive risk on the "upside potential" and then won't even let you inspect the current state.
I once interviewed for a software position at a risky looking small company, and I asked the CEO/owner if the books were available for me to verify their 1-5 year outlook before I moved my family across the country for the job. He looked totally shocked and gave a weirdly cagey “no”. I learned long after the fact that at first he was mortified and then later had a “wow who does he think he is” chuckle with the HR lady about me.
They ended up making a barely acceptable offer because despite my horrible faux pas, I was a domain expert and they couldn’t keep staff for more than a year. And I accepted because I was 1 month away from being bankrupt and homeless. Lasted a year and a half. The business turned out to be solid but I left for greener pastures.
I have no idea why owners are so cagey about the health of their businesses and funding sources, to potential employees. Especially when things are basically fine! He was bootstrapped and evidently had fine cash flow. Why is this a faux pas to ask? HN is full of entrepreneurs: why are you so offended when a candidate asks about cash flow or to see the cap table?
These are intelligent people and the actions don't make sense when you look at the details, like your example of being in a fine position. That only leaves unaccounted for variables at play, and the best I've been able to tell is that its a cultural gap between the execs and the plebs that plays out even at small startups.
You see the same behavior in non tech companies when VPs find out what their senior software engineers are paid, and start getting upset at the similar salary level, even though that's the market price. Or in things like rules that only Execs get to fly first class. I had a an executive have HR look into me "breaking the rules" when he saw me in first class with him on the way to a company event after I paid to upgrade my own seat.
- Founders/management get defensive because they don't think they are so small that they cannot be trusted to pay you on time and when you ask for data it implies you don't trust their word that can taken as insulting/lack-of-confidence in them.
- The other common reason is those numbers are confidential not just from employees, a competitor or investor who is evaluating a competitor could use it against you, so founders worry about that stuff, you may not take the offer and mention it to next company you talk to etc.
- Few tech employees have the financial know-how to read financials, especially of startups . Most early stage investors rarely go through the actual books in any detail.
- Measures like churn, CAC, ARR, MRR are the go-to metrics . The actual book numbers basis cash flow can be very bad although company is in decent health, this is why banks will not loan early-stage startups money unlike small businesses as startup numbers are not simply good enough by traditional metrics.
- In small enough companies exposing the books to new employee will give rough idea of who is earning how much including the founders, and what else company is spending money on, keeping the information asymmetry can be seen as beneficial by founders.
The upside to employees is very limited , that is the point of the post.
the upside will be low unless you join very early stage and get decent amount of equity or join as a founding engineer or the company you join becomes valued at 10s of billions which is of course rare otherwise there is very little upside.
Almost always FANNG level companies will pay you close or better what you would make best case in most startups with much less risk and far better work life balance.
The reasons I have found people are most happy with are non financial, like can’t join big tech/ great dev but poor leet coder, learning opportunities, much more senior role , switch skills, less red tape to get things done, stepping stone to starting your own etc. You can’t quantify that , for some it is worth the risk and the paycuts , for others it isn’t.
Most startup recruiters or founders probably won’t pitch that picture to prospective employees, independent of their ability to pay you economics is going to be favorable in big tech any day compared to most startups .
> the upside will be low unless you join very early stage and get decent amount of equity or join as a founding engineer or the company you join becomes valued at 10s of billions which is of course rare otherwise there is very little upside.
Startups often have very, very mission critical technical problems.
The first 20 engineers will be solving some really important technical problems. And they'll need high speed & high quality, since what they do will probably directly manifest in the ole bank account.
Even outside of engineering.
A rule of thumb running a startup is you should overpay for your first 30 employees. Get smart people who are future leadership candidates.
If/when you expand to a 500 person company. Out of those 30, chances are quite a few will manage upwards of 30 people as their reports and child reports.
I'm sure there's a million different variations on this story. By no means is it universal.
But the "early employees are solving life or death business problems, and will transition to being leaders and force multipliers of large numbers of new hires" definitely happens.
> The first 20 engineers will be solving some really important technical problems. And they'll need high speed & high quality, since what they do will probably directly manifest in the ole bank account.
