5 ms·

Good, pro-employee move. Next, I'd like to see pre-IPO startups offer longer periods to exercise shares when you leave. 90 days being standard is way too low.

by adoxyz 5y ago

tyingq 5y ago
Seems like a pro employer move too. Less people hanging around that have already decided to leave...just waiting on a vesting cliff.
- TechBro8615 5y ago
  Or you get a bunch of ex employees you fired after three months lingering around on the cap table (assuming you’re not a public company).
  - sk5t 5y ago
    Not if they haven't passed the cliff. Unvested options forfeit.
    - sk5t 5y ago
      This seems to be a very unpopular comment. But why--is the common case of losing (err, "returning to the employee option pool") unvested options at separation controversial, or have I done something offensive by pointing it out, or do y'all actually not agree with the accuracy of this?
      - TechBro8615 5y ago
        Probably because it was a non-sequitur to my comment. My point was that without a cliff, even employees who you terminated after three months will vest options that they can exercise for shares on your cap table. It’s irrelevant that they also have unvested options at that point. It’s the vested options that lead to the managerial overhead of a polluted cap table.
- paulddraper 5y ago
  > people hanging around But it's only 1 year? * Bonuses are usually given annually * Signing bonuses and sabbaticals usually obligate one year employment A year seems like a very low bar.
hn_throwaway_99 5y ago
I totally agree with the above, and have commented on it many times before, but note the 90 day standard is because that is the maximum amount of time allowed for ISOs by the IRS. To allow for conversion after that time (e.g. 5-10 years seems to be what a lot of people are pushing for), the ISOs convert into non-qualified options. Still worth it in my opinion. Even better would be for the IRS to change the law (not sure if it's a law or a reg), because with companies staying private so much longer it's a different world.
- borski 5y ago
  (Preface: IANAL) Only worth it if you aren’t early. ISOs provide preferential tax treatment, and early on are usually very very cheap, so many companies (mine included) also offer early exercise with ISOs, which is an unbeatable tax win (afaik). The issue occurs when options get expensive (aka the company is doing well) and then you have to do the math between ISOs or NSOs. The longer expiration may be better, but certainly not for every employee. That said, as companies get bigger they stop being able to offer as many ISOs (there is a max cap), so at that point they should extend the timeline for expiration. One thing companies do have to worry about though: a 10-year expiration means your cap table is in flux for 10 years, potentially, which makes calculations, acquisitions, etc, tougher.
  - fishtoaster 5y ago
    Wouldn't that only be an issue if a company offers NSOs instead of ISOs? What I've seen in the past is "here's some ISOs, they automatically convert to NSOs 90 days after you leave." That way you get all the benefits of an ISO (tax on sale) while you work there, then all the benefits of an NSO (doesn't disappear in a puff of smoke at day 90). Seems like strictly a win, regardless of company phase.
    - rileymat2 5y ago
      It not a win for a company that hires people who would not understand enough to value this rather obscure treatment. In the current system a lot of options get clawed back to the company's benefit from an inability or unwillingness to take the risk of exercising. It is no coincidence that this very simple modification is not too widespread.
echelon 5y ago
> Next, I'd like to see pre-IPO startups offer longer periods to exercise shares when you leave. 90 days being standard is way too low. It should be at least 365 days so that you can split it between tax years. I've still got options of a public company I need to "dispose" of, and I don't want to do it all at once. Perhaps until the options expire (typically 10 years) would be too much to wish for, but that would be ideal.
jkaplowitz 5y ago
My employer (not yet reflected in my profile and I'm not speaking for them here) made this change last year for every employee with at least 2 years tenure. For such employees, the post-termination exercise window equals the years of service up to a maximum of 4 years. I've heard similar things at a handful of other well-known tech startups.
deleted 5y ago
[deleted]
devoutsalsa 5y ago
Is there any real incentive to offer more favorable terms to employees that plan to leave?
- pm90 5y ago
  In this case they would be leaving with a smaller fraction of their stock grant and would allow the company to hire someone who would want the job sooner. Seems like a win-win.
- woah 5y ago
  Offering more favorable terms means being able to hire better employees
alasdair_ 5y ago
Niantic offers 10 years to exercise as an NSO and has done so for almost six years now.
mancerayder 5y ago
Naive question here. Given that there's a long-term cap gains consideration, if the company has a strong likelihood (call it greater than 50% chance) of IPO isn't it better to exercise ASAP so the shares are kept more than 12 months in time for the IPO+lockup event? What's the real advantage of waiting to exercise, to make sure that the stock will be worth something versus wasting your call option costs? How high are these strike prices that people are holding out? Again, I've some, but limited (but very different) experience here with equity grants and options.
- patothon 5y ago
  the question is often do you have the means to acquire that pre ipo stock. except if you join very early, it's too expensive to buy your stock with the level of risk associated. as an example, I joined an early stage startup as an exec (potential good deal!), but I would've had to shore 300k to exercise my stocks, pay taxes on it (minimal, that's the huge advantage here), and more than probably see it fail. now let's play the opposite scenario: you join as an engineer late stage, each ISO might be valued at 10 dollars each. how do you exercise. this game is skewed towards founders. in my example, I had to quit for personal reasons and the company was later acquired. however I wan't able to afford, so I got got of $100ks at the time of acquisition. removing these 90 days time would have let me gain what I was owed. no hard feelings, because I knew the game, but it was the moment I decided no more startups that have this 90 days BS.
- avalys 5y ago
  Let's say you accept a lower salary from a startup, because they offer you 100,000 options with a standard 4-year vest/1-year cliff/90 days to exercise at a strike price (409a valuation) of $1 / share, and claim that an exit at $10 / share looks likely if growth stays on track. You stay for three years. The exit hasn't come yet because the VCs want to see a higher valuation, but the company has grown and the 409(a) valuation is now $5 / share. You've now vested 60,000 options that would cost you $60,000 to exercise, plus you will have an AMT adjustment of $240,000 because of the difference between the strike price and the current 409(a) valuation. So, exercising those options will cost you $120,000 (ballpark, IANA accountant) in exercise cost and taxes. Keep in mind you've accepted a lower salary for the past three years because of this stock, so you might not have that kind of cash lying around. And even if you do - are you willing to throw $120,000 into a bet that the company will one day have an exit? Keep in mind that the company may have debt, preferred stock, liquidation preferences, etc. and most companies won't share all their past financing terms with ordinary employees, so it may be hard to estimate what a realistic exit even looks like for your stock. And if you're leaving, maybe you're a little disillusioned with how things are going in the first place? You have 90 days to make this decision after leaving the company and then you lose the stock forever. For many people, the answer at this point is that they don't want to take the bet - and they get screwed out of a large part of what was supposed to be their compensation. It's a shitty and exploitative system. I worked at a startup where this exact thing happened to many people who contributed immense value to the company. We had a bumpy year, some management turmoil, etc. and many people left before the IPO and got nothing out of their years of hard work other than a shitty, uncompetitive salary. I will never work for another startup under these terms.

