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What I Wish I'd Known About Equity Before Joining a Unicorn

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Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#21

Post by bluejekyll »

fermigier wrote: post #10

Should have been titled "... in the USA" as tax rules are very different in other countries. For instance, in France, you only owe money to the taxperson when you sell your shares, for a profit. If you sell for a loss, this is tax-deducible.

This is true in the US as well. And until the 409a rule, it was also exactly how you state. After 409a, private companies are required to speculate at their current value, and this sets the difference between your strike price and that at which you purchased the stock. It's this difference which is taxable. The US was trying to fix something that didn't exactly have a problem, making sure people are being taxed on profits, I think this was misguided.

The unintended consequences are exactly what is spelled out in this article, people with less means cannot exercise stock b/c of two reasons, the cost and then the tax, actually raising the cost on illiquid assets.

This is broken, and causes the type of self imposed entrapment described in the article. If this is a big deal to you, contact you congresspeople and ask them to "fix" or so that the tax is only due on liquidation of the stock.

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#22

Post by k2xl »

It's really unfortunate that most startups appear to be set up with ISO shares. The company I am at now is an LLC and distributes RSUs, which meant when I joined I was able to file an 83/b form which minimizes my tax impact.

At my last company, I exercised options. I owe the IRS tens of thousands of dollars due to AMT this year (not that it was unexpected, as I did heavy research beforehand).

Can anyone shed light why companies aren't set up to distribute RSU's (and allow employees to fill out an 83/b form within 30 days of being granted?). Is it not preferrable to investors for some reason?

The worst part of the AMT and exercising ISO shares at a startup is that it is nearly impossible to make an informed decision on whether or not to exercise (and how many shares to exercise). You can't possibly know your tax liability until next tax season when all your tax forms come in.

Last year, I called maybe 5 different tax accountants for advice on how to estimate what my tax impact would be for exercising shares and got 5 different answers. This stuff is COMPLICATED.

Finally just got TurboTax and plugged in some guesses of my deductions, etc and got some type of estimate. Filed some 1040ES's last year to minimize the penalty and hopefully will get close.

Another sad fact is how few people at startups are even educated on the subject. While one can argue it is up to each employee to do their own research, I think it is in startups ethical interest to have their CFO team give an overview of the stock plan and what kinds of things employees may want to ask their accountants about.

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#23

Post by mikepurvis »

equalarrow wrote: post #8

Great post and I totally agree. I recently talked to my financial advisor about my current company and we went through all the numbers for various pricing scenarios (of a public offering) over the next 4-6 year, at various valuations. From his point of view, he encourages me to stay the course - quite the opposite from most of the tech friends I know (most usually don't stick around after a few years). On a side note…

JIRA is what you make of it. My comment is that it requires a ton of gardening to keep it useful. You probably need 1 person for every 5-10 devs who has JIRA-wrangling as a primary responsibility that eats a significant chunk of their time. Part of this is the nature of project management, but part of it is that JIRA's workflows for basic tasks like "close as duplicate" or "do this action on all issues linked to issue X" are terrible and require way too many clicks. In shops that don't properly allocate people to this task, it's extra debt that just piles up and becomes a mess, so I could definitely picture some of the hate being as a result of those experiences.

The author may also be using "JIRA" as a proxy for a heavily pre-planned waterfall culture with a big emphasis on time tracking, doing what you're told, fake-metrics success theatre, etc. (cf. https://hackernoon.com/12-signs-youre-working-in-a-feature-f...)

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#24

Post by econner »

jaymzcampbell wrote: post #5

As always the main rule you need to live by is value the equity at zero and you'll be (maybe) happy. Short of being a founder (and thus not really being offered equity) I have never treated these things as anything beyond a minor on paper "bonus". Given you'd be lucky to get anything more than 1% even as a first employee I find them next to worthless as early stage motivators. Which is how everyone seems to play it -…

This advice is often given but it's easier said than done. Let's say you work at a unicorn for 3 years and in that time it goes up 10x in VC fantasy land valuation. On paper you have a lot of money and the company reasonably might go public a couple years after you leave.

