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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

#61
post #19

> fixed PTO Why on earth is this a downside? "Unlimited vacation" is a scam.

IMO, the amount of vacation you're actually permitted to take culturally is completely orthogonal to the vacation policy. I've worked in places with a fixed # of vacation days where it was absolutely unacceptable to actually take those days.

Yeah, been there, done that, got the t-shirt. Bad management. The "unlimited" vacation policy is a trap, too. I don't go to places that offer that, it's a litmus test. Nowadays I do contracts and it's such a simpler model--you get paid for the hours you work and don't get paid for the hours you don't work. It's perfect for me.

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

#62

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 -…

That would work for most employees. Founders know much more about their company and don't offer equity if things go well.

Equity is a good bargain right before the next funding round — when cash balance is low and founders pay with shares.

In this case, the question is how much the stake is worth now. Ask founders the share price of the last funding round. That's the closest market valuation you can get.

Exit conditions (exercise window, sale restrictions) are a must-know, but secondary. An employee can borrow to exercise options and then sell the shares. His company would love to buy shares/options back because they'll have to consolidate equity upon IPO/sellout anyway.

In general, companies go through so much dilution and uncertainty that worthwhile equity stakes start at 5-10% for early-stage startups.

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

#63
post #24

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…

If you ignored the options at the start and got the market rate salary as the OP suggested, then you can just wait it out. That's the point of getting market rate up front.

I think what the OP was really trying to avoid was working for 1/2 market rate for years, and then ending up in your scenario.

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

#64
post #57

> How many outstanding shares are there? (This will allow you to calculate your ownership in the company.) Is it not true that company can (and usually will) issue new shares and dilute your stake at every investment round? (I am just a layman like you)

I believe Facebook famously did that to some people?

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

#66

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 -…

That would work for most employees. Founders know much more about their company and don't offer equity if things go well. Equity is a good bargain right before the next funding round — when cash balance is low and founders pay with shares. In this case, the question is how much the stake is worth now . Ask founders the share price of the last funding round. That's the closest market valuation you can get. Exit condit…

>> Equity is a good bargain right before the next funding round — when cash balance is low and founders pay with shares.

I don't think that's true in general. If it's right before the next funding round, that's when terms can change to wipe you out (whether it's a down round or multipliers). I guess on-paper it can look good ("oh the valuation just increased 5x overnight!"), but it can do some pretty nasty things to your options' "value".

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

#67

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 -…

The article is not about early stage companies though: If a company has 20 employees, yes, chances are that the value is zero. But imagine you are joining one of those companies that aren't public, and have a large paper valuation: hundreds, if not thousands of employees, plenty of brand recognition and all that. Chances are that you are still paid in a way that resembles what Google or Facebook do, except instead of RSUs for a company that is publicly traded, you will probably get options, instead of a 100K+ salary premium over working at Google.

So that's the question you have to think about: Is it really sane to think that, say, two million bucks of Palantir options are worth exactly as much as what you get by joining a tiny 10 person startup that a very uncertain future and a far lower ceiling? Would RSUs with a dual trigger also be worth zero?

If this is really the case, everyone joining one of those companies is certifiably insane, because life is not that different from a bigger tech company, the hiring bar is not any lower, and in a publicly traded tech company, stock compensation is often quite large and very real. If that's not the case, then we need to understand those options a lot better than we do in tiny companies, and understand what happens if our stay is just a few years, while the company will remain private for longer, precisely because we expect the company to IPO at some point, making the options be worth something.

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

#68

Earlier quoted context omitted.

The US really does have a lot of problems with their tax system to be honest. For a country whose citizens outwardly hate tax, you'd think they would have one of the best, most straightforward, and fair tax systems in the world. But instead you have one of the most convoluted, loopholey, broken systems in the world. Whereas in countries where taxes aren't as "hated" (Europe, Canada, etc) they don't pay a cent to file…

Most people in the UK don't even need to do tax returns.

I lived and worked in the UK for decades and never did my own tax return. When I moved to the US, the UK taxman spotted this, calculated that I had overpaid my taxes for that year and sent me a refund automatically.

I guess the reason why it's not done this way in the US is a combination of the general mistrust of government, and the lobbying from companies like Intuit to keep the tax system as complex as it is now.

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

#69

> The correct amount to value your options at is $0. Agreed, but ... Try to negotiate a deal such that the employer gives you a one-time sign-on bonus which, after taxes, will pay for the early exercise of the offered equity, and get the employer to give you the paperwork for filing 83(b) election. This values the equity at $0, but prevents drastic financial implications (at least for the initial grant) should it act…

It's still tough from a liability standpoint as the loan needs to be 100% recourse for tax reasons, so you have to pay it all back even if the company goes under. With high valuations this might be a lot of money. You are therefore investing more in an underversified portfolio increasing an already high startup risk.

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

#70
post #34

"Worse yet, by exercising options you owe tax immediately on money that you never made." For NQSO this is true, for ISO this is false. The exercise of an ISO grant is not treated as ordinary income.

But it is for AMT, so your statement by itself is dangerously incomplete.
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