Another glaring issue that the article doesn't mention is option lifetime. Most options have a lifetime of 7 years from grant. Companies are delaying going public longer and longer. There's a very real chance that early employees can't sell shares, don't have the money to exercise their shares, and will watch their options expire from old age because the company thinks it's cooler to be private. This is a very real scenario; one that I'm about to face.
Dear Unicorn, Exit Please
31–40 of 124 posts
Re: Dear Unicorn, Exit Please
#32This trend also makes startups just less attractive as destinations for employees. My experience is that startups that have started to scale still don't have as much compensation as larger more mature companies.
Employees join for a number of reasons but stock compensation is one of them. This compensation has always been risky and hard to value but it is now becoming risky, hard to value and even if the company succeeds the compensation won't be realized for a very long time.
Re: Dear Unicorn, Exit Please
#33Allowing employees to make 83B elections on their options immediately after starting would help this situation a lot. Most companies don't "allow" you to do this. I've heard conflicting things on the subject. Some say the company has no say in the matter and it's purely in the IRS' court (exercise and notify IRS). Others say the company must allow you to do it. Second, the bogeyman of "letting some strange interloper…
why would the pump and dump merchants (sorry "owners") want to do this?
Re: Dear Unicorn, Exit Please
#34Allowing employees to make 83B elections on their options immediately after starting would help this situation a lot. Most companies don't "allow" you to do this. I've heard conflicting things on the subject. Some say the company has no say in the matter and it's purely in the IRS' court (exercise and notify IRS). Others say the company must allow you to do it. Second, the bogeyman of "letting some strange interloper…
you're right on the disclosure issue and cost issue - but I've always been more concerned with voting rights, which a strange interloper would certainly have. Especially in the context of M&A, the risk of a rogue common shareholder can be significant. I don't think it's a show stopper, but it is an issue.
Re: Dear Unicorn, Exit Please
#35> This is why companies with skyrocketing valuations are particularly dangerous for employees. Shelling out tens or hundreds of thousands of dollars is hard enough for most. You can imagine needing to pay millions of dollars to acquire your options when you don’t have it. Huh? The exercise price for options is established when employees are granted stock options, which almost always occurs at the beginning of employm…
You should understand the tax (particularly AMT) implications of exercising. $20k cost to exercise. $300k to Uncle Sam (given your 50x increase).
Re: Dear Unicorn, Exit Please
#36Allowing employees to make 83B elections on their options immediately after starting would help this situation a lot. Most companies don't "allow" you to do this. I've heard conflicting things on the subject. Some say the company has no say in the matter and it's purely in the IRS' court (exercise and notify IRS). Others say the company must allow you to do it. Second, the bogeyman of "letting some strange interloper…
Just to clarify on this subject: the 83(b) election applies to stock options where early exercise is involved. Not all companies permit early exercise.
Re: Dear Unicorn, Exit Please
#37I think that if you held a secret poll of founders of these companies, the majority of them would say they don't want this to change. Retention is really hard, and this is an incredibly powerful retention device at a fast growing company. As an employee though, you can always vote with your feet. When considering a job at a startup, you should go over the stock option plan and ask hard questions. Remember... the foun…
I think what's challenging in the current environment is that the most vested employees came on to a set of implicit promises made in the early stages of the company about long-term exit strategies. A decade ago the idea of a unicorn was unheard of so the equity grants seemed to have a closer date of execution than it was in reality.
Exactly.
Re: Dear Unicorn, Exit Please
#38> This is why companies with skyrocketing valuations are particularly dangerous for employees. Shelling out tens or hundreds of thousands of dollars is hard enough for most. You can imagine needing to pay millions of dollars to acquire your options when you don’t have it. Huh? The exercise price for options is established when employees are granted stock options, which almost always occurs at the beginning of employm…
Sure, $20,000 for the shares but what about the taxes you'd owe on the shares? If the value increases 50-fold, does the IRS not see that as 1,000,000 - 20,000 = $980,000 of taxable income?
Re: Dear Unicorn, Exit Please
#39Allowing employees to make 83B elections on their options immediately after starting would help this situation a lot. Most companies don't "allow" you to do this. I've heard conflicting things on the subject. Some say the company has no say in the matter and it's purely in the IRS' court (exercise and notify IRS). Others say the company must allow you to do it. Second, the bogeyman of "letting some strange interloper…
you're right on the disclosure issue and cost issue - but I've always been more concerned with voting rights, which a strange interloper would certainly have. Especially in the context of M&A, the risk of a rogue common shareholder can be significant. I don't think it's a show stopper, but it is an issue.
Most founder series preferred shares have voting multipliers built-in. The fear of an interloper led takeover based on voting rights is another myth.
Re: Dear Unicorn, Exit Please
#40> This is why companies with skyrocketing valuations are particularly dangerous for employees. Shelling out tens or hundreds of thousands of dollars is hard enough for most. You can imagine needing to pay millions of dollars to acquire your options when you don’t have it. Huh? The exercise price for options is established when employees are granted stock options, which almost always occurs at the beginning of employm…
The cost of exercising does increase after a big jump in valuation because you have to pay AMT tax on the unrealized capital gains.