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Do the math on your stock options

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Re: Do the math on your stock options

#221

Post by AndrewKemendo »

ngorski wrote: post #215
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…

> so they take no risk of paying taxes on something which might be worthless If a the time of a liquidity event the stock is worth less than an employee's strike price, they'll still be underwater. They'll either owe the loan back (the difference between the strike price and exit valuation) or the loan is forgiven and they owe income taxes on the forgiven debt. So there's still risk of owing tax on equity worth less…

There is no underwater because employees don't pay anything for their shares.

So there's still risk of owing tax on equity worth less than the current valuation at the time of their offer, right?

Nope. Because of the 83b election, they pay no tax as the shares vest and pay no tax until they sell their shares.

Re: Do the math on your stock options

#222

Post by morgante »

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…

I'm not sure about the specifics of your plan, but I have to commend you for figuring out how to give your employees actual equity (instead of options).

Stock is so much better for employees on almost every possible dimension and it's a real shame that more companies don't give it out, even when it's quite possible to do so (ex. early stage companies who have only raised convertible notes).

Re: Do the math on your stock options

#223

Post by morgante »

mpdehaan2 wrote: post #109
inthewoods wrote: post #68

Earlier quoted context omitted.

I've never seen the ability to customize these kind of things because they generally are, in my experience, part of the core options agreement for the entire company and would require BoD approval. Thus, you're asking a lot - works if your a key employee but probably not for the average employee. Would love to hear if people have been able to get these terms.

Righto, and asking a lot of demands/questions means the company is not going to like you as much and will influence your relationship after the offer is accepted. The info you get will be standard and there is certain info they are not going to want to share. Basically a casual ask for "can you share how many options are outstanding?" is about as good as you are going to get. Totally good. Non-stand demands? Not so g…

> will influence your relationship after the offer is accepted.

It will influence your relationship, positively.

Executives and managers always pay attention to these details and negotiate them when joining a company. The fact that you're paying attention signals that you actually understand what's going on and demands respect.

Some companies will refuse to give you this info and resent you for asking, but you should automatically reject such offers.

Re: Do the math on your stock options

#224

Post by Retric »

harryh wrote: post #180
Retric wrote: post #122

Earlier quoted context omitted.

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.

[Citaion needed] for public compaines or high value stock that's one thing, but this is private companies and small amounts of money which have very different rules.

PS: https://www.irs.gov/taxtopics/tc427.html

Statutory Stock Options If your employer grants you a statutory stock option, you generally do not include any amount in your gross income when you receive or exercise the option. However, you may be subject to alternative minimum tax in the year you exercise an ISO. For more information, refer to the Form 6251 Instructions (PDF). You have taxable income or deductible loss when you sell the stock you bought by exercising the option. You generally treat this amount as a capital gain or loss. However, if you do not meet special holding period requirements, you will have to treat income from the sale as ordinary income. Add these amounts, which are treated as wages, to the basis of the stock in determining the gain or loss on the stock's disposition. Refer to Publication 525 for specific details on the type of stock option, as well as rules for when income is reported and how income is reported for income tax purposes.

...

Not Readily Determined Fair Market Value - Most nonstatutory options do not have a readily determinable fair market value. For nonstatutory options without a readily determinable fair market value, there is no taxable event when the option is granted but you must include in income the fair market value of the stock received on exercise, less the amount paid, when you exercise the option. You have taxable income or deductible loss when you sell the stock you received by exercising the option. You generally treat this amount as a capital gain or loss. For specific information and reporting requirements, refer to Publication 525.

Re: Do the math on your stock options

#225

Post by encoderer »

AndrewKemendo wrote: post #212
encoderer wrote: post #199

Earlier quoted context omitted.

I'm sure that "options are for suckers" has a powerful effect in your recruiting materials but I don't think it adds any value to this discussion. Options have real advantages, you don't have to exercise them "out of your own money", and you ignore that a ton of feathers weighs the same as a ton of bricks. (eg, you're not giving me more money just because you're giving me a promissory note). There's no doubt that you…

Definitely isn't a recruiting tool or an ad - in fact I don't even really go into the details of the plan when I do my recruiting because most employees don't really know the difference at that point. If it was an ad it certainly wasn't effective as nobody has contacted me :p. I'm curious what advantages options give employees over a system like ours. I don't see any, and the whole point of our structure was to give…

It's not that options beat your system, it's that options are what's available and the point of this article is: do the math and understand your equity.

