11 ms·

Fixing the Inequity of Startup Equity

214 points by Harj 11y ago

alva 11y ago
"Many employees don’t have the money to exercise their options within such a short window and lose them." Sounds like an excellent opportunity for a business. Providing short term loans, taking x% or the exercised options. Although I am not familiar with US laws that cover this area.
- JonFish85 11y ago
  I really doubt whether that would work. The loans aren't necessarily "short term", as the term is pretty much not known, the shares are the lowest on the totem pole when it comes to payout and you have absolutely no control over the company. That's a lot of risk, and if the cost of exercising options is so high as to be difficult, the shares probably don't have the upside that might be required to make it work.
  - alva 11y ago
    My bad, misunderstood the nature of these type of options. I was making the assumption that the options could be exercised and then sold straight away. Eg, employee has option to buy during this window at a strike of 1.1, current value 1.3. I presumed the issue was raising the initial (options x preferred price) cash plus any taxes/fees involved.
    - JonFish85 11y ago
      I believe most companies whose stock is publicly traded provide this for their employees. If you have stock in, say, Google, when your stock vests, you can have it sold and take the difference directly--no loan needed. I've never done such a thing, so it's only hearsay on my part, but that's how I've understood it to be.
      - ropiku 11y ago
        It's called a cashless exercise. You exercise and sell the stock right away so you don't need to have the money to buy. However the problem is most startups in this case are not liquid so you cannot sell your shares (with some exceptions). Google and other public companies give you direct shares via RSUs since they can sell part of your shares to cover the taxes.
- rygine 11y ago
  Something like this already exists. http://www.esofund.com http://www.esofund.com
Harj 11y ago
We're excited to make 10 years the new standard option exercise window for startup employees. Each of us have personally experienced someone close to us dealing with the stress of trying to exercise their options within 90 days and it sucks. We'd like to see more companies making this change, we'll be keeping the public list of YC companies who have either implemented or pledged to implement an extended window, updated here: https://triplebyte.com/ycombinator-startups/extended-options https://triplebyte.com/ycombinator-startups/extended-options
- ekosz 11y ago
  Hey harj! The article and plan is really interesting. I wanted to read more of the details and comparisons, but it seems the link from the sentence "We’ve created a summary of the gory details on both the business and legal aspects here" just brings you to the triplebyte homepage. Do you happen to have a direct link to that page?
  - Harj 11y ago
    Sorry about that, fixed. Here's the link: https://data.triplebyte.com/extending-stock-option-exercise-window-guide-43821b47cbbd https://data.triplebyte.com/extending-stock-option-exercise-...
- jsprogrammer 11y ago
  How was the time period of 10 years picked? It seems rather arbitrary? As an employee, why would I want a dangling guillotine over my options/compensation?
  - hkmurakami 11y ago
    iirc 10 years is the legal limit.
  - Harj 11y ago
    It's ten years from the date the options are granted, which is how long the options themselves last for.
JonFish85 11y ago
As much noise as I hear about this, it's not really that simple. In my estimation, lengthening the exercise window just ensures that dilution will happen faster. If you have 5% of a company locked up by people who no longer work there, you have to find a way to reward current employees. Sure, cash is one way, but it might be easier to issue more stock, most likely of a different class. It might sound good on paper, but ultimately I really don't think this (edited: "this" = extending the window) will have any real positive impact for employees leaving the company.
- ammon 11y ago
  Sure it will. Keeping options is strictly better (for the employee) than not keeping options. Vested options are compensation for work that has been done. Everything you say can be true, but that does not mean that companies should not let their employees keep their options.
- holman 11y ago
  > If you have 5% of a company locked up by people who no longer work there, you have to find a way to reward current employees We need to get past this line of thinking. Why do companies not say the same thing for the salaries they've paid former employees? "Boy, I wish we could get back the $30,000 we paid Bob between July 2011 and October 2011." We don't say that because the employee earned that and once they've earned it, it's out of your account and into theirs. Stock, though a different mechanism, needs to be thought of the same way. If someone has worked there long enough to vest that stock, they should have the option available to own that stock. Just because they made the company successful enough to not be able to afford to exercise their options in time doesn't mean we should take that possibility away from them. Whether or not it was intended years ago when it became a norm, the 90 day exercise window, at this point, is a surrogate mechanism for companies to steal compensation from employees after the fact. That's horrible.
