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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)

#281

Post by mulcahey »

TheCoelacanth wrote: post #166
rwmj wrote: post #33

I think there are also tax implications of leaving a start-up with vested stock that you may not be able to sell on the market for another 8 years?

Actual stock, no. Options, which are probably more common than actual stock with start-ups, you have to pay tax on the "profit" when exercising them. Often, you only have a short time to exercise options when you leave a company.

I think you pay taxes when you exercise if they are NSO. If they are ISO you pay on sale of the shares you acquired & they’re subject to AMT.

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

#282

Post by dehrmann »

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)…

There was on place I left where the company was doing OK, but there were a lot of red flags on exercising options, so I let them expire. Someone asked why I didn't just exercise some for fun. I didn't want to have to do the taxes. Not pay the taxes, I mean fill out the forms.

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

#283

Post by silentsea90 »

joshuamorton wrote: post #279
silentsea90 wrote: post #260

Slightly related, Stripe now gives fixed $ amount of RSUs per year to new hires, which limits both upside and downside significantly. Not to act cynical, but to me it seems that this is another way of screwing employees by denying them stock appreciation on their initial grant. I understand that new hires would be signing off on this while joining so the rug isn't pulled beneath their feet, but this does seem like a…

> Slightly related, Stripe now gives fixed # RSUs to new hires, which limits both upside and downside significantly. Pretty much all companies start doing this once they get large-ish (snap, airbnb, lyft, uber, etc. all did essentially the same thing). At the valuation stripe has, I'm not seeing the downside, given that the upside of options is limited once you're the size of stripe today. > but to me it seems that t…

I reworded my comment - but I meant that you're guaranteed (say) $100k worth of stock every year, so the #RSUs will be calculated at the start of each year. If the valuation of Stripe is 70 Billion today and one gets granted 100k worth of stock this year (say 100 units), if valuation is 140 Billion next year, employees get 50 units next year (ignoring dilution etc), instead of 100 units each year.

I meant that it is fixed dollar amount not fixed RSU count per year at Stripe, if that helps clear it

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

#284

Post by dehrmann »

mateus1 wrote: post #261

I was part of a leadership team at a startup for 4.5 years (went from 10 to 200 employees, series A and B). During that time I accumulated a significant number of stock options which could potentially make me a millionaire. I left the company because my salary was incredibly low relative other companies in the same area. I have left and I have no possibility of exercising the options. I technically could but that wou…

If they haven't expired, you should look into the companies that will loan you money to exercise. ESO Fund is one, Employee Capital Partners is another, and I'm sure there are others. There's also the option of trying to sell shares on a platform like EquityZen.

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

#285

Post by robertlagrant »

spamizbad wrote: post #269
HALtheWise wrote: post #231

Earlier quoted context omitted.

I wouldn't dismiss so quickly that it's impossible for some people to create orders of magnitude more value than others, or for that distribution to change dramatically with time. In farming, for example, increased mechanization has allowed a ~100x increase in per-worker production, and unless literally every other occupation had the same change over the same time period, that should lead to dramatic productivity dif…

I am reminded of Sagan's standard "Extraordinary claims require extraordinary evidence" Has been there been any detailed breakdown of how much more effective the median CEO in 2020 is over the median executive in 1970? I am certain they are doing things better, have more data, etc but what scale are we really looking at here? Because, just thinking out loud here, the bulk of the workforce in the United States is more…

First demonstrate that it's an extraordinary claim.

Effectiveness isn't the measure, exactly, it's how replaceable the CEO is, and the same is true of any employee. If everyone is more educated (and education may be nothing to do with what's required, incidentally), then people are still just as replaceable.

I have no good answers, as I definitely think there are pros and cons to modern executive teams, but it starts with replaceability.

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

#286

Post by dehrmann »

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.

One question to ask when interviewing at a startup is when was the last time someone sold common shares. You can also turn it around and talk with someone at a platform like EquityZen and ask them "I'm negotiating an offer at X; what has you experience been with them?" Some startups make it very easy for people to sell shares, some don't, and some are so small there's no market for the shares.

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

#287

Post by robertlagrant »

an_opabinia wrote: post #230
lisper wrote: post #219

Earlier quoted context omitted.

> doesn’t really match the evidence Here's some data: https://www.pewsocialtrends.org/2020/01/09/trends-in-income-... Something is driving down wealth at the low end while driving it up at the high end. It seems unlikely in the extreme that this a reflection of actual value produced by people at the high end relative to those at the low end. Much more likely is that this is a reflection of some kind of structural pro…

You could just punch income inequality into Google Scholar or Google Books and learn at least 100 ways capital concentration or poverty is perpetuated, via the natural experiments of many rich western countries and US states.

Don't read too much into this analogy, but if I search for Flat Earth I'll get a load of stuff that talks about how the Earth is flat, and not much else.

For example, you may not get the following explanation much, even though it requires no conspiracies and explains the outcomes: income is disproportionate because risk and capital are more important to a business' success than any particular individual's labour, and so they are correspondingly rewarded more as well.

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

#288

Post by mateus1 »

dehrmann wrote: post #284
mateus1 wrote: post #261

I was part of a leadership team at a startup for 4.5 years (went from 10 to 200 employees, series A and B). During that time I accumulated a significant number of stock options which could potentially make me a millionaire. I left the company because my salary was incredibly low relative other companies in the same area. I have left and I have no possibility of exercising the options. I technically could but that wou…

If they haven't expired, you should look into the companies that will loan you money to exercise. ESO Fund is one, Employee Capital Partners is another, and I'm sure there are others. There's also the option of trying to sell shares on a platform like EquityZen.

I'd love that. I don't think there are any players in that market in Brazil.

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

#289

Post by lemonspat »

forkerenok wrote: post #204
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.

Could you explain more on what this means?

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

#290

Post by joshuamorton »

Groxx wrote: post #268
formalsystem wrote: post #81

Is there any reason why stock options can't be non dilutable? If new investors want to come in, they need to buy existing shares, the number of shares can be infinitely divisible to make it easy to always accommodate new investors.

Lets say your company is valued at $100 and all stock is claimed for current employees. Now you want to raise money by selling 50% of your company to investors. So you create $100 more and now they own 50% (at $200 valuation). This means the investors either over-paid (2x what they were worth!), or you were strongly under-valuing the stocks that existed before. If you dilute , they get 50% at $50, and the existing st…

Let's imagine that there are two employees who each own half the company, so each has $50 of stock in the $100 company. You wish to raise money.

You can sell 50% of each persons stake, or all of one person's stake, or something else. Without dilution, it would be a founders job to convince the other employees that giving up some of their shares was necessary (assuming the employee equity pool was the only source, but s/employees/other investors for the same result in general), and individual investors or employees could make that choice. Dilution allows certain investors to make that decision on behalf of other investors.

If I wanted to invest in 1% of a company, I want to be in control of that choice, not have someone else modify my investment to be smaller (even if the $-value stays the same, that defeats the point of my investment!)

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