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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

#71

Post by boulos »

Kiro wrote: post #53

I thought I could exercise my options 5 years after sign date, regardless of liquidation. Have I misunderstood or do I have some special deal?

The discussion here is about what happens when you quit. If you didn't exercise your options early, then you quit, the usual term says you have 90 days after you've quit. Pinterest and others have recently been highlighted for making much longer arrangements (years after quitting). If yours says the repurchase right doesn't kick in until 5 years after your employment is terminated, that's unusual and good for you!

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

#72

Post by inmygarage »

mavelikara wrote: post #29

> 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 act…

IANAL, but I do not believe you can file an 83(b) election for options. You can only file an 83(b) for NSOs or restricted stock. I am not sure if, post-exercise, the options become "owned options" or "restricted stock" and how the IRS views the difference between the two.

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

#73

Post by dj-wonk »

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…

I'd highly recommend checking out alternatives. The one that impressed me (for a particular situation) the most recently is Clubhouse. Compare based on your needs. Enterprise needs with established products are not the same as a startup, as you know or will soon.

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

#74

Post by zzalpha »

emilecantin wrote: post #26
zzalpha wrote: post #12

Earlier quoted context omitted.

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?

This is actually a pretty good summary:

http://www.taxplanningguide.ca/tax-planning-guide/section-1-...

Not, the 50% income deduction also applies to non-CCPC shares if the circumstances are right, which brings the income tax down to approximately capital gains... which at least softens the blow a bit.

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

#75

Post by ng12 »

lukejduncan wrote: post #46

There's a lot of advice to value your options at $0. I'm curious how people do the math when considering moving from a big company with RSUs that are liquid at vest to a startup (doesn't have to be a unicorn). Big company RSUs can be a big part of your annual total compensation. Do thinking about a "fair market salary" do folks consider that their base + risk adjusted RSUs? Seems like the best advice I've seen here t…

It's hard to negotiate up base comp. The whole reason startups pay equity is because they are desperate to not pay you in cash.

I think the real advice is don't join a startup (even a unicorn) for the money.

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

#76

Post by zzalpha »

uiri wrote: post #32
zzalpha wrote: post #12

Earlier quoted context omitted.

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...

Just to clarify for those who may be less familiar with Canadian tax rules: Canadian-controlled private corporation is exactly what it sounds like and has special tax rules (including lower tax rates) in Canada. I interpret the parent as referring to options in a corporation that is not a CCPC rather than options in a private corporation controlled by non-Canadians.

Correct. Options exercised in a CCPC don't result in a tax hit until the shares are liquidated.

Options exercised in a non-CCPC are subject to income tax on the difference between strike price and FMV of the shares at the time of exercise.

Fun!

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

#78

Post by rrhyne »

Really surprised how few people know about this legislation to fix the tax laws that cause one of the biggest issues with options.

https://www.gop.gov/better-way-startups/

It made it through the house and was approved by senate finance committee but is now stuck in a bill about retirement savings legislation.

Even finding information about the bill on the web or twitter is incredibly difficult. Please tweet, blog, etc and call your senators to support!

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

#79

Post by JonFish85 »

jaymzcampbell wrote: post #44
econner wrote: post #24

Earlier quoted context omitted.

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…

For me personally, if I was in that position I would stick it out for however long it takes. I cannot imagine having enough liquid assets to be happy to risk $100k like that. I am also of the opinion that even if I did amass such value in equity that there's a high chance I'm going to get screwed on whatever the book value of it today is tomorrow when I actually cash out. If it's so bad that I need to run not walk ou…

>> I cannot imagine having enough liquid assets to be happy to risk $100k like that

$100k isn't much money. If you've taken stock in lieu of $15-$20k/yr salary, $100k is pretty easy to make up (especially considering that many bigger, established companies also pay bonuses and have a better structure for vacation and such).

>> anything but the Uber or AirBnBs of this world Personally those are ones I'd be really, really scared of having stock in. They've boxed themselves into a corner: they have precisely one positive exit scenario: IPO. At their current valuations (2x and more of their competition), there's no reasonable path to acquisition. And if they continue to take investor money, those late investors are taking care to protect themselves (whether it's multipliers, last-in/first-out, etc). Employees are absolutely last in line to get the scraps unless things go crazy.

After IPO, there's the lockup period, during which there are earnings results (I believe 2?). If those don't go really well, a downturn in stock price can wipe out employee shares pretty quickly. If I'm an employee of either of those two companies, I'm a little nervous.

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

#80

Post by dantillberg »

rcurry wrote: post #34

"Worse yet, by exercising options you owe tax immediately on money that you never made." For NQSO this is true, for ISO this is false. The exercise of an ISO grant is not treated as ordinary income.

This is also what I found when I researched this a couple years ago. I'm a little concerned that TFA and most of the comments here seem to have it the other way around ("do I need to go file an amended tax return?"). But indeed, according to [0], "The tax benefit is that on exercise the individual does not have to pay ordinary income tax (nor employment taxes) on the difference between the exercise price and the fair market value of the shares issued (however, the holder may have to pay U.S. alternative minimum tax instead)."

[0]: https://en.wikipedia.org/wiki/Incentive_stock_option

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