Startup Stock Options – Why A Good Deal Has Gone Bad (2019) • Hacker News Board

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#61

Post by srtjstjsj » Mon, Dec 21, 2020, 1:36 PM UTC

johannes1234321 wrote: post #49

ClumsyPilot wrote: post #23

Earlier quoted context omitted.

So if people enjoy there work we don't have to compensate them competitively?

The compensation has to cover the needs/expectstions. See Maslow's hierarchy as a simple model. Pay me a million for something I don't care about in a bad environment and I won't do good work. Pay me 50k (I make more, but 50k is a good value for a good living here in the region) and let me do something I like in a fun environment and I get things done.

Why are we talking about good work? Whether the work is good isn't the employee's problem. I'd love to get $1m/yr for bad work, so I can put that money to good use.

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#62

Post by ghufran_syed » Mon, Dec 21, 2020, 1:38 PM UTC

YC has historically had a big influence on improving financing terms for founders and reducing founder-hostile behavior by investors, by creating competition among investors for YC companies. Should YC maybe consider developing and enforcing a code of conduct addressing these issues, that might similarly improve the situation for start-up employees?

They could maintain a public list of YC companies that abide by the code of conduct in order to encourage good behavior, and to help communicate to potential employees that they would get a “fair” option deal (as early investors, they would clearly have access to the terms of any financing deal).

[EDIT: they could also maybe publish a list of investors who have committed to following the guidelines, and consider excluding VC firms from YC events if they won’t commit to those standards]

Depending on how serious YC was about making a difference here, going against the code of conduct might even be grounds for exclusion from the YC community? My understanding is that YC has always focused on what’s best for the founders, even when they were the outsiders in silicon valley and at their own financial expense. Maybe now that YC is such an important player in the silicon valley ecosystem, they could use that power to maintain the health of that ecosystem in a way that few others could?

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#63

Post by srtjstjsj » Mon, Dec 21, 2020, 1:40 PM UTC

phendrenad2 wrote: post #29

Has anyone here made significant (2x exercise price) amounts from stock options at a non-unicorn in the last 5 years?

Significant is $, not %. 10% of $1M beats 100% of $10k.

Why would you expect options to pay big for a non-unicorn? Unicorn means the startup investment succeeded in its goal. No one gets rich when their investment fails.

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#64

Post by srtjstjsj » Mon, Dec 21, 2020, 1:41 PM UTC

rwmj wrote: post #33

I think there are also tax implications of leaving a start-up with vested stock that you may not be able to sell on the market for another 8 years?

Only in the sense that you can't harvest losses by selling.

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#65

Post by rutthenut » Mon, Dec 21, 2020, 1:41 PM UTC

cj wrote: post #55

konschubert wrote: post #46

Earlier quoted context omitted.

It happens regularly and it's called a re-up http://christophjanz.blogspot.com/2018/11/founders-please-do...

The article is from 2018, and reads: > In the last year, we have seen, on more than one occasion, a behavior among later-stage VCs that we’ve rarely observed in the years before Which seems to imply it's not a common practice. As I mentioned, it's 100% theoretically possible to do it, but the percent of companies that actually do it is very low. It would be not only bad for early employees, but also bad for early inv…

Your points about why this is bad are entirely correct.

But founders with shareholding may (do) work with later investors to their joint benefit, screwing over other early shareholders or investors. With VC money holding shares already, that is not so likely to happen - unless it is the VC buying-in more equity. However, smaller enterprises with startup beginnings are very likely to follow this pattern, as later investors (and perhaps greedy founders) do not care about those that came before.

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#66

Post by rutthenut » Mon, Dec 21, 2020, 1:43 PM UTC

thomasahle wrote: post #36

roflc0ptic wrote: post #26

I just started working somewhere that does a different equity scheme called “profit interest.” The gist is, they issue you equity whose worth is based on growth in valuation from when you joined. So if you’re granted 1% shares and the company grows from 100m to 200m on liquidity, you’re entitled to 1m. It avoids you having to front money for stock options, and it also avoids the tax burden b/c when issued, the shares…

> So if you’re granted 1% shares and the company grows from 100m to 200m on liquidity, you’re entitled to 1m. It avoids you having to front money for stock options, and it also avoids the tax burden b/c when issued, the shares are worth zero dollars Isn't that just like normal stock options?

The 1% options would be one percent of shareholdings at the time the option was offered.

With more shares created/sold later, the dilution means when the options mature, they will be less than 1% of the total company shareholding, or value.

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#67

Post by srtjstjsj » Mon, Dec 21, 2020, 1:44 PM UTC

konschubert wrote: post #13

polote wrote: post #12

In what world do we want employee to have stock options ? I mean, for me this is where the problem is, there is no reason to promise a lot of equity to an employee. Pay them well. Now any (private growing) company is well funded, you can afford market salaries.

Stock options may motivate some people to think more about the interests of the company rather than their own.

The question was more why employees should agree to it.

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#68

Post by contingencies » Mon, Dec 21, 2020, 1:47 PM UTC

ransom1538 wrote: post #19

What makes options a rough deal is the part of the contract: "We can change anything at anytime for any reason". What kills your options is dilution. You have no control over this AND as time progresses you get more and more diluted with new hires and rounds. You could be the second employee - however, if the founders & VC decide to make 20 million more shares [which they will] - you effectively have toilet paper --…

We can change anything at anytime for any reason

In private companies, always remember: (1) control ≠ equity (2) equity ≠ profit (3) equity ≠ information.

If this is new to you read Brad Feld's Venture Deals book and do the online course, it's time well invested.

Note this is simply the nature of private equity. Companies go public to drink at the capitalisation trough of public markets, but the cost is regulation and increased transparency. Companies that stay private are rarely bound by significant rules in terms of board or management decisions redefining structure, equity, terms and so forth. There are at least four key firewalls (exercise, issue, share class, transfer) between "options" as issued or promised and meaningful equity value extraction for an employee. Good lawyers can probably name five more, and definitely dream up or deploy tens more at any time without breaking laws.

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#69

Post by dd36 » Mon, Dec 21, 2020, 1:48 PM UTC

roflc0ptic wrote: post #26

I just started working somewhere that does a different equity scheme called “profit interest.” The gist is, they issue you equity whose worth is based on growth in valuation from when you joined. So if you’re granted 1% shares and the company grows from 100m to 200m on liquidity, you’re entitled to 1m. It avoids you having to front money for stock options, and it also avoids the tax burden b/c when issued, the shares…

Doesn’t that just mean you work for an LLC?

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#70

Post by Waterluvian » Mon, Dec 21, 2020, 1:51 PM UTC

ransom1538 wrote: post #19

What makes options a rough deal is the part of the contract: "We can change anything at anytime for any reason". What kills your options is dilution. You have no control over this AND as time progresses you get more and more diluted with new hires and rounds. You could be the second employee - however, if the founders & VC decide to make 20 million more shares [which they will] - you effectively have toilet paper --…

I bought $1000 of shares at a company when I left. $0.75. Their valuation at the time was like $18.

In retrospect I'm pretty sure all I did was buy myself a tax burden when they fold or pocket change when they exit.

The mistake I made was not realizing the parent comment: that I lack the information to make an informed decision or to be sure they don't just dilute to oblivion. The numbers I did have access to (above) communicated a very misleading story to me.