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Guide to Your Equity

442 points by samuelcouch 11y ago

BrainScraps 11y ago
This is a game changer, especially for people who are new/inexperienced in the Startup Compensation Lotto. I wish more companies would approach this subject so transparently!
- sr_banksy 11y ago
  Also makes the feedback / change process transparent! As long as all employees use git.
toomuchtodo 11y ago
> We have not undergone a 409A valuation to determine the current strike price of Clef stock. Isn't a 409A valuation required every 6-12 months by the IRS? EDIT: "Section 409A requires the value of stock options be determined “by the reasonable application of a reasonable valuation method” with two caveats: 1) the grant price must reflect material information, often referred to as a value creation event (i.e. the price paid in a recent financing); and 2), the calculation of value must not be more than 12 months old. In practice, private companies pursue 409A appraisals from independent qualified valuation firms either immediately after completion of a financing or other significant financial transaction (e.g. merger or acquisition), or, six to nine months of elapsed time since the prior appraisal, whichever comes sooner (more mature companies tend to pursue appraisals more frequently). The receipt of such an appraisal should provide a safe harbor to employees with regard to a potential tax liability as long as your company is less than 10 years old, you don’t have a liquidity event within 12 months after the option grant or you don’t have put or call rights on your company’s stock." https://blog.wealthfront.com/409a/ https://blog.wealthfront.com/409a/
- throwaway342526 11y ago
  Later they mention "(We are currently in the process of getting our 409A Valuation)" This might be fine if their compensation plan was formed in 2015.
tptacek 11y ago
Your stock options expire 10 years after they were issued or 30 days after you stop working with Clef This market standard provision in startup employee equity agreements is probably the single biggest obstacle to realizing a gain from employee equity. What it means is that when you leave your job, if you want to capture any potential upside from your options, you're required to execute them, paying your own money for actual shares. Depending on the amount of equity you have, this may or may not be a meaningful amount of money, but it is in any case a painful decision to have to make. Companies like Pinterest have done things to address this flaw; they allow employees who no longer work at the firm to retain their vested options without executing them for several years.
- jessepollak 11y ago
  Thanks for the feedback! We just realized this document is actually out of date with our legal contracts. I've opened up a PR with the change here (https://github.com/clef/handbook/pull/56 https://github.com/clef/handbook/pull/56), though it may be 10 years rather than 7, so I'm waiting for confirmation from our CEO before merging :) EDIT: Our CEO's response was: "this is more complicated than just changing that number, give me some time to write the fully change up." Incoming! EDIT #2: Updated with the 7 year number and a more depth explanation :) - thanks @brennenHN!
  - tptacek 11y ago
    \o/ You should definitely soak up some credit for having that term. :)
    - famousactress 11y ago
      And for how it played out! I'm sure that this wasn't what happened but it does occur to me that this pattern makes for a pretty good HN-hack by leveraging HN negativity/cynicism and then swooping in with an "oops - it's actually exactly what everyone thought it should be!". Definitely more net attention this way than would have been if it had just read this way originally.
powera 11y ago
"The lower the exercise price for Common Stock, the more money your options will earn you, so it’s in our best interest to make this price really low." - technically, while it's in the employee's interest to have the price be as low as possible, isn't it in the company's interest to have the price be as close to the 409A valuation as possible?
- daegloe 11y ago
  409A valuations apply to Common Stock, which lack the preferences associated with Preferred Stock (usually sold to investors). As a result, Common Stock is typically priced at a significant discount. It's most certainly in an early stage startup's best interest to keep the Common Stock price low, because it offers more flexibility when incentivizing team members.
tyre 11y ago
This is interesting, specifically the outstanding convertible notes. If the six year vesting is meant to communicate their company priorities, the over 30% (minimum, based on Series A) of the company owned by investors does too. > $175,000 was raised on notes with a cap of $5m > > $1,683,555 was raised on notes with a cap of $6m For the first set of notes, that is a minimum of 3.5% of the company. For the second set of notes, that is a minimum of 28% of the company. So for a pre-Series A company, you already have nearly a third of the company owned by investors. That percentage is only going to go higher in the future. If I'm an employee, I'd better hope my shares won't be diluted 30% in all future rounds.
amluto 11y ago
I'm surprised that there's no mention of an 83(b) election. I'm not a tax expert (hah!) and you might be nervous about giving anything that could be construed as tax advice, but I imagine you could safely say something like: "While we cannot give tax advice, we strongly suggest that you consider making an 83(b) election when you are initially granted employee stock options. If you choose to make an 83(b) election, you may need to do so within 30 days of joining." As I understand it, this can be a Big Deal (tm).
- js2 11y ago
