How Startup Options and Ownership Work

Post by zaroth » Thu, Aug 25, 2016, 4:30 PM UTC

beachstartup wrote: post #24

techterrier wrote: post #16

Earlier quoted context omitted.

Do you have any examples of these products?

yeah, cash money. if a startup has VC's and lawyers sitting around dreaming up and codifying a complicated and rather arbitrary set of rules to protect their investment from the little people, there's enough cash floating around to pay the employees a fair salary, they just don't want to. options are fool's gold, plain and simple. you are either a founder, or a venture capitalist, or lawyer, or you should expect a ze…

Post by zaroth » Thu, Aug 25, 2016, 4:36 PM UTC

prostoalex wrote: post #31

zaroth wrote: post #25

Earlier quoted context omitted.

Almost all your points apply exactly equally to restricted stock as it does to options. In both cases you will have a vesting schedule, just in the case of restricted stock it's usually a grant of the shares with no exercise price. In both cases you want to file an 83(b) election so you are taxed based on the FMV of the company when you receive the unvested shares (when the shares are worthless) so that you will only…

> In both cases you want to file an 83(b) election so you are taxed based on the FMV of the company when you receive the unvested shares Can you do this, though? 83b election with ISOs makes sense because the tax event is employee writing a check to pre-exercise his shares, so a transaction occurs. For RSUs the transaction seems to occur at the time of the actual grant - there's no money changing hands, no transactio…

  Section 83(b) Election
  Shareholders of restricted stock are allowed to report the fair market value
  of their shares as ordinary income on the date that they are granted, instead
  of when they become vested, if they so desire. This election can greatly reduce
  the amount of taxes that are paid upon the plan, because the stock price at the
  time of grant is often much lower than at the time of vesting. Therefore, capital
  gains treatment begins at the time of grant and not at vesting. This type of election
  can be especially useful when longer periods of time exist between when shares are
  granted and when they vest (five years or more).

  Taxation of RSUs
  The taxation of RSUs is a bit simpler than for standard restricted stock plans.
  Because there is no actual stock issued at grant, no Section 83(b) election is
  permitted. This means that there is only one date in the life of the plan on which
  the value of the stock can be declared. The amount reported will equal the fair market
  value of the stock on the date of vesting, which is also the date of delivery in this
  case. Therefore, the value of the stock is reported as ordinary income in the year the
  stock becomes vested.

Post by zaroth » Thu, Aug 25, 2016, 4:38 PM UTC

sokoloff wrote: post #27

zaroth wrote: post #23

Earlier quoted context omitted.

Most restricted stock subject to vesting will require the recipient to file an 83(b) election. This takes the full current value of all shares at the current issue price as income up front. Since the shares are typically worthless at that point, the tax bill is zero. The alternative is disastrous for a fast growing company. Each month, each year, you are vesting new shares at an exponentially increasing valuation, an…

> Most restricted stock subject to vesting will require the recipient to file an 83(b) election No RSU grant "requires" an 83(b) election. Your second point is why RSU grants with normal vesting and delayed release is desirable.

Post by idlewords » Thu, Aug 25, 2016, 4:43 PM UTC

Post by morgante » Thu, Aug 25, 2016, 4:48 PM UTC

theflork wrote: post #19

gortok wrote: post #5

The 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…

Are there any companies you know that use RSU's or stock grants instead of options? I've been interviewing at some startups and they only seem to offer options with their byzantine rules. Can people negotiate offers from options to RSUs/grants?