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It's bad for most people, but when it's good it's really good. I was lucky to join a now unicorn as one of the first few dozen employees a few years ago. I for

by l2c1928 7y ago

It's bad for most people, but when it's good it's really good. I was lucky to join a now unicorn as one of the first few dozen employees a few years ago. I forward exercised with a few thousand out of pocket (section 83b) an equity grant now worth around $1.5m. Because I forward exercised my options at a low valuation I didn't have to worry about paying taxes if I exercised at a later time when the company's valuation grew. It also meant that my gains became long-term capital gains, and thus taxed lower, as soon as possible after I vested each month.

seibelj 7y ago
I too would like to win the lottery.
- l2c1928 7y ago
  My point is that there are ways to manage risk as an employee, such as early exercising assuming you are joining an early stage startup where the cost is low enough. I would've been screwed if I didn't early exercise.
- CalChris 7y ago
  If you think of the Valley (or wherever you are) as a lottery then your chances of winning are about the same as those of a lottery. If you think of yourself as your personal VC then your odds approach those of a VC which while not great and moreover not diversified, they are much much better than a lottery.
  - donaldknuth123 7y ago
    This analogy fails almost immediately. Real VCs distribute their bets across dozens of companies. You personally are placing one massive bet on one single company so your odds are far worse than a VC.
  - maxxxxx 7y ago
    How do you diversify as an employee/engineer? work for 10 startups at the same time?
    - CalChris 7y ago
      You can't. That is what distinguishes you from a VC. Actually, you can. Serially. Plenty of people work for a startup through its early stage. A year here, a year there. That's diversification.
      - maxxxxx 7y ago
        But how do you determine when it's time to jump ship? A year seems awfully short to make that determination.
        CalChris 7y ago
        If your object is diversification of your investment then one year isn't too short. However, typically your option vests monthly after the cliff. So you don't have to stay for two years unless you want to.
    - opportune 7y ago
      Bounce around until you find somewhere that has a rocketship trajectory? If you can work at 10 startups over a 20 year career, your odds aren't terrible
creaghpatr 7y ago
Good point, although do long term cap gains apply to private company stock being held over years until the liquidity event?
- l2c1928 7y ago
  I paid long term capital gains after selling a portion of my private stock via a tender offer last year.
- bgentry 7y ago
  You get switched to long term capital gains 1 year after exercise or two years after the grant start date, whichever is later.
  - theIV 7y ago
    I don't believe the "or" part of this statement is right. I think you still need to hold for 1 year after exercise AND two years after the grant for long term to kick in. Not sure what the best source on this is, but a quick DDGing: https://www.fool.com/knowledge-center/tax-rate-on-exercising-stock-options.aspx https://www.fool.com/knowledge-center/tax-rate-on-exercising...
    - bgentry 7y ago
      I think we're saying the same thing. If I early exercise my options on day 1, then I still have to wait until the 2 years after the grant date (2 years of employment) to get long term capital gains treatment. If I wait 4 years, then exercise, then I have already satisfied the 2 years post-grant requirement, but I still have to wait a year after the exercise to get long term capital gains treatment. The key part was my last clause: "whichever is later".
lostcolony 7y ago
Yes, just like buying a lottery ticket is bad for most people, but when it's good it's really good. Stock options are never a reason to join a company. They are potentially an added bonus. But they should never be valued in that initial "should I work here?" Not when first taking the job, and not when considering whether you should leave or not (barring an imminent IPO that would delay your leaving by a bearable month or two)
aliston 7y ago
If you go into a casino, put 1000 on green at the roulette table and win, did you get a good deal? The fact that some people win at startup roulette doesn't mean that it's a good financial decision to join a startup, especially considering that you can make the same sort of money without the risk elsewhere.
- chadash 7y ago
  Parent started with "It's bad for most people, but when it's good it's really good.". So yes, roulette is similarly bad for those who don't win and good for the few who do.
  - deleted 7y ago
    [deleted]
  - aliston 7y ago
    Article is titled "why a good deal has gone bad." My point is that winning does not make it a good deal. To expand on it further, even if you are lucky to have joined a unicorn, you still didn't get a good deal in comparison to virtually everyone else involved in the company. The founders are likely billionaires and you made off with a low 7 figure outcome while taking on only marginally less risk. That's not a good deal by any reasonable definition.
    - jerguismi 7y ago
