12 ms·

Understanding Startup Offers

196 points by medtner 5y ago

keeptrying 5y ago
These set of questions are very thorough and will help you avoid 80% or more of the bad situations. I had to figure out all thsi on my own and most startups won’t answer these questions even after getting an offer. Some more question you might want to ask: - is there a double trigger clause? (If not then the founder can restart your vesting after an acquisition and do other nasty things.) - can I exercise my options after beating while I’m at the company. (You’ll be surprised but I’ve seen companies that don’t allow you to exercise while you’re employed there which means you can kiss qsbs goodbye and you can’t leave comoany if it gets too big else you’ll lose the options) - can I sell my exercised stock on the secondary market? (Some companies don’t allow this) 95% of people don’t ask these questions and can get screwed.
- throwawaysea 5y ago
  What does “beating” mean here? Was that a typo, maybe for “vesting”?
  - keeptrying 5y ago
    Yes :)
qqtt 5y ago
It would be interesting to see some analysis comparing pre-IPO offers versus standard FAANG-style engineering offers and see what the monetary difference actually is. In the not-so-distant past, start ups were pretty much the only avenue to secure a multiple-million dollar personal liquidity event, in the off chance you join a successful start up, work your tail off, and the company gets to a point where that exit happened (which was and still is rare). But nowadays, with software development offers being what they are are large public companies with outstanding growth prospects, the argument that you need to join a start up to fast track earning millions is pretty much out the window. Not only do people who are working at large stable companies like Google & Facebook have the generous perks and large company work life balance stability behind them - they are also soundly beating almost all "successful" start up offers in terms of compensation over the long term. I would love to see some real life practical numbers with start up offers at different stages of funding and how that would really compare to simply working at Google or Facebook over the same time horizon. It seems the only reasons to work at a start up these days are if you really really love building products, want to wear many different hats, are frustrated by the pace of big companies, and are stifled by the big company processes that dominate the day to day life working at these companies. Compelling reasons to work for a start up for sure, but compensation is not even in the top 10 reason to join a start up anymore, IMO.
- enra 5y ago
  The challenging part about equity that every company is different, takes bit different path and has different chances of success. My anecdotal example that I don't know anyone who made massive/post-economic money by joining a public company. You can probably make six figures easily, and potentially low 7 figures in some years. The only people I know who have mode 8 or 9 figures are people who have joined startups early or relatively early before the IPO, and the startup became a $20-100B company. Seed stage, as one of the first senior engineers, you might get 2%-0.5% equity. At $20M valuation (common YC valuation at the moment). That's $400k-100k value vesting over 4 years (which might sound low compared to FAANG offers). The point is the upside potential, not the value. FAANG companies might grow 5x in 5 years. Startups can grow much more. That's why the whole VC market exists. Hitting $1B means the company valuation went up 50x, hitting $10B means 500x, hitting $100B means 5000x. So your initial offer could be worth several millions to hundreds of millions. Even if you join later, when the company is valued $500M-$1B, you might still get 50-100x upside. The math is more complicated since usually companies raise multiple rounds which then dilutes the existing shareholders. Roughly 20% at seed/series a, and then less after that.
  - qqtt 5y ago
    With things like dilution mattering and stock options being popular vehicles for early stage start up it would be really interesting and elucidating to have practical examples to compare against. It's easy to understand a FAANG style offer in this context. You join Google in 2017, you get RSUs pegged at 800$ a share valuation, about 150k$ a year vesting, by 2021 those shares are worth 2800$ so you've earned about 2.1 million (not exactly as taxes come into play). You join AirBNB in 2017, valued at 30 billion, you get a similar offer, fast forward to today and AirBNB is now worth 100 billion, you might have made 2 million (again, not exactly, considering taxes and potential dilution). And AirBNB is one of Y Combinator's most successful start ups/exits. From some quick google searching - there are thousands of Y Combinator companies and only ~29 are worth one billion or more. Of those billion, they are all at this time late stage and trying to guess which up and coming Y Combinator company will be next to crack 1 billion is a very risky endeavour. How does the tax implication of stock options really impact your net gain, and does that practically move the needle for a comparison against a standard FAANG offer? Would be interesting to look at some cold hard numbers. Absolutely joining a 20M valuation YC company and sticking around until it grows to 1B would be incredibly lucrative - but how lucrative in a practical sense, given real offers? Dilution? Tax implications? Would love to see this analysis.
toomuchtodo 5y ago
