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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)

#111

Post by xmaaayyy »

est31 wrote: post #101
srtjstjsj wrote: post #63

Earlier quoted context omitted.

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.

Unicorn means the startup is as rare as a unicorn. Taking that as your benchmark for success is extremely unhealthy.

I think the generally accepted definition (as I understand it) is any startup with a private valuation over $1bn. So there is a lot of room for very successful companies that are not unicorns.

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

#112

Post by BowBun »

TuringNYC wrote: post #110
travisoneill1 wrote: post #107

Earlier quoted context omitted.

I don't buy this explanation. Very few employees are paid in any financially complex way. Wages dropping overall must have a different explanation, which I suspect is an increase in labor supply due to women entering the labor force and illegal immigration combined with a decrease in demand due to automation.

>> I don't buy this explanation. Very few employees are paid in any financially complex way. It depends on the class of workers. I'd agree with you w/r/t most wage earners being paid in transparent manner. But I think the GP comment was referring to technology workers (given the context of HN.) In the case of tech workers, many are paid in very complex ways. If you have illiquid stock options in a private company, an…

> if you have taken a below-market salary as many startup employees have

I think this is part of the startup mythos. At the three startups I've worked at (~10 people), none of us had to sacrifice competitive salaries for stock options. The options were on top to incentivize staying at the company longer.

I wonder how common it actually is for people to take significant paycuts in 2020 for a startup opportunity (founders aside)

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

#113

Post by lumost »

travisoneill1 wrote: post #107
mensetmanusman wrote: post #102

The recent HN article on meritocracy comes to mind. I had never considered it this way in the past, but in the 70’s, productivity started decoupling massively from productivity gains. I.e. the best people at finance (meritocracy) figured out how to capture all the new earnings relative to the workers (who didn’t know this game was going on). This has snowballed into a situation where the financial meritocracy is comp…

I don't buy this explanation. Very few employees are paid in any financially complex way. Wages dropping overall must have a different explanation, which I suspect is an increase in labor supply due to women entering the labor force and illegal immigration combined with a decrease in demand due to automation.

I think you overestimate how much negotiating power an individual worker has when deciding the price for their labor.

Anecdotally, in the Software field there is a lot of "price anchoring" where a large employer decides that a software engineer makes ~125k, and both smaller/peer employers decide that a software engineer makes 125k +/- 10%.

From past experience the base "going rate" in a given market doesn't seem to change all that much unless a large employer decides to change the going rate because a higher or lower price point better suits their business - other companies will set their salaries to the baseline. Big Tech has recently been dragging wages up across the board by both hiring in volume, and paying more than everyone else.

I'd be curious if anyone has a formal study on price anchoring in wage negotiations.

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

#114

Post by xmaaayyy »

hn_throwaway_99 wrote: post #82
srtjstjsj wrote: post #63

Earlier quoted context omitted.

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…

Unicorns are startups with private valuations over $1bn, but I don’t know anyone that wouldn’t be happy with 1% of a $100M non-unicorn exit

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

#115

Post by alex_h »

cs-szazz wrote: post #103
JumpCrisscross wrote: post #60

The elephant in the room are transfer restrictions. VCs demand their preferred stock trade in the secondary market. At the same time, common stock is locked down. If the common stock is sellable before the company exits, the risk-reward calculus for company equity shifts in employees’ favor.

How does something like this mesh with selling common stock but the company having right of first refusal? Say I want to sell common stock that I own, to someone who meets the SEC accredited investor definition. It seems that right of first refusal means that the company could buy the stock instead, but it would have to be at the price that I set with the external investor. In that case, don't I as an employee get li…

I learned the hard way that options agreements tend to have additional clauses allowing the company to unilaterally restrict sales. The contract might look like it has a straightforward process for employees to sell, with a company first right of refusal (with the company purchasing the stock instead). But there is usually additional fine print that basically gives the board veto power over any transfer of stock.

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

#116

Post by chollida1 »

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…

Help me understand this as it sounds interesting.

So when do you get this equity? Is it only at a liquidity event?

Because normally you pay taxes when you get something of value, equity in this case but you can't always sell said equity due to your company being private.

I'm assuming your company is private as a public company doesn't have these issues, they just give you stock, you sell stock, everyone is happy.

Or put another way, how does this setup not give you a tax bill each year, assuming you get your equity each year, that you have to pay with your own cash?

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

#117

Post by [deleted] »

cddotdotslash wrote: post #43
brabel wrote: post #10

Earlier quoted context omitted.

Why would anyone want to work for your startup when they can get much higher salaries working for larger companies? Stock options used to be that differentiator for startups... now it's just an empty promise in most places.

> Why would anyone want to work for your startup when they can get much higher salaries working for larger companies? As much as I agree with the "lottery ticket" mentality, this line of thinking has been popular to parrot on HN for at least 5-10 years. And as far as I'm aware, startups don't have much trouble attracting senior talent. So until that changes significantly, they are going to continue offering lower sal…

[deleted]

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

#118

Post by cgarvis »

travisoneill1 wrote: post #107
mensetmanusman wrote: post #102

The recent HN article on meritocracy comes to mind. I had never considered it this way in the past, but in the 70’s, productivity started decoupling massively from productivity gains. I.e. the best people at finance (meritocracy) figured out how to capture all the new earnings relative to the workers (who didn’t know this game was going on). This has snowballed into a situation where the financial meritocracy is comp…

I don't buy this explanation. Very few employees are paid in any financially complex way. Wages dropping overall must have a different explanation, which I suspect is an increase in labor supply due to women entering the labor force and illegal immigration combined with a decrease in demand due to automation.

The population has grown from 205 million in 1970 to 330 million today. If you think 50% of the people join the workforce that is an increase of 65 million more people working.

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

#119

Post by Bresenham »

travisoneill1 wrote: post #107
mensetmanusman wrote: post #102

The recent HN article on meritocracy comes to mind. I had never considered it this way in the past, but in the 70’s, productivity started decoupling massively from productivity gains. I.e. the best people at finance (meritocracy) figured out how to capture all the new earnings relative to the workers (who didn’t know this game was going on). This has snowballed into a situation where the financial meritocracy is comp…

I don't buy this explanation. Very few employees are paid in any financially complex way. Wages dropping overall must have a different explanation, which I suspect is an increase in labor supply due to women entering the labor force and illegal immigration combined with a decrease in demand due to automation.

> an increase in labor supply due to women entering the labor force

In the USA, there has been a (relative) decrease in labor supply due to women leaving the work force. Women's participation in the labor force by percentage has decreased over the past twenty years.

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

#120

Post by jannes »

est31 wrote: post #101
srtjstjsj wrote: post #63

Earlier quoted context omitted.

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.

Unicorn means the startup is as rare as a unicorn. Taking that as your benchmark for success is extremely unhealthy.

I think there's been a bit of an inflation when talking about unicorns. It just means any startup that is valued at >= $1bn
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