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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

#461

Post by superqd »

bbcbasic wrote: post #442
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 ex…

Yeah, the golden handcuffs really did shackle me emotionally. I couldn't part with the extra money to pay for the shares, even though I really wanted to leave the company much sooner. So I stayed since that was the only way I'd be able to keep the shares.

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

#462

Post by rrhyne »

Eridrus wrote: post #404
rrhyne wrote: post #391

Earlier quoted context omitted.

> 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?

I think I misread the bill, the part that I saw was "The employee may defer the inclusion of income from the stock until the year that includes the earliest of the dates on which... the employee becomes an excluded employee", I'll go update my original comment. Still, the conditions when the tax bill is due are unclear, e.g. what does "seven years have passed after the rights of the employee in the stock are transfer…

IANAL! Thanks for editing your earlier comment.

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

#463

Post by fullshark »

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 think the point is employees under estimate the risk involved. I could make a start up that pays people in literal lottery tickets but I'd be unable to hire anyone because prospective employees can easily see it's a bad deal. Not the case for start ups.

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

#464

Post by [deleted] »

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,…

[deleted]

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

#465

Post by gnicholas »

bbcbasic wrote: post #442
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 ex…

While employees may irrationally put in too much effort because of their perceived ownership value, the comparison to slivers of ownership of publicly-traded companies.

One person can make a difference in the value of a 20-person company, and if that person has a 1% stake in the company it can be rational to work longer hours to make that happen.

On the other hand, there is very little that a shareholder of a public company can do to materially affect the bottom line of that company. And as the owner of perhaps .000001% of that company, that person would see very little financial benefit from such effots.

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

#466

Post by poikniok »

snewman wrote: post #449
mavelikara wrote: post #444

Earlier quoted context omitted.

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…

This is unrelated to anything but just wanted to say how awesome your Topcoder results were, you are a legend!

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

#467

Post by perneto »

On the same topic, https://www.scribd.com/doc/55945011/An-Introduction-to-Stock... has detailed advice on what to do as a startup employee in the section about options. (tl;dr: early exercise, 83(b) election, ask for nonstatutory stock options instead of incentive stock options).

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

#468

Post by superqd »

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…

Interestingly, one person's time can be worth more than another person's money. For founders, this is sometimes factored in, but usually not for employees, even when they take a reduced salary. At best, if you are taking a 100k job for 50k, you are, in the eyes of most founders, only investing 50k in the company. But if you are putting in beyond 2k hours that year, anything beyond that is an investment and can be worth far more than the extra time put in by founders themselves. Such invested time is usually completely unrewarded, it's assumed to be "factored in".

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

#469

Post by superqd »

st3v3r wrote: post #432
nugget wrote: post #307

Earlier quoted context omitted.

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…

If I'm not being paid market rate, I am being given equity, and I'm expected to work the typical startup bullshit hours, then there is absolutely no way you can say I'm not risking both money and time.

Exactly that. Your additional time is money invested in the company.

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

#470

Post by nandemo »

PakG1 wrote: post #453
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…

Fair enough, but you could not have known that your options would not go underwater either. At the end of the day, options let you become an investor on the cheap. Hindsight is 20-20. I think the only nice way to do it is a long window for exercising options. Lets you benefit from your hours and also protects you from the risk if it goes south.

I get your point but I think a clarification is useful here: the risk for gp was not "options might get underwater" but rather "stock is too illiquid".

Options are underwater if the strike price is less than the current market price; shares in private companies might not have an actual market price but you can estimate them. Underwater options still have >0 value since there's a non-zero chance the stock price will decrease before the expiration date -- of course, if the expiration date is close by and the strike price is much higher than the current price, the option value might be very close to 0. Still, you practically never exercise underwater options (there are some rare exceptions not very relevant here).

In grandparent's case, the issue is not underwater options; they are about to exercise the options and get stock. At the time they left the company, the stock price was presumably way above the ~$1 strike price. They could have bought (say) $60k worth of stock for only $30k, making a profit on paper. The problem is, as the article says, you have to pay taxes on capital gains AND that stock is illiquid (you can't easily sell it if at all).

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