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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

#141

Post by nraynaud »

patio11 wrote: post #58
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?

Without some notion of how much your equity grant represents of the company (by current dilution), the actual number of options you get cannot be sensibly valued. The total number of shares at a company is totally arbitrary . Seriously, when you register one, the state just asks you to pick a number . If a company won't tell you enough to calculate the percentage, that's like you asking "What's your offer for salary?…

My last company did a split by 10 the first round moreover, they didn't tell me why, but I guess the new investors found the granularity too coarse for the stock option plan.

Re: An Engineer’s guide to Stock Options

#143

Post by judk »

walshemj wrote: post #138
Taniwha wrote: post #100

Earlier quoted context omitted.

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.

It is a problem that the employers force risk on their employees. No tax law fix needed, the law is correct. The employers should allow employees to sell back 35%ish of their optioned stocked, at "market" price, to cover the taxes. This is how RSUs (can) work, auto sale for taxes on the day the stock is transferred.

Re: An Engineer’s guide to Stock Options

#144

Post by vikas5678 »

jplewicke wrote: post #122
gabemart wrote: post #116

Earlier 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…

Exactly. Another common practice, especially for private companies considering an IPO, is they dont even reveal the valuation at which they most recently raised money. So unknown number of outstanding shares, unknown valuation - this is common. Anyone who interviewed with companies like box.net, linkedin(pre-IPO), etc would attest to this.

Re: An Engineer’s guide to Stock Options

#145

Post by walshemj »

judk wrote: post #143
walshemj wrote: post #138

Earlier quoted context omitted.

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.

It is a problem that the employers force risk on their employees. No tax law fix needed, the law is correct. The employers should allow employees to sell back 35%ish of their optioned stocked, at "market" price, to cover the taxes. This is how RSUs (can) work, auto sale for taxes on the day the stock is transferred.

How is it correct its perverse for many reasons.

1 How can I owe tax on something that has no value.

2 I think we can all agree that Employee ownership is considered a good thing therefore any law which penalizes this is bad law if not actively immoral.

The law should only tax you when you have an actual +ve capital gain. (the need for sensible vesting and taper relive to avoid tax avoidance is of course a given).

On point 2 even the UK's SWP (Socialist Workers Party) allow members to take part in share option schemes.

Re: An Engineer’s guide to Stock Options

#146

Post by trg2 »

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…

You are not nice.

Re: An Engineer’s guide to Stock Options

#147

Post by dmourati »

kylelibra wrote: post #21

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??

Yes, take X. Treat Z as zero or just say something like, "I wouldn't be interested in joining without an equity share."

Re: An Engineer’s guide to Stock Options

#150

Post by prostoalex »

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?

To offer shares for sale, you would need to exercise them first. Depending on whether you're not you've left the company by that time, with looming tax bill you're in the unfortunate position of needing to sell with buyer potentially using that to their advantage:

http://techcrunch.com/2011/12/17/facebook-shareholders-suck-...

"Then you have to figure out a spread. So the seller has to agree to $30, the buyer $31, and the dollar in the middle is split 15 ways. Its 30 million shares so that’s $30 million in the middle and everyone feels this is the transaction of a lifetime and they need to get a piece. And then, all of a sudden, the secretary of the mistress of the random king wants to get at least half of the spread in the middle or will block the whole thing. So everyone needs to get on the phone again. At 11 pm at night on a Saturday. And hagggle out fees."

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