If you have startup stock options, check your option plan • Hacker News Board

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

#151

Post by SeoxyS » Thu, Mar 05, 2015, 4:45 AM UTC

enjo wrote: post #89

ChuckMcM wrote: post #57

Earlier quoted context omitted.

It works as follows, there is a line of people who need to get paid, If the startup took on any debt, at the front of the line is a bank. Their 'note' usually gets paid first. $POOL -= $BANK When people invested in the Series A, B, C, ... their stock came with a 'liquidation preference' (which can have a few variants, but the two most common are, the investor chooses if they want the liquidation preference or the com…

I'm genuinely curious, is a 2x multiple really common these days? All of the recent raises I've been involved in have been Non-Participating Preferred at a 1x multiple. Or at least capped. I was under the impression that was where everyone had sort of settled these days? I'm basing this almost entirely off personal experience and the cooley report. http://www.cooley.com/files/104854_vf2014q2.pdf

That has been my experience too.

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

#152

Post by walterbell » Thu, Mar 05, 2015, 5:14 AM UTC

SeoxyS wrote: post #150

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…

One way to avoid the whole stock option / RSU mess is to structure your company as a C-corp that is wholly owned by an LLC, and give your employees membership units in the LLC. This is a very unusual setup and it'll take a good lawyer to help you get it right; but the benefits are huge for employees who own stock, because there are zero tax liability and zero purchasing price until the ownership produces a return.

Are there any published references on this technique, or a law firm that is well-versed in it?

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

#153

Post by mooredinty » Thu, Mar 05, 2015, 5:24 AM UTC

SeoxyS wrote: post #150

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…

One way to avoid the whole stock option / RSU mess is to structure your company as a C-corp that is wholly owned by an LLC, and give your employees membership units in the LLC. This is a very unusual setup and it'll take a good lawyer to help you get it right; but the benefits are huge for employees who own stock, because there are zero tax liability and zero purchasing price until the ownership produces a return.

In some states LLC members are not allowed to take salaries. They can only take guaranteed payments, which have other tax implications

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

#154

Post by SeoxyS » Thu, Mar 05, 2015, 5:37 AM UTC

walterbell wrote: post #152

SeoxyS wrote: post #150

Earlier quoted context omitted.

One way to avoid the whole stock option / RSU mess is to structure your company as a C-corp that is wholly owned by an LLC, and give your employees membership units in the LLC. This is a very unusual setup and it'll take a good lawyer to help you get it right; but the benefits are huge for employees who own stock, because there are zero tax liability and zero purchasing price until the ownership produces a return.

Are there any published references on this technique, or a law firm that is well-versed in it?

I don't know of any public resources on the topic, or of any law firms that are particularly adept at this. However, I have seen it done in practice.

I'd recommend talking to a law firm that's well versed in startup corporate law. The big firms Cooley and Orrick come to mind.

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

#155

Post by pyrrhotech » Thu, Mar 05, 2015, 5:55 AM UTC

trhway wrote: post #124

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?

what should happen and what happens legally are two different things. though it's your choice to take that risk, no one is forcing you to work for sub market rates.

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

#156

Post by kwang88 » Thu, Mar 05, 2015, 6:10 AM UTC

lutorm wrote: post #148

harryh wrote: post #42

Earlier quoted context omitted.

You are not doing anything wrong. You do not have a misunderstanding of how these things work. You should not go work for a company that will not tell you the total number of outstanding shares (so you can calculate your % ownership). It's basically the same thing as saying that they're going to pay you 100,000 a year but not bothering to mention the currency.

Why isn't the relevant number the valuation per share? (which they have to tell you, because that's information for your tax return, right?) In other words, if I have an option for N shares that are currently valued at $X, why do I care whether N is 10% or .0001% of the company. The "value" of the grant is the same in either case, no?

My understanding is that the valuation per share (at least, the valuation that matters for tax purposes) should depend on the 409A evaluation of the company, which determines the current price of shares in the eyes of the IRS. In some cases, especially if e.g. you're pre-revenue or nearly so, this number will be much lower when compared to the valuation per share that you'd see in an acquisition or subsequent funding round, both of which would presumably price in your potential future growth much more aggressively.

The net result is that generally speaking the number given by your 409A would seem low compared to the "true" price of the shares, and make it a weak recruitment tool.

(If this assessment is wrong I'd definitely be interested to hear to learn more)

As an aside -- unscrupulous companies can always quote inflated per-share prices based on extremely optimistic valuations e.g. "we're at least 10x the last round of funding -- your options are worth $500k!" So generally speaking, watch out.

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

#157

Post by onion2k » Thu, Mar 05, 2015, 6:44 AM UTC

bagels wrote: post #131

busyant wrote: post #46

Earlier quoted context omitted.

It's red flag. I asked the same question of one startup and was told that i didn't need to know the answer. Fast forward 10 years ... The company tried to go public and they had to do a 5760 to 1 REVERSE split to shore up their share price. People who naively thought they had 100k shares ended up w less than 20. Thecompany had to cancel the planned ipo, too.

I agree with this. An offer I didn't accept wouldn't disclose the numbers, ran out of funds and shut down a year or two after I declined.

And that is why refusing to share information is a bad idea. They lost a (presumably) good hire who might have made a difference to the outcome of their company. They wanted to hire but chose secrecy over a new employee. It didn't work out well.

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

#158

Post by hkmurakami » Thu, Mar 05, 2015, 7:04 AM UTC

ganeumann wrote: post #146

hkmurakami wrote: post #128

Earlier quoted context omitted.

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 ha…

Remember, the part of the bonus used to buy the stock comes right back to the company, it's just one pocket to the other. The tax piece is out the door (and is mostly a dead-weight loss if the company doesn't make it, one of the rationales behind options.)

Wow I completely overlooked this fact.　Thanks!

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

#159

Post by briandear » Thu, Mar 05, 2015, 7:26 AM UTC

amirmc wrote: post #21

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…

> "Why worry about stock options at all?" Because they do matter and are still part of the compensation package. There's still a significant difference between a payout that equates to two year's worth of salary vs another that pays out one year's worth.

It's a lottery ticket. If statistically most startups fail, then statistically most options are worthless.

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

#160

Post by lawnchair_larry » Thu, Mar 05, 2015, 7:40 AM UTC

prostoalex wrote: post #136

sxp wrote: post #26

Earlier quoted context omitted.

The segregation between common and priority stock can be painful. I learned about it the hard way after I left the startup and paid money to exercise the vested options. When the company was acquired, all the common stock was worthless (but the execs with voting power got millions of dollars of bonuses so they didn't care) which meant I had lost the money required to exercise the options. What annoyed me more than th…

Another trick is hidden dividend accrual for preferred stock. The dividends are triggered at liquidity event, so the cap table you thought you were looking at suddenly gets diluted with a bunch of freshly issued stock which is still senior to common.

Pure evil. Which companies have done that?