Earlier quoted context omitted.
Jesus fucking Christ
I asked a question to learn more, please be nicer.
Extraordinary
Startup Stock Options – Why A Good Deal Has Gone Bad (2019)
361–370 of 379 posts
Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)
#362just to a add a raw account of my experience for what it's worth: I joined a startup as employee #1 and though I opted to have slightly more salary than shares I ended up with 3.2% of the shares. I was with the startup long enough to fully vest and left with actual shares rather than share options (a product of me joining when the startup was just founded and had no share option scheme). After I left at I believe the…
Would you mind sharing what could have been done to prevent the last minute PAYE shock? Was this something that could have been avoided, or an inevitably that you should have been made aware of sooner? Also, as you mention a $USD, did you receive UK EMI options? Thanks for sharing!
An SIP scheme would likely have reduced tax. There were also likely alternative arrangements that could have legally been made to be more efficient even in the absence of the scheme.
Ultimately I would have preferred to know in advance even if the tax had to be paid this way and had the option to discuss and obtain advice on how to proceed rather than be lied to and have tax withheld with 1 day's notice.
However given the general chaotic and disorganised nature of the startup their poor handling was not at all a surprise.
I think the moral of the story is even if you are lucky enough to cash out don't expect the company to do 'the right thing' in any way. It is really out of your hands.
I had fully vested shares not options so EMI didn't come into it.
Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)
#363Earlier 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…
If you didn’t take a pay cut going in, you were underpaid to start. Or you were very junior, so the disparity is narrower.
There are no competitively paid senior+ swes that keep their comp going to a startup. Full stop.
Illiquid equity makes a significant difference too. We’re talking total realizable dollars earned in a year.
It’s worth noting that I’m not saying this is fundamentally broken - that’s just the design of the system.
Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)
#364Earlier quoted context omitted.
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…
Okay, but the way governments perpetuate income inequality isn't at all fake like Flat Earth conspiracies.
Even if all bias were removed from life, any free meritocracy would still perpetuate it. People can choose to make less, and some people can't add as much value as others.
Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)
#365Earlier quoted context omitted.
One strategy is to exercise as many options as you can until you would hit AMT (or an amount above AMT you are ok paying). You can do this each year until your expiration date comes up.
Not sure this would apply here - I don't think that advisors get ISOs (but I could be wrong).
Advisors get NSOs. You owe income tax on the spread between strike and FMV at time of exercise, regardless of liquidity in the underlying shares.
Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)
#366Earlier quoted context omitted.
Interesting, I have not but will investigate.
The keyword you are looking for is 409A. When paying taxes on your equity compensation, the amount you owe is based on the 409A.
My pedantry itch is kicking in and requires me to inform you all that the actual keyword you are looking for is FMV (fair market value) of common stock.
Investors set the price for preferred stock in various "rounds," so a company kinda knows what its preferred shares are worth.
But common stock usually isn't traded in any kind of market (until liquidity), so there's no obvious way to know what its FMV is.
A 409a valuation is a "professional" assessment of the value (price) of a share of common stock, which a company's board can safely use to determine the FMV of its common stock.
Anyway GGP is right that the amount subject to tax at exercise will be the difference between your option strike price (which was set based on FMV on the date your grant was issued) and the FMV of common stock on the date of exercise.
The FMV of common stock is almost always less than the price of preferred stock, though the two prices do converge as a company grows and gets closer to liquidity.
Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)
#367Earlier quoted context omitted.
Interesting, I have not but will investigate.
If you were granted Incentive Stock Options (ISOs), you are in for a world of hurt. You may end up wishing you'd never spent so much money on them. With the recent Trump Tax Reform, AMT thresholds have risen but it's best to check with a CPA (or what's called an EA - Enrolled Agent) about the tax implications of exercising your options. You may view the upside in an entirely different light. The nastiness of AMT is a…
The AMT is fine. The issue is that the implied gain at exercise of an ISO is subject to AMT.
Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)
#368YC 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…
I think part of the problem is that founders/employers/employees don't have a common term set that's known to be a fair deal to all parties. It would only take the addition of a few simple protections to make the equity a fair deal, even without divulging information about the cap table. I'm sure other sets of protections could be devised which provide different tradeoffs. After all, there is no reason that employees couldn't have a dedicated board seat!
- The employee equity participates at the highest prefered equity pool.
- The employee option strike price will always mirror the lowest 409A valuation while the option is open.
- Vested employee options are valid for 100 years while illiquid, and 7 years post liquidity event.
- Modifications to employee equity pools resulting in a decrease in option value as the result of a funding round must be accompanied by a tender offer of 70% of the pre-funding option value.
The above terms wouldn't provide much value if employees didn't understand that the companies equity is better than a competing employers equity.
Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)
#369Earlier quoted context omitted.
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.
I've exercised options a couple times and never filled out any forms until I've sold. Was I supposed to? They never sent me any, so I didn't bother. Most private companies are pretty sloppy about handling their options. You send them a check to exercise and they'll note it in a spreadsheet. That's basically it.
Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)
#370Earlier quoted context omitted.
Blog post from 2014: https://blog.samaltman.com/employee-equity That's more of an admonishment, but at least they recognized the problem ...
(I work at YC) Yes, we care a lot about making employee equity more generous and more fair. Part of our YC curriculum now is teaching founders about these issues and encouraging them to follow best practices around being generous and transparent with employees about equity compensation like Sam discussed in his blog post. I think there is still a lot more we can do, though.
For what it's worth. I ignore private company equity offers of all stages as it's impossible to fairly value the equity which inevitably leads to an undervalued total compensation package - even on successful exit. I'd expect that the market would work out the generosity component if the terms were fair - but right now great startups are competing for employees with their second scarcest resource (cash) with companies that have effectively unlimited cash and great liquid equity. This is a recipe to burn the startups first scarcest resource (time) as projects run slower due to weaker execution, and for later stage companies leadership.