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Yet another reason why taking startup stock sucks. Oh? You managed to actually get stock in a startup that seems to be worth something? And you didn't get dilu

Yet another reason why taking startup stock sucks. Oh? You managed to actually get stock in a startup that seems to be worth something? And you didn't get diluted to a pittance? And the board / founders didn't try to fire you or ask you to give stock back to the pool? Lucky you, you're one of the 1% of the 1%. Now stay there until the company sells or goes public. Wait -- they got bought? Congratulations, you just won 2+ years of golden handcuffs at Parent Corporation! Enjoy your new corporate job! Alternative storyline: You leave startup early, exercise options and go into debt, startup dies, you lost money.

hinkley 9y ago
The moment for me when I realized that options were bullshit was when I got a story about how “we wanted to give you a bigger raise but it’s not in the budget, so here’s $3k less and $3k worth of options” As if options had a value.
- sockgrant 9y ago
  Yeah they always assign a dollar amount to options instead of a % amount which is what really matters. $100,000 in options sounds great but if it’s .01% of options then you’ll have to be part of a monster IPO or sale to get a windfall. Always insist on the % amount. Most founders will try not to share it.
  - hkmurakami 9y ago
    If you have the dollar amount and the # of shares, then you can backtrack it to a rough percentage. Also options are a % increase in share price play, so $100,000 strike price can at least give you some information wrt how much $ you can make if the per share price of the company triples, etc. It's not always better to know % and % only. Let's say you get 1% options of a company valued at $10B. Options are priced at the preferred price, no discount. The company IPOs at $10B. Did you make $100M? Nope you made $0 so far!
    - timr 9y ago
      "If you have the dollar amount and the # of shares, then you can backtrack it to a rough percentage." Perhaps. But if a company will not give you a percentage of ownership and expects you to accept this as compensation, you should quit. Full stop. If the company won't tell you how to fairly evaluate your options, they're operating in bad faith, and should not be rewarded for their sleazy behavior.
      - hkmurakami 9y ago
        I agree with you on that regard fwiw. I've wondered whether a company will tell me what the liquidation preferences and antidilution clauses for its preferred shares are, since that also comes into play pretty significantly wrt evaluating the value of ones equity offer.
        timr 9y ago
        This gets into a fuzzy area, since it's a multidimensional equation, and often, even the founders can't tell you what your share is "worth" without lots of caveats and time spent on spreadsheets. There's usually not a single answer. The important principle, though, is that they shouldn't be hiding anything from you. If the company won't even tell you the percentage your shares represent, you can't trust them to do anything else.
- compiler-guy 9y ago
  Options have value, but the value comes with a large variance and serious risk. From a financial perspective, what you want isn't $1,000 worth of options, but a _risk-adjusted_ $1,000 worth of options. Which means in all likelyhood, more like $100,000 worth of options. Oh, the company doesn't want to give you that much? Well then, "Show me the non-risky money."
  - hinkley 9y ago
    10:1 or 20:1 would have sufficed, I think. But I don't think managers understand that while options might make people stay while things are going well, they make them flee (or worse, stay and become resentful) when things are clearly not going well. If you reward someone for their service you have to do it right or don't bother at all. A reward that loses its value, is delivered late, or requires the recipient to nag you constantly to deliver at all, has negative value for the person. 'Thanks for nothing' is not something you want to hear from an employee. It crushes motivation.
bsimpson 9y ago
Another detail that's not well-known unless you know someone who's gone through it: buying your shares comes with a huge tax bill. As I understand it, you have to pay tax on the difference between the option price and the value at the time you buy them. So if you have a bunch of options to buy at $10 per share, and the company grows to $90 per share by the time you quit/have to buy your shares, you're taxed on $80 a share. Remember, stock in a private company is worthless until you find a buyer, which is one of the reasons the people referenced in the article had to go into debt to exercise their options. 30% of a large amount of imaginary money ends up causing a gigantic tax bill, paid in actual money.
- hkmurakami 9y ago
  This is if you hit AMT, if you have ISOs. One positive for startup employees of the GOP tax bill is that it seeks to repeal AMT for individuals. If you have NQOs, this tax always happens.
  - ringaroundthetx 9y ago
    woah there, you committed the cardinal sin of describing something the GOP is doing as positive for people on the West Coast
  - khuey 9y ago
    Unless they're also planning to repeal the $100K limitation on ISOs (after which they're all treated as NQOs) this will only be a modest benefit.
    - hkmurakami 9y ago
      Is that the senate version? Also wasn't there a further amendment to that after lobbying to exempt private company shares from this? I recall fred Wilson writing something to that effect.
  - rconti 9y ago
    The Senate tax bill does not eliminate personal AMT, it merely "raises the threshold slightly". This could be fixed in reconciliation, but with the way things are going, I wouldn't be surprised if the house just votes for the senate bill. https://www.washingtonpost.com/news/wonk/wp/2017/11/30/what-is-in-the-senates-massive-tax-bill-and-what-could-change/?utm_term=.0411f6d44816 https://www.washingtonpost.com/news/wonk/wp/2017/11/30/what-...
clairity 9y ago
