10 ms·

A Guide to Employee Equity

200 points by craigcannon 10y ago

abalone 10y ago
Hi, thanks for the lucid interview. Why the 3 year minimum service period to extend the exercise window? > The main point is that if someone decides to not exercise and/or is not able to exercise and they leave the company, their options typically have a three-month expiration. So, unless the person exercises them within three months after leaving, they lose those options, which is kind of crazy to think about because the person has already invested time, already contributed to the company, already meaningfully helped the business. > So at Gusto... everyone that has stayed here at least three years, their expiration changes from three months to ten years. Doesn't everything just said about it being "crazy" to lose your options apply if you leave at 2.5 years? You've "already invested time, already contributed..." Why should you lose vested options, ever? I asked Adam D'Angelo about minimum service periods and he responded that it'd be more transparent to have a longer cliff. My perspective is that backloaded vesting would be closer to the probable intended effect here (a barrier to leaving early, but you don't lose everything). Put another way... Aren't "minimum service periods" exploiting opaqueness to make them seem like friendlier terms than longer cliffs or backloaded vesting?
- serge2k 10y ago
  > The thought process is that if hypothetically, an employee has to move home to live with their family or they’re getting married to a childhood sweetheart across the country, these are all things that are great decisions that should not be punished Unless you have only been at the company only 2 years 11 months. Then you have earned nothing. Don't let the door hit you on the way out. > My perspective is that backloaded vesting would be closer to the probable intended effect here (a barrier to leaving early, but you don't lose everything). Why is the approach of a cliff followed by getting a small amount of your stock every month afterwards not sufficient?
  - abalone 10y ago
    > Why is the approach of a cliff followed by getting a small amount of your stock every month afterwards not sufficient? I think it is. My point is either a longer cliff or backloaded vesting would be a more transparent replacement for "90 day exercise window for X years, 10 year window after that". What you may not realize is that under the 90 day exercise window term, you don't actually "get" a small amount of stock every month. But that's exactly what most people think happens. In truth, you may lose it all. It is clearer to say "vesting = you get it", and then spell out the vesting terms clearly and directly. If you think people should actually be able to walk with 20%-25% of their grant after 1 year, like what their vesting schedule implies, then cool. If you think people should actually stay longer than that like what the 90 day rule kind of enforces as a side effect, then ok, no judgement, but make it transparent. Call it a multi-year cliff or a 10/20/30/40 vesting schedule, whatever clearly states the expectations. But "vesting" should always mean "you get it".
    - hkmurakami 10y ago
      Well if you vest, then you do "get it". But you vest options, which is not shares. You "get" the option to buy shares in the company at $X strike price. The confusion seems to lie more in ISOs vs RSUs (or just plain equity, which is what most people have exposure to via the public market), rather than what "vesting" means. The problem is that vesting to most will inaccurately imply "getting" something they are not.
      - teej 10y ago
        A major difference between a 3 month window and a 10 month window is that with the former, you "get" to purchase lottery tickets. With the latter you have massively reduced downside risk.
      - abalone 10y ago
        You are arguing technical details when the issue is one of exploiting laypeoples' misunderstanding of technical details. It's not about confusing options for shares. It's confusion about how the 90 day window works. It is not at all obvious that the tax consequences may be many times greater than the strike price, resulting in you losing your vested options. This has been a surprise for many otherwise smart people. If you replaced it with more transparent terms, such as a "cliff that goes all the way to the IPO" or a heavily backloaded vesting schedule, I'd say most would consider it a below-market offer, even though it's roughly comparable. That's a reflection of the opacity and poor understanding of the standard terms.
- terravion 10y ago
  This is a really tough policy to get right because there is a continuum of cases. At one end, someone has vested shares and is pushed out for being harmful to the company. At the other you have a valued loyal employee that is going to business school for two years and hopefully coming back. It is a no-brainer that the employee going to school should get the exercise period extended--but if the toxic employee doesn't want to risk cash, why should the staying employees take dilution on what was probably unhelpful service? It is really hard to make a contract that fully reflects what's fair. I think the thing that gets missed a lot in these discussions is that just because default docs are super company favorable (i.e. assuming the former rather than the latter), in the opposite case one can make an exception.
  - toomuchtodo 10y ago
    > It is a no-brainer that the employee going to school should get the exercise period extended--but if the toxic employee doesn't want to risk cash, why should the staying employees take dilution on what was probably unhelpful service? Because in both cases, they earned their options. You can't take back their salary compensation, why should you be able to take back their options? > It is really hard to make a contract that fully reflects what's fair. No, it isn't. If you've earned your compensation, you have earned it. Unless you mean its difficult to write a contract where a company can weasel out of their obligations when its suits their purposes; I would agree with that.
