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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

#381

Post by danielweber »

finnh wrote: post #279
brianwawok wrote: post #272

Earlier quoted context omitted.

Don't most options include right of first refusal and more, to prevent you from selling them on the private market?

Yes, but ROFR doesn't necessarily hurt you - it just slows down the deal. Also, the VCs who do this also structure the deal in certain ways to make the ROFR price unclear and therefore negotiable. But, you're right, some start-ups are explicitly putting in an explicit "consent" clause into the ISO. Which I think is unfair, and kind of BS - certainly if such a clause were valid, that would drastically reduce the value…

I was at a start-up -- that I co-founded, so I take some of the blame here in not realizing what another co-founder was baking into the cake, but at least I can warn others now -- where the company interpreted "right of first refusal" as "the person trying to sell shares must hire an outside auditor to determine FMV," and refusing to answer any further questions about whether the auditor would actually be given access to the company's books.

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

#382

Post by danielweber »

maverick_iceman wrote: post #123
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 -…

Assuming equity is worthless the base salary has to be north of 200K to match the market rate (for low level software engineers) for public tech companies. In most Unicorns that's definitely not the case. In fact when I interviewed for Uber they explicitly said that their base salary is low compared to Google/FB but they make it up in equity.

> In most Unicorns that's definitely not the case.

It's only true because the market allows them to do that. The reason those unicorns lowball on salary is because they can.

If workers keep saying "yes, I'll take tulips in lieu of salary," the market will adjust and pay lower salary.

If workers say "nope, it's a good market out there, I either want salary or very good protections against dilution," then they'll have to pay market wages.

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

#383

Post by danielweber »

mattieuga wrote: post #361
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 -…

Why should a company offer a market rate salary and equity if the equity is valued at 0? Should companies just not offer equity in that case? Seems like a waste if it is not valued at all.

Or the company could do the very hard and legally annoying work of convincing candidates that the equity won't be destroyed at a moment's notice.

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

#384

Post by curun1r »

OmarIsmail wrote: post #119
rrhyne wrote: post #78

Really surprised how few people know about this legislation to fix the tax laws that cause one of the biggest issues with options. https://www.gop.gov/better-way-startups/ It made it through the house and was approved by senate finance committee but is now stuck in a bill about retirement savings legislation. Even finding information about the bill on the web or twitter is incredibly difficult. Please tweet, blog, et…

Maybe there are some gotchas I'm not seeing but from the summary this should be supported.

If you read the bill [1] (it's quite short), there are a couple of gotchas, but not too many.

1 - Don't go work for your brother's startup. As a family member of certain C-level employees, you're ineligible. Some C-level employees are also excluded. 2 - Early employees that get more than 1% of the company are excluded.

I'm usually among the first to complain when I see the Republicans advocating policy that I find foolish, but it's certainly not the case here. This is sensible policy that corrects a decades-old problem in Silicon Valley and, for that, I support them in this legislation.

[1] https://www.congress.gov/bill/114th-congress/house-bill/5719

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

#385

Post by rconti »

delinka wrote: post #115
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…

"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…

You can exercise your options the day they're granted, even if they're not vested.

That said, they're not really worth anything to you until they're vested, of course.

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

#386

Post by mywittyname »

femtopost wrote: post #243
mywittyname wrote: post #199

Earlier quoted context omitted.

> It doesn't, but because of the complexity of the tax system most people either use a tool like TurboTax or an accountant, Very few people actually need an accountant or even TurboTax to do their taxes.

Roughly 62% of Americans are homeowners[0]. Somewhere between 50-75% of Americans have children[1][2]. If you're in either situation, you're likely unable to file a Form 1040 EZ. While the full Form 1040 is only 2 pages long, the instructions for it are 106 pages long[3] - and when you complete your 1040 you declare, under penalty of perjury, that you filled it out accurately. Those people may not technically need an…

Neither of those situations is particularly difficult to handle. My mother has all of those things and to this day she still files a traditional paper 1040 like she has for the past decades. And she's not college educated or especially bright. She just does it because an hour of her time is worth more than the nearly $200 all-in costs of doing a state and federal return with TT.

The IRS could go towards a model where they assume a standard deduction and verified dependents, and issue a refund based on that. Then let people file an amended return with itemized deductions if they wish.