libertarians will tell you that that's on you for not understanding the risks involved, but that's a heartlessness and antisocial position to take. instead, potential startup employees can educate themselves a bit on how options are a risky derivative investment in the startup you work for. there's really no need for the bitterness in your post once you can properly account for them (they're like lottery tickets that are only mostly, but not completely, up to chance). if you know some quantitative finance, you can (approximately) value the options (binomial and black-scholes are commonly taught in b-school), but it's really easy to miss important valuation factors that will throw your valuation way off. for example, preferred shares bought by investors could have (very unfriendly) participating preferred clauses that discount the value of your common shares. you can value that, but you'd need to be pretty good about forecasting the future value of the company to get it right. a simpler approach is to do a rough back-of-the-envelope calculation like this: i've noticed (completely anecdotally) that startups will give you options at the current valuation that if the company has a good outcome, will net you about 1-5 years worth of salary in the end. if my salary is $100K and i believe the chances of this startup succeeding is 20% (this is the hand-wavy part), my options are worth $20-100K in 5-7 years when the startup exits. or if you're risk averse, you'll completely discount the value of the options in comp negotiations. that's different by the way from scornful statements like "options have no value" where you're completely surrendering your agency in the matter. in this case, you acknowledge your risk tolerance and account for it.
- gaius 9y ago
  libertarians will tell you that that's on you for not understanding the risks involved, but that's a heartlessness and antisocial position to take You're missing the constant drumbeat of "options will make you rich! Work 80 hour weeks, sacrifice your health and relationships, get paid well below market rate, join our startup!" The entire VC industry is focussed on misleading people like this. One of the reasons for ageism in Silly Valley is that experienced engineers can't be suckered like this.
- sockgrant 9y ago
  > they're like lottery tickets that are only mostly, but not completely, up to chance > if you know some quantitative finance [...] > a simpler approach is to do a rough back-of-the-envelope calculation [...] You're looking at this as if you're calculating the odds of winning the lottery and doing backwards math to figure out the viability. That's only half of the picture. There are a lot of circumstances that do happen and can't be put into a math equation. 1) If a company is striking gold and you have significant options they can fire you before the rest of your options vest to get more stock back into the pool. See: Zynga 2) If the company needs to grow fast but doesn't have enough stock to offer new employees they can ask you to relinquish stock back into the pool to help hire more employees. If you refuse, go back to #1. There was a good post on HN where someone was being strong armed like this. 3) Dilution will happen. You can't account for how founders and investors will dilute things because there's a lot of tricks that can happen here. 4) At the end of the day, you're counting on the company to go public or be sold. The problem is that founders turn down huge acquisitions all the time, only to have the company -- and your stock -- become worthless. See: Digg and the would-be-millionaire employees that ended up with fat debt from exercising. There's plenty of ways that your stock can go bottom-up that have nothing to do with the success of a company.
usaar333 9y ago
I'd argue that working at crappy companies is the problem and stock comp pain is just one symptom -- I find various forms of crappiness tend to correlate. At places with solid cultural values (Pinterest, Dropbox, Asana, Coinbase to name drop a few), employees are treating reasonably fairly on all dimensions. There's just a few ground rules: 1. Is the company giving options? They better have a 7 year exercise window (https://triplebyte.com/blog/fixing-the-inequity-of-startup-equity https://triplebyte.com/blog/fixing-the-inequity-of-startup-e... ); if not, don't work there. 2. Is the company giving RSUs? Great; just realize you'll be paying nearly 50% taxes when they convert to shares. (and make sure that the company will actually pay your taxes by buying back shares when they do convert!) 3. Is the company super early stage? Your options are probably worth nothing and probably will amount to nothing. But if it costs almost nothing to exercise (strike + taxes), you might as exercise them now.
- erentz 9y ago
  Why do you say 50% taxes on RSUs? You pay tax on them as normal income for their equivalent cash value at vesting. If you want to immediately sell you can. RSUs suck only when the company has one year vesting schedules. Quarterly or monthly vesting schedules work fine by me.
  - usaar333 9y ago
    I was unclear in my post and sadly the edit timeout has passed. You pay taxes on RSUs not at vesting, but when they settle into shares. This might be shortly after vesting; it might be delayed until an acquisition/IPO. (generally it is delayed for companies far away from IPO). The delay causes multi-year income to be batched into a single year. With a progressive tax system, that results in your money being taxed at a rather high marginal tax rate: If you have a substantial amount you vest a year, it's easiest to use the highest marginal bracket as a conservative guess of what you'll be taking home. In California, that's somewhere on the order of 48% combined state + federal.
- jondubois 9y ago
  That's true. I find that founders of companies that try to screw over their employees with crappy equity schemes are usually in it for the short-term gain; that means that the company is more likely to crash at some point in the future once the founders are all cashed up.
jondubois 9y ago
Options should be seen as worthless; they're mostly an instrument to deceive and screw over employees. It's like a lottery ticket. I would never accept options from any startup. I will only accept shares if I know and trust the founder(s) or if there is a way to cash out early. The last startup I worked for full time for 2 years added a clause to my contract which allows me to sell my shares as part of each capital raise that they do. Over the past few years since I left, I've had two opportunities to cash out. The last one looked pretty decent but I trust the founders so I decided to hold. It's nice to have the choice.
pascalxus 9y ago
I agree. If the company wants to "align incentives" with employees, then they should offer some kind of revenue/profit sharing.
- sockgrant 9y ago
  Revenue would work, probably not profit.