It would be helpful to explain how an early employee (whether still employed or separated from the company) is able to obtain the following documentation from their company to demonstrate QSBS treatment to the IRS (or if a letter indicating such from a finance department or the CFO would suffice): > Even though reporting QSBS is simple, you should still keep financial statements and other supporting documents to support your claim. Detailed balance sheets for the company from its incorporation through the close of your investment will show if it has more than $50 million in aggregate gross assets. Equity documents (type, date, etc.) are also important to demonstrate that your investment qualifies. [1] [1] https://withcompound.com/manual-company-equity/qsbs https://withcompound.com/manual-company-equity/qsbs
- ganoushoreilly 5y ago
  This is a good point. A lot of founders seem to want to protect or hide this information. Usually that's a red flag for me, but it's common. I think it needs to me more normalized and formalized.
  - deleted 5y ago
    [deleted]
  - deleted 5y ago
    [deleted]
- Dwolb 5y ago
  If you’re up for QSBS treatment, I’d recommend to hire a CPA, financial advisor, and possibly a lawyer. One of those three can send over a letter to the CEO or CFO to share relevant information. It’s usually already prepared for equity or debt financing rounds and possibly periodic reporting.
  - toomuchtodo 5y ago
    Appreciate the advice. Are there cut offs similar to an 83b election? Or can QSBS still apply if you're near the end of the five year wait period and you took no action at grant and exercise events (besides what you normally might for an ISO grant)? Asking so I'm not wasting the time of the involved.
synergy20 5y ago
Chatted with some early-stage-then-IPO-ed engineers yesterday, I asked "aren't your company IPO-ed and you should have retired?", the answer is, after multiple dilutions in rounds of fund raises, his options ended up worth just a few thousands, not useful at all. There is no way the startup you have been working for will keep your interest a priority, and you never know if your share will reach zero in the process of multi-stage VC rounds. Unless you're the founders who will always be at the negotiation table for new rounds, I saw no point to work for startups, not at all.
- clpm4j 5y ago
  I think the main advantage of working at a startup is when you're relatively young and inexperienced - you're being compensated in the experience and accelerated job titles that you can then leverage to ramp up your career by joining other companies or starting your own. Getting an exit is a cherry on top.
  - majormajor 5y ago
    I don't think startup job titles are worth much but they can be massive skill accelerators. If you're in the first 5 years of your career you'll have more opportunity to learn more technologies at a small startup where everyone has to do everything than at a FAANG (especially compared to Google where you will only learn the Google internal stack). You can leverage that into a much higher paying job in a way that you wouldn't be able to leverage experience at a mid-level company.
  - dhd415 5y ago
    In my experience, getting a FAANG job accelerates your career as well or better than titling up quickly in a startup. Having a FANG position on your resume is more of a known quantity for future potential employers than being promoted quickly in an unknown startup.
    - glassconclusion 5y ago
      I'm working for an unknown startup and I feel like I will placed in a pool of entry level candidates if I decide to join a big corp.
bbno4 5y ago
Is there one of these but for UK?
sys_64738 5y ago
Moral of story: avoid startups.
fasteddie 5y ago
This is a great, clean explainer. Series B seems to be the sweet spot to me if you would like to avoid working at a FAANG but want similar EV in your comp package, assuming you are decently good at guessing winners. At that point the company is meaningfully de-risked but the equity offers are still pretty good for mid-career folks that you end up with millions in a good exit.
- xtracto 5y ago
  I've come to prefer post-Series A startups. In my experience Series B tended to be the moment where the startup beings to establish "controls" and bureaucracy for things. It is when you start setting OKRs, it is when you start having 2 or more tiers of mid-management and "policy documents" start flying around. For me, post Series A is the sweet spot when there are exciting problems to solve and you still have good leeway to make things happen without too much red tape.
rdli 5y ago
The post says "an alternative career accelerated through learning, wealth, and reputation" ... and then doesn't talk about anything other than equity. The article says "Equity will be your largest driver of compensation at a startup." as the rationalization of why it focuses on that. Based on my past experiences, I would say that the learning, network, and reputational effects resulted in far more wealth to me over the medium-term than any incremental change in equity or salary.
mcgingras 5y ago
I have an offer that vests over 6 years with a 1.5 year cliff. Is that normal? I'm used to 4 years 1 year cliff, but the CEO said that 1.5/6 are common for companies that "want employees who care about the long term"
- majormajor 5y ago
  No, have had multiple recent better offers than that. They're trying to rip you off. If they want to keep you motivated for the long term even if value isn't increasing rapidly then they can do bonuses, refreshers, etc.
- deleted 5y ago
  [deleted]
- matheist 5y ago
  I've never heard of 1.5/6 being a thing. Would be a red flag for me but of course I only have the context you mentioned. Refresher grants could also motivate employees to stick around for the long term!
- devnulll 5y ago
  No, I don't believe that's normal. That sounds like a CEO trying to take advantage of the labor force.
  - mcgingras 5y ago
