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Startup ISOs are totally broken, and VCs and founders would rather write 30 page treatises on all their complexities (of course, glossing over the 99 ways to sc

Startup ISOs are totally broken, and VCs and founders would rather write 30 page treatises on all their complexities (of course, glossing over the 99 ways to screw employees), than actually try to improve them. A small percentage of people got rich off options a handful of times a long times ago, and since then countless people have been screwed. Public RSUs for stock you can sell immediately on the open market are fantastic. Common ISOs are toilet paper. At a _minimum_ you should get a 10 year exercise window, and if the CEO tries to say that would make it so early employees can hurt cap tables for future rounds, he's basically saying he doesn't consider your equity grant to be real equity as it deserves to be clawed back for the sin of not wanting to stick around for the 15 years it takes startups to IPO these days. These exact same people will try to convince you that their ISOs are a valid subsitute to liquid RSUs, THEN say that they don't deserve to be "preferred" instead of "common" because the VCs put in actual money (hint: so did you if you turned down a public company to work at the startup. Biggest difference is only that you're way less diversified). Am I ranting? Of course, but if VCs and founders are going to continually "educate" engineers on their equity offers, engineers need to stand up and inform each other of the pitfalls. I know countless people, myself included, who have been screwed by ISOs. You can actually lose money because the 30 day window forces you to pay strike price + taxes on gains, then you find out that the CEO sold the company at a bargain so liquidation preference kicked in and he just took a huge retention bonus instead. The way out of this mess is not Github treatises on how to evaluate your equities. The way out is for engineers to continually tell founders/VCs that they will pick public companies instead of startups until ISOs get fixed. If ISOs screwed over VCs instead of engineers, they would have gone to DC and gotten this fixed 10 years ago. At an absolute minimum you shouldn't have to pay a dime in taxes until you've actually realized some money in your checkings account. VCs/founders don't care because they don't have to care because engineers are still too gullible and accept these bogus deals.

