10 ms·

This advice is often given but it's easier said than done. Let's say you work at a unicorn for 3 years and in that time it goes up 10x in VC fantasy land valua

• zzalpha 10y ago
  It's much worse in late stage startups where expiration means use em or lose em. It comes down to a gamble. With your numbers, a big one. But until that choice is forced on you, I say wait. There's no reason for an early exercise. Even with slight tax advantages I'd rather call that the cost of minimizing my risk.
• BatFastard 10y ago
  Don't take the risk. Treat is as a lottery ticket. A good friend joined a late startup company in 1999, and in 2000 he was worth 40 million, of which he managed to cash out 10 million before the stock crashed. But that was in the days of IPOs, now the investors prefer to keep the rise in equity to themselves. So you chances of winning the lottery are much less.
  • AJ007 10y ago
    I wonder how many commonly utilized tools in startups actually reduce the overall chance of the companies success? Not sure high stress and wacky work environments are very productive outside of sales. I'll leave it at that.
  • logicallee 10y ago
    You basically just said, totally straight-faced: "Don't do it man, it's not worth it! My friend thought he was worth $40 million but was never able to cash more than $10 million out." That is literally the structure of your comment. You said, don't do it, you mentioned your friend as for why not, and the punchline to his sad story is he only cashed out 25%, or $10 million, of what he thought he had. By positioning this as your example of a loss, I don't think you could have made a stronger argument for doing it if you had tried. Anyone who has $10M is set for life and independently very wealthy: they're rich. They could fly every two weeks for thirty years, for example (780 trips) staying at a four star hotel every day of that entire time (100 euros * 365 * 30 years still gets to only $1M). I mention these because they're luxuries. He's loaded.
    • pbkhrv 10y ago
      You missed the second part: "But that was in the days of IPOs, now the investors prefer to keep the rise in equity to themselves. So you chances of winning the lottery are much less."
      • logicallee 10y ago
        I didn't miss the second part.
        • msandford 10y ago
          The second part was basically "but that was during a different time when such a thing was possible" and the not-too-subtle implication is that it's not possible anymore. You know, since startups aren't IPO-ing to nearly the degree that they used to. If at all. Hence the "it worked for him then, but probably wouldn't work for anyone else, now"
          • Bartweiss 10y ago
            It's not just "aren't IPO-ing" - the rapid sale described is often banned today under agreements where shares can't be offloaded for a certain period after the IPO, so that the banks backing the offering can make their money.
  • stale2002 10y ago
    There is an alternative. Vest and buy the shares as soon as possible. This way, your taxes stay low, and you don't actually pay that much for the shares. You aren't risking hundreds of thousands of dollars, only maybe 10s of thousands.
    • jzl 10y ago
      Not really if you join a unicorn, as this article was about. Unless if your grant is relatively very small, in which case you're not getting much benefit to joining the unicorn in the first place, at least in terms of possible stock upside. If you join a unicorn and your grant is anything less than $100k then you're getting a raw deal. (Again, at least in terms of stock upside, there may be other reasons to join.)
  • btilly 10y ago
    The issue is not that investors prefer to keep the rise in equity to themselves. The issue is that in response to Enron's collapse, Congress implemented The Sarbanes-Oxley Act. This makes IPOing massively more expensive since you have to go through a bureaucratic nightmare first. One established, the costs of continuing may be controlled. But coming into compliance is a headache that people want to avoid.
• jaymzcampbell 10y ago
  For me personally, if I was in that position I would stick it out for however long it takes. I cannot imagine having enough liquid assets to be happy to risk $100k like that. I am also of the opinion that even if I did amass such value in equity that there's a high chance I'm going to get screwed on whatever the book value of it today is tomorrow when I actually cash out. If it's so bad that I need to run not walk out of the building then I'd have to just make peace with binning it off. For most of us where startup equity comes with a real valuation of zero (i.e. anything but the Uber or AirBnBs of this world) - I think you're a lot better off ignoring it entirely. > to walk away from this situation with nothing This is where I think you are healthier having at least a market rate salary. Then you've not walked away with nothing - you've been a regular employee and happy with your lot and ready to move on.
