41 ms·

Let employees sell their equity

267 points by craigkerstiens 6y ago

tyre 6y ago
> I was stunned at how paltry the equity offers were from private, Series A-C companies. For most of the offers I received, the company valuation would need to increase by 8-20x for the yearly compensation to achieve parity with the first-year offer from a public SF-based company, let alone to exceed it. That’s what early stage startup equity is though. It’s specifically a high risk, high reward form of compensation. It’s rarely going to double in worth. Either it’s worth a lot more or it is worth zero. And it’s almost always worth zero.
- logicslave12 6y ago
  It’s not high risk high reward, it’s high risk low reward
  - mlthoughts2018 6y ago
    Exactly. 8-20x is a massively unlikely outcome so there’s huge risk. What do you get for taking a bet on that risk? Mere parity with annualized first year compensation elsewhere. That is a very low reward for such dramatic risk.
    - naniwaduni 6y ago
      Is "risk" even the right thing to call a too-low-to-expect probability of a desirable event? Is playing the lottery a "risk"?
      - sokoloff 6y ago
        I would saying playing the lottery is most certainly a risk (of the money you spent on tickets).
    - e1g 6y ago
      Some people might think "10-20x growth sounds likely for a startup, no?". Frequently, at "Series A" a startup is valued at $20-40M. Getting a 10-20x multiple on that means it should get to $200M-$1B range. Only 5% of all YCombinator companies hit that milestone (~100 companies from ~2,000 deals). Odds for a startups not backed by YC & co, would be lower. So no, not that likely, even if you're as early as day 1 of Series A.
      - Judgmentality 6y ago
        You're comparing seed funding (Y Combinator) and series A funding - most YC companies have yet to raise a series A. The other thing is that most YC companies are young and still have time to grow. I think you're comparing apples to oranges and trying to make a quantitative conclusion.
        sillysaurusx 6y ago
        If a yc co from 5 years ago still hasn’t raised a series A, it’s probably dead. (I would push this to “1 year ago,” but yc invests in long term projects now like biotech.)
        e1g 6y ago
        It's fair to point out that if a company gets to Series A, it is substantially de-risked. IIRC, ~30% of YC startups get to Series A, so this milestone is material.
  - deleted 6y ago
    [deleted]
- kamikaz1k 6y ago
  As the other poster said, this explicitly high risk low reward, at the expected required to break even. Because the range of those options is everything between and include 0x In order for it to be high risk high reward, the option's paper value should closer to competing packages from public companies. Because in order to take advantage of options, you have to exercise them, and in order to exercise them, you need to do it before they expire, with real cash out of your own pocket. Given the rate of startup failure, it's a good thing to allow earlier liquidity to those employees, so they don't get trapped into either staying for the 10 yrs till a real liquidity event, or bite the bullet and drop cash (forgoing other investment opportunities) when they decide to leave after some time (like a typical employee). In the end, the equity that group controls is very tiny.
- Judgmentality 6y ago
  > It’s specifically a high risk, high reward form of compensation. This really only applies to the first few employees, or maybe the first few hundred if you happen to be at the next Google (so the company has to 1,000x). After that, it's very unlikely you'd come out ahead even if the company 20x'ed compared to joining FAANG. And the other thing to consider is that FAANG stocks aren't stationary. I know people whose relatively modest AMZN stock offerings have made them millionaires. The fact of the matter is you don't join a startup to get rich (unless you're an idiot). You join a startup because of the many other benefits it provides - having a bigger impact, working on a smaller team, less bureaucracy, etc.
  - barclay 6y ago
    > You join a startup because of the many other benefits it provides This. So much this. The exit is the lottery ticket. It'll likely fail. But the real lure is getting to wear a ton of hats and fly by the seat of your pants. Any engineer in a < 20 person eng team is going to have a ton of exposure to how the business works, to making real-time decisions, and just generally being impactful. _THAT's_ why you go. (And, that said, it's definitely not for everyone)
    - dpeck 6y ago
      If you value having exposure to how business works, making real-time decisions, and being impactful at > $100k a year you’re a much better employee/coworker than I’ve ever been. The reality of the situations is working at a startup is a great opportunity to prove oneself and have stories to tell when it comes time for interviews (or drinks with colleagues). For most employees it gives those of us without the “perfect” education/gpa/etc an opportunity to work ourselves into positions to be making significant income at larger companies either through exit, acquisition or being hired somewhere else.
- trimbo 6y ago
  I think the deal has changed quite a bit in terms of how long it takes to figure that out. It used to be that a company's fate was pretty clear within a few years. You joined a startup and it either IPOed in a few years or you guessed your stock was worthless (and that was usually right). Today some of these "pre-IPO" companies are being kept alive on private capital life support for a decade-plus. Palantir is finally going public after 17 years. 17! Waiting a generation for a liquidity event is ridiculous.
- dyeje 6y ago
  Except it's not. It's high risk, low reward for most rank-and-file employees. Unless the company has an insane exit, you'll end up with new car money at best.
thundergolfer 6y ago
> For most of the offers I received, the company valuation would need to increase by 8-20x for the yearly compensation to achieve parity with the first-year offer from a public SF-based company, let alone to exceed it. Damn, what a terrible deal, particularly for Series-C. As one data point, my company's stock has 5x from my initial grant value, and that has been enough to push my compensation above an equivalent position in Google Sydney, which is probably the highest paying public tech company in the country. That is _if I can sell my equity though_. So yes, please let employees sell their equity. I don't want to have to wait for the dream IPO. Edit: Actually, given Google's very strong YTD stock gains, maybe it's borderline whether I come out ahead.
- lumost 6y ago
  There's a time value of money question here as well. At FNG you'd earn the equity over n years. You can use this equity to buy a home, pay for college/debts, or build a diversified portfolio.
- alfalfasprout 6y ago
  Unfortunately this has ultimately led me to conclude that, purely from a monetary standpoint, it is just not worth joining a startup unless you're joining as a C-level employee or director and receiving several % of equity (which again, is going to be rare outside of that level). Otherwise the risk/reward makes little sense. There are other reasons to join a startup of course-- more autonomy, you believe in the product, etc... but they come at a cost (lower TC and usually much worse WLB).
  - sokoloff 6y ago
    If you’re going to do that, why not just co-found something? Your position will likely be higher percentage than the amount of de-risking that’s happened in the company you’ll join. “First [non-founder] employee” is a very poor position to take on from an expected-value perspective.
    - marcinzm 6y ago
Galanwe 6y ago
You don't need a public market to sell your shares. The company itself could buy back the shares, or an other employee could buy them from you. Actually, I think most C level officers in a startup would be quite happy to buy lower level employees shares. Of course this would have to be possible considering the shareholder agreement, but I don't see any reason it would not.
- 3gjg3j3g3h3h3 6y ago
  Stack Overflow prohibited employees from selling shares privately, while also setting an expiry date on the options that has forced some of the company's longest-serving employees to choose between surrendering their equity, or paying a ton to exercise options that they may never be able to sell.
  - worker767424 6y ago
    Startup options have been like this forever. Maybe you could theoretically sell, but no one did, and marketplaces like Forge and Equityzen didn't exist.
