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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

#361

Post by mattieuga »

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 -…

Why should a company offer a market rate salary and equity if the equity is valued at 0? Should companies just not offer equity in that case? Seems like a waste if it is not valued at all.

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

#362

Post by Pyxl101 »

hendzen wrote: post #344
QuercusMax wrote: post #305

Earlier quoted context omitted.

Care to give a citation there? I'm quite certain you are wrong; there's no reason your employer can't withhold X% of your RSU at vesting time for taxes. In practice all this "really" means is they don't give you the full amount and send the equivalent dollar amount to the IRS instead.

It seems like this would be a very costly alternative for a company since it would essentially be a commitment to buy back 30-40% of outstanding RSU's at the equivalent price (current 409A valuation?). Over time I'd imagine this would become a major drain on cash reserves. Google, Facebook, Netflix etc. can do this easily since they can just sell the RSU shares on the public market. It's the illiquidity of the shares…

Correct. "Withholding" is something that companies do when they're legally required to, such as withholding taxes from your salary. When you receive a grant of stock or options, the company is not as far as I'm aware obligated to withhold anything. It's the employee's obligation to pay whatever taxes they owe. I have never heard of a company doing this, and I'm not sure there is any tax provision for it like there is for withholding from salary.

The common practice of immediately selling whatever percent of shares is required to pay taxes on them is something that employees are choosing to do, supported by the trading firms that help implement vesting schedules and stock sales. Employees are allowed to keep all of their shares and pay tax on whatever next interval is required instead, if they wish. One can only follow this practice of selling shares immediately to cover tax if the company's shares are liquid, i.e., the company is a publicly-traded company with an IPO.

I suppose in theory one could receive stock in a private company, and sell shares on the secondary market to cover taxes, but with private companies you can't take it for granted that (i) you'll be allowed to do that at all, or that (ii) there will be a buyer for those shares at all, or at a price you're happy with. With a publicly traded company, it is taken for granted that there's always a buyer for the shares, and at a price that is commonly known and accepted.

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

#363

Post by askafriend »

damnfinecoffee wrote: post #311
maverick_iceman wrote: post #281

Earlier quoted context omitted.

As in entry level.

Where are you living where entry level software engineer salaries are north of 200k? I'm in the bay area and base salaries for software engineering with a bachelor's degree range from 90-115k from what I've seen (generally with some stock options and bonus potential added on top but I've never met anyone who's come even close to 200k starting out)

He's talking about total comp, not just base salary. If you're looking at total comp, there's many many late stage unicorns and large public companies that have comp packages north of $200k for entry level engineers straight out of college. I've seen comp packages for many of these companies.

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

#365

Post by ska »

jMyles wrote: post #324
ska wrote: post #299

Earlier quoted context omitted.

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?

Ah I see - that's not how it works currently, but I can see why one might wish it did.

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

#366

Post by netik »

kooshball wrote: post #349
sbierwagen wrote: post #173

Earlier quoted context omitted.

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…

The proper way to do this for a non public company is to settle the stock for RSU based on the vesting schedule AND an exit (IPO/acquisition). This way you don't technically own the stock and have to pay taxes until there's liquidity. I believe this is how a lot of the bigger unicorns are issuing RSUs now. http://avc.com/2010/11/employee-equity-restricted-stock-and-...

The problem is that RSUs are still a joke and can be taken from you easily. ISOs have way, way more power.

https://www.retina.net/tech/rsus-vs-options.html

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

#367

Post by user5994461 »

jaymzcampbell wrote: post #101
JonFish85 wrote: post #79

Earlier quoted context omitted.

>> 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…

You divide 100k by 3 to account for the risk, and by 4 again to account for the vesting schedule (usually 4 years).

The shares are worth at most 8k in salary, that is if they're somewhat liquid. (which they are definitely not for startup and far away IPO).

If you took a $20k drop in salary for that, you've been not only screwing yourself at this job but also for ALL your future jobs, because future companies will try to downplay you based on your current salary.

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

#368

Post by jzl »

stale2002 wrote: post #314
BatFastard wrote: post #43

Earlier quoted context omitted.

Don't take the risk. Treat is as a lottery ticket. A good friend joined a late startup company in 1999, and in 2000 he was worth 40 million, of which he managed to cash out 10 million before the stock crashed. 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.

There is an alternative. Vest and buy the shares as soon as possible. This way, your taxes stay low, and you don't actually pay that much for the shares. You aren't risking hundreds of thousands of dollars, only maybe 10s of thousands.

Not really if you join a unicorn, as this article was about. Unless if your grant is relatively very small, in which case you're not getting much benefit to joining the unicorn in the first place, at least in terms of possible stock upside. If you join a unicorn and your grant is anything less than $100k then you're getting a raw deal. (Again, at least in terms of stock upside, there may be other reasons to join.)

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

#369

Post by Balgair »

iamcasen wrote: post #280
johngalt wrote: post #236

The equity payday funnel looks bleak. 1. Will this company succeed? 2. Once it succeeds will my equity be valuable? 3. If my equity could be valuable, will it be diluted before I can get paid? 4. If not diluted will it ever be liquid? 5. If there is liquidity will I be able to participate? Or only founders/investors. 6. If employees are able to extract real dollars, will I be forced out, laid off, constructively dism…

Your funnel is so spot on it hurts. I made it all the way to number 6, and boy let me tell you, it was a shit show. People being strong armed left and right, people suddenly not showing up to work, and management offering a memo like "Larry has decided to pursue something different in his career."

Name and shame?

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

#370

Post by bcherny »

mikemac wrote: post #320
bcherny wrote: post #290

Earlier quoted context omitted.

What's the benefit of doing it this way, as opposed to selling some of their own shares from a previous round to the funding VC, or on the secondary market? Is it just a cleaner deal this way?

I don't think it's actually that common, and typically used with really hot companies. A few reasons: it makes the new investor more competitive to the founders if there are others vying for the investment, but it also prevents selling too early. If you have $5M in the bank, you'll be more likely to try to go for the home run rather than sell to facebook for $3B (which was rebuffed by the founders of snapchat).

Makes sense - it's sort of a psychological exploit to make the deal more enticing. Of course founders can always sell their shares on a secondary market, but it's much harder to turn down $5M cash.
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