7 ms·

Early dropbox employees have had opportunities to cash out. Same has happened for other big private startups.

econner 9y ago
Yes, but there's no denying that a bit of bait and switch goes on at these companies whereby they grant you a bunch of stock options, call it part of your total comp, and then restrict 100% what you can do with them unless it's on their terms.
- appachai2 9y ago
  Yeah, most startups aren't geared towards their employees. They have to grow a certain size before the employees are able to get reasonable terms from their employer.
- cheriot 9y ago
  Plus the tax penalty of exercising those options when you leave! The only way companies will give up the ability to lock in talent is if enough people make it a condition of accepting the offer.
  - usaar333 9y ago
    Good thing Dropbox is one of those "good companies" that doesn't require exercising on leaving.
    - fossuser 9y ago
      Even with this, if they're ISOs they'll transfer to NSOs after 90 days. This probably didn't matter before, but the new tax law in the US increases where AMT kicks in from around 120k to 500k. This means that ISOs can probably be exercised tax free, but NSOs require you to pay taxes on the spread from strike to the fair market valuation. If your strike price is low enough you may be able to save and afford to exercise the ISOs, the NSOs will probably be too expensive with the tax burden. There's also a 10yr expiration on options anyway so it's possible that you could lose them even if you're waiting for an IPO while holding unexercised NSOs.
      - woolvalley 9y ago
        Now it's 500k, the entire concept of ISOs is actually somewhat useful. Exercising a bit each year doesn't have hilarious consequences where the tax cost to exercise is 4 times more than the strike price itself. In my experience, small startup options don't get exercised because of the tax bill, not because of the strike price.
        fossuser 9y ago
        Yeah it actually makes a difference now. You still have to watch out for the California AMT (which I didn't know about) - it's 7% and will still trigger at the lower value. As a bonus you can no longer deduct it either past 10k from federal taxes (though that may change with the charity thing). The ability to do early exercise on unvested shares is also often not an option at startups so when you are able to exercise the spread is higher and the tax penalty is worse.
- BadassFractal 9y ago
  What is the solution? Ask for all of your compensation to be in cash, Netflix-style?
  - jartelt 9y ago
    That could be a solution, but many startups will balk at your ask for full cash compensation and say you need some equity to "have skin in the game and to show you believe in the company."
    - BadassFractal 9y ago
      Which from their perspective makes sense, since they want a lock-in. I guess if you have a strong negotiating position you can potentially push things around. Maybe instead of options you get on some kind of a cash clawback plan for the first few years?
    - goialoq 9y ago
      The more directly balk at the prospect of paying cash they simply don't have.
  - bogomipz 9y ago
    I think this is a good solution. Almost any start up is going to have a one year cliff before your first vesting period begins. And to be fully vested often means remaining at the company for 4 years. So now you are that 5 year mark and if the company doesn't IPO by then and you want to leave you have to buy all of those options. So if you don't foresee being at the company for at least 5 year or foresee having the money to purchase the options you have accrued after the 1+ years then you are better off asking for cash. Companies of course don't like this because it costs them nothing if they pay part of your comp in options that you then leave on the table when you leave the company. This is calculated, the companies know this. How many startups can you expect to work in your career where you stay for 5 years? Lets say you work for which would be 20 years of your career. How many of those 5 are going to actually IPO? The math suggests you leaving a lot of money on the table. If you take the comp in cash you can put that money to work for you in other ways.
- bogomipz 9y ago
  Indeed. Companies generally have a right of first refusal on you selling your options. I experienced this first hand.