  I believe 83(b) only applies to restricted stock grants, not ISOs, but I am not an accountant. I have worked for two startups early enough to take advantage of the 83(b) election. In both cases, the companies assisted me with the election, providing all the paperwork, etc.
  - daegloe 11y ago
    83(b) election still applies to any early exercise of stock options subject to vesting. An important detail that is often overlooked.
  - amluto 11y ago
    On re-reading it, I think you're right. Still might be worth mentioning.
  - rconti 11y ago
    No, they apply to ISOs as well. I was able to benefit from this. I didn't do it immediately, but within a year or so of my start date, and at that point my paper gain was small enough (~15k) to not quite cross the AMT threshold.
- goodcjw2 11y ago
  Same thoughts there. For early employers, it is almost always beneficial to exercise early at a reasonable low strike price. (oh sure, please always consult tax experts).
CobrastanJorji 11y ago
> This is a little bit of a roundabout way to give you ownership of Clef, but the reason we give options instead of straight stock is that it keeps you from being taxed on the stock until you actually use it. If we gave you $10,000 worth of Clef stock today, you would have to pay thousands of dollars in taxes this year. Maybe I misunderstand, but this seems somewhat dishonest to me. Giving out options instead of shares does not help the employee or or "keep you from being taxed." Instead, it's a punishment for the company not growing. If the value of the company does not increase in value before the vest date, the options will be worth nothing, but shares would still have value.
- Stasis5001 11y ago
  Not at all. If the company doesn't grow, there is no way any of the common stock shareholders get a noticeable payout due to liquidation preferences. Whether their ownership is in the form of options or stock does not matter.
jman25 11y ago
Isn't it sale date 2 years from grant, not exercise date 2 years from grant, that matters for ISO vs NSO treatment? "Instead, if the employee holds the shares for two years after grant and one year after exercise, the employee only pays capital gains tax on the ultimate difference between the exercise and sale price. If these conditions are not met, then the options are taxed like a non-qualified option" from https://www.nceo.org/articles/stock-options-alternative-minimum-tax-amt https://www.nceo.org/articles/stock-options-alternative-mini...
choppaface 11y ago
The section about granting ISOs to avoid a tax burden on employees is downright dishonest. Support 83(b) elections or outright bonus the employee the strike and tax (I've personally seen this happen before). AMT is a motherfucker.
balls187 11y ago
"So if a share of Clef stock is worth $1 today and we grow so it’s worth $20 in a few years, you’ll still be able to buy it for $1 (and then sell it immediately for a profit of $19)." Use more realistic numbers. The likelihood of your company going to $20 a share, and with the ability of the share holder to "sell it immediately" is very unlikely.
hellbanner 11y ago
When stocks lack dividend payment, can someone explain their intrinsic value apart from market speculation & https://en.wikipedia.org/wiki/Greater_fool_theory https://en.wikipedia.org/wiki/Greater_fool_theory ?
- AnimalMuppet 11y ago
  They mean that you own a specific fraction of the company (at least until the stock gets diluted). If the company is worth $X, and you own Y% of it, then your stock is worth $XY/100.
  - drewrv 11y ago
    If I own 5% of a laundromat that gives me 5% of it's profits each quarter, then I have money coming in. What's the point of owning 5% of a company that never pays shareholders a dime? It seems a bit like owning a piece of property on the moon.
    - scott_karana 11y ago
      It's speculative. You're really just hoping that one day, your company will IPO, and the initial stock price will be (much) higher than the price of your options. Or, if the company starts paying dividends, you could exercise your options and start receiving dividends, but I think that's unlikely knowing the sector we're in. :)
      - hellbanner 11y ago
        But why would someone else buy a stock.. if their only motivation would be that the price increases .. and they sell to someone who.. (GOTO start of post). Is this not the bigger fool theory?
    - AnimalMuppet 11y ago
      The company itself is worth something. It's worth whatever it's worth to someone trying to buy it, for example. As a general guide, it's worth some multiple of its annual profit, with the multiple depending on how fast it's growing and how much longer it's expected to continue growing.
mahyarm 11y ago
Quick summary guide to what you want your option equity grant to be like: 1. Must have an 83(b) election process, and give a bonus to cover pre-exercise cost OR: 2. No expiry after leaving the company, instead should just convert to NSOs AND 3. If possible, options should expire after 15-20 years with the longer time horizons to IPO today compared to 7 years ago. Facebook for example took 8 years from founding to IPO. Even if you stay employed at facebook for the entire time, you could have lost all of your stock for example. 4. Vesting cliffs should be no longer than 1 year. If you are unwilling or incapable to pre-exercise your startup stock, then equivalent RSU grants are superior to stock option grants. Even most $1bb startup employees have a very hard time finding people to buy their stock outside of company secondaries when the company is private. ---- What you give up at a startup as a sr. engineer vs bigco: 1. Saleable within 1 year +$100k/yr equity grants. These equity grants can then be used in other investments, such as a house down payment or otherwise. Give them a bonus of %7 annual compounded interest. 2. Higher salaries 3. Bonuses 4. Some benefits which may have high amount of financial benefits for your situation, such as paid parental leave. 5. Hours worked. Make sure that the startup offer can beat a big co offer if a +$100mm sale event happens by a good margin. If your startup offer cannot beat that, then working at that startup will have a near certain chance of having a big financial downside compared to working at bigco. Working at bigco is the index fund of tech work, make sure your startup 'investment' at least has a chance of beating the index fund.
