Do the math on your stock options • Hacker News Board

Re: Do the math on your stock options

#211

Post by ryanSrich » Thu, Dec 31, 2015, 8:39 PM UTC

Ixiaus wrote: post #188

ryanSrich wrote: post #158

Earlier quoted context omitted.

Well when someone is offered a 'key' engineering role it's basically a fancy way of saying 'you'll be building pretty much everything'. Couple that with the fact that it requires a 40% pay cut and you've got a situation that definitely warrants co-founder status.

Most founders go with no pay for quite some time. You can still be a co-founder and receive pay but being a co-founder conveys far more risk and responsibility than being one of the first x employees in the company. Even if you happen to be the person "building pretty much everything", it still does not justify being a co-founder. If you wish to be a co-founder, you typically have to be willing to take more than 40%…

> but I do not believe you're entitled to founder status just because you're an early hire

That's not what I said at all.

Early employees that are paid a fair market salary are absolutely not entitled to founder status, and in some cases not even substantial equity.

Re: Do the math on your stock options

#212

Post by AndrewKemendo » Thu, Dec 31, 2015, 8:41 PM UTC

encoderer wrote: post #199

AndrewKemendo wrote: post #142

Options are for suckers. Do you want to be an investor? No? then why would you pay for stock out of your own money? At our startup everyone gets the same stock, not options, through our Equity Incentive Plan. Here's how it works. 1. We lend new employees the amount of money it would take to buy common stock on a non-recourse promissory note the collateral in this case is the stock itself. 2. The employee then buys th…

I'm sure that "options are for suckers" has a powerful effect in your recruiting materials but I don't think it adds any value to this discussion. Options have real advantages, you don't have to exercise them "out of your own money", and you ignore that a ton of feathers weighs the same as a ton of bricks. (eg, you're not giving me more money just because you're giving me a promissory note). There's no doubt that you…

Definitely isn't a recruiting tool or an ad - in fact I don't even really go into the details of the plan when I do my recruiting because most employees don't really know the difference at that point. If it was an ad it certainly wasn't effective as nobody has contacted me :p.

I'm curious what advantages options give employees over a system like ours. I don't see any, and the whole point of our structure was to give employees lower risk and more comfort that they actually owned equity, not a promise of it.

Re: Do the math on your stock options

#213

Post by gohrt » Thu, Dec 31, 2015, 8:50 PM UTC

inthewoods wrote: post #68

JumpCrisscross wrote: post #40

Always ask for: 1. TRANSFERABILITY. If you are given options to buy privately-held common stock in lieu of compensation, you must demand transferability. Rights of first refusal (ROFRs) are fine. "Board approval" is not. "Board approval" means "you may not sell your shares until we go public, except to us, if and when we feel like it, and at a price we get to unilaterally decide". 2. CASHLESS EXERCISABILITY. Always a…

I've never seen the ability to customize these kind of things because they generally are, in my experience, part of the core options agreement for the entire company and would require BoD approval. Thus, you're asking a lot - works if your a key employee but probably not for the average employee. Would love to hear if people have been able to get these terms.

Right. A CTO could negotiate these terms. Everyone else should value their options properly at 0

Re: Do the math on your stock options

#214

Post by idunno246 » Thu, Dec 31, 2015, 8:50 PM UTC

ewams wrote: post #210

jaredhansen wrote: post #192

Earlier quoted context omitted.

>Exercising risklessly is safe It may be safe, but it isn't free. As with most other things, you pay a risk premium -- in this case, in the form of failure to qualify for capital gains tax treatment on the resulting gain, because you didn't exercise in time to hold the underlying stock for more than one year. Depending on the amount, this difference can be quite significant. You do your own taxes so probably know all…

In the US, do you pay taxes when you exercise your option to buy the stock? For you example, say I exercise my option to by 1 at strike price of $100 in 2015. I hold on to it and sell it in 2017 for the FMV of $1000. Do you only pay the capital gains tax of the $900 gain? Ignore state rules, just at the fed.

Lets say the fmv in 2015 is $500, and your strike price $100. If they are ISO, in 2015 you own no regular tax on it(thats the Incentivized). In 2017 you owe capital gains on $900.

However, AMT(alternative minimum tax) doesnt recognize ISO. So in 2015, you have to calculate AMT, which $400 counts towards. This is basically a no-deduction(except a high standard deduction) flat tax, you potentially owe 26-35% on that 400. Even though you didnt sell anything - this is where people get screwed.

So lets say you paid $100 in AMT. In 2017, you still owe capital gains tax on the whole $900, but you calculate AMT and claim the difference, up to $100, as a credit - the difference should be >100. You can actually claim this credit every year until previously paid AMT runs out, but most likely the difference wont be sizable enough until you sell.

