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Our Stock Option pledge

blog.clearbit.com

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Re: Our Stock Option pledge

#11

Post by ErikVandeWater »

nazka wrote: post #6

I came across a very good article on HN about funding. It gives you a complete explanation to know what happen to your stocks through each series. The charts and the dynamic ones at the end are making it even better: http://dlopuch.github.io/venture-dealr/

Loved this. They are also creating a tool for those actually designing rounds:

"Like what you saw? Send some social love and encouragement for Venture Makr: a full editor to create your own rounds with custom valuations and equity distributions. Turn the knobs on your own creations and see how scenarios might unfold differently."

Re: Our Stock Option pledge

#12

Post by throwaway1124 »

technotony wrote: post #8
throwaway1124 wrote: post #5

I appreciate the thinking here and message but am concerned about this line "This will cost a few hundred dollars at most". Clearbit has raised a $2M seed round from top-tier investors implying a post-money valuation likely over $6M. A conservative FMV of the common shares would suggest a $1.2M valuation. To exercise a 0.5% of total equity grant would cost $6,000. Something doesn't add up here. If I am correct, will…

Yes, and the tax on that is a fraction of that... which is a small cost compared with cost of recruiting. remember the cash from excising the options goes back to the company so it's not really a cost (you just have to pay tax)

I agree. I think that in the earliest stages, startups should consider "bonus-ing" out the employees to exercise their options early. I'm wondering what the consequences/disadvantages would be for the startup.

Re: Our Stock Option pledge

#13

Post by loumf »

jaz46 wrote: post #10

This is a great trend that I'm seeing a lot of YC companies do. Early Exercise + 83b is an absolute must for all seed stage companies. I really like the notion of helping employees exercise their options too with cash compensation and it's something we're looking into too at Pachyderm as we just started hiring. What's the legal structure of that cash repayment? Is it a bonus or can the company just pay the exercise p…

You can do whatever you want. If your FMV is much higher than the strike, the bigger problem is the tax bill.

Re: Our Stock Option pledge

#14

Post by loumf »

JonFish85 wrote: post #9
technotony wrote: post #8

Earlier quoted context omitted.

Yes, and the tax on that is a fraction of that... which is a small cost compared with cost of recruiting. remember the cash from excising the options goes back to the company so it's not really a cost (you just have to pay tax)

Does one end up paying double taxes in such a case? Because you're "getting" the money to buy the stock and then immediately buying the shares--is that first step technically income?

It would have to be (meaning the first step is income)

Re: Our Stock Option pledge

#16

Post by russell_h »

JonFish85 wrote: post #9
technotony wrote: post #8

Earlier quoted context omitted.

Yes, and the tax on that is a fraction of that... which is a small cost compared with cost of recruiting. remember the cash from excising the options goes back to the company so it's not really a cost (you just have to pay tax)

Does one end up paying double taxes in such a case? Because you're "getting" the money to buy the stock and then immediately buying the shares--is that first step technically income?

The taxes aren't double though. A highly simplified example:

  1. Your company gives you $1400 to exercise options (I don't think Clearbit is doing this, to be clear)
  2. You pay $400 in taxes and early exercise $1000 of options in exchange for 1000 shares at $1 each
  3. Later you sell those 1000 shares for $1m total
At step 3, you will pay capital gains tax only on the $999,000 of actual gain. You don't have to pay taxes again on the original $1k.

Re: Our Stock Option pledge

#17

Post by zaroth »

throwaway1124 wrote: post #5

I appreciate the thinking here and message but am concerned about this line "This will cost a few hundred dollars at most". Clearbit has raised a $2M seed round from top-tier investors implying a post-money valuation likely over $6M. A conservative FMV of the common shares would suggest a $1.2M valuation. To exercise a 0.5% of total equity grant would cost $6,000. Something doesn't add up here. If I am correct, will…

I think the problem is with your $1.2M valuation. You have a company with $2m in preferences or debt which is first in line before any common stockholder, and most likely their liquid assets are less than $2m, and they have negative net income. That makes the common stock effectively worthless at this time.

Also, if you keep reading;

  Once our valuation rises and the cost becomes prohibitive, we’ll move to an
  extended exercise period model instead, where you will have 10 years to
  purchase your options. By that time we’ll either have had an exit (in which
  case you can do a cashless exercise), or we will have arranged some other
  form of liquidity.

Re: Our Stock Option pledge

#18

Post by loumf »

throwaway1124 wrote: post #12
technotony wrote: post #8

Earlier quoted context omitted.

Yes, and the tax on that is a fraction of that... which is a small cost compared with cost of recruiting. remember the cash from excising the options goes back to the company so it's not really a cost (you just have to pay tax)

I agree. I think that in the earliest stages, startups should consider "bonus-ing" out the employees to exercise their options early. I'm wondering what the consequences/disadvantages would be for the startup.

It could aid recruiting if they explain the value of this benefit. In the longer term it probably reduces retention of people that had to stay to keep options from expiring.

Re: Our Stock Option pledge

#19

Post by hkmurakami »

throwaway1124 wrote: post #5

I appreciate the thinking here and message but am concerned about this line "This will cost a few hundred dollars at most". Clearbit has raised a $2M seed round from top-tier investors implying a post-money valuation likely over $6M. A conservative FMV of the common shares would suggest a $1.2M valuation. To exercise a 0.5% of total equity grant would cost $6,000. Something doesn't add up here. If I am correct, will…

This is likely convertible debt/equity so the company hasn't been valued in the manner of a traditional priced equity round. You can use other valuation methods to determine a much lower 409A valuation.

If they say "several hundred dollars", this is likely coming from actual knowledge of their own 409A valuation number.

Re: Our Stock Option pledge

#20

Post by hkmurakami »

gwintrob wrote: post #2

I'm glad more companies are removing the stock option golden handcuffs. Pinterest made a similar move last year: https://medium.com/@michaeldeangelo/unlocking-the-golden-han...

Don't forget Quora (who are often forgotten in this conversation), who were the first ones to implement such a plan and set the number at the maximum 10 year exercise period allowed by law.
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