toadi 11y ago
I'm the only one who read 50 hours at the office? Poor Americans :)
- notliketherest 11y ago
  Still the most powerful and richest country in the world.
- ryanSrich 11y ago
  Wages are typically commensurate though. I'd rather be in the office for 10 more hours than you if I can make almost triple (depending on where you live, the UK for example has shockingly low wages for tech workers).
- funkysquid 11y ago
  That's pretty insane actually (although common) - would immediately disqualify them from consideration for me.
- gohrt 11y ago
  where does it say that?
  - tomtai 11y ago
    https://github.com/clef/handbook/blob/master/Employment%20Policies/Working%20Remotely.md https://github.com/clef/handbook/blob/master/Employment%20Po... "we expect full-time employees to be at the Clef office between 45 and 50 hours a week""
omouse 11y ago
We have not undergone a 409A valuation to determine the current strike price of Clef stock. So basically, what you're saying, is that unless you're guaranteed to strike it rich, it's better to ask for more salary, more vacation time or other tangibles? Greeeeeat. I would prefer profit sharing to stock options/equity or actual ownership that means something, such as in a co-operative. It's great they want to make sure they're building a company for the future, but cash now is always better and even better is if it's guaranteed cash in the future too (as with profit sharing where you can actually see the increase or with performance bonuses where you can actually see if they're shrinking or growing).
- deleted 11y ago
  [deleted]
rdl 11y ago
Looks interesting. I'm not a lawyer, but: 1) I'd consider Restricted Stock/Founders Stock instead of options for pre-A employees. 2) Early exercise should be an option; I'd personally not work at a pre-$50mm val company without EE as an option. 3) Whoa you survived a long time before getting a 409A. 4) Should let your employees exercise options for years after leaving.
- hesdeadjim 11y ago
  100% agree.
rdl 11y ago
You should include a Standard Offer Letter example showing employees what their stock/etc. will be worth under various exit assumptions. Showing/including the employee handbook at the same time is great, too. (I'd like to make this a standard thing; would be happy to help with this. Would need to find a lawyer willing to contribute time. I'd love a Standard Human Readable Offer Letter Builder.)
- dmor 11y ago
  Offer letter should be super standard. The offer letter generated by Zenefits is a single page...
  - rdl 11y ago
    Which is insufficient to value the offer. I want there to be an offer letter plus other materials which explain it. It's meaningless to say something like "12000 shares of stock, vesting over 4 years." That may be the legally binding part, but there should be an appendix or model which shows what that actually means. The problem with making that a separate unsigned/etc. document is it isn't legally binding in the same way an offer letter is. There's additionally the insanity around "stock options must be approved by the board at the next meeting after you're hired", which could be a quarter. That seems stupid. There should be some cleaner way to handle that.
    - dmor 11y ago
      Oh yeah, usually i just send a spreadsheet. Even the stock options aren't legally binding usually... they still get approved by the board after the hire is made. It is not possible to pre-approve them, but you can do it but UWC (unanimous written consent) without holding a full board meeting. That's what we do.
- spenczar5 11y ago
  They can do better - they explicitly list in another part of the handbook what every employee receives (https://github.com/clef/handbook/blob/master/Employment%20Policies/Salary%20and%20Equity%20Compensation.md https://github.com/clef/handbook/blob/master/Employment%20Po...): > Every employee will be offered 41,963 Clef stock options (~.9% of outstanding shares, including the option pool these are drawn from). As mentioned above, they can also choose to reduce their salary by $5k/year in exchange for 4,663 more options (totalling ~1% of outstanding shares). This is a genuinely impressive commitment to transparency.
dmor 11y ago
I commend you for sharing this. A couple issues for you to consider: Share price isn't always set in that clean a manner, as you'll learn when you fundraise. It's nice when your math works out like this: "if Clef is worth $20m and we raise $5m, we are now worth $25m. If you owned 5% of $20m before, you now own 4% of $25m (we sold 20% of the company, or, said differently, diluted you by 20%). The 5% stake was worth $1m before the fundraise and the 4% stake is now worth $1m." but often you end up with a bit more complexity. Beware simple examples can still set expectations. Converting notes with discounts is one example of this. Preferred and common are not treated the same way, and it is unlikely you will escape selling preferred shares to your next investor. Early exercise would actually be far more tax advantageous to your employees. You can do this "cashless" as an even greater benefit.
lohop 11y ago
This is the best thing since sliced bread. Resolved a lot of uncertainties to me (an engineer) about how this stuff works.
leroy_masochist 11y ago