    - hkmurakami 6y ago
      Startups used to IPO or fail much faster
      - marc__1 6y ago
        The time from founding to IPO is a stat that is widely misrepresented by well-educated people who may not have had the time to check the numbers. See for instance the graph Company Age (Years) shared by Meritech. There are 8 companies in the cohort that are 20+ years, only 1 (Salesforce) that IPOed with less than 10 years. In fact, from the entire comps (20+ public SaaS), only Salesforce IPOed at year 5. https://www.meritechcapital.com/public-comparables/enterprise#OperatingMetrics https://www.meritechcapital.com/public-comparables/enterpris...
gregrata 6y ago
On another side of this - I've seen places where employees were essentially locked in - unable to leave, because they couldn't sell any stock, and exercising cost too much, or, more likely, would be a taxable event (and again, they couldn't cover taxes by selling so it's a huge cash hit to buy the paper) I get at one level a company might like this - it's a "good" way to keep people from leaving. In reality, this means you have people that really want to leave and can't - which does not make for a happy, good employee. Let them sell at least a portion of the stock back to the company. Or sell some during a funding round, at least enough to cover their taxes so they can take their stock and go.
dangus 6y ago
Screw equity, pay me in cash and 401k matching. I’d love to find a company that actually goes above and beyond on 401k and uses it as a piece of salary rather than just a paltry little matching contribution. A company can legally contribute so much more money than an individual can, the overall limit is $57,000 but my individual limit is less than half that.
- dvtrn 6y ago
  What, and eat into the revenue???
- sokoloff 6y ago
  See if your company permits after-tax contributions and in-service rollovers to Roth 401(k). https://www.nerdwallet.com/blog/investing/mega-backdoor-roths-work/ https://www.nerdwallet.com/blog/investing/mega-backdoor-roth... I think you should expect income taxes to go up (likely substantially) over the next 40 years, making Roth attractive to those who will retire with substantial income streams in retirement.
- nfriedly 6y ago
  Yes, seriously! The IRS rules for 401k plans allow for the employer to put in twice as much as the employee - that's the only way to hit the maximum. But employers didn't seem to get the memo. My current employer advertised a 2-to-1 401k match, which was a big selling point until I learned that it was capped at $4800/year. And then even that went away because of COVID :( I've considered going back to consulting a couple of times just to be able to give myself a proper 401k match.
dccoolgai 6y ago
Sad truth that kinda hit home a little: the part about not being able to have more than a one percent impact unless you are a c-level.
- kelnos 6y ago
  I think it depends on company stage and size, though. If you're a part of a 5-person shop, then you'd better be able to increase the value of the company by way more than 1%, or the company made a really bad hire. Even through 50 and maybe even 100 employees, I'd think it's possible to have a meaningful impact on the company without having to destroy your work-life balance. But of course as the company grows, your influence gets smaller and smaller unless you become an executive.
  - xtracto 6y ago
    It also depends on what you do in the company. On my last startup, we were about 100 people, and I lead the Data Science team (doing Machine learning models for risk evaluation of loans). One of my more Jr. data scientists (a guy who had came out of the Uni, constructed a variable for one the models that improved the separation a lot. IIRC He single-handedly decrease our default from 20% to something like 17% (with the same acceptance %). That was huge.
fizixer 6y ago
Tangentially related: I often get super pissed when my employer, or a friend's employer internally announces that employees should suggest ways to improve the bottomline of the company, think outside the box, be proactive etc, etc. Like, I just work here. I know jacksh-t about how _you_ are running the company, how many stupid internal decisions _you_ are making everyday that's screwing all of us over like slow poison, what financial info _you_ have access to about the company that you would never share with me in a million years. And then you want me to magically solve your problems, and I'm the one who's not thinking outside the box?
kevindong 6y ago
I value my equity grant (in my privately held company) at $0. If it turns out to be worth something someday, great. But until then, I just don't consider it a part of my compensation. My company has a policy (that HR has made very, very clear can be changed at any time) where for RSUs that are vesting, the company will pay the income taxes for the employee in exchange for withholding/essentially buying back a portion of the vested shares (the exact mechanism by which this is done isn't something I really looked into). This policy opens up a backdoor way of essentially liquidating my vesting shares: I can simply file a new withholding form just before the vesting date, claim way fewer tax exemptions, and the company will withhold a higher portion of the vesting shares/remit more cash to the tax authorities. Upon filing my tax returns at the end of the year, I can receive the excess cash remitted as a refund.
- fossuser 6y ago
  I get this trope of valuing equity at $0 because a lot of people have been burned, but it’s bad advice. The fastest way to wealth is through equity. Yes, it’s hard to value but that value is not zero. Spending effort trying to value it is worth it, and picking companies where you think the equity will be valuable is worth it. Also worth considering the character of the founder and the other directors. There’s a lot of ways to get screwed out of equity, working with good people is important.
  - MattGaiser 6y ago
    If you can determine company value and future with any reliability, you may as well just take those skills to the public markets and use your extra cash compensation to buy stocks/options. Far more information is available about those companies than any privately held ones.
    - fossuser 6y ago
      Yeah I do do that, but you have to risk more and I disagree about it being easier to value from the outside. Public markets for non-dividend paying stocks are also betting more on what other people think the stock price will be rather than the company value itself - it’s a bit of a different game.
thinkingkong 6y ago
Equity at a startup is essentially worthless. Exercise prices, taxes, 90 day max exercise windows, asymetric price information, preference stacks, all contribute to a lack of clarity. Of course eveyone thinks their company will be worth a cool billion but thats rarely the case. Plus founders and investors are incentivized for your options to expire; they go back into the pool. Startup compensation needs a refactor pretty badly.
- mrnobody_67 6y ago
  You forgot venture debt, warrants, & management carve-outs during M&A.
rectang 6y ago
As an individual negotiating compensation with a company, you are at a structural disadvantage: the company does this all the time, and (lacking a union to negotiate on your behalf) you do this rarely. Unless you are an elite negotiator (and if you can hire a lawyer you are elite already), the complexity of any compensation package works in the company's favor. For almost all of us, equity is a vehicle to get screwed over. Articles like this one only to serve to perpetuate startup mythology and inflate false hopes. Theoretically, a startup that actually wants to compete on compensation by sharing in good fortune could craft an equity package which is simple and standardized enough to be comprehensible by ordinary humans. But so long as employees keep snapping at the vaporous bait of deceptive equity packages, there's not much incentive to do so.
- kelnos 6y ago
  > an equity package which is simple and standardized enough to be comprehensible by ordinary humans > deceptive equity packages What do you mean by "deceptive"? The standard for pre-IPO seems to me to be N number of options, at a particular strike price, 10-year expiration (or 90 days if you leave the company). That doesn't seem all that complicated to me, or deceptive. What can get deceptive is if the company is trying to lowball you on salary and tell you that your equity will become worth millions some day as if it was a sure thing, which is of course a scummy practice. And the whole expiration after 90 days thing is garbage. But deceptive? Complicated? I don't think it is. I really don't see what's not simple or standardized about what I described above. Granted, the last time I joined a startup (which is not a startup anymore) was 9 years ago, but I haven't read anything to suggest that this has changed drastically.
