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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

#511

Post by kaspiCZ »

amasad wrote: post #434
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…

I have a similar experience -- albeit only 2 years -- when I left I was faced with $30k (pre-tax) and didn't have the money and was actually in debt. Not to mention the battle scars: anemic, overweight, depressed, and cynical. Luckily I've recovered now and started my own company. In addition to a 10 year exercise window I try to educate our employees and potential employees on this matter and to be as transparent as…

I'm in a somewhat similar situation to you, but on the upward slope. If you don't mind, what was the breaking point for you? How did you approach your recovery? How much time and effort did you put into getting your business off the ground? How do you manage to combine enjoyable work with delivery (nowadays it is the mantra - everything has to at least help provide value for customer)? How do you handle employee's failures and your own?

I have started to think about these points a lot.

Given I basically have a coworking workshop (it's a 3 friend little webdev company), there is a lot to consider.

Solving and handing over of my current obligations, dedicating to my shop, or starting a new one my way, or finding a new place to soak in more experience (I'm 32, but somehow my brain still works well enough to quickly absorb new stuff).

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

#513

Post by nemo44x »

temp246810 wrote: post #165

When I joined zenefits they offered me 500 shares before raising the 500MM round. Then after the 500MM round they were 5000 shares. When I was negotiating my offer, I didn't budge on getting a market rate salary and in the end, I got it. Why? Because they did some hand wavy arithmetic and told me my 5000 shares would be worth 500K at some point. Yeah no thanks. As employee #500, I knew better. What happened? I hated…

"Don't compromise on your salary."

It's the damn truth. Cash is freedom - cash is king.

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

#514

Post by ScottBurson »

superqd wrote: post #450
acalderaro wrote: post #446

Earlier quoted context omitted.

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 rega…

I think this is a good point. If you're going to take options in lieu of part of your salary, they should for fairness be options on preferred shares, because you're effectively contributing cash.

Of course, nobody gives employees options on preferred shares.

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

#515

Post by amasad »

kaspiCZ wrote: post #511
amasad wrote: post #434

Earlier quoted context omitted.

I have a similar experience -- albeit only 2 years -- when I left I was faced with $30k (pre-tax) and didn't have the money and was actually in debt. Not to mention the battle scars: anemic, overweight, depressed, and cynical. Luckily I've recovered now and started my own company. In addition to a 10 year exercise window I try to educate our employees and potential employees on this matter and to be as transparent as…

I'm in a somewhat similar situation to you, but on the upward slope. If you don't mind, what was the breaking point for you? How did you approach your recovery? How much time and effort did you put into getting your business off the ground? How do you manage to combine enjoyable work with delivery (nowadays it is the mantra - everything has to at least help provide value for customer)? How do you handle employee's fa…

>what was the breaking point for you?

It got exponentially harder to get out of bed and get to work. I just had to quit because I couldn't show up. I didn't give anytime to interview or find an offer. I was also in a weird situation with regards to immigration. So it was reckless but goes to show how much I had to leave.

>How did you approach your recovery?

Joined a big company, got myself on a path to be comfortable financially, took every weekend off. Picked up hobbies, coded for fun. Worked out, visited doctors, changed my eating habits -- got healthy.

>How much time and effort did you put into getting your business off the ground?

Part of 2015 and 2016 I started working and growing on an old side project of mine until got to a point where I knew I could raise money for. I quit in April 2016 and worked like crazy for a month to raise enough money to hire a couple of engineers, get to feature complete, and start selling (which is what we're still working on now). I wrote about it here: https://amasad.me/2016

>How do you manage to combine enjoyable work with delivery (nowadays it is the mantra - everything has to at least help provide value for customer)?

If you're building a startup it's one of the hardest thing you'll ever do so in my opinion you need to align the mission, the product, and the market you're going after with what you care about. Whether that social good, tech, or business. Given that, it's builtin the company that you should enjoy what you're doing. Then hire people that enjoy that too and it all (seems) to fall into place naturally. To sum up, you're in a position to design your ideal work environment -- do it! (You may fail, but that's better than being stuck with something you don't care about).

>How do you handle employee's failures and your own?

I'd be lying if I said I don't push myself and others around me to be the best they can be. You just need to give feedback regularly so that there are never no big surprises (this is something that you can learn by being at one of the good big companies) and always be kind.

Good luck with your workshop.

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

#516

Post by _yosefk »

Twirrim wrote: post #426
_yosefk wrote: post #170

Earlier quoted context omitted.

"Treat as zero" is bad advice. "Treat as 10x or 50x cheaper than they say it is" - that's good advice. The difference is that 10x more equity solves a lot of problems with equity, and it's not what you'll be gunning for if you think its value is zero.

Given how few startup companies actually make it, treating it as zero is the only sane and rational thing to do.

Right, because it's better to be paid $X/year and have 0 stock options than it is to be paid $X/year and have Y stock options, and no sane person would prefer the latter or negotiate for a Y large enough to be worth something even if the startup doesn't "make it" but is sold for 5x less than they tell you the IPO is going to be. And a company that has already got $200M invested into it is just as likely to fail to grow in value as a 1-person startup operating from a dorm room - it's always a 1 in a million lottery ticket. Only after IPO do RSUs suddenly gain value from 0 to something.

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

#517

Post by bendbro »

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,…

A lot of times a company will have a decent idea of what their exit is, based on how much money is in their market, or how much similar companies have sold for. When that's the case, you need to ask.

