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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

#441

Post by dahart »

tibbon wrote: post #166
mikemac wrote: post #154

Earlier quoted context omitted.

I really doubt any startup would let you see the cap table as a prospective employee, ahead of being hired full time. It's better to ask what percentage of the company your X amount of shares would be. Company A could offer 1,000 shares and Company B could offer 10,000 shares but you have no idea what amount of ownership that actually is for either of them.

I've always assumed an investor would want to see the cap table prior to investing (is this true?), but thought it odd that such is hidden from prospective employees. Both are investing, just in different ways.

Yes, investors ask for cap tables. Always, in my experience.

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

#442

Post by bbcbasic »

superqd wrote: post #412

This has caused me some level of sadness in the past. I worked for a startup (started 6mo after founding with only 20 people and stayed for 8 years to 200+ people and 50million in revenue). During a number of phases, I worked for months at a time giving up weekends, late nights, holidays and even vacation time to get product out the door and beat the competition. I racked up 50k options, mostly all for less than a do…

If you think about it it is quite odd to give free labour to a company because you have shares (or some derivative of shares) in that company AND you are working for them.

Because you may also have lots of shares in companies in an aggregate fund (e.g. in a a pension) but you aren't working for free for those companies.

However people do get caught up in the emotional 'but I own a bit of it', and I think companies exploit this.

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

#443

Post by dahart »

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 -…

Same goes for standard bonuses, even yearly ones. Pretend you're not getting one until after the money is in your bank account. Expecting them will lead to unhappiness, I've seen it happen to too many people. It's crazy how sad & upset some people can get over huge checks of "free" money, when they expected more than what they got. And of course it's dangerous to spend it before you get it. Bonus plans can and do change after the profits are made, bonus pools can and do dilute and/or shrink unexpectedly, people who didn't help can and do figure out ways to jump into the pot after it gets big, management can and does change their minds and decide to invest or allocate profits. I've watched all of these things happen, and the only way to enjoy it all is to negotiate your compensation as if bonuses don't exist, wait to think about bonus money until it's in hand, and then consider yourself lucky when extra money arrives.

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

#444

Post by mavelikara »

snewman wrote: post #251
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.

Thanks for validating that this scheme is not crazy!

I have a follow-up question though. Every time a new employee joins, you are essentially shelling out the cash equivalent of their equity's FMV. This way, the offered equity is twice as expensive for you - once as equity itself, but then again as the cash bonus. Has this caused problems for your cash position? Is it sustainable as Scalyr grows into higher valuations?

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

#445

Post by mavelikara »

rwmj wrote: post #56
TheLarch wrote: post #9

I was so naive when I joined my first startup. When we were purchased, it came to light that the main guy never got around to signing my stock option agreement. He is a fucking mensch and signed it after the fact. Character buys a unique, abiding respect.

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…

If possible, please name the company and founders involved.

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

#446

Post by acalderaro »

superqd wrote: post #412

This has caused me some level of sadness in the past. I worked for a startup (started 6mo after founding with only 20 people and stayed for 8 years to 200+ people and 50million in revenue). During a number of phases, I worked for months at a time giving up weekends, late nights, holidays and even vacation time to get product out the door and beat the competition. I racked up 50k options, mostly all for less than a do…

You do realize that this is the exact premise of risk and reward? That company could have been the next Google, Facebook, Amazon, etc, and in those 800-ish days you would have given up for weekends over 8 years you could have earned more than all of your ancestors probably have ever earned in their entire lives. All in a fraction of your single life.

And yet, we still get posts like this one, and comments like yours, that make it seem like somehow the employees are the ones who are getting shafted.

Could equity deals be a little more clear and fair? Sure, absolutely. Maybe make the window for options something more like 6-12 months. It's entirely subjective. But when the "make or break" lifecycle of a startup is 5 years, waiting 6 months to make a critical hire because you have options tied up in people who don't even contribute to the organization anymore is detrimental AND unfair to the current employees.

It shouldn't make you sad that you couldn't exercise your shares. It should make you sad that you didn't work more effectively the capitalize on your options sooner.