Thank you for posting this! It's a brave move and I think other companies should do the same. One question for you: do you have any restrictions on the sale of your stock by employees before the stock is liquid? Specifically, do you have any provisions that say the stock can't be sold without board approval before shares are publicly issued on an exchange? I've had friends burned by this in the past....they throw down 5-6 figures to exercise their options, pay the taxes, etc after two years with the company, then find that they can't legally sell the shares without board approval, which basically means they can't sell until the stock is publicly traded. It's been particularly painful in one friend's case because he tied up virtually all his liquidity for what he thought was a very temporary basis in exercising the options, and now has no clear timeline to monetization (company's last round was B, no IPO in sight).
geofft 11y ago
This is the clearest document about how stock options work that I've seen yet. That alone is commendable, even if it weren't for other commendable things like listing the denominator on what fraction of the company you own and otherwise avoiding the usual employee-hostile temptations here.
YuriNiyazov 11y ago
Could you go into greater detail about what taxes does the company pays when an NSO is exercised in a year when a person is no longer employed? Is it just the employer's part of medicare and social security (7.5% up to 117000 as of 2014?) or is it something else?
throwawaymaroon 11y ago
Guide to your equity: you should assume your equity is worthless just out of the nature of startup risk. Even if it ends up being worth something, you should assume that your employer will do everything they legally can to dilute or otherwise devalue your financial reward from equity. Getting employee equity will always be, at best, a few crumbs from the loaf you're helping to build.
- rhizome 11y ago
  It's now possible to have a choice between a company whose benefits result in only crumbs, and a company that offers slices.
  - throwawaymaroon 11y ago
    You think this because you think have an actual slice? Wait for the payout. Whatever terms you have now, see what they actually become in practice.
fosk 11y ago
I would like to focus on those comments that are questioning if stocks are just a way to trick employees in getting a lower salary. I believe that regardless of the lifestyle you want to have, stocks have the potential to make you really wealthy, way more than collecting salaries. In startups a good salary will give you an affordable and stable life, sometimes short-term security (because a higher salary like 200k/yr could only last a couple of years until the startup cease to exist). On the other side stocks are the best investment to drastically improve your finances. To put it in layman's terms, it usually take many years, sometimes a lifetime, to buy long-term security, a nice house and fast cars just by collecting a salary month by month. Selling earned stocks can do all of that in 2/4 years. If it doesn't, then move on. It's a bet and a different type of gambling, therefore should be treated as such. Now, if you can or cannot afford to gamble it's a different story. In my experience people with families understandably lower their risks by preferring a higher salary, while those who don't have any wife/kids prefer stocks. Regardless of that, this doesn't change the fact that stocks have the potential of being worth 10-20-30-N times a yearly salary, and sometimes that qualifies them as a good bet to some people (and certainly it does for founders and investors).
boulos 11y ago
If I weren't on my phone I might open a pull request for this, but in this paragraph you suddenly use the term option to mean choice, I'd use choice where appropriate to avoid confusion: This means that while you have more options regarding your equity, you will lose a significant amount of your options' value if you wait. In weighing your different options, you should consult a tax attorney to help decide what path makes the most sense for you.
kriro 11y ago
That's a pretty solid summary even if you don't work for Clef. Very helpful document. A very good example to set for other companies. I'd love more "easy terms" github repos with a "if in doubt consult a lawyer" clause. It communicates that the company is interested in making sure that employees understand their benefits well (I often get the impression many companies don't) --- The "golden handcuffs" are interesting. Are there any companies that ofer you a credit at X% to buy your options when you leave? Say you leave and own 50k options at aprice of 1$ and they are valued at 20$ now. Currently you have to pony up the 50k or pay taxes after 90 days. Since the employer also has to pay taxes it would make sense for them to offer a deal where you get "just the profits -X" so to speak. Are there any money lenders specialized in this? It's basically a "sure thing" as long as you have the big lump sum up front.
tjholowaychuk 11y ago
Unless I missed it somewhere it would be interesting to learn more about how and when you can exercise and sell your shares. For example is it even possible to sell a portion when the company is private? Back to the company or to VCs? What if the company never goes public?
kabuks 11y ago
It's interesting that they offer people to take 0.1% more equity for a 5k reduction in salary. https://github.com/clef/handbook/blob/master/Employment%20Policies/Salary%20and%20Equity%20Compensation.md https://github.com/clef/handbook/blob/master/Employment%20Po... With a 6 year vesting schedule a new employee is 'buying' 0.1% worth of shares for 30k in salary. A 30MM valuation, or 5X the 6MM cap on the convertible note.
Too 11y ago
Sorry if I'm missing something but what's preventing the employer from creating stocks with 100000x liquidation preference for themselves after they have given the employees their equity? That would mean the employees stocks would be worth nothing at a sale? See also hellbanners comment about dividends. What is the actual value of having the stock?

