6 ms·

The article goes over stock options; but it doesn't address an alternate form of equity; issuing early employees restricted stock awards (instead of options).

• manuelflara 10y ago
  I'm not sure I quite get what you mean by "issuing early employees restricted stock awards". Can you elaborate? Is this like an IOU for restricted stock? Isn't that kind of like what stock options are (except for common stock)? And if you just mean giving actual restricted stock (like to investors), then the main problem is you have to pay those taxes right away (the whole point of options). But maybe you mean something else.
  • sokoloff 10y ago
    If you are granted restricted stock subject to vesting, in the US you owe taxes only when the stock is both released AND vested, meaning the tax bill comes due in stages as the shares vest, not "right away". If you give restricted shares that vest over time and are only released upon a change in control, you can further defer the tax bill due date (though at the expense of the eventual bill being higher on average).
    • zaroth 10y ago
      Most restricted stock subject to vesting will require the recipient to file an 83(b) election. This takes the full current value of all shares at the current issue price as income up front. Since the shares are typically worthless at that point, the tax bill is zero. The alternative is disastrous for a fast growing company. Each month, each year, you are vesting new shares at an exponentially increasing valuation, and now have to pay income tax on that completely illiquid gain with cash you literally don't have.
      • sokoloff 10y ago
        > Most restricted stock subject to vesting will require the recipient to file an 83(b) election No RSU grant "requires" an 83(b) election. Your second point is why RSU grants with normal vesting and delayed release is desirable.
        • zaroth 10y ago
          I've personally written restricted stock grants which require 83(b) elections to be filed. My understanding is that is boilerplate in the Restricted Stock Purchase Agreement. Please note, Restricted Stock !== RSU, and RSUs are not eligible for 83(b) because they are just a promise of future shares, no stock is actually issued until the conditions are met. (see above)
          • scurvy 10y ago
            If that's the case, do you require employees to pay for their shares at grant date? Otherwise it's a taxable event (not cap gains but real income) when they vest. Or do you "sell" a portion of the shares back to the company to pay taxes for the employee, then the employee gets 45-50% the number of shares that are vested. This is what Microsoft did when I was there, but they were publicly traded and had a public market to "sell" into (though it went straight to company stock buyback plan). Private companies don't have that luxury and would have to pay real money to the IRS to foot employees' tax bills at various vesting dates.
• cloudjacker 10y ago
  I've been making similar points too, it's actually shocking how founders and VCs are convinced that their way is the absolute correct way Instead of pointing out how stock options are primarily a reaction to accounting and taxation changes over the years , or the conflicts of interest in giving a more objective answer There are plenty of financial products possible that will tread the line of compensating employees for their risk and the lack of money and liquidity startups have
  • techterrier 10y ago
    Do you have any examples of these products?
    • beachstartup 10y ago
      yeah, cash money. if a startup has VC's and lawyers sitting around dreaming up and codifying a complicated and rather arbitrary set of rules to protect their investment from the little people, there's enough cash floating around to pay the employees a fair salary, they just don't want to. options are fool's gold, plain and simple. you are either a founder, or a venture capitalist, or lawyer, or you should expect a zero or negative value from this silly charade. if you can't tell which person sitting at the poker table is the sucker...
      • zaroth 10y ago
        >>> There are plenty of financial products possible that will tread the line of compensating employees for their risk and the lack of money and liquidity startups have >> Do you have any examples of these products? > yeah, cash money. Sorry, I don't follow. The standard term sheets available today can reduce the cost of issuing options or RSUs to a few thousand dollars. It's actually a very straightforward and simple process to get stared, and has to be done anyway to at least get shares into the Founder's hands on Day 1. So, yes, there are startup legal expenses, but you are paying it no matter what, adding an option pool up front does not really cost any extra.
    • cloudjacker 10y ago
• deleted 10y ago
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• 100k 10y ago
  Considering the author's previous article was about how employees do not deserve to keep their equity unless they stay with a company until liquidity, I suspect he would not support granting restricted stock. http://a16z.com/2016/07/26/options-plan/ http://a16z.com/2016/07/26/options-plan/
  • Bahamut 10y ago
    If they didn't deserve it, then they shouldn't be compensating the employees with equity & should be doing so with cash. Can't have it both ways. (This is more of a response to the link, not your comment in particular)
    • shostack 10y ago
      Well, having it both ways is entirely dependent on market forces. As of right now, it would seem they can in fact have it both ways.
      • k__ 10y ago
        always depends what employees are willing to do.
        • mythz 10y ago
          Which is what Parent meant by market forces.
