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Employee Equity

blog.samaltman.com

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181–190 of 342 posts

Re: Employee Equity

#181

Post by patio11 »

STRML wrote: post #180

I'm starting to see companies tossing around the idea of "Phantom Stock Options"; that is, shares kept purely on paper that are never issued to the employee. Upon a liquidity event, the employee can exercise the shares and be paid their value as regular income. This has some tradeoffs, some of them positive, some of them negative, but I am far from an expert I would love some input from somebody who knows more. It do…

It is highly likely that the IRS would treat any instrument described as "Like a stock option, except minus the tax treatment for stock options" as "a stock option." The magic words to ask your accountant about are "substance over form doctrine."

One of many consequences: an informal agreement, backed by paper or otherwise, to give you compensation in event of an acquisition, where that agreement survives your departure from the firm, is taxable at ordinary income rates on at its fair-market value. This income is realized in advance of the eventual acquisition/sale. That's why startupers care so much about their 83(b) elections, because otherwise that landmine bankrupts people.

Re: Employee Equity

#182

Post by throwawaymsft »

skrebbel wrote: post #83

Completely off topic, but I'm this post made me realise that Sam Altman went from programmer to enterpreneur to financial guy. This post has very little ado with what he once started doing. He's a partner (and president) of an investment fund now, a pretty odd career move once you take the pink Silicon Valley glasses off. This entire post is about finance. Not about business, not about products, not about customers,…

I don't think the skillset is the factor. Smart ambitious person happens to learn programming first, his ambition keeps him pushing to entrepreneurship and other fields.

Another smart ambitious person might start on a different side of the mountain and keep climbing.

Re: Employee Equity

#183

Post by sitkack »

michaelochurch wrote: post #142
sitkack wrote: post #127

Earlier quoted context omitted.

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.

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. Bingo. You fucking nailed it. The best thing to do after having been tainted by startup education is to go into consulting. How easy is that? I'm considering that avenue for myself, largely because I'm sick of office politics, re-orgs, and other time-wastin…

I'll try and follow up on this tomorrow, but I dont have a lot of insight. It is difficult. Lots of hustling.

Re: Employee Equity

#184

Post by rajacombinator »

skrebbel wrote: post #83

Completely off topic, but I'm this post made me realise that Sam Altman went from programmer to enterpreneur to financial guy. This post has very little ado with what he once started doing. He's a partner (and president) of an investment fund now, a pretty odd career move once you take the pink Silicon Valley glasses off. This entire post is about finance. Not about business, not about products, not about customers,…

As soon as you go from solo programmer to building a team, you need to be aware of these financial issues. How to structure equity and compensation are fundamental issues faced by all founders. Focusing on the details may not be necessary, but if you don't at least understand the basics of the financial side - which are not hard - it will be hard to build a company.

PS. I don't think it's fair to call him a "financial guy" based on one post.

Re: Employee Equity

#185

Post by sockgrant »

prostoalex wrote: post #77
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.

How many startups with $1 bln+ valuation are there in KC?

The OP's chance of being a $1bn+ valued company is unrelated to how many $1 bn startups have come out of KC.

Re: Employee Equity

#186

Post by diziet »

pyrrhotech wrote: post #175
diziet wrote: post #22

It's quite difficult to compete with Google and their revenue/cash hordes when it comes to salary / total comp. Especially if you price the options at the last round's price and discount them some more. Imagine a well to do company of 2 founders (in SF/Bay Area) and a team of 3-4 others that raised a seed at 10m cap. They want to grow their team headcount to 15 and are busy hiring, running servers, etc. They can offe…

200k is nowhere close to total comp for a lot of engineers at google. 300-400k for anyone with 7+ years experience who is worth a damn, and some are topping million+. Startups simply cannot compete with google compensation, period. No matter how much equity you give. There may be valid reasons to work for a startup, but thinking you will be paid to the best of your ability or god-forbid, thinking you will get rich is…

I was underestimating the comp for google engineers just to prove the point. I strongly agree that working at google is better in terms of pure comp (though the longer term capital gain taxes do work out better than salary..)

