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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

#161

Post by lawnchair_larry »

ditonal wrote: post #143
harryh wrote: post #142

Earlier quoted context omitted.

If investors were buying common stock instead of preferred stock what would happen to valuations?

You don't need to explain to me why the current 'standard' arrangement is designed to please and protect VCs at the expense of engineers. But that's exactly why we have a proliferation of VCs and startups and a 'shortage' of engineers willing to work for them. The classic argument for liquidation preference is because VCs are putting up money, but so is the engineer if he's taking a salary cut, and the only reason yo…

This is probably my favorite comment in a while. Most engineers don't understand this stuff, as you know, so it's important to make this broadly known. I don't know of a good way to do that, maybe one of those hot new blog startups like medium.

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

#162

Post by lawnchair_larry »

jedberg wrote: post #17
mtviewdave wrote: post #13

Earlier quoted context omitted.

The standard Silicon Valley employee stock option plan is X number of shares vested over 4 years, with the first 25% vesting all at once after 12 months, and the remaining 75% vesting in even installments once per month over the remaining 36 months. This has been the standard for decades. If you can arrange something more advantageous, by all means do it, but I think you're going to have a hard time negotiating away…

The cliff just creates artificial scarcity from what I've seen. When an employee is let go before 1 year, or quits because it isn't a good fit, I've always seen the company give what they would have vested in anyway (leave at 10 months? Get 10 months worth of vesting). It's really just the right thing to do, since they put work into your company.

No one does this ever.

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

#163

Post by AndrewKemendo »

spinlock wrote: post #144
cj wrote: post #92

Earlier quoted context omitted.

1) Company could offer more than exercise cost, so it also covers any tax liability. If I'm not mistaken, this is how [Google|Facebook|Apple] RSUs work. 2) Cash bonus would be dependent on employe exercising the grant.. it probably shouldn't be presented as a bonus, so the employee doesn't have to select between the bonus or the stock. If they prefer a cash heavy compensation package, that should probably be discusse…

It used to be common to loan the employee the money to purchase the stock. This avoids both the tax and early termination problems.

Well this is exactly what we are doing! In our case however we are probably going to sequentially forgive the debt, which would look like real income and as long as we space it out the tax burden is slow. All of the transactions are paper anyway so this also keeps our cash flow the same.

What good is equity as compensation if you have to purchase the stock after all?!

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

#164

Post by AndrewKemendo »

hkmurakami wrote: post #128
AndrewKemendo wrote: post #72

Earlier quoted context omitted.

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 ha…

Like you, I don't have a good answer yet.

I think as long as we have the goal of equity = ownership instead of options to own we will figure out how to structure it. Sounds silly but it is fairly innovative/progressive stuff we are trying to do - which is our whole goal anyway to innovate and progress.

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

#165

Post by jedberg »

lawnchair_larry wrote: post #162
jedberg wrote: post #17

Earlier quoted context omitted.

The cliff just creates artificial scarcity from what I've seen. When an employee is let go before 1 year, or quits because it isn't a good fit, I've always seen the company give what they would have vested in anyway (leave at 10 months? Get 10 months worth of vesting). It's really just the right thing to do, since they put work into your company.

No one does this ever.

My experience is very different than yours. I've never heard of anyone leaving before 1 year and not getting anything.

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

#166

Post by prostoalex »

lawnchair_larry wrote: post #160
prostoalex wrote: post #136

Earlier quoted context omitted.

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?

From reading "Venture Deals" I got the impression it's something a big VC firm tries to negotiate on a fairly regular basis. See, for example, the "Dividends" section of Houzz round http://techcrunch.com/2014/06/02/houzz-on-fire/

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

#167

Post by ChicagoDave »

nemo44x wrote: post #125
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.

No. Options can only be exercised if the owner(s) allow it. They can just as easily decide not to exercise them and revalue them at $0. This is generally considered unethical and would dramatically impact retention, but there is no explicit guarantee in options. It is implied and their value is entirely at the discretion of the owner(s).

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

#168

Post by ewindisch »

dlubarov wrote: post #88
ewindisch wrote: post #19

Earlier quoted context omitted.

IANAA (I am not an accountant)-- This is not true, or not necessarily. It's calculated for AMT, so if you're already paying AMT, or would be paying AMT with the addition of this income, then yes: You'll be paying that tax now. This is true for many in California with the high state taxes and a relatively high gross income (versus national averages). However, if the intrinsic value portion of your exercise (i.e. fair…

Sounds like you're describing ISOs, while the parent was describing NQSOs. With NQSOs, the (market value - exercise price) spread is taxed as ordinary income at the time of exercise.

correct -- for ISOs.
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