3 ms·

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 wher

by 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.
  - mavelikara 7y ago
    It is good exercise to contrast what accredited investors think of startup equity compared to average startup engineer.
jartelt 7y ago
Having a 10 year exercise window on options helps quite a bit. In most cases there will either be a liquidity event within 10 years or (for companies that are successful but stay private longer than 10 years) the company will have multiple huge fundraising rounds and can allow early employees to cash out some shares in a secondary round. To be fair the CEO should either eventually push for a liquidity event or should be open to allowing employees to sell shares on the secondary market.
- ericd 7y ago
  Yeah, I think long dated options plus regular internal tender offers help a lot. I need to look more into the implications of long dating options. Allowing sales on the secondary markets can help, but the interest/liquidity on those is super heavily concentrated in the household names, so if you're working at a $X00M startup, it tends not to work so well, even if the company is nominally friendly toward it.
jaz46 7y ago
TLDR: Offer RSAs and education! From my other comment: "I think the biggest gap that this guide and every one I've seen like it that they undersell the positive value for employees of the Restricted Stock Award (RSA). RSAs can be significantly better than ISOs in many situations. There is no actual reason why companies can only offer RSAs to founders and super early employees. The taxes get trickier once the strike price gets high enough, but employees should have the choice to maximize their equity value! From the very beginning of founding my company and still 5 years later, we offer our employees the choice to take their stock as RSAs, options, or a combination of the two. We also teach a mandatory "Stock 101" course every quarter for new employees that is a 1.5hr version of this guide. Too many employees' (engineers in particular in my experience), don't actually understand how their equity compensation works and I think it's the responsibility of the company to educate them -- both for their current role and possible future job offers." This stuff is a huge personal passion of mine and we've put a lot of effort (and lawyer dollars) into this at my company. Feel free to reach out anytime.
- ericd 7y ago
  Cool, thanks! I might take you up on that. In any case, I think that's the direction we'll go, at least in the beginning.

by ericd 7y ago

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.
- mavelikara 7y ago
  It is good exercise to contrast what accredited investors think of startup equity compared to average startup engineer.

jartelt 7y ago

Having a 10 year exercise window on options helps quite a bit. In most cases there will either be a liquidity event within 10 years or (for companies that are successful but stay private longer than 10 years) the company will have multiple huge fundraising rounds and can allow early employees to cash out some shares in a secondary round. To be fair the CEO should either eventually push for a liquidity event or should be open to allowing employees to sell shares on the secondary market.

ericd 7y ago
Yeah, I think long dated options plus regular internal tender offers help a lot. I need to look more into the implications of long dating options. Allowing sales on the secondary markets can help, but the interest/liquidity on those is super heavily concentrated in the household names, so if you're working at a $X00M startup, it tends not to work so well, even if the company is nominally friendly toward it.

jaz46 7y ago

TLDR: Offer RSAs and education! From my other comment: "I think the biggest gap that this guide and every one I've seen like it that they undersell the positive value for employees of the Restricted Stock Award (RSA). RSAs can be significantly better than ISOs in many situations. There is no actual reason why companies can only offer RSAs to founders and super early employees. The taxes get trickier once the strike price gets high enough, but employees should have the choice to maximize their equity value! From the very beginning of founding my company and still 5 years later, we offer our employees the choice to take their stock as RSAs, options, or a combination of the two. We also teach a mandatory "Stock 101" course every quarter for new employees that is a 1.5hr version of this guide. Too many employees' (engineers in particular in my experience), don't actually understand how their equity compensation works and I think it's the responsibility of the company to educate them -- both for their current role and possible future job offers." This stuff is a huge personal passion of mine and we've put a lot of effort (and lawyer dollars) into this at my company. Feel free to reach out anytime.

ericd 7y ago
Cool, thanks! I might take you up on that. In any case, I think that's the direction we'll go, at least in the beginning.