    - beambot 10y ago
      > they earned their options Yes, and that option expires in 3 months after departing... In the same way that publicly traded stock options (ie calls) typically have expiration dates. Part of the conflict here is that "options" aren't "shares" -- the option, including all terms (such as execution windows) are what is earned. Everything is known upfront. If you wanted comp to be around shares, then just issue shares via RSPA and deal with the cap table consequences and extra legal wrangling. This entire "problem" is caused by tax code: you owe the IRS on gains from option conversion, even though the underlying asset is entirely illiquid and frequently non-transferrable. Sounds like a "real" solution is to lobby for tax code changes. EDIT: to be clear... I'm not saying I agree with short expirations after departure. But there needs to be a clear distinction between shares, options, and 'intent'. Clearly the existing two ways of comp are lacking since there are either tax consequences (options) or out of pocket employee expenses to purchase (shares).
Artlav 10y ago
Interesting. I thought "equity" meant just giving stock to the employees after they worked X years, not the mess of complexity, taxes and spending your own money that it actually is...
- mgummelt 10y ago
  It mostly is with RSUs. Stock options are far more complicated.
  - hkmurakami 10y ago
    Even with RSUs, you'd have a tax obligation on illiquid RSUs if not for the terminology used in the contract to delay the actual "vesting event" in order to delay a tax event.
    - mgummelt 10y ago
      My understanding is that taxes for RSUs are typically withheld. See https://blog.wealthfront.com/stock-options-versus-rsu/ https://blog.wealthfront.com/stock-options-versus-rsu/
      - marcins 10y ago
        Depends on where you are - I believe that's the case in the US, but for example in Australia when RSUs fully vest the value at vesting is included as income on your tax return at the end of that financial year, so you don't actually pay the tax until after you file and are assessed.
      - hkmurakami 10y ago
        Right, they're withheld due to adding a clause to achieve this. Without that workaround, RSUs would intrinsically trigger a tax event.
ditonal 10y ago
Gusto (people being interviewed) formerly known as ZenPayroll, fired an acquaintance about a week before their options vested. Now they are trying to educate people on equity? You would need a full-semester class to explain the many ways in which VCs and their "startup" cronies can screw you out of compensation (e.g, dilution, selling at a low price and then using staying bonuses to kick in liquidation preference, 30 day exercise windows making it financially prohibitive to exercise, etc). Do companies even IPO anymore? If Uber still hasn't gone public, when do you think Gusto is? If these companies actually wanted us to value their equity, they would reimburse independent corporate lawyers to review the contract. Higher profile people like Zach Holman are already speaking up. It's going to take a while, but I already see programmers realizing that the smart move is either being a founder or going to work for GoogMicroAppleSoft. It's still to be determined whether the VCs will finally realize their inability to hire is their own damn fault and fix equity. Only the naive and the financially illiterate accept these equity offers as worth anything.
- fosk 10y ago
  > If Uber still hasn't gone public, when do you think Gusto is? IPO is only one of the exit strategies available, acquisitions being another one (selling to the private market being another one, etc). A company doesn't necessarily have to IPO in order to return a value to its shareholders.
  - enobrev 10y ago
    Unfortunately, an acquisition isn't necessarily all that valuable to employees.
    - duaneb 10y ago
      How do you figure? If they've vested they'll make cash.
      - icedchai 10y ago
        Wrong. Have you ever been part of an acquisition? More than likely you are given stock (or options, if you're still vesting) in the acquiring company. This can happen several times over, as your acquirer is acquired. You may, infact, never make any cash...
dawhizkid 10y ago
IMO medium sized startups that have raised a lot of money are the worst to join - still giving out options but are too expensive to consider early exercise and too expensive to exercise if you end up leaving after 1 year. IMO you should either join a super early startup that you really believe in and pay a few thousand to early exercise OR join a proven late stage startup that converted to RSUs and avoid paying for options in the first place.
danieltillett 10y ago
Are there any good studies on how much options motivate employees? I assume there are a large percentage of employees who value options at zero.
emilsedgh 10y ago
You should read this guide if you are: You’re a startup founder who wants to learn the basics behind offering employee equity You’re an employer who wants to offer equity to new hires You want to be wildly entertained (and learn some stuff along the way) Where can I found such guide intended for employees who are being offered equity?
- johnhess 10y ago
  I really like this one: https://blog.alexmaccaw.com/an-engineers-guide-to-stock-options https://blog.alexmaccaw.com/an-engineers-guide-to-stock-opti...
sl8r 10y ago
Several comments allude to liquidation preference / stock-participation for preferred stock holders. While both of these terms do bite into the common share stake, as others have pointed out, their effect is model-able; so you can see where you stand under different exit scenarios. Ask your employer, or get access to something like Pitchbook, to find out: 1. The amount of $ raised from investors, along with the % of equity in common vs preferred shares. 2. The liquidation preference (1.0x is common) for preferred. 3. Whether the preferred stock participates (not doing so is common). 4. What % of common equity your grant represents. You'll then be able to draw a payout diagram (like this[1], written by Andy Rachleff) showing how much you'll make for different exit prices. Be aware that under some complexities, like the fact that later rounds will cause dilution and that certain exit scenarios scenarios (like acquisitions) may trigger a different liquidation preference for preferred stock. [1] https://blog.wealthfront.com/wildly-different-financial-outcomes-employees-acquisitions/ https://blog.wealthfront.com/wildly-different-financial-outc...
