How Startup Options and Ownership Work • Hacker News Board

Re: How Startup Options and Ownership Work

#41

Post by morgante » Thu, Aug 25, 2016, 4:54 PM UTC

zaroth wrote: post #25

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…

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 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 practice, there are huge differences between them. Generally stock is much friendlier to employees and signals a company/founder which actually values employee ownership.

I'm surprised by the number of companies which try to pull shady stuff like not sharing the exercise price for options that are part of an offer. Lots of people apparently think that employees should value options at a substantially higher value than investors do. I've seen cases where the gap between the 409a price and the last investment is only a few thousand dollars, while the company insists this somehow makes up for a substantially subpar salary.

Equity is a risk, yes, but the status quo is that the risk falls much more on the people least able to bear it. Investors get all sorts of protections, while employees only benefit in a very narrow set of outcomes.

Re: How Startup Options and Ownership Work

#42

Post by [deleted] » Thu, Aug 25, 2016, 4:57 PM UTC

zaroth wrote: post #34

prostoalex wrote: post #31

Earlier quoted context omitted.

> 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…

Great point! From http://www.investopedia.com/articles/tax/09/restricted-stock... 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…

[deleted]

Re: How Startup Options and Ownership Work

#43

Post by gumby » Thu, Aug 25, 2016, 4:57 PM UTC

zaroth wrote: post #28

gumby wrote: post #18

This article mentions '“sticker shock” (or reverse!) [up]on leaving their first startup.' Companies can easily ameliorate this, especially for early employees, by permitting early exercise. The 409a valuation rarely changes between financing events so if you get 5000 $.50 options you can pay $2500, file 83(b), and not have to pay any tax until (unless you sell). If you leave before your vesting period is up the compa…

I look at companies like Uber raising billions of dollars (with liquidation preference) and losing billions of dollars in net operating loss each year, and I can only hope for the employee's sake that they have a 409a valuation on the common stock of exactly $1. In reality they are probably handing out options with a strike price valuating the common shares at billions of dollars and those options are likely worse th…

Indeed, as I mentioned, this doesn't help much in later rounds, but then again in later rounds salaries increase as well.

But for the early folks (B round or before), why not give them the maximum opportunity?

Re: How Startup Options and Ownership Work

#44

Post by scurvy » Thu, Aug 25, 2016, 5:02 PM UTC

zaroth wrote: post #36

sokoloff wrote: post #27

Earlier quoted context omitted.

> 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.

I've personally written restricted stock grants which require 83(b) elections to be filed. My understanding is that is boilerplate in the Restricted Stock Purchase Agreement. Please note, Restricted Stock !== RSU, and RSUs are not eligible for 83(b) because they are just a promise of future shares, no stock is actually issued until the conditions are met. (see above)

If that's the case, do you require employees to pay for their shares at grant date? Otherwise it's a taxable event (not cap gains but real income) when they vest.

Or do you "sell" a portion of the shares back to the company to pay taxes for the employee, then the employee gets 45-50% the number of shares that are vested. This is what Microsoft did when I was there, but they were publicly traded and had a public market to "sell" into (though it went straight to company stock buyback plan). Private companies don't have that luxury and would have to pay real money to the IRS to foot employees' tax bills at various vesting dates.

Re: How Startup Options and Ownership Work

#45

Post by dsugarman » Thu, Aug 25, 2016, 5:07 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?

You need to pay taxes on your stock. With options you only pay when you exercise so you can wait until liquidity to make sure you can afford the taxes. If you are getting straight stock you need to pay taxes that year

Re: How Startup Options and Ownership Work

#46

Post by calvinbhai » Thu, Aug 25, 2016, 5:19 PM UTC

patio11 wrote: post #35

calvinbhai wrote: post #13

I am curious to know when is the best time to ask all the questions about the stock options. Before signing the offer letter / getting started or after? Before may be a bad deal for startups, especially the ones that are keeping everything all the equity details under wraps. After is a bad deal for the employee who makes the move, and could be a major bait and switch

If you don't know (minimally) the fully diluted count of shares in the company, your option grant is as specific is saying that your salary will be denominated in dollars and you'll be given more detail about it sometime after joining the company, pinky-swear. A company which won't provide enough information to value an option grant contemporaneous with the written offer is being either abusive or stupid. There exist…

Thanks! My first two startup jobs, were purely based on the number of options. Fortunately, my current one gave me enough insight about it before, and much more in depth after. There's so much to know about how options work, most people dont realize when moving to a startup job for the first time!

Re: How Startup Options and Ownership Work

#47

Post by birken » Thu, Aug 25, 2016, 5:24 PM UTC

calvinbhai wrote: post #13

I am curious to know when is the best time to ask all the questions about the stock options. Before signing the offer letter / getting started or after? Before may be a bad deal for startups, especially the ones that are keeping everything all the equity details under wraps. After is a bad deal for the employee who makes the move, and could be a major bait and switch

Certainly before signing the offer letter. I created a website, Friendly Options [1], to act as a helpful ally is trying to extract this information from employers. It asks for a bunch of required information (# of total shares, strike price, share expiration, etc) and then breaks down your option grant in terms and scenarios that are easy to understand. If an employer isn't forthcoming about something you can just say "Look, this website is asking for it and that is why I need it".

Just because a company isn't forthcoming about all the stock option information doesn't mean that startup is unilaterally bad, in some cases the founders are just naive and don't really understand the complexities of your stock options vs their founder stock. However, if you ask the employer for the necessary information to fill out the website and they won't give it to you, then you essentially have no way to value the stock options and the only rational thing to do is value them at $0.

Many people just value stock options at $0 anyways and I don't agree with that. Stock options can be valuable (for example I've made much more money from startup stock options than from salary). However, if you don't have the full information about the stock options you are receiving you can't understand the risk you are taking and the potential rewards you might get.

1: http://friendlyoptions.org/

Re: How Startup Options and Ownership Work

#48

Post by dang » Thu, Aug 25, 2016, 5:25 PM UTC

ditonal wrote: post #33

Said the fox to the hen.

Please don't post generically cynical comments to Hacker News. It degrades the discourse here, even if your underlying assumption is right.

If you're aware of an inaccuracy in the article, or an important fact (as opposed to swipe) that is left out, you could add value to the thread by mentioning it.

Re: How Startup Options and Ownership Work

#49

Post by st3v3r » Thu, Aug 25, 2016, 5:29 PM UTC

dsugarman wrote: post #45

theflork wrote: post #19

Earlier quoted context omitted.

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?

You need to pay taxes on your stock. With options you only pay when you exercise so you can wait until liquidity to make sure you can afford the taxes. If you are getting straight stock you need to pay taxes that year

But if you're getting straight stock, odds are the price is so low to where it shouldn't be much. At least, nowhere near the tax bill one would get if they tried to exercise options in a company that's taken off (but not gone public yet).

Re: How Startup Options and Ownership Work

#50

Post by st3v3r » Thu, Aug 25, 2016, 5:31 PM UTC

cloudjacker wrote: post #8

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…

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 f…

Well, if your goal is not to compensate employees, but to get all of the money, their way is the correct way.