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)

#181

Post by cushychicken » Mon, Dec 21, 2020, 5:12 PM UTC

sanity wrote: post #174

I'm facing a headache with some options I was granted for a startup back in 2013 for being an advisor. I didn't exercise the options at the time (hindsight is 20-20). The startup is doing well - it recently raised ~$300m at a ~$3b valuation, but my options expire in Dec 2023 and I'm growing increasingly concerned that they won't have a liquidity event before then. If I exercise my options before then it will be taxed…

Are you still susceptible to this if they are ISOs? My understanding is that ISOs are only ever taxed at the time of sale.

Sounds like you're dealing in an ISO quantity beyond the limits my mind can comprehend though.

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

#182

Post by jayd16 » Mon, Dec 21, 2020, 5:12 PM UTC

frockington1 wrote: post #133

jaypeg25 wrote: post #109

Earlier quoted context omitted.

You can't be serious. Are you insinuating it has nothing to do with executive wages ballooning (CEO compensation growing nearly 1,000% since the 1970's) and is instead because women are working? https://www.epi.org/publication/ceo-compensation-2018/

I think you are missing the scale and reaching for a political point where one does not need to be made. There are 500 CEOs in the SP500 and 164 million women in the US. The supply increase of 164 million women will have a far greater impact on the common persons salary than 500 CEOs getting paid more

Isn't that still like $7b[1] at the average 15m? Compare that to $45k[2] * for the 76k[3] women in the workforce, that's only ~$3.5b.

Its US women vs the global S&P list, but it is interesting to compare, now that you mention it.

[1]https://aflcio.org/paywatch

[2]https://www.catalyst.org/research/womens-earnings-the-pay-ga....

[3]https://www.catalyst.org/research/women-in-the-workforce-uni....

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

#183

Post by tonystubblebine » Mon, Dec 21, 2020, 5:13 PM UTC

PragmaticPulp wrote: post #173

tonystubblebine wrote: post #144

Sort of a devil's advocate question, but does the value of the options deal depend a lot on a person's ability to choose and join good startups? One example I'm thinking of is Josh Elman who seemingly got into the VC game just on having worked at three companies that went on to IPO (LinkedIn, Twitter, FB) and so that was a track record that could stand in place of an investment record. It doesn't seem that impressive…

Unfortunately, no. The game has changed so much that even early employees can get nothing in $100 million acquisition deals some times. Eero is a perfect example: https://mashable.com/article/amazon-eero-wifi-router-sale/ The new trick is for founders to do side negotiations at acquisition time if the shares would be worthless due to dilution and liquidation preference. For example, the Eero executives got cash bonus…

Interesting. But this is also what I mean about quality. This is a low quality company, right? Like, it's not like it was a $100M acquisition on the upswing. They'd dropped 2/3 of their value which means it was damaged goods. So I'm still with my original question which at core is whether employees could have seen this and worked somewhere else. I don't know.

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

#184

Post by oillio » Mon, Dec 21, 2020, 5:14 PM UTC

sanity wrote: post #174

I'm facing a headache with some options I was granted for a startup back in 2013 for being an advisor. I didn't exercise the options at the time (hindsight is 20-20). The startup is doing well - it recently raised ~$300m at a ~$3b valuation, but my options expire in Dec 2023 and I'm growing increasingly concerned that they won't have a liquidity event before then. If I exercise my options before then it will be taxed…

Have you verified the valuation of the common stock the company is reporting to the IRS?

The common stock (what you probably get for your options) is usually valued at significantly less than the valuation from the latest raise.

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

#185

Post by mason55 » Mon, Dec 21, 2020, 5:18 PM UTC

ForHackernews wrote: post #145

mason55 wrote: post #137

Earlier quoted context omitted.

> 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. If that is indeed true, then there's almost no reason not to demand being paid in real cash money rather than stock options. If the company doubles in value and I have the same amount of money, then what's the point of getting options instead of USD? This like saying,…

> If the company doubles in value and I have the same amount of money, then what's the point of getting options instead of USD?