JonFish85 10y ago
These articles make front-page HN every couple of weeks and I find it very tiresome. Stock options most likely aren't going to be "worth it" (which is not to say that they're going to be entirely worthless, but $25k before taxes isn't turning any heads). Some bullet points: * Stock options for common stock mean you're dead last in line for making money. Before you are banks/lenders/creditors, investors & board members, founders and any extremely talented management that were brought in. * Unless everything goes absolutely amazing and according to plan, your options are not going to be worth much money. All it takes is one down round or a market downturn during your lockup and you're wiped out. * If your company goes IPO, you have a long time before you can do anything with your shares. In the meantime, the market may not be kind, and your options might be underwater. * If you get acquired, big flashy numbers can turn sour pretty quickly. "Top-billed" numbers (e.g. Company acquired for $2bn) can have a lot of fine print. Your options very well may be worthless, or you may be subject to lots of earn-outs that A) you probably won't hit or B) the acquirer has no real reason to help you hit them. And that's not to mention the whole ball of fun that comes along with figuring out your taxes. People (speaking mostly just about friends & coworkers) spend far too much time fussing about various outcomes and calculating things when, at the end of the day, it's not worth worrying about. You're probably not going to get rich off of stock options; negotiate for what you think you're worth, but once you have, forget about them. Of course, if you're a founder or a first-5 employee, the situation probably warrants a lot more scrutiny and have your lawyer/accountant look over the paperwork. But if you're not, it's really probably not worth more than an hour or two of reading the paperwork and asking some questions.
- hkmurakami 10y ago
  I help friends with assessing their job offers on a monthly basis and I agree. (in fact I am meeting one friend this evening to silently be on a call with him as they discuss his offer). I tell them "Don't join unless you are happy with your base salary and won't get anything else. Consider your options to be worth $0 when making a decision to join or not join."
pyrrhotech 10y ago
long term capital gains tax can be up to 33% in CA: http://taxfoundation.org/blog/how-high-are-capital-gains-tax-rates-your-state http://taxfoundation.org/blog/how-high-are-capital-gains-tax...
- deleted 10y ago
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- siberianbear 10y ago
  I'm curious where this site came up with this 33% number. For California, I calculated 20 (federal) + 3.8 (federal net investment) + 13.3 (state) = 37.1% For states with no income tax (Texas, Nevada, etc.), I calculated 23.8% (20 + 3.8), but the site you referred to lists 25.0%
deleted 10y ago
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hkmurakami 10y ago
Here's a cynical realization I had regarding options. It may be an unpopular position but one worth articulating. We like to believe (and are told, with marketing spin) from founders/hiring managers that we're being given a block of options to purchase shares in the company. We evaluate this grant, given the commonly presenting "key terms" of strike price, company valuation, ownership %, etc., to have some value $X [1]. What we're not explained is that we're actually given a block of options with expiration date of D (where D is most commonly length of tenure + 90 days). What I hadn't realized before is that this D really makes a difference in the value of an option. Ask any trader about the value of an option, and they'll explain to you that short dated options are the cheapest, and option contracts (ex: puts, calls) become more expensive as the expiration dates become longer. Longer expiration dates directly translate to a higher intrinsic value of those options. So going back to the option grant given to the startup employee, we can see that the expiration date clause on those options are a "key term" that is rarely, if ever, a point of contention. People negotiate for a larger number of options all the time (often trading salary for more options), but when's the last time someone tried to negotiate and trade the number of options for a longer expiration? That would actually be trading some amount of value for another amount of value, but it's never done. But this is something you could do if you wanted to open a position on say, $AAPL, using options. You'd intently consider both the strike and the expiration date for an $AAPL option, and look at how much each would cost. A longer expiration contract with the same strike price will always cost more. Some hedge fund managers have very long dated (3+ years), out of money (ex: the strike price is higher than the current price) call options on Oil. Those contracts would be much cheaper if they'd expire in 3 months, not 3+ years. So when we say "we've earned those options", it's not entirely accurate. We've actually "earned those options with expiration D" (and other terms). Holding strike price constant, option grants with "equivalent value" with different expiration dates would mean that the longer the expiration date, the fewer options you should get. Of course, figuring out the value of a longer expiration date would be incredibly difficult. I certainly have no idea how to price this, especially given that the value of the underlying asset (the company) is already a bit of a black box in the first place. But this is something worth being aware of, so that we can understand that