Who pays when startup employees keep their equity? • Hacker News Board

Re: Who pays when startup employees keep their equity?

#201

Post by akkartik » Wed, Jul 06, 2016, 4:52 AM UTC

usaar333 wrote: post #199

akkartik wrote: post #196

Earlier quoted context omitted.

My admittedly neophyte understanding is that a) RSUs are counted as income, b) if income exceeds some threshold the entirety of it is subject to a higher AMT rate. Without AMT, if you got stock and paid taxes in stock, you wouldn't care about the effect on taxes if the stock price later tanked. With AMT, however, you get screwed.

AMT (28%) is lower than ordinary marginal rates (35%+). What you may be thinking about is how some classes of income, like ISOs are treated differently under AMT than under the ordinary code: http://www.taxprophet.com/archives/Stock_Options_0306/ISO%20... http://www.taxprophet.com/archives/Stock_Options_0306/ISO%20... e.g. ISO exercise is not taxed under ordinary income, but is under AMT. Meaning your taxable income…

Here's an article at random discussing the impact of RSUs on AMT: http://www.mossadams.com/articles/2014/july/tax-planning-for.... It seems unlikely there's no impact.

Re: Who pays when startup employees keep their equity?

#202

Post by bostik » Wed, Jul 06, 2016, 4:54 AM UTC

Artemis2 wrote: post #171

morgante wrote: post #142

Earlier quoted context omitted.

The odds for startups are a lot closer to a lottery than they are to blackjack.

Of course, but it's about control over your chances of winning big

Considering that the biggest factor for turning a startup into a massive success is luck, I find that sentiment delusory.

The best you can do is to accept that you're not an expert in picking winners. (Just see how many hedge fund managers underperform the market. Even the supposed experts have problems doing any better than random decisions.)

Re: Who pays when startup employees keep their equity?

#203

Post by wyman » Wed, Jul 06, 2016, 5:02 AM UTC

mikeash wrote: post #86

shon wrote: post #64

Earlier quoted context omitted.

Of course I have seen people lose. I've personally lost on options as well. I didn't make the assertion that you can't lose. With options, you are betting that the company will not fail and that it will become much more valuable. Both are statistically unlikely. You are also betting that you won't leave or be otherwise eliminated before the exit. Mainly I'm framing this in comparison to additional salary which is als…

How much is needed for something to qualify as "significant wealth"? You seem to be dismissing differences in salary as unimportant, so it's fine to take a pay cut in exchange for even a small chance at significant wealth, because that's all that matters. Let's say the salary difference is $50,000/year. Over 20 years, that's maybe half a million dollars, post tax, that you gain by ditching options. Maybe that's not s…

For a new grad several years ago comparing offers between say Uber, Airbnb, Stripe, Google, and Facebook, the mid-stage private companies like Uber/Airbnb/Stripe are likely paying $100K, while Google/Facebook offer barely more at $120K or so.

However, the Google/FB overs likely include RSUs valued at $400K that vest over 4 years, while the private companies offer options (at the time) "worth" (at current company valuation) ~$300-400K, with incredibly low strike prices since the 409a can be much lower than the preferred valuation. It really depends on how well the company has down, but since the last 3 years those private companies have doubled to 8x in value (see Uber), and thus the Uber employee's shares would be worth $2.4M-$3.2M. Google also appreciated (+50%) making the RSUs worth $600K, but still has not appreciated as much. Of course, this is just one example, picking the most successful companies, but it is illustrative of the general principle: if 20-30% of the time you can get on a rocketship, you can be +EV but with higher variance.

Re: Who pays when startup employees keep their equity?

#204

Post by mathgeek » Wed, Jul 06, 2016, 5:04 AM UTC

Retric wrote: post #157

nommm-nommm wrote: post #136

Earlier quoted context omitted.

9k a year is not cheap.

Sure, though that only starts after pre-k and k, which tends to be much cheaper. Anyway, if you compare starting a family with ~1M in the bank and 1 income at 50k vs. dual income 220k in the valley and no savings outside of home equity there are benefits on both sides.

> starting a family with ~1M in the bank

This is an outlier and, in my opinion, not representative of any useful demographic for this discussion. The idea that you bank $100k a year (let's even through in compounding) is certainly feasible, but not common.

Re: Who pays when startup employees keep their equity?

#205

Post by 21echoes » Wed, Jul 06, 2016, 5:54 AM UTC

danieltillett wrote: post #144

I have always thought that companies should work out the salary of a new employee in all cash then once the parties are happy allow the employee to trade in whatever percentage they liked for equity. If you value the equity at zero why should the company give it to you and if you value it very highly why should they give you cash?

