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Holloway Guide to Equity Compensation
- kine 8y agoThis is insanely helpful. As employee #1 at a startup, should I get my 83b up front or in ~1 year when my first quarter of stock has vested?
- CalChris 8y agoAn 83(b) election must be filed with the IRS within 30 days after the grant or purchase date of the restricted stock.
- kjeetgill 8y agoI thought you were making the joke that your equity as employee #1 was a guaranteed 83 billion. Something along the lines of: "Ask HN: I start as employee #1 of a SF start-up next week, should I start shopping for a jet now?"
- kwang88 8y agoIf I'm correctly understanding the question, you should get the 83b form asap, as there's no downside to having the choice to exercise your options. As mentioned elsewhere once you exercise you have 30 days to file the 83b with the IRS. You can (and should) think carefully on whether or not to actually early-exercise your shares, based upon the cost and prospects of the business.
- acjohnson55 8y agoEDIT: See the other thread -- in practice, with typical vesting agreements, I think you have to early exercise, thus forfeiting your optionality. Hopefully someone will weigh in with definitive advice.
- ThrustVectoring 8y agoYou still have some optionality as long as you're still within the vesting period. You can quit, forfeiting the unvested portion of your grant. IIRC you even get refunded a prorated portion of the purchase cost, too. You may also have or be able to negotiate getting an explicit put option at the same price, too. That is, if you can buy shares at 20 cents a pop, you can also sell back to the company any shares you bought at 20 cents also at 20 cents. (NB: put-call parity proves that the value of "call + cash required to exercise" exactly the same as "underlying security + put at same strike", so you have exactly the same amount of value. Well, so long as the assets don't yield dividends, at which point American options that allow early exercise have the same value as European options that don't, and start-ups generally don't pay dividends.)
- sk5t 8y agoWhere do you suppose the money to refund the unvested early exercise, or to satisfy the put option, will come from if the firm goes belly-up? Wouldn't the granting of the put option confer some quantifiable (taxable) financial benefit as well?
- acjohnson55 8y agoAre you getting stock or options? Because the 83b election applies to grants of stock, not options. If options, then I've only ever heard of doing an 83b election in concert with early exercise, so that you are effectively making the election on a stock grant. I'm not sure whether you can choose to do within 30 days of every tranch of vesting. I've never heard of this, but I'd be interested to know whether this is actually possible. [1] https://blog.wealthfront.com/always-file-your-83b/ https://blog.wealthfront.com/always-file-your-83b/
- JumpCrisscross 8y ago> the 83b election applies to grants of stock, not options Unless you exercise early, in which case it does. Disclaimer: I am neither a lawyer nor a CPA. This is not tax advice.
- acjohnson55 8y agoYeah, that's mentioned in my post.
- pc86 8y agoAt which point the election is on the stock that you exercise, not the options.
- sk5t 8y ago83b is on grant, not vest. It can be used for options, but may not be a very good idea if the strike is appreciably greater than 0.
- acjohnson55 8y agoI am not a tax lawyer, so I'm just doing my non-expert best to understand this. Correct me if I'm wrong. According to [1], you have to pay the company for your shares in order to not be at substantial risk of forfeiture [2]. I understand that to mean that you need to both be granted and vested in the equity within the same 30 day period in order for it to qualify for 83b election. The timing doesn't work if your grant vests over a period years, hence the need to early exercise. [1] http://www.seedsafefinancial.com/how-to-make-an-83b-election-for-your-company-stock-options/ http://www.seedsafefinancial.com/how-to-make-an-83b-election... [2] http://www.henssler.com/blog/2015/3/27/substantial-risk-of-forfeiture.html http://www.henssler.com/blog/2015/3/27/substantial-risk-of-f...