there is real value at stake in the ongoing expiration date discussion. BUT -- we shouldn't forget that if the founders' intent truly is to "give Z% of the company to an employee in a tax efficient manner" (like they say in all their conversations), and if "the value of the option grant as computed by the value of the underlying option contract" is not a concern, then the founders will not actually be "giving up" any value since that value was inadvertently created and was never intended to be claimed by the founders/company in the first place. In this case, a founder who wishes to be consistent with herself and her own narrative should definitely adopt a long expiration option contract to make the reality of the situation as close to the narrative as possible, given the legal limitations. [1] I tell friends to consider their option grant as $X == $0 to simplify things and protect themselves from being mislead, but all options do have some nonzero value.
tyre 10y ago
As an ex-Gusto employee, let me provide another side. Gusto also has a company bylaw where they can veto any employee sale. Not Right of First Refusal, but can flat out veto an employee selling stock to buy a home, pay off student loans, start a company, etc. This isn't covered at the time of hiring, nor present in the option agreement provided to employees. As an early ZenPayroll (now Gusto) employee and a leader of the culture up to 70 employees, I'm honestly embarrassed by the company's stance here. It's hypocritical (in my opinion) to the values talked about by the company. Employees should benefit from the success of the company they worked hard to build. As a current founder, believe me I understand why founders get a much larger share. But at least be transparent. You can read about our approach to equity, and everything else, here: https://octopoedi.gitbooks.io/employee-handbook/content/ https://octopoedi.gitbooks.io/employee-handbook/content/
- abalone 10y ago
  It should be presented transparently, but that's a pretty standard term and there's a good reason for it. Those so-called secondary sales put more owners onto the cap table which can cause accounting and investor-relations headaches for small companies. Things like information rights, control issues, regulatory responsibilities. At a pre-IPO stage, it can be good for the company (including option-holders) to control who they invite in to own it. Basically Facebook and a few others tried allowing secondary sales, had problems, and since then the industry has retreated from that idea.
  - mgummelt 10y ago
    That is a real problem, yes, but the fair solution is right of first refusal, not vetoing a sale.
    - ncd 10y ago
      Precisely--this is the exact reason that ROFRs exist. They make sure that a company has the option of keeping its cap table clean in the event of a sale by an employee. What these companies want is to have their cake and eat it too: prohibit sales of stock to outsiders without having to pay for the privilege. The cynic in me says that this is because companies of this kind are far less likely to be in the position to exercise ROFRs and pay for it via profits simply because they are not yet profitable. And I'm sure investors don't like the idea of their capital being used to buy back shares of vested stock from employees.
tn13 10y ago
Despite reading many such articles there is one thing I have never understood. Under what circumstances it is NOT a good idea to exercises as soon as possible? Only one scenario is where you have to pay a large sum for this early exercise and you see a risk that the company might go out of business. But in such cases if the amount is large you are probably at the wrong company in first place.
- spoonie 10y ago
  My understanding is that you may have taken a lot of equity in exchange for salary, so much so that you literally can't afford to exercise any significant portion of the options.
  - tn13 10y ago
    In that case you have already taken crazy risk and if you still have doubts that company wont do well in future you should probably quit.
driverdan 10y ago
I stopped reading when I hit the part about 5 year vesting. Why would anyone put up with such a long cycle?
- hibikir 10y ago
  because today there are bigger problems with taking options than a 5 year schedule? a 4 year schedule was important when a company wanted to go IPO quickly, but today, where startups are private for 8+ years, and option terms make selling the options in the secondary market very difficult, it doesn't matter if you vest in 4 or 5 years: next liquidity event might be in 10 for all you know. I work for a company that is very likely to make it, but given that I don't know when in the world we'd even attempt to go public, I count my options at zero. Will I still be happy here in 2 years? 5? 8? I better get used to being happy here until there is a liquidity event, or the equity is worthless to me. I know people with 7 digits in paper vested options, but they can't exercise them: It's hard to afford them, the taxes are killers. Until there is a liquidity event, they have nothing, and all the promise of riches goes away 90 days after they leave the company. In practice, they might have a 10 year real vesting schedule. I don't know about you, but I don't know that many people that have stayed 10 years at a tech company. So that's why the long vesting cycle is fine in practice: The real cycle to getting cash out is even longer.
  - spoonie 10y ago
    Why can't you exercise and move on? Are you an early employee with lots of equity at a low strike price and a low enough salary that you can't pay the tax to exercise? Are you risk averse and don't want to pay to exercise until you know there will be a payoff?
neom 10y ago
We're trying to build things in a different way: https://www.linkedin.com/pulse/part-i-how-were-building-stae-john-edgar https://www.linkedin.com/pulse/part-i-how-were-building-stae... The comments here have shown some new thinking for me about employee as owner, love reading about it and welcome the input of others on building in a human first manner.

