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Dear Unicorn, Exit Please

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Re: Dear Unicorn, Exit Please

#111

Post by ryandrake »

nostrademons wrote: post #105
ryandrake wrote: post #80

Earlier quoted context omitted.

You have a choice though. The exercise price + taxes is the price you pay for potential upside. Not willing to take that risk? Just walk away from your options and pay nothing.

If that's the truth and the employee's best guess as to the company's outcomes are that their options will either be worth nothing or the taxes will be too expensive to afford with the cash available to him, the employee should rationally value any option grant at zero. Startups may find it a little hard to recruit employees if everyone starts valuing options at zero. This isn't in anyone's interests.

That's my argument exactly. Employees should value illiquid stock options at close to (but not exactly) zero. They're assets that have potentially huge upside, but also the risk of ending up worthless, cannot be sold now, and have no guarantee that they will ever be sellable. A rational decision maker would value such an asset at close to zero.

I'd argue that it's in the employees' best interest to realistically value the equity portion of their compensation package.

Re: Dear Unicorn, Exit Please

#112

Post by beagle3 »

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.

This was 2007, before the JOBS act. The company had 43 shareholders. It was subject to laws in a different country, that had the same "500 shareholder disclosure" trigger at 40 people (but the disclosure would have made it to the US as well, being public).

Also, the JOBS act is from April 2012. Almost every ESOP, ISO etc. plans in effect today were prepared and enacted before the JOBS act.

Re: Dear Unicorn, Exit Please

#113

Post by mahyarm »

7Figures2Commas wrote: post #51
sulam wrote: post #45

Earlier quoted context omitted.

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.

If you make a salary income around $150k/yr in California, your AMT credit no matter how large is going to be a few hundred dollars per year.

AMT credit is worthless unless your salary income is around $300k+.

AMT should not apply until you actually liquidate capital gains, but good luck getting that kind of thing passed or addressed.

Re: Dear Unicorn, Exit Please

#114

Post by mahyarm »

balls2you wrote: post #73
ryandrake wrote: post #55

Earlier quoted context omitted.

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.

Why work for a startup then ?

You were young and didn't realize these realties. 83b elections are not feasible since you have no savings to your name right out of school.

(Hint: this is where part of the SV age discrimination comes from)

Re: Dear Unicorn, Exit Please

#115

Post by sulam »

ryandrake wrote: post #111
nostrademons wrote: post #105

Earlier quoted context omitted.

If that's the truth and the employee's best guess as to the company's outcomes are that their options will either be worth nothing or the taxes will be too expensive to afford with the cash available to him, the employee should rationally value any option grant at zero. Startups may find it a little hard to recruit employees if everyone starts valuing options at zero. This isn't in anyone's interests.

That's my argument exactly. Employees should value illiquid stock options at close to (but not exactly) zero. They're assets that have potentially huge upside, but also the risk of ending up worthless, cannot be sold now, and have no guarantee that they will ever be sellable. A rational decision maker would value such an asset at close to zero. I'd argue that it's in the employees' best interest to realistically valu…

*if that employee doesn't have sufficient liquidity to take the risk.

This is another case in the world where having money helps you make money. I think most people rationally understand that it often takes money to make money, but the startup scene is usually portrayed differently.

Re: Dear Unicorn, Exit Please

#116

Post by zkhalique »

exelius wrote: post #14
zkhalique wrote: post #9

Earlier quoted context omitted.

Perhaps they should be able to sell their shares back to the company? The company would be responsible for raising more money and have some allocation for share buyback.

Who would determine the price of common shares without a liquid market?

Who determines them when you raise money from investors?

That's the market that should determine the value of the shares obviously. The last price fetched on that market. Whether its liquidity is high or low, it's still a viable market, even if it's not the public stock market.

Re: Dear Unicorn, Exit Please

#117

Post by jalonso510 »

mahyarm wrote: post #101
jalonso510 wrote: post #84

Earlier quoted context omitted.

It's not a matter of a company choosing to allow an 83(b) election. It's a personal tax election that you make by mailing a filing in to the IRS and you can do it without the company's involvement or permision. The problem is that 83(b) elections just aren't applicable unless (i) you own stock, not options, and (ii) that stock is subject to vesting. Longer explanation: When you buy something, if you are paying less t…

With vesting options, can you still exercise all of your options all at once even though you haven't vested yet? It's just you have to return the unvested stock when you leave?

It's up to the board at the time they make the grant. Some companies prefer not to allow early exercise to save the minor administrative burden, but it's employee friendly to allow it so lots of places do. Your option paperwork will mention it if you have this right.

Re: Dear Unicorn, Exit Please

#118

Post by birken »

mahyarm wrote: post #106
birken wrote: post #53

Earlier quoted context omitted.

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 o…

It's often only %10 of vested equity, once every one or 2 years. Also remember that if your $5mm company becomes a $1b unicorn after 4 years, and you got %0.5 at the start, then through dilution your %0.5 stake can become a %0.05 stake. Which means you get $500k / 4 years = $125k/yr in stock. But you cannot sell that stock, so it would of been better to go work at apple. It's very rare that a startup will pay better…

Your dilution math is pretty pessimistic. Even if you are diluted by 30% 5 times (which would be extremely uncommon for a company that grows so successfully), you'd go from 0.5% to 0.1% of the company in your example. More realistically, you'd probably expect to have around ~%0.15. So now you'd be looking at 1 or 1.5MM in a probably still-growing company, which compares much more favorably.

Yes, as I noted above I do agree that volume constraints are an issue and are pretty annoying. Even in the examples where you get to hold options for 7 years, you wouldn't get the ability to sell at the "peak" (if you think there is one) unless the company was public.

There are many things you have to take into account when valuing stock options, and from a purely compensation basis I agree that Apple/Google/Facebook are going to be tough to beat.

Re: Dear Unicorn, Exit Please

#119

Post by ajross »

nathan_f77 wrote: post #50
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.

Many (most?) readers of Hacker News are founders or employees at startups. It's very relevant to most of us.

The overwhelming majority of readers of Hacker News are not employees of the balooning private startups being discussed. Their companies have no equity exchange possibility at all.

Seriously, how many employees are there in the world of companies that could take "please exit" as serious advice? A few hundred, tops? And these are hardly impoverished folks to begin with, they could get solid six figure jobs at established tech companies in most cases. So why are we crying for them?

Re: Dear Unicorn, Exit Please

#120

Post by lberger »

ryandrake wrote: post #90
bkjelden wrote: post #85

Earlier quoted context omitted.

This just seems too black and white for the current environment, though. A seed stage startup? Sure. But if Uber made you an offer tomorrow, would it really be prudent to value the equity at $0?

I would truly, honestly treat that equity as I would a portion of my compensation being paid with lottery tickets. Unless there's a liquid secondary market for it, it's not worth anything to me.

I would, honestly not be able to treat it as lottery tickets and would rationalize it into the compensation at a higher rate than it is probably worth. Just being real.
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