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Understanding Startup Offers

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Re: Understanding Startup Offers

#81

Post by Dwolb »

toomuchtodo wrote: post #4

It would be helpful to explain how an early employee (whether still employed or separated from the company) is able to obtain the following documentation from their company to demonstrate QSBS treatment to the IRS (or if a letter indicating such from a finance department or the CFO would suffice): > Even though reporting QSBS is simple, you should still keep financial statements and other supporting documents to supp…

If you’re up for QSBS treatment, I’d recommend to hire a CPA, financial advisor, and possibly a lawyer.

One of those three can send over a letter to the CEO or CFO to share relevant information. It’s usually already prepared for equity or debt financing rounds and possibly periodic reporting.

Re: Understanding Startup Offers

#82

Post by bloodyplonker22 »

quokkafriend wrote: post #13
clpm4j wrote: post #9

Earlier quoted context omitted.

This is a good 'best-case' example that anyone could hope for, and like you say - you probably need to be one of first few engineering hires to have a shot at this type of outcome.

Yea I think this is a top 0.1% survivorship bias. Hitting 2 startup lotteries in a row at that kind of exit. Kudos.

The problem with your assumption is that you think everyone is equally poorly skilled in choosing startups to join.

Re: Understanding Startup Offers

#83

Post by toomuchtodo »

Dwolb wrote: post #81
toomuchtodo wrote: post #4

It would be helpful to explain how an early employee (whether still employed or separated from the company) is able to obtain the following documentation from their company to demonstrate QSBS treatment to the IRS (or if a letter indicating such from a finance department or the CFO would suffice): > Even though reporting QSBS is simple, you should still keep financial statements and other supporting documents to supp…

If you’re up for QSBS treatment, I’d recommend to hire a CPA, financial advisor, and possibly a lawyer. One of those three can send over a letter to the CEO or CFO to share relevant information. It’s usually already prepared for equity or debt financing rounds and possibly periodic reporting.

Appreciate the advice. Are there cut offs similar to an 83b election? Or can QSBS still apply if you're near the end of the five year wait period and you took no action at grant and exercise events (besides what you normally might for an ISO grant)? Asking so I'm not wasting the time of the involved.

Re: Understanding Startup Offers

#84

Post by Dwolb »

toomuchtodo wrote: post #83
Dwolb wrote: post #81

Earlier quoted context omitted.

If you’re up for QSBS treatment, I’d recommend to hire a CPA, financial advisor, and possibly a lawyer. One of those three can send over a letter to the CEO or CFO to share relevant information. It’s usually already prepared for equity or debt financing rounds and possibly periodic reporting.

Appreciate the advice. Are there cut offs similar to an 83b election? Or can QSBS still apply if you're near the end of the five year wait period and you took no action at grant and exercise events (besides what you normally might for an ISO grant)? Asking so I'm not wasting the time of the involved.

I need to say the obligatory THIS IS NOT FINANCIAL ADVICE CONSULT A TAX ACCOUNTANT.

Ok so my understanding is you need to exercise your options and wait 5 years for QSBS to kick in. After that you can start selling at $0 in capital gains.

Just a heads up though, this tax treatment may get closed soon with upcoming federal legislation. May not apply to shares exercised prior to the legislation being enacted though.

Note: here are some people who talk about QSBS as well https://www.mossadams.com/articles/2021/04/qualified-small-b...

Re: Understanding Startup Offers

#85

Post by toomuchtodo »

Dwolb wrote: post #84
toomuchtodo wrote: post #83

Earlier quoted context omitted.

Appreciate the advice. Are there cut offs similar to an 83b election? Or can QSBS still apply if you're near the end of the five year wait period and you took no action at grant and exercise events (besides what you normally might for an ISO grant)? Asking so I'm not wasting the time of the involved.

I need to say the obligatory THIS IS NOT FINANCIAL ADVICE CONSULT A TAX ACCOUNTANT. Ok so my understanding is you need to exercise your options and wait 5 years for QSBS to kick in. After that you can start selling at $0 in capital gains. Just a heads up though, this tax treatment may get closed soon with upcoming federal legislation. May not apply to shares exercised prior to the legislation being enacted though. No…

No worries, understood, hold harmless and all that jazz. Thank you for the time and the info.