    Thanks everyone, that's what I was thinking as well, but I'm fairly new to startups so I wasn't sure.
    - xtracto 5y ago
      Mhmm, I wouldn't put it like GP (someone wanting to take advantage of...). The large majority of employments DO NOT give stock options. Shit, in most countries that's unheard of (in Mexico for example, someone with a similar offer would think of the stock options as the cherry on the cake). Nonetheless, given YOUR market, you should check whether the other parts of the compensation they are giving you are right. For example, there was the case of Mailchimp a couple of days ago: They gave no stock to their employees. However, in theory their compensation package was good in other ways. So if the company is offering you a good salary + benefits (what about 401k matching? PTO? sick days? gym membership, WFH and whatnot), that will give you the full picture.
bruce343434 5y ago
Addendum: Understanding American Startup Offers
lankinen 5y ago
Great post!
destitude 5y ago
What happens to those that run into the 10 year limit for exercising their options? If there is no hope for liquidation event and you've been their for 9 years and haven't exercised your options it seems like you might as well leave, especially if there will be a huge tax burden to exercise them.
- jdavis703 5y ago
  A good place to start is asking your supervisor or HR person what can be done. For example you might be able to take out a loan or the company might be able to repurchase the stock.
entangledqubit 5y ago
The questions included here are good to see. For a more complete guide, my preferred document these days is the Holloway Guide ( https://www.holloway.com/g/equity-compensation https://www.holloway.com/g/equity-compensation ). Though now I have to add a warning that there's a slightly annoying attempt to get your contact info and it has gotten rather long...
- zuhayeer 5y ago
  This excerpt is particularly pretty nice to get a sense for equity ranges: https://www.holloway.com/g/equity-compensation/sections/typical-employee-equity-levels https://www.holloway.com/g/equity-compensation/sections/typi...
_moof 5y ago
Don't early exercise. Here's why. Yes, there are potential tax advantages; you avoid having to deal with AMT, which is significant. But the tradeoff is that you've thrown away the essential advantage that an option gives you: the ability to travel back in time and purchase stock with perfect knowledge of what it will do in the future. Why on earth would you give that up? An option lets you wait years with zero risk and then decide whether you should've invested before that time went by. That is a superpower. You might be thinking, well, I feel really bullish about this company, so I'm going to go ahead and early exercise. But here's the thing: most startups fail. It is extremely unlikely that your options will be worth anything in the future. So unless you're an unnaturally talented investor—and you aren't, you're a worker bee—you won't be able to beat those odds. And the great thing is, you don't have to—because you have options, the whole point of which is to eliminate risk. Don't throw away your time machine.
- dpeck 5y ago
  this is highly dependent on the strike price. Though if you're an early enough employee to be getting a strike price that you can exercise without any worry (on the order of $x00) then you probably should be getting stock directly vs options anyway.
- thoughtpeddler 5y ago
  I think this applies in most cases. That said, many more startups are now bootstrapped, and don't go on to raise beyond a Seed or Series A, if at all. If you're an early employee at one of those startups (with a very low strike price), and know that the company has a strong balance sheet, I would early exercise to lock in the long-term capital gains tax rate. This is even more true if the startup has novel IP, which could be worth a healthy sum even if the business were to go kaput. Also, as others have said, if startups weren't lucrative, VC as an asset class wouldn't exist at all. It's rare, but making millions as an early employee is something that definitely happens.
- bagels 5y ago
  Early exercised, do not regret. It really depends on the health of the company, risk tolerance, how long you plan to stay, and your strike price. Paying a few thousand to exercise early to avoid hundreds of thousands in taxes later was worth it for me.
m0zg 5y ago
Having been through this meat grinder, people do please run the numbers on that "equity" you're getting. Founders make it sound like 0.1% is a windfall, but it most certainly isn't, even in the unlikely event the startup succeeds. That said, in my estimation people go to startups to do interesting things, not for the money per se. BigCo (even a FAANG) is a depressing, high politics, low productivity morass, and a lot of people (myself included) find it difficult to tolerate it for long, in spite of the higher paycheck. As to running the numbers, there's an excellent essay by @luu that you need to read: https://danluu.com/startup-tradeoffs/ https://danluu.com/startup-tradeoffs/
bibabaloo 5y ago
I recently joined a series B startup valued at ~$200M with ~100 staff and was granted what amounts to be ~0.015% over 4 years. (So if I had all my options now they'd be worth ~$28k). Seems like that might be a bit low comparatively, have I been fleeced?
- jdavis703 5y ago
  That seems on the low end, but not unreasonable. What’s your cash salary, how many years of experience do you have, will you get annual refreshers and what do you think are the odds you’ll exit with a unicorn valuation? Now, do the same math except with an established company to compare with. Which one pays you more? And how much do you value startup culture vs. big co culture?
exnor 5y ago
Would be great to see a UK version of this.

