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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

#501

Post by sk5t »

chimeracoder wrote: post #346
ironchef wrote: post #235

Earlier quoted context omitted.

tldr: 83b isn't just for RSUs. You _may_ be able to perform an early exercise on ISOs and perform an 83(b) election at the same time. I've done that twice now .. the first time worked out very well. The second time I'd anticipate will work out quite well as well.

> You _may_ be able to perform an early exercise on ISOs and perform an 83(b) election at the same time. I've done that twice now .. the first time worked out very well. The second time I'd anticipate will work out quite well as well. Be careful. If your total grant (not the amount your exercising, but the total amount that will vest over four years) is worth more than $100,000, the amount in excess of $100,000 will…

I've wondered about this before--what is the meaning of the _worth_ of options for ISO treatment? Suppose you have ISOs for five shares, with a strike price of $1: the company goes public, becomes Berkshire Hathaway, time passes, and the stock is now worth $101,000 per share. You exercise one option and immediately sell one share. Do the other four shares remain ISOs?

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

#502

Post by jonathankoren »

econner wrote: post #321
jonathankoren wrote: post #289

Earlier quoted context omitted.

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.

I'm not saying that the basis points are unreasonable. I'm saying that my salary is more than $100,000.

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

#503

Post by dceddia »

taternuts wrote: post #147

> The working conditions at Silicon Valley companies are often the best in the world I'd take regular, sane hours and the ability to have a life over worthless perks like ping pong/foozeball tables and customized snacks. I can bring my own snacks, buy my own lunches with as long as I have a decent salary and that really doesn't bother me. The only real perks in a startup are more control over what you are building as…

Came here to quote this.

Personally when I see the phrase "working conditions" I immediately think of hours worked, aka "work/life balance." And from everything I've heard, hours at Silicon Valley companies are far from the best in the world.

Either the author ascribes a much different meaning to "working conditions" than I do, or my perception of those working conditions are way off base.

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

#504

Post by nemo44x »

zimzam wrote: post #496
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…

This is a sad story: 90-day exercise windows are employee hostile, they should be much longer, especially when the company isn't public. However, and I don't know how to put this more kindly, but I can't help but wonder if you understood how options work while employed at the company? A simple technique to avoid having to quickly come up with a lump sum is to set aside enough money to excercise your options as you ac…

But there's the opportunity cost and extreme risk in investing in something you have very little information on. Hopefully you're maxing your 401K and personal savings/investments before this.

In the end though it might be wise to hedge a bit and at least buy some of your options as you go if you believe the company is worth something eventually.

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

#505

Post by nemo44x »

wtbob wrote: post #486
refurb wrote: post #310

Earlier quoted context omitted.

What about taxes?

I think we're talking about after-tax money; unless you live somewhere that has a wealth tax, once you've paid all your taxes on income (wages or capital) then you're free and clear.

Common retirement strategies, like a 401K, differ taxes until withdrawal. So taking out 4% of your portfolio every year upon retirement would in fact incur taxes. Since a 401K is massively tax advantaged in your highest earning years it only makes sense to maximize this portfolio while you can thus delaying, but not avoiding taxes, until a later date when you'll likely pay much less on the income.

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

#506

Post by nemo44x »

coldnebo wrote: post #485
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…

Or, like one of the companies I worked for, you could exercise your options, wait for a large Fortune 500 to buy them up, but then get told that your bylaws have a special provision that if the sale doesn't clear a certain amount, everyone's common shares are liquidated. As in we got zero. Nothing. And this software is still in use in a major product. So no, please don't trust options or exercised shares at any priva…

Everyone wants to believe it won't happen to them and that their company must be special since they work there. But sadly this happens to brilliant people all the time.

Cash is king. Realize you don't understand finance much less finance in an opaque, illiquid company.

Say it 3 times: "Cash. Is. King.".

Max out your 401K and negotiate a company 100% match if you can. Start a private investment account and a savings account and distribute to them every check. Keep doing this. Maximize all this before you become Johnny Wall St. with your illiquid stock options. They're as useful as a penny stock as not as liquid.

Buy some of them if things look bright but classify the investment as your "highly speculative" class of investments and thus ensure they are a small part of your portfolio.

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

#507

Post by nojvek »

annetee wrote: post #498

I have a question: I know for sure that my company is going to IPO this year and I plan to stick around to see it happen. By the time it happens I will have about 30% of my options vested which I could choose to exercise. Is there any reason why it might be advantageous to exercise early? My current plan is just to see how the IPO goes and then consider exercising at that point - it means a lower risk for me because…

If you exercise early and hold it for an year before selling them for cash then you pay less tax.

The way I see is options only make sense when you have the following aligned.

1) Employer grants options. 2) Every pay check you save enough for strike price and estimated tax hit. 3) Exercise early when the price is low (assuming IPO will happen while you're still employed) 4) Sell when IPO or later when price is good after one year or more of exercise.

Or may be sell in bits to stay under the aggressive tax rates.

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

#508

Post by e12e »

pinewurst wrote: post #495
asanwal wrote: post #492

Earlier quoted context omitted.

Isn't the other way around still man exploits man?

That's the point. :)

To expand, it's a play on:

"Under capitalism, man exploits man. Under communism, it's just the opposite." which seems to be attributed (without any sources) to John Kenneth Galbraith:

http://www.quotationspage.com/quote/810.html

I've also seen it as "Under capitalism, man exploits man - under communism it's the other way around." I always assumed it was a translated Russian proverb, along the lines of: "No truth in the news and no news in the truth" (Major Soviet papers were "Pravda" (the truth) and "Izvestia" (the news).

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

#509

Post by nemo44x »

annetee wrote: post #498

I have a question: I know for sure that my company is going to IPO this year and I plan to stick around to see it happen. By the time it happens I will have about 30% of my options vested which I could choose to exercise. Is there any reason why it might be advantageous to exercise early? My current plan is just to see how the IPO goes and then consider exercising at that point - it means a lower risk for me because…

You would begin to qualify for long term capital gains which is taxed lower than the higher end of your income, presumably. You can sell your stock 6 months after it goes public so if by then you qualify for a long term capital gain (1 year holding an asset) you get taxed at this advantaged rate. If you will likely make a substantial amount of money (100k+) this could be a lot of money you save.

Of course you assume the risk of being an investor and you could lose money if it all goes south!

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

#510

Post by simonjgreen »

fermigier wrote: post #10

Should have been titled "... in the USA" as tax rules are very different in other countries. For instance, in France, you only owe money to the taxperson when you sell your shares, for a profit. If you sell for a loss, this is tax-deducible.

This does not apply in the UK either. You pay capital gains tax only when you realise the value.
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