ng12 7y ago
Exactly this. As far as I'm concerned the purpose of ISOs at companies more than a year old is to trick junior engineers into accepting a lower salary than they would receive elsewhere. Unless you have at least half a percent of a company you really, truly believe in I'd just ignore this article and put the value somewhere between $0 and a roll of lottery tickets.
- UncleMeat 7y ago
  Worse, as OP states, they can cause you to lose money. They can be worth less than zero dollars. Pay piles of taxes on the exercised options and then watch the company get gutted and preferred investors take everything.
  - pjbk 7y ago
    Sadly, examples from the dotcom burst and housing crisis abound. It's a double edged sword. I have always preferred to go for early exercising. "Many of these workers now owe far more in taxes than their stock is worth. Former Cisco engineer Jeffrey Chou, 32, owes $2.5 million in taxes on company stock he purchased last year that has since withered in value. Chou figures that if he were to sell everything he owns, including the three-bedroom Foster City, Calif., townhouse that he shares with his wife and 8-month-old daughter, the family still could not pay the bill." * https://www.chicagotribune.com/sns-tech-taxes-story.html https://www.chicagotribune.com/sns-tech-taxes-story.html
    - rhizome 7y ago
      That sounds like a single-edged sword to me.
    - ska 7y ago
      Hell, plenty examples exists from when the general economy was just fine. Startups are startups.
    - refurb 7y ago
      Jeeze. The IRS must work with you on that, right? Talk about getting screwed!
    - chii 7y ago
      > $2.5 million in taxes on company stock he purchased last year that has since withered in value. but if the stock dropped in value, doesn't the loss in capital offset the taxes? Or has he _already_ paid the taxes, and cannot claw back any losses (since he has to offset those losses on future capital gains from other sources)?
zyang 7y ago
VCs and startup founders are shooting themselves in the foot. It makes very little financial sense to work at a startup vs FAANG these days.
- spurdoman77 7y ago
  Ok cool, Il tired of seeing these startups popping up. Great thing that they are now thing of a past as they wont be able to hire anyone. /s
  - pjbk 7y ago
    A few startups are realizing it is a rigged, unfair game and are trying to balance things a bit. They are offering stock purchase and exercise windows valid for several years, instead of just months or even days. Unfortunately it is still not a widespread practice. I have yet to see a company equalizing stock priorities of employees vs VCs.
- notJim 7y ago
  Yeah exactly. Early in my career, I loved working at startups, and aside from compensation would prefer to do so again, but the opportunity cost now is way too high. The one advantage I see at a startup is that if you pick one with a decent engineering culture, you can learn a lot more than most FAANG roles (although you'll probably learn more at the best FAANG roles than at good startup roles? Unclear.)
  - alecbenzer 7y ago
    I think startups are a bit of a crapshoot even in this regard. You'll learn a lot at a good one, but could potentially learn a lot of bad habits at a bad one.
    - bradlys 7y ago
      > I think startups are a bit of a crapshoot even in this regard. You'll learn a lot at a good one, but could potentially learn a lot of bad habits at a bad one. I've seen far more shit habits from habitual startup employees than those who come from Big N. The people who come from big public companies are almost always better at best practices and writing code than startup employees. I don't believe working at startups really gives you good sense for architecture, scalability, readability, or a variety of aspects of programming. It's almost all about getting that short term dollar to get to the next stage of funding. So, raw first time implementation speed gets prioritized over all other aspects. I don't find many startups have very strong technical voices either. CTOs frequently being product people in disguise, etc. That's my experience...
alakin 7y ago
Employees should have capped liquidation prefs!
jiveturkey 7y ago
> Startup ISOs are totally broken. > Public RSUs for stock you can sell immediately on the open market are fantastic. Both correct statements, but apples and oranges.
- hn_throwaway_99 7y ago
  But for an engineer they are comparable, because many are deciding between the two. So do you want the bucket of beautiful, fresh Honey Crisps, or 3 month old moldy juice oranges?
  - jiveturkey 7y ago
    If you are deciding between the two, you are deciding the wrong thing. You should go to an early startup (ISOs) if that's the environment you want to work in. You should go to a public company or late stage startup (RSUs) if instead you prefer that environment. The choice between ISOs and RSUs shouldn't be a factor that you are deciding on; it comes with the territory for the job you are seeking, based on other factors.
jagged-chisel 7y ago
Are options considered an equity grant? I hadn’t thought so, but maybe I need to update my own vocabulary.
- alecbenzer 7y ago
  In common language when discussing comp, yeah definitely, I think so. "Legally" idk.
- dntbnmpls 7y ago
  Yes. Options given to you by your company as a non-cash compensation is an equity grant because it gives you the right to equity ( shares ) in a company. If you "exercise" the options, you get X amount of shares in the company.
tptacek 7y ago
Some of the reasons VCs get a better class of shares than employees are structural and unlikely to go away no matter how ISOs are structured; for instance, VCs get liquidation preferences for reasons that are sort of intrinsic to the concept of equity investment. The exercise window thing is a valid point and is a reason to devalue employee options.
- fountainofage 7y ago
  Then perhaps the start up should just pay above market rate in salary and not offer any ISOs since those ISOs are so dang valuable but couldn't possibly be given the same liquidation preference?
  - tptacek 7y ago
    I mean, I agree. I think employees generally under-value equity, for understandable reasons, and that it's probably more efficient to compensate them in cash. That does mean that when the company sells, the upside goes entirely to management and investors, but I guess you can't have it both ways.
    - ivalm 7y ago
      > when the company sells, the upside goes entirely to management and investors But for early startups that's basically an unlikely outcome.
      - tptacek 7y ago
        I agree. Working for early startups is risky. I'm just saying, we're unlikely to mitigate the risk by eliminating preferred shares for investors.
        ska 7y ago
        What about the converse, giving preference constraints to early/founding employees? Early founders & execs handle this by a combination of a) large initial stake to survive dilution and b) the ability to cut a deal eventually to counteract impact of liquidity preference etc. ... but you can only extend that to so many people. I don't think it's insane to structure things in such a way that you are basically saying if anyone makes money off this, these people do in proportion to their relatively small stake. I suppose the real problems here are that 1) early round investors don't get this protection (but I think they can just accept that) and 2) at some point you get a different class of employee equity which could be hard to judge.
simonebrunozzi 7y ago
Fully agree with you. How would you solve it then - besides engineers being more explicit with founders? (not trying to be smart with you; honest question).
- hn_throwaway_99 7y ago