196 points by medtner 5y ago

These set of questions are very thorough and will help you avoid 80% or more of the bad situations. I had to figure out all thsi on my own and most startups won’t answer these questions even after getting an offer. Some more question you might want to ask: - is there a double trigger clause? (If not then the founder can restart your vesting after an acquisition and do other nasty things.) - can I exercise my options after beating while I’m at the company. (You’ll be surprised but I’ve seen companies that don’t allow you to exercise while you’re employed there which means you can kiss qsbs goodbye and you can’t leave comoany if it gets too big else you’ll lose the options) - can I sell my exercised stock on the secondary market? (Some companies don’t allow this) 95% of people don’t ask these questions and can get screwed.

throwawaysea 5y ago
What does “beating” mean here? Was that a typo, maybe for “vesting”?
- keeptrying 5y ago
  Yes :)

qqtt 5y ago

It would be interesting to see some analysis comparing pre-IPO offers versus standard FAANG-style engineering offers and see what the monetary difference actually is. In the not-so-distant past, start ups were pretty much the only avenue to secure a multiple-million dollar personal liquidity event, in the off chance you join a successful start up, work your tail off, and the company gets to a point where that exit happened (which was and still is rare). But nowadays, with software development offers being what they are are large public companies with outstanding growth prospects, the argument that you need to join a start up to fast track earning millions is pretty much out the window. Not only do people who are working at large stable companies like Google & Facebook have the generous perks and large company work life balance stability behind them - they are also soundly beating almost all "successful" start up offers in terms of compensation over the long term. I would love to see some real life practical numbers with start up offers at different stages of funding and how that would really compare to simply working at Google or Facebook over the same time horizon. It seems the only reasons to work at a start up these days are if you really really love building products, want to wear many different hats, are frustrated by the pace of big companies, and are stifled by the big company processes that dominate the day to day life working at these companies. Compelling reasons to work for a start up for sure, but compensation is not even in the top 10 reason to join a start up anymore, IMO.