  - khuey 11y ago
    People think that way because you can't claw back the salary but you can dilute the entries on the cap table.
ant6n 11y ago
Does anybody know of a startup where common stock is issued right away (or let's say after a probation period), and then the employee issues options back to the startup, which expire at fixed intervals corresponding to the vesting schedule? For an early startup, this would mean when there is a liquidity event, almost all of the gain would be capital gains. In Canada, it would be even better: people can defer taxes on stock and option grants until disposition (sale/bankruptcy). And the stock could be placed in a registered (i.e. tax-sheltered) account.
- ammon 11y ago
  Early startups can do this. The problem for larger (valuable) startups is that the grant of stock would be taxed (as income). Options get around this. (The tax law makes the rather dubious claim that options granted at the market value of the company have zero value.)
  - jtfairbank 11y ago
    The main tax benefit of options is that you don't have to pay taxes until you exercise them (convert them into real stock). So even if you get the options at a discount then you don't have to pay until you want to convert them / cash them in (i.e. cost to exercise is $15 and the value per share when they are granted is $20).
- keithba 11y ago
  Many early stage startups will use early exercise options with a clawback mechanism. After the 409a valuation of the startup gets too high, this option becomes much harder for employees, which is why you don't generally see it outside of the earliest stages.
  - chimeracoder 11y ago
    > After the 409a valuation of the startup gets too high, this option becomes much harder for employees (Disclaimer: I am not a lawyer, not your lawyer, this is not legal/tax advice, etc.) As I understand it, it's not just the valuation, but also the tax implications. If the options (as granted) are worth more than a certain threshold (~$100K), you can't early-exercise them without losing ISO tax treatment on the value in excess of the $100K threshold. This threshold is on an annual basis, so not exercising them early means that you quadruple[0] the amount that will be eligible AMT (which is preferable to ordinary income tax). [0] Assuming the standard vesting schedule, in which 1/4 of the shares are made available each year
abalone 11y ago
Hold on, if we get this wrong we may be lowering the value of everyone's options and hurting startups. Are there any added protections here against high turnover in infancy-stage startups? For 30(?) years since the invention of stock options there has also been a de facto added protection against high turnover in infancy-stage startups, where having to rehire and retrain employees is extremely costly. Pre-IPO you basically had to pick a team and take it to that level of maturity before you could leave. You couldn't hop around seed-level startups without giving up your options, usually. What's changed now is startups are staying private longer, leading to unfair scenarios. E.g. you're at a >$1B company with >100 employees for 6 years and you still lose your options. Traditionally a company would have gone public by that time, but now it's not, so we need a fix. But if you overcorrect and now eliminate that added protections for younger startups, you risk creating an incentive to leave companies just for the sake of options portfolio diversification. Why bet on one team when you can bet on three, since even 1/3rd of a unicorn that makes it is worth more than 100% of the one that doesn't. And that individual decision leads to higher turnover which can kill infant startups. Bottom line this fix should be more carefully targeted at what has changed to exacerbate unfair situations, namely startups that have reached "should be public" levels of maturity, yet are still staying private.
- andreasklinger 11y ago
  If not being able to buy the options when leaving is the only thing keeping your employees you are in a very bad place. Options usually have cliffs in the first year and vest monthly. So no-one would get more than they deserve.
  - abalone 11y ago
    It's not about what one "deserves", it's about protecting infant startups from high turnover. One year is extremely high, potentially fatal turnover rate for companies with <30 employees.
    - st3v3r 11y ago
      "It's not about what one "deserves", it's about protecting infant startups from high turnover." Why should any of us care about that? High turnover is a very good signal that the company is a bad one. If the company dies because of it, it was probably for a good reason.
andreasklinger 11y ago
@Harjeet thanks for writing this up and putting the work into. Imo our industry needs this. Atm there is very little incentive for experienced people to join early stage start-ups as non-founders vs starting their own thing. Tikhon summarized this quite well: https://medium.com/@tikhon/founders-it-s-not-1990-stop-treating-your-employees-like-it-is-523f48fe90cb https://medium.com/@tikhon/founders-it-s-not-1990-stop-treat... Making options more employee friendly by default in our industry is an important & good first step!
cballard 11y ago