  Sam Altman did a post with some simple things a couple years ago. Three easy things: 1. Extend the exercise period to 10 years as GP says. Many companies have done this. Literally, all engineers out there, just walk away if they insist on 90 days. 2. Make the option pool bigger. Altman has a very good point, that companies try to pretend that the size of the option pool is something set in stone. The board just made that number up, they can change it, and if the pool is too small to support decent equity compensation, again, walk away. 3. Founders will need to give up more equity. A founder does deserve to make a lot more as they took the initial risk on the idea, but it's bullshit that a founder deserves to make, say, 50x a very early critical engineering hire. At the end of the day I do believe the market will force a shift. The FAANGs are paying so much, and while it's taken some time employees, especially junior ones, are starting to get better at evaluating their comp offers, specifically because of comment threads like this one.
  - gardnr 7y ago
    Hi Sam!
ericd 7y ago
I agree that the way a lot of companies structure their equity compensation is terrible. How would you structure equity compensation at a mid-stage startup where a share grant would come with a real, substantial tax hit, without any possibility of liquidity in the near future? I'm asking because we're just starting to think about how to do this ourselves, and I agree that most equity plans are giving engineers a raw deal. The answer might just be large share grants, at least until the share value makes that unattractive. I'd love to hear other peoples' thoughts on this. IIRC, much of the reason ISOs work the way they do is because of the way the IRS treats them, and companies that offer much longer exercise windows are having to work around these limitations to do so.
- bradleyjg 7y ago
  How about double trigger RSUs? The downside is that employees pay ordinary income on the full IPO value, but there are no upfront taxes and no exercise dilemma for people that leave after vesting.
  - zrail 7y ago
    Honesty I can’t imagine how a private company can offer single trigger RSUs. I would never accept an offer at a place where I knew I would have to write them a year after joining to cover taxes for illiquid not-quite-equity.
- ng12 7y ago
  Enough that's a nice bonus but still a minimal part of total compensation. IRS treatment of ISO/NSOs is part of the problem but the real issue is lack of liquidity. If you do make the equity significant at least give your employees the option to periodically liquidate to reduce the risk of them paying tax on money they'll never see. Tax issues aside there are many startups whose equity is incredibly valuable on paper but the stock is trading for a third of the FMV on the secondary market, if there are any buyers at all.
  - ericd 7y ago
    Yeah, secondary market liquidity on anything but the top startups seems pretty lackluster.
alecbenzer 7y ago
> don't deserve to be "preferred" instead of "common" because the VCs put in actual money I agree with most of what you said, but a nit: one perspective I've heard on the motivation for preferred stock is this: Suppose I give you $10M to start a company in exchange for 10% of it. You then easily sell the company for $9M, keeping 90% * $9M = $8.1M for yourself and returning $900k to me. Preferred (non-participating, 1x) shares prevent this problem by making sure you can't just run away with the money: you have to actually use it to build the business. People investing in the company in non-liquid ways (e.g., the founders or engineers, via opportunity costs) aren't in the same boat, because their opportunity cost can't be immediately liquidated.
- ericd 7y ago
  Right, I think the way to think about this is that common shares are for sharing in the value created at the company over and above the money invested in building the company. If your company spends all that excess value on perks and generating usage, then your common is more likely to get wiped out.
- TrueDuality 7y ago
  This is one of the better explanations I've heard about preferred stock. I'd say the counter point for the engineers at least is that frequently the opportunity cost for them is vesting stock. That lost revenue over the vesting period is IMHO the same as directly investing cash in the company that the company itself can liquidate. I would say that when shares are used for compensation with a vesting period they should be treated equivalently to investors that are directly putting cash in.
  - eanzenberg 7y ago
    Also eng's typically get way way less grants than VCs putting up cash, so turning those shares to preferred shouldn't be a huge deal. But it is.
- zapita 7y ago
  Except employees do invest money in the business by exercising their options. And that money, dollar for dollar, buys them an inferior product: lower priority in the liquidation stack; less liquidity because of abusive bylaws restricting secondary transactions; less tax benefits since your “gains” are taxed upfront. The lower the pay, and the higher the relative cost of exercising, the worse it gets. So higher-paid executives are less penalized than entry-level employees who might spend their savings exercising options that will end up worthless.
RcouF1uZ4gsC 7y ago
It seems that the fairest way to compensate employees at a startup is to pay them in cash, but also allow them to invest at each funding round with the same terms and conditions and liquidation preferences that the VC's are getting.
- hkmurakami 7y ago
  Reminds me of employee stock purchase plans at big (non tech, older industries) companies where you can buy your employer's stock with your pre-tax income. There might be something to this idea.
  - WaxProlix 7y ago
    Starbucks employees get to apply up to 10% of their (pre-tax, I believe) income to a fund that quarterly buys stock at a discounted rate (iirc, 90% of the stock price as of start or end of the quarter, whichever is lower). It's a nice benefit, and it'd be cool to see something similar in tech.
    - eanzenberg 7y ago
      ESPP is available to many (all?) public companies.
      - toast0 7y ago
        Certainly not all. They last public company did not have a plan; and of course, some plans are better than others.
    - why_only_15 7y ago
      Apple has a program like this. It's a 15% discount by default. Last quarter it was like 50% I think because the stock plan started when AAPL was at $200 or something and ended at $320
  - clintonb 7y ago
    Tech firms have ESPPs. I first learned of them when I interned at Texas Instruments in 2005.
entangledqubit 7y ago
>... you find out that the CEO sold the company at a bargain so liquidation preference kicked in and he just took a huge retention bonus instead. There's something potentially misaligned between the control of the founders and the final grant value on the other end. There are so many ways to distort this in the final exit deal and these are details that you probably won't learn about unless you happened to exercise stock before the exit happens. In general, the positive outcomes seem "capped" in that a founder is inclined to lock in their gains with an exit if the deal is reasonable for them. Maybe the option shouldn't be as a share of the company but a share of everything the CEO/founder makes from there on out. :) For really early stage, I generally assume that a founder is trying to at least 10x their net worth so any hand wavy exit estimate generally gets capped with that in mind.
harikb 7y ago
This! In addition to all of the above, it is very hard for the candidate to judge what "0.X % of the company" is worth. Like if one gave up, say 50,000 in salary, is the equity worth that much or some good multiple of it. The "preferred shares" and various other gimmicks played by VCs mean they might let the "current value" appear inflated than it really is. I have seen startups "start" with a valuation of "50 million dollars" out of thin air. No sales, no product, but a combination of confusing paperwork makes it appear as if someone recently "invested at that valuation". It will be too late by the time you find that the investor was nothing other than the founder, who found a creative way to value his/her time or seed money. Another major mistake made by new candidates is to miss the fact that there is a vesting period - the upfront large amount means nothing if you quit after a year. On top of it one may not even get any new ISOs in future years. Companies always show "current-year salary + total ISO issued" as "total compensation" - that is absurd. Even if you know what you are doing, you will fall for it after 10 repetitions.