Because startups are, effectively by definition, equity rich and cash poor. Trading $100k/yr in ISOs for $100k/yr in cash across 10 employees increases your cash burn by $1M/year, which is make-or-break for a lot of startups.

Re: Who pays when startup employees keep their equity?

#206

Post by danieltillett » Wed, Jul 06, 2016, 6:03 AM UTC

21echoes wrote: post #205

danieltillett wrote: post #144

I have always thought that companies should work out the salary of a new employee in all cash then once the parties are happy allow the employee to trade in whatever percentage they liked for equity. If you value the equity at zero why should the company give it to you and if you value it very highly why should they give you cash?

Because startups are, effectively by definition, equity rich and cash poor. Trading $100k/yr in ISOs for $100k/yr in cash across 10 employees increases your cash burn by $1M/year, which is make-or-break for a lot of startups.

But this doesn’t work if the employees doesn’t value the ISOs. If I want to hire you to come and work at my startup and you will only come if I pay you $200K then I either have to give you $200K cash or cash and some number of ISOs that you value at 200K as a package. If you don’t value the ISOs and I offer you 100K cash and ISOs that I consider are worth 100K then I have just offered you 100K. My value does not equal your value and me pretending is does not make it real.

The nice thing about cashing out equity like this is it signals your true valuation of the company, both to yourself and the company. Just giving options on top of cash tells nothing.

Re: Who pays when startup employees keep their equity?

#207

Post by usaar333 » Wed, Jul 06, 2016, 6:52 AM UTC

akkartik wrote: post #201

usaar333 wrote: post #199

Earlier quoted context omitted.

AMT (28%) is lower than ordinary marginal rates (35%+). What you may be thinking about is how some classes of income, like ISOs are treated differently under AMT than under the ordinary code: http://www.taxprophet.com/archives/Stock_Options_0306/ISO%20... http://www.taxprophet.com/archives/Stock_Options_0306/ISO%20... e.g. ISO exercise is not taxed under ordinary income, but is under AMT. Meaning your taxable income…

Here's an article at random discussing the impact of RSUs on AMT: http://www.mossadams.com/articles/2014/july/tax-planning-for... . It seems unlikely there's no impact.

If anything, it argues you are less likely to be in AMT with RSUs:

"In years when large blocks of RSUs vest, your ordinary income tax will usually exceed your AMT due to the additional ordinary income. As long as that’s the case—you’re not in AMT—you can use state income tax and property tax deductions to reduce your ordinary income tax liability. If you’re likely to be in AMT next year (say, because you’ll have fewer RSUs vesting), ...."

Re: Who pays when startup employees keep their equity?

#208

Post by kriro » Wed, Jul 06, 2016, 7:15 AM UTC

I like the basic idea and it's nicely presented however conceptually I'd favor a model where the employee gains come primarily from the losses of later stage investors and not early stage investors (and founders).

"""Within the investor class the earlier investors lose more. Year one investors go from 3.2% to 2.3% about a 25% loss, pretty much the same as founders. Year ten investors go from 9.0% to 8.7% about a 3.5% hit."""

So basically I'd like to work from sort of the reverse of this but I assume it's not very likely due to the investment horizons etc. Basically I suppose late stage investments should be a good chunk more expensive.

Re: Who pays when startup employees keep their equity?

#209

Post by kriro » Wed, Jul 06, 2016, 7:25 AM UTC

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…

The idea of taking higher salary over options is basically summed up in the "why your dentist is rich" chapter in Fooled by Randomness. It's "safer" and you'll be relatively rich over all outcomes.

Additionally you can theoretically invest the extra money over your vesting period of the options at whatever $insert ETF produces as an annual return.

Setting all the monetary issues asside I'm not sure if I'd prefer more money or more options on a philosophical basis. I feel like I'd go for options because if you work at a startup you should share the vision and work there because you believe it's awesome stuff that will change the world. OTOH taking the salary might make you less prone to certain biases and more "objective" in everyday work (+not overinvested in one outcome). tl;dr: I think I'd take the options package if I'd work at a startup because if I wouldn't I'd have to question why I work there in the first place

Re: Who pays when startup employees keep their equity?

#210

Post by abalone » Wed, Jul 06, 2016, 7:41 AM UTC

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…

I was surprised to learn the post is referring to a type RSU that defers settlement and thus taxation to a liquidity event.

This is very intriguing. We may not be familiar with this because traditionally RSUs were issued by mature public companies, so they couldn't / wouldn't need to support that trigger.

Are there any startups using these single trigger settlement RSUs today? Any other drawbacks like from an accounting perspective?