200 points by craigcannon 10y ago

Hi, thanks for the lucid interview. Why the 3 year minimum service period to extend the exercise window? > The main point is that if someone decides to not exercise and/or is not able to exercise and they leave the company, their options typically have a three-month expiration. So, unless the person exercises them within three months after leaving, they lose those options, which is kind of crazy to think about because the person has already invested time, already contributed to the company, already meaningfully helped the business. > So at Gusto... everyone that has stayed here at least three years, their expiration changes from three months to ten years. Doesn't everything just said about it being "crazy" to lose your options apply if you leave at 2.5 years? You've "already invested time, already contributed..." Why should you lose vested options, ever? I asked Adam D'Angelo about minimum service periods and he responded that it'd be more transparent to have a longer cliff. My perspective is that backloaded vesting would be closer to the probable intended effect here (a barrier to leaving early, but you don't lose everything). Put another way... Aren't "minimum service periods" exploiting opaqueness to make them seem like friendlier terms than longer cliffs or backloaded vesting?

serge2k 10y ago
> The thought process is that if hypothetically, an employee has to move home to live with their family or they’re getting married to a childhood sweetheart across the country, these are all things that are great decisions that should not be punished Unless you have only been at the company only 2 years 11 months. Then you have earned nothing. Don't let the door hit you on the way out. > My perspective is that backloaded vesting would be closer to the probable intended effect here (a barrier to leaving early, but you don't lose everything). Why is the approach of a cliff followed by getting a small amount of your stock every month afterwards not sufficient?
- abalone 10y ago
  > Why is the approach of a cliff followed by getting a small amount of your stock every month afterwards not sufficient? I think it is. My point is either a longer cliff or backloaded vesting would be a more transparent replacement for "90 day exercise window for X years, 10 year window after that". What you may not realize is that under the 90 day exercise window term, you don't actually "get" a small amount of stock every month. But that's exactly what most people think happens. In truth, you may lose it all. It is clearer to say "vesting = you get it", and then spell out the vesting terms clearly and directly. If you think people should actually be able to walk with 20%-25% of their grant after 1 year, like what their vesting schedule implies, then cool. If you think people should actually stay longer than that like what the 90 day rule kind of enforces as a side effect, then ok, no judgement, but make it transparent. Call it a multi-year cliff or a 10/20/30/40 vesting schedule, whatever clearly states the expectations. But "vesting" should always mean "you get it".
  - hkmurakami 10y ago
    Well if you vest, then you do "get it". But you vest options, which is not shares. You "get" the option to buy shares in the company at $X strike price. The confusion seems to lie more in ISOs vs RSUs (or just plain equity, which is what most people have exposure to via the public market), rather than what "vesting" means. The problem is that vesting to most will inaccurately imply "getting" something they are not.
    - teej 10y ago
      A major difference between a 3 month window and a 10 month window is that with the former, you "get" to purchase lottery tickets. With the latter you have massively reduced downside risk.
    - abalone 10y ago
      You are arguing technical details when the issue is one of exploiting laypeoples' misunderstanding of technical details. It's not about confusing options for shares. It's confusion about how the 90 day window works. It is not at all obvious that the tax consequences may be many times greater than the strike price, resulting in you losing your vested options. This has been a surprise for many otherwise smart people. If you replaced it with more transparent terms, such as a "cliff that goes all the way to the IPO" or a heavily backloaded vesting schedule, I'd say most would consider it a below-market offer, even though it's roughly comparable. That's a reflection of the opacity and poor understanding of the standard terms.
terravion 10y ago
This is a really tough policy to get right because there is a continuum of cases. At one end, someone has vested shares and is pushed out for being harmful to the company. At the other you have a valued loyal employee that is going to business school for two years and hopefully coming back. It is a no-brainer that the employee going to school should get the exercise period extended--but if the toxic employee doesn't want to risk cash, why should the staying employees take dilution on what was probably unhelpful service? It is really hard to make a contract that fully reflects what's fair. I think the thing that gets missed a lot in these discussions is that just because default docs are super company favorable (i.e. assuming the former rather than the latter), in the opposite case one can make an exception.
- toomuchtodo 10y ago
  > It is a no-brainer that the employee going to school should get the exercise period extended--but if the toxic employee doesn't want to risk cash, why should the staying employees take dilution on what was probably unhelpful service? Because in both cases, they earned their options. You can't take back their salary compensation, why should you be able to take back their options? > It is really hard to make a contract that fully reflects what's fair. No, it isn't. If you've earned your compensation, you have earned it. Unless you mean its difficult to write a contract where a company can weasel out of their obligations when its suits their purposes; I would agree with that.
  - beambot 10y ago
    > they earned their options Yes, and that option expires in 3 months after departing... In the same way that publicly traded stock options (ie calls) typically have expiration dates. Part of the conflict here is that "options" aren't "shares" -- the option, including all terms (such as execution windows) are what is earned. Everything is known upfront. If you wanted comp to be around shares, then just issue shares via RSPA and deal with the cap table consequences and extra legal wrangling. This entire "problem" is caused by tax code: you owe the IRS on gains from option conversion, even though the underlying asset is entirely illiquid and frequently non-transferrable. Sounds like a "real" solution is to lobby for tax code changes. EDIT: to be clear... I'm not saying I agree with short expirations after departure. But there needs to be a clear distinction between shares, options, and 'intent'. Clearly the existing two ways of comp are lacking since there are either tax consequences (options) or out of pocket employee expenses to purchase (shares).