- trjordan 8y agoYou probably shouldn't early exercise, which makes the question of 83b moot. You are investing a couple years of your life in this. That's probably investing a couple hundred thousand dollars of opportunity cost vs a job at large tech company. You have plenty invested. You'll do well if they do well. Spend your liquid investments in something diversified. - sincerely, a moderately lucky person who has joined 3 companies before employee 15
- throwaway76543 8y agoIt depends entirely on the cost to purchase. If it's a fraction of the opportunity cost you're probably crazy not to early exercise. There are major benefits beyond tax savings. If you quit before a liquidity event you can easily keep the vested equity without worrying about paying taxes on unrealized gain.
- trjordan 8y agoAt anything other than really-low-valuation-seed-stage, the cost to purchase is going to be material. Since 409(a) is basically just 1/5th of the last valuation, at $5mil valuation, 1.0% equity will cost you $10k to exercise. If you can burn $10k without thinking about it on startup salary, this advice isn't for you. If you wait, you get substantially more information. A company that makes it to a Series A has a much higher chance of succeeding, and you'll typically know that in your typical tenure of 1-3 years as a junior dev. If you want to spend $10k cash on buying startup equity, at least call yourself an angel investor and go find a company that's willing to issue you a note that converts to preferred stock. It's too easy for a company to have a couple of missteps and wipe out most of the common stock value, even much later.
- throwaway76543 8y agoIt's strange to worry about a $10k investment while we're both acknowledging the investment by way of accepting a below market salary is an order of magnitude higher. If you can't afford dropping $10k to buy your equity then you can't afford taking a $10k lower base salary -- let alone a $100k lower base.
- saamhaz 8y agoSearching answers on Google for this type of stuff has become futile - pretty much written it off at this point. Thank you for this. Wish it'd been around when I was at my first startup
- mikert5671 8y agoYeah you really cannot find any good information about it without spending hours, google just surfaces terrible generic articles on equity. Real information is surprisingly hard to come by, some kind of SEO has pushed it elsewhere.
- sophiaedm 8y agoagree x 100! thanks for making this!
- h4b4n3r0 8y agoMy advice is, hire a lawyer and have him/her review and correct your option contract before you sign it. You will pay a few hundred dollars. It’s worth it. I was employee #1 with a substantial equity stake, and my lawyer has found half a dozen ways I could be screwed. By default these contracts are incredibly one sided, but they don’t have to be. And as a rule in a startup if you can be legally screwed out of your money, you will be. EDIT: The linked site does have great advice and is vastly better than just about anything else on the topic you can find on the internet. Just remember that there will be a _lawyer_ on the other end, and they know this stuff much better than you do. It's better to retain a lawyer on your end as well, especially if the amount of equity is non-trivial.
- SparksZilla 8y ago"in a startup if you can be legally screwed out of your money, you will be." That is a (dark) awesome quote.
- ryandrake 8y agoNot just in startups. This is true for any transaction or business agreement (including plain vanilla employment) where your counterpart enjoys a massive information and power advantage over you.
- ironjunkie 8y agoWow, this is so helpful. As other comments seem to say. I googled quickly around when joining my first startup and this guide would have avoided me some typical first-timer mistakes.
- css 8y agoGetting a 504 trying to access this page. Edit: looks like it's back.
- claar 8y agoSame here. The Google cache of holloway.com links to https://github.com/jlevy/og-equity-compensation https://github.com/jlevy/og-equity-compensation -- perhaps this is the same content as the original post? Can anyone verify?
- zalzal 8y agoJosh, co-founder at Holloway here. That's the original content, yes, but we've augmented a lot on Holloway, added comments and search features, etc. Having a couple traffic hiccoughs but try it soon as you get in, and look forward to feedback.
- JumpCrisscross 8y ago> certain restrictions on it (like transfer restrictions) This is under appreciated outside executive levels. Start-ups are staying private longer. Most companies allow employees to sell their private shares (subject e.g. to a right of first refusal). Some, however, insert language requiring board approval for transfers. These shares trade at a steep discount, if they trade at all, and generally serve to give preferred stockholders a first crack at the exits.
- deleted 8y ago[deleted]
- tptacek 8y agoI see how that term has that effect, but before you impute intentionality to it, bear in mind that transfer restrictions have been a standard, market term for employee equity for decades. Closely held private companies are itchy about who holds their stock.