enra 5y ago
The challenging part about equity that every company is different, takes bit different path and has different chances of success. My anecdotal example that I don't know anyone who made massive/post-economic money by joining a public company. You can probably make six figures easily, and potentially low 7 figures in some years. The only people I know who have mode 8 or 9 figures are people who have joined startups early or relatively early before the IPO, and the startup became a $20-100B company. Seed stage, as one of the first senior engineers, you might get 2%-0.5% equity. At $20M valuation (common YC valuation at the moment). That's $400k-100k value vesting over 4 years (which might sound low compared to FAANG offers). The point is the upside potential, not the value. FAANG companies might grow 5x in 5 years. Startups can grow much more. That's why the whole VC market exists. Hitting $1B means the company valuation went up 50x, hitting $10B means 500x, hitting $100B means 5000x. So your initial offer could be worth several millions to hundreds of millions. Even if you join later, when the company is valued $500M-$1B, you might still get 50-100x upside. The math is more complicated since usually companies raise multiple rounds which then dilutes the existing shareholders. Roughly 20% at seed/series a, and then less after that.
- qqtt 5y ago
  With things like dilution mattering and stock options being popular vehicles for early stage start up it would be really interesting and elucidating to have practical examples to compare against. It's easy to understand a FAANG style offer in this context. You join Google in 2017, you get RSUs pegged at 800$ a share valuation, about 150k$ a year vesting, by 2021 those shares are worth 2800$ so you've earned about 2.1 million (not exactly as taxes come into play). You join AirBNB in 2017, valued at 30 billion, you get a similar offer, fast forward to today and AirBNB is now worth 100 billion, you might have made 2 million (again, not exactly, considering taxes and potential dilution). And AirBNB is one of Y Combinator's most successful start ups/exits. From some quick google searching - there are thousands of Y Combinator companies and only ~29 are worth one billion or more. Of those billion, they are all at this time late stage and trying to guess which up and coming Y Combinator company will be next to crack 1 billion is a very risky endeavour. How does the tax implication of stock options really impact your net gain, and does that practically move the needle for a comparison against a standard FAANG offer? Would be interesting to look at some cold hard numbers. Absolutely joining a 20M valuation YC company and sticking around until it grows to 1B would be incredibly lucrative - but how lucrative in a practical sense, given real offers? Dilution? Tax implications? Would love to see this analysis.

toomuchtodo 5y ago

It would be helpful to explain how an early employee (whether still employed or separated from the company) is able to obtain the following documentation from their company to demonstrate QSBS treatment to the IRS (or if a letter indicating such from a finance department or the CFO would suffice): > Even though reporting QSBS is simple, you should still keep financial statements and other supporting documents to support your claim. Detailed balance sheets for the company from its incorporation through the close of your investment will show if it has more than $50 million in aggregate gross assets. Equity documents (type, date, etc.) are also important to demonstrate that your investment qualifies. [1] [1] https://withcompound.com/manual-company-equity/qsbs https://withcompound.com/manual-company-equity/qsbs

ganoushoreilly 5y ago
This is a good point. A lot of founders seem to want to protect or hide this information. Usually that's a red flag for me, but it's common. I think it needs to me more normalized and formalized.
- deleted 5y ago
  [deleted]
- deleted 5y ago
  [deleted]
Dwolb 5y ago
If you’re up for QSBS treatment, I’d recommend to hire a CPA, financial advisor, and possibly a lawyer. One of those three can send over a letter to the CEO or CFO to share relevant information. It’s usually already prepared for equity or debt financing rounds and possibly periodic reporting.
- toomuchtodo 5y ago
  Appreciate the advice. Are there cut offs similar to an 83b election? Or can QSBS still apply if you're near the end of the five year wait period and you took no action at grant and exercise events (besides what you normally might for an ISO grant)? Asking so I'm not wasting the time of the involved.

