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I thought they switched to RSUs? Are you sure that new grad didn't get a mix of RSUs and options?

habosa 9y ago
They did attempt to make good later by converting some of those options to RSUs but some options remain. Note: I am basing this from one person who shared financial details with me, there may be a large variance in offers to different employees.
- seattleeng 9y ago
  Just to be clear, you're saying that the strike of the option grants (or the 409a) in 2014 was roughly based on a 10b valuation? That does seem to screw over anyone with such options, since it's unlikely they'll see appreciable gain on those. Is this sort of conversion from existing option grants to RSUs common? I know most startups convert to RSUs for new grants eventually, but was unaware that some also apply it retroactively. It's a nice show of good faith to convert them to some # of RSUs on Dropbox's part.
  - toast0 9y ago
    It's not uncommon for a company to take a look at the equity incentives it's given to employees, in whatever form and realize it's not worth very much and try to make good by giving replacement incentives. I've been at companies where they replaced underwater options at $N a share with at money options at $M with $M being much less than $N (of course the stock continued downward and I left for other reasons before anything vested); for a not yet public company, poorly priced options being replaced with RSUs makes a lot of sense, because the company may not be able to increase its valuation, but it doesn't want to decrease it, and options issued under FMV don't qualify for exciting tax programs.
ithinkinstereo 9y ago
RSUs are not necessarily better. You get taxed on those as ordinary income. If the grant is large enough, you're effectively stuck with paying tax on an illiquid asset. With options you're only taxed at the time of exercise. So in the case of the 2014 grads, they'd be underwater on the value of their options vis-a-vis the exercise price, but wouldn't necessary have any sunk costs provided they haven't exercised any of the shares. The downside with this situation of course, is that the employees have "golden handcuffs" since if they leave they'd have to exercise within 30-60-90 days or lose their vested, unexercised, options. For those employees that did exercise their underwater options, one small silver lining is they can write those losses off on future tax returns.
- goialoq 9y ago
  RSU tax can be paid by selling 25% of shares back to the company, which any reputable company should do.
- rrdharan 9y ago
  > For those employees that did exercise their underwater options, one small silver lining is they can write those losses off on future tax returns. Note this only applies to NQSOs not ISOs - since the gain in the ISO case is taxes as AMT; the loss can only be carried as an AMT loss and applied only if/when you are actually subject to the AMT.
- rrdharan 9y ago
  However, you're only taxed on RSUs if they are actually released to you. It's possible to have RSU awards that vest without them being released to the employee. This means that (unlike exercised options) you can't sell them on the secondary market, but it also means that you aren't liable for taxes on an illiquid asset.

They did attempt to make good later by converting some of those options to RSUs but some options remain. Note: I am basing this from one person who shared financial details with me, there may be a large variance in offers to different employees.

seattleeng 9y ago
Just to be clear, you're saying that the strike of the option grants (or the 409a) in 2014 was roughly based on a 10b valuation? That does seem to screw over anyone with such options, since it's unlikely they'll see appreciable gain on those. Is this sort of conversion from existing option grants to RSUs common? I know most startups convert to RSUs for new grants eventually, but was unaware that some also apply it retroactively. It's a nice show of good faith to convert them to some # of RSUs on Dropbox's part.
- toast0 9y ago
  It's not uncommon for a company to take a look at the equity incentives it's given to employees, in whatever form and realize it's not worth very much and try to make good by giving replacement incentives. I've been at companies where they replaced underwater options at $N a share with at money options at $M with $M being much less than $N (of course the stock continued downward and I left for other reasons before anything vested); for a not yet public company, poorly priced options being replaced with RSUs makes a lot of sense, because the company may not be able to increase its valuation, but it doesn't want to decrease it, and options issued under FMV don't qualify for exciting tax programs.

ithinkinstereo 9y ago

RSUs are not necessarily better. You get taxed on those as ordinary income. If the grant is large enough, you're effectively stuck with paying tax on an illiquid asset. With options you're only taxed at the time of exercise. So in the case of the 2014 grads, they'd be underwater on the value of their options vis-a-vis the exercise price, but wouldn't necessary have any sunk costs provided they haven't exercised any of the shares. The downside with this situation of course, is that the employees have "golden handcuffs" since if they leave they'd have to exercise within 30-60-90 days or lose their vested, unexercised, options. For those employees that did exercise their underwater options, one small silver lining is they can write those losses off on future tax returns.

goialoq 9y ago
RSU tax can be paid by selling 25% of shares back to the company, which any reputable company should do.
rrdharan 9y ago
> For those employees that did exercise their underwater options, one small silver lining is they can write those losses off on future tax returns. Note this only applies to NQSOs not ISOs - since the gain in the ISO case is taxes as AMT; the loss can only be carried as an AMT loss and applied only if/when you are actually subject to the AMT.
rrdharan 9y ago
However, you're only taxed on RSUs if they are actually released to you. It's possible to have RSU awards that vest without them being released to the employee. This means that (unlike exercised options) you can't sell them on the secondary market, but it also means that you aren't liable for taxes on an illiquid asset.