  - mehrdadn 6y ago
    Any thoughts on the AMT trap, and the potential inability to exercise (or go bankrupt with AMT) when you leave? It's not exactly written in red warning letters on offer packages, right?
    - eanzenberg 6y ago
eyelidlessness 6y ago
Alternate: stocks are gambling; startup stocks are gambling with money you don't have; startups are so prevalent that the incentive to gamble money you don't have is harmful to a larger set of people than would accept the gambling risk under normal circumstances.
paxys 6y ago
From what I remember (and I may be wrong) companies can't actually stop you from selling your shares to someone else right? That is why so many private secondary markets exist?
- kelnos 6y ago
  Sure they can. Nearly all standard pre-IPO equity comp contracts state that any sales may only be done with board approval. And pretty much no board ever approves that sort of thing. One potential option is that you could enter into a contract with a third party to sell your shares to them after a liquidity event, but they'll give you cash right now. There's a risk to the buyer that the shares might end up being worthless (but that's the price you pay for a speculative play), and a risk to the seller that the shares might be worth quite a bit more at IPO/acquisition (but that's the price you pay for early liquidity). Not sure if any equity comp contracts stipulate that you can't do that, but presumably they could prohibit you from doing that as well.
malisper 6y ago
I've had a number of chats with Dan Luu about this. If you want the high risk, high reward of a startup, while earning the total comp of a FAANG, you can work for FAANG and angel invest on the side. If out of college, you work for FAANG for ~5 years, you'll be able to meet the requirement for an accredited investor by making over $200k a year. At that point, you can invest any disposable income into early stage startups. In addition to getting the benefits of both working at a startup and working at FAANG, you also get the benefits of an investor! You are able to diversify your portfolio across several different startups and you are able to get liquidation preference in any startup you invest in.
- starfishjenga 6y ago
  W2 taxes will create significant friction here - more so the higher you get over $200k.
  - octoberfranklin 6y ago
    It's the other way around. FICA tops out at $135k. Past that your wages are taxed at only 1.45% (for medicare) more than any other non-capital-gains income.
    - vonmoltke 6y ago
      You are forgetting the Additional Medicare Tax of 0.9% that kicks in at $200,000 (single) or $250,000 (married joint). There is also the Net Investment Income Tax of 0.9% that applies to all unearned income when you hit those same thresholds, including but not limited to income that qualifies as long-term capital gains.
    - coryfklein 6y ago
      Uhhh... are you ignoring the normal state and federal income taxes?
- chii 6y ago
  > you work for FAANG for ~5 years...meet the requirement for an accredited investor...you can invest any disposable income into early stage startups. if you worked for $300k a year (total compensation) for 5 years, you would have accumulated $1.5m dollars. But you would have an outflow due to cost of living. Let's say it's 50% of your income goes to cost of living. Then you would have only $750k left to invest after the end of your 5 year tenure. Even if you managed to keep your stock based compensation (rather than selling it), or you picked some other stocks to purchase during your tenure, it's unlikely to have more than a 100% gain. Let's say you did, and end up with a $1.5m pot at the end due to lucky picks. > You are able to diversify your portfolio across several different startups A $1.5m is barely enough to invest in one early stage startup these days. And not to mention it's such a small amount that a private equity investment firms/VC firms would likely consider it not really worth the trouble to court you over. So it's likely you have to DIY everything yourself - from finding the startup, to hiring the lawyers and bankers to deal with, as well as learn the domain (which you may or may not already be an expert). Or you will have to take a much more unfavourable term with the PE/VC firms as a small client (you have no influence over the conditions of your investment).
necubi 6y ago
Things are broken in startup compensation. FAANG (and other large bay area tech companies) pay mid six figures for senior engineers. A startup will offer you equity that in the 95% outcome nets you that much, and only after 10+ years (with a large chance that's it's worth zero). Oh, and you have a to take a huge financial risk when you leave due to the 90 day exercise window, potentially paying hundreds of thousands in tax on an illiquid (and potentially worthless) asset. This used to work when companies IPO'd within a few years, but now that 10-15 years is common the system has broken down. As a personal example, neither of the two startups I've worked for (14 years and 9 years old) are anywhere close to an exit. Letting employees sell their equity would definitely help, but typically the equity packages are too small for this to make them directly competitive. An offer at a $20M series A company might be 0.5% equity over 4 years, but a FAANG offer will be 10x that with little of the risk. Removing the 90 day exercise window or granting employees money to early-exercise would help reduce this risk somewhat, but doesn't help with the limited upside. Eventually, statups are going to have to realize that if they want to attract good employees they're going to have to either massively increase cash compensation (which means raising more) or give dramatically more equity (which limits how much they can grow pre-exit). Personally, I think it's gotten so bad that the only way I would join a startup again is as a founder.
- marcinzm 6y ago
  >FAANG (and other large bay area tech companies) pay mid six figures for senior engineers. FAANG (and every other similarly paying company) accounts for at most 5-10% of the engineering talent in the US. Using them as a benchmark for how all companies should compensate engineers seems silly. A startup that needs at best an 80th percentile engineer has no need to meet FAANG compensation to get one hired.
  - necubi 6y ago
    This is pretty specific to the bay area market (should apply as well to Seattle and New York, but I'm not familiar enough with the hiring markets in other areas to comment). But I think for the average engineer getting a job at FAANG/equivalent is not very hard if you're willing to prepare for the interviews.
deleted 6y ago
[deleted]
maerF0x0 6y ago
It's not much better with RSUs, I've had both the experiences where a company's RSUs declined (so total comp fell) and they said "That's the risk we all take to have skin in the game". And I've had the experience where my RSUs have done well, and so they said "no raises or refreshers for you because your total comp is very high" ... So basically my risk if they decline and their gain if they rise... It's frustrating because it was my capital risk of additional salary to take those RSUs (which only pay infrequently, not like salary)... Taxed at same high rates as salary...
baron816 6y ago
I think the most compelling reason for a company to go public now is that it means they can off recruits liquid equity. I wouldn’t be surprised if the recent wave of filings was partially driven by a sense that star employees were being poached by FAANGS that could effectively pay double, mostly on account of being public.
macklemoreshair 6y ago
Having seen exit packages for director/ executive level individuals at a successful startup even, there’s a lot that doesn’t make sense. Early employees work really hard and are rarely promoted to important positions internally. I’ve seen equity turn out well. It obviously can. And being open to those opportunities that might change your life can be valuable. But most likely it won’t - be an investor, do due diligence and make sure it’s really a rocket
- swyx 6y ago
  can you offer more detail on director/exec startup comp please? not something we get to see often. even a range would be nice
  - mackle_hair 6y ago
