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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

#321

Post by econner »

jonathankoren wrote: post #289
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…

You are not going to get a year's salary in ISOs. You're not. At typical ISO strike prices (i.e. prices on the range ones of dollars), that would be an a lot of options. A company is simply not going to do that. It's much more likely you'll get something like half your salary or even less in ISOs (of course vesting over 4 years). This doesn't matter if the company IPOs with a 10x multiple of the strike price, but the…

What makes you so sure? Say the company is valued at $300M when you join. $100,000 worth of ISOs is 0.03% which is not unreasonable if you're an engineer from say employee 5 to employee 50 or so. Now, the company becomes a unicorn valued at $3B which is 10x.

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

#322

Post by ryanSrich »

luckystartup wrote: post #120

This is all true. I moved to San Francisco to join a startup as an early employee. The biggest surprise was when I had to empty my savings (and borrow a lot of money) to exercise my stock options. I filed an 83b election so that I didn't have to pay any taxes immediately, but $20,000 was (and still is) a huge amount of money. I had no idea it was so expensive to join a startup. At least, if you want to avoid golden h…

I think your situation is astonishingly rare.

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

#323

Post by acedinlowball »

nugget wrote: post #307
adekok wrote: post #97

Earlier quoted context omitted.

I agree. I worked for one startup which got bought. The founders made money. All of the employees lost money. One of the founders reached out to me a few years later, asking me to join his new startup as employee #2. I said "yes", but only if I made 10% of what he made. The answer was "No". OK... maybe 1% of what he makes? "No". Thanks, but no thanks. If you admit that you're not going to share the benefits, I have n…

Just to play devil's advocate - as a founder, I've both made money and lost money. Some of my ventures were self-funded to failure and I had to write off hundreds of thousands of dollars. I repeatedly remind my family that my worst case is not a year of unemployment with zero income but rather a year of business failure with a painful amount of red ink. One or two experiences like that and you become very aware of th…

but you're extremely wealthy so youre not like normal people. you can afford to lose hundreds of thousands of dollars starting companies and its just a tax write-off for you. That amount of money would destory most peoples lives.

Never forget how privileged you are. you seem you have forgotten.

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

#324

Post by jMyles »

ska wrote: post #299
jMyles wrote: post #138

Earlier quoted context omitted.

Wow. That's terrible. My gains tax for 2017 just went up. :-) So, what if you work 100% for equity? Even then, you don't get to declare any part of that?

Declare as what? It's treated as income - you declare it, and you pay tax on it.

I meant declare as part of the cost basis.

IE, if you are paid $5000 / week and you can optionally take $1000 of that as options, and you do so, why doesn't that $1000 become part of your cost basis?

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

#325

Post by 01181008 »

luckystartup wrote: post #120

This is all true. I moved to San Francisco to join a startup as an early employee. The biggest surprise was when I had to empty my savings (and borrow a lot of money) to exercise my stock options. I filed an 83b election so that I didn't have to pay any taxes immediately, but $20,000 was (and still is) a huge amount of money. I had no idea it was so expensive to join a startup. At least, if you want to avoid golden h…

Sure, I can relate :). Have a few thoughts:

$20k to $5-10m is incredible. That implies 250-500x valuation growth (for example you joined at series A with $20m valuation and the company is worth $10b), which means you hit a unicorn within the unicorns!

Was the company QSBS-eligible when you exercised? There are huge potential tax savings there.

Your shares were NSOs, correct? There are weird potential issues with 83bs and vesting ISOs.

It's worth thinking through how to factor your paper money into your investment portfolio. You could model it as $0 and have an otherwise standard asset allocation (e.g. whatever WealthFront recommends for your risk profile). Alternately you could include it as a huge illiquid stake in a US tech company -- as if your portfolio was 80% in GOOG -- and mitigate your overexposure in the other 20%. Or something in between.