442 points by samuelcouch 11y ago

This is a game changer, especially for people who are new/inexperienced in the Startup Compensation Lotto. I wish more companies would approach this subject so transparently!

sr_banksy 11y ago
Also makes the feedback / change process transparent! As long as all employees use git.

toomuchtodo 11y ago

> We have not undergone a 409A valuation to determine the current strike price of Clef stock. Isn't a 409A valuation required every 6-12 months by the IRS? EDIT: "Section 409A requires the value of stock options be determined “by the reasonable application of a reasonable valuation method” with two caveats: 1) the grant price must reflect material information, often referred to as a value creation event (i.e. the price paid in a recent financing); and 2), the calculation of value must not be more than 12 months old. In practice, private companies pursue 409A appraisals from independent qualified valuation firms either immediately after completion of a financing or other significant financial transaction (e.g. merger or acquisition), or, six to nine months of elapsed time since the prior appraisal, whichever comes sooner (more mature companies tend to pursue appraisals more frequently). The receipt of such an appraisal should provide a safe harbor to employees with regard to a potential tax liability as long as your company is less than 10 years old, you don’t have a liquidity event within 12 months after the option grant or you don’t have put or call rights on your company’s stock." https://blog.wealthfront.com/409a/ https://blog.wealthfront.com/409a/

throwaway342526 11y ago
Later they mention "(We are currently in the process of getting our 409A Valuation)" This might be fine if their compensation plan was formed in 2015.

tptacek 11y ago

Your stock options expire 10 years after they were issued or 30 days after you stop working with Clef This market standard provision in startup employee equity agreements is probably the single biggest obstacle to realizing a gain from employee equity. What it means is that when you leave your job, if you want to capture any potential upside from your options, you're required to execute them, paying your own money for actual shares. Depending on the amount of equity you have, this may or may not be a meaningful amount of money, but it is in any case a painful decision to have to make. Companies like Pinterest have done things to address this flaw; they allow employees who no longer work at the firm to retain their vested options without executing them for several years.

jessepollak 11y ago
Thanks for the feedback! We just realized this document is actually out of date with our legal contracts. I've opened up a PR with the change here (https://github.com/clef/handbook/pull/56 https://github.com/clef/handbook/pull/56), though it may be 10 years rather than 7, so I'm waiting for confirmation from our CEO before merging :) EDIT: Our CEO's response was: "this is more complicated than just changing that number, give me some time to write the fully change up." Incoming! EDIT #2: Updated with the 7 year number and a more depth explanation :) - thanks @brennenHN!
- tptacek 11y ago
  \o/ You should definitely soak up some credit for having that term. :)
  - famousactress 11y ago
    And for how it played out! I'm sure that this wasn't what happened but it does occur to me that this pattern makes for a pretty good HN-hack by leveraging HN negativity/cynicism and then swooping in with an "oops - it's actually exactly what everyone thought it should be!". Definitely more net attention this way than would have been if it had just read this way originally.

powera 11y ago

"The lower the exercise price for Common Stock, the more money your options will earn you, so it’s in our best interest to make this price really low." - technically, while it's in the employee's interest to have the price be as low as possible, isn't it in the company's interest to have the price be as close to the 409A valuation as possible?

daegloe 11y ago
409A valuations apply to Common Stock, which lack the preferences associated with Preferred Stock (usually sold to investors). As a result, Common Stock is typically priced at a significant discount. It's most certainly in an early stage startup's best interest to keep the Common Stock price low, because it offers more flexibility when incentivizing team members.

tyre 11y ago

This is interesting, specifically the outstanding convertible notes. If the six year vesting is meant to communicate their company priorities, the over 30% (minimum, based on Series A) of the company owned by investors does too. > $175,000 was raised on notes with a cap of $5m > > $1,683,555 was raised on notes with a cap of $6m For the first set of notes, that is a minimum of 3.5% of the company. For the second set of notes, that is a minimum of 28% of the company. So for a pre-Series A company, you already have nearly a third of the company owned by investors. That percentage is only going to go higher in the future. If I'm an employee, I'd better hope my shares won't be diluted 30% in all future rounds.

amluto 11y ago

I'm surprised that there's no mention of an 83(b) election. I'm not a tax expert (hah!) and you might be nervous about giving anything that could be construed as tax advice, but I imagine you could safely say something like: "While we cannot give tax advice, we strongly suggest that you consider making an 83(b) election when you are initially granted employee stock options. If you choose to make an 83(b) election, you may need to do so within 30 days of joining." As I understand it, this can be a Big Deal (tm).

js2 11y ago
I believe 83(b) only applies to restricted stock grants, not ISOs, but I am not an accountant. I have worked for two startups early enough to take advantage of the 83(b) election. In both cases, the companies assisted me with the election, providing all the paperwork, etc.
- daegloe 11y ago
  83(b) election still applies to any early exercise of stock options subject to vesting. An important detail that is often overlooked.
- amluto 11y ago
  On re-reading it, I think you're right. Still might be worth mentioning.
- rconti 11y ago
  No, they apply to ISOs as well. I was able to benefit from this. I didn't do it immediately, but within a year or so of my start date, and at that point my paper gain was small enough (~15k) to not quite cross the AMT threshold.
goodcjw2 11y ago
Same thoughts there. For early employers, it is almost always beneficial to exercise early at a reasonable low strike price. (oh sure, please always consult tax experts).