I don’t know, many startups are solving business problems, tech is sometimes just fancy versions of CRUD apps.
The nature of the business is, employer's rarely ever have to hire an employee who knows how to negotiate, knows when to walk away from a deal, and knows their market price.
Most employees you've ever worked with are not quite that clever.
Most employers vastly prefer employing this slightly dim type of employee, because they cost a lot less money and ask for a much simpler quid pro quo.
I find capitalism extremely exploitative like that. At least with unions you have a hustling union boss advocating for the union employee so employees don't get ripped off too much.
Now it seems like the vast majority of people I work with are tired parents in their 30s and 40s, who are working a job they don't love for not all that much money.
Because they don't have the resources, socioeconomic and otherwise, to bargain and argue their corner.
All good reasons. But an engineer/employee considering moving from a stable publicly traded company to a startup is justified in asking for the data.
I am evaluating options now and one of the reasons I am not so keen on offers from startups (even ones with multiple series of funding) is that they expect me to take the risk without sharing adequate information.
Employees have valid reasons to ask, just explaining why it is not common to get a good clear answer from founders . Not saying it is justified .
Having said that, if risk is a major concern most startups are not the perhapsright place to work. They are designed to fail quickly than become unsuccessful or low growth businesses, employees or founders do get short end of the stick frequently.
Risk appetite for each person is different. For anyone considering a start up an assessment of the degree of risk and rewards is essential. So if a startup does not offer me enough information to make that decision I will pass on the offer.
I once interviewed with a startup and the equity part of the offer was only x number of options. So I was like, OK what is current/expected evaluation and how many shares outstanding, like what is the percentage I get. That was apparently "big company thinking" and they rescinded the offer just for asking this question (through the experienced recruiter).
This is a great signal of which companies value their employees or not.
In my experience, all the good startups are transparent in helping employees evaluate equity offers. Ex. all YC companies I interviewed at were happy to share info on outstanding share count, valuations, and even preferred stock.
Meanwhile other lesser startups (often run by finance types) thought I was insane to even ask.
It's also normal when people choose the riskier path and people who choose the safe path profit more.
If the company went bust after 4 years, everyone with worthless stock options would be made at the guy who managed to cash out a higher salary.
The thing is, the vast majority of people asking the question will have no idea how to interpret it, and there are actually legitimate issues with privacy there.
I mean - I think it's fully legit for people to have a 'broad sense of the state of the company' - and companies should be prepared to speak to it in some way. But not exactly in the way people are asking.
If financing rounds are public, then at least there's that, and it's possible to 'very crudely guess' where companies are at.
> there are actually legitimate issues with privacy there
~Every interview process I've gone through required an NDA at some point.
> I mean - I think it's fully legit for people to have a 'broad sense of the state of the company' - and companies should be prepared to speak to it in some way. But not exactly in the way people are asking.
A "sense of how the company is doing" is not anywhere near enough. The company can be doing extremely well and that still doesn't give me any indication what (for example) 10,000 shares are worth.
If a company won't provide at a minimum the percentage your equity grant represents and valuation at last funding round, you should rightfully value stock at $0.
You're talking about two different things, which gives credence to my point that 'interviewee doesn't know what they are asking'.
The 'health of the company' and the 'valuation of you shares' are completely different things.
On your last point: "a minimum the percentage your equity grant represents and valuation at last funding round" - yes, they should probably do that. Because otherwise, the value of that equity could be anything, it's impossible to know what 10 000 shares means.
But that doesn't tell you anything about the company. Private valuations are mostly fantasy.
You'll want to get a sense if the company is healthy, and even 'burn rate' isn't so much the right question, it's probably new customers.
If the company is growing in terms of revenues and customers, it's probably the most positive signal of all not only in terms of stability, but also the actual value of the equity in then i.e. 'if it will be worth something'.
Finally, NDA's are not a very good protection, everything is still 'need to know'.
> You're talking about two different things, which gives credence to my point that 'interviewee doesn't know what they are asking'.
