8 ms·

This is fantastically useful both as a side-of-the-barn estimator, and a teaching tool. Thanks! Two things a lot of startup employees are unaware of that are w

This is fantastically useful both as a side-of-the-barn estimator, and a teaching tool. Thanks! Two things a lot of startup employees are unaware of that are worth highlighting: they actually have to buy their options, which eats into returns, and that if they leave the company they have a limited window (30 days, typically) in which to do so. In would behoove them to save/plan for this fact.

bethly 9y ago
Thanks! I really appreciate the feedback. The price of the options eating into returns is reflected in the number we present (we assume a consistent valuation growth by stage and at exit), but taxes aren't and those can 40%+ in the US, which people don't necessarily expect. Limited exercise windows are one of the things we have in the list of ways this can go horribly wrong, but you are right that it is something that you can plan for if you know it's coming. Thinking about it, that and early exercise might both be candidates for some sort of "list of questions to ask" tool...
- lafay 9y ago
  Early exercise / 83(b) has another benefit that most people aren't aware of -- if the exit is at least 5 years out, you can exclude 100% of your gain from federal cap gains tax under IRS Section 1202. See here for more: https://blog.wealthfront.com/qualified-small-business-stock-2016/ https://blog.wealthfront.com/qualified-small-business-stock-...
  - pmiller2 9y ago
    Aren't 83(b) elections only really available to founders, though?
    - yojo 9y ago
      No, it's at the discretion of the company. I asked for an 83(b) option at a 10 person startup I worked at and the CEO made it happen. The startup still went under so it didn't matter in the end, but management definitely did what they could for the employees.
    - morgante 9y ago
      Early employees (<25) can often negotiate them as well. I've done 83(b) at every startup I joined.
hibikir 9y ago
This is especially true in this time where even successful companies drag their feet when it comes to IPO. If you don't think you can't afford to buy the options and pay the taxes (yes, there's taxes when exercising illiquid options), then you have to discount the chances of still being with the company at the time of a liquidity event. This means you can find yourself valuing stock options very little, even in cases where you have full faith in the company making it and being very profitable. A growing company is very different year to year. What are the chances that you'll love the same company in 6 years? My personal calculation is that I have a 50% chance of leaving a job every year, so if I am guessing that it'll take 6 years to IPO, and I don't think I can just keep large amounts of money frozen in options, I have to discount the value of said options over 95% on top of the traditional calculations. RSUs from he big four don't have that problem.
- jacquesm 9y ago
  > This is especially true in this time where even successful companies drag their feet when it comes to IPO. That's a very weird statement. Companies are under no obligation at all to ever offer stock to the public. An IPO comes with all kinds of downsides and many companies simply do not feel the benefits weigh heavier than the downsides. Such as: transparency, SOX, all kinds of restrictions and demands regarding communications, dealing with the SEC (or the local equivalent) and so on.
  - s73ver 9y ago
    If they've taken VC funding, they most likely are.
    - jacquesm 9y ago
      The percentage of companies that have taken VC funding and that eventually IPO is far smaller than the percentage that either become a going concern or that end up being acquired by another company or by a private equity party.
      - 9y ago
sowbug 9y ago
And though few think of buying options as a taxable event, the bizarro world of AMT treats it that way.
morgante 9y ago
> they actually have to buy their options Yup. It honestly astounds me how many people don't factor this into their decision-making. Your only equity compensation on joining is the delta between your strike price and the current market value of your stock. This is often very little, far less than you give up in salary at many companies.
- robomc 9y ago
  How does this tool help you work that out though.
  - morgante 9y ago
    I never said anything about this tool. Do that calculation yourself, if you're looking at thousands of dollars in compensation it makes sense to do the research and unerstand things fully.
  - bethly 9y ago
    This tool reflects that profit by assuming a current strike price based on average valuation changes between rounds. Instead of saying that you get the full value of the stock you buy, the calculation takes into account that you also have to purchase the stock. This tool doesn't explain the dynamics going into the estimated profits (though it links to things that do), but it helps people avoid over-estimating the value by missing dynamics like strike price.
- htormey 9y ago
  Yep. This is a very important point. If you are experienced and planning on joining a startup try to negotiate for early exercise or a very long exercise window for your options. Either that or be prepared for a nasty bill if you ever decide to leave and the start up is doing well.
GlennS 9y ago
What's the reason for these companies offering stock options rather than just stock?