hinkley 9y ago

The moment for me when I realized that options were bullshit was when I got a story about how “we wanted to give you a bigger raise but it’s not in the budget, so here’s $3k less and $3k worth of options” As if options had a value.

sockgrant 9y ago
Yeah they always assign a dollar amount to options instead of a % amount which is what really matters. $100,000 in options sounds great but if it’s .01% of options then you’ll have to be part of a monster IPO or sale to get a windfall. Always insist on the % amount. Most founders will try not to share it.
- hkmurakami 9y ago
  If you have the dollar amount and the # of shares, then you can backtrack it to a rough percentage. Also options are a % increase in share price play, so $100,000 strike price can at least give you some information wrt how much $ you can make if the per share price of the company triples, etc. It's not always better to know % and % only. Let's say you get 1% options of a company valued at $10B. Options are priced at the preferred price, no discount. The company IPOs at $10B. Did you make $100M? Nope you made $0 so far!
  - timr 9y ago
    "If you have the dollar amount and the # of shares, then you can backtrack it to a rough percentage." Perhaps. But if a company will not give you a percentage of ownership and expects you to accept this as compensation, you should quit. Full stop. If the company won't tell you how to fairly evaluate your options, they're operating in bad faith, and should not be rewarded for their sleazy behavior.
    - hkmurakami 9y ago
      I agree with you on that regard fwiw. I've wondered whether a company will tell me what the liquidation preferences and antidilution clauses for its preferred shares are, since that also comes into play pretty significantly wrt evaluating the value of ones equity offer.
      - timr 9y ago
        This gets into a fuzzy area, since it's a multidimensional equation, and often, even the founders can't tell you what your share is "worth" without lots of caveats and time spent on spreadsheets. There's usually not a single answer. The important principle, though, is that they shouldn't be hiding anything from you. If the company won't even tell you the percentage your shares represent, you can't trust them to do anything else.
compiler-guy 9y ago
Options have value, but the value comes with a large variance and serious risk. From a financial perspective, what you want isn't $1,000 worth of options, but a _risk-adjusted_ $1,000 worth of options. Which means in all likelyhood, more like $100,000 worth of options. Oh, the company doesn't want to give you that much? Well then, "Show me the non-risky money."
- hinkley 9y ago
  10:1 or 20:1 would have sufficed, I think. But I don't think managers understand that while options might make people stay while things are going well, they make them flee (or worse, stay and become resentful) when things are clearly not going well. If you reward someone for their service you have to do it right or don't bother at all. A reward that loses its value, is delivered late, or requires the recipient to nag you constantly to deliver at all, has negative value for the person. 'Thanks for nothing' is not something you want to hear from an employee. It crushes motivation.