  - ChuckMcM 9y ago
    Having done this first hand, can you comment on whether or not they met the price? A VC related a story where an employee of a different company had offered to sell him his exercised common shares, and the company reminded the employee that they had first right of refusal, so the employee offered them to the company at the same price he was going to sell them to the VC, which the company took. The employee got what they wanted (cash for their stock).
    - woolvalley 9y ago
      That is what the right of first refusal is, you have to match the price they are selling for. ROFR isn't that bad. What is bad is some contracts have a call option on your stock at FMV price, even when you exercise.
    - bogomipz 9y ago
      Sure. The company rejected the sale between me and a third party. They instead arranged for an alternate sale at the same price with one of their "preferred buyers." They were obligated to meet the price I had arranged privately with my broker and my buyer. What infuriated me was that I had to do all the leg work and paper work and it was only when the money for the sale went into an escrow that the company rejected the offer. So they wasted a lot of people's time unfortunately - mine, the broker and the buyers time. The companies "preferred buyer" turned out to be some Hollywood big wig. And my guess is that they never had any intention of letting my proposed sale go through. One curious thing I learned is that although this practice of selling options on the secondary markets by "worker bees" was strongly "discouraged" because it was seen as a sign of not believing in the company, it turns out the execs were all selling their options left and right and had been doing so for years.
RestlessMind 9y ago
Is there any guarantee of a cash-out opportunity at private startups? Or is it at the mercy of your employer and one can even have bad experiences like Zynga where your options could be clawed back?
- komali2 9y ago
  My understanding is that it's entirely at the mercy of whatever contract you signed.
- hatred 9y ago
  Most startups in SV though have a standard ROFR clause. So as long as you can find a buyer, you would get paid. That being said, read the options agreement carefully and ensure your interests are well protected.
  - timr 9y ago
    "read the options agreement carefully and ensure your interests are well protected." It's worth noting that, in nearly all cases, you will not receive an options agreement until well after you have accepted the offer. I've never tried to ask for an options agreement prior to accepting an offer, but I'd imagine it would be a very difficult thing to get at most companies.
    - notyourday 9y ago
      So you accept the offer, get the options agreement and if it does not work for you then you find another job and move on.
      - timr 9y ago
        ...or maybe you've quit another job, or moved across the country, or any number of things that aren't easily reversible decisions. Not everyone is 20 years old, single and childless. Point is, negotiate a salary that meets your needs, and treat the stock options like lottery tickets, because that's what they are.
komali2 9y ago
What sort of opportunities? I'm curious what I can eventually do with my options.
- prklmn 9y ago
  Sell them in a private offering such as this - https://www.reuters.com/article/us-uber-softbank-tender/softbank-succeeds-in-tender-offer-for-uber-shares-idUSKBN1EM1NB https://www.reuters.com/article/us-uber-softbank-tender/soft...
- SREinSF 9y ago
  Secondary markets. Both SharesPost and Nasdaq Private Market (Second Market Solutions was acquired by Nasdaq) offer this service. Pre IPO, FB shares were floating around secondary markets. Note investors are usually looking for household name unicorns on these markets. https://www.wsj.com/articles/SB10001424052970203833004577249512827646658 https://www.wsj.com/articles/SB10001424052970203833004577249...
- woolvalley 9y ago
  As someone who has had those opportunities, they are often not that good. Your limited to a certain percentage of your vested stock, and there is a pool which quickly gets oversubscribed. And you can't do it in an adhoc manner, it's usually organized by the company to one buyer.
bogomipz 9y ago
And how many years was it before early Dropbox employees allowed to cash out?

