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What I Wish I'd Known About Equity Before Joining a Unicorn

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Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#221

Post by hesdeadjim »

milfandcookies wrote: post #215

"Your options have a strike price and private companies generally have a 409A valuation to determine their fair market value. You owe tax on the difference between those two numbers multiplied by the number of options exercised, even if the illiquidity of the shares means that you never made a cent, and have no conceivable way of doing so for the forseeable future." This is either incorrect or I'm misunderstanding it…

I believe he means that future 409a valuations that happen after the one that set your strike price change the amount of tax you would owe if you exercise.

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#222

Post by rhizome »

Osiris wrote: post #96
BrandonM wrote: post #85

Earlier quoted context omitted.

Some companies allow you to "early exercise" your options before they vest. If you do that, you'll certainly want to file an 83(b) election for that exercise, when the spread between strike price and fair market value (FMV) is $0. If you don't file the 83(b) and the FMV goes up, each future vesting period will be subject to taxation.

And all startup employees are expected to know all these rules? Before I joined a startup I spent days researching all the rules about options and I still didn't quite understand all the nuance.

Yeah, it's a little annoying to read all of these context-dependent details from people calling those who don't know them "naive."

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#223

Post by Humdeee »

bitwize wrote: post #168

Accepting equity instead of cash is like asking for your paycheck to be denominated in Bison Dollars. If they want to add some options on top of my salary for the full amount I'm worth each year, that's one thing. But options in lieu of part or all of one's salary is tantamount to a cut in pay.

The upside is if you hoard enough of this fake money, you may never have to play a game of Monopoly again where the banker is out of cash.

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#224

Post by krisdol »

econner wrote: post #24
jaymzcampbell wrote: post #5

As always the main rule you need to live by is value the equity at zero and you'll be (maybe) happy. Short of being a founder (and thus not really being offered equity) I have never treated these things as anything beyond a minor on paper "bonus". Given you'd be lucky to get anything more than 1% even as a first employee I find them next to worthless as early stage motivators. Which is how everyone seems to play it -…

This advice is often given but it's easier said than done. Let's say you work at a unicorn for 3 years and in that time it goes up 10x in VC fantasy land valuation. On paper you have a lot of money and the company reasonably might go public a couple years after you leave. Let's say you're granted about a year's salary in shares when you first join so you've vested $100K for a round number. When you leave that equity…

> Now, you have to come to the table with the $100K to exercise and probably another $200K to pay the tax man

But why shouldn't I just come to the table with $10k and taxes, exercise those shares, then use the profits to buy up the remaining shares?

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#225

Post by sbov »

luckystartup wrote: post #120

This is all true. I moved to San Francisco to join a startup as an early employee. The biggest surprise was when I had to empty my savings (and borrow a lot of money) to exercise my stock options. I filed an 83b election so that I didn't have to pay any taxes immediately, but $20,000 was (and still is) a huge amount of money. I had no idea it was so expensive to join a startup. At least, if you want to avoid golden h…

I had something similar - except we sold our company to another company, part cash part stock. Over the years we heard through the press that that other company was doing very well, so figured our shares were gaining some real value. Then out of nowhere they sold to an even bigger company, cool... but for a pretty disappointing number, and I got like 50k. The press was all BS to try to drive more funding/etc.

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#226

Post by jasode »

Osiris wrote: post #198
jasode wrote: post #171

Earlier quoted context omitted.

>I was promised that more options would be issued and we wouldn't get diluted from future rounds, I understand you're only relating your previous misunderstanding but to others reading this, they need to realize that it's unrealistic for employees not to be diluted. The founders' ownership will get diluted. The investors also get diluted. Therefore, employees are not special in this regard. Getting diluted is suppose…

It wasn't a misunderstanding. I specifically asked if our options would be diluted in the next fundraising round and the founder said NO, they would be increasing our options to compensate for the additional issued shares.