Re: Do the math on your stock options

#215

Post by ngorski » Thu, Dec 31, 2015, 8:54 PM UTC

AndrewKemendo wrote: post #142

Options are for suckers. Do you want to be an investor? No? then why would you pay for stock out of your own money? At our startup everyone gets the same stock, not options, through our Equity Incentive Plan. Here's how it works. 1. We lend new employees the amount of money it would take to buy common stock on a non-recourse promissory note the collateral in this case is the stock itself. 2. The employee then buys th…

> so they take no risk of paying taxes on something which might be worthless

If a the time of a liquidity event the stock is worth less than an employee's strike price, they'll still be underwater. They'll either owe the loan back (the difference between the strike price and exit valuation) or the loan is forgiven and they owe income taxes on the forgiven debt. So there's still risk of owing tax on equity worth less than the current valuation at the time of their offer, right?

Re: Do the math on your stock options

#216

Post by Namrog84 » Thu, Dec 31, 2015, 8:56 PM UTC

brianwawok wrote: post #112

lazaroclapp wrote: post #48

Earlier quoted context omitted.

In all fairness, anyone who doesn't get that the expression c/x where c is known and x is unknown can match any given rational number - or the implication that this makes c convey zero information - is pretty much definitionally unfit for running a tech company. So malice might actually be the charitable explanation here. I mean, imagine if someone followed the same practice for the salary part of compensation: "We w…

^^ At least in that case you would see in 2 weeks what your actual salary is ;)

Oh but this company pays annually and you got hired in January. Sorry ;)

Re: Do the math on your stock options

#217

Post by dripton » Thu, Dec 31, 2015, 9:08 PM UTC

nippoo wrote: post #153

dripton wrote: post #150

Earlier quoted context omitted.

I've had ISOs in a couple of startup employers, non-qualified options in a startup customer, and RSUs in a couple of public employers. The only book I've read on stock options is _Consider Your Options_ by Kaye Thomas, which I thought was good. I do my own taxes, and there was enough detail in that book to let me figure out the tax implications of my options. (Including AMT the one time I had to pay it.) The actual m…

Did you get the cash and options the wrong way round in your example ($100k + 5000 options / $110k + 3000 options)? That bit confused me for a while. Or maybe I'm missing something about how they work!

I did that on purpose. Options in company A are completely different than options in company B, and assuming that more is better is just silly. 3000 out of 100000 is 3%; 5000 out of 500000 is 1%. But you can't just compare percentages either, because a percentage of a more valuable company is worth more than a percentage of a less valuable company.

As an employee, you just don't know. So value them at zero. Or, if you want to be fancy, epsilon. And take the cash.

Re: Do the math on your stock options

#218

Post by sokoloff » Thu, Dec 31, 2015, 9:32 PM UTC

idunno246 wrote: post #214

ewams wrote: post #210

Earlier quoted context omitted.

In the US, do you pay taxes when you exercise your option to buy the stock? For you example, say I exercise my option to by 1 at strike price of $100 in 2015. I hold on to it and sell it in 2017 for the FMV of $1000. Do you only pay the capital gains tax of the $900 gain? Ignore state rules, just at the fed.

Lets say the fmv in 2015 is $500, and your strike price $100. If they are ISO, in 2015 you own no regular tax on it(thats the Incentivized). In 2017 you owe capital gains on $900. However, AMT(alternative minimum tax) doesnt recognize ISO. So in 2015, you have to calculate AMT, which $400 counts towards. This is basically a no-deduction(except a high standard deduction) flat tax, you potentially owe 26-35% on that 40…

For completeness, on ewams' question: if the options are non-qualified (NQSO instead of ISO) and FMV at the time of exercise was $500, you would owe ordinary income tax on $400 ($500-$100) of income in 2015 tax year and long-term capital gains on $500 ($1000-$500) in 2017 tax year.

Not a tax pro; this is not tax advice; yada yada.

Re: Do the math on your stock options

#219

Post by peter303 » Thu, Dec 31, 2015, 9:59 PM UTC

diziet wrote: post #14

nbevans wrote: post #10

What protects the stock from being diluted since presumably it has no or insufficient voting rights?

Nothing. Stock will get diluted. Typically every 'Series' fundraise will add 10-20% option pool and dilute the company by another 10-20% of preferred shares. The 'idea' is you have a smaller piece of a larger pie. Very incredible companies will raise at better terms and valuations and dilute more. This is very rare.

The Social Network movie shows some classic screwings in this case.

Re: Do the math on your stock options

#220

Post by peter303 » Thu, Dec 31, 2015, 10:07 PM UTC

jaredhansen wrote: post #192

dripton wrote: post #150

Earlier quoted context omitted.

I've had ISOs in a couple of startup employers, non-qualified options in a startup customer, and RSUs in a couple of public employers. The only book I've read on stock options is _Consider Your Options_ by Kaye Thomas, which I thought was good. I do my own taxes, and there was enough detail in that book to let me figure out the tax implications of my options. (Including AMT the one time I had to pay it.) The actual m…

>Exercising risklessly is safe It may be safe, but it isn't free. As with most other things, you pay a risk premium -- in this case, in the form of failure to qualify for capital gains tax treatment on the resulting gain, because you didn't exercise in time to hold the underlying stock for more than one year. Depending on the amount, this difference can be quite significant. You do your own taxes so probably know all…

A number of people got screwed six or seven figures in the early 200s dot.crash waiting the year for LTGC tax rates or during the sales lockout. There were a lot IPOs in the late 1990s and a lot of worthless stock a year or two after that.