Yes, but there's no denying that a bit of bait and switch goes on at these companies whereby they grant you a bunch of stock options, call it part of your total comp, and then restrict 100% what you can do with them unless it's on their terms.

appachai2 9y ago
Yeah, most startups aren't geared towards their employees. They have to grow a certain size before the employees are able to get reasonable terms from their employer.
cheriot 9y ago
Plus the tax penalty of exercising those options when you leave! The only way companies will give up the ability to lock in talent is if enough people make it a condition of accepting the offer.
- usaar333 9y ago
  Good thing Dropbox is one of those "good companies" that doesn't require exercising on leaving.
  - fossuser 9y ago
    Even with this, if they're ISOs they'll transfer to NSOs after 90 days. This probably didn't matter before, but the new tax law in the US increases where AMT kicks in from around 120k to 500k. This means that ISOs can probably be exercised tax free, but NSOs require you to pay taxes on the spread from strike to the fair market valuation. If your strike price is low enough you may be able to save and afford to exercise the ISOs, the NSOs will probably be too expensive with the tax burden. There's also a 10yr expiration on options anyway so it's possible that you could lose them even if you're waiting for an IPO while holding unexercised NSOs.
    - woolvalley 9y ago
      Now it's 500k, the entire concept of ISOs is actually somewhat useful. Exercising a bit each year doesn't have hilarious consequences where the tax cost to exercise is 4 times more than the strike price itself. In my experience, small startup options don't get exercised because of the tax bill, not because of the strike price.
      - fossuser 9y ago
        Yeah it actually makes a difference now. You still have to watch out for the California AMT (which I didn't know about) - it's 7% and will still trigger at the lower value. As a bonus you can no longer deduct it either past 10k from federal taxes (though that may change with the charity thing). The ability to do early exercise on unvested shares is also often not an option at startups so when you are able to exercise the spread is higher and the tax penalty is worse.
BadassFractal 9y ago
What is the solution? Ask for all of your compensation to be in cash, Netflix-style?
- jartelt 9y ago
  That could be a solution, but many startups will balk at your ask for full cash compensation and say you need some equity to "have skin in the game and to show you believe in the company."
  - BadassFractal 9y ago
    Which from their perspective makes sense, since they want a lock-in. I guess if you have a strong negotiating position you can potentially push things around. Maybe instead of options you get on some kind of a cash clawback plan for the first few years?
  - goialoq 9y ago
    The more directly balk at the prospect of paying cash they simply don't have.
- bogomipz 9y ago
  I think this is a good solution. Almost any start up is going to have a one year cliff before your first vesting period begins. And to be fully vested often means remaining at the company for 4 years. So now you are that 5 year mark and if the company doesn't IPO by then and you want to leave you have to buy all of those options. So if you don't foresee being at the company for at least 5 year or foresee having the money to purchase the options you have accrued after the 1+ years then you are better off asking for cash. Companies of course don't like this because it costs them nothing if they pay part of your comp in options that you then leave on the table when you leave the company. This is calculated, the companies know this. How many startups can you expect to work in your career where you stay for 5 years? Lets say you work for which would be 20 years of your career. How many of those 5 are going to actually IPO? The math suggests you leaving a lot of money on the table. If you take the comp in cash you can put that money to work for you in other ways.
bogomipz 9y ago
Indeed. Companies generally have a right of first refusal on you selling your options. I experienced this first hand.
- ChuckMcM 9y ago
  Having done this first hand, can you comment on whether or not they met the price? A VC related a story where an employee of a different company had offered to sell him his exercised common shares, and the company reminded the employee that they had first right of refusal, so the employee offered them to the company at the same price he was going to sell them to the VC, which the company took. The employee got what they wanted (cash for their stock).
  - woolvalley 9y ago
    That is what the right of first refusal is, you have to match the price they are selling for. ROFR isn't that bad. What is bad is some contracts have a call option on your stock at FMV price, even when you exercise.
  - bogomipz 9y ago
    Sure. The company rejected the sale between me and a third party. They instead arranged for an alternate sale at the same price with one of their "preferred buyers." They were obligated to meet the price I had arranged privately with my broker and my buyer. What infuriated me was that I had to do all the leg work and paper work and it was only when the money for the sale went into an escrow that the company rejected the offer. So they wasted a lot of people's time unfortunately - mine, the broker and the buyers time. The companies "preferred buyer" turned out to be some Hollywood big wig. And my guess is that they never had any intention of letting my proposed sale go through. One curious thing I learned is that although this practice of selling options on the secondary markets by "worker bees" was strongly "discouraged" because it was seen as a sign of not believing in the company, it turns out the execs were all selling their options left and right and had been doing so for years.

RestlessMind 9y ago

Is there any guarantee of a cash-out opportunity at private startups? Or is it at the mercy of your employer and one can even have bad experiences like Zynga where your options could be clawed back?

komali2 9y ago
My understanding is that it's entirely at the mercy of whatever contract you signed.
hatred 9y ago
Most startups in SV though have a standard ROFR clause. So as long as you can find a buyer, you would get paid. That being said, read the options agreement carefully and ensure your interests are well protected.
- timr 9y ago
  "read the options agreement carefully and ensure your interests are well protected." It's worth noting that, in nearly all cases, you will not receive an options agreement until well after you have accepted the offer. I've never tried to ask for an options agreement prior to accepting an offer, but I'd imagine it would be a very difficult thing to get at most companies.
  - notyourday 9y ago
    So you accept the offer, get the options agreement and if it does not work for you then you find another job and move on.
    - timr 9y ago
      ...or maybe you've quit another job, or moved across the country, or any number of things that aren't easily reversible decisions. Not everyone is 20 years old, single and childless. Point is, negotiate a salary that meets your needs, and treat the stock options like lottery tickets, because that's what they are.

komali2 9y ago

What sort of opportunities? I'm curious what I can eventually do with my options.

prklmn 9y ago
Sell them in a private offering such as this - https://www.reuters.com/article/us-uber-softbank-tender/softbank-succeeds-in-tender-offer-for-uber-shares-idUSKBN1EM1NB https://www.reuters.com/article/us-uber-softbank-tender/soft...
SREinSF 9y ago
Secondary markets. Both SharesPost and Nasdaq Private Market (Second Market Solutions was acquired by Nasdaq) offer this service. Pre IPO, FB shares were floating around secondary markets. Note investors are usually looking for household name unicorns on these markets. https://www.wsj.com/articles/SB10001424052970203833004577249512827646658 https://www.wsj.com/articles/SB10001424052970203833004577249...
woolvalley 9y ago
As someone who has had those opportunities, they are often not that good. Your limited to a certain percentage of your vested stock, and there is a pool which quickly gets oversubscribed. And you can't do it in an adhoc manner, it's usually organized by the company to one buyer.

bogomipz 9y ago

And how many years was it before early Dropbox employees allowed to cash out?