Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

Startup Stock Options – Why a Good Deal Has Gone Bad

steveblank.com

Post reply on HN
Print view View original

21–30 of 391 posts

Re: Startup Stock Options – Why a Good Deal Has Gone Bad

#21

Post by thesausageking »

He glosses over an important point: it's now typical for founders to take money off the table as part of financing rounds, sometimes as early as the A round. Founders will request it as part of a funding round and, there's so much competition to invest in the top startups, that VCs go along with it. Decades ago, this wasn't the case. Founders waited for the IPO like employees.

If you're an engineer sitting on $5m of vested stock in a decacorn, it makes financial sense to sell some of it. Today, companies make that really hard to do.

If employees could easily sell their stock while the startup is still private, this would solve a lot of the problems.

Re: Startup Stock Options – Why a Good Deal Has Gone Bad

#22

Post by mlthoughts2018 »

l2c1928 wrote: post #2

It'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…

Your story still leaves a lot of room for skepticism. For one, 1.5MM is not actually a very good deal for an engineer in your situation, and likely the company gave you very unfavorable terms. Electing 83b is a fairly irrelevant detail in your story as it only affects taxes, not the outcome of the company.

Your shares are likely going to get hugely diluted exactly because of growth investing like in the article. Investors and founders will essentially trade away your share of the company in new rounds, while they get huge payouts for it, your shares may grow a small amount, again realized over some long time horizon.

Let’s take an extreme example and say your shares double in value (not likely) through the remaining funding rounds, and eventually in another ~7 years you can actually sell them in some liquidity event.

So that’s $3 MM (gross) over 10 years. That works out to be $300,000 / yr in equity compensation.

Certainly very high. But not any kind of crazy number. Definitely there are rank and file engineers in FAANG companies, Wall Street, and other industries getting annual RSUs or bonuses well beyond that without having to wait 10 years to realize it or have the risk that it folds or you get laid off and lose a bunch of future value, and have a high base salary, good benefits, and good work/life balance the whole time.

Given that even a crazy outcome like $3 MM annualized over 10 years isn’t significantly better than other reasonable total comp opportunities, this overall paints a really bad picture for start-ups.

Your case, which is nearly about the best lottery ticket someone could get, is only slightly better than a competitive position at many public companies, finance shops, etc.

Meanwhile, almost all start-up outcomes would be far worse.

Re: Startup Stock Options – Why a Good Deal Has Gone Bad

#23

Post by howard941 »

save_ferris wrote: post #10

Why 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, es…

> Why don't startups offer actual equity grants instead of options?

Great tax advantages. For ex one startup I worked for did it the other way resulting in recognizable tax income and everyone got hit with a tax bill. Fortunately when it was brought to leadership's attention they were enlightened enough to offset the tax bill with cash but don't expect that, ever.

Re: Startup Stock Options – Why a Good Deal Has Gone Bad

#24

Post by commandlinefan »

mlthoughts2018 wrote: post #5

It’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…

I was awarded RSU's at my last company (a perpetual startup) - not millions, but maybe tens of thousands of dollars. I had a signed contract that guaranteed them. But then the company merged/consolidated/de-consolidated/re-merged and shuffled around so that when they finally got rid of all of us, they said that those stock options were worth nothing, too bad, so sad. And what am I going to do, spend $100K on a lawyer to maybe recover a quarter of that ten years from now? And they know we won't, that's why they get away with what they get away with.

Re: Startup Stock Options – Why a Good Deal Has Gone Bad

#25

Post by andrew311 »

save_ferris wrote: post #10

Why 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, es…

Share grants would be seen as income by the IRS and most states and taxed at their Fair Market Value. Options on the other hand usually qualify as Incentive Stock Options that aren’t taxed at grant time and “when exercised, it isn't necessary to pay ordinary income tax. Instead, the options are taxed at a capital gains rate.” [1]

Options are better up front because there is no outlay for the employee. They are a hassle down the road. However, if you exercise during a liquidation event your tax liability is probably covered.

Stock is a pain upfront unless granted before the first round of funding or any real revenue when the stock value is very little. They are easier down the road, though.

Just my two cents. HackerNews, please correct any errors in logic or how this stuff works.

1. https://www.investopedia.com/terms/i/iso.asp

Re: Startup Stock Options – Why a Good Deal Has Gone Bad

#26

Post by theIV »

bgentry wrote: post #15
creaghpatr wrote: post #6

Earlier quoted context omitted.

Good point, although do long term cap gains apply to private company stock being held over years until the liquidity event?

You get switched to long term capital gains 1 year after exercise or two years after the grant start date, whichever is later.

I don't believe the "or" part of this statement is right. I think you still need to hold for 1 year after exercise AND two years after the grant for long term to kick in.

Not sure what the best source on this is, but a quick DDGing:

https://www.fool.com/knowledge-center/tax-rate-on-exercising...

Re: Startup Stock Options – Why a Good Deal Has Gone Bad

#27

Post by rooam-dev »

dleslie wrote: post #13
seibelj wrote: post #3

Valid 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…

> You want to work a certain way (remote, on the beach, whatever) and they are willing to go this route. This is me. I quit my well paid job and took a massive pay hit so that I could work from home and so be able to spend more time with my daughters. Absolutely worth it.

At a start-up? How do you manage live/work balance? Are there any on-call duties? Thanks in advance.

Re: Startup Stock Options – Why a Good Deal Has Gone Bad

#28

Post by mlthoughts2018 »

andrew311 wrote: post #25
save_ferris wrote: post #10

Why 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, es…

Share grants would be seen as income by the IRS and most states and taxed at their Fair Market Value. Options on the other hand usually qualify as Incentive Stock Options that aren’t taxed at grant time and “when exercised, it isn't necessary to pay ordinary income tax. Instead, the options are taxed at a capital gains rate.” [1] Options are better up front because there is no outlay for the employee. They are a hass…

Companies should either:

- award RSUs that have a liquidity event as the final vesting requirement and don’t expire (so you are not taxed until you can sell, and don’t risk losing what you already earned), or

- pay annual cash bonuses that are “grossed up” so that the after-tax amount of the bonus is enough to cover the taxes levied against the employee’s value of actual stock or vested RSUs, etc., and ensure the company bears that tax burden.

I’d be more forgiving to fully bootstrapped companies, which are often fairer to employees anyway.

Not willing to compromise at all for VC-backed companies, period. They also should be paying full market wages and the equity portion is solely meant to be competitive with the equity compensation or bonuses at public companies.

Re: Startup Stock Options – Why a Good Deal Has Gone Bad

#29

Post by codingdave »

seibelj wrote: post #3

Valid 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…

Or if you are an older dev, picking up some more modern skills. I joined a startup for just under a year, and while I did not go in intending for it to be short-term, it ended up that way. But I modernized my skill set, got to work with more modern processes, and walked out a stronger dev than when I walked in.

Re: Startup Stock Options – Why a Good Deal Has Gone Bad

#30

Post by jerguismi »

rooam-dev wrote: post #27
dleslie wrote: post #13

Earlier quoted context omitted.

> You want to work a certain way (remote, on the beach, whatever) and they are willing to go this route. This is me. I quit my well paid job and took a massive pay hit so that I could work from home and so be able to spend more time with my daughters. Absolutely worth it.

At a start-up? How do you manage live/work balance? Are there any on-call duties? Thanks in advance.

There seems to be some kind of understanding that start-up means aways working overtime etc. AFAIK that is not often the case, but people can work quite normally in early-stage companies as well. And mostly it is the founders who are working hard and employees are not required to work the same way.
Post reply on HN