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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)

#201

Post by chubot »

ghufran_syed wrote: post #62

YC has historically had a big influence on improving financing terms for founders and reducing founder-hostile behavior by investors, by creating competition among investors for YC companies. Should YC maybe consider developing and enforcing a code of conduct addressing these issues, that might similarly improve the situation for start-up employees? They could maintain a public list of YC companies that abide by the…

Blog post from 2014: https://blog.samaltman.com/employee-equity

That's more of an admonishment, but at least they recognized the problem ...

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

#202

Post by lumost »

bob33212 wrote: post #158
lumost wrote: post #113

Earlier quoted context omitted.

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 s…

I think that hints to how these pay bands come to be within a company though, it's not a transparent and liquid market with a bid/ask spread and a clearing price. In practice the company decides a band that they think gets people in the door. HR gets involved, and management settles for a 0-2% inflationary increase YoY rather than the marginal rate.

If you combine this with one employer bordering on a monopsony for buying a particular category of labor - then pay won't move in proportion to productivity.

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

#203

Post by solumos »

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…

You should check out SecFi - they helped me out of a similar snag (non-recourse loan).

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

#204

Post by forkerenok »

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…

You can get non-recourse financing to cover exercise costs and taxes. I.e. you can offload the risk of early exercise for a share of the potential upside.

Source: I work at Secfi (https://secfi.com) and our equity and tax advisors are amazing.

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

#205

Post by rexreed »

Stock options are a poor proxy for company value. Instead, a company should allocate an interest in any in-the-money exit towards a pool that is distributed to employees on a rata share depending on duration of employment and period of employment. I've been working on an interesting formula for this that even rewards those who have left the company.

Most employees don't need or want a share of the company. They want a share of the profits or proceeds from an exit.

For example, a company can allocate 20% of all in-the-money proceeds from an exit to the Employee Exit Share pool. An employee's share of that Exit pool will be based on their employee-months worked divided by the total employee-months worked in the company, with every one year of employee months worked counting an additional time for the purposes of calculation. This thus rewards early employees and those who have worked for longer durations with a larger share.

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

#206

Post by jonathankoren »

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.

He’s being hit by the AMT due to the value of the options. If you’re hit by the AMT, you’ll owe taxes on the spread between the strike and FMV on exercise, even though you haven’t sold them.

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

#207

Post by redfern314 »

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.

Not quite true - ISOs can incur AMT at time of exercise, which is kind of complicated and doesn't always create a tax burden. In the $100k range, it probably will, but they'd have to do the calculation to find out.

https://www.esofund.com/blog/amt-tax

Regardless, they'll still have to front the $ to exercise and be left with illiquid stock. It's not a good situation.

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

#208

Post by lock-free »

PragmaticPulp wrote: post #147
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…

Blaming bankers and proposing revolution is one of those explanations that sounds satisfying but doesn’t really match the evidence. In some ways, as markets have become more efficient and transparent it becomes harder, not easier, for finance people to simply squeeze money out of the systems through financial tricks. We’re also living in a world where interest rates are at historical lows, making the cost of capital…

I agree it doesn't make sense to blame bankers for exploiting the legal system that allows them to enrich the rich at the expense of the poor for a commission, other than the revolving doors between government and industry and lobbying efforts to maintain our broken society the way it is.

There are numerous financial products and services available to only the wealthy that reduce tax burden and increase wealth and income that are inaccessible to anyone else, create little value, and are predicated on the concentration of wealth in the hands of a few.

Just a random example, if you can afford to buy a home in cash, you shouldn't because the mortgage terms the banks will offer you are too good to pass up - you'll come out ahead just by taking on low interest debt and accounting for the rise in the home's value plus the more lucrative investments you can make with the cash.

In other words, the people who get the most help are the ones who need it the least. That is the travesty of contemporary finance.

When the critique of the financial system is made its not in place of supply and demand for labor but the fact it creates very little besides disparity. The god of liquidity should not be worshipped so much.

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

#209

Post by ashtonkem »

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 --…

Increasingly, negotiating a job offer at a startup feels like buying a used car. There’s an obvious information asymmetry, and it’s hard to escape the feeling that you’re getting screwed.

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

#210

Post by jonathankoren »

sanity31415 wrote: post #195
cushychicken wrote: post #181

Earlier quoted context omitted.

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?

It would be in your grant letter explaining the number of options and the strike price.
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