Artlav 10y ago

Interesting. I thought "equity" meant just giving stock to the employees after they worked X years, not the mess of complexity, taxes and spending your own money that it actually is...

mgummelt 10y ago
It mostly is with RSUs. Stock options are far more complicated.
- hkmurakami 10y ago
  Even with RSUs, you'd have a tax obligation on illiquid RSUs if not for the terminology used in the contract to delay the actual "vesting event" in order to delay a tax event.
  - mgummelt 10y ago
    My understanding is that taxes for RSUs are typically withheld. See https://blog.wealthfront.com/stock-options-versus-rsu/ https://blog.wealthfront.com/stock-options-versus-rsu/
    - marcins 10y ago
      Depends on where you are - I believe that's the case in the US, but for example in Australia when RSUs fully vest the value at vesting is included as income on your tax return at the end of that financial year, so you don't actually pay the tax until after you file and are assessed.
    - hkmurakami 10y ago
      Right, they're withheld due to adding a clause to achieve this. Without that workaround, RSUs would intrinsically trigger a tax event.

ditonal 10y ago

Gusto (people being interviewed) formerly known as ZenPayroll, fired an acquaintance about a week before their options vested. Now they are trying to educate people on equity? You would need a full-semester class to explain the many ways in which VCs and their "startup" cronies can screw you out of compensation (e.g, dilution, selling at a low price and then using staying bonuses to kick in liquidation preference, 30 day exercise windows making it financially prohibitive to exercise, etc). Do companies even IPO anymore? If Uber still hasn't gone public, when do you think Gusto is? If these companies actually wanted us to value their equity, they would reimburse independent corporate lawyers to review the contract. Higher profile people like Zach Holman are already speaking up. It's going to take a while, but I already see programmers realizing that the smart move is either being a founder or going to work for GoogMicroAppleSoft. It's still to be determined whether the VCs will finally realize their inability to hire is their own damn fault and fix equity. Only the naive and the financially illiterate accept these equity offers as worth anything.

fosk 10y ago
> If Uber still hasn't gone public, when do you think Gusto is? IPO is only one of the exit strategies available, acquisitions being another one (selling to the private market being another one, etc). A company doesn't necessarily have to IPO in order to return a value to its shareholders.
- enobrev 10y ago
  Unfortunately, an acquisition isn't necessarily all that valuable to employees.
  - duaneb 10y ago
    How do you figure? If they've vested they'll make cash.
    - icedchai 10y ago
      Wrong. Have you ever been part of an acquisition? More than likely you are given stock (or options, if you're still vesting) in the acquiring company. This can happen several times over, as your acquirer is acquired. You may, infact, never make any cash...

dawhizkid 10y ago

IMO medium sized startups that have raised a lot of money are the worst to join - still giving out options but are too expensive to consider early exercise and too expensive to exercise if you end up leaving after 1 year. IMO you should either join a super early startup that you really believe in and pay a few thousand to early exercise OR join a proven late stage startup that converted to RSUs and avoid paying for options in the first place.

danieltillett 10y ago

Are there any good studies on how much options motivate employees? I assume there are a large percentage of employees who value options at zero.

emilsedgh 10y ago

You should read this guide if you are: You’re a startup founder who wants to learn the basics behind offering employee equity You’re an employer who wants to offer equity to new hires You want to be wildly entertained (and learn some stuff along the way) Where can I found such guide intended for employees who are being offered equity?

johnhess 10y ago
I really like this one: https://blog.alexmaccaw.com/an-engineers-guide-to-stock-options https://blog.alexmaccaw.com/an-engineers-guide-to-stock-opti...

sl8r 10y ago

Several comments allude to liquidation preference / stock-participation for preferred stock holders. While both of these terms do bite into the common share stake, as others have pointed out, their effect is model-able; so you can see where you stand under different exit scenarios. Ask your employer, or get access to something like Pitchbook, to find out: 1. The amount of $ raised from investors, along with the % of equity in common vs preferred shares. 2. The liquidation preference (1.0x is common) for preferred. 3. Whether the preferred stock participates (not doing so is common). 4. What % of common equity your grant represents. You'll then be able to draw a payout diagram (like this[1], written by Andy Rachleff) showing how much you'll make for different exit prices. Be aware that under some complexities, like the fact that later rounds will cause dilution and that certain exit scenarios scenarios (like acquisitions) may trigger a different liquidation preference for preferred stock. [1] https://blog.wealthfront.com/wildly-different-financial-outcomes-employees-acquisitions/ https://blog.wealthfront.com/wildly-different-financial-outc...