    $20 million for 2 years of being with the company as cto $3m for the earliest employees that had been there 6 years. for all the other engineers, a down payment on a nice house ~$300-500k for 4 years.
    - swyx 6y ago
      thats a nice payday for the CTO. not sure its fair for the earliest employees. thanks for the datapoints anyway!
bravoetch 6y ago
The trap is in the title. "Let employees". As long as you're just an employee you're at the mercy of these absurd mechanics. Opt out.
itronitron 6y ago
The primary investors should care about this as it can give great insight into how the rank and file feel about the long term prospects of their company.
sgtnoodle 6y ago
I've perhaps been very lucky and fortunate enough to be picky, but when negotiating for a new job, I've always just made a spreadsheet with a bunch of expected value calculations and then used that to counter as appropriate. For both my current job and the new offer, I'll calculate total expected compensation after 3 years from now assuming bad performance, realistic performance and best performance. Those numbers alone can be very enlightening. If the offer's realistic projection is less than the current realistic projection, I politely let the negotiator know that their offer will need tweaking to have parity with my current situation. Either way, I'll suggest a counter offer that puts the realistic compensation at least 1.2x current if it isn't already, then play it by ear from there. The composition of salary vs. equity really just depends on my current risk tolerance. The more equity, the higher the best case upside. This all happens after the company is serious about hiring me and I'm serious about joining them. It's nice to have a spreadsheet because it avoids appeals to emotion. I wouldn't share the formulas or numbers, but rather only the high level methodology and the conclusions you've drawn from it. It's your tool and confidential info, not theirs. If you feel like you've made a strategic error and asked for too much, you can easily backtrack and laugh it off with the negotiator by saying you had a typo somewhere. More likely, the negotiator will consult their own spreadsheets or board, and they will tell them that your counter offer is acceptable. One time I simply mentioned to a recruiter that I might need to take out a loan to leave my current job due to AMT (since the options were actually worth something), but I was still trying to find a tax consultant to crunch the numbers. She came back right away with a pre-offer for a larger starting bonus pending approval. I later told her that the AMT worked out okay without it, but she still got me the starting bonus since it got approved. It never hurts to ask politely for something!
edelans 6y ago
Very interesting point of view ! I'm a French engineer owning "BSPCE" (stock option equivalent for french startups), I wonder if I can exercise those and sell the stock privately (obviously, the company is not IPO'd). If any other french HNer is reading this and has experience with this subject, I'd be interested to talk about it !
BrandonM 6y ago
One roadblock, I think, is that the IRS requires 409(a) valuations every year to set a value for common stocks and thus the strike price for options. During those valuations, most startups strive to paint their value as being very low: “Seriously, folks, the market could dry up and leave common shareholders with nothing.” The resulting common share value is often pegged at 1/10 to 1/3 of the preferred share value implied by the most frequent fundraising round. Lower strike prices make it easier for employees to exercise their options and provide more upside. My understanding is that a sufficient volume of equity sales can force new 409(a) valuations. These would require more payments to an external accounting firm, and 4x the work to do it quarterly, work that often consumes leadership cycles. Moreover, these valuations would likely have the effect of narrowing the gap between common and preferred share values, elevating the strike price and squeezing potential profits out of employee equity. It’s probably different once a company is large enough that it’s granting RSUs. For companies at the ISO stage, I’m not sure the upsides outweigh the downsides.
gghootch 6y ago
At Secfi we 100% agree. Employees should: (a) have the knowledge to fairly assess their equity, and (b) have the option to cash out before an exit. We're working hard to fix this information asymmetry, and try to offer a way out of the equity-golden-handcuffs with a win-win structure to as many people as possible. Our financing product is not cheap, but it's a great option for a lot of startup employees that aren't able to sell their stock today. Sadly, that's still the reality at the moment, and as other commenters remarked it's likely to stay that way because individual employees are at such a negotiation disadvantage. With all that said, there's still heaps to be done to fix this issue and we'd love to get feedback from the community on some of our material: 1. Stock option starter guide: https://www.secfi.com/academy/stock-option-guide https://www.secfi.com/academy/stock-option-guide 2. Exercise guide: https://www.secfi.com/academy/exercise-guide https://www.secfi.com/academy/exercise-guide 3. Exercise tax calculator: https://www.secfi.com/products/exercise-tax-calculator https://www.secfi.com/products/exercise-tax-calculator
swyx 6y ago
as a holder of some employee stock now actually worth six figures (bc company raised a round and is offering to buy back my shares) I have been confronted w the opposite question: do I want to sell it? I did not. reason being that I didn't need it right this second and it wasn't a life changing amount yet and it could be. I think the illiquidity helps in that I'm not tempted to reevaluate this decision every trading day and likely make a bad decision at the first negative data point. at some point a company is clearly on the "will probably exit for non zero amount" track and the standard "its probably worth 0" advice does not apply. I'm not sure HN agrees with this.
- thundergolfer 6y ago
  I was recently in the same or similar position (partial buy-back) and opted to sell. Tax concerns aside, your essentially betting that the stock will do better than an alternative investment. That might be the case, but taking the money and then reinvesting it is also a valid “I don’t need this money right now” option. There’s also the factor that you’re more “eggs in one basket” if you keep the stock. I personally pulled mine out to donate it, as it is potentially life-changing money in other people’s hands.
  - swyx 6y ago
    very noble of you, great option. yes, i do think this stock has potential to at least 2-4x in 2 years from where it is today, and if things go south will at least be acquired for current valuation. so its probably better than any alternative investment i can do.
nfriedly 6y ago
One thing I really liked about Tanium was the way they handled employee equity. First starters, they granted RSU's instead of ISOs, so when you leave the company you just get to keep whatever stock you've earned without needing to write a big check and pay a bunch of taxes all at once. Secondly, they did something like what the article suggested and every time the company raised fumding (about once a year), they allowed employees to participate and sell stock (with some restrictions.) In fact, the company has been profitable for a while, so I think allowing employees to sell stock is the primary reason they still do regular funding rounds. I ended up leaving for other reasons, but I always felt like they treated me well in that regard.
- Cd00d 6y ago
  I was at a company that issued me an generous RSU package each year. Roughly $60k/year equivalent. When my department was made redundant and we were laid off, turns out I didn't actually have any stock. The account reverted to $0. Though, true, I never needed to write a big check or pay a bunch of taxes.
  - nfriedly 6y ago
    Ouch. I think Tanium's was initially like that, ("double trigger") requiring both vesting time and a liquidity event (acquisition, IPO, etc.) But they changed it to just vesting time ("single trigger") while I was there.
spurdoman77 6y ago
Or written other way "go public". To have liquidity for a company you need to be listed at some marketplace and be interesting enough so that people will trade tour stock.
deleted 6y ago
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zerr 6y ago
How do you covert equity to passive income?
deleted 6y ago
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tyre 6y ago

