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Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

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Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#371

Post by jmionwnil »

mason55 wrote: post #137
ransom1538 wrote: post #19

What makes options a rough deal is the part of the contract: "We can change anything at anytime for any reason". What kills your options is dilution. You have no control over this AND as time progresses you get more and more diluted with new hires and rounds. You could be the second employee - however, if the founders & VC decide to make 20 million more shares [which they will] - you effectively have toilet paper --…

> What kills your options is dilution. You have no control over this AND as time progresses you get more and more diluted with new hires and rounds. People are way too obsessed with dilution because it sounds so scary. "With the stroke of a pen they can create a billion more shares and your percentage goes from 5% to 0.01%" The reality is that all common shareholders have the same incentive to not dilute the outstand…

what (if anything) stop the founders from just giving themselves more shares?

they only have the same incentive to not dilute if they are getting the same penalty for diluting, right?

I am not an expert in any of this but it seems they could just agree to issue a ton of shares to all the investors / founders but not to employees in a way where everyone except the employees benefit.

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#372

Post by rmk »

stanleydrew wrote: post #367
rmk wrote: post #356

Earlier quoted context omitted.

If you were granted Incentive Stock Options (ISOs), you are in for a world of hurt. You may end up wishing you'd never spent so much money on them. With the recent Trump Tax Reform, AMT thresholds have risen but it's best to check with a CPA (or what's called an EA - Enrolled Agent) about the tax implications of exercising your options. You may view the upside in an entirely different light. The nastiness of AMT is a…

The AMT is fine. The issue is that the implied gain at exercise of an ISO is subject to AMT.

Yes, ISOs + spread triggers AMT. RSUs and NSOs do not.

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#373

Post by rmk »

srtjstjsj wrote: post #63
phendrenad2 wrote: post #29

Has anyone here made significant (2x exercise price) amounts from stock options at a non-unicorn in the last 5 years?

Significant is $, not %. 10% of $1M beats 100% of $10k. Why would you expect options to pay big for a non-unicorn? Unicorn means the startup investment succeeded in its goal. No one gets rich when their investment fails.

A lot of nitpickers commenting on this, but ignore them. Your basic thesis is correct: the ultimate valuation of the company matters way more than anything else. As engineer #100, say, the stock granted to you as a % of the options pool is negligible: there are effectively no differences in the ownership fraction no matter what company you choose. Whether you choose a company that grows into 50 billion vs 5 billion makes all the difference.

If you choose a company that ends up achieving a 500 million valuation as engineer #100, then your time will be wasted, massively. You will end up making no or -ve amounts of money.

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#375

Post by rexreed »

adrr wrote: post #245
rexreed wrote: post #205

Stock options are a poor proxy for company value. Instead, a company should allocate an interest in any in-the-money exit towards a pool that is distributed to employees on a rata share depending on duration of employment and period of employment. I've been working on an interesting formula for this that even rewards those who have left the company. Most employees don't need or want a share of the company. They want…

Ownership comes with legal protections from being screwed over during a liquidity event. End of the day, I want to be holding the same type of shares of the founders because I know that our interest are aligned.

And what specific legal protections would you be caring out most that would not be addressable with a shared exit pool? Common stock options are highly limited in their legal recourse and common share owners are often (legally) shafted through dilution, restrictions on share sales, and inability to access direct control.

Anything that is worth caring about from a legal perspective can be addressed through means of a guaranteed profit and exit share versus the less tangible and more easily screwed around with common shares, in which employee and founder interests are in many ways not aligned.

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#376

Post by sanity31415 »

solumos wrote: post #203
sanity wrote: post #174

I'm facing a headache with some options I was granted for a startup back in 2013 for being an advisor. I didn't exercise the options at the time (hindsight is 20-20). The startup is doing well - it recently raised ~$300m at a ~$3b valuation, but my options expire in Dec 2023 and I'm growing increasingly concerned that they won't have a liquidity event before then. If I exercise my options before then it will be taxed…

You should check out SecFi - they helped me out of a similar snag (non-recourse loan).

Thanks, I'll check them out.

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#377

Post by rmk »

rongenre wrote: post #80

The other point here is that it's taking ~10 years to go from a company being started to going public. So most employees are going to have to make the decision to either cough up thousands to exercise their illiquid options and pay taxes on them or just have them expire worthless. At this point, joining as a seed-round or series A employee seems like a sucker's bet if you're expecting equity to be worth anything.

There are plenty of situations where there are down rounds or rounds where earlier investors are completely wiped out or diluted out of existence. In these cases, the early employees get screwed big-time.

Even in the optimistic case of an exit, whether it be an acquisition or IPO, the risk incurred by the employees is way too high because of the lengthening of time towards the exit event. The lucky ones can get non-recourse loans and cash out with something to show for their efforts, but the overwhelming majority can't, and end up having to shell out real money for what are essentially rolls of the dice or losing that equity altogether.

It's interesting that if a person has vested stock with nominal value of $100 and exercise price of $5, he can't use that stock in lieu of the $5! i.e., he can't walk away with $95 worth of his grant. I wonder if there are IRS regulations that bar this type of arrangement.

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#378

Post by fennecfoxen »

dudeman13 wrote: post #254
fennecfoxen wrote: post #218

Earlier quoted context omitted.

I made $125k total by year 3 of my career. If you need $125k, look elsewhere (and specifically look in California and maybe possibly New York.) The unfortunate consequence of the taboo of salary discussions is young software engineers not knowing how much they can actually make.

I am not American.

Restrictions on the free movement of people may be our biggest barrier to economic growth worldwide.

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#379

Post by lr4444lr »

sanity wrote: post #174

I'm facing a headache with some options I was granted for a startup back in 2013 for being an advisor. I didn't exercise the options at the time (hindsight is 20-20). The startup is doing well - it recently raised ~$300m at a ~$3b valuation, but my options expire in Dec 2023 and I'm growing increasingly concerned that they won't have a liquidity event before then. If I exercise my options before then it will be taxed…

If you have a Roth retirement account (e.g. IRA, 401k), I believe you can exercise what you can cover from those funds and not have to worry about the gains there.
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