1/3% (and that's generous) of a potentially $1B dollar company might seem like a lot, but after 10 years of dilution how much will you really have left? If your options dilute by 1/4 (also generous), you've made about an extra $80k a year, and that's not even with taxes subtracted. And don't forget the likely higher salary, raises, bonuses, stock grants, and medical care you get at a big 4 company.

It's possible that you can be be assured to make no extra money working for a startup, even with all the extra risk, depending on how those factors play out.

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

#518

Post by wox »

CalChris wrote: post #494
qsymmachus wrote: post #436

Earlier quoted context omitted.

> None of the thousands of extra hours I worked (I kept track) counted for anything Yep, that's exactly what your management was counting on.

I worked my ass off at a startup, sleeping under the desk, weekends. The usual. At one point I needed a break and informed them that I was taking a break. Two months cycling through Europe. When I came back, they'd moved and I had the best cubicle reserved for my return. They missed me but only because I forced the issue.

Sorry I don't follow. So you came back, and the company had moved but they reserved a cubicle for you at the new office? What does you forcing the issue have to do with them missing you?

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

#519

Post by foo101 »

pinewurst wrote: post #425
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…

8 years of weekends, late nights, holidays and vacation for a net of $200K after taxes? That's ~25K/year so if you would've worked a regular 40 hour week, 20 hours of contract work at anything more than $35/hour would have put you ahead. And you would've still had weekends, nights and vacation.

Can you explain the calculation to me? I am interested to understand the calculation so that I can perform similar calculations when I have two opportunities to choose from.

superqd mentioned he would have made $300K more (i.e. in addition to the fixed salary he was earning) if he had bought the options. I assume that after paying for taxes, he would have still made $200K. Since he worked for 8 years, this is indeed $25K of additional income for every year. If he worked for $35/hour for 40 hours/week for say 50 weeks in a year, his total income would have been 35 * 40 * 50 = 70K. How is this better than his original job which was probably paying him say $80K or greater than $80K as fixed salary every month? It sounds like it would have put him behind by at least $10K. What am I missing?

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

#520

Post by foo101 »

I am just an engineer. I don't understand a lot of the terms and concepts necessary to understand the linked article. I tried going through the Wikipedia articles for the terms I was interested in but I don't think I can make sense of it all without a kind teacher to help me out. So here I am turning to you, HN, to be my teacher. Here are the questions I have. If one of you could answer just one question from this list, it would help me a lot. I am sure it would help other people like me.

While answering, please quote my entire question with the Q so that people don't have to scroll up and down to correlate the answers with the question.

Q1. Quote from article: "Your options have a strike price and private companies generally have a 409A valuation to determine their fair market value. You owe tax on the difference between those two numbers multiplied by the number of options exercised." My question: What is strike price? If I have accumulated say $30K worth of options, but I can afford only $10K, can I buy only $10K worth of options while leaving the startup?

Q2. Quote from article: "Due to tax law, there is a ten year limit on the exercise term of ISO options from the day they're granted. Even if the shares aren't liquid by then, you either lose them or exercise them, with exercising them coming with all the caveats around cost and taxation listed above." My question: Say I get buy ISO options for 30000 options for $30K from a startup while I leave the startup in 2017. Say, that startup still remains private in 2027. What are my options? Am I going for a total loss of $30K? If the startup hasn't gone IPO, how can I possibly exercise my 30000 options in 2027? What does the article mean by "exercise them" in this case? Does "exercise" mean buy the 30000 options for $30K or does "exercise" mean selling the options for a possibly larger price after the startup goes IPO?

Q3. Quote from article: "Some companies now offer 10-year exercise window (after you quit) whereby your ISOs are automatically converted to NSOs after 90 days." My question: How is NSO different from ISO? When the article mentions that NSOs are "strictly better" does it mean that I don't have to pay a penny to buy the NSOs but they remain in my account for free?

Q4. Quote from article: "Employees want some kind of liquidation event so that they can extract some of the value they helped create" My question: What are the events that count as liquidation events?

Q5. Quote from article: "Even if you came into a company with good understanding of its cap table" My question: What is the cap table? Why do I need to know this number? Can you explain this with some examples?

Q6. Quote from article: "New shares can be issued at any time to dilute your position. In fact, it's common for dilution to occur during any round of fundraising." My question: How does additional funding dilute my position? If I bought 30000 ISO options at say $1 per option, and I can sell it one day for say $2 per option, I am still making money. Why does it matter if additional funding occurred between buying and selling?

Q7. Quote from article: "If the company sells for a more modest $250M, between taxes and the dilution that inevitably will have occurred, your 1% won't net you as much as you'd intuitively think. It will probably be on the same order as what you might have made from RSUs at a large public company, but with far far more risk involved." Can someone show some approximate calculation for this? This is what I see: 1% of $250M is $2.5M. Say I lose 30% in tax I am still left with 0.70 * $2.5M = $1.75M. Can one really earn $1.75M from RSUs? The RSUs I have got at large public companies are of the order of $10K to $50K only.

Q8: Quote from the article: "Tender Offers". Can someone elaborate this? Can a startup force me to return my options in exchange for tender offers? Or is it a choice I have to make, i.e. to keep the options or go with the tender offer?

Q9: Quote from the article: "How many outstanding shares are there? (This will allow you to calculate your ownership in the company.)" How? Can you provide an example to calculate my ownership? Can you also provide an example of what that ownership means for me, if the company is sold for say $200M? Can you also provide another example of what that ownership means for me, if the company goes public and the price of each stock option is $10 after it goes public?

Q10: Quote from article: "Have there been any secondary sales for shares by employees or founders? (Try it route out whether founders are taking money off the table when they raise money, and whether there has been a tender offer for employees.)" What does this mean? How does it affect me?

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