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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

#101

Post by svachalek »

spacehome wrote: post #73
svachalek wrote: post #34

Earlier quoted context omitted.

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…

Maybe. But just looking at expected value ignores risk. Most people are risk averse, especially at the amounts of money we're talking about here.

Expected value is not $millions. Expected value is a few hundred $k (usually, if you are realistic about the potential of the business and your tiny share as an employee) MULTIPLIED by the relatively small chance of hitting that exit, say 1%. In short, a few thousand dollars, which is approximately what you get by multiplying out the strike price.

IMHO it takes risk into account in a very sobering way.

Re: An Engineer’s guide to Stock Options

#102

Post by pixelcort »

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…

So it's always better to own the stock ASAP (with risk of forfeiture) and get the 83(b) set up? Are most startups willing to arrange this for early employees?

Re: An Engineer’s guide to Stock Options

#103

Post by Kudos »

philjr wrote: post #98
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…

This is great information and I too would consider long and hard before laying out significant sums of cash early on. You're completely subject to market risk and you've just handed over some of your own money. Everyone's appetite for risk here is different... That being said, my own personal opinion is, if you're in early enough that options are on the table, you've basically taken a bet on the company anyway and yo…

Thanks for this, didn't expect to get advice for someone working in Ireland with options in a US company in the comments.

Re: An Engineer’s guide to Stock Options

#104

Post by philjr »

Kudos wrote: post #103
philjr wrote: post #98

Earlier quoted context omitted.

This is great information and I too would consider long and hard before laying out significant sums of cash early on. You're completely subject to market risk and you've just handed over some of your own money. Everyone's appetite for risk here is different... That being said, my own personal opinion is, if you're in early enough that options are on the table, you've basically taken a bet on the company anyway and yo…

Thanks for this, didn't expect to get advice for someone working in Ireland with options in a US company in the comments.

Just be aware I completely oversimplified the tax calculations here :-)

Happy to pass on details in Dublin for some folks I got advice from. I'll stick my email in my profile

Re: An Engineer’s guide to Stock Options

#105

Post by balls187 »

MagicWishMonkey wrote: post #81
AsymetricCom wrote: post #37

Earlier quoted context omitted.

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?

I hired him for our company's holiday party.

Re: An Engineer’s guide to Stock Options

#106

Post by balls187 »

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?

Yes it is odd. I would expect someone to at least say "I'll let you know." Asking for the Cap Table on the otherhand, I think it's okay to hand-wave that (imo).

Re: An Engineer’s guide to Stock Options

#107

Post by balls187 »

joosters wrote: post #63
doki_pen wrote: post #47

Earlier quoted context omitted.

If they gave you shares you'd have to pay income taxes on those shares for something that may never make you any money. Most people wouldn't choose to do that.

But (assuming a startup or young company), the shares would have little value and so the tax would be small. Plus, if the shares became worthless you could offset that loss against future income (I guess?) View it like the company giving you a cash bonus - not many people would turn down the bonus, even if it meant there would be tax due on it. If you think the shares have future value, then paying the tax on their c…

The difference is you can actually use your cash bonus to pay out the taxes on that bonus.

For restricted-stock, you cannot sell the stock, and thus have to pay taxes out of pocket.

If the company is public, you can sell some shares to cover this cost (typical for stock bonus awards), but as many tech companies aren't public, their stock is restricted such that you cannot sell it to other individuals.

Re: An Engineer’s guide to Stock Options

#108

Post by balls187 »

elwell wrote: post #97

What if you're too lazy to exercise your share?

Usually the Employee Share agreement has a clause that states that when you leave the company (or even in change of control scenarios) any vested stock options must be exercised by 90 days, otherwise their forfeit back to the company.

Re: An Engineer’s guide to Stock Options

#109

Post by gesman »

Red flags (from personal experience):

- "We will give you a big share of our (of-course-soon-to-be-facebook-or-google) company (15%+ in stock options) if you'll agree to work for us for close-to-nothing".

- Senior officers starting leaving the company one by one.

- Senior officers giving small promises that have tendency not to materialize.

- Senior officers do not have any/good exit track record. Opposite would be a green flag.

Re: An Engineer’s guide to Stock Options

#110

Post by balls187 »

throwawayy123 wrote: post #69

If I decide to leave a company in which I have partially vested stock options, would it be okay to ask my employer (or anyone else in my company) if they would be interested in buying the options off of me at the current valuation (EG, last amount of money raised)? Is something like this common, or would I get laughed out of the room? Similarly, how liquid are markets like Second Market in terms of liquidating option…

If you don't exercise your vested options, they will automatically expire after a certain date.

The company doesn't really have any incentive to purchase your options from you, however they will likely have a clause that gives the company first right of refusal--that is, if you plan on selling any shares prior to a liquidity event, you have to first offer them to the company for FMV.

As to pre-IPO, post fund raise, your stock is typically Restricted stock units, which have clauses that prevent you from selling stock.

It's possible, with board approval to issue a special class of common stock, that can be sold to outside investors. This is usually done to allow long-term founders to get some liquidity outside a liquidity event. This typically doesn't happen for most employee's though.

In an IPO scenario, all outstanding shares convert to a single class of stock, which can be freely sold (after a lock-up period).

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