      > To expand on it further, even if you are lucky to have joined a unicorn, you still didn't get a good deal in comparison to virtually everyone else involved in the company. The founders are likely billionaires and you made off with a low 7 figure outcome while taking on only marginally less risk. That's not a good deal by any reasonable definition. I wouldn't see the risk of being an employee and founder as similar. Typically often founders are for time periods without salary etc. Early employee should just consider it as a job with more risk of the company going down under (that risk also exists in more established company). You can request more salary for the job or some additional perks (such as options). I think for the employee the risks of joining to startup are quite easy to manage compared to a founder.
mlthoughts2018 7y ago
Your story still leaves a lot of room for skepticism. For one, 1.5MM is not actually a very good deal for an engineer in your situation, and likely the company gave you very unfavorable terms. Electing 83b is a fairly irrelevant detail in your story as it only affects taxes, not the outcome of the company. Your shares are likely going to get hugely diluted exactly because of growth investing like in the article. Investors and founders will essentially trade away your share of the company in new rounds, while they get huge payouts for it, your shares may grow a small amount, again realized over some long time horizon. Let’s take an extreme example and say your shares double in value (not likely) through the remaining funding rounds, and eventually in another ~7 years you can actually sell them in some liquidity event. So that’s $3 MM (gross) over 10 years. That works out to be $300,000 / yr in equity compensation. Certainly very high. But not any kind of crazy number. Definitely there are rank and file engineers in FAANG companies, Wall Street, and other industries getting annual RSUs or bonuses well beyond that without having to wait 10 years to realize it or have the risk that it folds or you get laid off and lose a bunch of future value, and have a high base salary, good benefits, and good work/life balance the whole time. Given that even a crazy outcome like $3 MM annualized over 10 years isn’t significantly better than other reasonable total comp opportunities, this overall paints a really bad picture for start-ups. Your case, which is nearly about the best lottery ticket someone could get, is only slightly better than a competitive position at many public companies, finance shops, etc. Meanwhile, almost all start-up outcomes would be far worse.
- l2c1928 7y ago
  There's a myth that you can't realize gains if a company doesn't IPO...I've already sold some shares in a tender offer. There is an active secondary market for shares if I chose to sell more. Not sure what your point is about $3MM over 10 years. Why would you divide it over anything other than the number of years you actually worked at the company? You've assumed I was a senior engineering hire. I was in a junior non-technical role a year out of college.
  - mlthoughts2018 7y ago
    Early selling for employees is exceedingly rare and also often on bad terms, this was mentioned in the OP article. Again, it’s lucky that you were able to, but is such a wildly unlikely outcome that functionally everyone else has to ignore that aspect of your story. To boot, being able to sell in a secondary market transaction only after about 3 years is even more ridiculously rare (to the point that it makes me question if your whole story is even true, or just some trolling). The few companies I’ve heard of allowing that type of thing (late pre-IPO Spotify, Squarespace), only allowed it after early employees like yourself would have waited 7-10 years before getting any payout. > “Not sure what your point is about $3MM over 10 years.” Please re-read my comment to help understand. > “You've assumed I was a senior engineering hire. I was in a junior non-technical role a year out of college.” Where did I make an assumption about junior vs senior level? As for your claim you were given this grant for a non-technical role 1 year out of college, I think it’s more likely you’re just lying to troll this comment thread. Just in a Bayesian sense, the conditional probability that you’re lying is higher than that this is a true story. It’s not impossible that this could have happened for a non-tech hire with no experience, but that mere possibility also is irrelevant compared with the far greater probability that this is just made up.
luckystartup 7y ago
I have a very similar story: Was on the first 10 employees at a now unicorn, forward exercised with a few thousand dollars, and my shares are also now worth around $1.5m. But unfortunately the company blocked all attempts at selling any shares on secondary markets. Something you might not be aware of: If you joined the company before they had $50M in assets, your stock would also qualify as QSBS [1], which means you don't have to pay any tax on gains of up to $10 million. [1] https://www.andersentax.com/services/for-private-clients/business-owners-and-entrepreneurs/qsbs https://www.andersentax.com/services/for-private-clients/bus...
SkyBelow 7y ago
>but when it's good it's really good. I don't think this is true. There are cases where people have broken equal or made slightly more than working at a corporation would have. It can be really good, but it can also be just okayish or not that great. This is based off my reading of the phrase, which means that good options have to be really good. The "it is really good" that is actually written verses "it can be really good" that is closer to the truth (imo).
khazhou 7y ago
My problem with it is that there are many scenarios that are fantastic for the founders, but only one (unicorn) that is fantastic for non-founders. You can put in the same long hours, pour your soul into it, take the same risk for years, but if there's an exit event, you'll only be feeding off crumbs while the founders feast on the rewards.

