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Stock options are complicated

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Re: Stock options are complicated

#121

Post by ouid »

zenlikethat wrote: post #42
draw_down wrote: post #39

Earlier quoted context omitted.

At this point, anybody offering those terms is well-aware it's not in the employee's best interest. And they don't give a shit. I agree, 90 days is totally ridiculous.

A 90-day window might be better for you if you want to stick around at a company for a while and there were other people that came before you, but left. "Dead equity" of startup employees who have left but not exercised means that they can let you do all of the work while they dilute the available equity pool (i.e., take money directly out of your pocket). This a16z article goes into this: http://a16z.com/2016/06/23/…

or, you know, just get rid of the idea of a separate capital gains rate.

Re: Stock options are complicated

#122

Post by friendzis »

zenlikethat wrote: post #42
draw_down wrote: post #39

Earlier quoted context omitted.

At this point, anybody offering those terms is well-aware it's not in the employee's best interest. And they don't give a shit. I agree, 90 days is totally ridiculous.

A 90-day window might be better for you if you want to stick around at a company for a while and there were other people that came before you, but left. "Dead equity" of startup employees who have left but not exercised means that they can let you do all of the work while they dilute the available equity pool (i.e., take money directly out of your pocket). This a16z article goes into this: http://a16z.com/2016/06/23/…

This a16z article states that some options not returning to option pool is a bad thing, because option pool has to be extended faster than expected. As I read it, this means that some employees granted stock options are expected not to exercise, or in other words, option pools are overcommitted (more options are scheduled than expected to be excercised).

To my mind, this is a very dangerous mindset, driving actual option value even lower, because for every 100 options vested, only say 90 are expected to be exercised, meaning that upon liquidity event options are expected to be diluted to at least 90% of their value. Amount of options offered therefore must be discounted for this. Sadly a prospective employee has no idea what is the expected option pool commit ratio adding one more variable to the equation and tipping the scales towards hard cash compensation.

Re: Stock options are complicated

#124

Post by watermanio »

beagle3 wrote: post #19
LouisSayers wrote: post #9

I can't help but feel the system is highly rigged in favour of investors. Many countries have tax incentives for investors, but when it comes to people actually joining startups, investing their time and effort, then all you get is a tax bill - and mostly at a highly inconvenient time to pay it! It very much feels like the system is designed to keep the rich rich, and to put the working (wo)man in their place.

The US is probably the worst in this respect, and I heard Canada is quite bad, but most of European tax systems follow the "pay taxes only when money comes your way" principle, which puts all investors on equal footing.

On the other hand, if you are lucky enough to work somewhere in the UK that grants options, those options are likely void the moment you leave the company so this entire discussion wouldn't even take place.

I've been granted options twice, both times essentially designed to stop people leaving during a rough period. Given how few UK startups float it wasn't much of an incentive!

Re: Stock options are complicated

#125

Post by propter_hoc »

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…

The basic reason that investor capital has a liquidation preference is that if it didn't, the founders could raise $X million on day N, then since they hold the majority of voting rights, declare bankruptcy on day N+1, and split the majority of the invested capital among each other.

There are ways around this, such as giving the investor a veto on bankruptcies and reorganizations, but the time-honored solution is a 1x liquidation preference where the investor gets their capital back in a bankruptcy.

Re: Stock options are complicated

#126

Post by jogjayr »

brians wrote: post #89
jogjayr wrote: post #88

Serious question: why does the IRS insist on valuing private company stock on the basis of a 409a valuation without taking into account whether a market for it even exists? The 409a is paid for by the company which (as the article mentioned) has an interest in keeping it lower. And holders of common stock in private companies, in most cases, can't actually liquidate their holdings (leaving apart cases like pre-IPO Fa…

Given the tax scheme is published well in advance, they certainly seem to be worth something---else who would take them?

Stock options and private stock are taken in the hope that they'll be worth something someday, not because they're necessarily worth anything at present.

It's all well and good to say "X is the fair market value of this stock based on factors y, z and a"* . But when no market exists (or severely restricted ones where sellers have to take a loss) then that value is not relevant (or should be discounted appropriately).

* I tried looking up (briefly) whether the absence or presence of a market for the company's stock is taken into account for a 409a valuation but couldn't find anything.

Re: Stock options are complicated

#127

Post by msencenb »

harryh wrote: post #95
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.

If your investors have liquidation preferences, that's not true and can leave founders with nothing depending on the exit.

If there are no liquidation preferences, then you are correct.

Re: Stock options are complicated

#128

Post by harryh »

msencenb wrote: post #127
harryh wrote: post #95

Earlier quoted context omitted.

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

If your investors have liquidation preferences, that's not true and can leave founders with nothing depending on the exit. If there are no liquidation preferences, then you are correct.

sigh

I meant to write founders and employees. Not founders and investors. Sorry. Not sure I screwed that up. The screwup made my statement completely wrong.

Investors, as you helpfully point out, generally have preferred stock with liquidation preferences and hence are "first in line."

Re: Stock options are complicated

#129

Post by acjohnson55 »

prostoalex wrote: post #112
acjohnson55 wrote: post #106

Earlier quoted context omitted.

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.

Yeah, but you still have to buy the shares at strike price. So not only are you getting paid below market rate, but you have to spend some of that pay exercise cost and taxes to have proper equity. So it's not so simple.

Re: Stock options are complicated

#130

Post by prostoalex »

acjohnson55 wrote: post #129
prostoalex wrote: post #112

Earlier quoted context omitted.

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

Yeah, but you still have to buy the shares at strike price. So not only are you getting paid below market rate, but you have to spend some of that pay exercise cost and taxes to have proper equity. So it's not so simple.

What did you mean then by "much prefer to have shares over options"? I assumed this implied equal footing with the investors, and shares distributed in exchange for the check. If you have the means and are willing to tolerate the risk, shares are a better deal. If at least one of those components is missing, call options are a better deal.
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