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If you have startup stock options, check your option plan

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Re: If you have startup stock options, check your option plan

#121

Post by ilyanep »

ryanSrich wrote: post #100
mcdoug wrote: post #9

Why worry about stock options at all? There is a spectrum of outcomes. On one end the startup flops, or is bought for so little that your share, even if paid out, is close to 0. On the other end you have Google, Facebook, Instagram, etc. Companies where 0.5% is worth quite a bit of money. The problem is that the majority fall in-between, where your stock options will be worth nothing, yet the company will sell for a…

> If you have the spare cash, buy them as early as you can Why would you want to do this? Wouldn't it be better to wait until the company is about to be acquired or IPO so you're not spending money on something of no value?

I am not an accountant, this is not tax advice.

You're usually correct, except for two things (in the US):

1) Holding stock for a year before selling is taxed at the lower long-term capital gains rate (~20% vs ~39.6% at the highest brackets).

2) Exercising an ISO is seen as a taxable income for the purposes of the Alternative Minimum Tax, so exercising late (when the difference between FMV and Strike Price is high) has a higher chance of incurring an AMT burden, whereas exercising early does not incur an AMT burden (because the spread is small) nor a normal tax burden (because this is how ISOs work).

Re: If you have startup stock options, check your option plan

#122

Post by justrudd »

ryanSrich wrote: post #100
mcdoug wrote: post #9

Why worry about stock options at all? There is a spectrum of outcomes. On one end the startup flops, or is bought for so little that your share, even if paid out, is close to 0. On the other end you have Google, Facebook, Instagram, etc. Companies where 0.5% is worth quite a bit of money. The problem is that the majority fall in-between, where your stock options will be worth nothing, yet the company will sell for a…

> If you have the spare cash, buy them as early as you can Why would you want to do this? Wouldn't it be better to wait until the company is about to be acquired or IPO so you're not spending money on something of no value?

Depends on the type of options you have. If you have ISO, yeah. I'd probably wait because there are "games" you can play to not impact your total tax bill for the year (i.e. not trigger AMT).

If they are NQSO, the difference between your option price and market price is a taxable event. So if your option price is $1 and the company IPOs and has a price of $12 when you exercise, you owe taxes on $11 per share (this is a gross oversimplification). Now if you had purchased before the company is acquired/goes public, the price might just be $5 so your overall tax bill is lower. You exercise at a lower price and hope the price goes up.

Re: If you have startup stock options, check your option plan

#123

Post by nemo44x »

iykwimthrowaway wrote: post #44
mcdoug wrote: post #9

Why worry about stock options at all? There is a spectrum of outcomes. On one end the startup flops, or is bought for so little that your share, even if paid out, is close to 0. On the other end you have Google, Facebook, Instagram, etc. Companies where 0.5% is worth quite a bit of money. The problem is that the majority fall in-between, where your stock options will be worth nothing, yet the company will sell for a…

I'm very curious about the middle part of this spectrum, since I'm currently in it: I'm an early employee with a significant chunk of options (high single-digit %), and the company is profitable and valued at (to my understanding) somewhere well over 10x the total amount of funding we took (I've heard talk of 40-50x). Management is explicitly not looking for an exit: they just want to keep building this company for t…

You own more than 5% of the company? With that stake you should be on the board if you exercised the options. There's only 20 5% owners in any company.

Re: If you have startup stock options, check your option plan

#124

Post by trhway »

bluehex wrote: post #5

Another thing to understand (and this will sound obvious to many of you) is that your options may be worth nothing, even after a multi-million dollar acquisition if there are priority stock holders (the investors) ahead of you in line. As a young and naive engineer I learned of this fact the day the first startup I worked for was acquired. First I read the big number that was to be paid for the company, was ecstatic,…

>In retrospect it sounds obvious that if the company sells for less than the money the investors put in, your x percent is worth nothing.

that is what i've been wondering about. If going into startup i take a $50K/year salary hit wouldn't it mean that i'm actually investing $50K/year and thus should get the same quality and price of shares (not options) what the early investors do?

Re: If you have startup stock options, check your option plan

#125

Post by nemo44x »

ChicagoDave wrote: post #54

Options are useless. Their value is entirely based on what the actual shareholders decide. It doesn't matter if stock gets sold to other investors or the company goes public. Options are useless. You want a stake in a business, you need to ask for actual stock. Not options.