bethly 9y ago

Thanks! I really appreciate the feedback. The price of the options eating into returns is reflected in the number we present (we assume a consistent valuation growth by stage and at exit), but taxes aren't and those can 40%+ in the US, which people don't necessarily expect. Limited exercise windows are one of the things we have in the list of ways this can go horribly wrong, but you are right that it is something that you can plan for if you know it's coming. Thinking about it, that and early exercise might both be candidates for some sort of "list of questions to ask" tool...

lafay 9y ago
Early exercise / 83(b) has another benefit that most people aren't aware of -- if the exit is at least 5 years out, you can exclude 100% of your gain from federal cap gains tax under IRS Section 1202. See here for more: https://blog.wealthfront.com/qualified-small-business-stock-2016/ https://blog.wealthfront.com/qualified-small-business-stock-...
- pmiller2 9y ago
  Aren't 83(b) elections only really available to founders, though?
  - yojo 9y ago
    No, it's at the discretion of the company. I asked for an 83(b) option at a 10 person startup I worked at and the CEO made it happen. The startup still went under so it didn't matter in the end, but management definitely did what they could for the employees.
  - morgante 9y ago
    Early employees (<25) can often negotiate them as well. I've done 83(b) at every startup I joined.

hibikir 9y ago

This is especially true in this time where even successful companies drag their feet when it comes to IPO. If you don't think you can't afford to buy the options and pay the taxes (yes, there's taxes when exercising illiquid options), then you have to discount the chances of still being with the company at the time of a liquidity event. This means you can find yourself valuing stock options very little, even in cases where you have full faith in the company making it and being very profitable. A growing company is very different year to year. What are the chances that you'll love the same company in 6 years? My personal calculation is that I have a 50% chance of leaving a job every year, so if I am guessing that it'll take 6 years to IPO, and I don't think I can just keep large amounts of money frozen in options, I have to discount the value of said options over 95% on top of the traditional calculations. RSUs from he big four don't have that problem.

jacquesm 9y ago
> This is especially true in this time where even successful companies drag their feet when it comes to IPO. That's a very weird statement. Companies are under no obligation at all to ever offer stock to the public. An IPO comes with all kinds of downsides and many companies simply do not feel the benefits weigh heavier than the downsides. Such as: transparency, SOX, all kinds of restrictions and demands regarding communications, dealing with the SEC (or the local equivalent) and so on.
- s73ver 9y ago
  If they've taken VC funding, they most likely are.
  - jacquesm 9y ago
    The percentage of companies that have taken VC funding and that eventually IPO is far smaller than the percentage that either become a going concern or that end up being acquired by another company or by a private equity party.
    - 9y ago

sowbug 9y ago

And though few think of buying options as a taxable event, the bizarro world of AMT treats it that way.

morgante 9y ago

> they actually have to buy their options Yup. It honestly astounds me how many people don't factor this into their decision-making. Your only equity compensation on joining is the delta between your strike price and the current market value of your stock. This is often very little, far less than you give up in salary at many companies.

robomc 9y ago
How does this tool help you work that out though.
- morgante 9y ago
  I never said anything about this tool. Do that calculation yourself, if you're looking at thousands of dollars in compensation it makes sense to do the research and unerstand things fully.
- bethly 9y ago
  This tool reflects that profit by assuming a current strike price based on average valuation changes between rounds. Instead of saying that you get the full value of the stock you buy, the calculation takes into account that you also have to purchase the stock. This tool doesn't explain the dynamics going into the estimated profits (though it links to things that do), but it helps people avoid over-estimating the value by missing dynamics like strike price.
htormey 9y ago
Yep. This is a very important point. If you are experienced and planning on joining a startup try to negotiate for early exercise or a very long exercise window for your options. Either that or be prepared for a nasty bill if you ever decide to leave and the start up is doing well.

GlennS 9y ago

What's the reason for these companies offering stock options rather than just stock?