How Startup Options and Ownership Work
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Re: How Startup Options and Ownership Work
#2Props to a16z for writing this up. Many of the practical problems that come up with stock options result from having one sophisticated party (the company) and one unsophisticated party (the employee).
When the details of their stock options become material, employees are often surprised -- and usually not in a pleasant way. Many engineers become disillusioned with stock options, and eventually the whole startup scene.
Re: How Startup Options and Ownership Work
#3[deleted]
Re: How Startup Options and Ownership Work
#4Has anyone ever heard of or seen a way that option holders don't get 100% screwed if a company is acquired for less than the sum of the investors' liquidation preferences?
Re: How Startup Options and Ownership Work
#5The article goes over stock options; but it doesn't address an alternate form of equity; issuing early employees restricted stock awards (instead of options).
From the receiver's point of view, Stock Options are a bad deal 99 times out of 100, let's review the cases in which owners of options get screwed:
- Company gets acquired, new terms are put into place.
- Company gets acquired, company isn't good fit.
- Company gets massive amounts of funding (those Unicorns), and due to the increasing funding at each round, those with options are left with a hefty tax bill and only 90 days to exercise if they leave
- If you have stock options and are an employee of a early stage startup, chances are you don't have the liquidity to exercise it. You're also not being paid market value (since you have stock options) If you did have the capital, you could have just invested in the seed round for a much better discount and return.
- If a company goes out of business
- if A company stays private and doesn't offer an internal market
There are only a very few cases where employees with options are taken care of:
- Company sells and ensures there are triggers in the options - Company extends exercise period
- Company goes public and employees are able to exercise their options with the tax bill that goes along with that and still make money on their shares
We have a romanticized view of options because Google, Microsoft, Apple, Twitter, Facebook, and a handful of other companies have hit the bigtime; but that's the huge exception, not the rule, and yet we allow companies to treat options as equal to salary, and they're not.
I know companies face reporting requirements if they have more than 50 shareholders; but the earliest employees should be compensated in a way that respects their sacrifice and risk; and options don't do that. At best, options are a placebo.
Re: How Startup Options and Ownership Work
#6Has anyone ever heard of or seen a way that option holders don't get 100% screwed if a company is acquired for less than the sum of the investors' liquidation preferences?
New company pays signing bonuses. That's the only way.
Re: How Startup Options and Ownership Work
#7The article goes over stock options; but it doesn't address an alternate form of equity; issuing early employees restricted stock awards (instead of options). From the receiver's point of view, Stock Options are a bad deal 99 times out of 100, let's review the cases in which owners of options get screwed: - Company gets acquired, new terms are put into place. - Company gets acquired, company isn't good fit. - Company…
I'm not sure I quite get what you mean by "issuing early employees restricted stock awards". Can you elaborate? Is this like an IOU for restricted stock? Isn't that kind of like what stock options are (except for common stock)? And if you just mean giving actual restricted stock (like to investors), then the main problem is you have to pay those taxes right away (the whole point of options). But maybe you mean something else.
Re: How Startup Options and Ownership Work
#8The article goes over stock options; but it doesn't address an alternate form of equity; issuing early employees restricted stock awards (instead of options). From the receiver's point of view, Stock Options are a bad deal 99 times out of 100, let's review the cases in which owners of options get screwed: - Company gets acquired, new terms are put into place. - Company gets acquired, company isn't good fit. - Company…
I've been making similar points too, it's actually shocking how founders and VCs are convinced that their way is the absolute correct way
Instead of pointing out how stock options are primarily a reaction to accounting and taxation changes over the years , or the conflicts of interest in giving a more objective answer
There are plenty of financial products possible that will tread the line of compensating employees for their risk and the lack of money and liquidity startups have
Re: How Startup Options and Ownership Work
#9Has anyone ever heard of or seen a way that option holders don't get 100% screwed if a company is acquired for less than the sum of the investors' liquidation preferences?
Carveouts are one approach. Some quick googling found this very readable explanation with pros/cons from a reputable source: https://www.dlapiper.com/en/us/insights/publications/2014/04...
This article primarily describes carveouts for management retention in a public company, but they can be used in private companies and are not restricted to management.
This is the only mechanism I have any familiarity with, I'm also very interested in hearing about others.
Re: How Startup Options and Ownership Work
#10The article goes over stock options; but it doesn't address an alternate form of equity; issuing early employees restricted stock awards (instead of options). From the receiver's point of view, Stock Options are a bad deal 99 times out of 100, let's review the cases in which owners of options get screwed: - Company gets acquired, new terms are put into place. - Company gets acquired, company isn't good fit. - Company…
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