Dear Unicorn, Exit Please • Hacker News Board

Re: Dear Unicorn, Exit Please

#51

Post by 7Figures2Commas » Fri, Jul 24, 2015, 5:21 PM UTC

sulam wrote: post #45

7Figures2Commas wrote: post #27

> 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 article doesn't state this well, but the additional cost comes from AMT. If you exercise your options you pay AMT on the face value of a share of common stock at time of exercise minus the exercise price (the spread). This is true regardless of whether or not those options are liquid at the time. For a unicorn, the stock has most certainly increased in value over time, which means the exercise price is a fraction…

Virtually nobody talks about the AMT credit when discussing ISOs and the AMT trap. Everybody assumes that AMT is this horrible beast, and while it's never a good thing, folks would do very well to have an experienced professional look at their unique situation and perform the calculations because it's often not nearly as bad as suggested.

Re: Dear Unicorn, Exit Please

#52

Post by ryandrake » Fri, Jul 24, 2015, 5:22 PM UTC

nemo44x wrote: post #44

7Figures2Commas wrote: post #27

> 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…

Capital gains taxes. When the "fair market value" of the company increases away from your strike price, when you exercise your options you have to pay tax on the difference between your strike price and the fair market value. And it will be a short term capital gain so it isn't cheap. If those .20 options of your have a fair market value of 5.00 now, you will owe tax on 4.80 of capital gains. 4.80 * 100,000 is 480,00…

Then, simply don't exercise your options--you won't have any taxes to worry about.

Re: Dear Unicorn, Exit Please

#53

Post by birken » Fri, Jul 24, 2015, 5:22 PM UTC

iaw wrote: post #22

birken wrote: post #16

I 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.

The truth is that most companies in the unicorn zone will probably have some sort of stock sales plans set up that go through the company. It isn't black and white between private/no liquidity and public/full liquidity.

However, the private market liquidity is always controlled by the company, and that can create artificial boundaries on timing and volume, which can be trouble if an employee wants to leave on their own schedule.

Re: Dear Unicorn, Exit Please

#54

Post by joshjkim » Fri, Jul 24, 2015, 5:23 PM UTC

Missing from the article: the fact that employees are discouraged from seeking buyers because there is an unspoken implication that this means the employee is "losing faith" or "believes less" in the company, or is getting ready to leave.

If the party line is: "hey, we are going to be a billion dollar company!" and then one employee says "hey, I want to sell at this $100M valuation", even if the $100M is a solid upside from the employees strike price the next natural question for the founder is: "hey, why would you sell at this valuation if we all know we are going to unicorn?"

Lots of people are reasonable and could understand many good reasons to sell at that point, but in high-growth culture those are not always appreciated. Sure, employee can/should suck it up, but it still makes it more challenging.

Generally, I think this is why company's should more regularly organize secondaries, it removes this dynamic to a certain extent.

Re: Dear Unicorn, Exit Please

#55

Post by ryandrake » Fri, Jul 24, 2015, 5:24 PM UTC

nathan_f77 wrote: post #48

7Figures2Commas wrote: post #27

> 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 company's valuation increases fifty-fold. Now you decide to exercise your stock options, and you pay $20,000. You have just paid $20,000 for stock that is now worth $1,000,000. The IRS now expects you to pay tax on your $980,000 in income. However, your stock is not liquid, so you can't sell it. This is why you can need "millions" to acquire your options.

Why would you exercise a stock option to receive stock you can't sell? If you can't sell it, it's not worth $1,000,000--it's a piece of paper that might one day be worth more or less than $1,000,000.

Re: Dear Unicorn, Exit Please

#56

Post by 7Figures2Commas » Fri, Jul 24, 2015, 5:25 PM UTC

scurvy wrote: post #46

7Figures2Commas wrote: post #36

Earlier quoted context omitted.

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.