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

#326

Post by lukejduncan »

ryandrake wrote: post #88
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…

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 yo…

FWIW, at LinkedIn evergreen grants are fairly common but not guaranteed. That's prior to the MS acquisition though which has a reputation for being less generous with equity.

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

#327

Post by ryandrake »

Bartweiss wrote: post #298
msandford wrote: post #255

Earlier quoted context omitted.

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"

It's not just "aren't IPO-ing" - the rapid sale described is often banned today under agreements where shares can't be offloaded for a certain period after the IPO, so that the banks backing the offering can make their money.

That's pretty crappy. Another way to prevent anyone but the founders and investors from capturing any value from the IPO.

Instead of selling your shares right after the IPO, couldn't you trade options on those shares in a way that closely simulates selling the underlying equity, and stay within the agreement?

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

#328

Post by jasode »

curtis wrote: post #315
jasode wrote: post #226

Earlier quoted context omitted.

>I specifically asked if our options would be diluted in the next fundraising round I guess I don't understand what motivated you to ask about dilution and then believing a promise of no dilution since you're supposed to get diluted over time as the startup reaches maturity. Everybody is supposed to get diluted. If a founder promised me "no dilution", I'd have to conclude either... 1) he doesn't understand the mathem…

> ... and then believing a promise of no dilution ... He expected to get diluted. But he was also expected to be able to offset that dilution by being issued new options. Which would be a perfectly sensible thing for the company to do for a valued employee.

>offset that dilution

The typical mathematical mechanism that offsets dilution is the increasing price of the shares.

E.g. 16%(diluted) of $20 billion equals $3.2 billion whereas 50%(undiluted) of $0 equals $0. (I assume Larry Page loves the power of dilution.)

Basically, you own less percentage of a more valuable company.

>Which would be a perfectly sensible thing for the company to do for a valued employee.

But it would be nonsensical if the employee's diluted ownership is worth more. They are supposed to be worth more after a dilution because that means another new investor valued the company at a higher amount and bought a piece of the company. That piece of equity to sell comes out of the founders' share, the investors' share, and employees' share. It comes from everybody's share. Don't get mislead by dilution -- it's the total value of shares that matters.

Protecting an employee's fixed ownership percentage might come into play if there was a down round where the company was valued less than the previous round. The founder might then do something extraordinary such as dip into some of his own shares and give them to a valued employee to make up for the loss on share price. That would be an unusual remedy that's done on an adhoc basis. It's not something that's typically spelled out during hiring negotiations so I wouldn't think that scenario would have been the context of OP's question.

Many people incorrectly think of "dilution" as a synonym for "bad". If you work from that flawed premise, you end up asking financially naive questions and become susceptible to unrealistic answers from crooked/incompetent founders. In the spirit of the thread's title, learn to understand that dilution is normal and a good thing.

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

#329

Post by dpark »

mattkrause wrote: post #164
dpark wrote: post #89

Earlier quoted context omitted.

The tax system was a mess before Intuit existed. I don't see a way to lay the blame at their feet.

Others may messed it up, but Intuit lobbies to keep things that way. Here's their lobbyist's disclosure form. It says "Oppose IRS government tax preparation" right there in Box 16. https://soprweb.senate.gov/index.cfm?event=getFilingDetails&... Their SEC disclosure says essentially the same thing. Grab it from here: http://investors.intuit.com/financial-information/annual-rep... Specifically, on page 10 of the 2016 v…

The lack of auto filing is not the core issue with our tax code. The ridiculous complexity is. I want auto filing but the tax code could be drastically simplified without the government directly competing with TurboTax.

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

#330

Post by roadnottaken »

rosser wrote: post #291

Apparently, "forward exercise" (also called an 83(b) election) isn't something The Fine Article's author has ever heard of. Nearly every one of the tax consequences this article bemoans could have been avoided, with just that one move. Yes, it means you need to have the cash on hand, but honestly, taking out a bank loan to forward exercise your option grant would probably be orders of magnitude cheaper than wrestling…

I don't think you can do an 83b for options from a private company, which is what the article is about.
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