Startup Stock Options – Why a Good Deal Has Gone Bad
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Startup Stock Options – Why a Good Deal Has Gone Bad
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Re: Startup Stock Options – Why a Good Deal Has Gone Bad
#2It's bad for most people, but when it's good it's really good.
I was lucky to join a now unicorn as one of the first few dozen employees a few years ago. I forward exercised with a few thousand out of pocket (section 83b) an equity grant now worth around $1.5m. Because I forward exercised my options at a low valuation I didn't have to worry about paying taxes if I exercised at a later time when the company's valuation grew. It also meant that my gains became long-term capital gains, and thus taxed lower, as soon as possible after I vested each month.
Re: Startup Stock Options – Why a Good Deal Has Gone Bad
#3Valid reasons to work for a startup:
- You are a cofounder.
- You have little experience and you are using this to break into the industry, and get experience on many different technologies ("wear many hats").
- They are working on a very specific problem or using a specific technology that you strongly desire to work on and it's difficult to do it anywhere else.
- You want to work a certain way (remote, on the beach, whatever) and they are willing to go this route.
Invalid reasons for working at a startup:
- Getting rich off stock options.
- Making a lot of money in salary.
- Work / life balance.
- Stability.
Re: Startup Stock Options – Why a Good Deal Has Gone Bad
#4It's bad for most people, but when it's good it's really good. I was lucky to join a now unicorn as one of the first few dozen employees a few years ago. I forward exercised with a few thousand out of pocket (section 83b) an equity grant now worth around $1.5m. Because I forward exercised my options at a low valuation I didn't have to worry about paying taxes if I exercised at a later time when the company's valuatio…
I too would like to win the lottery.
Re: Startup Stock Options – Why a Good Deal Has Gone Bad
#5It’s not just that the structure of option grants has worsened (also, expiration practices still are pretty bad for employees), but also that the valuation of the option grants is often way too low.
If, as in the article, a start-up is effectively offering a low salary + a lottery ticket and expecting candidates to see it as at least equally as valuable as a high total comp figure from a competitor, then the lottery ticket has to be priced very highly, to drag up the expected value after accounting for all the high likelihood outcomes that have poor payoffs.
Add to this the fact that, despite false promises, you won’t get more freedom, career opportunities, cutting edge work, etc., at most start-ups than you would at even average-case public companies, and it’s a bleak picture. No aspects of the work experience will create additional forms of “payoff” that help offset the low salary and poor lottery ticket equity, and in many cases the work environment will be toxic, full of immature behavior, unprofessional, etc., and candidates should really be requiring higher compensation than at a big company, to deal with the start-up dysfunction.
When the option valuation (even assuming a hilariously unlikely high value exit or IPO) is eventually diluted and spread out across ~10 years that you have to delay getting that money you earned (or even lose it all because of a layoff + poor expiration policy), and at best it turns out to be the annualized equivalent of a pretty modest bonus, it’s just deeply not worth it.
You will not have gotten anything else out of it (specialized experience, leadership or business skills, networking, oddball perks) that offsets the income you could have been earning almost anywhere else.
Re: Startup Stock Options – Why a Good Deal Has Gone Bad
#6It's bad for most people, but when it's good it's really good. I was lucky to join a now unicorn as one of the first few dozen employees a few years ago. I forward exercised with a few thousand out of pocket (section 83b) an equity grant now worth around $1.5m. Because I forward exercised my options at a low valuation I didn't have to worry about paying taxes if I exercised at a later time when the company's valuatio…
Good point, although do long term cap gains apply to private company stock being held over years until the liquidity event?
Re: Startup Stock Options – Why a Good Deal Has Gone Bad
#7It's bad for most people, but when it's good it's really good. I was lucky to join a now unicorn as one of the first few dozen employees a few years ago. I forward exercised with a few thousand out of pocket (section 83b) an equity grant now worth around $1.5m. Because I forward exercised my options at a low valuation I didn't have to worry about paying taxes if I exercised at a later time when the company's valuatio…
Yes, just like buying a lottery ticket is bad for most people, but when it's good it's really good.
Stock options are never a reason to join a company. They are potentially an added bonus. But they should never be valued in that initial "should I work here?" Not when first taking the job, and not when considering whether you should leave or not (barring an imminent IPO that would delay your leaving by a bearable month or two)
Re: Startup Stock Options – Why a Good Deal Has Gone Bad
#8It's bad for most people, but when it's good it's really good. I was lucky to join a now unicorn as one of the first few dozen employees a few years ago. I forward exercised with a few thousand out of pocket (section 83b) an equity grant now worth around $1.5m. Because I forward exercised my options at a low valuation I didn't have to worry about paying taxes if I exercised at a later time when the company's valuatio…
If you go into a casino, put 1000 on green at the roulette table and win, did you get a good deal?
The fact that some people win at startup roulette doesn't mean that it's a good financial decision to join a startup, especially considering that you can make the same sort of money without the risk elsewhere.
Re: Startup Stock Options – Why a Good Deal Has Gone Bad
#9It's bad for most people, but when it's good it's really good. I was lucky to join a now unicorn as one of the first few dozen employees a few years ago. I forward exercised with a few thousand out of pocket (section 83b) an equity grant now worth around $1.5m. Because I forward exercised my options at a low valuation I didn't have to worry about paying taxes if I exercised at a later time when the company's valuatio…
Good point, although do long term cap gains apply to private company stock being held over years until the liquidity event?
I paid long term capital gains after selling a portion of my private stock via a tender offer last year.
Re: Startup Stock Options – Why a Good Deal Has Gone Bad
#10Why don't startups offer actual equity grants instead of options? It seemed strange to me when I was starting out in my career that I needed to take a lower salary and options to exercise upon my exit, which wound up costing me thousands of dollars from that lower salary.
Two years later, one founder forced out his two other cofounders, started a new company in the exact same space, and poached his best employees, essentially jettisoning the cap table in the process.
The small frys who exercised their options were totally screwed. That was a real lesson for me on how crazy this stuff can be.