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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

#171

Post by jasode »

Osiris wrote: post #91
adhambadr wrote: post #52

It has always baffled me the way founders treat employees and investors so vastly asymmetric. Ive been involved in rounds close enough to see how just the "hint" of a potential investment and all the numbers, financials, cap tables are sent in one big email to their analyst, while some early employees (who controversially have worked just as hard as the founders) have no clue who owns what and whats going on. I get i…

I've noticed the same thing. Early employees are the ones responsible for building the product, without whom there would be nothing to sell, and yet they get stiffed when more money is raised and shares are diluted. When I joined a startup I was promised that more options would be issued and we wouldn't get diluted from future rounds, but that never happened. As employee #22 I received options that equaled 0.05% of o…

>I was promised that more options would be issued and we wouldn't get diluted from future rounds,

I understand you're only relating your previous misunderstanding but to others reading this, they need to realize that it's unrealistic for employees not to be diluted.

The founders' ownership will get diluted. The investors also get diluted. Therefore, employees are not special in this regard. Getting diluted is supposed to be a Wonderful Event because it means the smaller ownership percentage is worth more.

E.g. Larry Page's ownership of Google Inc got diluted from 50% in 1998 down to 16% in 2004. That smaller 16% was worth ~$3 billion around the time of the IPO.[1] If Larry insisted on "no dilution", no VC would invest money to help the search engine grow and therefore, he would own 50% of a worthless company.

In other words, you can't look at dilution in isolation; it has be combined with the (hopefully increasing) value of the shares.

[1] http://www.nbcnews.com/id/5033780/ns/business-stocks_and_eco...

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

#172

Post by imsofuture »

ronald_raygun wrote: post #146
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…

So I never understood - it seems like it would cost you 200k to buy something worth a million. Arent there people/institutions out there that would cover the 200k cost in exchange for maybe 300k worth of stock?

Yes, it's my understanding the company will sometimes offer ways to finance the options purchase such as cashless exercise, or promissory note. Alternatively you can taking out a loan (anything from a general loan, to a specialize 'options exercise loan'). Cribbed this answer from the longer form one here: https://www.quora.com/How-am-I-supposed-to-afford-my-stock-o...

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

#173

Post by sbierwagen »

delinka wrote: post #115
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…

"Let's say you're granted about a year's salary in shares..." Please use correct terminology. You're given options to purchase shares, or you're given shares outright. The former is what most people are accustomed to: options to purchase shares at a discounted price. The latter, know as a "stock grant," does not require the employee to purchase the shares - they've been granted to the employee. Both of these things t…

Also note that RSUs and options are taxed differently. When you're issued a block of RSUs, you almost always do a section 83(b) election, declaring the RSUs as ordinary income. When you sell them years later, the difference in value is then taxed at the lower capital gains rate, rather than the income tax rate.

However, this means you take the tax hit when you receive RSUs, unlike options, where you're taxed when you exercise them. This can be good or bad, depending on the value of the shares, the vesting schedule, etc.

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

#175

Post by rwmj »

hedora wrote: post #137
rwmj wrote: post #56

Earlier quoted context omitted.

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…

Wow. Did they implode while the employees gave them the finger as they walked, or did it take a while? (This matters a lot to the remaining shareholders, since there is usually a post-IPO lockup to protect new investors). Seriously, I can't figure out why this doesn't immediately escalate into noisy public events that tank the stock before the founders cash out (e.g., strike / unionization).

Probably because we were all starry-eyed 20-somethings?

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

#176

Post by rwmj »

Spoom wrote: post #111
rwmj wrote: post #56

Earlier quoted context omitted.

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…

That sounds like it wasn't a contract in the first place. Doesn't it have to in some way bind both parties to be considered a contract? I would almost think that a lawyer would be able to convince a judge that that "contract" was written so adversely that the "arbitrary change" clause should be struck, since the rest of the contract is essentially illusory if it remained.

I think I left when I was 25 or 26, and I was in no position financially or otherwise to start legal action. That was 20 years ago and you live and learn.

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

#177

Post by mikeflynn »

"The correct amount to value your options at is $0. Think of them more as a lottery ticket. If they pay off, great, but your employment deal should be good enough that you'd still join even if they weren't in your contract."

Totally agree with this and I think it's the core of the whole piece. I tell everyone who asks about options the same thing before getting in to the details.

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

#178

Post by cookiecaper »

maxxxxx wrote: post #118
adhambadr wrote: post #52

It has always baffled me the way founders treat employees and investors so vastly asymmetric. Ive been involved in rounds close enough to see how just the "hint" of a potential investment and all the numbers, financials, cap tables are sent in one big email to their analyst, while some early employees (who controversially have worked just as hard as the founders) have no clue who owns what and whats going on. I get i…

When I joined a startup in 2000 I tried to be prudent and get the relevant financial information. It was virtually impossible. Even after exercising a few shares they wouldn't do it. I probably could have sued them but that would have cost a lot of money. When they raised more money they would also not tell us anything about the terms and the resulting dilution. You just have to hope for the best and if it doesn't wo…

Yeah. There are a lot of naive people out there, and in particular, "young" is virtually synonymous with "naive" (through no fault of the young people directly, they simply haven't had the experiences yet).

Like the other lies the moneyed interests tell, the belief that it takes a fresh young generation to build good products and that's why the oldest guy in a random SV startup is 26 is pure propaganda that they're hoping you won't see through. People take this bait and go out and work for a free room in an apartment shared by 6 other "founders" and a laughably small basic living stipend that doesn't even equate to minimum wage.

Maybe a few hundred of these people have actually ended up getting rich? And they're "founders". How many early startup employees are doing well right now anyway? How much have Dropbox's first 50 gotten, for example, and how does that contract with dhouston's take-home? The early employee race is really baseless.

It's a fool's game, and people realize that after a couple of years, and then go work at a real company, where they can at least collect a market salary and where prudence and experience aren't plainly mocked and discarded [because these attributes threaten the people at the top].

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

#179

Post by rpedela »

rrhyne wrote: post #78

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, et…

I think that will solve a lot of the headache around stock options. Exercising options could still be cost prohibitive depending on price and quantity but at least there wouldn't be any tax burden until a liquidation event. There would still be issues around percentage and dilution but that isn't something the government can or should solve in my opinion.

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

#180

Post by rgbrgb »

djb_hackernews wrote: post #144
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…

The whole premise of a startup in any stage hiring a technical employee and granting them $100k worth of stock options will never happen. Typically you are granted X number of options. You are never told what the outstanding # of shares are and typically the shares themselves are valued in pennies. The idea is you think to yourself "well, it's 10k shares worth about $5k at the current valuation, but if they IPO and i…

> The whole premise of a startup in any stage hiring a technical employee and granting them $100k worth of stock options will never happen.

That's a false assumption. If they raised $1M seed at a $6M cap, that's 1.4-1.7%. I just pulled up AngelList and there are a number of seed companies offering that along with a decent salary. Taking the $6M to $60M is the risky piece and that's going to be hard, but opportunities to try are definitely available.

> You are never told what the outstanding # of shares are and typically the stock are valued in pennies.

If the CEO is unwilling to tell you when you ask, walk away.

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