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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

#91

Post by Osiris »

adhambadr wrote: post #52

It has always baffled me the way founders treat employees and investors so vastly asymmetric. Ive been involved in rounds close enough to see how just the "hint" of a potential investment and all the numbers, financials, cap tables are sent in one big email to their analyst, while some early employees (who controversially have worked just as hard as the founders) have no clue who owns what and whats going on. I get i…

I've noticed the same thing. Early employees are the ones responsible for building the product, without whom there would be nothing to sell, and yet they get stiffed when more money is raised and shares are diluted.

When I joined a startup I was promised that more options would be issued and we wouldn't get diluted from future rounds, but that never happened. As employee #22 I received options that equaled 0.05% of outstanding shares, and by 2 years later, I was down to 0.015%.

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

#92

Post by adamnemecek »

adhambadr wrote: post #52

It has always baffled me the way founders treat employees and investors so vastly asymmetric. Ive been involved in rounds close enough to see how just the "hint" of a potential investment and all the numbers, financials, cap tables are sent in one big email to their analyst, while some early employees (who controversially have worked just as hard as the founders) have no clue who owns what and whats going on. I get i…

Because an angry investor can fuck you over more than an angry employee.

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

#93

Post by roadnottaken »

rcurry wrote: 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.

Yes, but for ISO you owe AMT. It amounts to ~28% federal tax rather than ~39%. But it's still a big number.

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

#94

Post by beagle3 »

econner wrote: post #24
jaymzcampbell wrote: post #5

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…

Most countries have sane tax codes that say you only owe taxes when there's a liquidity event for you. The US is exceptionally bad in this respect of taxing illiquid paper profits, and of onerous lockup periods (SEC rule 144).

An investment of mine that yielded 5X exit transaction ended up being 1.3X for those reasons, and I was lucky - if it closed a couple of months earlier, I would end up with 40% loss and a useless tax credit.

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

#95

Post by hedora »

dandare wrote: 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)

Hiring is the primary source of dilution at new companies. Stock packages have to come from somewhere.

Also, equity rounds reduce your percentage ownership, but (usually) not the current value of the stock you hold. If a $100M company raises $100M, the number of outstanding shares doubles. However the company is now worth $200M (the cash in the bank counts towards valuation). Now, your 1% share is a 0.5% share, but it is still worth $1M. If the company spends the $100M without growing, then the funding round was a mistake, and your shares are now worth $0.5M

So, spending money lowers the value of your stock. Issuing shares lowers your upside at a fixed future valuation. If management knows what it is doing, raising cash should increase the chances the company grows, and so should hiring.

(these calculations are oversimplifications, but the intuition is right)

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

#96

Post by Osiris »

BrandonM wrote: post #85
inmygarage wrote: post #72

Earlier quoted context omitted.

IANAL, but I do not believe you can file an 83(b) election for options. You can only file an 83(b) for NSOs or restricted stock. I am not sure if, post-exercise, the options become "owned options" or "restricted stock" and how the IRS views the difference between the two.

Some companies allow you to "early exercise" your options before they vest. If you do that, you'll certainly want to file an 83(b) election for that exercise, when the spread between strike price and fair market value (FMV) is $0. If you don't file the 83(b) and the FMV goes up, each future vesting period will be subject to taxation.

And all startup employees are expected to know all these rules? Before I joined a startup I spent days researching all the rules about options and I still didn't quite understand all the nuance.

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

#97

Post by adekok »

adhambadr wrote: post #52

It has always baffled me the way founders treat employees and investors so vastly asymmetric. Ive been involved in rounds close enough to see how just the "hint" of a potential investment and all the numbers, financials, cap tables are sent in one big email to their analyst, while some early employees (who controversially have worked just as hard as the founders) have no clue who owns what and whats going on. I get i…

I agree. I worked for one startup which got bought. The founders made money. All of the employees lost money.

One of the founders reached out to me a few years later, asking me to join his new startup as employee #2. I said "yes", but only if I made 10% of what he made. The answer was "No". OK... maybe 1% of what he makes? "No".

Thanks, but no thanks. If you admit that you're not going to share the benefits, I have no reason to get involved.

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

#99

Post by dpark »

battlebot wrote: post #51
Someone1234 wrote: post #20

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…

We citizens have very little say in the machinery. That is the biggest problem we face these days. Regular people have no agency at all and there is a sneering elite that runs things from the coasts who believe everyone else is a sheep to be sheared for them.

More than half the population lives on the coasts. Most of them are "regular people", too.

The problem with our tax code is the same as the problem with the rest of our laws: pandering politicians push through complex and expensive trash because it makes either their constituents or their donors happy.

For taxes specifically, normal people have complex taxes because of the dozens of deductions and credits that hide the handouts (to the wealthy and the poor alike) built into the system. In a sane tax code, there would be no standard deduction or mortgage deduction or earned income tax or alternative minimum tax. There would be a set of tax brackets (adjusted to compensate for the loss of all the complexity) and very little else.

Of course in a sane system, the government would just file your taxes and send you a statement along with a refund or a bill. They have all the relevant information with the exception of some itemized stuff they can't know about, but they could just eliminate that and simplify.

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

#100

Post by iaw »

fermigier wrote: post #10

Should have been titled "... in the USA" as tax rules are very different in other countries. For instance, in France, you only owe money to the taxperson when you sell your shares, for a profit. If you sell for a loss, this is tax-deducible.

Honest question: what percentage of unicorn start-ups are outside of the US?

Being modestly familiar with legal restrictions around closing offices in France I'd be surprised if the scene there was massive.

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