Huh? You should compare the current value of the options to their value at the last fundraising round, not between pre- and post-money in the same round.

The doubling in value happen between (e.g.) the Series A raise and the Series B raise, not at the time of the Series B raise, and when you compare the value of your options between the raises that's when you'll see the increase in value.

For example, imagine you have 10% of the company and after the Series A raise the company is valued at $1m, so your share is $100k. Now you go and work for two years and increase the value of the company to $20m (pre-money). Your 10% is worth $2m now. If the company raises $5m for 20% ($25m post-money) in a Series B you now have 8.3% of the company (you were diluted) but your 8.3% is still worth $2m.

The stock option reward happens while you're building the company.

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

#186

Post by VRay » Mon, Dec 21, 2020, 5:18 PM UTC

zpeti wrote: post #167

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.

It’s funny how economists never talk about this (women in the workforce). Its adding 50% more people to the workforce. Yes, it’s less because women might work less or part time, buts it’s an insanely high number in terms of market effects. I wouldn’t be surprised if one of the reasons you simply can’t survive on one person per household working, as in the 60s and 70s, is simply that two people are willing to work now…

Man, I'd like to see some more info on the whole housing industry in general

It seems to be completely FUBAR to me. In Japan, housing ISN'T a glamorous investment, and I think that helps the house pricing situation a lot.. You can get a nice apartment in the fanciest part of downtown Tokyo for cheaper than a dangerous hole in the wall in San Jose

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

#187

Post by mason55 » Mon, Dec 21, 2020, 5:20 PM UTC

ransom1538 wrote: post #160

mason55 wrote: post #137

Earlier quoted context omitted.

> 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…

A top-up would increase your number of options (and thus your percentage), that is different from the value/percentage not changing as part of a new raise.

Unless you're talking about the cap table being completely wiped but that's a different scenario and I wouldn't consider that to be part of dilution.

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

#188

Post by throwaway4748 » Mon, Dec 21, 2020, 5:21 PM UTC

barnacled wrote: post #171

throwaway4748 wrote: post #156

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 muc…

what was the company valued at and what % did you own after dilution? Roughly speaking of course. I cashed out $500k pre-tax as employee #1 at ~1.3% post-dilution but pre-IPO with the startup valued at $35M so had the company been valued at a sub-unicorny $350M or so it would have made me a millionaire. Just wondering how the % numbers compare.

Smaller percentage of a much larger company. It’s a speculative market right now which helps. Most of these startups you’re seeing in the news are going public at $5B-$10B plus valuations. The big ones for $50B+

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

#189

Post by JumpCrisscross » Mon, Dec 21, 2020, 5:23 PM UTC

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…

> In that case, don't I as an employee get liquidity either way, since it's being bought at the agreed upon price?

Correct. The problem is a lot of companies go further. They restrict sales completely. In practice, insiders are allowed to purchase at depressed prices in tenders from time to time and then resell at a mark-up in the open markets.

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

#190

Post by roflc0ptic » Mon, Dec 21, 2020, 5:23 PM UTC

chollida1 wrote: post #116

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…

So I'm fairly ignorant about these things, but I'll give it a go.

My company is an LLC. In a sense, I have this equity. This is how the value is defined:

Value = Percent_Of_Shares *(Current_Price_Of_Company - Price_of_Company_At_Time_Of_Issuance)

Note that, on the day these issued to me, the value here is equal to zero, because the current price of company is equal to the price of company at time they are issued. Thus, I have received something which has no value, and thus have no tax burden. Technically I'm now a partner in the LLC.

This has tax implications: when the company is making money, I owe tax money on that. However, they're in growth mode, and losing money, which means I get to carry a tax writeoff. Further, it's written into the company's bylaws that if they make money, they're obligated to give employees a distribution equal to the tax burden that the employee will incur, i.e. when there is a tax burden outside of a liquidation event, they are obligated to give me enough money to cover it. Also, if they sell the company, my shares are vested immediately. I don't know what happens to them covering the taxes if I leave; maybe I become liable for it, and there's a downside there.

The shares are non transferrable, which is lame but apparently quite standard.