bsimpson 9y ago

Another detail that's not well-known unless you know someone who's gone through it: buying your shares comes with a huge tax bill. As I understand it, you have to pay tax on the difference between the option price and the value at the time you buy them. So if you have a bunch of options to buy at $10 per share, and the company grows to $90 per share by the time you quit/have to buy your shares, you're taxed on $80 a share. Remember, stock in a private company is worthless until you find a buyer, which is one of the reasons the people referenced in the article had to go into debt to exercise their options. 30% of a large amount of imaginary money ends up causing a gigantic tax bill, paid in actual money.

hkmurakami 9y ago
This is if you hit AMT, if you have ISOs. One positive for startup employees of the GOP tax bill is that it seeks to repeal AMT for individuals. If you have NQOs, this tax always happens.
- ringaroundthetx 9y ago
  woah there, you committed the cardinal sin of describing something the GOP is doing as positive for people on the West Coast
- khuey 9y ago
  Unless they're also planning to repeal the $100K limitation on ISOs (after which they're all treated as NQOs) this will only be a modest benefit.
  - hkmurakami 9y ago
    Is that the senate version? Also wasn't there a further amendment to that after lobbying to exempt private company shares from this? I recall fred Wilson writing something to that effect.
- rconti 9y ago
  The Senate tax bill does not eliminate personal AMT, it merely "raises the threshold slightly". This could be fixed in reconciliation, but with the way things are going, I wouldn't be surprised if the house just votes for the senate bill. https://www.washingtonpost.com/news/wonk/wp/2017/11/30/what-is-in-the-senates-massive-tax-bill-and-what-could-change/?utm_term=.0411f6d44816 https://www.washingtonpost.com/news/wonk/wp/2017/11/30/what-...

clairity 9y ago

libertarians will tell you that that's on you for not understanding the risks involved, but that's a heartlessness and antisocial position to take. instead, potential startup employees can educate themselves a bit on how options are a risky derivative investment in the startup you work for. there's really no need for the bitterness in your post once you can properly account for them (they're like lottery tickets that are only mostly, but not completely, up to chance). if you know some quantitative finance, you can (approximately) value the options (binomial and black-scholes are commonly taught in b-school), but it's really easy to miss important valuation factors that will throw your valuation way off. for example, preferred shares bought by investors could have (very unfriendly) participating preferred clauses that discount the value of your common shares. you can value that, but you'd need to be pretty good about forecasting the future value of the company to get it right. a simpler approach is to do a rough back-of-the-envelope calculation like this: i've noticed (completely anecdotally) that startups will give you options at the current valuation that if the company has a good outcome, will net you about 1-5 years worth of salary in the end. if my salary is $100K and i believe the chances of this startup succeeding is 20% (this is the hand-wavy part), my options are worth $20-100K in 5-7 years when the startup exits. or if you're risk averse, you'll completely discount the value of the options in comp negotiations. that's different by the way from scornful statements like "options have no value" where you're completely surrendering your agency in the matter. in this case, you acknowledge your risk tolerance and account for it.