    • steveklabnik 10y ago
      > Can't have it both ways. See the "participating" section of the article on preference, where the investor can in fact have it both ways.
• theflork 10y ago
  Are there any companies you know that use RSU's or stock grants instead of options? I've been interviewing at some startups and they only seem to offer options with their byzantine rules. Can people negotiate offers from options to RSUs/grants?
  • sulam 10y ago
    RSUs are typical at a certain size -- generally around 500 employees I think these days. There's a forcing function called the Exchange Act, section 12(g) of which says there's a cap on the number of shareholders you can have without reporting financials effectively as if you're a public company. That number was increased from 500 shareholders to 2000 in 2012. The reason for the lower number where RSUs start to be considered than where strictly required has a couple motivations: 1) Generally by 200 employees your stock is starting to be expensive, so exercising is no longer a trivial amount of money. This is especially important if an employee wants to 83(b) exercise (which is pre-buying their shares as soon as they're granted, to move the long term capital gains clock up to a year ahead of where it would otherwise kick in). 2) Getting to 500 employees generally implies some attrition, and of course your investors are also on your cap table, so it's fairly easy to be approaching 2000 shareholders with a smaller number of employees depending on how fast you've grown and how many party rounds you've done. 3) RSUs are trivial for the company to control. Shares that you own can, without special restrictions which are only starting to become standard in the last few years, can be traded on secondary markets even if you can't trade them on a public exchange. RSUs are simply a promise, and while you could write a contract that dictates what you'll do at the time of RSU conversion, that doesn't affect the company because by definition they're already public by then. Selling your vested options to another party is much harder on the company, since as shareholders this third party has an explicit relationship with the company and, depending on where they are incorporated, rights to examine the company's finances. Oh, and rereading I just realized I didn't connect the dots from the 12(g) threshold forcing people to use RSUs. RSUs are not considered stock. For tax purposes they are ordinary compensation awarded at the time of conversion, and only then do you count as a shareholder in the company. A company like Uber (could easily have been over 2000 shareholders by now I'm sure) has been using RSUs for probably multiple years now.
• zaroth 10y ago
  Almost all your points apply exactly equally to restricted stock as it does to options. In both cases you will have a vesting schedule, just in the case of restricted stock it's usually a grant of the shares with no exercise price. In both cases you want to file an 83(b) election so you are taxed based on the FMV of the company when you receive the unvested shares (when the shares are worthless) so that you will only owe capital gains later. But more importantly, in both cases you end up exactly and equally screwed in terms of you are holding the same class of stock (common) with the same vesting terms (no, single, or double trigger acceleration), all the exact same issues around dilution, liquidity, preferred shares, and unfair buyout terms funneling cash to key executives, etc. Equity is a massive gamble all around, and there's no magic bullet that I've seen which can defray many of the inherent risks of owning common shares of a private company which has perhaps a 1 in 100 odds of ever seeing a public market or liquidity event that surpasses the total liquidation preferences.
  • prostoalex 10y ago
    > In both cases you want to file an 83(b) election so you are taxed based on the FMV of the company when you receive the unvested shares Can you do this, though? 83b election with ISOs makes sense because the tax event is employee writing a check to pre-exercise his shares, so a transaction occurs. For RSUs the transaction seems to occur at the time of the actual grant - there's no money changing hands, no transaction on record, and hence no tax event. Not a tax lawyer, just trying to understand the complexity that I thought I had under control.
    • zaroth 10y ago
      Great point! From http://www.investopedia.com/articles/tax/09/restricted-stock-tax.asp http://www.investopedia.com/articles/tax/09/restricted-stock... Section 83(b) Election Shareholders of restricted stock are allowed to report the fair market value of their shares as ordinary income on the date that they are granted, instead of when they become vested, if they so desire. This election can greatly reduce the amount of taxes that are paid upon the plan, because the stock price at the time of grant is often much lower than at the time of vesting. Therefore, capital gains treatment begins at the time of grant and not at vesting. This type of election can be especially useful when longer periods of time exist between when shares are granted and when they vest (five years or more). Taxation of RSUs The taxation of RSUs is a bit simpler than for standard restricted stock plans. Because there is no actual stock issued at grant, no Section 83(b) election is permitted. This means that there is only one date in the life of the plan on which the value of the stock can be declared. The amount reported will equal the fair market value of the stock on the date of vesting, which is also the date of delivery in this case. Therefore, the value of the stock is reported as ordinary income in the year the stock becomes vested. To me that means that Founders shares would be in the form of restricted stock, however RSUs would only be appropriate for liquid (publicly traded) shares.
• syedkarim 10y ago
  What if the earliest employees make no sacrifice and take no risk?