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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)

#191

Post by sanity31415 »

oillio wrote: post #184
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.

Interesting, I have not but will investigate.

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

#192

Post by alex_h »

cs-szazz wrote: post #151
alex_h wrote: post #115

Earlier quoted context omitted.

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?

I'm definitely not an expert on options contracts, but the examples of clauses I've seen are:

(In the options exercise agreement): "All certificates evidencing shares purchased under this agreement shall bear the following legend: "The shares represented hereby may not be sold, assigned, ..., except in compliance with the terms of a written agreement between the company and the registered holder...""

(On the share certificate): "This certificate and the shares represented hereby are issued and shall be held subject to all ... bylaws of the corporation, to all of which each holder ... agrees to be bound"

Either of which seems to give the company the ability to unilaterally reject any transfer/sale of shares.

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

#193

Post by pnutjam »

BowBun wrote: post #112
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…

> 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 (found…

Not really a myth, more of a way to underpay people who aren't in the know. Another facet of the "old boys club".

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

#194

Post by roflc0ptic »

simonebrunozzi wrote: post #53
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…

I believe that the tax treatment of your hypothetical Million dollars is different than the treatment of an equivalent Million dollars earned through stock options. I am not an accountant, so please correct me if I'm wrong.

I think it falls under capital gains.

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

#195

Post by sanity31415 »

cushychicken wrote: post #181
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.

Hmm, I'm not sure - how would I tell if they're classified as ISOs?

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

#196

Post by VRay »

marcus_holmes wrote: post #129
commandlinefan wrote: post #97

Earlier quoted context omitted.

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 been my experience with the startup/entrepreneur subreddits too - no-one wants to hear anything that contradicts the Startup Dream. I figure there are very few people actually walking the walk in there.

The site is engineered in a way that makes it useless for any sort of expert information. If you know less than the average Redditor about something, it's GREAT, but otherwise it's best to just steer clear.

Everybody gets an upvote button and a downvote button from day 1, and they'll downvote to oblivion anything they don't instantly resonate with. It turns every large-ish subreddit into an echo chamber pretty quickly

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

#197

Post by roflc0ptic »

mizzao wrote: post #91
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…

Can you share more about this? Trying to figure out how to be fair to future employees as a founder and considering all the options

https://www.investopedia.com/terms/p/profits-interest.asp In some detail.

There's one thing that some of these articles claim that isn't quite right. Because this arrangement technically makes employees in a partnership, per the IRS this means they have to pay their own side of social security and isn't entitled to e.g. health insurance. It turns out the department of labor has issued conflicting guidance: if I am, for all intents and purposes, employed by a company, then I am to be paid as a W2 employee and am entitled to benefits. My company has chosen to follow the department of labor's guidance.

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

#198

Post by roflc0ptic »

roflc0ptic wrote: post #190
chollida1 wrote: post #116

Earlier quoted context omitted.

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. Thu…

I only make money on this in the case of a liquidity event, or if the company decides to start paying "dividends" or whatever the appropriate finance word is here.

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

#199

Post by nullc »

jaypeg25 wrote: post #109
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.

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/

If you divide the CEO compensation increase by the number of employees in the company you'll see that it itself is not particularly relevant in employee wages.

For example Tim Cook earns 133M/yr which is $976 per employee. ... and this probably massively overstates the figure due to contractors.

Or Sundar Pichai with $86M/yr which is $676 per employee (again... not counting contractors).

Obviously it's more if you include more executives, but the number of top executive companies is basically a constant and at large companies it still ends up being not very large per employee.

This isn't to say that it isn't a concern but I don't see how to justify the belief that the executive compensation at large companies is a major factor in the overall wage market.

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

#200

Post by boatsie »

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…

This is a common enough situation that there are companies that will loan you the money to help pay for options and deal with tax liability, using the shares as collateral. I haven’t used one myself and am not a lawyer or financial advisor. One for instance:

https://www.esofund.com/blog/exercise-loan

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