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An Engineer’s guide to Stock Options

blog.alexmaccaw.com

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Re: An Engineer’s guide to Stock Options

#81

Post by MagicWishMonkey »

AsymetricCom wrote: post #37
JshWright wrote: post #30

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. 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.

I bet you're a real blast at parties, aren't ya?

Re: An Engineer’s guide to Stock Options

#82

Post by mseebach »

spacehome wrote: post #70
mseebach wrote: post #66

What is the exact mechanism for "golden handcuffs"? Can the company prevent a vested option holder from exercising and then selling the shares to a secondary market investor immediately (offering them to the company for first refusal, obviously)? In that case, can't I just line up a secondary market investor, borrow the cash to exercise, sell, repay the loan and thus get out of the handcuffs?

No. The golden handcuffs arise from the fact that the employee doesn't have the cash on hand to exercise the options and pay the taxes since there is no liquid market from the shares. If the employee quits, then they forfeit the upside of the options since the options expire 90 days after terminating employment. So, if the employee wants to participate in the options' upside, he or she is forced to stay with the comp…

So, just to make sure, the thing I can't do is line up a secondary market investor, because there probably aren't any? And being that secondary market investor is what you're saying Alex MacCaw and his friends are?

Re: An Engineer’s guide to Stock Options

#83

Post by spacehome »

vikas5678 wrote: post #52

Is it odd that almost every startup I or my friends have interviewed with refuse to answer the "number of outstanding shares" question? Have others had similar experiences?

They may have reasons for not wanting to give exact numbers, because backing out changes in this number over time can give information on the compensation of your peers. However, any honest company should be willing to give you numbers in writing to within an error of, say, +/- 1-2%. Which should be enough precision to make your decision. Variations in potential future valuations far exceed this error, so the exact number shouldn't be terribly crucial.

On the other hand, any company that gives you no information on the number of outstanding shares makes their options worthless as compensation. You should let them know this on your way out the door.

Re: An Engineer’s guide to Stock Options

#84

Post by justinbeaver »

grellas wrote: post #43

Really nice write-up explaining stock options. A few added thoughts sparked by some of the comments already made in this thread and otherwise: 1. The value of options is inextricably linked to tax and you need to understand the tax basics in evaluating the economic risks and benefits of holding and exercising any kind of option. With NQOs, you are taxed on the spread as ordinary income on the date of exercise (meanin…

When it comes to ISOs, are there any tricks/loopholes to avoid the cash commitment required for early exercise but also somehow become qualified for long term capital gain tax treatment at the time of liquidation? I understand that is having one's cake and eating it too, but figured worth asking. Thank you.

Re: An Engineer’s guide to Stock Options

#85

Post by kibibu »

AsymetricCom wrote: post #68
JshWright wrote: post #54

Earlier quoted context omitted.

Apparently I've triggered some deep seated angst... Let me try to clarify what I meant, and maybe you'll feel better? This post didn't present any new 'facts' for me. I was already aware of all the details he explained (and most, but not all, of the implications of those details). My point was simply that by framing shares as currency presented them in a way that I had never considered before, and that comparison cau…

Not at all, now that I've learned about your learning, we can all discuss how happy that makes us feel. It's a win-win. Wait, maybe if there was a higher context to share our approval of the article without distracting away from its content? Like some kind of high-level rating system that was enforced through a framework of some sort and presented as a low-friction indicator of the quality of the article? We could ev…

Are you ok? You seem inordinately upset about someone pointing out a particular point in the article that resonated with them.

Re: An Engineer’s guide to Stock Options

#86

Post by thecage411 »

tptacek wrote: post #18
michaelochurch wrote: post #2

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…

Exactly what does the cap table have to do with your expected outcome, presuming you know the percentage of your allocation, the liquidation preferences and valuation, and the company's runway?

are companies typically forthcoming with information about liquidation preferences? At jobs I've asked and been told the percentage of allocation, valuation, and runway, but have never asked about liquidation preferences.

Also, does it really matter if I know? A later round could have wildly different liquidation preferences that wipe out my gains, right? Though I guess that's true of dilution as well...

Re: An Engineer’s guide to Stock Options

#87

Post by kt9 »

grellas wrote: post #43

Really nice write-up explaining stock options. A few added thoughts sparked by some of the comments already made in this thread and otherwise: 1. The value of options is inextricably linked to tax and you need to understand the tax basics in evaluating the economic risks and benefits of holding and exercising any kind of option. With NQOs, you are taxed on the spread as ordinary income on the date of exercise (meanin…

What an awesome comment. Thanks for explaining the subtleties of ISO, RSU and 83b elections. I thought I understood it all quite well but I just learned something new in point 2 above about how and why 83b elections are not applicable to ISO except for early exercise. Bookmarked for when I need a refresher on this stuff.

Re: An Engineer’s guide to Stock Options

#88

Post by spacehome »

mseebach wrote: post #82
spacehome wrote: post #70

Earlier quoted context omitted.

No. The golden handcuffs arise from the fact that the employee doesn't have the cash on hand to exercise the options and pay the taxes since there is no liquid market from the shares. If the employee quits, then they forfeit the upside of the options since the options expire 90 days after terminating employment. So, if the employee wants to participate in the options' upside, he or she is forced to stay with the comp…

So, just to make sure, the thing I can't do is line up a secondary market investor, because there probably aren't any? And being that secondary market investor is what you're saying Alex MacCaw and his friends are?

A secondary market investor is someone who will buy the shares from you after you've exercised. These people may or may not exist, depending on how attractive the company is. The shares you purchase from the company will likely be restricted, and you won't be able to transfer them for a year. After that year is up, you can sell it to whomever you wish. The company will have right of first refusal, but if it comes to that, you don't really care who buys the shares off of you (company or secondary market investor) because you get paid the same either way.

This is technically different that what Alex is proposing, but the end result is fairly similar. He's offering to loan you money to exercise. You keep ownership of the shares, and the loan comes due if and when there is a liquid market for the shares. He's allowing you to move on from the company before any other investor is interested in the shares, but still provide upside to you if and when the shares are actually worth something. And he takes some cut because he's assuming the (very significant) risk that no other investor is ever willing to pay for the shares.

Re: An Engineer’s guide to Stock Options

#89

Post by icedchai »

JshWright wrote: post #30

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. I consider myself a fairly smart person, who had a reasonable grasp on the basics of financial markets, currencies, etc. That simple paragraph just…

Curious... How did you think about stocks previously?

Re: An Engineer’s guide to Stock Options

#90

Post by comatose_kid »

grellas wrote: post #43

Really nice write-up explaining stock options. A few added thoughts sparked by some of the comments already made in this thread and otherwise: 1. The value of options is inextricably linked to tax and you need to understand the tax basics in evaluating the economic risks and benefits of holding and exercising any kind of option. With NQOs, you are taxed on the spread as ordinary income on the date of exercise (meanin…

Wonderful comment. Please write a book so I don't have to search HN posts for nuggets of wisdom.
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