Good, pro-employee move. Next, I'd like to see pre-IPO startups offer longer periods to exercise shares when you leave. 90 days being standard is way too low.

by adoxyz 5y ago

Good, pro-employee move. Next, I'd like to see pre-IPO startups offer longer periods to exercise shares when you leave. 90 days being standard is way too low.

tyingq 5y ago

Seems like a pro employer move too. Less people hanging around that have already decided to leave...just waiting on a vesting cliff.

TechBro8615 5y ago
Or you get a bunch of ex employees you fired after three months lingering around on the cap table (assuming you’re not a public company).
- sk5t 5y ago
  Not if they haven't passed the cliff. Unvested options forfeit.
  - sk5t 5y ago
    This seems to be a very unpopular comment. But why--is the common case of losing (err, "returning to the employee option pool") unvested options at separation controversial, or have I done something offensive by pointing it out, or do y'all actually not agree with the accuracy of this?
    - TechBro8615 5y ago
      Probably because it was a non-sequitur to my comment. My point was that without a cliff, even employees who you terminated after three months will vest options that they can exercise for shares on your cap table. It’s irrelevant that they also have unvested options at that point. It’s the vested options that lead to the managerial overhead of a polluted cap table.
paulddraper 5y ago
> people hanging around But it's only 1 year? * Bonuses are usually given annually * Signing bonuses and sabbaticals usually obligate one year employment A year seems like a very low bar.

hn_throwaway_99 5y ago

I totally agree with the above, and have commented on it many times before, but note the 90 day standard is because that is the maximum amount of time allowed for ISOs by the IRS. To allow for conversion after that time (e.g. 5-10 years seems to be what a lot of people are pushing for), the ISOs convert into non-qualified options. Still worth it in my opinion. Even better would be for the IRS to change the law (not sure if it's a law or a reg), because with companies staying private so much longer it's a different world.