- jaz46 7y ago
  The standards that have us thinking about this in terms of % ownership of the company is part of the problem IMO. Future rounds and other factors can quickly make this calculus impossible or with 1000% error margin. IMO, the correct way to approach this is keep everything in terms of $$ values. There is available research online that can allow you to aggregate data for comparable companies on things like: "if the preferred shares price was worth $X per share at the series A, what was the that same share worth at IPO/acquisition?" It's still not easy to answer as the data is sparse and widely varying, but thinking in these terms normalizes the conversation around dollars and gets rid of the "what dilution might happen" part of the equation. For example, my company is in the open source data infra space. So while its hard to get very many data points, trying to get info about the preferred and common share prices at each round and all the up to IPO of companies like MongoDB, Hortonworks, Elastic, Cloudera, etc -- even though they all raised totally different number of rounds and IPOed at different valuations -- in aggregate you can start to build an insightful picture.
sgustard 7y ago
I've never taken a job in 20 years because of money and I don't advise anyone to do that. I choose a company for culture, the people I work with, the kinds of projects, and quality of life. Also a desire to ship things and not spend my days in meetings or dealing with bureaucracy, a desire not to work with jerks, and a desire not to work on lines of business that I find morally repugnant. The latter criteria have made most of my FAANG offers quite unappealing. But I love going to work at a startup with my buddies, building cool tools that help people, and spending plenty of time with my family.
- snisarenko 7y ago
  They commenter isn't saying you should pick a job just because of money. But you should also avoid a job that is taking advantage of you, by giving you absolute crap compensation, by "selling" you ISO's as something valuable, when in most cases it isn't because of the constraints. We all want to work on things that are cool, but we also have bills to pay, and retirement to prepare for.
- seattle_spring 7y ago
  A "culture" of founders making a ton of money for my work is not a culture I would consider good.
  - sokoloff 7y ago
    Every startup I’ve joined, I’ve always wished for the founders to make bank on my work. Because that’s the only way I’d do well.
    - seattle_spring 7y ago
      My point is that founders frequently make bank while your stock options go to zero.
- senordevnyc 7y ago
  If you’ve never done it, maybe you shouldn’t be giving advice on it? I just took a job at a smaller public tech company that’s paying me almost what I’d make at a FAANG (more than double what startups were offering), and I’m experiencing none of what you’re talking about. Great work life balance, WFH whenever you need to, people are in the office 40 hours or less, people take 5 weeks vacation per year, we don’t have a crazy amount of meetings or bureaucracy, and our business is selling useful software tools to customers who pay us money for them. Pretty nuts to do that while getting paid nearly half a million per year.
adrr 7y ago
ISOs can't be over 90 days by law. You can do non-quals for 10 years but you'll lose half of it on taxes on exit. Pick your poison.
- envoked 7y ago
  Are you sure about this? I thought the limit across the board was 10 years.
  - adrr 7y ago
    You can make options expire after 90 days but they lose their IRS protection and have to be treated as income and not capital gains. ISO 90 day limit is an IRS limit. https://employeestockoptions.com/difference-iso-nso/ https://employeestockoptions.com/difference-iso-nso/
- sk5t 7y ago
  You'd lose most of the NQSO's taxes on exercise of ISOs too if the proceeds are at all meaningful.
- hn_throwaway_99 7y ago
  I've been in that scenario, and honestly I can't imagine why any sane person wouldn't have them convert to NQSOs rather than the true poison of needing to exercise within 90 days. An extremely common scenario: 1. You work your ass off at a startup for years, but even after all those years the company is still not public and the stock isn't liquid. 2. You quit, so you have 90 days to decide if you want to cough up the cash to pay for those options, with no real way to sell. 3. Oh, don't forget the huge AMT bill you'll likely get that year. 4. Pray to God that company is eventually sold for more than all the liquidation preferences of the investors. Would you rather have that or take the 24-37% potential tax hit (when you can actually sell your shares) vs 15% capital gains. Also note you can write it so that the decision is totally up to the employee: exercise within 90 days and they're ISOs, after that either lose them or convert to NQSOs.
choppaface 7y ago
83(b) election is one way to make ISOs more on par with RSUs. 83(b) isn’t cheap... But! These days a lot of companies (especially FAANG, but start-ups too) are offering $20k-$100k signing bonuses; those bonuses essentially give the appearance of competitive total comp while in actuality depress base salary growth. It might be productive for employees to push towards having signing bonuses turned into an 83(b) election bonus that covers strike and (some amount of) taxes. Then fewer employees get roped into dumb tax games that only entertain investors, and we’d be moving the notion of competitive compensation towards reducing stock risk for those who can least afford it. (If salaries grow more rapidly as a side-effect, that’d be nice too).
- usaar333 7y ago
  Correct - this allows you to get QSBS treatment on your stock - a huge tax win. The better startups will even loan employees "money" to exercise.
xyzzy_plugh 7y ago
> Public RSUs for stock you can sell immediately on the open market are fantastic. I mostly agree with this statement, but they are not entirely without risk. With the almost universal 6 month lockup these days, through an IPO employees could be left with a large tax burden, including having to make quarterly estimated payments, on a bunch of income that might be worth less than it was taxed at, or even worthless, if the company folded. Sure, it's unlikely, but look at some of the 2019 IPO flops. If you are taxed on a something like a million dollars of income, but only actually pocket half that, then at the end of the day you effectively have a quarter of what you started with.
- YokoZar 7y ago
  If your RSUs dropped that much in value before you could sell them, isn't that some sort of loss you can note on your taxes?
  - rrdharan 7y ago
    Depends. AMT losses (from ISO exercise spreads and subsequent collapse) are separate and can't offset normal capital gains. That's what caused tons of pain for folks during the first bubble burst.
- gowld 7y ago
  None of that has anything to do with "Public RSUs for stock you can sell immediately on the open market"
seattle_spring 7y ago
Your post captures my feelings and experience perfectly. I will never trade cash compensation for ISOs again. It sucks because I'd rather be working for small companies, but I'll be God Damned if I'm going to get some asshole rich off of my hard work.
rolltiide 7y ago
If only there was some sort of collective bargaining possible to address the unique nuances of our industry
andreshb 7y ago
Offering Restricted Common Stock (Same as founders) as a solution is more pragmatic than granting preferred stock (Same as investors)

