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Stock options are complicated

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Re: Stock options are complicated

#111

Post by prostoalex »

dlubarov wrote: post #110
prostoalex wrote: post #105

Earlier quoted context omitted.

It's not really a double standard. A share of stock and an option to buy such share of stock are two distinct products, priced differently. E.g. MSFT share price today is $64.27, a contract allowing you to buy a share of MSFT on March 17, 2017 for $64 is 83c. Investors buy their shares in full, cash-on-delivery, so to speak. Would investors like to be able to buy call options in the companies at pre-specified valuati…

I don't think you're really justifying why employees and investors ought to have different terms. To the extend that investors need extra compensation, they can always be compensated with additional shares, regardless of those shares' terms. I think in an ideal world, investors would normally receive common stock (and more of it), but there are some practical reasons why that isn't the case: - Selling preferred stock…

I'd go with Occam's razor on this - investors always want preferred, the more preferences the merrier, companies always want to sell common, and if they could go sub-common (by stripping the shares of voting rights or dividend participation) they would.

Whoever has the most leverage in the transaction tends to win.

Re: Stock options are complicated

#112

Post by prostoalex »

acjohnson55 wrote: post #106
prostoalex wrote: post #105

Earlier quoted context omitted.

It's not really a double standard. A share of stock and an option to buy such share of stock are two distinct products, priced differently. E.g. MSFT share price today is $64.27, a contract allowing you to buy a share of MSFT on March 17, 2017 for $64 is 83c. Investors buy their shares in full, cash-on-delivery, so to speak. Would investors like to be able to buy call options in the companies at pre-specified valuati…

Well then that's doubly ironic, because most startup employees would probably much prefer to have shares over options. I know I would.

If the company allows 83(b) early exercise, they can.

Re: Stock options are complicated

#113

Post by hkmurakami »

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?

You likely have a clause where they become NSOs after 90 days.

Re: Stock options are complicated

#115

Post by javitury »

The recommendation to immediately transform your options to shares and sell them is the exception rather than the rule. In this context, it is assumed that options are very illiquid.

But in general, if you want to recover as much as you can, you should sell your options directly. That is why the value of an American and a European option tends to be the same.

https://en.m.wikipedia.org/wiki/Option_style#Difference_in_v...

Re: Stock options are complicated

#116

Post by hkmurakami »

jpm_sd wrote: post #86
xt00 wrote: post #16

In my experience most people at startups who leave end up not exercising their options due to the cost of exercising them coupled with the fact that they may be underpaid due to the assumption that their options may end up quite valuable. So basically they pay somebody 90k/year then give them ~20k/year in options. Then they quit after 2 years and have 90 days to buy like 50k worth of stock at the strike price they we…

In my experience (have worked at 3 start-ups), if you quit, you probably don't expect the options to ever be worth anything!

Eh, worked at one where there was a departmental exodus while the company was expected to IPO within the year (and it did). Plenty of people left due to political reasons or after full vest, exercised their options, and made out well. Anecdotes.

Re: Stock options are complicated

#117

Post by greenleafjacob »

mcfunley wrote: post #76

This doesn't mention transfer restrictions at all, and that's an altogether different reason that options are complicated. It's a bad idea to assume that you'll be able to sell private company shares, even if the company is popular and you've heard of other people selling. The existence of a market for the shares doesn't guarantee that you'll be allowed to get rid of them, because the company can enforce all manner o…

> Read your option agreement. You'll note that among other things, it says that the agreement can be amended by the company at any time to say anything at all. Good luck!

That is likely not actually usable because there may be no consideration [1].

[1] https://en.wikipedia.org/wiki/United_States_contract_law#Con...

Re: Stock options are complicated

#118

Post by gumby »

xt00 wrote: post #16

In my experience most people at startups who leave end up not exercising their options due to the cost of exercising them coupled with the fact that they may be underpaid due to the assumption that their options may end up quite valuable. So basically they pay somebody 90k/year then give them ~20k/year in options. Then they quit after 2 years and have 90 days to buy like 50k worth of stock at the strike price they we…

Just one point:

> An investor who paid 50k to invest in the company most likely got preferred shares, so the young guy who paid 50k who probably can barely afford that is now taking way more risk for a much smaller percentage of the company.

The common shares cost less than preferred shares as they lack the preferences. So when the employee leaves, her 50K will buy a larger percentage of the company than your hypothetical investor. She may of course still be taking a larger risk as she probably has a smaller asset base than the investor and his customers (err, LPs).

Re: Stock options are complicated

#119

Post by programmarchy »

pinot wrote: post #41
xt00 wrote: post #16

In my experience most people at startups who leave end up not exercising their options due to the cost of exercising them coupled with the fact that they may be underpaid due to the assumption that their options may end up quite valuable. So basically they pay somebody 90k/year then give them ~20k/year in options. Then they quit after 2 years and have 90 days to buy like 50k worth of stock at the strike price they we…

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

To add a counter-anecdote, I left a startup while still having a good amount of faith in the company. Left after finishing work on a couple of their products because I wanted a lifestyle change and had an opportunity to strike out on my own venture. The product was great, but engineering culture was a death march, partially due to the seasonal industry (hardware/toys) and partially due to management.

Oddly enough, a bunch of other engineers also left shortly after -- after all the hard work was done. Company is profitable now due to increased sales, but also cutting salary costs. Strike price was still low when I left, so I bought my options.

Re: Stock options are complicated

#120

Post by ssalazar »

chimeracoder wrote: post #10
richardhenry wrote: post #2

Regarding stock options expiring 3 months after leaving the company, it doesn't have to be this way and a lot of startups are moving in the direction of 10 year exercise periods. I think Quora was the first to do this: https://dangelo.quora.com/10-Year-Exercise-Periods-Make-Sens...

> Regarding stock options expiring 3 months after leaving the company, it doesn't have to be this way and a lot of startups are moving in the direction of 10 year exercise periods. This requires converting all options to NSOs, and the tax implications of NSOs are not pretty. (From a tax perspective, ISOs aren't great[0], but they're much better for employees, by design). [0] You have to pay AMT on the spread between…

What are the tax implications of NSOs? ISOs are a pretty huge gamble, basically a lotto ticket, if you leave before a liquidity event occurs or is known to be on the near horizon.
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