synergy20 5y ago

Chatted with some early-stage-then-IPO-ed engineers yesterday, I asked "aren't your company IPO-ed and you should have retired?", the answer is, after multiple dilutions in rounds of fund raises, his options ended up worth just a few thousands, not useful at all. There is no way the startup you have been working for will keep your interest a priority, and you never know if your share will reach zero in the process of multi-stage VC rounds. Unless you're the founders who will always be at the negotiation table for new rounds, I saw no point to work for startups, not at all.

clpm4j 5y ago
I think the main advantage of working at a startup is when you're relatively young and inexperienced - you're being compensated in the experience and accelerated job titles that you can then leverage to ramp up your career by joining other companies or starting your own. Getting an exit is a cherry on top.
- majormajor 5y ago
  I don't think startup job titles are worth much but they can be massive skill accelerators. If you're in the first 5 years of your career you'll have more opportunity to learn more technologies at a small startup where everyone has to do everything than at a FAANG (especially compared to Google where you will only learn the Google internal stack). You can leverage that into a much higher paying job in a way that you wouldn't be able to leverage experience at a mid-level company.
- dhd415 5y ago
  In my experience, getting a FAANG job accelerates your career as well or better than titling up quickly in a startup. Having a FANG position on your resume is more of a known quantity for future potential employers than being promoted quickly in an unknown startup.
  - glassconclusion 5y ago
    I'm working for an unknown startup and I feel like I will placed in a pool of entry level candidates if I decide to join a big corp.

bbno4 5y ago

Is there one of these but for UK?

sys_64738 5y ago

Moral of story: avoid startups.

fasteddie 5y ago

This is a great, clean explainer. Series B seems to be the sweet spot to me if you would like to avoid working at a FAANG but want similar EV in your comp package, assuming you are decently good at guessing winners. At that point the company is meaningfully de-risked but the equity offers are still pretty good for mid-career folks that you end up with millions in a good exit.

xtracto 5y ago
I've come to prefer post-Series A startups. In my experience Series B tended to be the moment where the startup beings to establish "controls" and bureaucracy for things. It is when you start setting OKRs, it is when you start having 2 or more tiers of mid-management and "policy documents" start flying around. For me, post Series A is the sweet spot when there are exciting problems to solve and you still have good leeway to make things happen without too much red tape.

rdli 5y ago

The post says "an alternative career accelerated through learning, wealth, and reputation" ... and then doesn't talk about anything other than equity. The article says "Equity will be your largest driver of compensation at a startup." as the rationalization of why it focuses on that. Based on my past experiences, I would say that the learning, network, and reputational effects resulted in far more wealth to me over the medium-term than any incremental change in equity or salary.

mcgingras 5y ago

I have an offer that vests over 6 years with a 1.5 year cliff. Is that normal? I'm used to 4 years 1 year cliff, but the CEO said that 1.5/6 are common for companies that "want employees who care about the long term"

majormajor 5y ago
No, have had multiple recent better offers than that. They're trying to rip you off. If they want to keep you motivated for the long term even if value isn't increasing rapidly then they can do bonuses, refreshers, etc.
deleted 5y ago
[deleted]
matheist 5y ago
I've never heard of 1.5/6 being a thing. Would be a red flag for me but of course I only have the context you mentioned. Refresher grants could also motivate employees to stick around for the long term!
devnulll 5y ago
No, I don't believe that's normal. That sounds like a CEO trying to take advantage of the labor force.
- mcgingras 5y ago
  Thanks everyone, that's what I was thinking as well, but I'm fairly new to startups so I wasn't sure.
  - xtracto 5y ago
    Mhmm, I wouldn't put it like GP (someone wanting to take advantage of...). The large majority of employments DO NOT give stock options. Shit, in most countries that's unheard of (in Mexico for example, someone with a similar offer would think of the stock options as the cherry on the cake). Nonetheless, given YOUR market, you should check whether the other parts of the compensation they are giving you are right. For example, there was the case of Mailchimp a couple of days ago: They gave no stock to their employees. However, in theory their compensation package was good in other ways. So if the company is offering you a good salary + benefits (what about 401k matching? PTO? sick days? gym membership, WFH and whatnot), that will give you the full picture.