ng12 7y ago

Exactly this. As far as I'm concerned the purpose of ISOs at companies more than a year old is to trick junior engineers into accepting a lower salary than they would receive elsewhere. Unless you have at least half a percent of a company you really, truly believe in I'd just ignore this article and put the value somewhere between $0 and a roll of lottery tickets.

UncleMeat 7y ago
Worse, as OP states, they can cause you to lose money. They can be worth less than zero dollars. Pay piles of taxes on the exercised options and then watch the company get gutted and preferred investors take everything.
- pjbk 7y ago
  Sadly, examples from the dotcom burst and housing crisis abound. It's a double edged sword. I have always preferred to go for early exercising. "Many of these workers now owe far more in taxes than their stock is worth. Former Cisco engineer Jeffrey Chou, 32, owes $2.5 million in taxes on company stock he purchased last year that has since withered in value. Chou figures that if he were to sell everything he owns, including the three-bedroom Foster City, Calif., townhouse that he shares with his wife and 8-month-old daughter, the family still could not pay the bill." * https://www.chicagotribune.com/sns-tech-taxes-story.html https://www.chicagotribune.com/sns-tech-taxes-story.html
  - rhizome 7y ago
    That sounds like a single-edged sword to me.
  - ska 7y ago
    Hell, plenty examples exists from when the general economy was just fine. Startups are startups.
  - refurb 7y ago
    Jeeze. The IRS must work with you on that, right? Talk about getting screwed!
  - chii 7y ago
    > $2.5 million in taxes on company stock he purchased last year that has since withered in value. but if the stock dropped in value, doesn't the loss in capital offset the taxes? Or has he _already_ paid the taxes, and cannot claw back any losses (since he has to offset those losses on future capital gains from other sources)?

zyang 7y ago

VCs and startup founders are shooting themselves in the foot. It makes very little financial sense to work at a startup vs FAANG these days.

spurdoman77 7y ago
Ok cool, Il tired of seeing these startups popping up. Great thing that they are now thing of a past as they wont be able to hire anyone. /s
- pjbk 7y ago
  A few startups are realizing it is a rigged, unfair game and are trying to balance things a bit. They are offering stock purchase and exercise windows valid for several years, instead of just months or even days. Unfortunately it is still not a widespread practice. I have yet to see a company equalizing stock priorities of employees vs VCs.
notJim 7y ago
Yeah exactly. Early in my career, I loved working at startups, and aside from compensation would prefer to do so again, but the opportunity cost now is way too high. The one advantage I see at a startup is that if you pick one with a decent engineering culture, you can learn a lot more than most FAANG roles (although you'll probably learn more at the best FAANG roles than at good startup roles? Unclear.)
- alecbenzer 7y ago
  I think startups are a bit of a crapshoot even in this regard. You'll learn a lot at a good one, but could potentially learn a lot of bad habits at a bad one.
  - bradlys 7y ago
    > I think startups are a bit of a crapshoot even in this regard. You'll learn a lot at a good one, but could potentially learn a lot of bad habits at a bad one. I've seen far more shit habits from habitual startup employees than those who come from Big N. The people who come from big public companies are almost always better at best practices and writing code than startup employees. I don't believe working at startups really gives you good sense for architecture, scalability, readability, or a variety of aspects of programming. It's almost all about getting that short term dollar to get to the next stage of funding. So, raw first time implementation speed gets prioritized over all other aspects. I don't find many startups have very strong technical voices either. CTOs frequently being product people in disguise, etc. That's my experience...

alakin 7y ago

Employees should have capped liquidation prefs!

jiveturkey 7y ago

> Startup ISOs are totally broken. > Public RSUs for stock you can sell immediately on the open market are fantastic. Both correct statements, but apples and oranges.

hn_throwaway_99 7y ago
But for an engineer they are comparable, because many are deciding between the two. So do you want the bucket of beautiful, fresh Honey Crisps, or 3 month old moldy juice oranges?
- jiveturkey 7y ago
  If you are deciding between the two, you are deciding the wrong thing. You should go to an early startup (ISOs) if that's the environment you want to work in. You should go to a public company or late stage startup (RSUs) if instead you prefer that environment. The choice between ISOs and RSUs shouldn't be a factor that you are deciding on; it comes with the territory for the job you are seeking, based on other factors.

