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

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

#81

Post by hamburglar » Wed, Mar 04, 2015, 8:16 PM UTC

ChuckMcM wrote: post #57

cylinder wrote: post #30

Earlier quoted context omitted.

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 works as follows, there is a line of people who need to get paid, If the startup took on any debt, at the front of the line is a bank. Their 'note' usually gets paid first. $POOL -= $BANK When people invested in the Series A, B, C, ... their stock came with a 'liquidation preference' (which can have a few variants, but the two most common are, the investor chooses if they want the liquidation preference or the com…

Tell me if I have this right: given a list of all the investors and note holders and their liquidation preferences, you can calculate a fixed dollar amount that gets subtracted from $POOL before it's divided up among the common shareholders.

In the example above, if you've got $2M in $LIQUIDATION and $NOTE is $1M, that means that common shareholders dreaming about buyout money should simply subtract $3M mentally from any sale price they hear.

That about it?

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

#82

Post by bradleyjg » Wed, Mar 04, 2015, 8:17 PM UTC

ChuckMcM wrote: post #57

cylinder wrote: post #30

Earlier quoted context omitted.

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 works as follows, there is a line of people who need to get paid, If the startup took on any debt, at the front of the line is a bank. Their 'note' usually gets paid first. $POOL -= $BANK When people invested in the Series A, B, C, ... their stock came with a 'liquidation preference' (which can have a few variants, but the two most common are, the investor chooses if they want the liquidation preference or the com…

The implicit question is—where the acquisition allocates $0 to common, in what sense are the board of directors fulfilling their fiduciary duty to common shareholders in approving the deal?

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

#83

Post by harryh » Wed, Mar 04, 2015, 8:22 PM UTC

ditonal wrote: post #25

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…

It's really unfortunate, because there are many engineers like me who would gladly take a pay cut if we were brought in as collaborators and offered real equity deals. Instead we are brought in as serfs to build their 'vision', with no input of our own or recourse if bad management runs our projects into the ground, and offered financial instruments that are obviously rigged against us. No engineer who understands pe…

What do you think fair terms look like for, say, the first 100 people at a tech company where you have 50 engineers, 20 product people, 20 sales people, and 10 business people? All roles will of course have varying levels of seniority and experience.

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

#84

Post by ChuckMcM » Wed, Mar 04, 2015, 8:30 PM UTC

hamburglar wrote: post #81

ChuckMcM wrote: post #57

Earlier quoted context omitted.

It works as follows, there is a line of people who need to get paid, If the startup took on any debt, at the front of the line is a bank. Their 'note' usually gets paid first. $POOL -= $BANK When people invested in the Series A, B, C, ... their stock came with a 'liquidation preference' (which can have a few variants, but the two most common are, the investor chooses if they want the liquidation preference or the com…

Tell me if I have this right: given a list of all the investors and note holders and their liquidation preferences, you can calculate a fixed dollar amount that gets subtracted from $POOL before it's divided up among the common shareholders. In the example above, if you've got $2M in $LIQUIDATION and $NOTE is $1M, that means that common shareholders dreaming about buyout money should simply subtract $3M mentally from…

Yes, pretty much. It is always possible to work backwards from the capitalization table and the termsheets from previous funding and other notes, to figure out how much has to be subtracted off before common sees any return.

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

#85

Post by harryh » Wed, Mar 04, 2015, 8:35 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…

So what you're saying is if you give an employee say, 10k shares at $2/share strike price you give them a 20k signing bonus?

Then the idea is that they pay, say, 6k in taxes on the bonus. Then they write you a check for 20k to early exercise the options and file and 83b.

So they're out 6k in taxes but on the other hand they've early exercised so they actually own the stock (subject to 4 years of vesting).

1) What happens if they can't afford the 6k in taxes?

2) What if they don't want to early exercise? Can they just keep the bonus in cash?

3) What if they leave the company in less than 4 years. Do they have to pay the pro-rated portion of the bonus back?

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

#86

Post by gamblor956 » Wed, Mar 04, 2015, 8:36 PM UTC

ChuckMcM wrote: post #57

cylinder wrote: post #30

Earlier quoted context omitted.