It scares me that this could be used to justify stock options as having a value other than $0, and could be used to drive down real actual cash money salaries. I'm fine with the current situation because I have no plan to act on the options anyways - I don't invest in lottery tickets either.
- boling11 11y ago
  If you believe that the stock options of the startup you're at are worth $0, you should just ask for a market salary with 0 equity. Many companies will give you a sliding scale of cash / equity.
  - deleted 11y ago
    [deleted]
birken 11y ago
Great stuff. I've personally had to deal with these decisions and know many friends who struggled with figuring out how they could possibly pay for exercising their vested shares, in some cases after they were laid off and had no choice in the timing. If I were getting a job, I'd only consider offers with extended exercise windows. If they combined it with a more back-loaded vesting schedule [1], I wouldn't mind and would evaluate that. But dealing with the 90 day exercise window is black and white: it isn't worth all the potential trouble and risk you can be forced to take on. 1: 20%/20%/30%/30% instead of 25%/25%/25%/25%, or 6 years instead of 4 years
- JonFish85 11y ago
  Does it really matter that much? If you're a first-50 employee, then maybe your shares will be worth a decent amount of money, but your exercise price will be very low (most likely). If you're not a first-50, your options probably won't be worth all that much anyways--is it really worth discarding working for a company based entirely on your exit strategy?
  - birdmanjeremy 11y ago
    Unless I'm mistaken, even if your exercise price is low, you may still owe a crapton (technical term) in taxes if the company has a high enough valuation.
  - birken 11y ago
    Yes, it does matter. If the stock has appreciated in value, your exercise price may be low but your AMT bill may be high even if you have no liquidity at all. In my case I paid more in AMT than I did to exercise all my shares, though both individually were large and incredibly risky investments. I could afford the risk and it did eventually work out for me, but some people can't afford the risk or frankly don't want to deal with the incredible complication of doing it. Just trying to figure out what your AMT bill might be involves doing your entire tax return based on projections, which depending on what time of year you are leaving could introduce quite a bit of inaccuracy and guesswork. If you have an extended exercise window you just don't have to worry about it. If you want to take the risk of early exercise to get better tax treatment, do it. But if you don't (which I suspect will be the majority of people), all of the complication goes away completely... just sit on your options and exercise-and-sell when/if you get a chance at liquidity.
hkmurakami 11y ago
Next up (and the harder problem imo) is for companies to feel like they have enough leverage vs investors (mainly institutional VC) that they can be "nonstandard" in their option contracts (particularly during seed and A rounds). It's no coincidence that the companies that have taken the lead on this front are the startup darlings and/or repeat founders who have considerable leverage against funders (including YC companies, since their cred boost makes being nonstandard much easier than those without the brand). We've made huge progress in that direction over the last 5 years as ZIRP made money cheap (and since the main leverage investors have against companies is the scarcity of funding, their leverage has decreased dramatically since the 80's). But as the funding mania crescendo of 2015 has passed, ZIRP is being wound down, and as private and public market valuations of small young tech companies plummet, I am not sure if that trend will continue into the future. If there is one cohort that can band together to change the status quo, right now, that would be the YC companies. I am hopeful that enough momentum can be built over the next small handful of years by these companies so that "what is normal" can change permanently.
- bretpiatt 11y ago
  I understand the Fed moved the overnight rate up to 25 basis points. It isn't going to last. Rates are going to stay low for the foreseeable future for a laundry list of macro economic reasons -- the easiest to cover is the USA cannot afford to raise rates as it will increase the global consolidation of capital in the US causing severe issues for EU and AP regional (bond primarily) markets. The yield of the 10 year Treasury should show that money is still flooding in and it is still hard to find quality returns: https://ycharts.com/indicators/10_year_treasury_rate https://ycharts.com/indicators/10_year_treasury_rate
boulos 11y ago
Slightly off-topic: The title made me wonder if it was going to be about the vast difference in equity grants between founders and employees (oh well). But back on topic, harj et al. what's your opinion of Restricted Stock for early employees? I believe the issue is just that granting Restricted Stock once the company / share valuation is high enough is a definite tax impact. But it seems like nearly every pre-Series-A company could give the early employees 100% Restricked Stock. Is there some reason I'm missing that this never seems to happen? Edit: s/RSUs/Restricted Stock/ since that's what I actually mean (the weirdness of RSUs remains funny).
