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It would behoove everyone to learn the basics of the terms you are getting stock. I have been through it and know. It will take you a couple afternoons of casu

It would behoove everyone to learn the basics of the terms you are getting stock. I have been through it and know. It will take you a couple afternoons of casual reading to nail it down. But to save you some time let me give you a template for the type of stock option deal you want and you don't want. Don’t want 1) 409A valuation price is already in the multiple dollar range. a. Why : You can’t afford to exercise do to tax burden 2) No acceleration – e.g. in the event of sale or IPO your unvested shares DON’T fully vest. a. Why: You should be rewarded for taking the risk position. Negotiate acceleration or what is known as ratcheting if you are a very early employee. 3) Stock buyback rights – The company has the right to buy back all your shares if you leave the company before a liquidity event a. Why: This is a prison sentence and a total gamble as you really own nothing until an event. 4) The company is past its 3nd round of funding. In all but rare cases your percentage ownership will be so low at this point it is not worth it. WANT 1) 409A valuation price is in cents and the stock option plan has an early exercise option. a. Why: You can file an 83b election with the IRS and pre exercise all your stock for a few hundred dollars. Because the strike price is the same as the value you will owe 0 tax. In addition you start the clock on long term capital gains as soon as the stock does vest according to the vesting schedule. This is how all the big boys make their money. As they vest you actually own them and are free to leave the company at any time with what has vested. 2) Acceleration or ratcheting – In situations like the company gets bought, IPO or management wants you gone and you have unvested shares they must accelerate your vesting schedule. You own them and can go anywhere you want. 3) The company is in seed or series A and you own at least 0.5%+ of the company. a. The company’s founders do not want to take series C unless they absolutely have to. Ask them! In short, you will only be rewarded by taking the risk of wasting your TIME in an early stage that has potential with a good founding team. And never forget the freaking 83b election!

ISV_Damocles 10y ago
This is what should have been in the article. The only other thing I wish I knew was that I could early exercise 6 months before the 1 year vesting cliff at my company (it was in the stock agreement, but I didn't comprehend what it meant due to how it was worded). Would've gotten it with zero tax, by 1 year there was a valuation event that made it non-zero.
econner 10y ago
This is excellent advice. For what it's worth you really need to know the total number of outstanding shares to appropriately assess the 409A valuation. The stock could split later.
dlubarov 10y ago
> 1) 409A valuation price is already in the multiple dollar range. a. Why: You can’t afford to exercise do to tax burden. The value of one share isn't meaningful. You should calculate the exercise cost of the whole grant (based on the last 409A) to see whether early exercise + 83(b) would be a good option. > 2) No acceleration – e.g. in the event of sale or IPO your unvested shares DON’T fully vest. a. Why: You should be rewarded for taking the risk position. Negotiate acceleration or what is known as ratcheting if you are a very early employee. Acceleration is nice, but why would you insist on it? I'd happily trade it for (substantially) more options. If there's a liquidity event and your options have a substantially positive spread, that's already a positive outcome, so in the interest of minimizing risk, I'd rather improve the scenario where you want to leave before a liquidity event. > 4) The company is past its 3nd round of funding. In all but rare cases your percentage ownership will be so low at this point it is not worth it. You should simply calculate your percent ownership (while accounting for liquidation preferences), rather than using the number of funding rounds as a proxy.
- nwellinghoff 10y ago
  2) That is an acceptable nego tactic if you can get it. And by all means you should go back and forth to get as many as possible. But after that you still want acceleration as the terms of your un-vested options are subject to change when ownership changes. Even if you stay with the new company. 4) True, this is just generic advice and usually by the 3rd round your % is going to be VERY low. But of course always consider actual % taking TSO into account.

ISV_Damocles 10y ago

This is what should have been in the article. The only other thing I wish I knew was that I could early exercise 6 months before the 1 year vesting cliff at my company (it was in the stock agreement, but I didn't comprehend what it meant due to how it was worded). Would've gotten it with zero tax, by 1 year there was a valuation event that made it non-zero.

econner 10y ago

This is excellent advice. For what it's worth you really need to know the total number of outstanding shares to appropriately assess the 409A valuation. The stock could split later.

dlubarov 10y ago

> 1) 409A valuation price is already in the multiple dollar range. a. Why: You can’t afford to exercise do to tax burden. The value of one share isn't meaningful. You should calculate the exercise cost of the whole grant (based on the last 409A) to see whether early exercise + 83(b) would be a good option. > 2) No acceleration – e.g. in the event of sale or IPO your unvested shares DON’T fully vest. a. Why: You should be rewarded for taking the risk position. Negotiate acceleration or what is known as ratcheting if you are a very early employee. Acceleration is nice, but why would you insist on it? I'd happily trade it for (substantially) more options. If there's a liquidity event and your options have a substantially positive spread, that's already a positive outcome, so in the interest of minimizing risk, I'd rather improve the scenario where you want to leave before a liquidity event. > 4) The company is past its 3nd round of funding. In all but rare cases your percentage ownership will be so low at this point it is not worth it. You should simply calculate your percent ownership (while accounting for liquidation preferences), rather than using the number of funding rounds as a proxy.

nwellinghoff 10y ago
2) That is an acceptable nego tactic if you can get it. And by all means you should go back and forth to get as many as possible. But after that you still want acceleration as the terms of your un-vested options are subject to change when ownership changes. Even if you stay with the new company. 4) True, this is just generic advice and usually by the 3rd round your % is going to be VERY low. But of course always consider actual % taking TSO into account.