jagged-chisel 7y ago

Are options considered an equity grant? I hadn’t thought so, but maybe I need to update my own vocabulary.

alecbenzer 7y ago
In common language when discussing comp, yeah definitely, I think so. "Legally" idk.
dntbnmpls 7y ago
Yes. Options given to you by your company as a non-cash compensation is an equity grant because it gives you the right to equity ( shares ) in a company. If you "exercise" the options, you get X amount of shares in the company.

tptacek 7y ago

Some of the reasons VCs get a better class of shares than employees are structural and unlikely to go away no matter how ISOs are structured; for instance, VCs get liquidation preferences for reasons that are sort of intrinsic to the concept of equity investment. The exercise window thing is a valid point and is a reason to devalue employee options.

fountainofage 7y ago
Then perhaps the start up should just pay above market rate in salary and not offer any ISOs since those ISOs are so dang valuable but couldn't possibly be given the same liquidation preference?
- tptacek 7y ago
  I mean, I agree. I think employees generally under-value equity, for understandable reasons, and that it's probably more efficient to compensate them in cash. That does mean that when the company sells, the upside goes entirely to management and investors, but I guess you can't have it both ways.
  - ivalm 7y ago
    > when the company sells, the upside goes entirely to management and investors But for early startups that's basically an unlikely outcome.
    - tptacek 7y ago
      I agree. Working for early startups is risky. I'm just saying, we're unlikely to mitigate the risk by eliminating preferred shares for investors.
      - ska 7y ago
        What about the converse, giving preference constraints to early/founding employees? Early founders & execs handle this by a combination of a) large initial stake to survive dilution and b) the ability to cut a deal eventually to counteract impact of liquidity preference etc. ... but you can only extend that to so many people. I don't think it's insane to structure things in such a way that you are basically saying if anyone makes money off this, these people do in proportion to their relatively small stake. I suppose the real problems here are that 1) early round investors don't get this protection (but I think they can just accept that) and 2) at some point you get a different class of employee equity which could be hard to judge.

simonebrunozzi 7y ago

Fully agree with you. How would you solve it then - besides engineers being more explicit with founders? (not trying to be smart with you; honest question).

hn_throwaway_99 7y ago
Sam Altman did a post with some simple things a couple years ago. Three easy things: 1. Extend the exercise period to 10 years as GP says. Many companies have done this. Literally, all engineers out there, just walk away if they insist on 90 days. 2. Make the option pool bigger. Altman has a very good point, that companies try to pretend that the size of the option pool is something set in stone. The board just made that number up, they can change it, and if the pool is too small to support decent equity compensation, again, walk away. 3. Founders will need to give up more equity. A founder does deserve to make a lot more as they took the initial risk on the idea, but it's bullshit that a founder deserves to make, say, 50x a very early critical engineering hire. At the end of the day I do believe the market will force a shift. The FAANGs are paying so much, and while it's taken some time employees, especially junior ones, are starting to get better at evaluating their comp offers, specifically because of comment threads like this one.
- gardnr 7y ago
  Hi Sam!

ericd 7y ago

I agree that the way a lot of companies structure their equity compensation is terrible. How would you structure equity compensation at a mid-stage startup where a share grant would come with a real, substantial tax hit, without any possibility of liquidity in the near future? I'm asking because we're just starting to think about how to do this ourselves, and I agree that most equity plans are giving engineers a raw deal. The answer might just be large share grants, at least until the share value makes that unattractive. I'd love to hear other peoples' thoughts on this. IIRC, much of the reason ISOs work the way they do is because of the way the IRS treats them, and companies that offer much longer exercise windows are having to work around these limitations to do so.

bradleyjg 7y ago
How about double trigger RSUs? The downside is that employees pay ordinary income on the full IPO value, but there are no upfront taxes and no exercise dilemma for people that leave after vesting.
- zrail 7y ago
  Honesty I can’t imagine how a private company can offer single trigger RSUs. I would never accept an offer at a place where I knew I would have to write them a year after joining to cover taxes for illiquid not-quite-equity.
ng12 7y ago
Enough that's a nice bonus but still a minimal part of total compensation. IRS treatment of ISO/NSOs is part of the problem but the real issue is lack of liquidity. If you do make the equity significant at least give your employees the option to periodically liquidate to reduce the risk of them paying tax on money they'll never see. Tax issues aside there are many startups whose equity is incredibly valuable on paper but the stock is trading for a third of the FMV on the secondary market, if there are any buyers at all.
- ericd 7y ago
  Yeah, secondary market liquidity on anything but the top startups seems pretty lackluster.

alecbenzer 7y ago

> don't deserve to be "preferred" instead of "common" because the VCs put in actual money I agree with most of what you said, but a nit: one perspective I've heard on the motivation for preferred stock is this: Suppose I give you $10M to start a company in exchange for 10% of it. You then easily sell the company for $9M, keeping 90% * $9M = $8.1M for yourself and returning $900k to me. Preferred (non-participating, 1x) shares prevent this problem by making sure you can't just run away with the money: you have to actually use it to build the business. People investing in the company in non-liquid ways (e.g., the founders or engineers, via opportunity costs) aren't in the same boat, because their opportunity cost can't be immediately liquidated.