- jkaplowitz 8y agoThey have at least one good reason to be itchy: too many direct stockholders and they have most of the same requirements with the SEC as publicly traded companies. Though that doesn't justify all possible restriction regimes, of course.
- Dowwie 8y agogithub repo: https://github.com/jlevy/og-equity-compensation/ https://github.com/jlevy/og-equity-compensation/
- wtvanhest 8y agoThis guide is great, but if you are the author, please, please, please consider locking the top bar so it doesnt move while the reader is scrolling. Many people use the top of their screen as a place holder and this is basically unreadable on mobile.
- SparksZilla 8y agoHi there! Andy Sparks here, Co-Founder of Holloway. This must be a bug—sorry you're having troubles. I know it's work for you, but we'd like to get it fixed. Can you email me a screenshot and any other details (andy@holloway.com)?
- blahblahblogger 8y agoWhat do you do when a company won't give you all the info required to really evaluate an offer like the 409A or some such?
- kevhsu 8y agoRefuse to work for them because they aren't letting you do due diligence on the offer. What do they have to hide?
- zalzal 8y ago(Josh, co-founder of Holloway here.) There are a couple sides to this. No company should or will tell every financial detail to every candidate. On the other hand, if a company has given you an offer and really wants to hire you, yet is very evasive about all the info you need to evaluate your offer, it can be a warning sign; it's likely indicative of the level of transparency you'll get as an employee, too. The 409A is material to understand your stock options, so very fair to ask about before signing. Also—we'd love more questions like this in the marginal notes in the Guide, so it improves iteratively! If you (or anyone else) wants early access to that feature shoot an e-mail to josh@holloway.com
- hereIam1234 8y agoIt's really well organized and the menu is well-designed. One thing that would be nice, though, is if the menu were easier to scroll through. Without expanding anything, you can see the headers of all the sections ... but if you expand one thing, you have to drag and highlight in order to get to the bottom. IDK, maybe there's a scrolling tool that I'm missing, or maybe I'm all thumbs. I find this to be a problem with most of the internet, so.
- SparksZilla 8y agoHello! Andy Sparks, co-founder of Holloway here. Thank you for the positive words on the organization and menu. I'm trying to get a better idea of the issue you're running into, as it doesn't sound like something we intended to have happen. Would you mind sending me a screenshot or more detail at andy@holloway.com?
- dmitrygr 8y agoThis image https://imgur.com/a/2Rzeac2 https://imgur.com/a/2Rzeac2 in section "Fundraising, growth, and dilution" really says a lot! Person #4 in the company likely is as important as first 3, and took as much risk (also quit previous job and did not take a high-paying one at G/M/A/F), but ends up with 1/10 the share of the first 3 at best (options pool is spread between him and others).
- nojvek 8y agoI imagine person 4 comes in after an year or two after first 3 founders busted their arse to build a product to have the first few paying customers. Before joining any company, you have to realize the opportunity cost. You could work at AAMG and make decent money being part of ~1 trillion companies. OR you choose to join a small startup that has managed to find a product market fit and now needs to scale to realize their potential and ride that wave.
- dmitrygr 8y agoIn more sane parts of the world perhaps. In Silicon Valley, with VC funding, a year after company ia created, it is probably 50 people or more in size.
- birdmom 8y agoThe search in this thing is incredible. Definitions come up, context comes up, even get results from the material in the linked resources. Really cool how easy it is to navigate--if you click a link to go to another section of the text, back arrow brings you back where you were. That really makes it easier to learn what you don't know, like flipping back and forth to a glossary or footnotes in a book but without any hassle.
- treblig 8y agoAfter hearing about this for awhile and now playing with the product for the first time, I was super pumped to guess (and be right!) that the arrow keys could be used to help navigate sections. Nice touch, guys :)
- goauntflow 8y agoThis is literally the best thing I have ever read. For the first time ever, I feel like I know what position I am in as a founder.
- davidw 8y agodavidw guide to equity compensation: it's probably worth jack shit. That said, this looks like a great guide if you're going to go that route.
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