5 ms·
For late-stage startups like this, RSUs are common instead of options. Because stock is issued rather than purchased (like an option), I don't think this is dis
by philip1209 3y ago
For late-stage startups like this, RSUs are common instead of options. Because stock is issued rather than purchased (like an option), I don't think this is dishonest. (If a company valuation stays flat, stock options are worthless - but RSUs have value).
Either way: A thing to keep an eye out for is startups that describe the compensation value of stock using the preferred stock price, but then issue you common stock. I've personally seen one late-stage YC company doing this - you sign the offer letter with $Xk in stock, then the paperwork shows up later with $(X/4)k in the grant.
If a late-stage startup is including stock-based compensation in this number, I think it's likely they are pricing the stock inconsistent with its class in the 409a valuation. Keep an eye out for this - I think it's a common and dishonest way to boost perceived compensation.
- zachthewf 3y agoYou are right, but using the 409a pricing would not really be honest either. (In the sense that the 409a is basically "as low as we could reasonably value this stock" in order to keep the strike prices low.)
- malfist 3y agoBut that is what the market will pay. No one goes onto the stock market and purchases orders above their ask
- singron 3y agoThe 409a isn't based on what the market will pay since private shares aren't on the stock market. It's a guess about what the market might pay, but since the shares aren't liquid, the guess can't be tested, so there is huge leeway to pick a favorable number.
- juancampa 3y ago409a value is determined by an independent appraiser though, not the market. And in my (very limited) experience the actual difference can vary wildly, especially since the appraisal happens only once a year.
- deleted 3y ago[deleted]
- philip1209 3y agoI understand the founder argument. "Our investors said our valuation was $XM, so we give you your stock grant based on that price." But, the investors don't take normal stock. They demand special ("preferred") stock with more voting power that can get paid first - before employees. So, the $XM valuation isn't fair between the different stock levels, and the employees are at the bottom of the food chain - most likely to walk away with nothing. Startups typically give their employees stock or options, and how you price the stock has tax implications. So, the IRS strongly suggests that you do something called a 409a valuation, where a neutral 3rd-party professional accounting firm determines the value of each stock type in your company. So, if your startup valuation is Schrodinger's Cat, then the 409a process is intended to have some trusted third party open the box and see what's happening. The problem arises when you report one valuation to the IRS, and another to employees. You can't keep two different sets of accounting books, and you can't represent two different sets of valuations at the same time. By having the third-party accounting firm issue a valuation and by issuing stock at that valuation, you're supposed to have eliminated uncertainty in your stock price - and if you haven't, then the tax treatment of your grant is at risk. That duality is made clear when your offer letter says "$X" and the stock grant says "$<X". That's dishonest and potentially fraud. You can say "Your stock is valued at $X based on a $Y liquidity event, and $Y is the post-money valuation of our last round of funding." But, that's not the same as "We advertise your stock as worth $X (but, shhh, that's not what we tell the government so keep it a secret)."
- milkshakes 3y agoIf anything, RSU compensation is worse than options because of the tax implications. With options you have the option of paying the tax before the appreciation of the equity. With RSUs, you pay at liquidity.
- toomuchtodo 3y agoIf issued ISOs that are QSBS qualified, no federal tax on the first $10M or 10x your cost basis, whichever is more. 83(b) election is sometimes an option too. RSUs are, as you mentioned, mostly cash comp due to valuation and tax treatment. (not tax advice, we're just talking lottery ticket mechanics)
- beambot 3y agoIIRC, you only get QSBS if you (a) exercise to purchase actual shares while the company is QSBS eligible; and (b) hold the resulting stock for 5 full years.
- toomuchtodo 3y agoCorrect. You’ll also want a QSBS attestation letter from the finance team or whomever handles equity admin if the IRS comes knocking. Save it with your options grant documentation.
- philip1209 3y agoI've seen RSUs issued with single-trigger acceleration on acquisition or IPO.
- milkshakes 3y agotypically, the liquidity event is the trigger that takes longer, not the vesting schedule. with options, you can exercise before the liquidity event, and pay taxes on a much smaller income (or none at all in the case of QSBS as a sibling comment noted)
- 3y ago
- temp_praneshp 3y ago>(If a company valuation stays flat, stock options are worthless - but RSUs have value) Can you help me understand why? I'd expect if you're granted options at a strike price of $Y, you will still make money as long as the valuation at liquidation time is more than $Y.
- yen223 3y agoIf the company value stays flat, that means its valuation at liquidation time is equal to $Y
- MrDarcy 3y agoPut another way, your capital gains are zero.
- temp_praneshp 3y agoBut in any offer I have received, I've seen two numbers: Preferred value(?): X, and strike price: Y, with Y well below X. In any case, you don't have to teach me all about options here, I was just curious :)
- deleted 3y ago[deleted]
- bfung 3y agoThe kicker is “at liquidation time”, which is unpredictable and unknowable. Most of the time, options go to zero due to company shutdown.