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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

#251

Post by snewman »

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…

This is exactly what we do at my startup: our options are early-exercisable, we pay a bonus equal to the strike price, and we set up the 83(b) paperwork for you. (We don't gross up the bonus, so you will owe taxes on the strike price, but so far that hasn't been a problem for anyone; early-stage strike prices are manageable.) Are other companies doing this as well? It does seem like the sane approach.

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

#252

Post by econner »

finnh wrote: post #210
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…

There's a growing secondary market for illiquid shares of private companies; I would look into that before letting the options lapse. There a few market-making websites as well as VCs that specialize in this. You need to be pretty savvy to marshal the whole process and understand the contracts, though - it is not turnkey.

Most unicorns disallow this nowadays to prevent the headache Facebook had when IPOing (very explicit you cannot transfer shares without the companies consent clauses in contracts). Some do controlled tender offers which allow employees to sell some shares, but these happen at the behest of the company, not the employee.

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

#253

Post by fullshark »

altern8tif wrote: post #81

What's the better option to motivate employees then? Profit-sharing rather than equity?

This seems to remain the best way to motivate employees from the founders' eyes. Everyone loves the idea of striking it rich, especially young workers just out of college, even if it's unlikely to happen.

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

#254

Post by matthewmcg »

stanfordkid wrote: post #103
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 le…

"The company can choose not to buy back your unexercised options at par-value for as long as it wants."

That's usually not right for incentive options. Check your option agreement. Most will say that the stock option automatically expires or converts to a non-qualified option if not exercised within 90 days of termination without the company having to decide to do anything.

What you are describing is more commonly associated with restricted stock, where the employee "owns" the shares, subject to the company's right to buy them back at par in certain situations.

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

#255

Post by msandford »

logicallee wrote: post #182
pbkhrv wrote: post #136

Earlier quoted context omitted.

You missed the second part: "But that was in the days of IPOs, now the investors prefer to keep the rise in equity to themselves. So you chances of winning the lottery are much less."

I didn't miss the second part.

The second part was basically "but that was during a different time when such a thing was possible" and the not-too-subtle implication is that it's not possible anymore. You know, since startups aren't IPO-ing to nearly the degree that they used to. If at all.

Hence the "it worked for him then, but probably wouldn't work for anyone else, now"

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

#256

Post by teej »

BrandonM wrote: post #209
Osiris wrote: post #96

Earlier quoted context omitted.

And all startup employees are expected to know all these rules? Before I joined a startup I spent days researching all the rules about options and I still didn't quite understand all the nuance.

But wait, there's more... Let's say that you decide it's too risky to early exercise in year 1, but by year 3 things are looking pretty good and you early exercise all your options. Let's say your strike price is $0.20, and now the FMV is $0.75, and you're exercising all 10,000 of your shares, including 2,500 that haven't vested yet. When you exercise, you file an 83(b) so that you get taxed (AMT) on the full $5,500…

Err, are you sure you can't take a capital loss on the $1,031.25 spread?

Not that I would benefit personally. I am still burning through years of capital loss carryover from ZNGA.

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

#257

Post by bogomipz »

>"Private markets do exist that trade private stock and even help with the associated tax liabilities. However, it's important to consider that this sort of assistance will come at a very high cost, and you'll almost certainly lose a big chunk of your upside. Also, depending on the company you join, they may have restricted your ability to trade private shares without special approval from the board."

It is true that you might lose a big chunk of your upside by going to a secondary market but if the alternative is to leave the ISOs on the table it might not matter.

Also firms that provide a secondary market will give you a loan to purchase those shares if they line up a buyer for you so you don't have to come up with this money on the spot yourself. SharesPost does this.

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

#258

Post by [deleted] »

matthewmcg wrote: post #254
stanfordkid wrote: post #103

Earlier quoted context omitted.

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 le…

"The company can choose not to buy back your unexercised options at par-value for as long as it wants." That's usually not right for incentive options. Check your option agreement. Most will say that the stock option automatically expires or converts to a non-qualified option if not exercised within 90 days of termination without the company having to decide to do anything. What you are describing is more commonly as…

[deleted]

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

#259

Post by bsenftner »

adamnemecek wrote: post #92
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…

Because an angry investor can fuck you over more than an angry employee.

Any truly angry employee can fuck over a business far worse than an investor. Sure, the rare investor with industry swaying clout is dangerious, but low level employees can cripple any technology dependant company immediately with a few minutes effort.

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

#260

Post by rcurry »

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.

Well, you MAY owe AMT; it's not certain, and depends on your specific financial situation. Also if you pay AMT then you are eligible for an AMT tax credit which can offset the taxes you have to pay later on when you sell the shares.

I think the bottom line is that ISOs are far better than NQSOs in terms of your own tax liability.

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