ericd 7y ago
Right, I think the way to think about this is that common shares are for sharing in the value created at the company over and above the money invested in building the company. If your company spends all that excess value on perks and generating usage, then your common is more likely to get wiped out.
TrueDuality 7y ago
This is one of the better explanations I've heard about preferred stock. I'd say the counter point for the engineers at least is that frequently the opportunity cost for them is vesting stock. That lost revenue over the vesting period is IMHO the same as directly investing cash in the company that the company itself can liquidate. I would say that when shares are used for compensation with a vesting period they should be treated equivalently to investors that are directly putting cash in.
- eanzenberg 7y ago
  Also eng's typically get way way less grants than VCs putting up cash, so turning those shares to preferred shouldn't be a huge deal. But it is.
zapita 7y ago
Except employees do invest money in the business by exercising their options. And that money, dollar for dollar, buys them an inferior product: lower priority in the liquidation stack; less liquidity because of abusive bylaws restricting secondary transactions; less tax benefits since your “gains” are taxed upfront. The lower the pay, and the higher the relative cost of exercising, the worse it gets. So higher-paid executives are less penalized than entry-level employees who might spend their savings exercising options that will end up worthless.

RcouF1uZ4gsC 7y ago

It seems that the fairest way to compensate employees at a startup is to pay them in cash, but also allow them to invest at each funding round with the same terms and conditions and liquidation preferences that the VC's are getting.

hkmurakami 7y ago
Reminds me of employee stock purchase plans at big (non tech, older industries) companies where you can buy your employer's stock with your pre-tax income. There might be something to this idea.
- WaxProlix 7y ago
  Starbucks employees get to apply up to 10% of their (pre-tax, I believe) income to a fund that quarterly buys stock at a discounted rate (iirc, 90% of the stock price as of start or end of the quarter, whichever is lower). It's a nice benefit, and it'd be cool to see something similar in tech.
  - eanzenberg 7y ago
    ESPP is available to many (all?) public companies.
    - toast0 7y ago
      Certainly not all. They last public company did not have a plan; and of course, some plans are better than others.
  - why_only_15 7y ago
    Apple has a program like this. It's a 15% discount by default. Last quarter it was like 50% I think because the stock plan started when AAPL was at $200 or something and ended at $320
- clintonb 7y ago
  Tech firms have ESPPs. I first learned of them when I interned at Texas Instruments in 2005.

entangledqubit 7y ago

>... you find out that the CEO sold the company at a bargain so liquidation preference kicked in and he just took a huge retention bonus instead. There's something potentially misaligned between the control of the founders and the final grant value on the other end. There are so many ways to distort this in the final exit deal and these are details that you probably won't learn about unless you happened to exercise stock before the exit happens. In general, the positive outcomes seem "capped" in that a founder is inclined to lock in their gains with an exit if the deal is reasonable for them. Maybe the option shouldn't be as a share of the company but a share of everything the CEO/founder makes from there on out. :) For really early stage, I generally assume that a founder is trying to at least 10x their net worth so any hand wavy exit estimate generally gets capped with that in mind.

harikb 7y ago

This! In addition to all of the above, it is very hard for the candidate to judge what "0.X % of the company" is worth. Like if one gave up, say 50,000 in salary, is the equity worth that much or some good multiple of it. The "preferred shares" and various other gimmicks played by VCs mean they might let the "current value" appear inflated than it really is. I have seen startups "start" with a valuation of "50 million dollars" out of thin air. No sales, no product, but a combination of confusing paperwork makes it appear as if someone recently "invested at that valuation". It will be too late by the time you find that the investor was nothing other than the founder, who found a creative way to value his/her time or seed money. Another major mistake made by new candidates is to miss the fact that there is a vesting period - the upfront large amount means nothing if you quit after a year. On top of it one may not even get any new ISOs in future years. Companies always show "current-year salary + total ISO issued" as "total compensation" - that is absurd. Even if you know what you are doing, you will fall for it after 10 repetitions.

jaz46 7y ago
The standards that have us thinking about this in terms of % ownership of the company is part of the problem IMO. Future rounds and other factors can quickly make this calculus impossible or with 1000% error margin. IMO, the correct way to approach this is keep everything in terms of $$ values. There is available research online that can allow you to aggregate data for comparable companies on things like: "if the preferred shares price was worth $X per share at the series A, what was the that same share worth at IPO/acquisition?" It's still not easy to answer as the data is sparse and widely varying, but thinking in these terms normalizes the conversation around dollars and gets rid of the "what dilution might happen" part of the equation. For example, my company is in the open source data infra space. So while its hard to get very many data points, trying to get info about the preferred and common share prices at each round and all the up to IPO of companies like MongoDB, Hortonworks, Elastic, Cloudera, etc -- even though they all raised totally different number of rounds and IPOed at different valuations -- in aggregate you can start to build an insightful picture.