  • JonFish85 10y ago
    >> I cannot imagine having enough liquid assets to be happy to risk $100k like that $100k isn't much money. If you've taken stock in lieu of $15-$20k/yr salary, $100k is pretty easy to make up (especially considering that many bigger, established companies also pay bonuses and have a better structure for vacation and such). >> anything but the Uber or AirBnBs of this world Personally those are ones I'd be really, really scared of having stock in. They've boxed themselves into a corner: they have precisely one positive exit scenario: IPO. At their current valuations (2x and more of their competition), there's no reasonable path to acquisition. And if they continue to take investor money, those late investors are taking care to protect themselves (whether it's multipliers, last-in/first-out, etc). Employees are absolutely last in line to get the scraps unless things go crazy. After IPO, there's the lockup period, during which there are earnings results (I believe 2?). If those don't go really well, a downturn in stock price can wipe out employee shares pretty quickly. If I'm an employee of either of those two companies, I'm a little nervous.
    • jaymzcampbell 10y ago
      > $100k isn't much money. If you've taken stock in lieu of $15-$20k/yr salary, $100k is pretty easy to make up (especially considering that many bigger, established companies also pay bonuses and have a better structure for vacation and such). I'm not sure I follow. If I agree to be underpaid by $20k a year say then I'm not sure how I'd then on reduced salary save up $100k after tax and to the extent I wouldn't "miss it" in exercising the options. If a company is paying bonuses etc I'd rather get the market rate salary to begin with and ignore the stock. I may be heavily misunderstanding your first sentence though :) The lockup period post IPO is an excellent point - and probably further fuels my cynicism around low percentage stock options as anything but a gamble.
• battlebot 10y ago
  This reads like a Faustian bargain. I've seen this sort of stuff happen over and over to my colleagues, it was worst in the late '90s and early '00s. As much as I wanted to work for a startup once in my life, I learned that the only way to do "startup" is if you are the founder. Practically everyone else is along for the ride. The US used to have a steady IPO market but that has dried up in recent years. I have read that 2017 might brighten things a bit, but we'll see.
  • ktRolster 10y ago
    "The US used to have a steady IPO market but that has dried up in recent years. I have read that 2017 might brighten things a bit, but we'll see." The biggest problem is SOX: going from a private company to public (something I've done twice, now) is a pain, and can take a year to implement all the regulations (you may even need to change source code, and also commit processes). It's even worse on the accounting/business side. More importantly perhaps, it's expensive: you don't want to take your company public unless you can afford the hit to productivity and cash flow. According to the WSJ, that's why there aren't more IPOs these days.
    • xyzzy_plugh 10y ago
      Yep, it's way easier and way less friction to store everything including payment information in one huge database accessible to all employees. A security nightmare, but time and time again we've seen you don't need good security to make a lot of money.
• matwood 10y ago
  If you ignored the options at the start and got the market rate salary as the OP suggested, then you can just wait it out. That's the point of getting market rate up front. I think what the OP was really trying to avoid was working for 1/2 market rate for years, and then ending up in your scenario.
• deleted 10y ago
  [deleted]
• beagle3 10y ago
  Most countries have sane tax codes that say you only owe taxes when there's a liquidity event for you. The US is exceptionally bad in this respect of taxing illiquid paper profits, and of onerous lockup periods (SEC rule 144). An investment of mine that yielded 5X exit transaction ended up being 1.3X for those reasons, and I was lucky - if it closed a couple of months earlier, I would end up with 40% loss and a useless tax credit.
  • vacri 10y ago
    Australia is even worse in that you owe tax on the options, before any event of any kind has occured. I think that they're pushing through legislation now in order to make it more US-like and allow founders to offer these worthless lottery tickets to potential employees :)
  • ant6n 10y ago
    I Canada I can defer paying the (income) taxes on the options exercise until 'deemed disposition', which unfortunately also includes going bankrupt. And the possibility to count the capital loss against the income is severely restricted.