I've heard from several sources that the company has no say in the matter. That it's basically rule by fear. That said, thrusting 83b paperwork upon a company that doesn't "allow" it isn't the best way to start your new job. Also, Peter Thiel always told his portfolio companies to allow 83b elections. It's smart for the employee and the employee. I guess it's a changing of the guard from the Founders Fund types to th…

I don't know who your sources are, but you can talk to an attorney about this. A company does not have to permit employees the early exercise of options that have not yet vested.

Founders and key early hires, who may be receiving restricted stock (not options), are in a different camp because they're receiving stock, not options.

Re: Dear Unicorn, Exit Please

#57

Post by scurvy » Fri, Jul 24, 2015, 5:26 PM UTC

7Figures2Commas wrote: post #41

scurvy wrote: post #35

Earlier quoted context omitted.

You should understand the tax (particularly AMT) implications of exercising. $20k cost to exercise. $300k to Uncle Sam (given your 50x increase).

You should understand that every situation is different. Are you talking about NSOs, or ISOs? Have you factored in the minimum tax credit? Very few articles on ISOs and AMT highlight the minimum tax credit that is applied when the amount paid under AMT exceeds what would otherwise have been paid.

You still need to pay your taxes in one year to claim it as a credit in a successive year. Uncle Sam and California don't take kindly to IOU's (nor does your credit score).

What if you exercise a little every year, triggering AMT each year? No credit for you and the credit is reduced the older it gets. Like you said, each situation is different, but most people are going to pay a boatload in taxes on this and not be able to claim it as a credit later on.

Re: Dear Unicorn, Exit Please

#58

Post by enum_write3 » Fri, Jul 24, 2015, 5:27 PM UTC

joshjkim wrote: post #54

Missing from the article: the fact that employees are discouraged from seeking buyers because there is an unspoken implication that this means the employee is "losing faith" or "believes less" in the company, or is getting ready to leave. If the party line is: "hey, we are going to be a billion dollar company!" and then one employee says "hey, I want to sell at this $100M valuation", even if the $100M is a solid upsi…

The only faith developers should have is that the owners will fuck them, it just depends how hard and if lube is used, or they are tossed out without a dime!

Re: Dear Unicorn, Exit Please

#59

Post by scurvy » Fri, Jul 24, 2015, 5:28 PM UTC

joshjkim wrote: post #49

scurvy wrote: post #39

Earlier quoted context omitted.

Most founder series preferred shares have voting multipliers built-in. The fear of an interloper led takeover based on voting rights is another myth.

hm, but i don't think most founders have founder series preferred. It was getting more popular for a few years but the trend seems to have died down - if you have evidence to the contrary, I'd be curious to see. Mine's anecdotal but not bad: last 20 cap tables with at least 5 you would recognize as "hot" companies, I didnt see one.

I haven't looked for a few years now. Most of my current data is hearsay. Interesting to see that the trend swung the other way. Thanks!

Re: Dear Unicorn, Exit Please

#60

Post by ryan-c » Fri, Jul 24, 2015, 5:28 PM UTC

I worked at a company for about five years. It became a unicorn while I worked there and I saw the value of my initial grant increase tremendously (something like 35x) over the years. I was significantly in debt and very nearly out of savings when I started there, so early exercise, while available, was not affordable to me. By the time I had money to exercise my shares, the potential AMT liability plus lack of liquidity made it unrealistic to do so. If I left, I'd lose it all. I ended up feeling held hostage by loss aversion. It was not good for my mental health. Feeling stuck can make an otherwise awesome job terrible.

I was very lucky - when I left I was able to just barely cover exercising everything by liquidating my non-retirement investments and savings, then sell enough on the secondary market (which took many nerve wracking months) to cover the AMT bill, pay myself back and set aside enough to pay the tax bills for selling shares.

Very much "Silicon Valley Problems", and I don't expect much, if any, sympathy - especially since I had a good outcome. I'd just like to see the AMT rules changed to make it easier on employees who don't have the luxury of liquidity.