Your position is inconsistent and conceited. If you have actual points, you wouldn't resort to denigrating others.
Especially since you're moving the goal posts, your contribution to this thread is useless. You've swiftly gone from saying employees should scrounge info on funding rounds from the web to admitting employees need to be told info about outstanding equity and valuations.
I hope you're never in a position of hiring for a startup. Anyone with an attitude like yours would chase away quality candidates and only leave clueless rubes behind.
> You'll want to get a sense if the company is healthy, and even 'burn rate' isn't so much the right question, it's probably new customers.
This shows how incredibly uninformed you are. It's easy to acquire many customers by selling $1 for $0.50. It doesn't mean the business is healthy.
I highlight the fact that you did that - which validated my position that 'interviewees won't know specifically what to ask'.
You jumped into the ad hominem.
I have 'hired for startups' in fact several of them, including two Unicorns, and I'm an adviser to others, and I've helped set up a VC fund.
But that's besides the point.
You don't seem to understand the material being presented, but maybe worse, lack the self awareness to recognize that, and possibly have thin skin, all of which are not good attributes for dynamic environments like startups.
You are being deliberately vague with your position and relying on ad hominems.
I'll help you. For each of these questions, do you think it's something employees should be told:
1. How many shares are outstanding and what preferences are included in the cap table?
2. What was the valuation at last raise and when did that round close?
3. What's the burn rate and remaining runway?
4. What are the 6/12/18 month plans for the company? What are the biggest risks and opportunities currently facing the company?
> You don't seem to understand the material being presented
The long con of startups is that founders want you to think you're an investor--in truth, you are, because you're investing time, which ought to be more valuable than the money of people who have scads of it--and work like you're an investor... but they're still going to treat you like an employee. It's the same dysfunctional bureaucracy of the corporate ladder, except in this iteration it's across companies, so you don't even see the true executives (VCs). There are more rungs, more pitfalls, and greater socioeconomic distances than there ever were before.
The innovation of Silicon Valley isn't anything to do with technology, and hasn't been since the 1990s. Rather, it's the disposable company. If the investors get sick of something existing, they can choose not to fund it in the next round, call their friends and tell everyone else not to fund it, and it dies, allowing them to build something new in its place. The advantages (to investors) of the disposable company are legion, but one if them is that it doesn't matter all that much if you pick a scumbag. Which is also why YC backs so many DVFs (domestic violence founders). If they're jerks who get stuff done, you can let them collect a few million before firing them and putting your buddies in executive positions; if they're jerks who don't get stuff done, then you scrap the company and fund some other DVF.
Thank you for that website! It's nice to see a resource for the European audience, almost everything in HN is US-only and it makes me click out of so so many discussions
Huh, a lot of this doesn't ring true to me, as someone who's negotiated comp at 6 (mostly YC backed) startups over the past 5 years.
In my experience, 10 year expiration dates for options and reasonably detailed financials (at the very least, ARR, ARR growth rate, churn rate) have been table stakes. And most companies were happy to let me view their latest round's pitch deck, after signing an NDA.
It's frustrating that almost no company offers early exercise rights, given how significant a tax value that it can represent, but compared to most other industries, it does seem tech is particularly employee friendly.
It's fascinating because the 2 YC backed startups I worked for both offered early exercise. Not saying you are wrong, In my n = 2 experience, I thought it was in the "YC Playbook".
The real answer, of course, is social class. Marx was right. Investors are the bourgeoisie, and you're a proletarian whose survival needs are an exploitable resource. They don't follow the rules you do. Investors are like Ancient Greek gods (or Ancient Greek something else) to founders, and you and I are shit to these people, and the moment you stop making excuses for their behavior and see it as it really is, it all makes sense.
What even Marx didn't foresee was the effectiveness with which managerial bureaucrats (who might have been considered upper proletarian in the 1800s) would take the system over for their own purposes and merge into--and, arguably, become--the real elite... the same thing that happened in certain failed socialist experiments.
It’s less class and a matter of who needs whom. Tell an investor to sign and NDA and he says pass. An employee or potential employee doesn’t have the bargaining chips.