seibelj 7y ago

I too would like to win the lottery.

l2c1928 7y ago
My point is that there are ways to manage risk as an employee, such as early exercising assuming you are joining an early stage startup where the cost is low enough. I would've been screwed if I didn't early exercise.
CalChris 7y ago
If you think of the Valley (or wherever you are) as a lottery then your chances of winning are about the same as those of a lottery. If you think of yourself as your personal VC then your odds approach those of a VC which while not great and moreover not diversified, they are much much better than a lottery.
- donaldknuth123 7y ago
  This analogy fails almost immediately. Real VCs distribute their bets across dozens of companies. You personally are placing one massive bet on one single company so your odds are far worse than a VC.
- maxxxxx 7y ago
  How do you diversify as an employee/engineer? work for 10 startups at the same time?
  - CalChris 7y ago
    You can't. That is what distinguishes you from a VC. Actually, you can. Serially. Plenty of people work for a startup through its early stage. A year here, a year there. That's diversification.
    - maxxxxx 7y ago
      But how do you determine when it's time to jump ship? A year seems awfully short to make that determination.
      - CalChris 7y ago
        If your object is diversification of your investment then one year isn't too short. However, typically your option vests monthly after the cliff. So you don't have to stay for two years unless you want to.
  - opportune 7y ago
    Bounce around until you find somewhere that has a rocketship trajectory? If you can work at 10 startups over a 20 year career, your odds aren't terrible

creaghpatr 7y ago

Good point, although do long term cap gains apply to private company stock being held over years until the liquidity event?

l2c1928 7y ago
I paid long term capital gains after selling a portion of my private stock via a tender offer last year.
bgentry 7y ago
You get switched to long term capital gains 1 year after exercise or two years after the grant start date, whichever is later.
- theIV 7y ago
  I don't believe the "or" part of this statement is right. I think you still need to hold for 1 year after exercise AND two years after the grant for long term to kick in. Not sure what the best source on this is, but a quick DDGing: https://www.fool.com/knowledge-center/tax-rate-on-exercising-stock-options.aspx https://www.fool.com/knowledge-center/tax-rate-on-exercising...
  - bgentry 7y ago
    I think we're saying the same thing. If I early exercise my options on day 1, then I still have to wait until the 2 years after the grant date (2 years of employment) to get long term capital gains treatment. If I wait 4 years, then exercise, then I have already satisfied the 2 years post-grant requirement, but I still have to wait a year after the exercise to get long term capital gains treatment. The key part was my last clause: "whichever is later".

lostcolony 7y ago

Yes, just like buying a lottery ticket is bad for most people, but when it's good it's really good. Stock options are never a reason to join a company. They are potentially an added bonus. But they should never be valued in that initial "should I work here?" Not when first taking the job, and not when considering whether you should leave or not (barring an imminent IPO that would delay your leaving by a bearable month or two)

aliston 7y ago

If you go into a casino, put 1000 on green at the roulette table and win, did you get a good deal? The fact that some people win at startup roulette doesn't mean that it's a good financial decision to join a startup, especially considering that you can make the same sort of money without the risk elsewhere.

chadash 7y ago
Parent started with "It's bad for most people, but when it's good it's really good.". So yes, roulette is similarly bad for those who don't win and good for the few who do.
- deleted 7y ago
  [deleted]
- aliston 7y ago
  Article is titled "why a good deal has gone bad." My point is that winning does not make it a good deal. To expand on it further, even if you are lucky to have joined a unicorn, you still didn't get a good deal in comparison to virtually everyone else involved in the company. The founders are likely billionaires and you made off with a low 7 figure outcome while taking on only marginally less risk. That's not a good deal by any reasonable definition.
  - jerguismi 7y ago
    > To expand on it further, even if you are lucky to have joined a unicorn, you still didn't get a good deal in comparison to virtually everyone else involved in the company. The founders are likely billionaires and you made off with a low 7 figure outcome while taking on only marginally less risk. That's not a good deal by any reasonable definition. I wouldn't see the risk of being an employee and founder as similar. Typically often founders are for time periods without salary etc. Early employee should just consider it as a job with more risk of the company going down under (that risk also exists in more established company). You can request more salary for the job or some additional perks (such as options). I think for the employee the risks of joining to startup are quite easy to manage compared to a founder.