borski 5y ago
(Preface: IANAL) Only worth it if you aren’t early. ISOs provide preferential tax treatment, and early on are usually very very cheap, so many companies (mine included) also offer early exercise with ISOs, which is an unbeatable tax win (afaik). The issue occurs when options get expensive (aka the company is doing well) and then you have to do the math between ISOs or NSOs. The longer expiration may be better, but certainly not for every employee. That said, as companies get bigger they stop being able to offer as many ISOs (there is a max cap), so at that point they should extend the timeline for expiration. One thing companies do have to worry about though: a 10-year expiration means your cap table is in flux for 10 years, potentially, which makes calculations, acquisitions, etc, tougher.
- fishtoaster 5y ago
  Wouldn't that only be an issue if a company offers NSOs instead of ISOs? What I've seen in the past is "here's some ISOs, they automatically convert to NSOs 90 days after you leave." That way you get all the benefits of an ISO (tax on sale) while you work there, then all the benefits of an NSO (doesn't disappear in a puff of smoke at day 90). Seems like strictly a win, regardless of company phase.
  - rileymat2 5y ago
    It not a win for a company that hires people who would not understand enough to value this rather obscure treatment. In the current system a lot of options get clawed back to the company's benefit from an inability or unwillingness to take the risk of exercising. It is no coincidence that this very simple modification is not too widespread.

echelon 5y ago

> Next, I'd like to see pre-IPO startups offer longer periods to exercise shares when you leave. 90 days being standard is way too low. It should be at least 365 days so that you can split it between tax years. I've still got options of a public company I need to "dispose" of, and I don't want to do it all at once. Perhaps until the options expire (typically 10 years) would be too much to wish for, but that would be ideal.

jkaplowitz 5y ago

My employer (not yet reflected in my profile and I'm not speaking for them here) made this change last year for every employee with at least 2 years tenure. For such employees, the post-termination exercise window equals the years of service up to a maximum of 4 years. I've heard similar things at a handful of other well-known tech startups.

deleted 5y ago

[deleted]

devoutsalsa 5y ago

Is there any real incentive to offer more favorable terms to employees that plan to leave?

pm90 5y ago
In this case they would be leaving with a smaller fraction of their stock grant and would allow the company to hire someone who would want the job sooner. Seems like a win-win.
woah 5y ago
Offering more favorable terms means being able to hire better employees

alasdair_ 5y ago

Niantic offers 10 years to exercise as an NSO and has done so for almost six years now.

mancerayder 5y ago

Naive question here. Given that there's a long-term cap gains consideration, if the company has a strong likelihood (call it greater than 50% chance) of IPO isn't it better to exercise ASAP so the shares are kept more than 12 months in time for the IPO+lockup event? What's the real advantage of waiting to exercise, to make sure that the stock will be worth something versus wasting your call option costs? How high are these strike prices that people are holding out? Again, I've some, but limited (but very different) experience here with equity grants and options.

patothon 5y ago
the question is often do you have the means to acquire that pre ipo stock. except if you join very early, it's too expensive to buy your stock with the level of risk associated. as an example, I joined an early stage startup as an exec (potential good deal!), but I would've had to shore 300k to exercise my stocks, pay taxes on it (minimal, that's the huge advantage here), and more than probably see it fail. now let's play the opposite scenario: you join as an engineer late stage, each ISO might be valued at 10 dollars each. how do you exercise. this game is skewed towards founders. in my example, I had to quit for personal reasons and the company was later acquired. however I wan't able to afford, so I got got of $100ks at the time of acquisition. removing these 90 days time would have let me gain what I was owed. no hard feelings, because I knew the game, but it was the moment I decided no more startups that have this 90 days BS.
avalys 5y ago
Let's say you accept a lower salary from a startup, because they offer you 100,000 options with a standard 4-year vest/1-year cliff/90 days to exercise at a strike price (409a valuation) of $1 / share, and claim that an exit at $10 / share looks likely if growth stays on track. You stay for three years. The exit hasn't come yet because the VCs want to see a higher valuation, but the company has grown and the 409(a) valuation is now $5 / share. You've now vested 60,000 options that would cost you $60,000 to exercise, plus you will have an AMT adjustment of $240,000 because of the difference between the strike price and the current 409(a) valuation. So, exercising those options will cost you $120,000 (ballpark, IANA accountant) in exercise cost and taxes. Keep in mind you've accepted a lower salary for the past three years because of this stock, so you might not have that kind of cash lying around. And even if you do - are you willing to throw $120,000 into a bet that the company will one day have an exit? Keep in mind that the company may have debt, preferred stock, liquidation preferences, etc. and most companies won't share all their past financing terms with ordinary employees, so it may be hard to estimate what a realistic exit even looks like for your stock. And if you're leaving, maybe you're a little disillusioned with how things are going in the first place? You have 90 days to make this decision after leaving the company and then you lose the stock forever. For many people, the answer at this point is that they don't want to take the bet - and they get screwed out of a large part of what was supposed to be their compensation. It's a shitty and exploitative system. I worked at a startup where this exact thing happened to many people who contributed immense value to the company. We had a bumpy year, some management turmoil, etc. and many people left before the IPO and got nothing out of their years of hard work other than a shitty, uncompetitive salary. I will never work for another startup under these terms.