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The Lack of Options for Startup Employees’ Options

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Re: The Lack of Options for Startup Employees’ Options

#101

Post by throwaway2016a »

ThomPete wrote: post #98
throwaway2016a wrote: post #95

This may be being said elsewhere but I think the bigger problem is that you get taxed when buying options that are not liquid. I own a significant amount of a startup company and am fully vested but I can't exercise because of the tax bill.

You can. You just can't do long term capital gains.

It's my understanding I have to pay tax on the difference between excise price and fair market value for the year I exercise my option that year. And I've gotten conflicting tax advise on whether or not private investor rounds set a fair market value as far as the IRS is concerned.

This article seems to be of the same opinion.

Either way, if you can't do capital gains and you're still at the company no use wasting the money on buying in early.

Re: The Lack of Options for Startup Employees’ Options

#103

Post by akkartik »

maxxxxx wrote: post #96
akkartik wrote: post #47

Just one addition to all the other critiques in this thread. "The challenge in broadly adopting the 10-year exercise rule for all employees at the outset of the company as a solution is that it disadvantages employees who choose to make a long-term commitment to the company relative to those who leave." Employees who stay longer get more options than employees who leave early. I don't see the problem.

Don't a lot of companies give you an initial number of options and then only sometimes more? That's how it was at startups I talked to in 1999 and 2000.

Well, if you stay 4 years and don't get an equity refresh that's a pretty strong signal they want you to move on. Starting year 5 you'd be taking a pay cut. So I imagine it would be a rare outcome.

(Of course, this only holds under current conventions. With the OP's proposal companies would have a strong incentive to make life miserable for employees past year 7 or so, because those who left wouldn't be able to take their stock with them.)

Re: The Lack of Options for Startup Employees’ Options

#104

Post by a13n »

encoderer wrote: post #80
a13n wrote: post #70

Earlier quoted context omitted.

Sure but if you join on day 1 then the refresher grants could be peanuts compared to your initial offer? Why wait 4 years to find out you won't get any more equity instead of baking it into the original offer with a longer vesting period? Longer vesting periods + more equity guarantee that employees get more equity. 4 year vesting lets the board decide what happens.

In this scenario you give those employees a new 4 year refresher grant every single year. Not one at hire and one four years later. You pile them on both as a form of performance based compensation and to prevent the exact situation you describe. In your example the guy who leaves after 4 years of low salary makes a lot less than the guy who gets incremental grants and a growing salary who is a vp at the end making 5…

Seems like your incremental grants would be significantly less than the initial ones joining early on, no? Or is it common that leaders get big refreshers along the way?

I would say I'm pretty unfamiliar with early employee refreshes but from what I've heard refreshers are usually small compared to the initial grant.

Re: The Lack of Options for Startup Employees’ Options

#105

Post by rdtsc »

mkehrt wrote: post #100
rdtsc wrote: post #91

I am being quite ridiculous and ignorant probably, but to me options just seems a way to trick people into buying a lottery ticket, except it has very complicated rules how to cash it and you don't even know if you've won or not sometimes. Why not just grant people stock / ownership. Wouldn't most people like to get a smaller guaranteed amount of ownership percentage than some mythical huge number of options which ge…

This is essentially what an RSU is: a stock grant with a vesting schedule. Many public tech companies grant them, but they are more complicated for the granting company taxwise[1], so they are rare in small startups. [1] They have to withhold some for taxes, for one thing.

Ok, so it is not a completely crazy idea. It if funny that granting ownership is more complicated than granting an option to ownership.

Re: The Lack of Options for Startup Employees’ Options

#106

Post by encoderer »

a13n wrote: post #104
encoderer wrote: post #80

Earlier quoted context omitted.

