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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

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.

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.