> I was stunned at how paltry the equity offers were from private, Series A-C companies. For most of the offers I received, the company valuation would need to increase by 8-20x for the yearly compensation to achieve parity with the first-year offer from a public SF-based company, let alone to exceed it. That’s what early stage startup equity is though. It’s specifically a high risk, high reward form of compensation. It’s rarely going to double in worth. Either it’s worth a lot more or it is worth zero. And it’s almost always worth zero.

logicslave12 6y ago
It’s not high risk high reward, it’s high risk low reward
- mlthoughts2018 6y ago
  Exactly. 8-20x is a massively unlikely outcome so there’s huge risk. What do you get for taking a bet on that risk? Mere parity with annualized first year compensation elsewhere. That is a very low reward for such dramatic risk.
  - naniwaduni 6y ago
    Is "risk" even the right thing to call a too-low-to-expect probability of a desirable event? Is playing the lottery a "risk"?
    - sokoloff 6y ago
      I would saying playing the lottery is most certainly a risk (of the money you spent on tickets).
  - e1g 6y ago
    Some people might think "10-20x growth sounds likely for a startup, no?". Frequently, at "Series A" a startup is valued at $20-40M. Getting a 10-20x multiple on that means it should get to $200M-$1B range. Only 5% of all YCombinator companies hit that milestone (~100 companies from ~2,000 deals). Odds for a startups not backed by YC & co, would be lower. So no, not that likely, even if you're as early as day 1 of Series A.
    - Judgmentality 6y ago
      You're comparing seed funding (Y Combinator) and series A funding - most YC companies have yet to raise a series A. The other thing is that most YC companies are young and still have time to grow. I think you're comparing apples to oranges and trying to make a quantitative conclusion.
      - sillysaurusx 6y ago
        If a yc co from 5 years ago still hasn’t raised a series A, it’s probably dead. (I would push this to “1 year ago,” but yc invests in long term projects now like biotech.)
      - e1g 6y ago
        It's fair to point out that if a company gets to Series A, it is substantially de-risked. IIRC, ~30% of YC startups get to Series A, so this milestone is material.
- deleted 6y ago
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kamikaz1k 6y ago
As the other poster said, this explicitly high risk low reward, at the expected required to break even. Because the range of those options is everything between and include 0x In order for it to be high risk high reward, the option's paper value should closer to competing packages from public companies. Because in order to take advantage of options, you have to exercise them, and in order to exercise them, you need to do it before they expire, with real cash out of your own pocket. Given the rate of startup failure, it's a good thing to allow earlier liquidity to those employees, so they don't get trapped into either staying for the 10 yrs till a real liquidity event, or bite the bullet and drop cash (forgoing other investment opportunities) when they decide to leave after some time (like a typical employee). In the end, the equity that group controls is very tiny.
Judgmentality 6y ago
> It’s specifically a high risk, high reward form of compensation. This really only applies to the first few employees, or maybe the first few hundred if you happen to be at the next Google (so the company has to 1,000x). After that, it's very unlikely you'd come out ahead even if the company 20x'ed compared to joining FAANG. And the other thing to consider is that FAANG stocks aren't stationary. I know people whose relatively modest AMZN stock offerings have made them millionaires. The fact of the matter is you don't join a startup to get rich (unless you're an idiot). You join a startup because of the many other benefits it provides - having a bigger impact, working on a smaller team, less bureaucracy, etc.
- barclay 6y ago
  > You join a startup because of the many other benefits it provides This. So much this. The exit is the lottery ticket. It'll likely fail. But the real lure is getting to wear a ton of hats and fly by the seat of your pants. Any engineer in a < 20 person eng team is going to have a ton of exposure to how the business works, to making real-time decisions, and just generally being impactful. _THAT's_ why you go. (And, that said, it's definitely not for everyone)
  - dpeck 6y ago
    If you value having exposure to how business works, making real-time decisions, and being impactful at > $100k a year you’re a much better employee/coworker than I’ve ever been. The reality of the situations is working at a startup is a great opportunity to prove oneself and have stories to tell when it comes time for interviews (or drinks with colleagues). For most employees it gives those of us without the “perfect” education/gpa/etc an opportunity to work ourselves into positions to be making significant income at larger companies either through exit, acquisition or being hired somewhere else.
trimbo 6y ago
I think the deal has changed quite a bit in terms of how long it takes to figure that out. It used to be that a company's fate was pretty clear within a few years. You joined a startup and it either IPOed in a few years or you guessed your stock was worthless (and that was usually right). Today some of these "pre-IPO" companies are being kept alive on private capital life support for a decade-plus. Palantir is finally going public after 17 years. 17! Waiting a generation for a liquidity event is ridiculous.
dyeje 6y ago
Except it's not. It's high risk, low reward for most rank-and-file employees. Unless the company has an insane exit, you'll end up with new car money at best.

thundergolfer 6y ago

> For most of the offers I received, the company valuation would need to increase by 8-20x for the yearly compensation to achieve parity with the first-year offer from a public SF-based company, let alone to exceed it. Damn, what a terrible deal, particularly for Series-C. As one data point, my company's stock has 5x from my initial grant value, and that has been enough to push my compensation above an equivalent position in Google Sydney, which is probably the highest paying public tech company in the country. That is _if I can sell my equity though_. So yes, please let employees sell their equity. I don't want to have to wait for the dream IPO. Edit: Actually, given Google's very strong YTD stock gains, maybe it's borderline whether I come out ahead.

lumost 6y ago
There's a time value of money question here as well. At FNG you'd earn the equity over n years. You can use this equity to buy a home, pay for college/debts, or build a diversified portfolio.
alfalfasprout 6y ago
Unfortunately this has ultimately led me to conclude that, purely from a monetary standpoint, it is just not worth joining a startup unless you're joining as a C-level employee or director and receiving several % of equity (which again, is going to be rare outside of that level). Otherwise the risk/reward makes little sense. There are other reasons to join a startup of course-- more autonomy, you believe in the product, etc... but they come at a cost (lower TC and usually much worse WLB).
- sokoloff 6y ago
  If you’re going to do that, why not just co-found something? Your position will likely be higher percentage than the amount of de-risking that’s happened in the company you’ll join. “First [non-founder] employee” is a very poor position to take on from an expected-value perspective.
  - marcinzm 6y ago

Galanwe 6y ago

You don't need a public market to sell your shares. The company itself could buy back the shares, or an other employee could buy them from you. Actually, I think most C level officers in a startup would be quite happy to buy lower level employees shares. Of course this would have to be possible considering the shareholder agreement, but I don't see any reason it would not.

