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Stock options are complicated

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Re: Stock options are complicated

#71

Post by st3v3r »

zenlikethat wrote: post #42
draw_down wrote: post #39

Earlier quoted context omitted.

At this point, anybody offering those terms is well-aware it's not in the employee's best interest. And they don't give a shit. I agree, 90 days is totally ridiculous.

A 90-day window might be better for you if you want to stick around at a company for a while and there were other people that came before you, but left. "Dead equity" of startup employees who have left but not exercised means that they can let you do all of the work while they dilute the available equity pool (i.e., take money directly out of your pocket). This a16z article goes into this: http://a16z.com/2016/06/23/…

"A 90-day window might be better for you if you want to stick around at a company for a while"

I don't know many people that go into a job not wanting to stick around for a while. But that's at the beginning of the relationship, when everything is rosy. After the honeymoon, if it turns out that the company is toxic, things change.

"They're your employer, not your parents."

This statement makes no sense. That doesn't mean they aren't obligated to act ethically.

Re: Stock options are complicated

#72

Post by msencenb »

I (respectfully) disagree entirely with this conclusion.

If you want to do analysis like this, you need to weight these numbers against the possibility of it happening to get the expected value of each column. You have also simplified the smaller exit values to not include investor preferences (which means investors are first in line to get money, founders second, employees dead last).

Additionally, most contracts do not allow for early exercise so lots of these ideas are moot. If you do not have early exercise in your contract and you leave the company it's usually a leading indicator of failure. Either the company laid you off to reduce burn (do not under any circumstances buy stock if you have been laid off), or you left the company for a moral/business/whatever reason. In the latter case, it seems unwise to put your money where your heart isn't.

If you are optimizing your life for the best chance of striking it rich do not be a startup employee. Be a founder. Better yet, be an investor.

There are lots of reasons to be a startup employee, but being in it for the options is not one of them. Treat them as worth $0 and negotiate for more cash or things you care about like vacation or part time hours.

Re: Stock options are complicated

#73

Post by st3v3r »

zenlikethat wrote: post #64
pcmaffey wrote: post #60

Earlier quoted context omitted.

"Dead equity" could also be used in reference to most of a company's investors. That is of course, tongue in cheek. Why should employees have their investment of time and energy taken away from them when investors' one-time cash investment earns preference? Another industry double-standard.

Because the investors' cash is the thing that enables high growth companies to survive and be, well, high growth (who do you think pays said employees' salaries?). Not saying they don't often make out much better than employees, but no one forces you to accept a term sheet you don't want to, and you should understand the implications of the equity you're getting walking in.

I don't buy that argument for a second. The employees actual work, causing the startup to be able to actually do something or sell something, is what allows the company to survive.

Re: Stock options are complicated

#74

Post by jschwartzi »

zenlikethat wrote: post #68
CalChris wrote: post #62

Earlier quoted context omitted.

Wise advice but if the distinction between preferred+common is a real difference, then don't take the stock. Hella don't take the stock.

Curious about this, what "distinction" are you referring to here exactly? My understand is that the whole point of preferred vs. common shares is that there's a distinction: preferred shares get, well, preference in a liquidity event. This ensures investors recoup their losses if things go awry.

The problem is that the whole point of options is as consideration for the employee's time investment.

Re: Stock options are complicated

#75

Post by ThrustVectoring »

zenlikethat wrote: post #67
ThrustVectoring wrote: post #59

Earlier quoted context omitted.

If you think that former early employees don't contribute to future "generations" of work, then the ethical thing to do is to offer better cash compensations and less equity. It's not really ethical to offer equity compensation that looks like it could be valuable but has significant hidden barriers to actually being used.

> the ethical thing to do is to offer better cash compensations and less equity That's one of my main points: Employees have the power to refuse employers that offer equity in lieu of fair salary. But my experience has been that people keep falling for the equity carrot again and again, and as long as they keep falling for it, employers will keep doing it.

Just because it's legal and in your best interest to do things doesn't mean that it's ethical. This is analogous to misleading advertising.

Re: Stock options are complicated

#76

Post by mcfunley »

This doesn't mention transfer restrictions at all, and that's an altogether different reason that options are complicated. It's a bad idea to assume that you'll be able to sell private company shares, even if the company is popular and you've heard of other people selling. The existence of a market for the shares doesn't guarantee that you'll be allowed to get rid of them, because the company can enforce all manner of restrictions on sales.

The market for stock in a private company tends to be very small. Existing investors and prospective investors in the company can comprise most or all of it. Those folks care more about relationships with the company than getting their hands on a handful of employee shares. What this means practically is that if the company doesn't want you to sell for any reason, the buyers won't cooperate with you either.

If you're planning on selling, you should feel comfortable communicating this to the company. And they should agree to it. And that assent should be very recent and in writing.

You can find startups out there willing to buy derivatives on your exercised shares, which is functionally similar to selling shares. But this is a mixed bag, and you should read those terms carefully.

Read your option agreement. You'll note that among other things, it says that the agreement can be amended by the company at any time to say anything at all. Good luck!

Re: Stock options are complicated

#77

Post by sokoloff »

ar15saveslives wrote: post #38
mahyarm wrote: post #24

Earlier quoted context omitted.

What is the trap / bad part in Canada?

When you exercise your SO, you need to pay taxes, based on current price of shares, even if you don't sell them right away. SO is a joke in Canada.

I fail to see how that's different from the US. Stock option exercises of vested shares are taxable here, too.

Re: Stock options are complicated

#78

Post by aanm1988 »

zenlikethat wrote: post #57
pinot wrote: post #41

Earlier quoted context omitted.

Not to mention $90k person is likely leaving because they have low faith in the company in the first place.

Just playing devil's advocate here: So they are leaving because they have low faith in the company, but still expect to be able to collect rewards on other peoples' work years later if the company happens to succeed? If they didn't have a high degree of confidence in the company, the safe bet would always be to not exercise.

They already put in the time. That's the whole point of vesting.

Re: Stock options are complicated

#79

Post by zenlikethat »

st3v3r wrote: post #73
zenlikethat wrote: post #64

Earlier quoted context omitted.

Because the investors' cash is the thing that enables high growth companies to survive and be, well, high growth (who do you think pays said employees' salaries?). Not saying they don't often make out much better than employees, but no one forces you to accept a term sheet you don't want to, and you should understand the implications of the equity you're getting walking in.

I don't buy that argument for a second. The employees actual work, causing the startup to be able to actually do something or sell something, is what allows the company to survive.

And the investors are who pays for the employees, no?

Re: Stock options are complicated

#80

Post by nandemo »

hkmurakami wrote: post #26
beagle3 wrote: post #19

Earlier quoted context omitted.

The US is probably the worst in this respect, and I heard Canada is quite bad, but most of European tax systems follow the "pay taxes only when money comes your way" principle, which puts all investors on equal footing.

In Japan you owe taxes when you vest options (not even exercise!!) Which is even worse.

That doesn't sound right. It should be when you exercise the options or when you sell the stocks:

> Basic taxation of stock options depends on whether they are qualified stocks or unqualified stocks. The qualified stock option is not subject to Japanese income tax until it is sold, on the other hand the unqualified stock option is subject to Japanese income tax when it is exercised and sold.

http://tk-tax-accounting.com/en/english-taxation-of-stock-op...

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