If you have startup stock options, check your option plan • Hacker News Board

Re: If you have startup stock options, check your option plan

#41

Post by Florin_Andrei » Wed, Mar 04, 2015, 6:50 PM UTC

bluehex wrote: post #5

Another thing to understand (and this will sound obvious to many of you) is that your options may be worth nothing, even after a multi-million dollar acquisition if there are priority stock holders (the investors) ahead of you in line. As a young and naive engineer I learned of this fact the day the first startup I worked for was acquired. First I read the big number that was to be paid for the company, was ecstatic,…

TLDR: If you're an average Joe, the people holding the money bags are actively looking to screw you (while waving their philosophical hands and going "these are not the droids you're looking for").

Re: If you have startup stock options, check your option plan

#42

Post by harryh » Wed, Mar 04, 2015, 6:50 PM UTC

tieTYT wrote: post #29

The last two companies I've gotten offers from gave me very, very heavy pushback when I tried to figure out what % of equity they were giving me. They told me they were giving me 5,000 shares (for example). OK... 5,000 of how many? What % of all the shares is 5,000? My understanding is you need this information to know if the equity is worth something or nothing. Yet, they really don't want to give me this informatio…

You are not doing anything wrong. You do not have a misunderstanding of how these things work.

You should not go work for a company that will not tell you the total number of outstanding shares (so you can calculate your % ownership). It's basically the same thing as saying that they're going to pay you 100,000 a year but not bothering to mention the currency.

Re: If you have startup stock options, check your option plan

#43

Post by cj » Wed, Mar 04, 2015, 6:51 PM UTC

AndrewKemendo wrote: post #11

I read a lot about how employees get screwed over with stock options, so what we decided to do was to just give employees vesting stock straight up as a buy through. Basically the way this works is that we give new employees an up front lump sum in the amount of how much it costs to purchase the shares of the company. The employee then purchases those shares from us in line with a vesting agreement. All warrants and…

Founders stock works well for early employees.

Since valuations of pre-series A companies is effectively $0, the cost for employees to buy their shares upfront is minimal (literally a few dollars for a few percent).

But as a company raises capital, it's legally required to have a "409a valuation", which establishes the "fair market value" of the stock. Once this happens, it can cost $x,xxx's of dollars for employees if they're given founders stock (restricted stock) upfront, compared to stock options that have no upfront cost.

One solution to this is to give employees a signing bonus to buy the restricted stock upfront, so it cancels out the amount they owe upfront. Alternatively, you could grant stock options, and sign something that says the company will give them a bonus equal to the exercise price of the options.

Re: If you have startup stock options, check your option plan

#44

Post by iykwimthrowaway » Wed, Mar 04, 2015, 6:57 PM UTC

mcdoug wrote: post #9

Why worry about stock options at all? There is a spectrum of outcomes. On one end the startup flops, or is bought for so little that your share, even if paid out, is close to 0. On the other end you have Google, Facebook, Instagram, etc. Companies where 0.5% is worth quite a bit of money. The problem is that the majority fall in-between, where your stock options will be worth nothing, yet the company will sell for a…

I'm very curious about the middle part of this spectrum, since I'm currently in it: I'm an early employee with a significant chunk of options (high single-digit %), and the company is profitable and valued at (to my understanding) somewhere well over 10x the total amount of funding we took (I've heard talk of 40-50x). Management is explicitly not looking for an exit: they just want to keep building this company for the long term. My salary started on the low side for my career, but was reasonable, and it has slowly ratcheted up over time to the point where I think it's certainly fair but I could be making more elsewhere. On the whole, it feels like I have a large chunk of (potential) ownership in something very successful.

My question is: how does this actually benefit me in the big picture? I'm approaching the 10 year date when my options agreement is going to EXPIRE, and it's still unclear to me whether I should exercise them, because as far as I can tell, they're just very expensive (when you consider the tax implications) paper. What's the endgame for this success story putting cash in my pocket? Profit-sharing? Other than the usual big-bang exits you read about, I have no clue.