So then it's exactly class. The number of bargaining chips you have is approximately the number you are born with. Sure, there's some Brownian motion, but it's basically insubstantial except for lottery winners and lightning victims.
If you're born into connections, you make more connections. If you're stuck having to work to survive, you get assigned more drudgery and never advance. It's the same shitty system that's been around for thousands of years.
I think you're confusing social class with Marx's proletariat (working class) vs bourgeoisie (capitalists).
Your bargaining chips are determined by supply and demand. If you have stuff - money, knowledge, skill, power by virtue of organizational position - you have leverage. If you don't, you don't. Eliminating social class doesn't change this much.
if you have skill and knowledge that others don't, but others need, then you can bargain for your meals and shelter very efficiently - so much so that there would be left over money.
The people with connections and serious money do not meaningfully compete against their own class (at least, they ensure that their intra-group competition does not benefit anyone outside their group). The people with skills, knowledge, and work ethic have to compete against the whole world.
It's power derived from supply and demand, not class. It's possible for you to have knowledge and skills that give you power, rather than just some money.
"Social class" is not the same as a class in a classifier. The plumber may have a lot of bargaining power when an ice-storm breaks all the pipes in a major city, but the plumber does not have a high social class. Typically high social class also has a fair amount of bargaining power, due to frequently having capital (usually politically or financially), but not always.
The fact that the social classes here happen to line up with political power does not change the fact that there are two social classes being treated differently as well. There are other posters in this comment section talking about how even when the engineers are domain experts that are needed by the business, there is a knee jerk reaction to deny requests for this sort of information when it is expected to be handed over to the investor class.
If these weren't social classes then you wouldn't see resistance to changing the formula in the face of market pressures and you would see easy movement between investors and engineers instead of them being gatekept along connections and rituals.
Potential investors aren't shown trade secrets because anything that you show without an NDA ceases to be a trade secret. "No NDA" disclosure can also block patent protection.
There's a huge difference between pitching and due diligence.
Also, it's reasonably common to show a pitch deck to 100+ potential investors. How many series A companies interview 20 engineers, let alone 100?
I agree - it has become far more common the last 5 or so years for startups to open their books to new hires. I’ve seen quite a few places even breaking out the expected return at different valuations and dilutions after further funding rounds.
The article leaves out the part where investors living in low-cost areas are offered less equity than investors in other areas. They are told this is still a good deal because it is a better deal than they'd find investing in local companies.
> Can’t you guys just replace this 90-day clause with a 10-year expiry, so that I wouldn’t have to deal with all these risks?
I'm not an expert but my understanding is that everyone should be pushing for this or for options to be way cheaper to purchase when you leave.
Without one of those two options the safest thing to do to not waste vesting time is join a public company or a late stage startup. Late stage startup you're more likely to be acquired or IPO while you're there and you don't purchase options out of pocket.
Early stage startups are where you're least likely to stay the 7-12 years required for the exit event to take place and thus most likely to leave vested options on the table when you leave the company because you don't have cash and/or don't want to risk that cash.
Series A isn't "early" these days and 10k options reflects that. (100k is only 1% given 10M authorized, 10M being reasonably common for initial authorization and 1% being around market for an early engineer.)
That said, the strike price for common should still be reasonable at Series A - not $0.0001, but not $10 either, so 5-10k options can be around $10k. (Yes, a company can raise at $100M valuation even though the 10M common have a strike price of $1. The $100M is preferred.)
And, there's no law saying that 803(b) is all or nothing.
As I understand it, options being cheaper to purchase means a larger tax bill when you vest them, since they have a strike price below their current value.
You aren't taxed when options vest because there was no gain. Only when you exercise options, and you will be taxed on the gain. So if you make more money, sure your tax will be higher.
Because the options, when they vest, have no value. However, an ITM option does have value. The amount it's ITM. So you'd have to pay the amount it's below FMV as income, right?
I think the parent poster is saying that this tax treatment of options is inconsistent with the way RSUs are taxed, though.
RSUs are taxed at vest time even if you hold the shares, presumably because they can be sold immediately since they have some FMV.