CobrastanJorji 11y ago

> This is a little bit of a roundabout way to give you ownership of Clef, but the reason we give options instead of straight stock is that it keeps you from being taxed on the stock until you actually use it. If we gave you $10,000 worth of Clef stock today, you would have to pay thousands of dollars in taxes this year. Maybe I misunderstand, but this seems somewhat dishonest to me. Giving out options instead of shares does not help the employee or or "keep you from being taxed." Instead, it's a punishment for the company not growing. If the value of the company does not increase in value before the vest date, the options will be worth nothing, but shares would still have value.

Stasis5001 11y ago
Not at all. If the company doesn't grow, there is no way any of the common stock shareholders get a noticeable payout due to liquidation preferences. Whether their ownership is in the form of options or stock does not matter.

jman25 11y ago

Isn't it sale date 2 years from grant, not exercise date 2 years from grant, that matters for ISO vs NSO treatment? "Instead, if the employee holds the shares for two years after grant and one year after exercise, the employee only pays capital gains tax on the ultimate difference between the exercise and sale price. If these conditions are not met, then the options are taxed like a non-qualified option" from https://www.nceo.org/articles/stock-options-alternative-minimum-tax-amt https://www.nceo.org/articles/stock-options-alternative-mini...

choppaface 11y ago

The section about granting ISOs to avoid a tax burden on employees is downright dishonest. Support 83(b) elections or outright bonus the employee the strike and tax (I've personally seen this happen before). AMT is a motherfucker.

balls187 11y ago

"So if a share of Clef stock is worth $1 today and we grow so it’s worth $20 in a few years, you’ll still be able to buy it for $1 (and then sell it immediately for a profit of $19)." Use more realistic numbers. The likelihood of your company going to $20 a share, and with the ability of the share holder to "sell it immediately" is very unlikely.

hellbanner 11y ago

When stocks lack dividend payment, can someone explain their intrinsic value apart from market speculation & https://en.wikipedia.org/wiki/Greater_fool_theory https://en.wikipedia.org/wiki/Greater_fool_theory ?

AnimalMuppet 11y ago
They mean that you own a specific fraction of the company (at least until the stock gets diluted). If the company is worth $X, and you own Y% of it, then your stock is worth $XY/100.
- drewrv 11y ago
  If I own 5% of a laundromat that gives me 5% of it's profits each quarter, then I have money coming in. What's the point of owning 5% of a company that never pays shareholders a dime? It seems a bit like owning a piece of property on the moon.
  - scott_karana 11y ago
    It's speculative. You're really just hoping that one day, your company will IPO, and the initial stock price will be (much) higher than the price of your options. Or, if the company starts paying dividends, you could exercise your options and start receiving dividends, but I think that's unlikely knowing the sector we're in. :)
    - hellbanner 11y ago
      But why would someone else buy a stock.. if their only motivation would be that the price increases .. and they sell to someone who.. (GOTO start of post). Is this not the bigger fool theory?
  - AnimalMuppet 11y ago
    The company itself is worth something. It's worth whatever it's worth to someone trying to buy it, for example. As a general guide, it's worth some multiple of its annual profit, with the multiple depending on how fast it's growing and how much longer it's expected to continue growing.

mahyarm 11y ago

Quick summary guide to what you want your option equity grant to be like: 1. Must have an 83(b) election process, and give a bonus to cover pre-exercise cost OR: 2. No expiry after leaving the company, instead should just convert to NSOs AND 3. If possible, options should expire after 15-20 years with the longer time horizons to IPO today compared to 7 years ago. Facebook for example took 8 years from founding to IPO. Even if you stay employed at facebook for the entire time, you could have lost all of your stock for example. 4. Vesting cliffs should be no longer than 1 year. If you are unwilling or incapable to pre-exercise your startup stock, then equivalent RSU grants are superior to stock option grants. Even most $1bb startup employees have a very hard time finding people to buy their stock outside of company secondaries when the company is private. ---- What you give up at a startup as a sr. engineer vs bigco: 1. Saleable within 1 year +$100k/yr equity grants. These equity grants can then be used in other investments, such as a house down payment or otherwise. Give them a bonus of %7 annual compounded interest. 2. Higher salaries 3. Bonuses 4. Some benefits which may have high amount of financial benefits for your situation, such as paid parental leave. 5. Hours worked. Make sure that the startup offer can beat a big co offer if a +$100mm sale event happens by a good margin. If your startup offer cannot beat that, then working at that startup will have a near certain chance of having a big financial downside compared to working at bigco. Working at bigco is the index fund of tech work, make sure your startup 'investment' at least has a chance of beating the index fund.

