This is very helpful, thanks. I was very surprised when I first learned that AMT will cause you to owe tax on your gains when exercising options, even if they are only on paper. (If the company is public or there is a private market, fine, but it is incredibly inconvenient to be taxed on something for which there is currently no market). This is an area where it can really pay to plan ahead.
An Engineer’s guide to Stock Options
31–40 of 162 posts
Re: An Engineer’s guide to Stock Options
#32Is 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??
See the other posts. Someone had a good one "Treat options like confetti".
I own a few options in companies I was at. One went under and the other did a "tech deal" and then divested it's assets. Both cases my options are worth about $0 :)
Re: An Engineer’s guide to Stock Options
#33I thought 83(b) only helps with RSU grants? For ISO grants I thought you can't do an 83(b) election? Can anyone clarify?
An 83(b) election is for restricted stock only. Meaning the company pays you in actual equity (vesting notwithstanding). Restricted stock, notably, is not the same as an RSU (Google's "GSU"); one of the reasons an RSU exists is to simplify taxes, and because you are not issued stock at the time of grant there is no 83(b) election for RSUs. Think of restricted stock as a chunk of equity set aside for you that you grad…
The technical requirement of the rule is that the stock is (a) subject to a substantial risk of forfeiture, and (b) not transferable. Some stock option plans have an early exercise provision, which, if used, has the effect of converting the option to stock, but subject to restrictions that meet the requirements of Sec. 83(b). Stock options that are subject to an early exercise provision would no longer qualify for ISO treatment.
Re: An Engineer’s guide to Stock Options
#34Is 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??
If you were going to do it from a pure accounting perspective, you'd take the expected value of the options + salary and compare directly. You should probably also figure in high value benefits like 401(k) match.
The problem there is, the expected value is more or less the current market value of the options (if you believe in anything approaching an efficient market), which is more or less the strike price times the number of shares. So, often these are in the neighborhood of $10k over 4 years or $2500/yr.
In other words, don't try to talk yourself into it from an accounting perspective.
Re: An Engineer’s guide to Stock Options
#35Earlier quoted context omitted.
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…
> Founders generally have the same class of stock as employees (common stock), and so are in the same boat. 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.…
That's why I said 'generally'. Either way, AFAIK, series FF doesn't change liquidation preferences or the effects of dilution.
Re: An Engineer’s guide to Stock Options
#36Can 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…
> Generally, if things are going well, dilution isn’t worth worrying about
Just to clarify...
People who are just learning about this stuff (and many who aren't) learn about dilution and think it's total bullshit, get concerned about how much they're being diluted, feel like they're being stolen from if there's a dilution event, etc etc etc. The idea, however, is that if you're being diluted it's because someone wants to give the company money, and that's usually because the company is growing. Your piece of the pie will shrink but if your execs know what they're doing the pie will grow more than your piece will shrink and you will come out ahead in the end.
Re: An Engineer’s guide to Stock Options
#37I 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. I consider myself a fairly smart person, who had a reasonable grasp on the basics of financial markets, currencies, etc. That simple paragraph just…
We should start a thread about how ignorant you were before this awesome guide. I'm sure we can talk about all sorts of stupid things people believe while managing to learn nothing beyond the scope of the very basic article.
Re: An Engineer’s guide to Stock Options
#38Two 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…
You can ask feel free to ask for a pony in a salary negotiation, and in general I bow to no one in advising "ask for more", but that specific ask has the dual unhappy properties of being very awkward for founders to grant and yet not very useful to you the prospective employee. (Even an idealized employee who'd be capable of understanding what it meant.)
"What was your most recent valuation?", "What is the size of my grant relative to the full dilution of the company as of today?", etc, get you more signal with less social awkwardness. I mean, at a minimum, it's more of an imposition than "Give me the salary details for everyone at this company", which is for better or worse radioactive almost everywhere, and in addition to similarly being against the corporate interest also tends to disclose privileged information about folks who wouldn't even be listed in salaries.csv.
P.S. In my n=2 experience as a very small angel investor I am struggling to remember ever seeing the full cap table. I'd have to check my docs to see if I'm allowed to ask for it, but my limited social radar for the Valley suggests that's the sort of thing that would be socially contentious. Founders I invested in were very circumspect about getting explicit permission to be able to quote the fact of the investment publicly, to say nothing of the amount.
P.P.S. Disregard the above if somebody who does this on a more regular basis suggests that you're more in touch with reality than I am. It's possible.
Re: An Engineer’s guide to Stock Options
#39Earlier quoted context omitted.
An 83(b) election is for restricted stock only. Meaning the company pays you in actual equity (vesting notwithstanding). Restricted stock, notably, is not the same as an RSU (Google's "GSU"); one of the reasons an RSU exists is to simplify taxes, and because you are not issued stock at the time of grant there is no 83(b) election for RSUs. Think of restricted stock as a chunk of equity set aside for you that you grad…
The technical requirement of the rule is that the stock is (a) subject to a substantial risk of forfeiture, and (b) not transferable. Some stock option plans have an early exercise provision, which, if used, has the effect of converting the option to stock, but subject to restrictions that meet the requirements of Sec. 83(b). Stock options that are subject to an early exercise provision would no longer qualify for IS…
"Stock options that are subject to an early exercise provision would no longer qualify for ISO treatment."
Not sure exactly what you mean by this, but I believe the same ISO rules apply if you exercise early: you don't owe taxes (under the normal income tax calculation; AMT is different for ISOs) until you actually sell the shares.
Re: An Engineer’s guide to Stock Options
#40Quick question: Why should a company give share options to employees, and not plain old shares? Is this just because it's better tax-wise for the company?