Re: Do the math on your stock options

#226

Post by [deleted] »

AndrewKemendo wrote: post #212
encoderer wrote: post #199

Earlier quoted context omitted.

I'm sure that "options are for suckers" has a powerful effect in your recruiting materials but I don't think it adds any value to this discussion. Options have real advantages, you don't have to exercise them "out of your own money", and you ignore that a ton of feathers weighs the same as a ton of bricks. (eg, you're not giving me more money just because you're giving me a promissory note). There's no doubt that you…

Definitely isn't a recruiting tool or an ad - in fact I don't even really go into the details of the plan when I do my recruiting because most employees don't really know the difference at that point. If it was an ad it certainly wasn't effective as nobody has contacted me :p. I'm curious what advantages options give employees over a system like ours. I don't see any, and the whole point of our structure was to give…

[deleted]

Re: Do the math on your stock options

#227

Post by morgante »

drglitch wrote: post #58

I am considering an offer from an early stage startup. Salary is being dragged down ~40% under market due to stock options. The role is being a 'first key engineer' hire after the three co-founders. What kind of common-stock equity offer is 'average' in this case? 1%? 2%? 5%?

> The role is being a 'first key engineer' hire after the three co-founders.

I've been in that role for two different companies.

First of all, you should never accept a ~40% under market pay cut (at least if your "market" is mid-to-senior developer). A 10% cut is reasonable, but you should absolutely never accept less than ex. $130k in SF.

In terms of the equity grant, you can find some average here: https://angel.co/salaries

It should absolutely be at least 1%, but the specific percentage is going to vary a lot based on your perception of the company's value. Put yourself in the shoes of an angel investor and try to imagine what valuation you would invest at. This can include factors like (a) what did other investors invest at, (b) founder history/background, (c) market potential/size. Then take whatever annual salary you're giving up, multiply by 8, and ask for that percentage.

Re: Do the math on your stock options

#228

Post by morgante »

ryanSrich wrote: post #82
drglitch wrote: post #58

I am considering an offer from an early stage startup. Salary is being dragged down ~40% under market due to stock options. The role is being a 'first key engineer' hire after the three co-founders. What kind of common-stock equity offer is 'average' in this case? 1%? 2%? 5%?

In my experience it's never a good idea to take a pay cut in lue of equity. Taking a pay cut because you like the product, the role, etc. are infinity better reasons than equity. In my opinion a 40% pay cut and being one of the first 5 engineers warrants co-founder status.

> In my opinion a 40% pay cut and being one of the first 5 engineers warrants co-founder status.

As someone who has been the first employee at two different startups, it doesn't warrant co-founder status.

Yes, it's going to be a lot of work. But you never go without salary and never have the same stress level or expectations as founders. At the end of the day, you're still an employee—a key one, who should be compensated with single digit equity, but an employee nonetheless.

Re: Do the math on your stock options

#229

Post by vellum »

drglitch wrote: post #58

I am considering an offer from an early stage startup. Salary is being dragged down ~40% under market due to stock options. The role is being a 'first key engineer' hire after the three co-founders. What kind of common-stock equity offer is 'average' in this case? 1%? 2%? 5%?

Think of it from another perspective. If you were just an investor, would you take pay 40% of your salary, per year, for those options?

Re: Do the math on your stock options

#230

Post by lifeisstillgood »

sokoloff wrote: post #182
lifeisstillgood wrote: post #171

Earlier quoted context omitted.

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 t…

I don't view it as "shut up and take it", but rather "here's what we're offering; would you like to take it?" The most common form of dilution protection is the right to invest more cash in future rounds pro-rata. (So you can pay to stop being diluted.) That you might be able to get if you hold shares, but you're going to need to pay cash at each round to avoid dilution. You won't realistically be able to get it as a…

I may have been more ... Assertive .. than I meant.

Interesting. The right to invest as dilution protection I had not remembered (Is it stripe that surprised everyone by giving investors right to invest at the previous round prices?)

I suppose that what I am trying to protect against is to not see dilution occur worse than that of founders. But then if you don't trust the founders that much at the outset, don't join.

So, perhaps better advice is take the money not the options, and if you want a lottery ticket, start your own company.

I think I will give up and form a co-operative.

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