How Startup Options and Ownership Work • Hacker News Board

Re: How Startup Options and Ownership Work

#11

Post by sokoloff » Thu, Aug 25, 2016, 3:36 PM UTC

manuelflara wrote: post #7

gortok wrote: post #5

The article goes over stock options; but it doesn't address an alternate form of equity; issuing early employees restricted stock awards (instead of options). From the receiver's point of view, Stock Options are a bad deal 99 times out of 100, let's review the cases in which owners of options get screwed: - Company gets acquired, new terms are put into place. - Company gets acquired, company isn't good fit. - Company…

I'm not sure I quite get what you mean by "issuing early employees restricted stock awards". Can you elaborate? Is this like an IOU for restricted stock? Isn't that kind of like what stock options are (except for common stock)? And if you just mean giving actual restricted stock (like to investors), then the main problem is you have to pay those taxes right away (the whole point of options). But maybe you mean someth…

If you are granted restricted stock subject to vesting, in the US you owe taxes only when the stock is both released AND vested, meaning the tax bill comes due in stages as the shares vest, not "right away". If you give restricted shares that vest over time and are only released upon a change in control, you can further defer the tax bill due date (though at the expense of the eventual bill being higher on average).

Re: How Startup Options and Ownership Work

#12

Post by SmellTheGlove » Thu, Aug 25, 2016, 3:43 PM UTC

manuelflara wrote: post #7

gortok wrote: post #5

The article goes over stock options; but it doesn't address an alternate form of equity; issuing early employees restricted stock awards (instead of options). From the receiver's point of view, Stock Options are a bad deal 99 times out of 100, let's review the cases in which owners of options get screwed: - Company gets acquired, new terms are put into place. - Company gets acquired, company isn't good fit. - Company…

I'm not sure I quite get what you mean by "issuing early employees restricted stock awards". Can you elaborate? Is this like an IOU for restricted stock? Isn't that kind of like what stock options are (except for common stock)? And if you just mean giving actual restricted stock (like to investors), then the main problem is you have to pay those taxes right away (the whole point of options). But maybe you mean someth…

Sort of. With restricted stock, the stock is not transferable from the company to you until certain conditions are met. The grant has been made, but the shares aren't yours until they vest (conditions met). I believe (I'm not a tax lawyer) that you pay taxes on the fair market value of the stock as of the vesting date, but you can elect to pay those taxes on the date of the grant instead, based on the value of those shares on that date (with the risk being that if the shares never vest, you don't get your tax money back).

Then there are RSUs - restricted stock units. This is more like an IOU in that the company promises now to grant you a block of restricted stock at some point in the future. It's to manage taxation, and again, that's less my area. A good explanation is here:

http://avc.com/2010/11/employee-equity-restricted-stock-and-...

Re: How Startup Options and Ownership Work

#13

Post by calvinbhai » Thu, Aug 25, 2016, 3:50 PM UTC

I am curious to know when is the best time to ask all the questions about the stock options. Before signing the offer letter / getting started or after?

Before may be a bad deal for startups, especially the ones that are keeping everything all the equity details under wraps.

After is a bad deal for the employee who makes the move, and could be a major bait and switch

Re: How Startup Options and Ownership Work

#14

Post by halifaxbeard » Thu, Aug 25, 2016, 3:51 PM UTC

I remember asking for a cap table at a startup and in not so few words, was told to fuck off.

At that point I realized it didn't matter how many options I had, I was going to get screwed should there be an exit, and made my own.

