Read Venture Deals by Brad Feld. It will make you more knowledgeable then 99.9% of all the people in venture funded companies and put you on the level playing field with the VC's.
An Engineer’s guide to Stock Options
131–140 of 162 posts
Re: An Engineer’s guide to Stock Options
#132Two 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…
> If you're employee #30 and your share is 0.05%, that might be fair if it's a biotech that has already taken a $100M infusion from the venture capitalists (who'll typically take 90%, in that case). 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.
It isn't a claim that can be backed up more than anecdotally - it's the typical jihad without real data.
Re: An Engineer’s guide to Stock Options
#133This was truly a great article and i have bookmarked it for later reading (i haven't read all of it yet). But perhaps i can expand on this explaining what "options" are in the first place.
Ok imagine a situation where stock X costs $100 today. Alice thinks that the price will go considerably up, bob thinks it'll go down. So they make a deal, one year from now, Alice will buy shares of stock X from Bob at $104 dollars[1]. Now if Alice's prediction is right, she'll make a profit by buying low ($104) and selling high (at the then market price). If bob's prediction is right, he'll profit by buying low (market price) and selling high($104). This is called a Forward Contract.
Problem with Forward Contracts are that they put you in an obligation to make that transaction, no matter how much loss. What if the price falls and Alice doesn't wanna buy from bob? So then instead of a Forward Contract, she'd get an option (a "Call" option to be specific). This will give her the option to either buy the shares at the agreed upon price (called "strike price") if it is favorable, else do nothing. Well what about Bob? He can get into a "put" option (with someone else) that gives him the option to sell stock X if it is favorable.
Pretty neat huh? but the difference here is, Forwards are free (except for tax etc) and options cost a "premium" to get into. But since options COST something, that means you can SELL them as well and make money off of that. And their prices vary just like the price of stock varies.
Hope this helps
Re: An Engineer’s guide to Stock Options
#134Earlier quoted context omitted.
Please forgive my ignorance, but if you know the number and price of the options, is the problem that you don't know the current valuation? Because it seems like if you know the price of the option, how many options you're being offered, and the current valuation, it's trivial to work out the number of outstanding shares. I guess the current valuation is privileged? Or that there is no current-valuation if it's been…
It's still necessary to consider the total number of shares. Let's say you've been issued 500,000 options with a $0.10 strike price, and the company is currently valued at $4 million. The approximate pretax value of exercising your options immediately would be: ~ $2,000,000 if they've only issued 500,000 shares ~ $100,000 if they've issued 13,000,000 shares ~ $2,000 if they've issued 40,000,000 shares. And your retur…
I must have misunderstood. I thought that the strike price always reflected the current price of the shares at the time the option was issued, but it seems that this is not the case. Thanks for clarifying.
Re: An Engineer’s guide to Stock Options
#135Does anyone have any UK specific advice considering stock options? ..and how does it affect things if these are offered to a contractor and not a FT employee, is that even possible?
From what I recall, the company needs to have an HMRC Approved Company Share Option Scheme [1] to allow the recipients of options to avoid income tax at the time they are granted. IANAL. These schemes are open to employees and executive directors - although it looks like there is a time requirement for directors [2] there doesn't appear to be one for employees.
Maybe you could work as an employee one day a week and as a contractor for the remaining five and get the options as an employee? :-)
[1] http://www.hmrc.gov.uk/manuals/essum/essum40105.htm
[2] http://www.out-law.com/en/topics/tax/share-plans/hmrc-approv...
My main advice - if you think there potentially a chunk of money involved I would go and see an accountant or lawyer that knows the details of the current legislation and can give you detailed advice on what to do - I've done this in the past around options and the advice was worth every penny.
Re: An Engineer’s guide to Stock Options
#136Haha, investment advice from a guy in his early twenties. Thanks but no thanks.
Re: An Engineer’s guide to Stock Options
#137Two 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…
> If you're employee #30 and your share is 0.05%, that might be fair if it's a biotech that has already taken a $100M infusion from the venture capitalists (who'll typically take 90%, in that case). 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.
Biotech has different rules. Investments tend to be much larger but the Vc's get a larger percentage. It's probably fairer and more straightforward than what happens to most web startups, where the initial take is a small percentage but the Vc's demand rapid growth and risk-taking. (That is, I'd rather the VC's take 90% upfront for $100 million than take 20% but ensure, by how they manage the company and the risks they force me to take, that they get 90% of the upside in the end.)
Re: An Engineer’s guide to Stock Options
#138Really 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…
having been through this a bunch of times my simple rule is: - if you can afford, and think it's a good bet it buy the stock when it is granted to lock in the capital gains and avoid income tax - otherwise go the exercise and sell route and pay tax at your marginal rate anything in between IMHO is quite possibly a mistake .... don't forget all those people in the .com crash who'd been granted options at 10c, exercise…
yeah the us system where you can end up with worthless shares but have a huge tax bill is just bizarre its a huge disincentive for employees to have a stake in their employer.
Why are not the CA senators and congressmen being told to sort that out ASAP by their constituents.
Re: An Engineer’s guide to Stock Options
#139Does anyone have any UK specific advice considering stock options? ..and how does it affect things if these are offered to a contractor and not a FT employee, is that even possible?
I don't believe it's possible to grant them to a UK contractor in a tax-efficient manner
Thats because you not an employee
Re: An Engineer’s guide to Stock Options
#140Does anyone have any UK specific advice considering stock options? ..and how does it affect things if these are offered to a contractor and not a FT employee, is that even possible?
From what I recall, the company needs to have an HMRC Approved Company Share Option Scheme [1] to allow the recipients of options to avoid income tax at the time they are granted. IANAL. These schemes are open to employees and executive directors - although it looks like there is a time requirement for directors [2] there doesn't appear to be one for employees. Maybe you could work as an employee one day a week and a…
mm I think that Revenue might see that as disguised employment and go after you under ir35 rules.