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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

#21

Post by amirmc »

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.

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

#22

Post by dglass »

gregrata wrote: post #12
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…

> buy them as early as you can, Careful on this one - when you buy, it's a taxable event. The spread between what the IRS thinks the company is worth and what you paid is taxable. You have to pay that NOW. I've known people that were screwed on this - strike price was around 1, value by IRS was 8 (based on funding rounds). By the time the person could sell the stock, it as worth .013. Fun!

This can go both ways. You can buy in with a strike price of 1.00 while the IRS value of your company is still low, say 2.00. You pay the taxes on the 1.00 difference since the IRS counts that as income, and you become a shareholder.

If your company raises funding in the future and the price goes up to 5.00 it's all profit (aside from capital gains tax when you sell, but chances are you'll pay long term capital gains since you're already a shareholder and these things don't happen overnight). This is better than buying in after the round of funding where you'd pay taxes on the difference of 4.00.

This is why it can be a good idea to exercise your vested shares before a round of funding where the price will go up. It's a trick to minimize your taxes. Not saying there's any less risk in purchasing the shares of a startup however.

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

#23

Post by triplesec »

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…

I wish more companies were so transparent and decent as yours. Why do others prefer not to do it this way, if it's not just sheer greed and obfuscation?

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

#24

Post by birken »

For those of you that found this interesting and want to learn more about stock options, with advice that is a bit more general, I highly recommend "An introduction to stock options for the tech entrepreneur or startup employee":

http://www.scribd.com/doc/55945011/An-Introduction-to-Stock-...

It gives a detailed background of a lot of key issues related to stock options and some really well reasoned recommendations that are applicable to anybody taking a job involving stock options.

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

#25

Post by ditonal »

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…

It's really unfortunate, because there are many engineers like me who would gladly take a pay cut if we were brought in as collaborators and offered real equity deals. Instead we are brought in as serfs to build their 'vision', with no input of our own or recourse if bad management runs our projects into the ground, and offered financial instruments that are obviously rigged against us. No engineer who understands personal finance and seriously values his tech career would be an employee at a startup over an established tech company today.

Founders still behave like VC money is scarce and engineering talent is plenty. I am seeing many of these companies struggle to ship competitive products due to lack of engineering talent, and so I am hoping we see these startups fail and lose to big tech companies that value their engineers, and force the VC funded startup scene to totally re-evaluate their 'standard' offers so that those of us who would prefer smaller teams can join one on fair terms.

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

#26

Post by sxp »

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,…

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 the couple $K I lost from the options was the opportunity cost of not leaving the job earlier. Like all startups, the company paid below average wages (since startups pay a significant proportion of compensation in the form of options) so if I left earlier, I would have gotten a large pay bump from having joined a non-startup that paid a normal salary.

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

#27

Post by leroy_masochist »

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…

>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.

Interesting. Can you provide more detail on this? Do you just pay the lump sum outright as a hiring bonus? Obviously this works at early stages when the stock is like $0.001/share, but what happens after you've raised a few rounds and the current fair value of the stock is in the 6-7 digit range?

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

#28

Post by ekanes »

triplesec wrote: post #23
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…

I wish more companies were so transparent and decent as yours. Why do others prefer not to do it this way, if it's not just sheer greed and obfuscation?

This approach is awesome, but (I am not a lawyer, this is not advice!) one drawback is that the whole concept of an option is that it's optional. If the company succeeds, you exercise your option and spend that money to get a much larger return. If you must buy the option, and the company does not succeed, then you've spent the money and it's gone. You've lost the "option" aspect of an option.

And of course, yes, the company may say "we're spending our money to buy this for you, don't worry" the truth is money is money. Someone (company or you) is buying the option early, thus having less money to spend on other things.

Alternatives could be the company pays you that money, so it's yours to spend as you see fit. Including, someday, buying the option if you want.

Hope that helps!

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

#29

Post by tieTYT »

The last two companies I've gotten offers from gave me very, very heavy pushback when I tried to figure out what % of equity they were giving me.

They told me they were giving me 5,000 shares (for example). OK... 5,000 of how many? What % of all the shares is 5,000? My understanding is you need this information to know if the equity is worth something or nothing. Yet, they really don't want to give me this information.

For one of these jobs the recruiter I was going through (this is a big recruitment company) literally told me nobody has ever asked these questions about the options they were getting.

Am I doing something wrong? Do I have a misunderstanding of how these things work? Is it unreasonable for me to be told the outstanding shares?

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

#30

Post by cylinder »

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,…

How did that happen? The acquirer just purchased a certain class of shares, i.e. preferred stock and didn't care about owning 100% of the company?
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