Options are not taxed at vest time, even if they are ITM and have some large positive FMV. And for ISOs, even if you exercise immediately at vest and you don't sell the exercised shares, there is no tax (assuming no AMT).
What is the reason for the different tax treatment?
An option itself has fair market value. Like, I can buy options on Uber stock right now at a variety of price points. You can make the case that options at FMV have negligible value, which is why they get special treatment. But if you want to work at a startup unicorn and ask for stock options with a strike price of $0.01 as your whole income, it's still (possibly) extremely valuable.
This is going to sound mean but the more you talk the more confused I am about your original point. Please understand, I am trying to understand you.
You originally said:
> options being cheaper to purchase means a larger tax bill when you vest them
The operative word here is vest. No tax on vest.
I think you are trying to say "if you join a startup and get dirt cheap options, when you exercise them at a later date and they are worth something then, your tax bill will be larger than if you got more expensive options and exercise them. Yes, this is true.
- strike price: $0.01 FMV at exercise: $20
- strike price: $15.00 FMV at exercise: $20
You have a larger gain in the first, so sure, you will pay more tax. Is this what you are trying to say?
If you give me something of value (stock, steaks, money) in return for work I owe taxes on it. As I understand it, I owe taxes when such an item (eg RSUs) become something I can acquire and control, aka vest.
I can go online right now and buy options in Uber (or any other publicly traded company). Options clearly have some value.
Options in a private company with a strike price of FMV have essentially no value, and have no taxes.
Options in a private company with a strike price of $0.01 and a FMV (per share) of $20.00 are worth at least $19.99.
Therefore, options with a very low strike price should create a taxable event when they vest, whereas options with a FMV strike price would create a taxable event of $0 when they vest.
So a very low strike price seems to force employees to pay taxes when they vest.
It's possible I'm wrong (I'm not a tax accountant or attorney), but I would like the problem in my logic pointed out.
Thank you for clarifying. You are a bit wrong, and I'm not a tax accountant, but speaking from experience as someone who has had options that have vested and exercised in startups, and have paid taxes on them. I appreciate you engaging with me and I'm trying to help you.
If you buy an option right now in uber, you will not be taxed until you exercise that option (I'm 99% sure of this -- I don't trade options, but also I think you can buy/sell options contracts themselves, and I don't know the tax implications of that) You will either have a capital gain, or a capital loss. An option is the right to buy/sell a stock at a price. You don't get taxed until the moment you actually buy/sell the asset.
When you are given options in a startup they work the same way, it's just a contract, you will have no tax implications until you actually receive something of value, by exercising the right to purchase the stock.
> So a very low strike price seems to force employees to pay taxes when they vest.
People don't pay taxes when the options vest, because that's just a part of a contract. People pay taxes when they exercise the right to purchase those options which converts them into shares. If your equity is worth 100,000 FMV and your strike price for those options equals 10k and you do nothing, you have no tax. If you execute that contract, you pay 10k, get 100k worth of stock, and have a 90k gain. That's what you are taxed on.
This is what forces people in startups to pay taxes and the dangerous part is you might pay taxes and never get a chance to sell the stock.
I'll share two examples:
- I've exercised options where the strike price == FMV, and paid no tax. But the operative word you keep mixing up is vesting and exercising.
- I also currently have options that are vesting in 10 days, and I will not pay tax until I exercise them.
RSUs are different, because they are literally actually stock, it's not a contract to buy stock, so you are given an asset, and you are taxed appropriately for it as you had a capital gain. (The same as the second half of an options contract, you get stock, you are taxed on the value that you get)
> If you buy an option right now in uber, you will not be taxed until you exercise that option
This is true (or sell the option). This is just like stock, in that it only gets taxed when it pays off, either by a dividend, buyback or sale. Only in this case, it's when it gets executed or sold. (Although I think if you execute and hold the stock, it just somehow adds to the basis.)
> People don't pay taxes when the options vest, because that's just a part of a contract
I agree that ATM options have this. My contention is that ITM options (ones with a strike price less than FMV) would require taxes. I could easily be wrong, but my assumption would be since options have a FMV themselves (just like shares of stock), they would be income in and of themselves.