bruce343434 5y ago

Addendum: Understanding American Startup Offers

lankinen 5y ago

Great post!

destitude 5y ago

What happens to those that run into the 10 year limit for exercising their options? If there is no hope for liquidation event and you've been their for 9 years and haven't exercised your options it seems like you might as well leave, especially if there will be a huge tax burden to exercise them.

jdavis703 5y ago
A good place to start is asking your supervisor or HR person what can be done. For example you might be able to take out a loan or the company might be able to repurchase the stock.

entangledqubit 5y ago

The questions included here are good to see. For a more complete guide, my preferred document these days is the Holloway Guide ( https://www.holloway.com/g/equity-compensation https://www.holloway.com/g/equity-compensation ). Though now I have to add a warning that there's a slightly annoying attempt to get your contact info and it has gotten rather long...

zuhayeer 5y ago
This excerpt is particularly pretty nice to get a sense for equity ranges: https://www.holloway.com/g/equity-compensation/sections/typical-employee-equity-levels https://www.holloway.com/g/equity-compensation/sections/typi...

_moof 5y ago

Don't early exercise. Here's why. Yes, there are potential tax advantages; you avoid having to deal with AMT, which is significant. But the tradeoff is that you've thrown away the essential advantage that an option gives you: the ability to travel back in time and purchase stock with perfect knowledge of what it will do in the future. Why on earth would you give that up? An option lets you wait years with zero risk and then decide whether you should've invested before that time went by. That is a superpower. You might be thinking, well, I feel really bullish about this company, so I'm going to go ahead and early exercise. But here's the thing: most startups fail. It is extremely unlikely that your options will be worth anything in the future. So unless you're an unnaturally talented investor—and you aren't, you're a worker bee—you won't be able to beat those odds. And the great thing is, you don't have to—because you have options, the whole point of which is to eliminate risk. Don't throw away your time machine.

dpeck 5y ago
this is highly dependent on the strike price. Though if you're an early enough employee to be getting a strike price that you can exercise without any worry (on the order of $x00) then you probably should be getting stock directly vs options anyway.
thoughtpeddler 5y ago
I think this applies in most cases. That said, many more startups are now bootstrapped, and don't go on to raise beyond a Seed or Series A, if at all. If you're an early employee at one of those startups (with a very low strike price), and know that the company has a strong balance sheet, I would early exercise to lock in the long-term capital gains tax rate. This is even more true if the startup has novel IP, which could be worth a healthy sum even if the business were to go kaput. Also, as others have said, if startups weren't lucrative, VC as an asset class wouldn't exist at all. It's rare, but making millions as an early employee is something that definitely happens.
bagels 5y ago
Early exercised, do not regret. It really depends on the health of the company, risk tolerance, how long you plan to stay, and your strike price. Paying a few thousand to exercise early to avoid hundreds of thousands in taxes later was worth it for me.

m0zg 5y ago

Having been through this meat grinder, people do please run the numbers on that "equity" you're getting. Founders make it sound like 0.1% is a windfall, but it most certainly isn't, even in the unlikely event the startup succeeds. That said, in my estimation people go to startups to do interesting things, not for the money per se. BigCo (even a FAANG) is a depressing, high politics, low productivity morass, and a lot of people (myself included) find it difficult to tolerate it for long, in spite of the higher paycheck. As to running the numbers, there's an excellent essay by @luu that you need to read: https://danluu.com/startup-tradeoffs/ https://danluu.com/startup-tradeoffs/

bibabaloo 5y ago

I recently joined a series B startup valued at ~$200M with ~100 staff and was granted what amounts to be ~0.015% over 4 years. (So if I had all my options now they'd be worth ~$28k). Seems like that might be a bit low comparatively, have I been fleeced?

jdavis703 5y ago
That seems on the low end, but not unreasonable. What’s your cash salary, how many years of experience do you have, will you get annual refreshers and what do you think are the odds you’ll exit with a unicorn valuation? Now, do the same math except with an established company to compare with. Which one pays you more? And how much do you value startup culture vs. big co culture?

exnor 5y ago

Would be great to see a UK version of this.