I bought this book back in the early days of Google to make sure I was doing everything right. It's boring but clear and helpful, which is about as much as you can expect from a book about stock options.
Say you have a bunch of shares vesting over 2-4 years.
Is it possible (or realistic) to make an arrangement that in the event of an acquisition or liquidity event that your stock becomes full vested? Even if its been less than the full vesting period?
Single-trigger is what you are talking about: when all of your options vest immediately upon acquisition. It could be argued that this is unfair to those that have worked their full time to earn their full options grant. Usually, in this arrangement, a certain percentage of your shares are subject to the trigger (so, 25% vest immediately, for example). I think it would be unusual for 100% of your options to vest immediately upon acquisition: what if you were acquired a month after you joined?
The second type is double-trigger. Let's say that you have 75% of your options unvested in an acquisition, and you have 3 years remaining to vest at the new company. If they fire you, you lose the rest of your options. Double-trigger acceleration is where your options vest immediately if you are not fired "for cause". That means that, as long as you are not being grossly negligent at your job, the new company can't screw you out of your unvested options by laying you off.
The one thing to remember here, is that a lot of this is subject to your leverage over the company and the leverage the company has with its new acquirer. All of these terms are subject to renegotiation in an acquisition, and anything could change at any time -- look at what happened with Zynga.
Consider it a gentleman's agreement, for the most part. Good people will honor it, shitty people might try to screw you. As with anything, you should only do business with those you trust.
And finally, the absolute best way to make sure you get the full value of your options (as an employee or a founder) is to always make sure you are indispensable to the company. A company who needs you can't screw you.
(final note: IANAL, this is my understanding of how things work)
When you combine this with the famous Charles de Gaulle quote ("The graveyards are full of indispensable men"), you properly understand the predicament.
Note that the reverse is also possible: A change-of-control which restarts the vesting clock.
The best thing you can get out of these kind of books/articles (IMHO) is empowerment to think independently about the terms you need, and to speak intelligently about those terms in a negotiation.
Don't buy one just to hear about what everyone else has or has not successfully negotiated in the past. That's interesting and relevant, but it's peripheral.
Get the deal you feel you need, or walk. At worst, they'll remember the kid who wasn't a sucker, and you'll respect yourself in the morning.
Update: Do as I say, not as I do. :)
At the core of this issue was (and still is) how "deferred compensation" can be exploited by executives as golden parachutes. When execs can spread out their compensation over time, the tax treatment of the compensation can be minimized for the execs and maximized for the companies. Before 409a, the reverse was true. Whenever corporate profits are earned they're either re-invested or distributed -- only two ways to handle the money.
Before 409a, golden-parachute-type arrangements taxed execs when amounts were actually (or "constructively") received as income. This tax treatment made it favorable for employers to give deferred compensation as incentive -- lots of it. Makes sense: amass huge liability for work that was never actually done on profits that have not yet been earned. If you're an executive of General Motors, or on the board of any large company, this pre-Enron way was good for the manager getting deferred compensation, but bad for the company. Any future profits go to the executives FIRST (whether or not those execs are even at the company still!), and the short-term performance of the company and manager is what they want to focus on.
There has always been a huge battle between corporate profits and executive compensation. One of the best professors I had in grad school had done his doctoral on golden parachutes, and this is a pretty interesting area. Complicated, but interesting.
Unfortunately, we don't have any laws creating incentives for corps to give profits to the common shareholders (in this case, employees receiving vanilla stock options), just the laws that encourage companies and their (current and former) executives to engage in tug-of-war over the distribution of future profits. When this happens, very little of the value tends to trickle down to Joe Shareholder .
Does anyone have a link to a document that would detail the ways that you could get screwed over by a startup? Or by VCs? I know there are tricks that can be made via dilution, or something, but all I've heard are horror stories, but no actual mechanics of how it was done, and what you should look out for when looking at joining a startup.
There's really no need, because it all falls under this category: You work really hard, and then they use one of the many powers of the board to screw you out of a payoff. I've seen punitive dilution, reverse splits plus new issuance, firing before vesting events.
If you haven't looked up variable-reward experiments, it's worth a gander because it bears a strong resemblence to startups.
When the FMV has increased, do founders also have to pay taxes for their shares?
Described in more detail here: http://www.grellas.com/faq_business_startup_004.html
Procedurally, an 83(b) election must be made within 30 days of the date of grant.
Is it when the vesting schedule says you vest?
Is it when the vesting schedule says you vest, and the stock is physically sign over?
obviously their notes wouldn't be legally binding either, but it would be a step which would improve this already awesome guide.
No bank in their right mind would give millions of dollars to a "coder" with a "great" idea.
A bank (or any rational debt holder) has little interest in upside. Their interest is capital protection and repayment.
Debt is typically divided between "asset lends" and "cash-flow lends". You can get serious leverage with an asset lend, maybe 80% of equity, but that assumes you have assets (less debt) as colateral. So if you want $3m, you need at least $3m in equity.
As for cash flow lends, rational debt providers won't go anywhere near even 5 times for an unstable/unproven company. 5 times what? Usually some proprietary measure of earnings (EBIT, EBITDA, EBITDA-C, NPAT, cash flow, etc, adjusted for whatever the bank decides). So for $3m, you usually need $1m in cash-flow already. Even then, you have to deal with monthly or quarterly debt covenant reporting.
Most businesses who qualify for cash flow lends are relatively solid. That's because the covenants are restrictive (and especially frightening for an inconsistent business). A 5% drop in revenue can filter down to a serious drop in the proprietary cash-flow calculation and have the bank calling its capital the next day.
Compare that to a VC scenario. Imagine you've burnt through $3m, sales have dropped, then the bank calls the entire $3m loan. Maybe in the US that stuff flies, but in most responsible financial markets, that means you're toast for 5-7 years. You won't even get a mobile phone contract in some countries.
Of course there are business suited to traditional debt, but I can't imagine the typical HN reader would look for serious capital from credit institutions, unless of course they made serious money and they couldn't get VC for market size reasons.