toadi 11y ago

I'm the only one who read 50 hours at the office? Poor Americans :)

notliketherest 11y ago
Still the most powerful and richest country in the world.
ryanSrich 11y ago
Wages are typically commensurate though. I'd rather be in the office for 10 more hours than you if I can make almost triple (depending on where you live, the UK for example has shockingly low wages for tech workers).
funkysquid 11y ago
That's pretty insane actually (although common) - would immediately disqualify them from consideration for me.
gohrt 11y ago
where does it say that?
- tomtai 11y ago
  https://github.com/clef/handbook/blob/master/Employment%20Policies/Working%20Remotely.md https://github.com/clef/handbook/blob/master/Employment%20Po... "we expect full-time employees to be at the Clef office between 45 and 50 hours a week""

omouse 11y ago

We have not undergone a 409A valuation to determine the current strike price of Clef stock. So basically, what you're saying, is that unless you're guaranteed to strike it rich, it's better to ask for more salary, more vacation time or other tangibles? Greeeeeat. I would prefer profit sharing to stock options/equity or actual ownership that means something, such as in a co-operative. It's great they want to make sure they're building a company for the future, but cash now is always better and even better is if it's guaranteed cash in the future too (as with profit sharing where you can actually see the increase or with performance bonuses where you can actually see if they're shrinking or growing).

deleted 11y ago
[deleted]

rdl 11y ago

Looks interesting. I'm not a lawyer, but: 1) I'd consider Restricted Stock/Founders Stock instead of options for pre-A employees. 2) Early exercise should be an option; I'd personally not work at a pre-$50mm val company without EE as an option. 3) Whoa you survived a long time before getting a 409A. 4) Should let your employees exercise options for years after leaving.

hesdeadjim 11y ago
100% agree.

rdl 11y ago

You should include a Standard Offer Letter example showing employees what their stock/etc. will be worth under various exit assumptions. Showing/including the employee handbook at the same time is great, too. (I'd like to make this a standard thing; would be happy to help with this. Would need to find a lawyer willing to contribute time. I'd love a Standard Human Readable Offer Letter Builder.)

dmor 11y ago
Offer letter should be super standard. The offer letter generated by Zenefits is a single page...
- rdl 11y ago
  Which is insufficient to value the offer. I want there to be an offer letter plus other materials which explain it. It's meaningless to say something like "12000 shares of stock, vesting over 4 years." That may be the legally binding part, but there should be an appendix or model which shows what that actually means. The problem with making that a separate unsigned/etc. document is it isn't legally binding in the same way an offer letter is. There's additionally the insanity around "stock options must be approved by the board at the next meeting after you're hired", which could be a quarter. That seems stupid. There should be some cleaner way to handle that.
  - dmor 11y ago
    Oh yeah, usually i just send a spreadsheet. Even the stock options aren't legally binding usually... they still get approved by the board after the hire is made. It is not possible to pre-approve them, but you can do it but UWC (unanimous written consent) without holding a full board meeting. That's what we do.
spenczar5 11y ago
They can do better - they explicitly list in another part of the handbook what every employee receives (https://github.com/clef/handbook/blob/master/Employment%20Policies/Salary%20and%20Equity%20Compensation.md https://github.com/clef/handbook/blob/master/Employment%20Po...): > Every employee will be offered 41,963 Clef stock options (~.9% of outstanding shares, including the option pool these are drawn from). As mentioned above, they can also choose to reduce their salary by $5k/year in exchange for 4,663 more options (totalling ~1% of outstanding shares). This is a genuinely impressive commitment to transparency.

dmor 11y ago

I commend you for sharing this. A couple issues for you to consider: Share price isn't always set in that clean a manner, as you'll learn when you fundraise. It's nice when your math works out like this: "if Clef is worth $20m and we raise $5m, we are now worth $25m. If you owned 5% of $20m before, you now own 4% of $25m (we sold 20% of the company, or, said differently, diluted you by 20%). The 5% stake was worth $1m before the fundraise and the 4% stake is now worth $1m." but often you end up with a bit more complexity. Beware simple examples can still set expectations. Converting notes with discounts is one example of this. Preferred and common are not treated the same way, and it is unlikely you will escape selling preferred shares to your next investor. Early exercise would actually be far more tax advantageous to your employees. You can do this "cashless" as an even greater benefit.

lohop 11y ago

This is the best thing since sliced bread. Resolved a lot of uncertainties to me (an engineer) about how this stuff works.

