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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

#351

Post by systemBuilder »

blackflame7000 wrote: post #331
MobileVet wrote: post #301

I was part of a very well know incubator and a very early employee at a flagship company. Founder blew tons of cash and dilutions but that is part of it and I didn’t mind. What was ethically shady was shortly after I left with 4yrs vested they decided to restructure the entire company so they could attract investment. They took all the debt from the original company and put that in a shell company that then owned a p…

That happened to me too. Owner restructuring companies or moving from LLC to LLC and then starting the vesting schedule over again. It's fairly common it seems that owners play games with the people who actually build the company after the work is done.

What's amazing is that you didn't realize that all CEOs are like this. To be a CEO you have to believe that you deserve 99% of a company's profit. Also you have to feel like it's a mistake if the employees get more than 1%!

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

#352

Post by blackflame7000 »

anonytrary wrote: post #340
blackflame7000 wrote: post #331

Earlier quoted context omitted.

That happened to me too. Owner restructuring companies or moving from LLC to LLC and then starting the vesting schedule over again. It's fairly common it seems that owners play games with the people who actually build the company after the work is done.

Is that illegal? Sounds pretty illegal. I'd imagine the owner getting sued by his employees.

What would you sue for in a startup that doesn't yet have value? Later on, if the company became worth something then yea you could sue but how do you work with the people to build something successful when you know that they are screwing you?

It sucks because you sign on to something and change your whole career but once you do that they kind of have you trapped in a way. They can change the deal arbitrarily once you don't have a job to go back to and you don't have a lot of recourse until the company becomes profitable.

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

#353

Post by blackflame7000 »

everdev wrote: post #255
deanmoriarty wrote: post #251

Earlier quoted context omitted.

I believe I am the kind of person who would just say "Go ahead, shut it down if that's the only alternative. If you would like me to sign a deal to restructure the company, then I'll happily do it, but the company needs to pay me a one time cash bonus that reflects the value of the shares that I am forfeiting". I am not naive enough to believe it would work, as they would probably find a way to screw me regardless, b…

It's better than the alternative of giving in. Shutting down / reopening the company takes $$ and I still think you'd have a decent lawsuit against the new startup.

But the new startup wouldn't yet or might not ever be worth anything and so you just gave up your steady paycheck for a chance to sue for a small percentage of possibly nothing.

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

#355

Post by sytelus »

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…

One problem with startup RSU is limited liquidity. If you got $1M RSU and have 25% tax rate then you need to drill a hole for $250K in your bank balance right away. If private market exist and you can sell 25% of your grant, that probably works but otherwise the $1M RSU sits there just looking pretty next to that ugly hole you just drilled. Now if company goes down for any reason then that's $250K not coming back possibly not just making you work for peanuts but you might have paid out of pocket to work at that company, i.e., received a negative salary. With stock options the same outcome could occur. The great outcome occurs if you got stock options and stick around all the way until successful exit. This would be desirable by founders and investors but things may not be under your control because, you know, life happens.

This basically means that to avoid negative salary outcome startups must arrange so at least portion of grant can be sold privately to cover tax liability at the time of grant in case of RSUs or at the time of exercise in case of stock options.

If this condition is not met, trade waters very carefully.

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

#356

Post by wreath »

everdev wrote: post #248
deanmoriarty wrote: post #215

Earlier quoted context omitted.

But signing something without not understanding it is too naive. So, assume I already left the company and exercised a big bag of common options and so I have a decent amount of common shares. If they tell me to sign something that looks shady I just say: "No, it looks shady". What then, can they do?

Threaten to shut down the company. Then your shares are worth zero.

But then it makes wonder, why would anyone get themselves into startups anyway? Especially when you consider the relatively low compensation and high risk.

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

#357

Post by sytelus »

kurthr wrote: post #72
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…

Maybe this used to happen earlier, but I only really saw this after the DotCom bust. In my case it was founders/execs issuing themselves new/preferred stock and diluting all their coworkers into oblivion on an exit. Granted, these were small shops ~30 people and the exits were small ~$100M, but the effects were devastating. Everyone who could quit, did. People for whom an extra few $100k would have been a big deal wo…

Could you/should you ask founders if they have such unilateral dilution powers? How do you check for this when joining a startup? Should this be explicitly written in the offer letter you get?

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

#358

Post by wwweston »

djakjxnanjak wrote: post #310
fj39dkf wrote: post #305

Earlier quoted context omitted.

Can you elaborate?

The world is at peril, and full of people who are suffering. I can easily call an oil company evil, because they are burning the earth. I can call a food manufacturer that knowingly puts poison in their products to save a few bucks evil. I cannot bring myself to call Facebook or Google evil because they are configuring computers to display ads that introduce people to products they might want to buy. It’s really a tr…

Upvoted, but at the same time it's worth considering that right now, we have little idea how to account for the harm of the concentrations of personal data that both companies (among others) currently have. Even in the context of marketing, but more pressingly, once it becomes accessible to actors whose intentions may be either more malevolent, or simply up for sale to malevolent actors (e.g., Cambridge Analytica). You're speaking of poisoned products; what happens when data-intensive psych profiling is used to taint or outright poison discourse?

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

#359

Post by hvidgaard »

mikekchar wrote: post #337
kabdib wrote: post #183

I made a bunch of money from ISOs at large, established companies. I made zero (well, negative, really) from startup stock options, even before things got really shifty in the 2000s. One startup that I left, that is now a billion dollar company, simply decided to "extinguish" the shares I bought a few years after I resigned. I was probably cheated, but it's not worth the effort to go after them and they know it. Trea…

On the other hand, I once worked for a large well known company that actually gave me a pension. I can't remember what it was, but I think something like 5-10% of my total compensation went into this pension plan, which was essentially a mutual fund (although you could opt for long stock in the actual company instead). It took 3 years to fully vest. I stayed 5. When I left they sent me a letter literally saying that…

Hindsight is 20/20, but seriously. If you want to save money for pension, it must be something you control. Having your pension funds in the same company that pays your salary, is putting all the eggs in one basket.

If they really want to pay you 10% in pension, they can pay to a fund in your name with some terms about when and how they can be used.

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

#360

Post by sytelus »

dasil003 wrote: post #45
ohaideredevs wrote: post #11

Earlier quoted context omitted.

Not exactly a unique experience, but my .05 - I started of at a startup with a "lol just do it" attitude to whatever the problem was. Worked 12 hours a day a lot, was stressed out all the time, didn't have a life, got calls at odd hours to deploy...but, if I didn't have that experience, I wouldn't have grown nearly as fast. Got to see all aspects of the products and the consequences of the decisions we made early on.…

FANG is undisputably the best risk-adjusted compensation return for a programmer, and they're up there in terms of working with super smart colleagues, and therefore they have a high floor, compared to say a startup that goes nowhere with the blind leading the blind, but the ceiling is also constrained by what projects you're working on. In terms of raw software engineering development there's probably no substitute…

All compensations are risk + skills adjusted (a technical term is expected return). With lower risk you must sacrifice possibility of higher reward and vice versa. This universal law is not broken by FANG or anyone else. FANG is not better risk adjusted and there is nothing special about their compensation.

If you are young and blessed with no dependencies, you should attempt exploiting higher risk domains. As you get older with more dependencies, you need to lower your risk tolerance. The technical term for this is exploration vs exploitation. The maximum payouts in many complex system requires some balance between two and sticking with just exploitation is often not the optimal policy when you look at life span as a whole.

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