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Employee Equity

blog.samaltman.com

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Re: Employee Equity

#121

Post by dlubarov »

lettergram wrote: post #29
x0x0 wrote: post #7

The best solution I have heard is from Adam D’Angelo at Quora. The idea is to grant options that are exercisable for 10 years from the grant date, which should cover nearly all cases That is an awesome idea, and really classy on Adam's part.

I think 180 - 365 days seems far more reasonable. It's ridiculous to have the company shares tied up with the inability to give them back to other employees.

Presumably if the company is successful, the options will be exercised at some point. The company would make that assumption and expand their option pool accordingly.

Re: Employee Equity

#122

Post by hundt »

aetherson wrote: post #45

I don't understand why options are taxed at exercise. You aren't getting money out of the transaction. If you have an option to buy a share at $1 (when the share is valued at $10), and later you sell at $50, why isn't the tax treatment just that you have a $49 capital gain? Why do we instead do a $1 -> $10, and then a $10 -> $50 tax thing?

This is indeed what happens if the option itself (and not just the underlying security) is actively traded. [1] However in that case, when you receive the option, you have taxable income equal to the current FMV of the option (determined by looking at the market). To do the analogous thing with startup options would (a) result in employees getting taxed even earlier and (b) require using Black-Scholes or something to estimate the value of the option, resulting in "income" that is even more divorced from reality than the current status quo.

[1] http://www.irs.gov/publications/p525/ar02.html#en_US_2013_pu...

Re: Employee Equity

#123

Post by dylanlacom »

andrewfong wrote: post #10

I've been thinking of putting together something simple to analyze employee option paperwork and add some plain English annotations to help employees understand exactly what they're signing. Based on my experience, there's something like 5 or so templates that cover 90% of the startups in the valley, so shouldn't be too hard. Is there any interest in something like this?

I agree, this would be awesome.

Re: Employee Equity

#124

Post by x0x0 »

jbkp wrote: post #60

You know, it's funny, I read things like this from time to time: "so if I have 0.5% of company and it gets acquired tomorrow for $100 million dollars, will I get $500,000?" and I remember that I am in this exact scenario, and have no idea what the answer is. I've been an employee at a startup for 2 years now. I joined when I was young, naive, and broke — I don't even remember if I read the paperwork before signing it…

I've exercised before. Typically, you email hr and say, "I want to exercise"; they send you some paperwork which you fill out; you write the company a check. DO NOT DO THIS BEFORE UNDERSTANDING TAX CONSEQUENCES. You will typically pay tax on the spread between strike (your price per option) and the fair market value (fmv) which is set by the board and often updated quarterly. This can also be a backdoor way of a board tightening those golden handcuffs; if you where early enough the taxes may well exceed the strike price. You should also be able to get the fmv by asking. Keep in mind these shares you're buying may well be completely illiquid and the irs wants their taxes right now anyway.

A numerical example: 20k shares with a strike of $0.11; fmv of $0.39. Then I write the company a check for 2e4 x 0.11 = $2200 dollars and report income to the irs of 2e4 x (0.39-0.11) = $5600 (for amt).

A nuance is if the company is succeeding, it can be worth it to buy options when they vest; it starts the clock ticking on long term capital gains and can roughly half your tax bill if and when you can actually sell the share. Which reminds me: you will pay taxes twice: once when you exercise the option to turn into a share, and again when you sell the share. If you are lucky enough to go public the company will often get a firm that handles all this for you and just gives you a check net of all taxes.

A good accountant will cost $500-ish (or less) to go over your situation in detail. It's worth the money. If you already pay ab accountant, not someone at hr block or similar people who just know how to fill out paperwork, they may go over your situation for much less money.

Also, you must understand amt; that can bite hard. If you don't understand amt, see that accountant.

Re: Employee Equity

#125

Post by rdl »

prostoalex wrote: post #79
rdl wrote: post #26

I don't think the 4/1 aspect of vesting is a particularly big problem. If you are enjoying your job at 4 years, the job has probably changed substantially, and you can renegotiate for a refresher grant. I don't see any problem with restricted stock pre series A, when equity is the biggest consideration for employees. As long as financing is notes, the common hasn't yet been priced, so you can just use a very low valu…

Most people don't know how to renegotiate, and by the time they need to do it, they've negotiated their compensation at some other place and are giving a 2-week notice. Founders/management need to be proactive about this. Good school of thought on this is Andy Rachleff of Benchmark / Wealthfront https://blog.wealthfront.com/the-right-way-to-grant-equity-t...

It would be cool if people got a "career manager" who helped them with this kind of stuff on an ongoing basis (at least within a given job, if not across companies for the duration of a career).

If you trust the founders, they can probably help you up to ~50 person companies like this, but there is an inherent conflict of interest.

Re: Employee Equity

#126

Post by redmaverick »

michaelochurch wrote: post #111
jstrate wrote: post #69

I've worked at two startups, including one YC. Both were acquired by larger tech companies. I was employee #3 at one and rebuilt most of a broken codebase in the other. I got nothing out of either WRT options. I agree with the author on point 4 but I don't think more options are the answer, I should have just asked for a higher salary I would have been better off. Startup-bucks are even worse than a lottery ticket, b…

Now I work at a large tech company in SV and wont be involved in another startup unless I'm a founder. You're making the right call. I'm probably older than you and I've done two startups. My career hasn't recovered from the lost time. Total waste. Most startups (by startup, I mean "company focused on such rapid growth that VC investment is mandatory") are pure shit. They fuck up your finances, drain your emotional r…

overperformance is far more dangerous (in large companies) than underperformance.

Why? Can you explain.

Re: Employee Equity

#127

Post by sitkack »

redmaverick wrote: post #126
michaelochurch wrote: post #111

Earlier quoted context omitted.

Now I work at a large tech company in SV and wont be involved in another startup unless I'm a founder. You're making the right call. I'm probably older than you and I've done two startups. My career hasn't recovered from the lost time. Total waste. Most startups (by startup, I mean "company focused on such rapid growth that VC investment is mandatory") are pure shit. They fuck up your finances, drain your emotional r…

overperformance is far more dangerous (in large companies) than underperformance. Why? Can you explain.

You alienate yourself with respect to your peers and your boss will think you are trying to take their job. Nearly everyone around you will consider you a threat.

That is my take and my experience from that statement.

The best thing to do after having been tainted by startup education is to go into consulting.

Re: Employee Equity

#128

Post by d2ncal »

Great article. One thing that he forgets to mention is to let employees "Pre Exercise" the options.

For a very young startup (even for Series A), the shares are still worth pennies per share, and letting employees pre-exercise the shares not only saves them from AMT but also lets the long term capital gains kick-in sooner.

Only a few startups that I've seen do this, and its really effective specially for employees.

Re: Employee Equity

#130

Post by sscalia »

larrys wrote: post #64
spo81rty wrote: post #41

This is where having a startup outside of the valley is nice. Nobody where we are (KC) really even expects stock options. We just pay a good competitive salary and don't have to compete with someone like Google paying 2x as much. We have given some people stock incentives but because we pay well and competitively it isn't the primary compensation. The costs of running a startup are so much lower here.

I'm curious why the people who are not in the valley don't go to the valley. Is it because they: a) aren't motivated to b) don't know what the potential is there may not even know what is going on. May not even know about YC or VC's etc. c) don't think there is potential there (think it's all over hyped and focuses on a few people who win). d) have family obligations which prevent them from moving to the valley e) Ot…

Because it's actually not a great place to live?
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