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Dear Unicorn, Exit Please

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Re: Dear Unicorn, Exit Please

#91

Post by ekanes »

scurvy wrote: post #79
beagle3 wrote: post #63

Earlier quoted context omitted.

> The myth that "having lots of shareholders increases costs too much" is also just a myth. No, it isn't a myth. I used to work for a company which had to re-incorporate for various reasons, and had three shareholders too many; They managed to buy them out before the reincorporation, but it was a big problem (with lots of drama), and if an agreement wasn't reached, the company might have had to fold, and would defini…

It's a myth. The US JOBS act removed the 500 shareholder disclosure trigger. It's 500 unaccredited or 2000 total now. You might have been forced to fold for reasons, but having 500 shareholders wasn't one of them. Going out on a limb here, but it sounds like there were lots of other serious problems and cap table length was a minor one.

> We were subject to laws in several countries, the minimum of which had 40 shareholders trigger these problems.

They couldn't have more than 40 shareholders, and they quite clearly were affected by this.

Re: Dear Unicorn, Exit Please

#92

Post by ryan-c »

ryandrake wrote: post #76
ryan-c wrote: post #70

Earlier quoted context omitted.

Because you'd like to do something new and if you leave you must either exercise within 90 days or lose your options.

So if you want to leave, your choices are: 1. Exercise your options, pay potentially huge taxes on it, and be left holding stock that is practically worthless because you can't sell it OR 2. Give up your options and move on with your life I know what I'd do.

It's not always that easy. People are not totally rational. Loss aversion is powerful. I've been in that situation. I'm actively avoiding putting myself in it again.

Re: Dear Unicorn, Exit Please

#93

Post by s73v3r »

ryandrake wrote: post #55
nathan_f77 wrote: post #48

Earlier quoted context omitted.

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.

Because your options are about to expire.

Re: Dear Unicorn, Exit Please

#94

Post by aetherson »

ryandrake wrote: post #47
j_baker wrote: post #11

At most private companies, stock options aren't worth the paper they're written on. Unless of course the company sells, in which case they're worth slightly more than the paper they're written on. And besides that, to exercise them you usually have to pay a pretty hefty sum. I generally don't consider equity as a part of my compensation package when I work for a private company.

Best response so far. Your equity compensation is worth what you can currently sell it for. If you can't sell it, it's worth nothing. You should consider it an extremely fortunate and lucky turn of events should your equity become both liquid and in the money--you shouldn't expect it as a given.

I mean, that's pretty true for a lot of traditional start-ups.

It's not very true for unicorns. Stock in the unicorns is going to be worth something -- it's just frustrating to try to realize that value right now.

Re: Dear Unicorn, Exit Please

#95

Post by birken »

angersock wrote: post #81
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…

Would you (or anyone else so inclined) mind just spelling out a list of these "hard questions" in a reply here? I, for example, actually didn't know about the 83b stuff.

I'd read this:

http://www.scribd.com/doc/55945011/An-Introduction-to-Stock-...

The "summary" section had a good list of questions, and if you read the document you'll have all the background necessary to understand their importance.

Re: Dear Unicorn, Exit Please

#96

Post by nathan_f77 »

ryandrake wrote: post #55
nathan_f77 wrote: post #48

Earlier quoted context omitted.

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.

Here's the advantages of exercising stock options and filing an 83b election as soon as you join a company:

* When the company has an IPO, you only pay the Long Term Capital Gains tax rate (20%), instead of the standard income tax rate (39.6%).

* Once your stock options have vested, you have the freedom to leave at any time without worrying about taxes or losing your options.

So you can risk tens of thousands now to potentially save hundreds of thousands later, in addition to giving you some freedom.

It's very risky. The company might fail. The company might be successful, yet never have a liquidity event (acquisition or IPO). But you only join a startup if you believe it has a good chance at success. You're risking a huge amount of time and effort, so you may as well risk a bit of cash too.

Re: Dear Unicorn, Exit Please

#97

Post by crucini »

angersock wrote: post #81
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…

Would you (or anyone else so inclined) mind just spelling out a list of these "hard questions" in a reply here? I, for example, actually didn't know about the 83b stuff.

I don't think it's possible for a candidate to properly value the options part of an offer. Not only is too much information withheld in the beginning, but the picture changes several times through the life of the startup, and employees are generally not informed.

There was a good thread or subthread on this recently - can't find it.

The company has a large bag of tricks to dilute your options, if desired.

I had this discussion in depth with a Valley CEO a few years back. The best indicator you get as a candidate is that the CEO has rewarded employees in past exits.

Now focusing on the numbers could theoretically prove you're getting a bad deal, but it can never prove you're getting a good deal.

(I'm guessing the "hard questions" start with total shares/options outstanding, valuation, and liquidation preferences).

Re: Dear Unicorn, Exit Please

#98

Post by justizin »

ajross wrote: post #6

While it's no doubt annoying for those involved, I find myself unable to sympathize much with the woes and travails of those poor stock-holding employees of private firms with skyrocketing valuations. Cry me a river, basically. If this is a serious issue that needs to be addressed, it's at most inside baseball not worth the rest of us worrying about.

> I find myself unable to sympathize much with the woes and travails of those poor stock-holding employees of private firms with skyrocketing valuations.

Stock-Option-Holding and often financially restricted from exercising.

Re: Dear Unicorn, Exit Please

#99

Post by robotresearcher »

ryan-c wrote: post #60

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 liqui…

Cash is very cheap right now, and has been for several years. Is it difficult or expensive to obtain loans to cover these expenses against the shares themselves?

Re: Dear Unicorn, Exit Please

#100

Post by ryandrake »

ryan-c wrote: post #92
ryandrake wrote: post #76

Earlier quoted context omitted.

So if you want to leave, your choices are: 1. Exercise your options, pay potentially huge taxes on it, and be left holding stock that is practically worthless because you can't sell it OR 2. Give up your options and move on with your life I know what I'd do.

It's not always that easy. People are not totally rational. Loss aversion is powerful. I've been in that situation. I'm actively avoiding putting myself in it again.

Fair enough, my argument relies on rational decision making.
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