Do the math on your stock options • Hacker News Board

Re: Do the math on your stock options

#171

Post by lifeisstillgood » Thu, Dec 31, 2015, 6:58 PM UTC

sokoloff wrote: post #65

lifeisstillgood wrote: post #45

Is this a sensible approach: You have offered me X ordinary shares which is y % of total outstanding. I want a contract that guarantees me the same % of this class of shares, and the same % of any other more privileged class of shares, and I am given an opportunity to participate in every liquidation event pre public offering Seems to cover many of the horrors people have hit?

Unless you're an irreplaceable employee, you won't get that. In particular, it's unreasonable to take the initial percentage and demand the same percentage of preferred shares (or venture debt convertible into shares at the lender option). Many of these "horrors" are a reality of the angels and VCs protections that enable and are essential to the company financing. IOW, attempting to tunnel under those protections fo…

VCs get dilution protection, why can't other "investors" who invest time and effort.

If that dilution protection is some other form than stated, well I need to read up on it.

But my general approach is that just because you are an employee not a capital investor does not mean you should just take whatever shit is doled out. Especially not these days.

That whole thread is about finding better terms and protection to take options on.

"They won't let you" is close to "shut up and take it". (Not the same but a bit too close for my ckmfort

Re: Do the math on your stock options

#172

Post by mrkurt » Thu, Dec 31, 2015, 6:59 PM UTC

relkor wrote: post #164

AndrewKemendo wrote: post #142

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 th…

This is exactly what I was looking for. As a first time founder at a small private business I was looking for a nicer way to compensate the employees other than sticking them with a huge tax bill as thanks for our success. Has this approach held up in court or survived an audit? Do you actually transfer the money to the employee's account? How do how do you prevent them from having a program to immediately wire the m…

If it's a small private business, restricted share grants are pretty easy / cheap. Until you have a good basis for a fair market valuation (409a, raising an equity round, etc) employees can just pay the strike price for the shares, file an 83b election, and avoid most of the options calculus.

Re: Do the math on your stock options

#173

Post by [deleted] » Thu, Dec 31, 2015, 7:02 PM UTC

relkor wrote: post #164

AndrewKemendo wrote: post #142

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 th…

This is exactly what I was looking for. As a first time founder at a small private business I was looking for a nicer way to compensate the employees other than sticking them with a huge tax bill as thanks for our success. Has this approach held up in court or survived an audit? Do you actually transfer the money to the employee's account? How do how do you prevent them from having a program to immediately wire the m…

[deleted]

Re: Do the math on your stock options

#174

Post by mahyarm » Thu, Dec 31, 2015, 7:02 PM UTC

AndrewKemendo wrote: post #142

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 th…

This is how to do your equity compensation founders. It would be the recruiting tool you need to hire people who won't work at most startups due to research or being burned in the past.

Thanks for sharing this. Thinking on how to do equity compensation right when you have no real profit to share was one of the barriers for me starting a startup.

Re: Do the math on your stock options

#175

Post by AndrewKemendo » Thu, Dec 31, 2015, 7:03 PM UTC

mrkurt wrote: post #170

AndrewKemendo wrote: post #142

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 th…

This is clever. Who put the plan together? #4 seems like something the IRS would look on unfavorably. Also, before a 409a valuation wouldn't you just be better off granting the shares outright and having employees write a check for $20 or whatever?

Our lawyer put it all together.

It used to be standard practice until a bunch of executives used it in the 80s to cheat the system.

I should note that this plan cannot apply to executives, for that reason.

Also, before a 409a valuation wouldn't you just be better off granting the shares outright and having employees write a check for $20 or whatever?

Yes that's definitely easier, but if you have had a round of financing even before filing a 409a the "valuation" can be determined as far as the IRS in concerned.

Re: Do the math on your stock options

#176

Post by swingbridge » Thu, Dec 31, 2015, 7:04 PM UTC

Most people don't have a clue how options really work, but are thrilled to get them... until they try to excise them.

Truth is companies give options to low level employees because it's cheaper than paying cash. Most employees don't do their homework to realize that in the vast majority of cases they'd probably be better off demanding cash.

Re: Do the math on your stock options

#177

Post by mahyarm » Thu, Dec 31, 2015, 7:06 PM UTC

mrkurt wrote: post #170

AndrewKemendo wrote: post #142

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 th…

This is clever. Who put the plan together? #4 seems like something the IRS would look on unfavorably. Also, before a 409a valuation wouldn't you just be better off granting the shares outright and having employees write a check for $20 or whatever?

#4 is actually pretty clever. This way the employees are only taxed at the strike price of the grant as income vs. being taxed at the full value of the stock at the liquidity event. And all the profit from the liquidity event is taxed as long term capital gains. By being a loan vs. income, the stock given to the employee is not taxable until they actually sell.

When the liquidity event happens, the tax from a forgiven loan is very miniscule compared the standard situation.

Re: Do the math on your stock options

#178

Post by AndrewKemendo » Thu, Dec 31, 2015, 7:07 PM UTC

relkor wrote: post #164

AndrewKemendo wrote: post #142

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 th…

This is exactly what I was looking for. As a first time founder at a small private business I was looking for a nicer way to compensate the employees other than sticking them with a huge tax bill as thanks for our success. Has this approach held up in court or survived an audit? Do you actually transfer the money to the employee's account? How do how do you prevent them from having a program to immediately wire the m…

>Has this approach held up in court or survived an audit?

Yes, it's actually a very old way to do things that fell out of favor in the 80s in favor of options. This way of doing it is more complex and more risk for the employer, so it makes no sense to do it over options if your goal is to just give tokens to employees.

>Do you actually transfer the money to the employee's account?

No, it's all papered

Re: Do the math on your stock options

#179

Post by Denzel » Thu, Dec 31, 2015, 7:08 PM UTC

What prevents a company from issuing vested stock options with an anti-dilution clause to early employees? Has any company set the precedent? Would it scare investors away?

I'm very curious.

Re: Do the math on your stock options

#180

Post by harryh » Thu, Dec 31, 2015, 7:14 PM UTC

Retric wrote: post #122

amasad wrote: post #110

Earlier quoted context omitted.

I got offered a job 4 years ago at a very early stage company with really generous stock options. I didn't know what options meant, I didn't know that I had to exercise. That was pretty silly on my part but in my defense I was getting my visa, moving across the world, and working as the first employee trying to keep up with insane growth. When the time came to raise our second round, I got intrested in how it would a…

Assuming you followed a professional’s advice I would really not worry about this stuff. Unless you make a lot of money or do something really strange your unlikely to get audited. Also, they don't generally go back very far even with an audit. As to stock options they are best treated as lotto tickets. Unless you think the company is very likely to get sold or go public at a high valuation you’re generally better of…

This is bad advice. You do not have to get audited to get yourself in trouble here. When you exercise options, that is reported to the IRS and their automated systems will ding you if you fail to report them correctly.