- harryh 11y ago
  If you are starting at a pre-Series-A company you are probably much better off getting options (that you early exercise) instead of RSUs to get cap gains tax treatment.
  - boulos 11y ago
    Oops, I should have said Restricted Stock (not RSUs). Founders get restricted stock (with vesting), so why not the first several employees?
    - harryh 11y ago
      Ya. That's prolly a good idea in many cases. You just have to be careful that the FMV doesn't climb too high, and employees correctly handle their 83b paperwork or there will be tax problems. Honestly I suspect this is why it isn't more standard. It's kind of a pain in the ass to get right. Options are just easier.
gregrata 11y ago
While this would be great, I'd personally like to see the tax code change - being taxed on the "value" of something you can't realize, and my NEVER realize, is crazy. Most of the time I've been at a startup as a founder/early employee, the strike price was low enough that I'd be willing to take a roll of the dice and just exercise, if I was going to leave. It's usually 10's of thousands of dollars. By the time I started vesting a fair amount, the TAX on that was non-trivial - 100's of thousands if not more. Something I personally can't really do.
throwaway6497 11y ago
This is great! I hope this becomes the new norm for all new startups. If a start-up doesn't want to follow this then it really shows the values founders believe in and the kind of company they want to build. Is this kind of plan unpopular with VCs; shark and Gordon Gekko ilk?
Animats 11y ago
OK, that's the option exercise period. The next step is better antidilution terms. Employees should have the same antidilution protection as founders.
oroup 11y ago
How about this - the company agrees to purchase And give to the employee any options that are vested and un-exercised for two years and agrees to cooperate w a declared set of known secondary buyers. Employees are on their own for the taxes and can always decline. * It extends the retention effect of equity since it starts kicking in at year 3 and extends smoothly forward. * It has no cash impact on the company since its buying the shares from itself. * In the early years the tax impact should be minimal. In later years there should be secondary buyers who can give employees enough cash to cover the tax liability at the cost of offering a discount. * It discourages the pure lottery players since it requires the employee to either cover the tax burden or engage a secondary firm and deal w the discount they require. * The downside for the company (aside from increased dilution vs the status quo) is that it establishes a clear market price for common equity which can be disadvantageous.
AndrewKemendo 11y ago
Sorry but this doesn't fix it, it just delays the inevitable. The main problem is that startups are offering options instead of restricted commmon stock. That means the new hire is paying for stock as an investment. That's not a benefit at all. I have talked at length elsewhere on HN [1] about the system we use to give employees actual common shares, at current strike price, and delay any taxes until exercise so they have zero out of pocket expenses until they have to pay taxes (usually only capital gains). [1] https://news.ycombinator.com/item?id=10818573 https://news.ycombinator.com/item?id=10818573
jtfairbank 11y ago
@harj - How do you feel about granting cash bonuses to employees at pre-determined intervals to cover the tax cost of exercising their options? It seems like that would solve a lot of these issues, but also give the employee the flexibility to keep a small amount of cash if they'd prefer that over the risk of owning stock. An example: I join a $5,000,000 Series A startup with a 1% equity grant that vests evenly over four years. At the end of each year, I get a $5000 bonus for the purpose of paying taxes on exercised options. It's a bit more than the tax cost for the first year, and likely a bit less in the later years, but after 4 years I've been given $20,000 which should be enough to cover most of the tax burden. If I leave at the end, I still have a 90 day window to exercise them and the money in the bank to do so. I could just keep the cash, exercise them at the end, or exercise them for a cheaper cost each year. That doesn't seem too unreasonable for post Series-A startups cost wise. An extra 5k a year is nothing compared to the cost of a developer overall.
kriro 11y ago
As I understand it the major problem is that engineers need a lot of cash to get even more cash if they exit the company and need it in 90 days. Possibly very naive question...couldn't you include a clause along the following line in your funding round(s): "Investor X guarantees that they will offer to cover the necessary cost to exercise all options in return for Y%". So basically if engineer A leaves and could exercise options the investor must offer a "bridge loan" with guaranteed ROI (either cash or just keep the equivalent options). Good investors shouldn't mind this clause that much (I'd think) as it takes away one major point of worry for engineers and lets them concentrate on their job from day 0.
spoonie 11y ago
Does having a bunch of vested, 10-year-window options on the books of a startup affect its valuation? Would a potential buyer look at that and think "That's a liability!"?

