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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

#101

Post by jaymzcampbell »

JonFish85 wrote: post #79
jaymzcampbell wrote: post #44

Earlier quoted context omitted.

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, rea…

> $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).

I'm not sure I follow. If I agree to be underpaid by $20k a year say then I'm not sure how I'd then on reduced salary save up $100k after tax and to the extent I wouldn't "miss it" in exercising the options. If a company is paying bonuses etc I'd rather get the market rate salary to begin with and ignore the stock. I may be heavily misunderstanding your first sentence though :)

The lockup period post IPO is an excellent point - and probably further fuels my cynicism around low percentage stock options as anything but a gamble.

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

#102

Post by [deleted] »

dasil003 wrote: post #70
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.

But it is for AMT, so your statement by itself is dangerously incomplete.

[deleted]

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

#103

Post by stanfordkid »

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 would be true ... but only because people don't understand how to leverage and negotiate using their power. Engineers have historically been unable to organize large movements and work together. The size of most of these unicorns is still under 2000 people, with less than 4-500 engineers. This means that if you really want to you can "lead a revolt"

Think about it -- any engineer at these companies can easily leave... but imagine if half the engineers left. The company would go down in flames. People need to work together to have companies pass policies that allow them to have longer periods to exercise.

BTW anyone that understands corporate law needs to understand that the fact that you "must" exercise your options by exorbitant amounts is simply a (very dirty) retention tactic. The company can choose not to buy back your unexercised options at par-value for as long as it wants. The fact that it is "policy" to buy un-exercised options is complete bullshit.

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

#104

Post by iaw »

vonmoltke wrote: post #90
secabeen wrote: post #55

Earlier quoted context omitted.

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.

Do you think it would survive a legal challenge?

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

#105

Post by BrandonM »

roadnottaken wrote: post #93
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.

Yes, but for ISO you owe AMT. It amounts to ~28% federal tax rather than ~39%. But it's still a big number.

This is correct. To put some concrete numbers on it, I'm in my 6th year at a startup. In 2016, I spent $6,400 to exercise ~50,000 options that had a total FMV of ~$60,000. This is going to add over $7,000 to my 2016 taxes due to AMT.

If you're single and your income is over $115K, or if you're married and your total income is over $150K, there will be tax implications for exercising your options, unless you exercise them when the spread is $0.

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

#106

Post by throwaay1000111 »

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?

Taxes on income (share value - option strike price) become owing on option exercise.

If the company is not a CCPC and the value of the options at grant-time were less than the share value, you may qualify for a 50% deduction (bringing it in line with capital gains), subject to some conditions (arms-length dealing, etc).

If the company is a CCPC, you can defer the taxes until the shares are sold. If sold within 2 years, you pay full income tax. If sold after 2 years of holding, a 50% deduction applies bringing it in line with capital gains. CCPC status of options are grandfathered in so if the company loses CCPC status, your options continue to qualify.

Keep in mind that going bankrupt/company sale are forced sales of your shares, which could hit you with a big tax bill and since that tax bill is income (not cap gains), the capital losses of the sale cannot be used to offset it!

CCPC employees should also look at the lifetime capital gains exemption (LCGE) of $750000 to reduce taxes on the capital gains following exercise, and the allowable business investment loss (ABIL) which can be used to halve the tax owing in the downside case. In theory, the 50% deductions mentioned above and the ABIL stack to reduce the tax owed to 0.

The problem with all of this stuff is that when you exercise, there is no way to know what deductions you will qualify for under various hypothetical scenarios.

It feels like tax laws just aren't set up to deal with the notion of illiquid shares and fairy tale valuations.

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

#107

Post by cmdrfred »

battlebot wrote: post #64
dandare wrote: post #57

> How many outstanding shares are there? (This will allow you to calculate your ownership in the company.) Is it not true that company can (and usually will) issue new shares and dilute your stake at every investment round? (I am just a layman like you)

I believe Facebook famously did that to some people?

It's a verb now. When it happens to you, you've been zuckerburged.

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

#108

Post by iaw »

rwmj wrote: post #56
TheLarch wrote: post #9

I 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.

At my first startup, the share option terms and conditions had a clause allowing the company to arbitrarily change any condition in the contract. Of course we signed it and didn't think much about it. At the IPO this clause was very predictably used to extend all the employees'[1] vesting schedule to many years after the IPO event. By that time the options were worthless because the company was acquired in a fire sal…

I helped an ex of mine work through the negotiations of an executive pay package. Everyone that's been around upper-management is fully aware of this and works clauses into their contracts to prevent it. It's such crap.

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

#109

Post by hedora »

ellisv wrote: post #25

I'm a bit surprised cashless exercising wasn't mentioned (although perhaps the author isn't aware of the option). Here is a link to a HN discussion on equity compensation from about a year ago: https://news.ycombinator.com/item?id=10880726

Cashless exercies aren't really an option pre-IPO.

This ends up creating a regressive tax on people that don't have cash laying around for early exercising.

People with more cash on hand can exercise before the stock goes up, so they pay much lower taxes, but they pay them earlier, and lose more if the company tanks.

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

#110

Post by iaw »

tarr11 wrote: post #87
TheLarch wrote: post #9

I 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...

I haven't seen many start-ups that didn't break the law in some way or another. Sometimes out of sheer ignorance and other times out of expedience. Hell, Airbnb and Uber are built on breaking the law.
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