Well, you have the right to exercise those options and then they become stock and you have a stake in the company. The nice part of it being an option is it grants you the right to invest in the company at a static price if you choose. And you choose to do this when the company is doing very well.

Re: If you have startup stock options, check your option plan

#126

Post by Iftheshoefits »

harryh wrote: post #114
aetherson wrote: post #47

Earlier quoted context omitted.

I think that people talk past each other a lot, and part of it is understanding that 1% is not 1%. Like, if I'm joining a company that has started to get traction, is well-funded and pays me say 80-90% what Google would pay me, and is likely to either fail or experience a monetization event in the next 3-5 years, and I get 1% of that company, holy shit guys that's amazing. Maybe still overall less compensation than G…

This is the best comment in this entire thread. People see 1% and immediately think small when that is not, in fact, the case. They have almost never thought through the fact that it generally takes a lot of people to build a successful company so that 100% needs to get divided up into a lot of little pieces.

It's pretty tiny when the expectation is that one will be treated like a regular employee with respect to compensation and benefits but expected to behave like a 20% (or more)-equity founder with respect to passion and (especially) effort.

Re: If you have startup stock options, check your option plan

#127

Post by sliverstorm »

AndrewKemendo wrote: post #11

I read a lot about how employees get screwed over with stock options, so what we decided to do was to just give employees vesting stock straight up as a buy through. Basically the way this works is that we give new employees an up front lump sum in the amount of how much it costs to purchase the shares of the company. The employee then purchases those shares from us in line with a vesting agreement. All warrants and…

As someone trying to understand the various stock incentive plans, can you explain the difference between this and RSUs with an 83b election?

Re: If you have startup stock options, check your option plan

#128

Post by hkmurakami »

AndrewKemendo wrote: post #72
cj wrote: post #43

Earlier quoted context omitted.

Founders stock works well for early employees. Since valuations of pre-series A companies is effectively $0, the cost for employees to buy their shares upfront is minimal (literally a few dollars for a few percent). But as a company raises capital, it's legally required to have a "409a valuation", which establishes the "fair market value" of the stock. Once this happens, it can cost $x,xxx's of dollars for employees…

100% correct. We hope that we will be able to float those amounts to the employees (as bonus) as we get to later stages of growth, but what I have discussed with our GC looks closer to the conversion bonus when and if that happens. The boundary cases where there is a contentious firing will have to be taken case by case but then whatever that portion of the taxes are due for the percentage vested we would compensate…

I was thinking about the exact same model the other day (even to the point of paying new hires a signing bonus to cover the stock purchase + tax liability). The wall I ran into was how long I would be able to continue such a model -- how big of a bonus would I be willing to dole out? 20k? 50k? 100k?

If switching to a stock options at some point, what is the proper time? Post-A/B round? (obviously a nice problem to have if you have to worry about such things)

Would be keen on discussing it further sometime, since we seem to have arrived at the same conclusion independently.

Re: If you have startup stock options, check your option plan

#129

Post by Kalium »

chrisabrams wrote: post #33
tedyoung wrote: post #31

Earlier quoted context omitted.

You are completely reasonable. I've turned down offers because of this exact reason (and it was the only problem with the offer). I tell them that if they won't give me the denominator of the equation, I'll assume it's pretty close to infinity, and value the options aspect of the offer at $0. I think it's shady and manipulative to not provide such details ("but we're giving you 50,000 options!"). What are they trying…

Also, why do these companies think that engineers won't try to find a way to bring math into the equation?

They're assuming that big numbers will make engineers shut up and stop thinking.

Re: If you have startup stock options, check your option plan

#130

Post by Kalium »

chrisabrams wrote: post #35
paulhauggis wrote: post #18

This is why I never take equity. It's just a way to dangle a carrot in front of an employee to make them think they will get a big pay day. Many times, the employee doesn't want to quit because this pay day is seemingly right around the corner. My previous employer gave me stock options on top of my salary. I never really cared about the stock options too much. A few months ago, I found out the owner created a new LL…

a good employment contract would cover this scenario...best to make friends with an attorney in the field :)

Where would one go to set about purchasing beer for such a new friend?
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