Let's say you're granted about a year's salary in shares when you first join so you've vested $100K for a round number. When you leave that equity is worth $1 million. Now, you have to come to the table with the $100K to exercise and probably another $200K to pay the tax man. If the company goes belly up, you lose $100K outright and are stuck with a $200K tax credit that you get back in $3K per year deductions for the rest of your life.

Or, you could have exercised the shares as you vested and paid a bit less in tax with the lower 409A valuation..but you're still maybe looking at a $100K total tax bill.

Do you take the risk or not? Or do you end up locked in for a few more years of handcuffs while waiting it out?

It'd be really hard for me at least to walk away from this situation with nothing..so then I have to value the equity as something. And if I want to treat it as 0 it'd be really tempting to wait a few years and see..which again means the equity is worth something to me.

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#26

Post by emilecantin »

zzalpha wrote: post #12
fermigier wrote: post #10

Should have been titled "... in the USA" as tax rules are very different in other countries. For instance, in France, you only owe money to the taxperson when you sell your shares, for a profit. If you sell for a loss, this is tax-deducible.

Doesn't apply to Canada, either. Well, unless the options are for shares in a non-Canadian controlled private corporation. Got bit by that little loophole in my late stage startup when facing options expiration...

Got any good sources on what exactly the rules are in Canada?

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#27

Post by JonFish85 »

tobltobs wrote: post #11

Imho without asking a lawyer, which should be an expert in this field, you will never be able to understand the value of the offered deal.

Just to expand on this more, there are some reasons why this is. The biggest one is that even if you have all cap-table information available at the time of your offer (which you almost certainly don't), you don't have to be told when things happen (bank loans, bridge loans from investors, terms of new investments, new employee hires, expansion of the employee pool of stock, more shares issued to officers, new stock classes and more).

And that is just as an employee; you can't possibly be on top of all of this information without being a C-level employee, and if you're constantly asking for updates on this, you're probably not doing your regular job. Even so, you may not be privileged to some information (investors getting more shares issued if target revenue numbers aren't hit, for instance). And you definitely don't get a say in any decisions that affect this (unless you're a C-level employee, again).

When you are leaving the company, there are so many ways you can get screwed. Regardless of the 90 day exercise window, unless the company is on the very precipice of IPO-ing, you're never going to find out the terms of new investments / bank loans / (see above). And honestly, the easiest segment of people to screw over are the former-employees. The company can issue new classes of shares to current employees that render former employees' stock worth effectively $0. The company has nothing to lose; current employees are happy because they get a bigger slice of the pie, investors are happy because they didn't have to give up anything; the only people upset are the people who aren't around anymore.

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#28

Post by arethuza »

Someone1234 wrote: post #20
fermigier wrote: post #10

Should have been titled "... in the USA" as tax rules are very different in other countries. For instance, in France, you only owe money to the taxperson when you sell your shares, for a profit. If you sell for a loss, this is tax-deducible.

The US really does have a lot of problems with their tax system to be honest. For a country whose citizens outwardly hate tax, you'd think they would have one of the best, most straightforward, and fair tax systems in the world. But instead you have one of the most convoluted, loopholey, broken systems in the world. Whereas in countries where taxes aren't as "hated" (Europe, Canada, etc) they don't pay a cent to file…

Most people in the UK don't even need to do tax returns.

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#29

Post by mavelikara »

> The correct amount to value your options at is $0.

Agreed, but ...

Try to negotiate a deal such that the employer gives you a one-time sign-on bonus which, after taxes, will pay for the early exercise of the offered equity, and get the employer to give you the paperwork for filing 83(b) election.

This values the equity at $0, but prevents drastic financial implications (at least for the initial grant) should it actually become worth any real money.

What does HN think about such a scheme?

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#30

Post by jMyles »

> Your options have a strike price and private companies generally have a 409A valuation to determine their fair market value.

Is this exactly accurate? My understanding was that you owe gains tax on the difference between the 409A and (strike price + wages traded for options).

In other words, if you take a $1000 / month cut for one year in exchange for options, you get to add $12,000 to your cost basis for the purpose of calculating gains taxes.

Is this incorrect?

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