leroy_masochist 11y ago

Thank you for posting this! It's a brave move and I think other companies should do the same. One question for you: do you have any restrictions on the sale of your stock by employees before the stock is liquid? Specifically, do you have any provisions that say the stock can't be sold without board approval before shares are publicly issued on an exchange? I've had friends burned by this in the past....they throw down 5-6 figures to exercise their options, pay the taxes, etc after two years with the company, then find that they can't legally sell the shares without board approval, which basically means they can't sell until the stock is publicly traded. It's been particularly painful in one friend's case because he tied up virtually all his liquidity for what he thought was a very temporary basis in exercising the options, and now has no clear timeline to monetization (company's last round was B, no IPO in sight).

geofft 11y ago

This is the clearest document about how stock options work that I've seen yet. That alone is commendable, even if it weren't for other commendable things like listing the denominator on what fraction of the company you own and otherwise avoiding the usual employee-hostile temptations here.

YuriNiyazov 11y ago

Could you go into greater detail about what taxes does the company pays when an NSO is exercised in a year when a person is no longer employed? Is it just the employer's part of medicare and social security (7.5% up to 117000 as of 2014?) or is it something else?

throwawaymaroon 11y ago

Guide to your equity: you should assume your equity is worthless just out of the nature of startup risk. Even if it ends up being worth something, you should assume that your employer will do everything they legally can to dilute or otherwise devalue your financial reward from equity. Getting employee equity will always be, at best, a few crumbs from the loaf you're helping to build.

rhizome 11y ago
It's now possible to have a choice between a company whose benefits result in only crumbs, and a company that offers slices.
- throwawaymaroon 11y ago
  You think this because you think have an actual slice? Wait for the payout. Whatever terms you have now, see what they actually become in practice.

fosk 11y ago

I would like to focus on those comments that are questioning if stocks are just a way to trick employees in getting a lower salary. I believe that regardless of the lifestyle you want to have, stocks have the potential to make you really wealthy, way more than collecting salaries. In startups a good salary will give you an affordable and stable life, sometimes short-term security (because a higher salary like 200k/yr could only last a couple of years until the startup cease to exist). On the other side stocks are the best investment to drastically improve your finances. To put it in layman's terms, it usually take many years, sometimes a lifetime, to buy long-term security, a nice house and fast cars just by collecting a salary month by month. Selling earned stocks can do all of that in 2/4 years. If it doesn't, then move on. It's a bet and a different type of gambling, therefore should be treated as such. Now, if you can or cannot afford to gamble it's a different story. In my experience people with families understandably lower their risks by preferring a higher salary, while those who don't have any wife/kids prefer stocks. Regardless of that, this doesn't change the fact that stocks have the potential of being worth 10-20-30-N times a yearly salary, and sometimes that qualifies them as a good bet to some people (and certainly it does for founders and investors).

boulos 11y ago

If I weren't on my phone I might open a pull request for this, but in this paragraph you suddenly use the term option to mean choice, I'd use choice where appropriate to avoid confusion: This means that while you have more options regarding your equity, you will lose a significant amount of your options' value if you wait. In weighing your different options, you should consult a tax attorney to help decide what path makes the most sense for you.

kriro 11y ago

That's a pretty solid summary even if you don't work for Clef. Very helpful document. A very good example to set for other companies. I'd love more "easy terms" github repos with a "if in doubt consult a lawyer" clause. It communicates that the company is interested in making sure that employees understand their benefits well (I often get the impression many companies don't) --- The "golden handcuffs" are interesting. Are there any companies that ofer you a credit at X% to buy your options when you leave? Say you leave and own 50k options at aprice of 1$ and they are valued at 20$ now. Currently you have to pony up the 50k or pay taxes after 90 days. Since the employer also has to pay taxes it would make sense for them to offer a deal where you get "just the profits -X" so to speak. Are there any money lenders specialized in this? It's basically a "sure thing" as long as you have the big lump sum up front.

tjholowaychuk 11y ago

Unless I missed it somewhere it would be interesting to learn more about how and when you can exercise and sell your shares. For example is it even possible to sell a portion when the company is private? Back to the company or to VCs? What if the company never goes public?

kabuks 11y ago

It's interesting that they offer people to take 0.1% more equity for a 5k reduction in salary. https://github.com/clef/handbook/blob/master/Employment%20Policies/Salary%20and%20Equity%20Compensation.md https://github.com/clef/handbook/blob/master/Employment%20Po... With a 6 year vesting schedule a new employee is 'buying' 0.1% worth of shares for 30k in salary. A 30MM valuation, or 5X the 6MM cap on the convertible note.

Too 11y ago

Sorry if I'm missing something but what's preventing the employer from creating stocks with 100000x liquidation preference for themselves after they have given the employees their equity? That would mean the employees stocks would be worth nothing at a sale? See also hellbanners comment about dividends. What is the actual value of having the stock?