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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

#391

Post by rrhyne »

Eridrus wrote: post #374
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…

[EDIT]: I misread the bill, ignore this comment :) So, the devil here is in the details: https://www.congress.gov/bill/114th-congress/house-bill/5719 The tax bill will come due when the employee leaves the company; so this doesn't really help a lot. Has a few caveats that make it inapplicable to early employees too. Interestingly, it seems like it applies to stock, not just options, which if it didn't come due when y…

> The tax bill will come due when the employee leaves the company; so this doesn't really help a lot.

I don't see where this is the case. In fact, it's against the spirit of the original proposal. Can you point to where you read this?

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

#392

Post by danielweber »

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.

Assume you are correct and it is not a contract.

That doesn't mean the employee gets stock options. The contract granted the stock options. With no contract, there's nothing.

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

#393

Post by rconti »

roadnottaken wrote: post #330
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.

Yes, you can. I did precisely this. I even had to take out a personal loan to cover some of the costs, as the value was just starting to ramp leading to the IPO.

In the end, I paid hundreds of dollars (or perhaps a thousand?) in interest, but it paid off handsomely as the spread between short term and long term capital gains is large enough to make it worthwhile.

But, of course, there's always risk.

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

#394

Post by btilly »

BatFastard wrote: post #43
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…

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.

The issue is not that investors prefer to keep the rise in equity to themselves.

The issue is that in response to Enron's collapse, Congress implemented The Sarbanes-Oxley Act. This makes IPOing massively more expensive since you have to go through a bureaucratic nightmare first. One established, the costs of continuing may be controlled. But coming into compliance is a headache that people want to avoid.

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

#395

Post by rosser »

roadnottaken wrote: post #330
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.

Yes and no.

> It is a common misconception, but a Section 83(b) election generally cannot be made with respect to the receipt of a private company stock option. You must exercise the option first and acquire the stock before you can make a Section 83(b) election, and you would only make a Section 83(b) election in that instance if you exercised the option and acquired unvested stock (if the stock acquired on exercise of the stock option was vested, there would be no reason to make a Section 83(b) election).

Source: http://www.startuplawblog.com/section-83b/

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

#396

Post by danielweber »

JonFish85 wrote: post #353
hedora wrote: post #95

Earlier quoted context omitted.

Hiring is the primary source of dilution at new companies. Stock packages have to come from somewhere. Also, equity rounds reduce your percentage ownership, but (usually) not the current value of the stock you hold. If a $100M company raises $100M, the number of outstanding shares doubles. However the company is now worth $200M (the cash in the bank counts towards valuation). Now, your 1% share is a 0.5% share, but i…

> Hiring is the primary source of dilution at new companies. Is that true? Generally don't companies set aside ~5% of the company for employees? Even the first 5 employees probably get a combined total of less than 10%, whereas the first investors probably get 10+%.

I agree with you. The dilution events happen because something unexpected happens, not because "we had to hire people."

If people are getting diluted from shares being issued to employees like you, you have already entered a death spiral.

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

#397

Post by rosser »

rconti wrote: post #393
roadnottaken wrote: post #330

Earlier quoted context omitted.

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

Yes, you can. I did precisely this. I even had to take out a personal loan to cover some of the costs, as the value was just starting to ramp leading to the IPO. In the end, I paid hundreds of dollars (or perhaps a thousand?) in interest, but it paid off handsomely as the spread between short term and long term capital gains is large enough to make it worthwhile. But, of course, there's always risk.

Exactly. Imagine you were talking with a very early-stage company (say, to be employee number It would be so profoundly painful, financially — and in so many different ways at once — to exercise at any other time but immediately upon hire (or at a minimum, in advance of any subsequent liquidity event), in that circumstance.

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

#399

Post by metaphorm »

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…

my experience exactly at the company I worked at for the last 3 years (I'm somewhere else now, and enjoying it much more so far).

Management at that company began to systematically harass, exclude, and demoralize early employees (I was #4) until most of us left. I still haven't got a straight answer, but my best guess is that fear of a down-round was taking over and the founders were eager to claw back some of the equity they had tied up in option grants to early employees, so they could try to protect themselves from the consequences of the impending down round.

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

#400

Post by colordrops »

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…

Does this bill help with RSUs?
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