81–89 of 89 posts
Since investing in stocks is so troublesome, no way to beat the market, why even bother to learn about it? And when it happen, rarely to have the chance to get equity, I think its normal.
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"I was an early engineer at Zenefits and found myself holding stock options seminars to explain this stuff to the rest of the engineers." This is a tricky position to be in, considering that in this sort of situation, you're generally explaining to people a small subset of the ways that they can get screwed. As much as it might seem nice to see people spending lots of time trying to figure out what their stock option…
The simplest heuristic to use is to assume the company exits at its latest valuation and do the calculations of what your options would be worth in that case. Then, understand when your company could (at soonest) go public, given that growth rates will slow down at a rate around what comparable companies exhibit. Obviously it's still a crapshoot, but this will give you a value for E(x) and timeframe.
Sure, but even in this case, you have no idea what the provisions of that round are, most likely. The investors may have asked for better returns (money-back + participation), there may be lines of credit that have to be paid back first, there may be loans that are paid off the top. My point is that most non-executive employees can't get enough information to make an accurate assumption. It's possible, maybe even likely, that if you exit at your latest valuation, your stock is worth $0 of actual money when on-paper, it was worth something significant.
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The only rational reason to work as an employee of a startup is for better job titles, working conditions, and professional development (from tougher challenges). Getting paid in lottery tickets is not sound investment strategy. You may be a better informed investor if you pick the locks on the filing cabinets in the C-level offices after the bosses go home, and bug all the conference rooms, but it is unlikely that w…
> Getting paid in lottery tickets is _not_ sound investment strategy. Anecdotally, I know someone personally who was an early employee at multiple startups at all IPO'd. Some of those IPOs happened years after he had already left. He's now a millionaire many times over because he had the acumen to pick winners, and that's specifically what he was looking for when he made his choice on where to work. This is obviously…
And also unethical, in my opinion. If startups treated their investors like investors, and their employees like employees, they would be able to hire people without needing to look at risk tolerance as a hiring qualification. Perhaps coincidentally, young, single people have a much higher risk tolerance than older people with families. If avoiding the appearance of age discrimination is at all important
They would even fare better if they refrained from treating employee-investors as a lower class of investor, that can be diluted to oblivion while the higher classes of investor still get paid.
Your anecdotal acquaintance sounds like an investor first, who just happened to be able to get hired as an employee. If you job hop while collecting discount equity opportunities, and leave before the success of the company is ultimately determined, how much of that value comes from the work you do, rather than your evaluation of the company and your co-workers? I presume that if the initial evaluation was off, he'd scarper for greener pastures in the middle of the night without waiting for anything to vest?
You can't do that in most of the US. Away from the west coast and the Boston-to-DC corridor, there may only be one or two startups in town that need tech employees, if any. If you're in a college town, there may be few dozen, built around somebody's thesis work. If you don't like the local job scene, you have to move your entire household somewhere else. The startups follow the expectations of the investors, and the investors are looking at the coastal unicorns. I just get sick of all the cargo-culting of SV startup culture, y'know? It only works there because it's there, and I'm not even sure that "works" is the right word to use.
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AIUI, RSUs are treated as normal W-2 income when they vest.
Right. Your cost basis is the price at vesting, so it's the same as if you bought the stock at market with cash for the same price.
Earlier quoted context omitted.
The simplest heuristic to use is to assume the company exits at its latest valuation and do the calculations of what your options would be worth in that case. Then, understand when your company could (at soonest) go public, given that growth rates will slow down at a rate around what comparable companies exhibit. Obviously it's still a crapshoot, but this will give you a value for E(x) and timeframe.
> assume the company exits at its latest valuation and do the calculations of what your options would be worth in that case. Sure, but even in this case, you have no idea what the provisions of that round are, most likely. The investors may have asked for better returns (money-back + participation), there may be lines of credit that have to be paid back first, there may be loans that are paid off the top. My point is…
No, this is not just a problem you're having. I was an early engineer at Zenefits and found myself holding stock options seminars to explain this stuff to the rest of the engineers. I built optionvalue.io as a calculator to help people answer some basic questions about what their stock is worth, and I'm building it out more to answer questions (eg, tax implications and exercise windows). I've talked to grellas and so…
Just checked your option value calculator. I understand you're still building it out but wanted to say nice work so far! Something like this that's easy and clear could be really useful. Like some of the "estimate tax refund" calculators online, while details of the US tax code can be information overload, going through guided steps on an estimate calculator a person can learn a ton of key info. Cheers and GL.
No, this is not just a problem you're having. I was an early engineer at Zenefits and found myself holding stock options seminars to explain this stuff to the rest of the engineers. I built optionvalue.io as a calculator to help people answer some basic questions about what their stock is worth, and I'm building it out more to answer questions (eg, tax implications and exercise windows). I've talked to grellas and so…
That's a really nice tool, well thought-out, and the calculations it does are spot on. However, I think it's based on one pretty big assumption: that the shares that investors buy are the same as the shares that you would get through your ISOs. They typically are not the same, with the investors getting preferred shares that are superior to your common shares. Furthermore, terms like liquidation preferences and "part…
The reason why it's a reasonable assumption is that in any material outcome, common share preferences converge to preferred share preferences.
Yes, once in a while you have an exit at 0.3x to 0.8x latest round where the investors are made whole and common share holders take an excessive haircut or are wiped out entirely. Good Technologies is an example here.
But looking at VC returns, almost all come from ~5x+ exits: "home runs". In fact, most VCs will block acquisitions at less than 2x latest round valuation except in case of corporate distress.
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Right. Your cost basis is the price at vesting, so it's the same as if you bought the stock at market with cash for the same price.
so is the capital gains tax only on the profit from the stock? wouldnt it be better just to sell instantly and not have so much of your money tied up into one asset anyway? Sorry if these are basic questions
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That's a really nice tool, well thought-out, and the calculations it does are spot on. However, I think it's based on one pretty big assumption: that the shares that investors buy are the same as the shares that you would get through your ISOs. They typically are not the same, with the investors getting preferred shares that are superior to your common shares. Furthermore, terms like liquidation preferences and "part…
That is a pretty big assumption, and I would like to highlight it more. The reason why it's a reasonable assumption is that in any material outcome, common share preferences converge to preferred share preferences. Yes, once in a while you have an exit at 0.3x to 0.8x latest round where the investors are made whole and common share holders take an excessive haircut or are wiped out entirely. Good Technologies is an e…