3gjg3j3g3h3h3 6y ago
Stack Overflow prohibited employees from selling shares privately, while also setting an expiry date on the options that has forced some of the company's longest-serving employees to choose between surrendering their equity, or paying a ton to exercise options that they may never be able to sell.
- worker767424 6y ago
  Startup options have been like this forever. Maybe you could theoretically sell, but no one did, and marketplaces like Forge and Equityzen didn't exist.
  - hkmurakami 6y ago
    Startups used to IPO or fail much faster
    - marc__1 6y ago
      The time from founding to IPO is a stat that is widely misrepresented by well-educated people who may not have had the time to check the numbers. See for instance the graph Company Age (Years) shared by Meritech. There are 8 companies in the cohort that are 20+ years, only 1 (Salesforce) that IPOed with less than 10 years. In fact, from the entire comps (20+ public SaaS), only Salesforce IPOed at year 5. https://www.meritechcapital.com/public-comparables/enterprise#OperatingMetrics https://www.meritechcapital.com/public-comparables/enterpris...

gregrata 6y ago

On another side of this - I've seen places where employees were essentially locked in - unable to leave, because they couldn't sell any stock, and exercising cost too much, or, more likely, would be a taxable event (and again, they couldn't cover taxes by selling so it's a huge cash hit to buy the paper) I get at one level a company might like this - it's a "good" way to keep people from leaving. In reality, this means you have people that really want to leave and can't - which does not make for a happy, good employee. Let them sell at least a portion of the stock back to the company. Or sell some during a funding round, at least enough to cover their taxes so they can take their stock and go.

dangus 6y ago

Screw equity, pay me in cash and 401k matching. I’d love to find a company that actually goes above and beyond on 401k and uses it as a piece of salary rather than just a paltry little matching contribution. A company can legally contribute so much more money than an individual can, the overall limit is $57,000 but my individual limit is less than half that.

dvtrn 6y ago
What, and eat into the revenue???
sokoloff 6y ago
See if your company permits after-tax contributions and in-service rollovers to Roth 401(k). https://www.nerdwallet.com/blog/investing/mega-backdoor-roths-work/ https://www.nerdwallet.com/blog/investing/mega-backdoor-roth... I think you should expect income taxes to go up (likely substantially) over the next 40 years, making Roth attractive to those who will retire with substantial income streams in retirement.
nfriedly 6y ago
Yes, seriously! The IRS rules for 401k plans allow for the employer to put in twice as much as the employee - that's the only way to hit the maximum. But employers didn't seem to get the memo. My current employer advertised a 2-to-1 401k match, which was a big selling point until I learned that it was capped at $4800/year. And then even that went away because of COVID :( I've considered going back to consulting a couple of times just to be able to give myself a proper 401k match.

dccoolgai 6y ago

Sad truth that kinda hit home a little: the part about not being able to have more than a one percent impact unless you are a c-level.

kelnos 6y ago
I think it depends on company stage and size, though. If you're a part of a 5-person shop, then you'd better be able to increase the value of the company by way more than 1%, or the company made a really bad hire. Even through 50 and maybe even 100 employees, I'd think it's possible to have a meaningful impact on the company without having to destroy your work-life balance. But of course as the company grows, your influence gets smaller and smaller unless you become an executive.
- xtracto 6y ago
  It also depends on what you do in the company. On my last startup, we were about 100 people, and I lead the Data Science team (doing Machine learning models for risk evaluation of loans). One of my more Jr. data scientists (a guy who had came out of the Uni, constructed a variable for one the models that improved the separation a lot. IIRC He single-handedly decrease our default from 20% to something like 17% (with the same acceptance %). That was huge.

fizixer 6y ago

Tangentially related: I often get super pissed when my employer, or a friend's employer internally announces that employees should suggest ways to improve the bottomline of the company, think outside the box, be proactive etc, etc. Like, I just work here. I know jacksh-t about how _you_ are running the company, how many stupid internal decisions _you_ are making everyday that's screwing all of us over like slow poison, what financial info _you_ have access to about the company that you would never share with me in a million years. And then you want me to magically solve your problems, and I'm the one who's not thinking outside the box?

kevindong 6y ago

I value my equity grant (in my privately held company) at $0. If it turns out to be worth something someday, great. But until then, I just don't consider it a part of my compensation. My company has a policy (that HR has made very, very clear can be changed at any time) where for RSUs that are vesting, the company will pay the income taxes for the employee in exchange for withholding/essentially buying back a portion of the vested shares (the exact mechanism by which this is done isn't something I really looked into). This policy opens up a backdoor way of essentially liquidating my vesting shares: I can simply file a new withholding form just before the vesting date, claim way fewer tax exemptions, and the company will withhold a higher portion of the vesting shares/remit more cash to the tax authorities. Upon filing my tax returns at the end of the year, I can receive the excess cash remitted as a refund.

fossuser 6y ago
I get this trope of valuing equity at $0 because a lot of people have been burned, but it’s bad advice. The fastest way to wealth is through equity. Yes, it’s hard to value but that value is not zero. Spending effort trying to value it is worth it, and picking companies where you think the equity will be valuable is worth it. Also worth considering the character of the founder and the other directors. There’s a lot of ways to get screwed out of equity, working with good people is important.
- MattGaiser 6y ago
  If you can determine company value and future with any reliability, you may as well just take those skills to the public markets and use your extra cash compensation to buy stocks/options. Far more information is available about those companies than any privately held ones.
  - fossuser 6y ago
    Yeah I do do that, but you have to risk more and I disagree about it being easier to value from the outside. Public markets for non-dividend paying stocks are also betting more on what other people think the stock price will be rather than the company value itself - it’s a bit of a different game.

thinkingkong 6y ago

Equity at a startup is essentially worthless. Exercise prices, taxes, 90 day max exercise windows, asymetric price information, preference stacks, all contribute to a lack of clarity. Of course eveyone thinks their company will be worth a cool billion but thats rarely the case. Plus founders and investors are incentivized for your options to expire; they go back into the pool. Startup compensation needs a refactor pretty badly.

mrnobody_67 6y ago
You forgot venture debt, warrants, & management carve-outs during M&A.

rectang 6y ago

As an individual negotiating compensation with a company, you are at a structural disadvantage: the company does this all the time, and (lacking a union to negotiate on your behalf) you do this rarely. Unless you are an elite negotiator (and if you can hire a lawyer you are elite already), the complexity of any compensation package works in the company's favor. For almost all of us, equity is a vehicle to get screwed over. Articles like this one only to serve to perpetuate startup mythology and inflate false hopes. Theoretically, a startup that actually wants to compete on compensation by sharing in good fortune could craft an equity package which is simple and standardized enough to be comprehensible by ordinary humans. But so long as employees keep snapping at the vaporous bait of deceptive equity packages, there's not much incentive to do so.