Maybe I'm incorrect in that reasoning, but I don't understand why. An option to buy a share of Uber is currently ~31.68. An option to buy a share of Uber for $20 is ~11.90. Therefore, if you buy that option and sell it later for 12.00, you'd have a short term capital gain of 0.10. If I give you an option, I'm giving you a gift of $11.90.
My confusion is how can a company give you, say 100,000 options, which could have a market value in the millions and you don't pay tax on them.
Appreciate your final question here and I wasn't able to answer "why" but this document on page 12 https://www.irs.gov/pub/irs-pdf/p525.pdf explains that you won't pay tax on ISOs at grant. Wish there was a git blame on the file :P
I have to assume that if someone was granted a million dollars worth of gains in one year and the asset was not sellable the tax burden would probably bankrupt most people. (This is the risk of exercising options when the stock is not yet liquid anyway, "phantom tax").
Thanks for the link, that clarifies things so much. I had been circling around the "non-statutory options" on page 11, like you would get without the 90 day exercise clause. In that case, the taxable event is vesting (assuming the options can have a determined FMV). I see that I was confused by thinking FMV exercise price was part of the requirement to have an ISO, but instead the IRS clarifies in the middle of page 13 that any valuation below FMV is taxable on exercise (if it's an ISO, and not a nonstatutory option)
If the investors had bought in, Episode 2 would have 60% of the investors either being made so miserable they quit, or fired "for performance" after 364 days of service ("cliff") so they get nothing--of course, even the employees who do hold on rarely get anything, but that's another story.
The really sickening thing is that most acquisitions (since that's the likely route for these companys, if they succeed at all) involve the common stock getting wiped out while the executives get "management incentive plans" in new stock. They still get screwed if they leave the acquirer (since their vesting clocks usually reset) but they at least have a shot at getting something.
I'd have to imagine that taking equity as an employee is in most cases a negative EV move. Keep in mind, people win powerball. That fact that something is negative EV doesn't mean there aren't winners.
FAANG RSUs might potentially be another exception.
But it seems like early stage startup options are an absolutely minefields for employees. I've seen instances where it was setup so regardless of how the company performed, people in the first 10 employees would have walked away with nothing in an exit.
And that's before talking about Cliffs. Even if every other thing falls into place, you can just get fired on day 355 if a founder decides they'd prefer to hold more equity.
Equity (in reality, options, not stock) doesn't have a negative EV. What it has is an opportunity cost, but that's the whole package vs your alternative, not options.
Let's be more specific. Equity and options only have opportunity cost to the degree that accepting them means entering into an agreement which limits your opportunities.
Generally, equity on its own does not require agreements like this. Accepting a job offer does.
I don't think it's helpful to think of equity as having an opportunity cost. It makes it sound like taking equity, everything else being equal, could make you worse off. It won't.
(Excepting externalities like taxes which are variable between jurisdictions.)
Taking equity as an engineer specifically means that you’re foregoing salary in favor of potential future earnings. Not only is it widely agreed to be an opportunity cost, it’s specifically designed that way, as a gamble with the potential to benefit both parties. It can and does routinely make people worse off than they would be, if they had chosen to take a salary instead.
Taking a salary implies you're forgoing a salary. There's nothing special about equity in this respect. In a conversation about equity specifically, holding everything else constant, it does not have a negative EV by itself.
> Taking a salary implies you're forgoing a salary
You lost me there. How does taking a salary imply that you’re foregoing a salary? That sentence doesn’t make sense.
You seem to be conflating the expected value of equity with the general financial outcome of having a job, or you might not know precisely what expected value means. (That’s okay! I’m not judging.) You can’t say that equity is positive EV just because you didn’t lose money and ended up with some salary. To calculate EV, you must compare it to what happens when you don’t take equity. That is the definition of Expected Value: the probability of an event multiplied by the outcome gain/loss. Since accepting lower salary has a probability of 100%, and the probability of the value of shares being greater than $0 has a probability less than 100%, it is obvious and tautological that the EV of some equity can be negative.