mlthoughts2018 7y ago

Your story still leaves a lot of room for skepticism. For one, 1.5MM is not actually a very good deal for an engineer in your situation, and likely the company gave you very unfavorable terms. Electing 83b is a fairly irrelevant detail in your story as it only affects taxes, not the outcome of the company. Your shares are likely going to get hugely diluted exactly because of growth investing like in the article. Investors and founders will essentially trade away your share of the company in new rounds, while they get huge payouts for it, your shares may grow a small amount, again realized over some long time horizon. Let’s take an extreme example and say your shares double in value (not likely) through the remaining funding rounds, and eventually in another ~7 years you can actually sell them in some liquidity event. So that’s $3 MM (gross) over 10 years. That works out to be $300,000 / yr in equity compensation. Certainly very high. But not any kind of crazy number. Definitely there are rank and file engineers in FAANG companies, Wall Street, and other industries getting annual RSUs or bonuses well beyond that without having to wait 10 years to realize it or have the risk that it folds or you get laid off and lose a bunch of future value, and have a high base salary, good benefits, and good work/life balance the whole time. Given that even a crazy outcome like $3 MM annualized over 10 years isn’t significantly better than other reasonable total comp opportunities, this overall paints a really bad picture for start-ups. Your case, which is nearly about the best lottery ticket someone could get, is only slightly better than a competitive position at many public companies, finance shops, etc. Meanwhile, almost all start-up outcomes would be far worse.

l2c1928 7y ago
There's a myth that you can't realize gains if a company doesn't IPO...I've already sold some shares in a tender offer. There is an active secondary market for shares if I chose to sell more. Not sure what your point is about $3MM over 10 years. Why would you divide it over anything other than the number of years you actually worked at the company? You've assumed I was a senior engineering hire. I was in a junior non-technical role a year out of college.
- mlthoughts2018 7y ago
  Early selling for employees is exceedingly rare and also often on bad terms, this was mentioned in the OP article. Again, it’s lucky that you were able to, but is such a wildly unlikely outcome that functionally everyone else has to ignore that aspect of your story. To boot, being able to sell in a secondary market transaction only after about 3 years is even more ridiculously rare (to the point that it makes me question if your whole story is even true, or just some trolling). The few companies I’ve heard of allowing that type of thing (late pre-IPO Spotify, Squarespace), only allowed it after early employees like yourself would have waited 7-10 years before getting any payout. > “Not sure what your point is about $3MM over 10 years.” Please re-read my comment to help understand. > “You've assumed I was a senior engineering hire. I was in a junior non-technical role a year out of college.” Where did I make an assumption about junior vs senior level? As for your claim you were given this grant for a non-technical role 1 year out of college, I think it’s more likely you’re just lying to troll this comment thread. Just in a Bayesian sense, the conditional probability that you’re lying is higher than that this is a true story. It’s not impossible that this could have happened for a non-tech hire with no experience, but that mere possibility also is irrelevant compared with the far greater probability that this is just made up.

luckystartup 7y ago

I have a very similar story: Was on the first 10 employees at a now unicorn, forward exercised with a few thousand dollars, and my shares are also now worth around $1.5m. But unfortunately the company blocked all attempts at selling any shares on secondary markets. Something you might not be aware of: If you joined the company before they had $50M in assets, your stock would also qualify as QSBS [1], which means you don't have to pay any tax on gains of up to $10 million. [1] https://www.andersentax.com/services/for-private-clients/business-owners-and-entrepreneurs/qsbs https://www.andersentax.com/services/for-private-clients/bus...

SkyBelow 7y ago

>but when it's good it's really good. I don't think this is true. There are cases where people have broken equal or made slightly more than working at a corporation would have. It can be really good, but it can also be just okayish or not that great. This is based off my reading of the phrase, which means that good options have to be really good. The "it is really good" that is actually written verses "it can be really good" that is closer to the truth (imo).

khazhou 7y ago

My problem with it is that there are many scenarios that are fantastic for the founders, but only one (unicorn) that is fantastic for non-founders. You can put in the same long hours, pour your soul into it, take the same risk for years, but if there's an exit event, you'll only be feeding off crumbs while the founders feast on the rewards.