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Who pays when startup employees keep their equity?

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Re: Who pays when startup employees keep their equity?

#131

Post by iaw »

codeonfire wrote: post #30
iaw wrote: post #8

Earlier quoted context omitted.

This comment isn't very productive. Some high-level valley participants are definitely bad actors but the bulk of them are just normal people in positions of power.

Normal people that like money. If this article is about how equity compensation can be improved, then that is a fairly messed up world view and kind of insulting. Employee equity compensation is always designed to explode or have no value. Workers are sick of the schemes. Just pay cash. Companies don't want to and never will improve equity compensation. A better solution would be a law that requires a cash value of g…

There is an argument going on in the VC world right now about how to properly structure employee compensation.

There is a side arguing for the status-quo and another side arguing for a change given the new-norm of long-delayed IPO/liquidity events.

I see where you're coming from, but the world isn't black-and-white and everyone with money isn't Art Carnegie hiring the Pinkertons. It's convenient to paint the VC industry in simplistic terms but it doesn't paint an accurate picture.

Re: Who pays when startup employees keep their equity?

#132

Post by payne92 »

While the dialog around various equity-based incentive compensation mechanisms is good, this article is off base in SO many ways:

>>With an often high strike price,

Only an issue at the later stages of companies (note: this writeup argues RSUs "from the beginning").

>>a large tax burden on execution due to AMT,

Only if you are exercising later in the company stage, when the fair market value has (usually) gone up. If you are bullish on the company, it's generally best to exercise as you vest, for this very reason.

Also, exercising as you vest gets the timer going for (a) cap gains treatment (much better tax rates), AND, a possible Qualified Small Business Stock tax exclusion (5yr holding, significant tax break).

>>and a 90 day execution window after leaving the company many share options are left unexecuted.

This is MUCH less of an issue if you are exercising as you go along (see above).

If you you have just left a large unicorn private company, there are often secondary buyers for the stock. You could exercise and sell some stock to them to cover your exercise cost.

Regarding RSUs, you HAVE TO PAY TAX AS YOU VEST. For a private company, you're just replacing one potential problem (AMT with option exercises) with a very specific actual problem (steady tax liability as without liquidity).

RSUs are a very useful compensation tool, but you can't declare them unilaterally better. ALL equity compensation forms require some "user sophistication", including options and RSUs.

If you don't understand how to optimize your situation, get advice from someone who does!

Re: Who pays when startup employees keep their equity?

#133

Post by Retric »

mathgeek wrote: post #127
Retric wrote: post #122

Earlier quoted context omitted.

There are a very large number of cheap locations with good schools. Especially when you include private schools.

Private schools tend to increase the "cheap" part quite a bit.

Depends on # of kids. Many great schools are well under 10k/year, but that's only so useful if you have 5 kids.

Re: Who pays when startup employees keep their equity?

#134

Post by shostack »

bradleyjg wrote: post #125
shostack wrote: post #116

Earlier quoted context omitted.

Can you elaborate on the "tournament type structure?" Are you referring to those at a high enough level where the expectation is that they source deals? If so, then yes, because at that point it is sales, and if you don't deliver new business, you bomb out, same as any other sales job. If you are low enough level though, that isn't necessarily a concern since you aren't expected to source deals.

In the investment banking industry you can't be a lifetime associate, it is up or out. If you make it to managing director you are doing very very well for yourself, but you still don't have any job security. That big pay packet is a ripe target when fortunes turn and the bank needs to cut costs. And if you get let go as an MD it is unlikely you will find another bank to take you in (the usual thing where it is harde…

Interesting research and thanks for the link.

So it looks like we're in agreement that this primarily would apply to the upper levels of ibanking when there is an expectation of deal sourcing. But for junior analysts and such, there really isn't that stigma since their performance is not measured on a sales basis (and thus their mobility is not necessarily hindered by a down year).

Do you have any info or insights into how deal sourcing typically works at that level? Seems like a crazy thing to measure against when your annual deal volume would be relatively low given the size of the deals.

