What's the better option to motivate employees then? Profit-sharing rather than equity?
What I Wish I'd Known About Equity Before Joining a Unicorn
81–90 of 586 posts
Re: What I Wish I'd Known About Equity Before Joining a Unicorn
#82Really 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, et…
What's the name of the bill it's attached to right now?
Re: What I Wish I'd Known About Equity Before Joining a Unicorn
#83It'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 wh…
RSUs for early employees makes a lot of sense. The problem is that by granting RSUs, you're effectively forcing the employee to accept taxable property as it vests. For folks that want to early exercise anyway, that's fine (more efficient than paying the company for the options and dealing with the AMT stuff!).
But as you get even a little bit down the line, and your company valuation goes up, that's real liability for the employee. Said another way, not everyone early exercises their options, so some folks would prefer not to definitely owe taxes.
A lot of these later stage companies (like say Dropbox, and famously Facebook pre-IPO), start blending towards RSUs for exactly this reason though. Shares are nicer than options, but you need to be cognizant of the tax implications (I believe, but haven't experienced it, that even Dropbox does RSU withholding, so employees aren't left figuring out how to pay the IRS thousands of dollars for their illiquid shares).
Disclaimer: I'm not a tax professional, lawyer, accountant, or any of that (like you, I just wish at least early employees would get RSUs).
Re: What I Wish I'd Known About Equity Before Joining a Unicorn
#84Really 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, et…
Wow, did not know about that. What do you think the chances are it gets passed in the forseeable future?
Re: What I Wish I'd Known About Equity Before Joining a Unicorn
#85> 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.
Some companies allow you to "early exercise" your options before they vest. If you do that, you'll certainly want to file an 83(b) election for that exercise, when the spread between strike price and fair market value (FMV) is $0. If you don't file the 83(b) and the FMV goes up, each future vesting period will be subject to taxation.
Re: What I Wish I'd Known About Equity Before Joining a Unicorn
#86As 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…
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Re: What I Wish I'd Known About Equity Before Joining a Unicorn
#87I was so naive when I joined my first startup. When we were purchased, it came to light that the main guy never got around to signing my stock option agreement. He is a fucking mensch and signed it after the fact. Character buys a unique, abiding respect.
If it was not approved by the board at the correct time, that could be pretty illegal...
Re: What I Wish I'd Known About Equity Before Joining a Unicorn
#88There'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…
Multiply your RSU quantity by the company's current stock price and consider them part of your salary when comparing. If your company's stock is not very volatile, they're pretty much equivalent to cash, since you can (and some would argue you should) sell them the day they vest, converting them to cash.
Don't forget RSUs usually fully vest (stop coming in) after a few years, so if you're looking at an offer where you get 25% of your salary in RSUs that fully vest in 4 years, then keep in mind you're looking at a 25% pay cut after 4 years. I'm told some companies issue "evergreen" equity to counteract that problem, but I've never seen it in practice.
Re: What I Wish I'd Known About Equity Before Joining a Unicorn
#89Earlier quoted context omitted.
Most people in the UK don't even need to do tax returns.
I lived and worked in the UK for decades and never did my own tax return. When I moved to the US, the UK taxman spotted this, calculated that I had overpaid my taxes for that year and sent me a refund automatically. I guess the reason why it's not done this way in the US is a combination of the general mistrust of government, and the lobbying from companies like Intuit to keep the tax system as complex as it is now.
The tax system was a mess before Intuit existed. I don't see a way to lay the blame at their feet.
Re: What I Wish I'd Known About Equity Before Joining a Unicorn
#90Earlier quoted context omitted.
If you ever wanted confirmation of this, suggest to your company that instead of "unlimited vacation", which is really vague and hard to understand, the company give 8 weeks vacation that doesn't accrue or roll over year to year.
Interestingly, that's not legal in California. Vacation is a form of earned income, and must accrue and be paid out at separation. (You can cap accruals, but vacation accrued must be paid, and can't expire.)
There's a legal workaround to that, though: reduce the next year's vacation allotment by the amount of unused vacation the previous year. Raytheon uses this trick to implement their use-it-or-lose-it PTO policy.