Re: If you have startup stock options, check your option plan

#45

Post by dsjoerg » Wed, Mar 04, 2015, 6:58 PM UTC

cylinder wrote: post #30

bluehex wrote: post #5

Another thing to understand (and this will sound obvious to many of you) is that your options may be worth nothing, even after a multi-million dollar acquisition if there are priority stock holders (the investors) ahead of you in line. As a young and naive engineer I learned of this fact the day the first startup I worked for was acquired. First I read the big number that was to be paid for the company, was ecstatic,…

How did that happen? The acquirer just purchased a certain class of shares, i.e. preferred stock and didn't care about owning 100% of the company?

It's called a "liquidation preference". http://www.investopedia.com/terms/l/liquidation-preference.a...

The mechanics & technicalities are beyond me, but the consequence is as described above.

Re: If you have startup stock options, check your option plan

#46

Post by busyant » Wed, Mar 04, 2015, 6:58 PM UTC

tieTYT wrote: post #29

The last two companies I've gotten offers from gave me very, very heavy pushback when I tried to figure out what % of equity they were giving me. They told me they were giving me 5,000 shares (for example). OK... 5,000 of how many? What % of all the shares is 5,000? My understanding is you need this information to know if the equity is worth something or nothing. Yet, they really don't want to give me this informatio…

It's red flag. I asked the same question of one startup and was told that i didn't need to know the answer.

Fast forward 10 years ... The company tried to go public and they had to do a 5760 to 1 REVERSE split to shore up their share price. People who naively thought they had 100k shares ended up w less than 20. Thecompany had to cancel the planned ipo, too.

Re: If you have startup stock options, check your option plan

#47

Post by aetherson » Wed, Mar 04, 2015, 7:08 PM UTC

Iftheshoefits wrote: post #20

mtviewdave wrote: post #13

Earlier quoted context omitted.

The standard Silicon Valley employee stock option plan is X number of shares vested over 4 years, with the first 25% vesting all at once after 12 months, and the remaining 75% vesting in even installments once per month over the remaining 36 months. This has been the standard for decades. If you can arrange something more advantageous, by all means do it, but I think you're going to have a hard time negotiating away…

That may be standard, but it's entirely not in the interests of any employee to play the game. The founders' and investors' beliefs regarding "skin in the game" are missing one key component: the reduced salary one takes at a startup. That reduced salary is skin in the game, as is the acceptance of risk by agreeing be compensated in equity in the first place. I don't object to 4-year vesting. I don't object to cliffs…

I think that people talk past each other a lot, and part of it is understanding that 1% is not 1%.

Like, if I'm joining a company that has started to get traction, is well-funded and pays me say 80-90% what Google would pay me, and is likely to either fail or experience a monetization event in the next 3-5 years, and I get 1% of that company, holy shit guys that's amazing. Maybe still overall less compensation than Google would've given me, but more likely to change my life.

If I'm part of the founding team of a company with no product out right now, that's paying me 20-50% of what Google would pay me, and any monetization event is clearly 7+ years off, 1% is a lot less exciting for four different reasons: 1. Obviously I'm giving up more salary. 2. Payout is less likely. 3. Payout even if it happens is farther away. 4. (Crucially) My stake is very likely to be much further diluted before any monetization events.

If you ACTUALLY get 1% of the monetization of any reasonably successful company, you're probably doing pretty damn well. A medium-sized acquisition at $300 million, 1% of that is $3 million. 1% of WhatsApp would've been around $200 million. 1% of Facebook would've made you a billionaire.

Trying to get more than a genuine 1% isn't very important. Trying to figure out what the percentage that they quote you in your job hire process will turn out to be during a monetization is very important.