JonFish85 10y ago

These articles make front-page HN every couple of weeks and I find it very tiresome. Stock options most likely aren't going to be "worth it" (which is not to say that they're going to be entirely worthless, but $25k before taxes isn't turning any heads). Some bullet points: * Stock options for common stock mean you're dead last in line for making money. Before you are banks/lenders/creditors, investors & board members, founders and any extremely talented management that were brought in. * Unless everything goes absolutely amazing and according to plan, your options are not going to be worth much money. All it takes is one down round or a market downturn during your lockup and you're wiped out. * If your company goes IPO, you have a long time before you can do anything with your shares. In the meantime, the market may not be kind, and your options might be underwater. * If you get acquired, big flashy numbers can turn sour pretty quickly. "Top-billed" numbers (e.g. Company acquired for $2bn) can have a lot of fine print. Your options very well may be worthless, or you may be subject to lots of earn-outs that A) you probably won't hit or B) the acquirer has no real reason to help you hit them. And that's not to mention the whole ball of fun that comes along with figuring out your taxes. People (speaking mostly just about friends & coworkers) spend far too much time fussing about various outcomes and calculating things when, at the end of the day, it's not worth worrying about. You're probably not going to get rich off of stock options; negotiate for what you think you're worth, but once you have, forget about them. Of course, if you're a founder or a first-5 employee, the situation probably warrants a lot more scrutiny and have your lawyer/accountant look over the paperwork. But if you're not, it's really probably not worth more than an hour or two of reading the paperwork and asking some questions.

hkmurakami 10y ago
I help friends with assessing their job offers on a monthly basis and I agree. (in fact I am meeting one friend this evening to silently be on a call with him as they discuss his offer). I tell them "Don't join unless you are happy with your base salary and won't get anything else. Consider your options to be worth $0 when making a decision to join or not join."

pyrrhotech 10y ago

long term capital gains tax can be up to 33% in CA: http://taxfoundation.org/blog/how-high-are-capital-gains-tax-rates-your-state http://taxfoundation.org/blog/how-high-are-capital-gains-tax...

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siberianbear 10y ago
I'm curious where this site came up with this 33% number. For California, I calculated 20 (federal) + 3.8 (federal net investment) + 13.3 (state) = 37.1% For states with no income tax (Texas, Nevada, etc.), I calculated 23.8% (20 + 3.8), but the site you referred to lists 25.0%

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hkmurakami 10y ago

Here's a cynical realization I had regarding options. It may be an unpopular position but one worth articulating. We like to believe (and are told, with marketing spin) from founders/hiring managers that we're being given a block of options to purchase shares in the company. We evaluate this grant, given the commonly presenting "key terms" of strike price, company valuation, ownership %, etc., to have some value $X [1]. What we're not explained is that we're actually given a block of options with expiration date of D (where D is most commonly length of tenure + 90 days). What I hadn't realized before is that this D really makes a difference in the value of an option. Ask any trader about the value of an option, and they'll explain to you that short dated options are the cheapest, and option contracts (ex: puts, calls) become more expensive as the expiration dates become longer. Longer expiration dates directly translate to a higher intrinsic value of those options. So going back to the option grant given to the startup employee, we can see that the expiration date clause on those options are a "key term" that is rarely, if ever, a point of contention. People negotiate for a larger number of options all the time (often trading salary for more options), but when's the last time someone tried to negotiate and trade the number of options for a longer expiration? That would actually be trading some amount of value for another amount of value, but it's never done. But this is something you could do if you wanted to open a position on say, $AAPL, using options. You'd intently consider both the strike and the expiration date for an $AAPL option, and look at how much each would cost. A longer expiration contract with the same strike price will always cost more. Some hedge fund managers have very long dated (3+ years), out of money (ex: the strike price is higher than the current price) call options on Oil. Those contracts would be much cheaper if they'd expire in 3 months, not 3+ years. So when we say "we've earned those options", it's not entirely accurate. We've actually "earned those options with expiration D" (and other terms). Holding strike price constant, option grants with "equivalent value" with different expiration dates would mean that the longer the expiration date, the fewer options you should get. Of course, figuring out the value of a longer expiration date would be incredibly difficult. I certainly have no idea how to price this, especially given that the value of the underlying asset (the company) is already a bit of a black box in the first place. But this is something worth being aware of, so that we can understand that there is real value at stake in the ongoing expiration date discussion. BUT -- we shouldn't forget that if the founders' intent truly is to "give Z% of the company to an employee in a tax efficient manner" (like they say in all their conversations), and if "the value of the option grant as computed by the value of the underlying option contract" is not a concern, then the founders will not actually be "giving up" any value since that value was inadvertently created and was never intended to be claimed by the founders/company in the first place. In this case, a founder who wishes to be consistent with herself and her own narrative should definitely adopt a long expiration option contract to make the reality of the situation as close to the narrative as possible, given the legal limitations. [1] I tell friends to consider their option grant as $X == $0 to simplify things and protect themselves from being mislead, but all options do have some nonzero value.