214 points by Harj 11y ago

alva 11y ago

"Many employees don’t have the money to exercise their options within such a short window and lose them." Sounds like an excellent opportunity for a business. Providing short term loans, taking x% or the exercised options. Although I am not familiar with US laws that cover this area.

JonFish85 11y ago
I really doubt whether that would work. The loans aren't necessarily "short term", as the term is pretty much not known, the shares are the lowest on the totem pole when it comes to payout and you have absolutely no control over the company. That's a lot of risk, and if the cost of exercising options is so high as to be difficult, the shares probably don't have the upside that might be required to make it work.
- alva 11y ago
  My bad, misunderstood the nature of these type of options. I was making the assumption that the options could be exercised and then sold straight away. Eg, employee has option to buy during this window at a strike of 1.1, current value 1.3. I presumed the issue was raising the initial (options x preferred price) cash plus any taxes/fees involved.
  - JonFish85 11y ago
    I believe most companies whose stock is publicly traded provide this for their employees. If you have stock in, say, Google, when your stock vests, you can have it sold and take the difference directly--no loan needed. I've never done such a thing, so it's only hearsay on my part, but that's how I've understood it to be.
    - ropiku 11y ago
      It's called a cashless exercise. You exercise and sell the stock right away so you don't need to have the money to buy. However the problem is most startups in this case are not liquid so you cannot sell your shares (with some exceptions). Google and other public companies give you direct shares via RSUs since they can sell part of your shares to cover the taxes.
rygine 11y ago
Something like this already exists. http://www.esofund.com http://www.esofund.com

Harj 11y ago

We're excited to make 10 years the new standard option exercise window for startup employees. Each of us have personally experienced someone close to us dealing with the stress of trying to exercise their options within 90 days and it sucks. We'd like to see more companies making this change, we'll be keeping the public list of YC companies who have either implemented or pledged to implement an extended window, updated here: https://triplebyte.com/ycombinator-startups/extended-options https://triplebyte.com/ycombinator-startups/extended-options

ekosz 11y ago
Hey harj! The article and plan is really interesting. I wanted to read more of the details and comparisons, but it seems the link from the sentence "We’ve created a summary of the gory details on both the business and legal aspects here" just brings you to the triplebyte homepage. Do you happen to have a direct link to that page?
- Harj 11y ago
  Sorry about that, fixed. Here's the link: https://data.triplebyte.com/extending-stock-option-exercise-window-guide-43821b47cbbd https://data.triplebyte.com/extending-stock-option-exercise-...
jsprogrammer 11y ago
How was the time period of 10 years picked? It seems rather arbitrary? As an employee, why would I want a dangling guillotine over my options/compensation?
- hkmurakami 11y ago
  iirc 10 years is the legal limit.
- Harj 11y ago
  It's ten years from the date the options are granted, which is how long the options themselves last for.

JonFish85 11y ago

As much noise as I hear about this, it's not really that simple. In my estimation, lengthening the exercise window just ensures that dilution will happen faster. If you have 5% of a company locked up by people who no longer work there, you have to find a way to reward current employees. Sure, cash is one way, but it might be easier to issue more stock, most likely of a different class. It might sound good on paper, but ultimately I really don't think this (edited: "this" = extending the window) will have any real positive impact for employees leaving the company.

ammon 11y ago
Sure it will. Keeping options is strictly better (for the employee) than not keeping options. Vested options are compensation for work that has been done. Everything you say can be true, but that does not mean that companies should not let their employees keep their options.
holman 11y ago
> If you have 5% of a company locked up by people who no longer work there, you have to find a way to reward current employees We need to get past this line of thinking. Why do companies not say the same thing for the salaries they've paid former employees? "Boy, I wish we could get back the $30,000 we paid Bob between July 2011 and October 2011." We don't say that because the employee earned that and once they've earned it, it's out of your account and into theirs. Stock, though a different mechanism, needs to be thought of the same way. If someone has worked there long enough to vest that stock, they should have the option available to own that stock. Just because they made the company successful enough to not be able to afford to exercise their options in time doesn't mean we should take that possibility away from them. Whether or not it was intended years ago when it became a norm, the 90 day exercise window, at this point, is a surrogate mechanism for companies to steal compensation from employees after the fact. That's horrible.
- khuey 11y ago
  People think that way because you can't claw back the salary but you can dilute the entries on the cap table.