gaius 9y ago
libertarians will tell you that that's on you for not understanding the risks involved, but that's a heartlessness and antisocial position to take You're missing the constant drumbeat of "options will make you rich! Work 80 hour weeks, sacrifice your health and relationships, get paid well below market rate, join our startup!" The entire VC industry is focussed on misleading people like this. One of the reasons for ageism in Silly Valley is that experienced engineers can't be suckered like this.
sockgrant 9y ago
> they're like lottery tickets that are only mostly, but not completely, up to chance > if you know some quantitative finance [...] > a simpler approach is to do a rough back-of-the-envelope calculation [...] You're looking at this as if you're calculating the odds of winning the lottery and doing backwards math to figure out the viability. That's only half of the picture. There are a lot of circumstances that do happen and can't be put into a math equation. 1) If a company is striking gold and you have significant options they can fire you before the rest of your options vest to get more stock back into the pool. See: Zynga 2) If the company needs to grow fast but doesn't have enough stock to offer new employees they can ask you to relinquish stock back into the pool to help hire more employees. If you refuse, go back to #1. There was a good post on HN where someone was being strong armed like this. 3) Dilution will happen. You can't account for how founders and investors will dilute things because there's a lot of tricks that can happen here. 4) At the end of the day, you're counting on the company to go public or be sold. The problem is that founders turn down huge acquisitions all the time, only to have the company -- and your stock -- become worthless. See: Digg and the would-be-millionaire employees that ended up with fat debt from exercising. There's plenty of ways that your stock can go bottom-up that have nothing to do with the success of a company.

usaar333 9y ago

I'd argue that working at crappy companies is the problem and stock comp pain is just one symptom -- I find various forms of crappiness tend to correlate. At places with solid cultural values (Pinterest, Dropbox, Asana, Coinbase to name drop a few), employees are treating reasonably fairly on all dimensions. There's just a few ground rules: 1. Is the company giving options? They better have a 7 year exercise window (https://triplebyte.com/blog/fixing-the-inequity-of-startup-equity https://triplebyte.com/blog/fixing-the-inequity-of-startup-e... ); if not, don't work there. 2. Is the company giving RSUs? Great; just realize you'll be paying nearly 50% taxes when they convert to shares. (and make sure that the company will actually pay your taxes by buying back shares when they do convert!) 3. Is the company super early stage? Your options are probably worth nothing and probably will amount to nothing. But if it costs almost nothing to exercise (strike + taxes), you might as exercise them now.

erentz 9y ago
Why do you say 50% taxes on RSUs? You pay tax on them as normal income for their equivalent cash value at vesting. If you want to immediately sell you can. RSUs suck only when the company has one year vesting schedules. Quarterly or monthly vesting schedules work fine by me.
- usaar333 9y ago
  I was unclear in my post and sadly the edit timeout has passed. You pay taxes on RSUs not at vesting, but when they settle into shares. This might be shortly after vesting; it might be delayed until an acquisition/IPO. (generally it is delayed for companies far away from IPO). The delay causes multi-year income to be batched into a single year. With a progressive tax system, that results in your money being taxed at a rather high marginal tax rate: If you have a substantial amount you vest a year, it's easiest to use the highest marginal bracket as a conservative guess of what you'll be taking home. In California, that's somewhere on the order of 48% combined state + federal.
jondubois 9y ago
That's true. I find that founders of companies that try to screw over their employees with crappy equity schemes are usually in it for the short-term gain; that means that the company is more likely to crash at some point in the future once the founders are all cashed up.

jondubois 9y ago

Options should be seen as worthless; they're mostly an instrument to deceive and screw over employees. It's like a lottery ticket. I would never accept options from any startup. I will only accept shares if I know and trust the founder(s) or if there is a way to cash out early. The last startup I worked for full time for 2 years added a clause to my contract which allows me to sell my shares as part of each capital raise that they do. Over the past few years since I left, I've had two opportunities to cash out. The last one looked pretty decent but I trust the founders so I decided to hold. It's nice to have the choice.

pascalxus 9y ago

I agree. If the company wants to "align incentives" with employees, then they should offer some kind of revenue/profit sharing.

sockgrant 9y ago
Revenue would work, probably not profit.