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Stock options are complicated

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Re: Stock options are complicated

#91

Post by elastic_church »

CalChris wrote: post #83
zenlikethat wrote: post #68

Earlier quoted context omitted.

Curious about this, what "distinction" are you referring to here exactly? My understand is that the whole point of preferred vs. common shares is that there's a distinction: preferred shares get, well, preference in a liquidity event. This ensures investors recoup their losses if things go awry.

We are talking about the exact same distinction and the exact same scenario only from different POVs. To be clear, I'm not at all saying that investors who put up real money for startups shouldn't get preferred stock as compared with employees' common. What I am saying is that if+when an employee leaves a startup and has say 90 days to buy any accrued options then that employee should utterly pass if they think the c…

employees don't currently have the transparency to make this objective decision.

founders and board members are very opaque about this information, the prevalence and the covenants of preferred shares.

the state of delaware has created greater transparency requirements for securities holders of private companies. fortuantely it is still trendy for companies to incorporate in that state despite the 55+ distinct jurisdictions under the federal umbrella. unfortunately, employees have found themselves in legal battles with their own companies for attempting to leverage these regulations.

Re: Stock options are complicated

#92

Post by morgante »

zenlikethat wrote: post #57
pinot wrote: post #41

Earlier quoted context omitted.

Not to mention $90k person is likely leaving because they have low faith in the company in the first place.

Just playing devil's advocate here: So they are leaving because they have low faith in the company, but still expect to be able to collect rewards on other peoples' work years later if the company happens to succeed? If they didn't have a high degree of confidence in the company, the safe bet would always be to not exercise.

This mentality is dangerous and pernicious. We have vesting schedules for a reason. They'd be reaping the rewards of their past work, not other people's future work.

Re: Stock options are complicated

#93

Post by harryh »

xt00 wrote: post #61
danpalmer wrote: post #40

Earlier quoted context omitted.

> I honestly think the 90 day exercise is totally ludicrous in the startup world. I think that should be a major negotiation point with anybody who is joining a startup. They should just insist on it no matter what. Unfortunately, while the number of options, salary, holiday, etc are relatively easy for a company to change, I think changing the contracts around exercising for a single employee is a change large and c…

Yea I'll have to find some term sheets laying around, but I can't remember seeing the 90 day exercise being explicitly written into most term sheets. I only have seen it written into people's offer letters. Does anybody know where that language would be written actually otherwise? Some sort of bylaws or something -- seems like that could be relatively easily changed to read something like "exercise period of employee…

This language appears in your stock option grant agreement (or some other very similarly named document). It's probably about 10 pages. You probably signed one when you received your stock option grant. It's full of legalese so a lot of people don't read it very carefully.

Re: Stock options are complicated

#94

Post by morgante »

zenlikethat wrote: post #64
pcmaffey wrote: post #60

Earlier quoted context omitted.

"Dead equity" could also be used in reference to most of a company's investors. That is of course, tongue in cheek. Why should employees have their investment of time and energy taken away from them when investors' one-time cash investment earns preference? Another industry double-standard.

Because the investors' cash is the thing that enables high growth companies to survive and be, well, high growth (who do you think pays said employees' salaries?). Not saying they don't often make out much better than employees, but no one forces you to accept a term sheet you don't want to, and you should understand the implications of the equity you're getting walking in.

That's possibly the most bullshit argument I've ever heard.

Any founder will tell you employees are more important than investors. It's possible to build a successful company without VC—it's impossible to build one without quality employees.

Re: Stock options are complicated

#95

Post by harryh »

msencenb wrote: post #72

I (respectfully) disagree entirely with this conclusion. If you want to do analysis like this, you need to weight these numbers against the possibility of it happening to get the expected value of each column. You have also simplified the smaller exit values to not include investor preferences (which means investors are first in line to get money, founders second, employees dead last). Additionally, most contracts do…

Founders and investors are generally at the same place in line. Both hold common shares.