ant6n 11y ago

Does anybody know of a startup where common stock is issued right away (or let's say after a probation period), and then the employee issues options back to the startup, which expire at fixed intervals corresponding to the vesting schedule? For an early startup, this would mean when there is a liquidity event, almost all of the gain would be capital gains. In Canada, it would be even better: people can defer taxes on stock and option grants until disposition (sale/bankruptcy). And the stock could be placed in a registered (i.e. tax-sheltered) account.

ammon 11y ago
Early startups can do this. The problem for larger (valuable) startups is that the grant of stock would be taxed (as income). Options get around this. (The tax law makes the rather dubious claim that options granted at the market value of the company have zero value.)
- jtfairbank 11y ago
  The main tax benefit of options is that you don't have to pay taxes until you exercise them (convert them into real stock). So even if you get the options at a discount then you don't have to pay until you want to convert them / cash them in (i.e. cost to exercise is $15 and the value per share when they are granted is $20).
keithba 11y ago
Many early stage startups will use early exercise options with a clawback mechanism. After the 409a valuation of the startup gets too high, this option becomes much harder for employees, which is why you don't generally see it outside of the earliest stages.
- chimeracoder 11y ago
  > After the 409a valuation of the startup gets too high, this option becomes much harder for employees (Disclaimer: I am not a lawyer, not your lawyer, this is not legal/tax advice, etc.) As I understand it, it's not just the valuation, but also the tax implications. If the options (as granted) are worth more than a certain threshold (~$100K), you can't early-exercise them without losing ISO tax treatment on the value in excess of the $100K threshold. This threshold is on an annual basis, so not exercising them early means that you quadruple[0] the amount that will be eligible AMT (which is preferable to ordinary income tax). [0] Assuming the standard vesting schedule, in which 1/4 of the shares are made available each year

abalone 11y ago

Hold on, if we get this wrong we may be lowering the value of everyone's options and hurting startups. Are there any added protections here against high turnover in infancy-stage startups? For 30(?) years since the invention of stock options there has also been a de facto added protection against high turnover in infancy-stage startups, where having to rehire and retrain employees is extremely costly. Pre-IPO you basically had to pick a team and take it to that level of maturity before you could leave. You couldn't hop around seed-level startups without giving up your options, usually. What's changed now is startups are staying private longer, leading to unfair scenarios. E.g. you're at a >$1B company with >100 employees for 6 years and you still lose your options. Traditionally a company would have gone public by that time, but now it's not, so we need a fix. But if you overcorrect and now eliminate that added protections for younger startups, you risk creating an incentive to leave companies just for the sake of options portfolio diversification. Why bet on one team when you can bet on three, since even 1/3rd of a unicorn that makes it is worth more than 100% of the one that doesn't. And that individual decision leads to higher turnover which can kill infant startups. Bottom line this fix should be more carefully targeted at what has changed to exacerbate unfair situations, namely startups that have reached "should be public" levels of maturity, yet are still staying private.

andreasklinger 11y ago
If not being able to buy the options when leaving is the only thing keeping your employees you are in a very bad place. Options usually have cliffs in the first year and vest monthly. So no-one would get more than they deserve.
- abalone 11y ago
  It's not about what one "deserves", it's about protecting infant startups from high turnover. One year is extremely high, potentially fatal turnover rate for companies with <30 employees.
  - st3v3r 11y ago
    "It's not about what one "deserves", it's about protecting infant startups from high turnover." Why should any of us care about that? High turnover is a very good signal that the company is a bad one. If the company dies because of it, it was probably for a good reason.

andreasklinger 11y ago

@Harjeet thanks for writing this up and putting the work into. Imo our industry needs this. Atm there is very little incentive for experienced people to join early stage start-ups as non-founders vs starting their own thing. Tikhon summarized this quite well: https://medium.com/@tikhon/founders-it-s-not-1990-stop-treating-your-employees-like-it-is-523f48fe90cb https://medium.com/@tikhon/founders-it-s-not-1990-stop-treat... Making options more employee friendly by default in our industry is an important & good first step!

cballard 11y ago

It scares me that this could be used to justify stock options as having a value other than $0, and could be used to drive down real actual cash money salaries. I'm fine with the current situation because I have no plan to act on the options anyways - I don't invest in lottery tickets either.

