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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)

#151

Post by cs-szazz »

alex_h wrote: post #115
cs-szazz wrote: post #103

Earlier quoted context omitted.

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.

Interesting, are you able to share more? Or if you know where I might be able to read more about this?

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

#152

Post by PragmaticPulp »

commandlinefan wrote: post #97
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 --…

This isn't new, either - this happened to me a couple times in the late 90's/early 2000's and I've since made a point of not even taking "stock options" into consideration when evaluating job offers. Yet my most downvoted comment on reddit ever was on /r/cscareerquestions when somebody was asking how to weigh stock options when considering job options and I said "not at all" and shared my own experiences.

That’s strange. My experience with /r/cscareerquestions and other online forums has been excessive cynicism about everything, especially stock options.

The catch is usually when people are asking about RSUs of public companies or other relatively liquid and predictable compensation, in which case equity comp should definitely not be valued at $0.

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

#153

Post by TuringNYC »

yourapostasy wrote: post #125
TuringNYC wrote: post #110

Earlier quoted context omitted.

>> 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…

> ...at startups as employees, you dont get to see the cap table, so the whole maze is invisible too! I've never heard it adequately explained why employees should accept this state of affairs. Not only is the cap table invisible, but the fully-diluted cap table and terms of dilution and many other terms and conditions are also hidden from non-founders/investors at most startups I've read about. I've heard so many st…

I think I can explain it looking at some of the comments on the similar discussion yesterday: https://news.ycombinator.com/item?id=25487130

It is the same as acting and sports -- people look the handful of winners, ignore the field of dropouts, and think they too can become a winner. They see AirBNB and think their startup is the next AirBNB.

Also much like acting and sports, there are a constant stream of new entrants who have not learned the lessons.

I want to be fair here -- I work at a startup and I love it. But I value my equity at zero and nothing more. I chose to work at a startup because I get to do cross-functional work rather than get stuck into a silo of a silo at a large company. I took a significant paycut from a large company salary and a significant upside cut from when I was a founder in exchange for more accelerated learning and exposure to all parts of the company.

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

#154

Post by PragmaticPulp »

rongenre wrote: post #80

The other point here is that it's taking ~10 years to go from a company being started to going public. So most employees are going to have to make the decision to either cough up thousands to exercise their illiquid options and pay taxes on them or just have them expire worthless. At this point, joining as a seed-round or series A employee seems like a sucker's bet if you're expecting equity to be worth anything.

IPOs are rare. Most exits come in the form of private acquisitions. You don’t hear about the latter group in the news because they’re usually much smaller companies.

Many IPO-track companies are growing fast and attracting serious investment, so they pay engineers top dollar. They want to maximize chances of getting to IPO so they don’t benefit from cutting corners on a few engineers.

If you have The opportunity to join an actual IPO-track company then go for it. The catch is that many startups will claim to be headed for IPO, so you have to look at actual growth and TAM and make your own judgments.

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

#155

Post by fortran77 »

Waterluvian wrote: post #70
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)…

The tax implications make this deal a bad one nearly every time. It's simply not worth taking the chance.

(BTW: Congress bailed out dot-com specu-vestors who claimed not to understand the tax event that occurrs when exercising options. https://www.mercurynews.com/2008/11/10/rescue-bill-offers-re... )

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

#156

Post by throwaway4748 »

I became a millionaire with options from a startup IPO and hardly feel that I won the lottery. There’s thousands of employees at dozens of private companies that either went public this year or will next that will be in the same position.

Certainly it helps that there’s a deluge of liquidity in the financial markets right now that has completely changed the calculus from even just a year ago. I would certainly be much more optimistic now than any other recent point in time if you work at a company with good growth prospects.

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

#157

Post by nfriedly »

rwmj wrote: post #94
srtjstjsj wrote: post #64

Earlier quoted context omitted.

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

Don't you have to pay tax on the notional value of the shares, which leaves you in a difficult position because you cannot realise those gains.

I think it depends on if you trigger the Alternative Minimum Tax. The default is that you don't pay taxes on ISOs at execution time, but if you trigger AMT then suddenly you do pay taxes, it can be a lot of taxes, and you may have no way to sell the stock to get the cash to pay the taxes.

(Obvious you should talk to a tax professional rather than taking advice from a random stranger on the internet before taking any action.)

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

#158

Post by bob33212 »

lumost wrote: post #113
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 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 c…

I don't think they just pull 125k out of the air. I think that at 90k you are not going to get many great candidates. And at 250k you risk spending a LOT more money and still not being able to successfully recruit people that are much better than the 125k people. It is not like all your 125k people are going to quit when you double salaries to make way for all the FAANG people who are looking to switch jobs for the same salary.

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

#159

Post by pjdemers »

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

If you were born before between 1935 and 1955, this might have affected your career progression. Maybe. Because the more workers meant a bigger economy and therefore more jobs overall. If you were born before 1925 or after 1975, it had zero effect.

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

#160

Post by ransom1538 »

mason55 wrote: post #137
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 --…

> 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. People are way too obsessed with dilution because it sounds so scary. "With the stroke of a pen they can create a billion more shares and your percentage goes from 5% to 0.01%" The reality is that all common shareholders have the same incentive to not dilute the outstand…

“So you might own 1% of a $10m company before the dilution and 0.5% of a $20m company after the dilution but the value of your holding didn't change.”

Nope. If you are topped up (which means you still have political standing) then you start a new vesting schedule. So all those shares you worked for and vested — you can work for again!! Yay! Until another 4 years you are diluted. Yay! But likely there will be another round while you wait to vest the shares you already had!! Hahahaha!

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