If I take a half salary, and a bunch of equity to compensate for the low salary, and the company never goes public, then it’s a negative outcome, I lose 50% of the money compared to taking a full salary with no equity. (Even if I collected, say, $1M in salary in the mean time.) This is what actually happens all the time, equity ends up worth less than the value that it was traded for. Given that most startups fail and never go public, that means that the average EV of equity over all startups probably is negative.
Shower thoughts, I thought today about what you said, and realized that you might be thinking of the term “expected value” to mean the same thing as “what do I expect the future value of this equity to be?”. In that sense, you’re right, equity’s value cannot go negative. There are dumb little corner cases where you buy stock and get taxed and it tanks before you sell, or things like that. But speaking generally, the monetary value of equity is mostly zero or positive, and cannot go very far negative nor is very likely to go negative.
That would be logical and a reasonable assumption, but that’s not what the term “expected value” actually means. The term has a specific mathematical meaning in statistics that is very different from the calculation of what your options are worth. EV specifically means that you take the outcome of all possibilities, and you weight them by the probability of each possibility. This is why I was insisting that you need to account for the case where you take a larger salary and no equity, because that is the other major possibility, and it’s what you trade away when you take equity as part of a startup compensation package. This is what the term “opportunity cost” is referring to, it’s referring to the path you didn’t take.
So, I (perhaps) see what you were trying to say, and I agree with you insofar as equity won’t cost you actual cash once you have it. But it can and does cost you money that you could have had, if you took a different path. It’s important to understand what “expected value” and “opportunity cost” mean before you choose to take the equity. Once you have the equity, it’s too late and you’ve already paid the opportunity cost, now you have to hope the equity becomes valuable enough to exceed all the salary you traded it for.
Right. A thing that only has upside (options, let's forget about extreme tax situations for now) can't have negative EV on it's own. The implication is that it's negative EV when factoring the opportunity cost.
I don't work in a start-up to get rich. There is this 0.01% chance it could happen, but I don't waste my time on thinking of it (and that others would get unfairly richer in that event).
I work in a start-up because I got tired of corporate BS and middle managers that produce nothing in the best case and hinder progress of my work in the not so good ones.
>"I work in a start-up because I got tired of corporate BS and middle managers that produce nothing in the best case and hinder progress of my work in the not so good ones."
Perhaps I'm unlucky but I've worked for enough startups where that sadly still existed. I feel like there's some point in the growth trajectory where inevitably those folks show up. Sometimes they even bring others from their former corporate cabal to help with those things.
On the other hands, some founders are amazing. I'm currently working at a biotech startup started by a very successful serial founder. At this company, the founder hired people that he has worked with before, so my colleagues are top-notch. The founder respects everyone he hired (and vice versa). The short-term compensation is highly competitive and rather than options, all employees were able to purchase shares (and the cost was covered by a bonus). All of the employees are regularly briefed on the fund-raising prospects (SAFE notes, Series A). Of course, I had just resigned from a company that fit the OP's description all too well.
Note there are two components to this: (1) paying all cash-based compensation (2) giving the ability to invest at fair market price. I believe both components should be considered best practices.
Well, actually I had a similar conversation at a startup a few years back. I wanted to be paid in stock instead of money. This is actually not an uncommon sort of conversation when you intend to work at a company, but where they want you to sell a separate existing company you already hold.
In any case working for a paycheck is different compared to investing for a possible payday.
I recently went through the interview process at a startup and got an offer at the end. The RSU and bonus schemes were so difficult to value that I just took another contracting gig with a simple hourly rate.
I'll keep my investments separate to my work, thank you.
A reminder that the 90-day window is a requirement by law in order for options to qualify as Incentive Stock Options, and receive favorable tax treatment for employees [1].
If you want to do 10-yr exercise, that's fine, but until the law is changed those will be NSOs and not receive that special tax treatment and will be taxed on exercise instead of on sale.
[1] https://www.cooleygo.com/isos-v-nsos-whats-the-difference/