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 works as follows, there is a line of people who need to get paid, If the startup took on any debt, at the front of the line is a bank. Their 'note' usually gets paid first. $POOL -= $BANK When people invested in the Series A, B, C, ... their stock came with a 'liquidation preference' (which can have a few variants, but the two most common are, the investor chooses if they want the liquidation preference or the com…

If the startup took on any debt, at the front of the line is a bank. Their 'note' usually gets paid first. $POOL -= $BANK

Debt holders do not have priority when the debtor is sold, as the debtor remains in existence. Creditor priority generally matters only where an entity's debt structure is being altered, such as in a bankruptcy, liquidation, or debt restructuring. However, your example is correct if the bank held convertible debt, exercised the option to convert the debt to equity, and the converted equity carried a liquidation preference. (Note that "liquidation" shows up twice in this paragraph but the two usages have very different meanings. "Liquidation" refers to the termination of a corporate business and the distribution of its assets to its creditors and shareholders; "liquidation preference" refers to the maximum return a preferred stockholder may receive when it "liquidates" its holdings in a company as part of an exit event before the common shareholders or subordinated preferred shareholders receive their returns. In the Non-VC world, liquidation preferences are almost always fixed numbers; in the VC-world, liquidation preferences are usually multiples.)

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

#87

Post by iykwimthrowaway » Wed, Mar 04, 2015, 8:39 PM UTC

mahyarm wrote: post #79

iykwimthrowaway wrote: post #61

Earlier quoted context omitted.

> considering yourself a "potential owner" when you're not invited to the meetings where owners decide things means you are very confused about things Well gosh, I don't think there's any need to get nasty about it. I may be naive but give me a break. When I refer to ownership I'm obviously simply referring to being a shareholder. No, I am not invited to board meetings, but as far as I know, neither is anybody else w…

If it's a profitable company that you've been at almost 10 years, that you want to stay at, can't you ask them for a raise, and ask them for help with the stock option problem? They probably would want to work with you if you've been there that long.

Raises have of course been requested and granted. My salary isn't really what's at stake here and any raise I could ask for is dwarfed by the potential value of shares sitting on the table that I simply don't know how to get money out of. What are you imagining I'd ask for when you say "help with the stock option problem?" Ask them to buy me out?

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

#88

Post by dlubarov » Wed, Mar 04, 2015, 8:41 PM UTC

ewindisch wrote: post #19

gregrata wrote: post #12

Earlier quoted context omitted.

> buy them as early as you can, Careful on this one - when you buy, it's a taxable event. The spread between what the IRS thinks the company is worth and what you paid is taxable. You have to pay that NOW. I've known people that were screwed on this - strike price was around 1, value by IRS was 8 (based on funding rounds). By the time the person could sell the stock, it as worth .013. Fun!

IANAA (I am not an accountant)-- This is not true, or not necessarily. It's calculated for AMT, so if you're already paying AMT, or would be paying AMT with the addition of this income, then yes: You'll be paying that tax now. This is true for many in California with the high state taxes and a relatively high gross income (versus national averages). However, if the intrinsic value portion of your exercise (i.e. fair…

Sounds like you're describing ISOs, while the parent was describing NQSOs. With NQSOs, the (market value - exercise price) spread is taxed as ordinary income at the time of exercise.

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

#89

Post by enjo » Wed, Mar 04, 2015, 8:42 PM UTC

ChuckMcM wrote: post #57

cylinder wrote: post #30

Earlier quoted context omitted.

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 works as follows, there is a line of people who need to get paid, If the startup took on any debt, at the front of the line is a bank. Their 'note' usually gets paid first. $POOL -= $BANK When people invested in the Series A, B, C, ... their stock came with a 'liquidation preference' (which can have a few variants, but the two most common are, the investor chooses if they want the liquidation preference or the com…

I'm genuinely curious, is a 2x multiple really common these days?

All of the recent raises I've been involved in have been Non-Participating Preferred at a 1x multiple. Or at least capped. I was under the impression that was where everyone had sort of settled these days?

I'm basing this almost entirely off personal experience and the cooley report. http://www.cooley.com/files/104854_vf2014q2.pdf

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

#90

Post by mallyvai » Wed, Mar 04, 2015, 8:45 PM UTC

I highly, highly encourage all employees with options packages to go through our equity checklist and blog post here:

http://offerletter.io/blog/201412-understanding-and-negotiat...

Questions:

> What is the number of shares outstanding on a fully-diluted basis?

> What is the fair market value (FMV) of my shares?

> What is the exercise price (aka strike price)?

> Do you allow early-exercise of options?

> Do you allow an 83(b) Election?

> What is the vesting schedule?

> What are some potential exit scenarios?

Equity is complicated. Options are complicated. Even well-meaning founders may inadvertently introduce disfavorable language into an employee options plan at the behest of an investor or board member. It is contingent on the individual to figure this out and stand up for themselves.

I also encourage virtually every engineer i chat with these days to retain an equity lawyer to help them pore over the contents of their grant paperwork and minimize surprise. It's going to cost a few hundred bucks and potentially save you from millions in losses down the road.