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Who pays when startup employees keep their equity?

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Re: Who pays when startup employees keep their equity?

#51

Post by jamie_ca »

timcederman wrote: post #26

There is a downside to RSUs. Say you work for a private company with a high valuation, e.g. AirBnB at $25B, and you are granted 0.01% equity over 4 years. That means you are vesting $2.5m of RSUs over 4 years, and these RSUs are taxable at that amount. Typically for folks earning over $150k/year in base salary, particularly if married, even half as much will put you into AMT territory, and you will end up paying a si…

Is that a US thing?

I'm up in Canada, and the RSU structure for my employer is an initial grant of $3x, with $x vesting every year for three years. Only when I exercise the vested RSUs (flat exchange at fair market value - typically the average stock price over the past week) do I declare them as income, at which point it's taxed as per usual for employment income.

Re: Who pays when startup employees keep their equity?

#52

Post by justinlardinois »

shon wrote: post #31

It's interesting to see the popular response to this thread being one where people think employees are better off with salary over options. This seems crazy to me as I have watched many close friends cash out options from companies including Google, Yelp, Apple and Pandora and buy houses (some with cash), start companies, become investors and/or take long sabbaticals with the proceeds from their options. With salary…

Are you talking about options being the entirety of one's financial compensation? Because I wonder how people who work without a salary manage to pay the bills every month.

> the tax on W2 income is simply the worst

As opposed to getting taxed on what you eventually make from your options?

Re: Who pays when startup employees keep their equity?

#53

Post by FussyZeus »

shon wrote: post #31

It's interesting to see the popular response to this thread being one where people think employees are better off with salary over options. This seems crazy to me as I have watched many close friends cash out options from companies including Google, Yelp, Apple and Pandora and buy houses (some with cash), start companies, become investors and/or take long sabbaticals with the proceeds from their options. With salary…

This is like someone winning the lottery then telling you to liquidate your retirement fund and buy powerball tickets.

Yeah, if you worked for Google back in the day, you could actually do this. Now? With the crowded landscape of tech companies competing to provide services, except for the few services who have one or MAYBE two companies that completely own the field? You'd be insane to take options.

Re: Who pays when startup employees keep their equity?

#54

Post by pc86 »

JonFish85 wrote: post #47
home_boi wrote: post #37

Earlier quoted context omitted.

Does the government take private RSU's as payment for taxes? It seems unfair to tax people for equity that even the government itself doesn't value.

Of course not, the IRS takes cash. It's far simpler that way, and probably will remain that way for quite awhile.

And it probably should - the IRS is in the business of collecting money from citizens and corporations. It should not be in the business of managing investments and RSUs in thousands of private entities.

Re: Who pays when startup employees keep their equity?

#55

Post by jonknee »

landryraccoon wrote: post #48
bradleyjg wrote: post #42

Earlier quoted context omitted.

Going the cash route has a higher expected value but a lower variance. Different people have different attitudes towards risk.

I think you mean lower expected value, no? The way you put it cash is strictly better in every way than options - both higher expectation and lower risk. According to you there's no upside to options relative to cash.

No, having your options be worth a lot is a very rare event. That's why they hand them out instead of giving you more money.

Re: Who pays when startup employees keep their equity?

#56

Post by calcsam »

The barrier to entry of this stock option tweak: it requires an informed populace, ie, us.

If you are a founder with reasonable engineer cred and announce differentiated stock option terms, ie, Adam D' Angelo at Quora, there's a reasonable chance that engineers considering joining your company will be encouraged by your effort on this.

If you're someone else, and your company offers this, many experienced engineers, not unreasonably, will value their equity packages at zero regardless of what you do. Many others, such as new grads, will not know enough about stock options to understand the distinction you're drawing.

If you do decide to offer RSUs for the reasons the authors cited, you may want to follow the example of Henry Ward at eShares and put together some good presentation materials to explain the benefits of this course. Otherwise, you're making an expensive choice for little benefit.

Re: Who pays when startup employees keep their equity?

#57

Post by linkregister »

cloudjacker wrote: post #44
timcederman wrote: post #26

There is a downside to RSUs. Say you work for a private company with a high valuation, e.g. AirBnB at $25B, and you are granted 0.01% equity over 4 years. That means you are vesting $2.5m of RSUs over 4 years, and these RSUs are taxable at that amount. Typically for folks earning over $150k/year in base salary, particularly if married, even half as much will put you into AMT territory, and you will end up paying a si…

You know the simple solution to this is that companies withhold the amount of RSUs from you that would be taxed, when they vest. Its almost like so simple of a solution that reporters won't touch it. edit: nevermind. even the company cant pay the tax with their illiquid RSUs so its still a problem, and a bigger problem if the share valuation increases, pre-IPO

The company I work for does this. The non-fanfare way it was described to me implies this is not rare across the industry.

Edit: I think the parent poster was talking about RSUs (pre-IPO) that cannot be sold to pay off the required tax. My friends at companies in this pre-IPO stage hold the RSUs in the employees' names until the IPO permits the employees to sell RSUs to pay the tax. The companies also let employees recieve the RSUs and pay the tax themselves if they want to, but nobody I know has done this.

Re: Who pays when startup employees keep their equity?

#58

Post by freddyc »

bhickey wrote: post #15
jusben1369 wrote: post #4

Earlier quoted context omitted.

Quick question. Do you work for a startup now with options? Or, have you in the past? I'm trying to work out if people who object to options would ever join startups. Or, if they're appetite for risk is too small to be a potential candidate.

Framing it as an appetite for risk is too simplistic. Risk adjusted returns matter. For example, I've got a friend who's been working at a startup for about eight years. They have a looming exit. If it goes through, he'll probably walk away with $1.5m. Had he gone the salaryman route, that'd be money in the bank.

This is an important calculation that too many employees ignore. They get lured in by the stories of early Facebook and Google employees walking away with tens or in some cases hundreds of millions from their options, when in reality most start-ups fail and of those that succeed a sub-$100m exit is more likely than a blockbuster exit.

As an early employee you can probably negotiate 1-2%, which after dilution, tax and all the other fun things that come with options doesn't generate the returns to justify giving up the better part of a decade while arguably taking on just as much risk (if not more) than a founder. I've worked at several start-ups - including one where the founder plundered the employee option pool to offset his own dilution - and won't work at another unless it pays an above market salary or I am in a founder role.

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