kelnos 6y ago
> an equity package which is simple and standardized enough to be comprehensible by ordinary humans > deceptive equity packages What do you mean by "deceptive"? The standard for pre-IPO seems to me to be N number of options, at a particular strike price, 10-year expiration (or 90 days if you leave the company). That doesn't seem all that complicated to me, or deceptive. What can get deceptive is if the company is trying to lowball you on salary and tell you that your equity will become worth millions some day as if it was a sure thing, which is of course a scummy practice. And the whole expiration after 90 days thing is garbage. But deceptive? Complicated? I don't think it is. I really don't see what's not simple or standardized about what I described above. Granted, the last time I joined a startup (which is not a startup anymore) was 9 years ago, but I haven't read anything to suggest that this has changed drastically.
- mehrdadn 6y ago
  Any thoughts on the AMT trap, and the potential inability to exercise (or go bankrupt with AMT) when you leave? It's not exactly written in red warning letters on offer packages, right?
  - eanzenberg 6y ago

eyelidlessness 6y ago

Alternate: stocks are gambling; startup stocks are gambling with money you don't have; startups are so prevalent that the incentive to gamble money you don't have is harmful to a larger set of people than would accept the gambling risk under normal circumstances.

paxys 6y ago

From what I remember (and I may be wrong) companies can't actually stop you from selling your shares to someone else right? That is why so many private secondary markets exist?

kelnos 6y ago
Sure they can. Nearly all standard pre-IPO equity comp contracts state that any sales may only be done with board approval. And pretty much no board ever approves that sort of thing. One potential option is that you could enter into a contract with a third party to sell your shares to them after a liquidity event, but they'll give you cash right now. There's a risk to the buyer that the shares might end up being worthless (but that's the price you pay for a speculative play), and a risk to the seller that the shares might be worth quite a bit more at IPO/acquisition (but that's the price you pay for early liquidity). Not sure if any equity comp contracts stipulate that you can't do that, but presumably they could prohibit you from doing that as well.

malisper 6y ago

I've had a number of chats with Dan Luu about this. If you want the high risk, high reward of a startup, while earning the total comp of a FAANG, you can work for FAANG and angel invest on the side. If out of college, you work for FAANG for ~5 years, you'll be able to meet the requirement for an accredited investor by making over $200k a year. At that point, you can invest any disposable income into early stage startups. In addition to getting the benefits of both working at a startup and working at FAANG, you also get the benefits of an investor! You are able to diversify your portfolio across several different startups and you are able to get liquidation preference in any startup you invest in.

starfishjenga 6y ago
W2 taxes will create significant friction here - more so the higher you get over $200k.
- octoberfranklin 6y ago
  It's the other way around. FICA tops out at $135k. Past that your wages are taxed at only 1.45% (for medicare) more than any other non-capital-gains income.
  - vonmoltke 6y ago
    You are forgetting the Additional Medicare Tax of 0.9% that kicks in at $200,000 (single) or $250,000 (married joint). There is also the Net Investment Income Tax of 0.9% that applies to all unearned income when you hit those same thresholds, including but not limited to income that qualifies as long-term capital gains.
  - coryfklein 6y ago
    Uhhh... are you ignoring the normal state and federal income taxes?
chii 6y ago
> you work for FAANG for ~5 years...meet the requirement for an accredited investor...you can invest any disposable income into early stage startups. if you worked for $300k a year (total compensation) for 5 years, you would have accumulated $1.5m dollars. But you would have an outflow due to cost of living. Let's say it's 50% of your income goes to cost of living. Then you would have only $750k left to invest after the end of your 5 year tenure. Even if you managed to keep your stock based compensation (rather than selling it), or you picked some other stocks to purchase during your tenure, it's unlikely to have more than a 100% gain. Let's say you did, and end up with a $1.5m pot at the end due to lucky picks. > You are able to diversify your portfolio across several different startups A $1.5m is barely enough to invest in one early stage startup these days. And not to mention it's such a small amount that a private equity investment firms/VC firms would likely consider it not really worth the trouble to court you over. So it's likely you have to DIY everything yourself - from finding the startup, to hiring the lawyers and bankers to deal with, as well as learn the domain (which you may or may not already be an expert). Or you will have to take a much more unfavourable term with the PE/VC firms as a small client (you have no influence over the conditions of your investment).

necubi 6y ago

Things are broken in startup compensation. FAANG (and other large bay area tech companies) pay mid six figures for senior engineers. A startup will offer you equity that in the 95% outcome nets you that much, and only after 10+ years (with a large chance that's it's worth zero). Oh, and you have a to take a huge financial risk when you leave due to the 90 day exercise window, potentially paying hundreds of thousands in tax on an illiquid (and potentially worthless) asset. This used to work when companies IPO'd within a few years, but now that 10-15 years is common the system has broken down. As a personal example, neither of the two startups I've worked for (14 years and 9 years old) are anywhere close to an exit. Letting employees sell their equity would definitely help, but typically the equity packages are too small for this to make them directly competitive. An offer at a $20M series A company might be 0.5% equity over 4 years, but a FAANG offer will be 10x that with little of the risk. Removing the 90 day exercise window or granting employees money to early-exercise would help reduce this risk somewhat, but doesn't help with the limited upside. Eventually, statups are going to have to realize that if they want to attract good employees they're going to have to either massively increase cash compensation (which means raising more) or give dramatically more equity (which limits how much they can grow pre-exit). Personally, I think it's gotten so bad that the only way I would join a startup again is as a founder.

marcinzm 6y ago
>FAANG (and other large bay area tech companies) pay mid six figures for senior engineers. FAANG (and every other similarly paying company) accounts for at most 5-10% of the engineering talent in the US. Using them as a benchmark for how all companies should compensate engineers seems silly. A startup that needs at best an 80th percentile engineer has no need to meet FAANG compensation to get one hired.
- necubi 6y ago
  This is pretty specific to the bay area market (should apply as well to Seattle and New York, but I'm not familiar enough with the hiring markets in other areas to comment). But I think for the average engineer getting a job at FAANG/equivalent is not very hard if you're willing to prepare for the interviews.

deleted 6y ago

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maerF0x0 6y ago

It's not much better with RSUs, I've had both the experiences where a company's RSUs declined (so total comp fell) and they said "That's the risk we all take to have skin in the game". And I've had the experience where my RSUs have done well, and so they said "no raises or refreshers for you because your total comp is very high" ... So basically my risk if they decline and their gain if they rise... It's frustrating because it was my capital risk of additional salary to take those RSUs (which only pay infrequently, not like salary)... Taxed at same high rates as salary...

baron816 6y ago

I think the most compelling reason for a company to go public now is that it means they can off recruits liquid equity. I wouldn’t be surprised if the recent wave of filings was partially driven by a sense that star employees were being poached by FAANGS that could effectively pay double, mostly on account of being public.