The tax code in the US can be very complicated, but the for the vast majority of wager earners, it's pretty straight forward. The complications come on the business end of things.

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

#387

Post by danielweber »

jasode wrote: post #171
Osiris wrote: post #91

Earlier quoted context omitted.

I've noticed the same thing. Early employees are the ones responsible for building the product, without whom there would be nothing to sell, and yet they get stiffed when more money is raised and shares are diluted. When I joined a startup I was promised that more options would be issued and we wouldn't get diluted from future rounds, but that never happened. As employee #22 I received options that equaled 0.05% of o…

>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…

I've seen this scenario multiple times:

1. Company needs to raise money

2. Company issues new shares

3. Board realizes "oh shit, this is a lot of dilution"

4. Board decides "okay, who is important enough to keep around" and issues stock grants to those special people to undo their dilution.

Founders and VCs have seats at the board table, and so are always important enough to get grants. Employees do not, especially after exit.

So the two choices left are

a) employees have no protection against dilution, therefore no protection, therefore shares are worth zero, or

b) employees are given protection against dilution.

You can say "b" is never going to happen. That's okay. It means that "a" and it's obvious conclusion happen.

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

#388

Post by Eridrus »

tibbon wrote: post #31

I've worked at several small startups, in the range of seed to C-rounds. Except for the one that I've was co-founder, I never knew when/how to ask or negotiate options things. It always felt like something that was supposed to happen at 'other companies' and not the one I was applying/negotiating to work at. I know I should in theory ask to see the cap table, but it seems awkward and if shown it right then I'm not su…

I've managed to negotiate options by just saying I wanted more, but the company was pretty keen on hiring me, so it worked.

People have been sketchier about showing me a cap table. I didn't think of it at the time, but maybe asking for an anonymized one would have helped since it felt like some of the resistance was because it would have names attached. I ended up just asking if there were more liquidation preferences in there for investors and getting an answer that there weren't, but in hindsight I'm sceptical that there wasn't at least a 1x preference in there.

In terms of reasonableness; companies/founders will have some idea of how much they value options at; it will almost certainly be higher than you value them at, after all paying you more $$ from the investment money is cheaper than diluting themselves. You can probably get a sense for how valuable they see them by just asking them about the possibility of trading off salary vs equity.

In my experience, startup owners vastly over-estimate the value of their equity since they do not price any risk into it.

[EDIT]: I was looking for a job recently and a startup gave me a ridiculously small offer in two variants and they saw 35k of options over 4 years (i.e. 8.75k options/yr) as equivalent to 15k in salary. I'm sure that felt right to the founders since they're growing, etc, but that's a clear over-valuation in their head.

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

#389

Post by danielweber »

maxxxxx wrote: post #118
adhambadr wrote: post #52

It has always baffled me the way founders treat employees and investors so vastly asymmetric. Ive been involved in rounds close enough to see how just the "hint" of a potential investment and all the numbers, financials, cap tables are sent in one big email to their analyst, while some early employees (who controversially have worked just as hard as the founders) have no clue who owns what and whats going on. I get i…

When I joined a startup in 2000 I tried to be prudent and get the relevant financial information. It was virtually impossible. Even after exercising a few shares they wouldn't do it. I probably could have sued them but that would have cost a lot of money. When they raised more money they would also not tell us anything about the terms and the resulting dilution. You just have to hope for the best and if it doesn't wo…

There's this mug's game where you are treated as belligerent for wanting access to the essential data to value your shares, and stupid if you value your shares at zero.

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

#390

Post by freddyc »

k2xl wrote: post #22

It's really unfortunate that most startups appear to be set up with ISO shares. The company I am at now is an LLC and distributes RSUs, which meant when I joined I was able to file an 83/b form which minimizes my tax impact. At my last company, I exercised options. I owe the IRS tens of thousands of dollars due to AMT this year (not that it was unexpected, as I did heavy research beforehand). Can anyone shed light wh…

>The company I am at now is an LLC and distributes RSUs, which meant when I joined I was able to file an 83/b form which minimizes my tax impact.

The usual impediment to this is venture funding. VCs generally don't like, and often can't invest in, LLCs so companies are forced down the corporation route.

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