boling11 11y ago
If you believe that the stock options of the startup you're at are worth $0, you should just ask for a market salary with 0 equity. Many companies will give you a sliding scale of cash / equity.
- deleted 11y ago
  [deleted]

birken 11y ago

Great stuff. I've personally had to deal with these decisions and know many friends who struggled with figuring out how they could possibly pay for exercising their vested shares, in some cases after they were laid off and had no choice in the timing. If I were getting a job, I'd only consider offers with extended exercise windows. If they combined it with a more back-loaded vesting schedule [1], I wouldn't mind and would evaluate that. But dealing with the 90 day exercise window is black and white: it isn't worth all the potential trouble and risk you can be forced to take on. 1: 20%/20%/30%/30% instead of 25%/25%/25%/25%, or 6 years instead of 4 years

JonFish85 11y ago
Does it really matter that much? If you're a first-50 employee, then maybe your shares will be worth a decent amount of money, but your exercise price will be very low (most likely). If you're not a first-50, your options probably won't be worth all that much anyways--is it really worth discarding working for a company based entirely on your exit strategy?
- birdmanjeremy 11y ago
  Unless I'm mistaken, even if your exercise price is low, you may still owe a crapton (technical term) in taxes if the company has a high enough valuation.
- birken 11y ago
  Yes, it does matter. If the stock has appreciated in value, your exercise price may be low but your AMT bill may be high even if you have no liquidity at all. In my case I paid more in AMT than I did to exercise all my shares, though both individually were large and incredibly risky investments. I could afford the risk and it did eventually work out for me, but some people can't afford the risk or frankly don't want to deal with the incredible complication of doing it. Just trying to figure out what your AMT bill might be involves doing your entire tax return based on projections, which depending on what time of year you are leaving could introduce quite a bit of inaccuracy and guesswork. If you have an extended exercise window you just don't have to worry about it. If you want to take the risk of early exercise to get better tax treatment, do it. But if you don't (which I suspect will be the majority of people), all of the complication goes away completely... just sit on your options and exercise-and-sell when/if you get a chance at liquidity.

hkmurakami 11y ago

Next up (and the harder problem imo) is for companies to feel like they have enough leverage vs investors (mainly institutional VC) that they can be "nonstandard" in their option contracts (particularly during seed and A rounds). It's no coincidence that the companies that have taken the lead on this front are the startup darlings and/or repeat founders who have considerable leverage against funders (including YC companies, since their cred boost makes being nonstandard much easier than those without the brand). We've made huge progress in that direction over the last 5 years as ZIRP made money cheap (and since the main leverage investors have against companies is the scarcity of funding, their leverage has decreased dramatically since the 80's). But as the funding mania crescendo of 2015 has passed, ZIRP is being wound down, and as private and public market valuations of small young tech companies plummet, I am not sure if that trend will continue into the future. If there is one cohort that can band together to change the status quo, right now, that would be the YC companies. I am hopeful that enough momentum can be built over the next small handful of years by these companies so that "what is normal" can change permanently.

bretpiatt 11y ago
I understand the Fed moved the overnight rate up to 25 basis points. It isn't going to last. Rates are going to stay low for the foreseeable future for a laundry list of macro economic reasons -- the easiest to cover is the USA cannot afford to raise rates as it will increase the global consolidation of capital in the US causing severe issues for EU and AP regional (bond primarily) markets. The yield of the 10 year Treasury should show that money is still flooding in and it is still hard to find quality returns: https://ycharts.com/indicators/10_year_treasury_rate https://ycharts.com/indicators/10_year_treasury_rate

boulos 11y ago

Slightly off-topic: The title made me wonder if it was going to be about the vast difference in equity grants between founders and employees (oh well). But back on topic, harj et al. what's your opinion of Restricted Stock for early employees? I believe the issue is just that granting Restricted Stock once the company / share valuation is high enough is a definite tax impact. But it seems like nearly every pre-Series-A company could give the early employees 100% Restricked Stock. Is there some reason I'm missing that this never seems to happen? Edit: s/RSUs/Restricted Stock/ since that's what I actually mean (the weirdness of RSUs remains funny).