sgustard 7y ago

I've never taken a job in 20 years because of money and I don't advise anyone to do that. I choose a company for culture, the people I work with, the kinds of projects, and quality of life. Also a desire to ship things and not spend my days in meetings or dealing with bureaucracy, a desire not to work with jerks, and a desire not to work on lines of business that I find morally repugnant. The latter criteria have made most of my FAANG offers quite unappealing. But I love going to work at a startup with my buddies, building cool tools that help people, and spending plenty of time with my family.

snisarenko 7y ago
They commenter isn't saying you should pick a job just because of money. But you should also avoid a job that is taking advantage of you, by giving you absolute crap compensation, by "selling" you ISO's as something valuable, when in most cases it isn't because of the constraints. We all want to work on things that are cool, but we also have bills to pay, and retirement to prepare for.
seattle_spring 7y ago
A "culture" of founders making a ton of money for my work is not a culture I would consider good.
- sokoloff 7y ago
  Every startup I’ve joined, I’ve always wished for the founders to make bank on my work. Because that’s the only way I’d do well.
  - seattle_spring 7y ago
    My point is that founders frequently make bank while your stock options go to zero.
senordevnyc 7y ago
If you’ve never done it, maybe you shouldn’t be giving advice on it? I just took a job at a smaller public tech company that’s paying me almost what I’d make at a FAANG (more than double what startups were offering), and I’m experiencing none of what you’re talking about. Great work life balance, WFH whenever you need to, people are in the office 40 hours or less, people take 5 weeks vacation per year, we don’t have a crazy amount of meetings or bureaucracy, and our business is selling useful software tools to customers who pay us money for them. Pretty nuts to do that while getting paid nearly half a million per year.

adrr 7y ago

ISOs can't be over 90 days by law. You can do non-quals for 10 years but you'll lose half of it on taxes on exit. Pick your poison.

envoked 7y ago
Are you sure about this? I thought the limit across the board was 10 years.
- adrr 7y ago
  You can make options expire after 90 days but they lose their IRS protection and have to be treated as income and not capital gains. ISO 90 day limit is an IRS limit. https://employeestockoptions.com/difference-iso-nso/ https://employeestockoptions.com/difference-iso-nso/
sk5t 7y ago
You'd lose most of the NQSO's taxes on exercise of ISOs too if the proceeds are at all meaningful.
hn_throwaway_99 7y ago
I've been in that scenario, and honestly I can't imagine why any sane person wouldn't have them convert to NQSOs rather than the true poison of needing to exercise within 90 days. An extremely common scenario: 1. You work your ass off at a startup for years, but even after all those years the company is still not public and the stock isn't liquid. 2. You quit, so you have 90 days to decide if you want to cough up the cash to pay for those options, with no real way to sell. 3. Oh, don't forget the huge AMT bill you'll likely get that year. 4. Pray to God that company is eventually sold for more than all the liquidation preferences of the investors. Would you rather have that or take the 24-37% potential tax hit (when you can actually sell your shares) vs 15% capital gains. Also note you can write it so that the decision is totally up to the employee: exercise within 90 days and they're ISOs, after that either lose them or convert to NQSOs.

choppaface 7y ago

83(b) election is one way to make ISOs more on par with RSUs. 83(b) isn’t cheap... But! These days a lot of companies (especially FAANG, but start-ups too) are offering $20k-$100k signing bonuses; those bonuses essentially give the appearance of competitive total comp while in actuality depress base salary growth. It might be productive for employees to push towards having signing bonuses turned into an 83(b) election bonus that covers strike and (some amount of) taxes. Then fewer employees get roped into dumb tax games that only entertain investors, and we’d be moving the notion of competitive compensation towards reducing stock risk for those who can least afford it. (If salaries grow more rapidly as a side-effect, that’d be nice too).

usaar333 7y ago
Correct - this allows you to get QSBS treatment on your stock - a huge tax win. The better startups will even loan employees "money" to exercise.

xyzzy_plugh 7y ago

> Public RSUs for stock you can sell immediately on the open market are fantastic. I mostly agree with this statement, but they are not entirely without risk. With the almost universal 6 month lockup these days, through an IPO employees could be left with a large tax burden, including having to make quarterly estimated payments, on a bunch of income that might be worth less than it was taxed at, or even worthless, if the company folded. Sure, it's unlikely, but look at some of the 2019 IPO flops. If you are taxed on a something like a million dollars of income, but only actually pocket half that, then at the end of the day you effectively have a quarter of what you started with.

YokoZar 7y ago
If your RSUs dropped that much in value before you could sell them, isn't that some sort of loss you can note on your taxes?
- rrdharan 7y ago
  Depends. AMT losses (from ISO exercise spreads and subsequent collapse) are separate and can't offset normal capital gains. That's what caused tons of pain for folks during the first bubble burst.
gowld 7y ago
None of that has anything to do with "Public RSUs for stock you can sell immediately on the open market"

seattle_spring 7y ago

Your post captures my feelings and experience perfectly. I will never trade cash compensation for ISOs again. It sucks because I'd rather be working for small companies, but I'll be God Damned if I'm going to get some asshole rich off of my hard work.

rolltiide 7y ago

If only there was some sort of collective bargaining possible to address the unique nuances of our industry

andreshb 7y ago

Offering Restricted Common Stock (Same as founders) as a solution is more pragmatic than granting preferred stock (Same as investors)