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

#447

Post by acalderaro »

superqd wrote: post #412

This has caused me some level of sadness in the past. I worked for a startup (started 6mo after founding with only 20 people and stayed for 8 years to 200+ people and 50million in revenue). During a number of phases, I worked for months at a time giving up weekends, late nights, holidays and even vacation time to get product out the door and beat the competition. I racked up 50k options, mostly all for less than a do…

You do realize that this is the exact premise of risk and reward? That company could have been the next Google, Facebook, Amazon, etc, and in those 800-ish days you would have given up for weekends over 8 years you could have earned more than all of your ancestors probably have ever earned in their entire lives. All in a fraction of your single life.

And yet, we still get posts like this one, and comments like yours, that make it seem like somehow the employees are the ones who are getting shafted.

Could equity deals be a little more clear and fair? Sure, absolutely. Maybe make the window for options something more like 6-12 months. It's entirely subjective. But when the "make or break" lifecycle of a startup is 5 years, waiting 6 months to make a critical hire because you have options tied up in people who don't even contribute to the organization anymore is detrimental AND unfair to the current employees.

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

#448

Post by OliverJones »

calcsam wrote: post #249

The most poignant line is near the end: "It's really tough to ask these [questions] without sounding obsessed with money, which feels unseemly, but you have to do it anyway." Basic due diligence on a startup offer is asking for # of shares outstanding, last company valuation, strike price. Advanced due diligence is talking about things like extended exercise windows, secondary sales, and liquidation preferences. Unfo…

This is exactly right. If a company offers you shares or options as pay for your work, they're asking you to be both an employee and an investor. If the company's executives become skittish or sullen when you ask questions any sane investor would ask ("what's my upside?"), that's a red flag. Be careful.

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

#449

Post by snewman »

mavelikara wrote: post #444
snewman wrote: post #251

Earlier quoted context omitted.

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.

Thanks for validating that this scheme is not crazy! I have a follow-up question though. Every time a new employee joins, you are essentially shelling out the cash equivalent of their equity's FMV. This way, the offered equity is twice as expensive for you - once as equity itself, but then again as the cash bonus. Has this caused problems for your cash position? Is it sustainable as Scalyr grows into higher valuation…

It's cash-neutral for us. Suppose a new hire gets 10,000 options with a strike price of $1.00. (These are not real numbers.) They will pay $10,000 up front to early-exercise the options. We give them a bonus of $10,000. Net cash impact to us: zero. (As I noted, there is some cash impact to the new hire, as they will have to report $10,000 income and pay taxes on it.)

We've lost the opportunity to earn a little money from the new hire by selling them stock at a nonzero price. But that's not an opportunity we want.

As we grow into higher valuations, the tax impact may become an issue. We might have to start grossing up the bonus. Also, if someone leaves before they're fully vested, all this has to be unwound and I'm not certain of the tax implications there. We haven't worried much about that because at this stage no one is leaving. :)

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

#450

Post by superqd »

acalderaro wrote: post #446
superqd wrote: post #412

This has caused me some level of sadness in the past. I worked for a startup (started 6mo after founding with only 20 people and stayed for 8 years to 200+ people and 50million in revenue). During a number of phases, I worked for months at a time giving up weekends, late nights, holidays and even vacation time to get product out the door and beat the competition. I racked up 50k options, mostly all for less than a do…

You do realize that this is the exact premise of risk and reward? That company could have been the next Google, Facebook, Amazon, etc, and in those 800-ish days you would have given up for weekends over 8 years you could have earned more than all of your ancestors probably have ever earned in their entire lives. All in a fraction of your single life. And yet, we still get posts like this one, and comments like yours,…

I realize I could have attempted to exercise sooner, but that isn't quite the point. The part that really bugs me is the fact that time is undervalued (or non-valued). If I have a high value asset, my time, that I contribute towards the success of a company, it's value goes severely underappreciated by management and the board. That's the problem. If person X puts in money, and person Y puts in time, the time is regarded as a non-asset. Now, you might be tempted to say, "but you got paid", and I did. But I put in far more time than would be required somewhere else. That is, I put in extra time, a non-fungible unrecoverable asset, into the company and had nothing to show for it. Asking for more payment (for the options) is the equivalent of asking me for more time, which I had given plenty of already.
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