macklemoreshair 6y ago

Having seen exit packages for director/ executive level individuals at a successful startup even, there’s a lot that doesn’t make sense. Early employees work really hard and are rarely promoted to important positions internally. I’ve seen equity turn out well. It obviously can. And being open to those opportunities that might change your life can be valuable. But most likely it won’t - be an investor, do due diligence and make sure it’s really a rocket

swyx 6y ago
can you offer more detail on director/exec startup comp please? not something we get to see often. even a range would be nice
- mackle_hair 6y ago
  $20 million for 2 years of being with the company as cto $3m for the earliest employees that had been there 6 years. for all the other engineers, a down payment on a nice house ~$300-500k for 4 years.
  - swyx 6y ago
    thats a nice payday for the CTO. not sure its fair for the earliest employees. thanks for the datapoints anyway!

bravoetch 6y ago

The trap is in the title. "Let employees". As long as you're just an employee you're at the mercy of these absurd mechanics. Opt out.

itronitron 6y ago

The primary investors should care about this as it can give great insight into how the rank and file feel about the long term prospects of their company.

sgtnoodle 6y ago

I've perhaps been very lucky and fortunate enough to be picky, but when negotiating for a new job, I've always just made a spreadsheet with a bunch of expected value calculations and then used that to counter as appropriate. For both my current job and the new offer, I'll calculate total expected compensation after 3 years from now assuming bad performance, realistic performance and best performance. Those numbers alone can be very enlightening. If the offer's realistic projection is less than the current realistic projection, I politely let the negotiator know that their offer will need tweaking to have parity with my current situation. Either way, I'll suggest a counter offer that puts the realistic compensation at least 1.2x current if it isn't already, then play it by ear from there. The composition of salary vs. equity really just depends on my current risk tolerance. The more equity, the higher the best case upside. This all happens after the company is serious about hiring me and I'm serious about joining them. It's nice to have a spreadsheet because it avoids appeals to emotion. I wouldn't share the formulas or numbers, but rather only the high level methodology and the conclusions you've drawn from it. It's your tool and confidential info, not theirs. If you feel like you've made a strategic error and asked for too much, you can easily backtrack and laugh it off with the negotiator by saying you had a typo somewhere. More likely, the negotiator will consult their own spreadsheets or board, and they will tell them that your counter offer is acceptable. One time I simply mentioned to a recruiter that I might need to take out a loan to leave my current job due to AMT (since the options were actually worth something), but I was still trying to find a tax consultant to crunch the numbers. She came back right away with a pre-offer for a larger starting bonus pending approval. I later told her that the AMT worked out okay without it, but she still got me the starting bonus since it got approved. It never hurts to ask politely for something!

edelans 6y ago

Very interesting point of view ! I'm a French engineer owning "BSPCE" (stock option equivalent for french startups), I wonder if I can exercise those and sell the stock privately (obviously, the company is not IPO'd). If any other french HNer is reading this and has experience with this subject, I'd be interested to talk about it !

BrandonM 6y ago

One roadblock, I think, is that the IRS requires 409(a) valuations every year to set a value for common stocks and thus the strike price for options. During those valuations, most startups strive to paint their value as being very low: “Seriously, folks, the market could dry up and leave common shareholders with nothing.” The resulting common share value is often pegged at 1/10 to 1/3 of the preferred share value implied by the most frequent fundraising round. Lower strike prices make it easier for employees to exercise their options and provide more upside. My understanding is that a sufficient volume of equity sales can force new 409(a) valuations. These would require more payments to an external accounting firm, and 4x the work to do it quarterly, work that often consumes leadership cycles. Moreover, these valuations would likely have the effect of narrowing the gap between common and preferred share values, elevating the strike price and squeezing potential profits out of employee equity. It’s probably different once a company is large enough that it’s granting RSUs. For companies at the ISO stage, I’m not sure the upsides outweigh the downsides.

gghootch 6y ago

At Secfi we 100% agree. Employees should: (a) have the knowledge to fairly assess their equity, and (b) have the option to cash out before an exit. We're working hard to fix this information asymmetry, and try to offer a way out of the equity-golden-handcuffs with a win-win structure to as many people as possible. Our financing product is not cheap, but it's a great option for a lot of startup employees that aren't able to sell their stock today. Sadly, that's still the reality at the moment, and as other commenters remarked it's likely to stay that way because individual employees are at such a negotiation disadvantage. With all that said, there's still heaps to be done to fix this issue and we'd love to get feedback from the community on some of our material: 1. Stock option starter guide: https://www.secfi.com/academy/stock-option-guide https://www.secfi.com/academy/stock-option-guide 2. Exercise guide: https://www.secfi.com/academy/exercise-guide https://www.secfi.com/academy/exercise-guide 3. Exercise tax calculator: https://www.secfi.com/products/exercise-tax-calculator https://www.secfi.com/products/exercise-tax-calculator

swyx 6y ago

as a holder of some employee stock now actually worth six figures (bc company raised a round and is offering to buy back my shares) I have been confronted w the opposite question: do I want to sell it? I did not. reason being that I didn't need it right this second and it wasn't a life changing amount yet and it could be. I think the illiquidity helps in that I'm not tempted to reevaluate this decision every trading day and likely make a bad decision at the first negative data point. at some point a company is clearly on the "will probably exit for non zero amount" track and the standard "its probably worth 0" advice does not apply. I'm not sure HN agrees with this.

thundergolfer 6y ago
I was recently in the same or similar position (partial buy-back) and opted to sell. Tax concerns aside, your essentially betting that the stock will do better than an alternative investment. That might be the case, but taking the money and then reinvesting it is also a valid “I don’t need this money right now” option. There’s also the factor that you’re more “eggs in one basket” if you keep the stock. I personally pulled mine out to donate it, as it is potentially life-changing money in other people’s hands.
- swyx 6y ago
  very noble of you, great option. yes, i do think this stock has potential to at least 2-4x in 2 years from where it is today, and if things go south will at least be acquired for current valuation. so its probably better than any alternative investment i can do.

nfriedly 6y ago

One thing I really liked about Tanium was the way they handled employee equity. First starters, they granted RSU's instead of ISOs, so when you leave the company you just get to keep whatever stock you've earned without needing to write a big check and pay a bunch of taxes all at once. Secondly, they did something like what the article suggested and every time the company raised fumding (about once a year), they allowed employees to participate and sell stock (with some restrictions.) In fact, the company has been profitable for a while, so I think allowing employees to sell stock is the primary reason they still do regular funding rounds. I ended up leaving for other reasons, but I always felt like they treated me well in that regard.

Cd00d 6y ago
I was at a company that issued me an generous RSU package each year. Roughly $60k/year equivalent. When my department was made redundant and we were laid off, turns out I didn't actually have any stock. The account reverted to $0. Though, true, I never needed to write a big check or pay a bunch of taxes.
- nfriedly 6y ago
  Ouch. I think Tanium's was initially like that, ("double trigger") requiring both vesting time and a liquidity event (acquisition, IPO, etc.) But they changed it to just vesting time ("single trigger") while I was there.

spurdoman77 6y ago

Or written other way "go public". To have liquidity for a company you need to be listed at some marketplace and be interesting enough so that people will trade tour stock.

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zerr 6y ago

How do you covert equity to passive income?

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