harryh 11y ago
If you are starting at a pre-Series-A company you are probably much better off getting options (that you early exercise) instead of RSUs to get cap gains tax treatment.
- boulos 11y ago
  Oops, I should have said Restricted Stock (not RSUs). Founders get restricted stock (with vesting), so why not the first several employees?
  - harryh 11y ago
    Ya. That's prolly a good idea in many cases. You just have to be careful that the FMV doesn't climb too high, and employees correctly handle their 83b paperwork or there will be tax problems. Honestly I suspect this is why it isn't more standard. It's kind of a pain in the ass to get right. Options are just easier.

gregrata 11y ago

While this would be great, I'd personally like to see the tax code change - being taxed on the "value" of something you can't realize, and my NEVER realize, is crazy. Most of the time I've been at a startup as a founder/early employee, the strike price was low enough that I'd be willing to take a roll of the dice and just exercise, if I was going to leave. It's usually 10's of thousands of dollars. By the time I started vesting a fair amount, the TAX on that was non-trivial - 100's of thousands if not more. Something I personally can't really do.

throwaway6497 11y ago

This is great! I hope this becomes the new norm for all new startups. If a start-up doesn't want to follow this then it really shows the values founders believe in and the kind of company they want to build. Is this kind of plan unpopular with VCs; shark and Gordon Gekko ilk?

Animats 11y ago

OK, that's the option exercise period. The next step is better antidilution terms. Employees should have the same antidilution protection as founders.

oroup 11y ago

How about this - the company agrees to purchase And give to the employee any options that are vested and un-exercised for two years and agrees to cooperate w a declared set of known secondary buyers. Employees are on their own for the taxes and can always decline. * It extends the retention effect of equity since it starts kicking in at year 3 and extends smoothly forward. * It has no cash impact on the company since its buying the shares from itself. * In the early years the tax impact should be minimal. In later years there should be secondary buyers who can give employees enough cash to cover the tax liability at the cost of offering a discount. * It discourages the pure lottery players since it requires the employee to either cover the tax burden or engage a secondary firm and deal w the discount they require. * The downside for the company (aside from increased dilution vs the status quo) is that it establishes a clear market price for common equity which can be disadvantageous.

AndrewKemendo 11y ago

Sorry but this doesn't fix it, it just delays the inevitable. The main problem is that startups are offering options instead of restricted commmon stock. That means the new hire is paying for stock as an investment. That's not a benefit at all. I have talked at length elsewhere on HN [1] about the system we use to give employees actual common shares, at current strike price, and delay any taxes until exercise so they have zero out of pocket expenses until they have to pay taxes (usually only capital gains). [1] https://news.ycombinator.com/item?id=10818573 https://news.ycombinator.com/item?id=10818573

jtfairbank 11y ago

@harj - How do you feel about granting cash bonuses to employees at pre-determined intervals to cover the tax cost of exercising their options? It seems like that would solve a lot of these issues, but also give the employee the flexibility to keep a small amount of cash if they'd prefer that over the risk of owning stock. An example: I join a $5,000,000 Series A startup with a 1% equity grant that vests evenly over four years. At the end of each year, I get a $5000 bonus for the purpose of paying taxes on exercised options. It's a bit more than the tax cost for the first year, and likely a bit less in the later years, but after 4 years I've been given $20,000 which should be enough to cover most of the tax burden. If I leave at the end, I still have a 90 day window to exercise them and the money in the bank to do so. I could just keep the cash, exercise them at the end, or exercise them for a cheaper cost each year. That doesn't seem too unreasonable for post Series-A startups cost wise. An extra 5k a year is nothing compared to the cost of a developer overall.

kriro 11y ago

As I understand it the major problem is that engineers need a lot of cash to get even more cash if they exit the company and need it in 90 days. Possibly very naive question...couldn't you include a clause along the following line in your funding round(s): "Investor X guarantees that they will offer to cover the necessary cost to exercise all options in return for Y%". So basically if engineer A leaves and could exercise options the investor must offer a "bridge loan" with guaranteed ROI (either cash or just keep the equivalent options). Good investors shouldn't mind this clause that much (I'd think) as it takes away one major point of worry for engineers and lets them concentrate on their job from day 0.

spoonie 11y ago

Does having a bunch of vested, 10-year-window options on the books of a startup affect its valuation? Would a potential buyer look at that and think "That's a liability!"?