Re: Stock options are complicated

#97

Post by randominternets »

stanleydrew wrote: post #90
freddyc wrote: post #69

Earlier quoted context omitted.

It's usually in the underlying option plan I believe. I think the challenge with changing the 90 day window is that you run the risk of the option not qualifying as an ISO. If that's the case, it would instead be classified as a non-qualified stock option and the holder would lose the capital gains benefits and be subject to ordinary income tax (IANAL though, so could be way off base).

This is roughly correct. The 90-day exercise window isn't just something made up out of thin air to handcuff employees and keep them from leaving. It's explicitly written into the tax code that an option must be exercised within 90 days of leaving a company if the option is to be treated as an ISO. ISOs are arguably more advantageous than NSOs, which is why this is the default.

That sounds suspect to me. The company I work for gives 90 days + 1 month for every 1 month over a year you work there (so work there 2 years and you have 1 year, 90 days to exercise after leaving).

Is this arrangement just a loophole?

Re: Stock options are complicated

#98

Post by bogomipz »

idunno246 wrote: post #85
bogomipz wrote: post #33

Earlier quoted context omitted.

>"The fmv is recalculated every year, or on any fundraise events." This is the piece I was missing. Thank you for the clear explanation. That being said it would be interesting to buy exercise them just to see what the company is actually valuing those options at, since this is often opaque to the average worker. I wonder if it's possible to exercise a single option and use it as a barometer of sorts to quantify you…

I've never had a company refuse to give me the 409a valuation if I asked point blank for it(just say you're considering exercising and it's important for tax planning). It's important to keep in mind though they tend to purposely depress that value. But investors get a premium because their stock has legitimately more value than yours(liquidation preferences, board seats, etc). And without a liquid market, if you do…

I see, I guess you just need to know to ask for it. I imagine many(most?) do not. I find these discussions and these types of articles really helpful. I would like to think we are all becoming more savvy about these a result. Thanks for the tip.

Re: Stock options are complicated

#99

Post by mnutt »

zenlikethat wrote: post #64
pcmaffey wrote: post #60

Earlier quoted context omitted.

"Dead equity" could also be used in reference to most of a company's investors. That is of course, tongue in cheek. Why should employees have their investment of time and energy taken away from them when investors' one-time cash investment earns preference? Another industry double-standard.

Because the investors' cash is the thing that enables high growth companies to survive and be, well, high growth (who do you think pays said employees' salaries?). Not saying they don't often make out much better than employees, but no one forces you to accept a term sheet you don't want to, and you should understand the implications of the equity you're getting walking in.

Employees are effectively making an investment in the company in the form of work instead of cash. If a startup chose not to give out stock options, they'd likely have to pay their employees more, and they may have to raise another round to get cash to do so. The dilution from that round would never come back to the original stockholders under any circumstances.

When employees accepted the options in lieu of cash, they were taking a risk in exchange for a potential future reward. The work they put in often makes that success happen, whether or not they're actually working for the company at the time a liquidation event occurs.

I liken the scheme a16z proposes to something like using a loophole to buy back all of your investors' stock at their original valuation, just because you got to profitability. At that point you no longer _need_ their money, so why do investors deserve to reap the rewards?

Re: Stock options are complicated

#100

Post by phamilton »

randominternets wrote: post #97
stanleydrew wrote: post #90

Earlier quoted context omitted.

This is roughly correct. The 90-day exercise window isn't just something made up out of thin air to handcuff employees and keep them from leaving. It's explicitly written into the tax code that an option must be exercised within 90 days of leaving a company if the option is to be treated as an ISO. ISOs are arguably more advantageous than NSOs, which is why this is the default.

That sounds suspect to me. The company I work for gives 90 days + 1 month for every 1 month over a year you work there (so work there 2 years and you have 1 year, 90 days to exercise after leaving). Is this arrangement just a loophole?

Do they keep you employed for that month? It's fairly common to extend your termination date for health insurance and visa reasons. If you aren't actually terminated, the 90 days wouldn't have started.
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