In this scenario you give those employees a new 4 year refresher grant every single year. Not one at hire and one four years later. You pile them on both as a form of performance based compensation and to prevent the exact situation you describe. In your example the guy who leaves after 4 years of low salary makes a lot less than the guy who gets incremental grants and a growing salary who is a vp at the end making 5…

Seems like your incremental grants would be significantly less than the initial ones joining early on, no? Or is it common that leaders get big refreshers along the way? I would say I'm pretty unfamiliar with early employee refreshes but from what I've heard refreshers are usually small compared to the initial grant.

Yeah I think if you have somebody who is a classic "first engineering hire" and s/he grows into an engineering leader, each major promotion (to manager, director, vp) brings an opportunity for a rich follow-on, as well as a normal yearly grant. Now if somebody is particularly adept at negotiating and somehow take a full point out in their initial grant, you're probably right that incremental grants won't touch that value. But that is 2-4x what I've internalized as the norm.

Re: The Lack of Options for Startup Employees’ Options

#107

Post by potatolicious »

Stasis5001 wrote: post #23

This article is incoherent, because the notion of dead equity being unfair doesn't make any sense. If I buy a share of Microsoft, that's 'dead equity' since I don't work there and am not contributing to the company's value, yet when Microsoft sold that stock, they got paid in cash. Is that unfair to current employees? Exactly the same for startup stock. The company granted the stock to investors for cash and employee…

Exactly this - companies can't have their cake and eat it too. Equity is part of the overall compensation package for employees, which is to say that without equity these companies would have to pay more cash to attract talent.

Which is just a long-winded way of saying: equity is compensation for services performed, just like your cash salary is. In fact this is exactly how it works in BigCos, where equity is treated as compensation for work performed. AmaGooFaceSoft don't try to claw back shares when you leave, even though the employee is now hanging onto equity and "no longer contributing to shareholder value".

They paid for these shares with labor, same as everyone else.

We wouldn't ever imagine getting an employee to repay their salary when leaving a company, but yet we're totally fine with getting them to cough up their equity?

Re: The Lack of Options for Startup Employees’ Options

#108

Post by solidsnack9000 »

> ...since refreshing the pool means dilution for all those who are still employed by the company, it’s the remaining employees who get diluted in order to allow former employees to keep their optionality...

Doesn't it mean dilution for the former employees, as well?

Re: The Lack of Options for Startup Employees’ Options

#109

Post by nwatson »

csmeder wrote: post #63
dadkins wrote: post #51

There's a much simpler solution: early exercise. It's already possible and good companies offer it as an option. You exercise all of your options immediately upon joining. The difference between the fair market value and strike price is zero, so there's no tax due upon exercise. If you stay for at least a year, which is where the cliff is, you're now in long-term capital gains territory. And if you leave before all o…

Wouldn't this essentially just be the same as being an angel investor. This takes away all the value of getting options. For example I am an early employee at a startup valued at 1M. If on day one I am given $10,000 worth of options and I buy all of them, how is this different than investing $10,000 worth of money for 1% of the company? The value of options is that they are options. You get to wait and see if they ar…

An Angel investor ends up with Series A stock which typically costs more per share and has extended rights. The early-exercising employee buys cheaper Common shares. In an IPO the classes may end up with the same value, meaning the employee got a better financial deal per share for their sweat-equity. In a non-IPO the employee may get a lot less per share often 0. Also, each employee has access to a very limited supply of cheap stock, whereas no founder/board will stop an Angel from buying more shares ... "wanna double your investment? come to the trough. "

Re: The Lack of Options for Startup Employees’ Options

#110

Post by solidsnack9000 »

numlocked wrote: post #53

I think folks might be misinterpreting this a bit -- his issue with the 10-year window isn't that it will 'prevent' shares coming back into the pool (remember, the article started out talking about how employees should be able to exercise their options regardless of their cash constraints), but that giving folks the ability to wait-and-see for years, with zero risk, before pulling the trigger isn't really fair. Let's…

Giving out options with the expectation they won't be exercised is a kind of double-selling. It's a risky practice and doesn't always work; those that engage in it deserve what they get.
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