    • uiri 10y ago
      Canada has a much better treatment of capital gains than the US. Instead of a separate tax, 50% of the gain is taxed as ordinary income.
• delinka 10y ago
  "Let's say you're granted about a year's salary in shares..." Please use correct terminology. You're given options to purchase shares, or you're given shares outright. The former is what most people are accustomed to: options to purchase shares at a discounted price. The latter, know as a "stock grant," does not require the employee to purchase the shares - they've been granted to the employee. Both of these things tend to come with a vesting schedule: you don't get to buy all your discounted shares when you start working on day 1, nor are granted shares handed to you because you showed up on the first day. "Granted a year's salary in shares" would mean there's nothing to buy because those shares are yours.
  • sbierwagen 10y ago
    Also note that RSUs and options are taxed differently. When you're issued a block of RSUs, you almost always do a section 83(b) election, declaring the RSUs as ordinary income. When you sell them years later, the difference in value is then taxed at the lower capital gains rate, rather than the income tax rate. However, this means you take the tax hit when you receive RSUs, unlike options, where you're taxed when you exercise them. This can be good or bad, depending on the value of the shares, the vesting schedule, etc.
    • billmalarky 10y ago
      I was of the impression that typically a portion of your RSUs are used to handle the income tax from receiving them immediately, so you simply receive less RSUs as opposed to the full amount plus a big initial tax bill. That seems to me like a good way to offset the risk that the RSUs could be worthless in the future.
      • Cerium 10y ago
        Yes, the company issuing the RSU's must pay the taxes for you. They do that by selling a portion of the shares to cover the tax (which at least where I've been works out to a bit above 40%).
        • 10y ago
• mmsmatt 10y ago
  > "Or do you end up locked in for a few more years of handcuffs while waiting it out?" The golden cuffs _will_ click if you stick around any time at all and have even slightly bad luck: Maybe you burn out before vesting, or the company blows an acquisition that would've fit your schedule and your payout/life goals. Waiting around after you hear the click becomes a losing game. Find another one to play, it's a big world.
• djb_hackernews 10y ago
  The whole premise of a startup in any stage hiring a technical employee and granting them $100k worth of stock options will never happen. Typically you are granted X number of options. You are never told what the outstanding # of shares are and typically the shares themselves are valued in pennies. The idea is you think to yourself "well, it's 10k shares worth about $5k at the current valuation, but if they IPO and it does what google does...I'll be a millionaire!" You never take in to account that the likelihood of you joining a unicorn like google is near 0% and not taking in to account the time frame of such an adventure, the opportunity cost, dilution and other tricks companies play on their employees before IPOs and acquisitions like reverse stock splits. And the likelihood of a startup valuation increasing 10x in 4 years (typical vesting schedule) after dilution is extremely extremely unlikely to the point that it is time wasted even entertaining the outcome of such a scenario.
  • jes5199 10y ago
    I have literally, personally, gotten an offer that that included options denominated in the current share price in dollars, and it was a little over $100k.
  • rgbrgb 10y ago
    > The whole premise of a startup in any stage hiring a technical employee and granting them $100k worth of stock options will never happen. That's a false assumption. If they raised $1M seed at a $6M cap, that's 1.4-1.7%. I just pulled up AngelList and there are a number of seed companies offering that along with a decent salary. Taking the $6M to $60M is the risky piece and that's going to be hard, but opportunities to try are definitely available. > You are never told what the outstanding # of shares are and typically the stock are valued in pennies. If the CEO is unwilling to tell you when you ask, walk away.
  • kobeya 10y ago
    Standard procedure in the valley is about ~$100k in options at present valuation. Granted this is typically calculated without adjusting for the lower valuation of common stock, but the presumption is that in an IPO-like liquidity event the common and preferred stock valuations would be basically the same.