>I specifically asked if our options would be diluted in the next fundraising round

I guess I don't understand what motivated you to ask about dilution and then believing a promise of no dilution since you're supposed to get diluted over time as the startup reaches maturity. Everybody is supposed to get diluted.

If a founder promised me "no dilution", I'd have to conclude either...

1) he doesn't understand the mathematics of selling equity (e.g. to maintain your 0.05% ownership, it has to come from someone else's shares since ownership % comes from a finite pie)

2) he does understand math, but he's a dishonest crook and therefore will tell you anything

3) he's mentally ill

4) he's absurdly generous of which I'd ask the same question 5 different ways to double check the more likely possibilities #1 through #3 again.

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#227

Post by AnonMcThrowAway »

Early employees usually get hosed, and I wouldn't sign up again unless comp was at least equivalent. The best large companies are much better run than they were 20 years ago, generally pay much better, offer a fair chance of stock appreciation (and it's liquid!) while offering more opportunities for professional growth. I speak from a lot of experience.

True story: I was the first employee at a startup that raised > 15M from top investors and sold to a big SV company for several multiples of the total investment. I left before the company sold, but had low single digits of ownership. Terms of the sale: investors were made whole, founders made 'house-changing' money (low millions each) + really nice salaries. Common stock was zeroed.

Granted, the founders probably had to work hard to sell the company, but as an early employee, I took quite a few risks as well and the reward was definitely asymmetric.

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#228

Post by billmalarky »

sbierwagen wrote: post #173
delinka wrote: post #115

Earlier quoted context omitted.

"Let's say you're granted about a year's salary in shares..." Please use correct terminology. You're given options to purchase shares, or you're given shares outright. The former is what most people are accustomed to: options to purchase shares at a discounted price. The latter, know as a "stock grant," does not require the employee to purchase the shares - they've been granted to the employee. Both of these things t…

Also note that RSUs and options are taxed differently. When you're issued a block of RSUs, you almost always do a section 83(b) election, declaring the RSUs as ordinary income. When you sell them years later, the difference in value is then taxed at the lower capital gains rate, rather than the income tax rate. However, this means you take the tax hit when you receive RSUs, unlike options, where you're taxed when you…

I was of the impression that typically a portion of your RSUs are used to handle the income tax from receiving them immediately, so you simply receive less RSUs as opposed to the full amount plus a big initial tax bill. That seems to me like a good way to offset the risk that the RSUs could be worthless in the future.

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#229

Post by kobeya »

krisdol wrote: post #224
econner wrote: post #24

Earlier quoted context omitted.

This advice is often given but it's easier said than done. Let's say you work at a unicorn for 3 years and in that time it goes up 10x in VC fantasy land valuation. On paper you have a lot of money and the company reasonably might go public a couple years after you leave. Let's say you're granted about a year's salary in shares when you first join so you've vested $100K for a round number. When you leave that equity…

> Now, you have to come to the table with the $100K to exercise and probably another $200K to pay the tax man But why shouldn't I just come to the table with $10k and taxes, exercise those shares, then use the profits to buy up the remaining shares?

Because there are no profits because you can't sell the shares because the company is private.

Re: What I Wish I'd Known About Equity Before Joining a Unicorn

#230

Post by mywittyname »

hedora wrote: post #50

I'd add a few things: - You probably won't have a 10 year horizon if you are joining a company that is now a unicorn. You likely will if you found a company that later becomes one. - Sarbanes-Oxley is a big villian here. It pushes the cost of legal compliance through the roof for public companies, forcing companies to delay IPOs until revenue is higher. In addition to delaying liquidity events, it prevents small trad…

> - Sarbanes-Oxley is a big villian here.

SOX exists because investors were tired of being defrauded by the people running the companies. While SOX might make it more onerous to go for an IPO, it's still a good thing for public markets.

I suspect the real reason companies stay private for so much longer is not because SOX-compliance is too expensive, but because companies can take advantage of private investors in ways that they cannot get away with in public markets.

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