Is there any reason why stock options can't be non dilutable? If new investors want to come in, they need to buy existing shares, the number of shares can be infinitely divisible to make it easy to always accommodate new investors.
Startup Stock Options – Why A Good Deal Has Gone Bad (2019)
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Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)
#82Has 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.
The percentage is actually more relevant to what we're discussing here, because it represents the gain from the employee's known starting point when they were hired. If they were only offered a measly number of options on being hired, well they can just decide to bail - it's the percentage gain that is the unknown and variable part of the equation.
> Why would you expect options to pay big for a non-unicorn?
I think the idea is that there should be a good swath of successful startups between "failed" and "unicorn". Indeed, the whole name unicorn came about because they used to be incredibly rare. So the parent is really asking "If you were in a moderately successful startup, did you get anything out of your equity?"
Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)
#83Earlier quoted context omitted.
It is pretty remarkable if it prevents dilution. Are you sure there's no weasel-wording in your contract that allows arbitrary changes in the future, has funky exercise restrictions, etc.? Their special tax structure makes me suspicious as well (if this is the US). Sadly I think VCs saw all the mini-millionaires being created at FAANGs in the last decade and have pressured many companies into watering down stock comp…
I don't think it prevents dilution. Hard to believe investors would agree to a scheme where new rounds pay a % fee directly to employees.
It doesn't. It's basically still monopoly money. According to the org, they've had 3 or 4 rounds of financing, and each time they've taken on new funding they've distributed new shares to offset the dilution. This isn't policy they've committed to, just something they've opted to do.
Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)
#84Earlier quoted context omitted.
Personally for me it has always been faster personal growth from wider responsibilities. This makes a lot of sense in some stages of your career and your career goals but hardly for everyone.
I’ve never heard of any startups where you can obtain faster skill or personal growth. “Wear many hats” means you must be whatever type of firefighting janitor the company needs this week, which often causes skill atrophy not skill growth. Larger companies not only offer better compensation, but usually offer much better career development, responsibility growth, training and “learn by doing” opportunities. The start…
Big corporations will give you more opportunity to “learn by doing” than a startup? Hard to take your comment seriously when you say something like that.
Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)
#85Earlier quoted context omitted.
So if people enjoy there work we don't have to compensate them competitively?
I don't see how what I wrote led to this assumption. It's just that I don't value the shares in a startup - ever. I value the salary side, and enjoy the interesting work.
To many people who value $$$ to get other important things in their life, shares are a meaningful factor in their expected value from devoting their life to a job.
So when you say you don't work at a startup for monetary reasons, and that you don't care about shares, which has an expected value of real money despite the uncertain outcome, it's natural to wonder if you don't care about compensation aka money.
Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)
#86Past comments: https://news.ycombinator.com/item?id=19624164
Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)
#87> “For later employees make sure the company offers “refresh” option grants to longer-tenured employees. Better yet, offer restricted stock units (RSUs). Restricted Stock Units are a company’s promise to give you shares of the company’s stock. Unlike a stock option, which always has a strike (purchase) price higher than $0, an RSU is an option with a $0 purchase price. The lower the strike price, the less you have to pay to own a share of company stock. Like stock options, RSU’s vest.”
Aren’t RSUs taxed at the time of grant? Therefore in a refresh grant, the employee would get hit with a large tax bill on the fair market price of the equity, even with an 83(b) election. Most people probably don’t have that kind of money to lay down up front on something that could still go bust. At least with options, you can always (unless you get fired) stay long enough to see the come through to IPO where options are then a sure thing. Am I missing something here on the quote above?
Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)
#88Earlier quoted context omitted.
> Not if they just issue themselves more shares This doesn't happen in the real world. When more shares are issued, it's because you've raised another capital round and the new shares go directly to the new shareholders (new VCs) and future employees who haven't yet been hired. New shares wouldn't go to the founders. Yes, it's hypothetically possible, but it doesn't happen in the real world.
It happens regularly and it's called a re-up http://christophjanz.blogspot.com/2018/11/founders-please-do...
Great article! I'd heard about this maneuver only in theory before and never saw it written up.
Sounds like a bit of a moral hazard / principal agent problem for founders!
Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)
#89I 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…
It is pretty remarkable if it prevents dilution. Are you sure there's no weasel-wording in your contract that allows arbitrary changes in the future, has funky exercise restrictions, etc.? Their special tax structure makes me suspicious as well (if this is the US). Sadly I think VCs saw all the mini-millionaires being created at FAANGs in the last decade and have pressured many companies into watering down stock comp…
Yes, I was suspicious, too. They offset my suspicions by 1. paying me a generous salary, and 2. giving me time to talk to an accountant about it. The accountant had never heard of it, but looked into it and it was legit. The reason that it's unfamiliar is because it's so danged advantageous to the employees.
There is some room for them to dilute the shares out of existence. Notably I don't have to exercise them, I already "own" them. The vesting schedule is really more of a forfeiture schedule. If I leave after a year, I forfeit 3/4s of them. Otherwise, they're mine into perpetuity, until liquidation.
Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)
#90Earlier quoted context omitted.
So if people enjoy there work we don't have to compensate them competitively?
I don't see how what I wrote led to this assumption. It's just that I don't value the shares in a startup - ever. I value the salary side, and enjoy the interesting work.
Work at a startup in a field you love with coworkers who also pour their blood sweat and tears into the company, only to have the founders fail upwards and employees left with nothing. Then you might feel differently.
Founders shouldn't be exiting with massive rewards when the risk they took was only marginally higher than early employees.
Yeah, I enjoyed my time there and I learned a lot. But a mismanaged company shouldn't reward the management and leave employees with nothing after all is said and done.