Do the math on your stock options

Options are for suckers.

Do you want to be an investor? No? then why would you pay for stock out of your own money?

At our startup everyone gets the same stock, not options, through our Equity Incentive Plan. Here's how it works.

1. We lend new employees the amount of money it would take to buy common stock on a non-recourse promissory note the collateral in this case is the stock itself.

2. The employee then buys the shares from the company with the loan.

3. The employee then files an 83b election so that when it comes time to cash out, they only pay taxes at the strike price of when the shares were bought.

4. At a liquidity event, the promissory note goes away and they own the shares outright

5. They only pay taxes when they sell their shares not when they buy them

Now there are other provisions like if they want to sell prior to a liquidity event, we get rights to buy them back first if we choose to - in which case we just write off whatever the unvested portion from the note and take those shares back.

In the end it gives the employee actual rights to the same class of stock as the founders, so we can't fudge our employees out of stock benefits without hurting our own shares. This also prevents them for having to lay out any money until there is an actual no kidding liquidity event, so they take no risk of paying taxes on something which might be worthless. Even then they will only ever have to pay taxes on the shares, the promissory note goes away, so in effect looks like a equity grant at the time of sale.

Co-founder? You could call me "Company Wizard and Lord of Space and Time" and I still wouldn't take a 40% pay cut. That's outrageous.

What does "walk" mean in this context? My (naive) reading is that you can cut all ties and run because they've essentially broken a contract; that's trivially true, but doesn't help with the actual goal of getting money from those options.

Then find yourself another key engineer. :) Or perhaps you do not know what "key" means?

It is rude to lie to people about the value of their options to hire them. ("Your options are 0.866% of the company"). But to try to defend that practice in public is just hilarious.

Heh, at least now we know what it does take to be a cofounder :)

I've had ISOs in a couple of startup employers, non-qualified options in a startup customer, and RSUs in a couple of public employers.

The only book I've read on stock options is _Consider Your Options_ by Kaye Thomas, which I thought was good. I do my own taxes, and there was enough detail in that book to let me figure out the tax implications of my options. (Including AMT the one time I had to pay it.)

The actual mechanics when you already have options are straightforward. You either exercise speculatively (pay real cash to turn options into shares, then hold the shares), or exercise risklessly (pay cash to turn options into shares which you sell immediately for more cash than it cost to exercise). Exercising speculatively has risks -- you pay real money for shares that then go down in value, possibly to less than the strike price, possibly leaving you with a tax bill even though you made a loss. Exercising risklessly is safe.

I don't like to speculate with meaningful amounts of money. If in doubt, sell the stock and diversify. Think of the worst case (the company crashes and you lose both your job and the value you thought the stock had). Better to not have all your eggs in one basket and sleep well. I suspect this is not a popular sentiment there, though.

The real question with options is when you're considering multiple job offers. Company A offers $100k and 3000 options. Company B offers $110k and 5000 options. How do you value the options? For a startup, the usual answer is that you can't, because there's no anti-dilution protection. If the founders want to hose you, they can hose you, by diluting your shares or by firing you right before a vesting date. So I value them at zero and take the job I like better, or the job that pays more actual cash.

(RSUs in a healthy public company are a bit different, since they have an actual immediate cash value. I value them at 75% of the current value of the stock. The 25% discount is because of vesting periods.)