Re: How Startup Options and Ownership Work

#15

Post by 100k » Thu, Aug 25, 2016, 3:53 PM UTC

gortok wrote: post #5

The article goes over stock options; but it doesn't address an alternate form of equity; issuing early employees restricted stock awards (instead of options). From the receiver's point of view, Stock Options are a bad deal 99 times out of 100, let's review the cases in which owners of options get screwed: - Company gets acquired, new terms are put into place. - Company gets acquired, company isn't good fit. - Company…

Considering the author's previous article was about how employees do not deserve to keep their equity unless they stay with a company until liquidity, I suspect he would not support granting restricted stock.

http://a16z.com/2016/07/26/options-plan/

Re: How Startup Options and Ownership Work

#16

Post by techterrier » Thu, Aug 25, 2016, 3:55 PM UTC

cloudjacker wrote: post #8

gortok wrote: post #5

The article goes over stock options; but it doesn't address an alternate form of equity; issuing early employees restricted stock awards (instead of options). From the receiver's point of view, Stock Options are a bad deal 99 times out of 100, let's review the cases in which owners of options get screwed: - Company gets acquired, new terms are put into place. - Company gets acquired, company isn't good fit. - Company…

I've been making similar points too, it's actually shocking how founders and VCs are convinced that their way is the absolute correct way Instead of pointing out how stock options are primarily a reaction to accounting and taxation changes over the years , or the conflicts of interest in giving a more objective answer There are plenty of financial products possible that will tread the line of compensating employees f…

Do you have any examples of these products?

Re: How Startup Options and Ownership Work

#17

Post by Bahamut » Thu, Aug 25, 2016, 3:56 PM UTC

100k wrote: post #15

gortok wrote: post #5

The article goes over stock options; but it doesn't address an alternate form of equity; issuing early employees restricted stock awards (instead of options). From the receiver's point of view, Stock Options are a bad deal 99 times out of 100, let's review the cases in which owners of options get screwed: - Company gets acquired, new terms are put into place. - Company gets acquired, company isn't good fit. - Company…

Considering the author's previous article was about how employees do not deserve to keep their equity unless they stay with a company until liquidity, I suspect he would not support granting restricted stock. http://a16z.com/2016/07/26/options-plan/

If they didn't deserve it, then they shouldn't be compensating the employees with equity & should be doing so with cash.

Can't have it both ways.

(This is more of a response to the link, not your comment in particular)

Re: How Startup Options and Ownership Work

#18

Post by gumby » Thu, Aug 25, 2016, 3:57 PM UTC

This article mentions '“sticker shock” (or reverse!) [up]on leaving their first startup.'

Companies can easily ameliorate this, especially for early employees, by permitting early exercise. The 409a valuation rarely changes between financing events so if you get 5000 $.50 options you can pay $2500, file 83(b), and not have to pay any tax until (unless you sell). If you leave before your vesting period is up the company pays you back what you paid for the unvested amount -- again, not taxable. I always make sure this is in the stock plan.

There's some minor subtleties (you want to put a voting agreement into place etc) but they require no heavy lifting at all, and they treat employees as what they should be: valued members of the team.

Yes, in later rounds when the share price climbs, this is less useful so but be it. It's annoying that 409a common valuations end up at about 20% of preferred these days; I think it was more fair back when the board could just determine that 10% was reasonable.

Re: How Startup Options and Ownership Work

#19

Post by theflork » Thu, Aug 25, 2016, 4:01 PM UTC

gortok wrote: post #5

The article goes over stock options; but it doesn't address an alternate form of equity; issuing early employees restricted stock awards (instead of options). From the receiver's point of view, Stock Options are a bad deal 99 times out of 100, let's review the cases in which owners of options get screwed: - Company gets acquired, new terms are put into place. - Company gets acquired, company isn't good fit. - Company…

Are there any companies you know that use RSU's or stock grants instead of options? I've been interviewing at some startups and they only seem to offer options with their byzantine rules. Can people negotiate offers from options to RSUs/grants?

Re: How Startup Options and Ownership Work

#20

Post by bretthoerner » Thu, Aug 25, 2016, 4:11 PM UTC

calvinbhai wrote: post #13

I am curious to know when is the best time to ask all the questions about the stock options. Before signing the offer letter / getting started or after? Before may be a bad deal for startups, especially the ones that are keeping everything all the equity details under wraps. After is a bad deal for the employee who makes the move, and could be a major bait and switch

Always before. If they won't tell you the details of your compensation you need to run, not walk.