Re: Who pays when startup employees keep their equity?

#135

Post by superuser2 »

cloudjacker wrote: post #44
timcederman wrote: post #26

There is a downside to RSUs. Say you work for a private company with a high valuation, e.g. AirBnB at $25B, and you are granted 0.01% equity over 4 years. That means you are vesting $2.5m of RSUs over 4 years, and these RSUs are taxable at that amount. Typically for folks earning over $150k/year in base salary, particularly if married, even half as much will put you into AMT territory, and you will end up paying a si…

You know the simple solution to this is that companies withhold the amount of RSUs from you that would be taxed, when they vest. Its almost like so simple of a solution that reporters won't touch it. edit: nevermind. even the company cant pay the tax with their illiquid RSUs so its still a problem, and a bigger problem if the share valuation increases, pre-IPO

My RSUs don't vest until the AND of the vesting schedule and a liquidity event.

I may own illiquid RSUs, but only during the employee lockup period.

Re: Who pays when startup employees keep their equity?

#136

Post by nommm-nommm »

Retric wrote: post #133
mathgeek wrote: post #127

Earlier quoted context omitted.

Private schools tend to increase the "cheap" part quite a bit.

Depends on # of kids. Many great schools are well under 10k/year, but that's only so useful if you have 5 kids.

9k a year is not cheap.

Re: Who pays when startup employees keep their equity?

#138

Post by morgante »

timcederman wrote: post #26

There is a downside to RSUs. Say you work for a private company with a high valuation, e.g. AirBnB at $25B, and you are granted 0.01% equity over 4 years. That means you are vesting $2.5m of RSUs over 4 years, and these RSUs are taxable at that amount. Typically for folks earning over $150k/year in base salary, particularly if married, even half as much will put you into AMT territory, and you will end up paying a si…

Does that still apply to liquidity-triggered RSUs?

My understanding was that single-trigger RSUs aren't taxable until exit.

Re: Who pays when startup employees keep their equity?

#139

Post by morgante »

jusben1369 wrote: post #4
buttershakes wrote: post #2

This is very interesting. Options are really an unappealing mechanism to incentivize employees. I feel like they prey on people who really don't know any better, and don't understand the tax implications or the possibilities around future dilution. As a rule of thumb I discount face value of options by as much as 70%, that generally doesn't go over very well with people trying to convince you to accept them in lieu o…

Quick question. Do you work for a startup now with options? Or, have you in the past? I'm trying to work out if people who object to options would ever join startups. Or, if they're appetite for risk is too small to be a potential candidate.

I've worked for two startups.

In both cases, one of the defining factors in choosing the particular startups that I work for was that the founders were very employee-friendly.

In both cases, I was granted actual stock (ie. not options).

In my view, options (as typically offered) are basically useless as compensation. They have a strike price which isn't much lower than the price investors last bought stock at. Companies which offer these as a substantial component of compensation are essentially exploiting the naivety of employees and expecting them to value "ownership" more heavily than investors do, despite having much less favorable terms.

Risk appetite is not the issue.

Re: Who pays when startup employees keep their equity?

#140

Post by hkmurakami »

chollida1 wrote: post #3

There was a PE firm that came around about 4-5 years ago trying to raise money on this very premise. Their thesis was that - startups would remain private longer. - employee's lost their options when they leave - longer periods to go public means more employees return options to the pool which means employee option pools can be smaller - longer private periods leads to more rounds raised which benefits investors over…

Maybe I'm missing something, but that doesn't really sound like a "thesis" but rather just an identifying mispriced securities ("arb opportunity" also works).

I agree with the latter that the late stage market for startup growth capital likely did not price this advantage in, and that the PE fund had an edge. But even at that stage there are winners and losers, and I would think that a thesis would still need to resemble the kind that Series B investors must concoct, and be able to sift out the winners from the losers.

In any case I appreciate you sharing this info. It's enlightening.

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