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Startup Stock Options – Why a Good Deal Has Gone Bad

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Re: Startup Stock Options – Why a Good Deal Has Gone Bad

#341

Post by lumost »

gwbas1c wrote: post #335

I joined a company where my offer letter had two salary options: A higher salary with less stock, or a lower salary with higher stock. (It wasn't a very large difference.) About a year later, we were sold, and the payout from the stock did not justify the salary difference. In order to justify the difference, the payout needed to be about 20x. When I confronted the CEO she just changed the subject, and didn't underst…

The problem in these situations is that your were offered "stock" as in a portion of the equity of the company, and given a complex financial instrument with undefined terms and indeterminate payout. You felt screwed when you discovered you'd been given something worth 1/20th of the dollar value.

Startups have effectively given away their biggest talent attraction, why bother working for a high risk startup for "options" when you can work for a steady growing FANG with liquidity and real "equity"? From a talent acquisition perspective it doesn't make sense.

Re: Startup Stock Options – Why a Good Deal Has Gone Bad

#342

Post by kingbirdy »

jammygit wrote: post #321
breischl wrote: post #228

Earlier quoted context omitted.

I had a former employer do something different but similar. They sold all the products to another company, paid all of the proceeds out as a bonus to the execs and big investors, and left the holders of the common stock (ie, employees who had bought their options) with a worthless, empty shell. Thanks for working hard and buying shares in the company!

What stops ordinary companies from doing this to ordinary shareholders?

That no one would buy shares in the new company, making it worth dramatically less than the old one

Re: Startup Stock Options – Why a Good Deal Has Gone Bad

#343

Post by anonytrary »

gwbas1c wrote: post #335

I joined a company where my offer letter had two salary options: A higher salary with less stock, or a lower salary with higher stock. (It wasn't a very large difference.) About a year later, we were sold, and the payout from the stock did not justify the salary difference. In order to justify the difference, the payout needed to be about 20x. When I confronted the CEO she just changed the subject, and didn't underst…

To clarify, were you expecting a 20x payout on your stock, or was the payout was 20x less than what you were expecting? Either way, sounds like you got bamboozled when you signed the offer letter. I'd almost always take a higher salary at a startup. The vast majority of startups aren't anywhere near Facebook or Google.

Re: Startup Stock Options – Why a Good Deal Has Gone Bad

#345

Post by CPLX »

entangledqubit wrote: post #308
rottencupcakes wrote: post #304

Earlier quoted context omitted.

Curious why you don't mention their name? Feels like there's little recourse against this sort of thing other than reputation risk, why not out them publically?

While I'm sure it would be quickly sued out of existence, are there sites specializing in this sort of information? I'd love to see names of founders/early investors/board members/... easily associated with these kinds of decisions (i.e. track records of the good and bad). I have to send feelers out into my network to dig up this kind of information but that's not an option for a lot of people new to the industry.

Shame we don’t have fuckedcompany.com around for this any more.

Re: Startup Stock Options – Why a Good Deal Has Gone Bad

#346

Post by [deleted] »

MobileVet wrote: post #301

I was part of a very well know incubator and a very early employee at a flagship company. Founder blew tons of cash and dilutions but that is part of it and I didn’t mind. What was ethically shady was shortly after I left with 4yrs vested they decided to restructure the entire company so they could attract investment. They took all the debt from the original company and put that in a shell company that then owned a p…

[deleted]

Re: Startup Stock Options – Why a Good Deal Has Gone Bad

#347

Post by jungturk »

jammygit wrote: post #321
breischl wrote: post #228

Earlier quoted context omitted.

I had a former employer do something different but similar. They sold all the products to another company, paid all of the proceeds out as a bonus to the execs and big investors, and left the holders of the common stock (ie, employees who had bought their options) with a worthless, empty shell. Thanks for working hard and buying shares in the company!

What stops ordinary companies from doing this to ordinary shareholders?

Fiduciary duties - I'm not sure if those are being left out of these anecdotes or there were actual issues preventing the obligations from being enforced.

https://smallbusiness.chron.com/legal-relationship-between-s...

Re: Startup Stock Options – Why a Good Deal Has Gone Bad

#348

Post by zik »

MobileVet wrote: post #301

I was part of a very well know incubator and a very early employee at a flagship company. Founder blew tons of cash and dilutions but that is part of it and I didn’t mind. What was ethically shady was shortly after I left with 4yrs vested they decided to restructure the entire company so they could attract investment. They took all the debt from the original company and put that in a shell company that then owned a p…

That sounds like straight up shareholder fraud to me.

Re: Startup Stock Options – Why a Good Deal Has Gone Bad

#349

Post by aiisahik »

The article is right but misses the biggest problem with options: the need to spend money you may never get back in order to have a chance to be paid anything. There are two ways this happens:

- You leave the company after 4 years and have 30-90 days to exercise. The exercise will cost you $20,000. The company is nowhere near an exit. Do you do it?

- When you exercise you are either immediately hit with a tax bill for NSOs or you get screwed on AMT with ISOs. You suddenly owe money to the IRS simply because the company received a very high 409A valuation just before you left. A liquidity event is nowhere in sight.

You've taken a huge gamble by joining a fledgling company that pays little with a low probability of success. You toil for years an overcome tremendous odds to just keep the company alive. But now when you leave the IRS and the company itself wants you to take a final gamble with your hard earned cash.

I used to be an attorney who drafted option agreements. Now I've been at two startups as early employees. The reason why this never comes up is because employees do not know what they are getting themselves into. The options are worth very little BY DESIGN. Unless you are among the first 5 hires, you will have no leverage to negotiate a better deal.

Re: Startup Stock Options – Why a Good Deal Has Gone Bad

#350

Post by nojvek »

aiisahik wrote: post #349

The article is right but misses the biggest problem with options: the need to spend money you may never get back in order to have a chance to be paid anything. There are two ways this happens: - You leave the company after 4 years and have 30-90 days to exercise. The exercise will cost you $20,000. The company is nowhere near an exit. Do you do it? - When you exercise you are either immediately hit with a tax bill fo…

A number of startups screw over their employees with options. 90 days is a terribly short exercise window. Kinda like a scam in a way.

But not all startups are like that. Where I work (Mixpanel), that window is 5 years. Which I feel is a much generous and fair offer.

With stock options, I pay no tax. If the company liquidates, then I convert the options to real stock (yeah i’ll have to pay money to do that). If things go better, I hold that stock for one year and when I sell, I pay capital gains tax at a much lower rate on the gains.

But. Big BUT, there’s a lot of assumptions. Things may not go well, may it doesn’t get valued as much, may be it takes longer than 5 years. Lots of may be’s. That’s part of the startup gamble.

We are hiring btw if anyone is interested in analytics space. DM me.

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