Re: If you have startup stock options, check your option plan

#48

Post by hga » Wed, Mar 04, 2015, 7:11 PM UTC

iykwimthrowaway wrote: post #44

mcdoug wrote: post #9

Why worry about stock options at all? There is a spectrum of outcomes. On one end the startup flops, or is bought for so little that your share, even if paid out, is close to 0. On the other end you have Google, Facebook, Instagram, etc. Companies where 0.5% is worth quite a bit of money. The problem is that the majority fall in-between, where your stock options will be worth nothing, yet the company will sell for a…

I'm very curious about the middle part of this spectrum, since I'm currently in it: I'm an early employee with a significant chunk of options (high single-digit %), and the company is profitable and valued at (to my understanding) somewhere well over 10x the total amount of funding we took (I've heard talk of 40-50x). Management is explicitly not looking for an exit: they just want to keep building this company for t…

This is a general big problem, especially with the moribund post-SarBox IPO environment. Before those days, my father made more than a little money arranging cash-outs for founders of such companies, and there's absolutely no assurance you'll ever see a cash out.

But this strikes me as a problem your company ought to care about, especially if your options were part of a compensation package with below market salary, so maybe bring it up with the relevant people? It does them little good to get people like you upset, take a reputational hit, etc.

Re: If you have startup stock options, check your option plan

#49

Post by sbisker » Wed, Mar 04, 2015, 7:13 PM UTC

tieTYT wrote: post #29

The last two companies I've gotten offers from gave me very, very heavy pushback when I tried to figure out what % of equity they were giving me. They told me they were giving me 5,000 shares (for example). OK... 5,000 of how many? What % of all the shares is 5,000? My understanding is you need this information to know if the equity is worth something or nothing. Yet, they really don't want to give me this informatio…

You're doing nothing wrong. At the same time, I wouldn't walk just because they aren't being candid. Usually what this tells you - especially for later-stage startups - is that your options have very little expected value (think a few thousand a year in the best case), and you should act accordingly. Sometimes it's not because HR is full of evil monsters - sometimes it's their way of telling you an unpleasant truth that they aren't allowed to say directly.

Assuming if you're truly ready to walk if they don't share, this could even carry over to your negotiation. At this point, it's just business - if this company is willing to give you $XXk more than a competing offer with more candid numbers, then the cash could be worth it to hedge that risk. Depending, of course, on how much you value the upside.

Re: If you have startup stock options, check your option plan

#50

Post by ditonal » Wed, Mar 04, 2015, 7:14 PM UTC

iykwimthrowaway wrote: post #44

mcdoug wrote: post #9

Why worry about stock options at all? There is a spectrum of outcomes. On one end the startup flops, or is bought for so little that your share, even if paid out, is close to 0. On the other end you have Google, Facebook, Instagram, etc. Companies where 0.5% is worth quite a bit of money. The problem is that the majority fall in-between, where your stock options will be worth nothing, yet the company will sell for a…

I'm very curious about the middle part of this spectrum, since I'm currently in it: I'm an early employee with a significant chunk of options (high single-digit %), and the company is profitable and valued at (to my understanding) somewhere well over 10x the total amount of funding we took (I've heard talk of 40-50x). Management is explicitly not looking for an exit: they just want to keep building this company for t…

Are you invited to board meetings? If not, considering yourself a "potential owner" when you're not invited to the meetings where owners decide things means you are very confused about things. There's a reason why when a company goes public, the quarterly minutes at board meetings become public as well, because you aren't really an owner if you're excluded from even learning about the biggest of decisions.

What you should do depends heavily on whether you have common or preferred shares. If you have the options to buy common shares, which you probably do, they're worthless so don't even bother exercising them, the people who are invited to the board meetings have all sorts of routes they can take so that your options will become meaningless, so to spend the money to exercise and pay the capital gains on them is madness.

My advice is to recognize that you have a sunk cost (look up sunk cost fallacy) and jump ship. Keep applying to companies like Google, Facebook, Amazon, Microsoft, and other larger companies until one makes you an offer, and those companies will give you real compensation packages and stock plans that you will be able to easily turn into American dollars in a year.