21–30 of 162 posts
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Current Salary On Open Market = X
Startup Salary = Y
Option Value Today = Z
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4(X) = 4(Y)+Z(2)
this is obviously the big IF, if people are saying think of it as windfall, maybe 1.5??
Can you talk a bit more about the dilution an employee should expect if the company completes more funding? That could have a serious impact on your shares. Who usually gets diluted first? Founders? Previous investors? Employees? If you're an employee that received options and the company is doing another round of funding, should you be worried or on the front foot about finding out what will happen to your options?
Everyone gets diluted when a company raises more money: founders, employees, and previous investors. Investors usually have ‘prorata rights’ which mean they are allowed to invest additional money at the new valuation to maintain their given percentage ownership of the company. Founders generally have the same class of stock as employees (common stock), and so are in the same boat. Investors have preferred shares. Pre…
I thought 83(b) only helps with RSU grants? For ISO grants I thought you can't do an 83(b) election? Can anyone clarify?
That is correct. The 83(b) declaration is only valid for 'restricted stock' which is stock that is granted to you rather than as an option to buy. In those situations you acquire the 'right' to the stock over time (this is called vesting). And when you vest stock the IRS treats it like income and it gets added to your W2 as such. The 83(b) election allows you to take the entire tax hit immediately even though you don…
Another great post on this subject (which may be a bit dated nowadays) was this one[3]. Hacker News startup lawyer had also some great comments on its corresponding HN thread[4]. Note that it embeds the Introduction to Stock Options[5] that also had an amazing discussion on HN a few years ago[6]
[1] http://www.paulgraham.com/airbnb.html
[2] http://www.avc.com/a_vc/2012/04/mba-mondays-live-employee-eq...
[3] http://gigaom.com/2011/06/05/5-mistakes-you-cant-afford-to-m...
[4] https://news.ycombinator.com/item?id=2623182
[5] http://www.scribd.com/doc/55945011/An-Introduction-to-Stock-...
More importantly, technical details aside, I think it's important for a prospective employee to make some strategic decisions about equity up front.
The author writes:
> If the company seems reluctant to answer these questions, keep pressing and don’t take ‘no’ for an answer. If you’re going to factor in your options into any compensation considerations, you deserve to know what percentage of the company you’re getting, and its value.
And in the next paragraph he writes:
> I’d be wary of compromising on salary for shares, unless you’re one of the first few employees or founders. It’s often a red flag if the founders are willing to give up a large percentage of their company when they could otherwise afford to pay you. Sometimes you can negotiate a tiered offer, and decide what ratio of salary to equity is right for you.
You can't have it both ways. If you focus on equity (by demanding that the company divulge detailed information about its share structure), you are sending the signal that equity is just as important or more important than salary, and thus opening the door to a negotiation that contemplates a trade of equity for salary. Precisely the thing that you want to avoid!
Unless equity is expected to be liquid in the near future (i.e. you're at a company expected to go public in the near future), an equity-focused negotiation is more likely to benefit the prospective employer than employee.
Is there a good formula for figuring out taking a lower salary in exchange for options? For example: . Current Salary On Open Market = X Startup Salary = Y Option Value Today = Z . 4(X) = 4(Y)+Z(2 ) this is obviously the big IF, if people are saying think of it as windfall, maybe 1.5??
It entirely depends on the person and how risk-averse (or not) they are.
I've "pre-exercised" before, with a meaning different from what's depicted here in the article. In the "pre-exercise", I was able to exercise the stock before I'd vested in it, with the understanding, of course, that the company would buy back my unvested shares at the exercise price if I left the company before vesting all the options. The disadvantage, of course, is that you pay for your stock up front, and will lo…
I don't see any reference to "pre-exercise" in the article.
Is there a good formula for figuring out taking a lower salary in exchange for options? For example: . Current Salary On Open Market = X Startup Salary = Y Option Value Today = Z . 4(X) = 4(Y)+Z(2 ) this is obviously the big IF, if people are saying think of it as windfall, maybe 1.5??
I have to think that putting it into a formula is difficult. It all depends on risk, obviously: how certain is a person that the company will be worth something? On top of that, you have ability to get by at a given salary. If you have enough saved to live for 5 years with $1/yr salary, then you can afford more of a risk than if you can live for 6 months without a salary. Or if you can afford to live at half your sal…
Two corrections: 1. OP says: Once you’ve cliffed, you have the right to buy shares in the company. "Cliffing", when used as a verb, refers to firing someone just before the cliff-- not an employee achieving it. It's something you'd rather avoid. 2. If the company isn't publicly traded, you should ask to see the cap table. If you're employee #30 and your share is 0.05%, that might be fair if it's a biotech that has al…
Could you point me in the direction of some sources that back up the "90% [in the typical case]" claim? I'm genuinely interested in learning more.
Can you talk a bit more about the dilution an employee should expect if the company completes more funding? That could have a serious impact on your shares. Who usually gets diluted first? Founders? Previous investors? Employees? If you're an employee that received options and the company is doing another round of funding, should you be worried or on the front foot about finding out what will happen to your options?
Everyone gets diluted when a company raises more money: founders, employees, and previous investors. Investors usually have ‘prorata rights’ which mean they are allowed to invest additional money at the new valuation to maintain their given percentage ownership of the company. Founders generally have the same class of stock as employees (common stock), and so are in the same boat. Investors have preferred shares. Pre…
Not quite - Another extremely important point is ensuring that there isn't a hidden type of equity/option ("Series FF" or alike) sitting above you as an employee. In this situation founders are less aligned with you as an employee as they get the option to cash out rather than being diluted in follow-on rounds. This is a mechanism designed to align founders with investors by causing founders to shoot for the moon even through appealing exit offers, but has the side effect of allowing them to stop caring and not exit until it's too late (they've got theirs, after all).
I like thinking about shares as a virtual currency.
Shareholders are speculating on that currency, and
the company is trying to increase its value. Companies
can inflate or deflate this currency depending on
their performance, perceived potential or by issuing
new shares.