• ronald_raygun 10y ago
  So I never understood - it seems like it would cost you 200k to buy something worth a million. Arent there people/institutions out there that would cover the 200k cost in exchange for maybe 300k worth of stock?
  • imsofuture 10y ago
    Yes, it's my understanding the company will sometimes offer ways to finance the options purchase such as cashless exercise, or promissory note. Alternatively you can taking out a loan (anything from a general loan, to a specialize 'options exercise loan'). Cribbed this answer from the longer form one here: https://www.quora.com/How-am-I-supposed-to-afford-my-stock-options https://www.quora.com/How-am-I-supposed-to-afford-my-stock-o...
  • Swizec 10y ago
    Most banks will give you that loan if the stock is liquid and actually evaluatable. But if something happens on your way from the bank to the stock sale, guess who still has to pay back all that money.
  • WalterSear 10y ago
    It's common to perform a sell-to-purchase, covering the stock purchase with the sale of itself.
  • Anderkent 10y ago
    Unless there's buyers for that stock lined up, what you're buying is only worth a million on paper.
• jes5199 10y ago
  I walked away from a unicorn, a few years ago. If I had stayed - and somehow survived the effects it was having on my mental health - I might actually be a millionaire now. Instead, I bought a fee thousand dollars worth of shares - only what I could afford. They IPOed at 10x, and I made a down payment on a house. But that was a rare case: I had some extra savings, the company was clearly succeeding with clear intent to IPO. And even so, I had to wait four years for a payoff.
  • bookbinder 10y ago
    How was it affecting your mental heath--stress, sleep deprivation?
    • jes5199 10y ago
      well, I developed a kind of generalized anxiety - I think it came from the long hours in a fairly large and crowded open-floorplan office - it was just way more constant social contact than I'm comfortable with. I guess if it was stress, it was stress from trying to perform while conforming to an environment that I found profoundly uncomfortable. Also there were nebulous culture mismatches that made me feel like I had to put on a fake persona to fit in. Now I work from home and I'm much happier.
      • xynny 10y ago
        i call open floor plans "sweatshop chic"
• finnh 10y ago
  There's a growing secondary market for illiquid shares of private companies; I would look into that before letting the options lapse. There a few market-making websites as well as VCs that specialize in this. You need to be pretty savvy to marshal the whole process and understand the contracts, though - it is not turnkey.
  • econner 10y ago
    Most unicorns disallow this nowadays to prevent the headache Facebook had when IPOing (very explicit you cannot transfer shares without the companies consent clauses in contracts). Some do controlled tender offers which allow employees to sell some shares, but these happen at the behest of the company, not the employee.
  • maverick_iceman 10y ago
    Many private companies, e.g. Uber, doesn't allow unapproved secondary selling of their shares.
    • agiamas 10y ago
      can't you sell a future security on your shares though? This is a "promise" to sell at some point in the future, can't see how can this be prohibited.
  • brianwawok 10y ago
    Don't most options include right of first refusal and more, to prevent you from selling them on the private market?
    • finnh 10y ago
      Yes, but ROFR doesn't necessarily hurt you - it just slows down the deal. Also, the VCs who do this also structure the deal in certain ways to make the ROFR price unclear and therefore negotiable. But, you're right, some start-ups are explicitly putting in an explicit "consent" clause into the ISO. Which I think is unfair, and kind of BS - certainly if such a clause were valid, that would drastically reduce the value of non-publicly-tradeable shares, and it would be nice if the IRS agreed =)
• krisdol 10y ago
  > Now, you have to come to the table with the $100K to exercise and probably another $200K to pay the tax man But why shouldn't I just come to the table with $10k and taxes, exercise those shares, then use the profits to buy up the remaining shares?
  • kobeya 10y ago
    Because there are no profits because you can't sell the shares because the company is private.