Re: Understanding Startup Offers

#86

Post by dudul »

mcgingras wrote: post #23

I have an offer that vests over 6 years with a 1.5 year cliff. Is that normal? I'm used to 4 years 1 year cliff, but the CEO said that 1.5/6 are common for companies that "want employees who care about the long term"

Never heard of such a schedule, and I've worked for startups for the past 15 years.

Re: Understanding Startup Offers

#87

Post by icedchai »

akomtu wrote: post #30
quokkafriend wrote: post #12

Earlier quoted context omitted.

My equity grants as a non-eng (but involved in prod dev) have ranged from 0.05% to 0.6% over the course of 10 years in startups (age 25-35). All Series A to Series B. My take is that unless you are very good at judging leadership teams and company prospects, that joining a FAANG or a Series C+ scale-up (and even that takes thoughtful research and luck) is the better play. Early stage at my past grant levels has to hi…

A typical 4-year vesting plan at 500k/year gives 2M in "nominal" dollars. 2x that to account for stock market growth, 2x for work life balance (startups demand 2x more of your time than FANG), 3x for dilution and other startup shenanigans, 5x for the risk (how many C series get bought for 1B within 5 years?), and you need a 60x2M offer from a startup to just match FANG. 120M looks outrageous only because it's fake mo…

95% chance of not getting anything seems about right.

I had 0.5% of a startup that just went through a seed round, about 10 years ago. It got acquired by a larger startup that was "going to IPO." Reality is that larger company went through a few down rounds, got bought by a PE firm, barely paid back the initial investors, and I wound up with about $10K (profit.)

Next startup: as the first engineering hire, I got about 5%. After several down rounds, that 5% is now 1%. Several years later, the company valuation is barely 7 figures. I also invested some of my own money into the company (preferred shares) that have declined in value by 90%. I've since moved on, but the odds of even getting my investment back are near zero.

I've done far, far better investing in the stock market.

Re: Understanding Startup Offers

#88

Post by Dwolb »

toomuchtodo wrote: post #85
Dwolb wrote: post #84

Earlier quoted context omitted.

I need to say the obligatory THIS IS NOT FINANCIAL ADVICE CONSULT A TAX ACCOUNTANT. Ok so my understanding is you need to exercise your options and wait 5 years for QSBS to kick in. After that you can start selling at $0 in capital gains. Just a heads up though, this tax treatment may get closed soon with upcoming federal legislation. May not apply to shares exercised prior to the legislation being enacted though. No…

No worries, understood, hold harmless and all that jazz. Thank you for the time and the info.

Yup, good luck.

Re: Understanding Startup Offers

#89

Post by toast0 »

toomuchtodo wrote: post #83
Dwolb wrote: post #81

Earlier quoted context omitted.

If you’re up for QSBS treatment, I’d recommend to hire a CPA, financial advisor, and possibly a lawyer. One of those three can send over a letter to the CEO or CFO to share relevant information. It’s usually already prepared for equity or debt financing rounds and possibly periodic reporting.

Appreciate the advice. Are there cut offs similar to an 83b election? Or can QSBS still apply if you're near the end of the five year wait period and you took no action at grant and exercise events (besides what you normally might for an ISO grant)? Asking so I'm not wasting the time of the involved.

83b has reporting requirements (you've got to send it in within x days of exercise and again with your 1040 for that tax year, although the second one is maybe not super required: regulations say you must send it, but I think there's rulings that say otherwise), but QSBS doesn't really: you just say some of your capital gains (more or less) don't count on the QSBS form. Only if you're audited do you provide documentation.

Re: Understanding Startup Offers

#90

Post by _moof »

Don't early exercise.

Here's why. Yes, there are potential tax advantages; you avoid having to deal with AMT, which is significant. But the tradeoff is that you've thrown away the essential advantage that an option gives you: the ability to travel back in time and purchase stock with perfect knowledge of what it will do in the future. Why on earth would you give that up? An option lets you wait years with zero risk and then decide whether you should've invested before that time went by. That is a superpower.

You might be thinking, well, I feel really bullish about this company, so I'm going to go ahead and early exercise. But here's the thing: most startups fail. It is extremely unlikely that your options will be worth anything in the future. So unless you're an unnaturally talented investor—and you aren't, you're a worker bee—you won't be able to beat those odds. And the great thing is, you don't have to—because you have options, the whole point of which is to eliminate risk.

Don't throw away your time machine.

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