Re: Employee Equity

#187

Post by hga »

johngalt wrote: post #176
redmaverick wrote: post #126

Earlier quoted context omitted.

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

The curse of competence. In your next family gathering people will ask you to fix their computer. You say 'Sorry I'm not IT, I'm a programmer'. Suddenly they dislike you. Do they dislike your cousin who waits tables for not fixing their computer? No, just you. Similar themes play out in a business setting. If you're competent everyone will want you to do everything important. Which will result in: 1. You get stretche…

"You get stretched too thin and start making mistakes -> fired."

It can be worse than that. In a small startup, you can be the least-worst informed and capable about several critical areas, where you pitch in and do a better job than anyone else could have, and make mistakes.

(In one particularly galling example in my work history where I was employee #1, I recommended an ISP, which was good, but without talking to me the co-founder who set that up also bought their bundled email service, back in 1997 when this was seldom well done. This turned out to be a mistake visible at the top of the company....

Or take firewalls: while I now know a lot more about them, and can set one up with raw iptables or Shorewall, back then all I knew was what I'd read in Cheswick and Bellovin's seminal book https://en.wikipedia.org/wiki/Firewalls_and_Internet_Securit... and said, "Gauntlet has a good reputation". Yeah, but its company, Trusted Information Systems, had just been bought by Network Associates, which apparently following a common Computer Associates business model of firing almost all of the technical staff and milking the reputation....)

Re: Employee Equity

#188

Post by johnrob »

prostoalex wrote: post #75
johnrob wrote: post #27

The easiest would be if the IRS would agree to not tax illiquid private stock until it gets sold, and then tax the gain from the basis as long-term capital gains and the original value as ordinary income. I think employees would be more than happy to treat all of this as ordinary income, if that would make it more appealing to the IRS.

Why? Worst-case AMT rate is 28%, worst case income tax rate is 39.6%. If you have a choice and means, you want to pay AMT.

It's a quid-pro-quo. Right now, if a company gives you private stock you have to treat it as income and pay taxes for it. It's not real income yet, since you can't sell it, but you pay taxes. Later on (hopefully), the stock turns into real money and you pay the (lower) long term capital gains rate.

What I was proposing was: Hey IRS, if you let me skip the taxes early on, I'll pay a higher rate down the road. I will gladly sacrifice long term upside for short term risk in this particular case (since the odds are already so heavily skewed in the other direction).

Re: Employee Equity

#189

Post by bane »

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…

I worked at a few also and managed to get a little money out of options, but nothing to write home about. I think after one company sold I got my payout and bought a new computer and a nice dinner and that was it.

I'm actually sitting on a huge pile of vested options at a company I left a few years ago, but I'm unlikely to ever exercise them during a sale because the strike price is almost guaranteed to be higher than they're worth.

I also know quite a few folks working a big startup sitting on lots of options, except the startup is on something like a G round of financing so they're likely diluted to worthless. Most of them started working there right out of college and don't understand how it works, and the company salary caps employees...it's a cool place to work but they're likely to get screwed if they're ever acquired/IPO.

One thing I've learned after working at quite a few startups as a non-founder is this, ignore the options and try and get the best possible salary you can. If you get some options, that's cool, but don't count on them for anything.

Re: Employee Equity

#190

Post by encoderer »

zminjie wrote: post #169
apta wrote: post #138

Earlier quoted context omitted.

> you're stuck either investing often tens of thousands of dollars into an illiquid investment while paying taxes on it right now I am not really familiar about this area. It is a one time price to pay to purchase the stock options, is that correct? Furthermore, where does tax come into play? Don't you only get taxed if you decide to sell the stocks to generate income?

From how I understand it, when you decide to exercise your options (pay the strike price), you owe taxes on the different between your strike price and current fair market value even if you don't sell the stock. Most of the time, this counts as AMT (Alternative Minimum Tax) if you don't sell the stocks within the same tax year.

You have to report the "paper capital gains" for AMT purposes but that doesn't necessarily subject you to paying the AMT. And if it does, you will at least get AMT credits you can apply towards future tax years.
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