• chrdlu 10y ago
  The good news is that there are a couple new firms that aim to address this exact issue. The firm I work for is called the Employee Stock Option Fund (ESOFund) and we aim to help employees exercise and cover the taxes associated with the exercise (on a non-recourse basis - meaning you don't have to pay us back if the company fails). In exchange, we split the future profits. If you use us, it is a risk-free way to exercise with a chance of significant profit in the future! https://employeestockoptions.com/ https://employeestockoptions.com/
  • econner 10y ago
    What percent of the "profits" do you take? Can you explain how ESOFund would work in the situation I outlined above?
    • chrdlu 10y ago
      Each of our deal is custom tailored to the specific situation. In the situation above, we would help provide the 300k upfront and then we would negotiate terms. We aim to take less than half of the ultimate proceeds, but that ultimately depends on how the company exits. We don't require any transfer or pledge of stock and as a result, we take on a lot of counter party risk. We aim to price it in such a way where it is a good deal for the both of us. As you can imagine though, the deals that cost more money upfront requires a high payoff in the future. The other advantage we offer is that we can move extremely quickly. While other firms might take a few months to decide, we've closed deals in less than 24 hours before.
• compsciphd 10y ago
  I believe It's only a $3K per year income deduction if you have no other capital gains to offset it with. If you have future capital gains of $200K, it can make that go to 0 and you wouldn't have to pay tax on it.
  • econner 10y ago
    Ah, yes, you're right. It would offset future capital gains.
• jonathankoren 10y ago
  You are not going to get a year's salary in ISOs. You're not. At typical ISO strike prices (i.e. prices on the range ones of dollars), that would be an a lot of options. A company is simply not going to do that. It's much more likely you'll get something like half your salary or even less in ISOs (of course vesting over 4 years). This doesn't matter if the company IPOs with a 10x multiple of the strike price, but then again, the company has to have a major liquidity event. The uncertainty around the current valuation (which everyone has due to the infrequency of material events), the uncertainty around the likelihood of a major liquidity event, its size, and its type make ISOs incredibly hard to accurately price. If anyone says they can do it accurately, they're lying.
  • econner 10y ago
    What makes you so sure? Say the company is valued at $300M when you join. $100,000 worth of ISOs is 0.03% which is not unreasonable if you're an engineer from say employee 5 to employee 50 or so. Now, the company becomes a unicorn valued at $3B which is 10x.
    • jonathankoren 10y ago
      I'm not saying that the basis points are unreasonable. I'm saying that my salary is more than $100,000.
• danielweber 10y ago
  On paper you have a lot of money and the company reasonably might go public a couple years after you leave. If you aren't at the company, it will be extremely ordinary for some funding event to dilute you to nothing. And you will have absolutely no say in the matter, because you're an outsider who, and this will be a direct quote, "isn't moving the company forward."
• fspeech 10y ago
  I think it is a lot more than 20% to pay the tax man since the gain on the exercise is considered regular income. This could be a big problem if the stock is still illiquid on the day of exercise. And if you later couldn't get the private valuation price the loss is capital loss and only $3000 per year can be used to offset regular income.
• coldnebo 10y ago
  Or, like one of the companies I worked for, you could exercise your options, wait for a large Fortune 500 to buy them up, but then get told that your bylaws have a special provision that if the sale doesn't clear a certain amount, everyone's common shares are liquidated. As in we got zero. Nothing. And this software is still in use in a major product. So no, please don't trust options or exercised shares at any private company to be worth anything. You want to get paid? Negotiate salary and laugh in their faces when they offer you options.
  • nemo44x 10y ago
    Everyone wants to believe it won't happen to them and that their company must be special since they work there. But sadly this happens to brilliant people all the time. Cash is king. Realize you don't understand finance much less finance in an opaque, illiquid company. Say it 3 times: "Cash. Is. King.". Max out your 401K and negotiate a company 100% match if you can. Start a private investment account and a savings account and distribute to them every check. Keep doing this. Maximize all this before you become Johnny Wall St. with your illiquid stock options. They're as useful as a penny stock as not as liquid. Buy some of them if things look bright but classify the investment as your "highly speculative" class of investments and thus ensure they are a small part of your portfolio.