tyre 10y ago

As an ex-Gusto employee, let me provide another side. Gusto also has a company bylaw where they can veto any employee sale. Not Right of First Refusal, but can flat out veto an employee selling stock to buy a home, pay off student loans, start a company, etc. This isn't covered at the time of hiring, nor present in the option agreement provided to employees. As an early ZenPayroll (now Gusto) employee and a leader of the culture up to 70 employees, I'm honestly embarrassed by the company's stance here. It's hypocritical (in my opinion) to the values talked about by the company. Employees should benefit from the success of the company they worked hard to build. As a current founder, believe me I understand why founders get a much larger share. But at least be transparent. You can read about our approach to equity, and everything else, here: https://octopoedi.gitbooks.io/employee-handbook/content/ https://octopoedi.gitbooks.io/employee-handbook/content/

abalone 10y ago
It should be presented transparently, but that's a pretty standard term and there's a good reason for it. Those so-called secondary sales put more owners onto the cap table which can cause accounting and investor-relations headaches for small companies. Things like information rights, control issues, regulatory responsibilities. At a pre-IPO stage, it can be good for the company (including option-holders) to control who they invite in to own it. Basically Facebook and a few others tried allowing secondary sales, had problems, and since then the industry has retreated from that idea.
- mgummelt 10y ago
  That is a real problem, yes, but the fair solution is right of first refusal, not vetoing a sale.
  - ncd 10y ago
    Precisely--this is the exact reason that ROFRs exist. They make sure that a company has the option of keeping its cap table clean in the event of a sale by an employee. What these companies want is to have their cake and eat it too: prohibit sales of stock to outsiders without having to pay for the privilege. The cynic in me says that this is because companies of this kind are far less likely to be in the position to exercise ROFRs and pay for it via profits simply because they are not yet profitable. And I'm sure investors don't like the idea of their capital being used to buy back shares of vested stock from employees.

tn13 10y ago

Despite reading many such articles there is one thing I have never understood. Under what circumstances it is NOT a good idea to exercises as soon as possible? Only one scenario is where you have to pay a large sum for this early exercise and you see a risk that the company might go out of business. But in such cases if the amount is large you are probably at the wrong company in first place.

spoonie 10y ago
My understanding is that you may have taken a lot of equity in exchange for salary, so much so that you literally can't afford to exercise any significant portion of the options.
- tn13 10y ago
  In that case you have already taken crazy risk and if you still have doubts that company wont do well in future you should probably quit.

driverdan 10y ago

I stopped reading when I hit the part about 5 year vesting. Why would anyone put up with such a long cycle?

hibikir 10y ago
because today there are bigger problems with taking options than a 5 year schedule? a 4 year schedule was important when a company wanted to go IPO quickly, but today, where startups are private for 8+ years, and option terms make selling the options in the secondary market very difficult, it doesn't matter if you vest in 4 or 5 years: next liquidity event might be in 10 for all you know. I work for a company that is very likely to make it, but given that I don't know when in the world we'd even attempt to go public, I count my options at zero. Will I still be happy here in 2 years? 5? 8? I better get used to being happy here until there is a liquidity event, or the equity is worthless to me. I know people with 7 digits in paper vested options, but they can't exercise them: It's hard to afford them, the taxes are killers. Until there is a liquidity event, they have nothing, and all the promise of riches goes away 90 days after they leave the company. In practice, they might have a 10 year real vesting schedule. I don't know about you, but I don't know that many people that have stayed 10 years at a tech company. So that's why the long vesting cycle is fine in practice: The real cycle to getting cash out is even longer.
- spoonie 10y ago
  Why can't you exercise and move on? Are you an early employee with lots of equity at a low strike price and a low enough salary that you can't pay the tax to exercise? Are you risk averse and don't want to pay to exercise until you know there will be a payoff?

neom 10y ago

We're trying to build things in a different way: https://www.linkedin.com/pulse/part-i-how-were-building-stae-john-edgar https://www.linkedin.com/pulse/part-i-how-were-building-stae... The comments here have shown some new thinking for me about employee as owner, love reading about it and welcome the input of others on building in a human first manner.