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There are IMO two points in time where joining a startup makes sense. One is very early, iff the startup supports early exercise. Join, immediately do an early

by jjav 3y ago

There are IMO two points in time where joining a startup makes sense. One is very early, iff the startup supports early exercise. Join, immediately do an early exercise of all your options and file an 83(b). This only makes sense if you join so early that you can afford to exercise all those options for an amount of money that you won't mind losing if the company goes nowhere. Typically this only makes sense if the exercise price is in the few pennies range (but depends on your finances). So before a series A at the very latest. This is good because you can now work there are long as you want but you are also free to leave if things become unpleasant. As long as you spent at least a year there, any shares you vested prior to leaving are yours for good. If the company IPOs many years after you leave, you still get something. The other good time is when the company is already large and well-known and clearly on the path to an IPO. You'll get far less ownership obviously, but probabily of success is much higher. The worst time to join a startup is anywhere in between. The exercise price of your options is too high on day 1 you can't afford to buy them, then you work there for years and become vested on paper but can't do anything about it, then you leave prior to an IPO and you still can't afford to buy the options so they cancel and you are left with nothing. I've done each of these scenarios, some more than once.

robocat 3y ago
If you want to spend money on startup shares, why wouldn't you buy preferential shares? The median value of common shares is muck - converting options buys you risky common shares and causes tax liabilities. Angel investing is extremely risky, and converting options is riskier than that! Common shares are much much higher risk than preferential shares. Plus diversification is good. Concentrating your assets and job into one investment is speculation: great when you win but terrible when you lose. I reckon we are conceited to think we can invest smarter than professional VCs? They lose all the time even though it is their fulltime job and they are insiders on the rules of the game.
- Glyptodon 3y ago
  There really isn't much tax liability for exercising options when the fair market price is still minimal unless you have an awful lot of them.
  - jjav 3y ago
    You'd want to buy when exercise price and FMV price are the same, so quantity doesn't matter.
    - robocat 3y ago
      Returns are highly skewed. If your prior is: exercise price and Fair Market Value are equal, my bet would be that the shares are most likely loser shares. Winning shares are much more likely to have a fair market value that exceeds the option exercise price. The rules of the game are written by the winners!
      - jjav 3y ago
        > Winning shares are much more likely to have a fair market value that exceeds the option exercise price. You can't have that, options can't be granted below FMV. See e.g. https://rsmus.com/insights/services/business-tax/stock-options-and-section-409a-frequently-asked-questions.html https://rsmus.com/insights/services/business-tax/stock-optio... "The exercise price may never be less than the fair market value (FMV) of the underlying stock on the date the option is granted." If you are able to early exercise, the exercise price and the FMV can be the same though. Which is ideal since the taxable delta is then zero and you file the 83(b).
- jjav 3y ago
  > why wouldn't you buy preferential shares? I'm left with the sense that this is a response to some other post, not mine? To be clear, I'm talking about scenarios where one would join a startup as a regular employee. Not talking about angel investing or anything like that.
  - robocat 3y ago
    I am just saying that common shares are extremely high risk investments. When you start putting money into an investment I believe you should aim to get the same risk profile as other investors that are putting money in. If exercising your shares is a trivial cost, then it doesn't matter. If exercising shares costs a lot then it really really matters. Common shares have zero value until after the preferential shares are in the money. i.e. buying common shares is as risky as investing in call options. Angel investing is extreme risk, call options are extreme risk, and as a sweeping generalisation: common shares are riskier than those. I'm only mentioning Angel investing because we all know how risky that is, so it is a baseline to compare against. You answered JonChesterfield who's point was "here's some tokens". Your reply is entirely sensible and you are rightly saying those tokens can end up winning and you explain a good strategy to get valuable tokens and gamble some of your pot. I am attempting to amplify JonChesterfield's comment, perhaps I'm failing! Aside: I really appreciate your comment and I am commenting to help my own thinking. I have been trending towards doing Angel investments which requires understanding VC incentives. I'm past being an employee so I'm not sure how relevant my comments are to anyone! VCs and the VC ecosystem use the confusion between the details of public market shares, common shares, and preferential shares to the advantage of the VCs.
    - jjav 3y ago
      I guess you're equating being an early employee to being an angel investor in that startup? In some sense, that's kind of true. But still, not how most employees of the company are going to think about it. You have to work somewhere. > If exercising your shares is a trivial cost, then it doesn't matter. Well yes, that was my point. That's why you'd ideally join very early, so you can early exercise and buy all the options up front for very little money.
rustcleaner 3y ago
>The worst time to join a startup is anywhere in between. The exercise price of your options is too high on day 1 you can't afford to buy them, then you work there for years and become vested on paper but can't do anything about it, then you leave prior to an IPO and you still can't afford to buy the options so they cancel and you are left with nothing. Hedge with far OTM (1-5 delta?) LEAPS puts in same-industry/sector competitors or market indices? At least reduce some crash risk, though I am not sure how you run your stock options compensation through BSM without a market to price against. Probably should figure what your VaR is for an x-sigma crash and try to get a hedge which will roughly balloon to that level under high vanna.

by jjav 3y ago

robocat 3y ago

If you want to spend money on startup shares, why wouldn't you buy preferential shares? The median value of common shares is muck - converting options buys you risky common shares and causes tax liabilities. Angel investing is extremely risky, and converting options is riskier than that! Common shares are much much higher risk than preferential shares. Plus diversification is good. Concentrating your assets and job into one investment is speculation: great when you win but terrible when you lose. I reckon we are conceited to think we can invest smarter than professional VCs? They lose all the time even though it is their fulltime job and they are insiders on the rules of the game.

Glyptodon 3y ago
There really isn't much tax liability for exercising options when the fair market price is still minimal unless you have an awful lot of them.
- jjav 3y ago
  You'd want to buy when exercise price and FMV price are the same, so quantity doesn't matter.
  - robocat 3y ago
    Returns are highly skewed. If your prior is: exercise price and Fair Market Value are equal, my bet would be that the shares are most likely loser shares. Winning shares are much more likely to have a fair market value that exceeds the option exercise price. The rules of the game are written by the winners!
    - jjav 3y ago
      > Winning shares are much more likely to have a fair market value that exceeds the option exercise price. You can't have that, options can't be granted below FMV. See e.g. https://rsmus.com/insights/services/business-tax/stock-options-and-section-409a-frequently-asked-questions.html https://rsmus.com/insights/services/business-tax/stock-optio... "The exercise price may never be less than the fair market value (FMV) of the underlying stock on the date the option is granted." If you are able to early exercise, the exercise price and the FMV can be the same though. Which is ideal since the taxable delta is then zero and you file the 83(b).
jjav 3y ago
> why wouldn't you buy preferential shares? I'm left with the sense that this is a response to some other post, not mine? To be clear, I'm talking about scenarios where one would join a startup as a regular employee. Not talking about angel investing or anything like that.
- robocat 3y ago
  I am just saying that common shares are extremely high risk investments. When you start putting money into an investment I believe you should aim to get the same risk profile as other investors that are putting money in. If exercising your shares is a trivial cost, then it doesn't matter. If exercising shares costs a lot then it really really matters. Common shares have zero value until after the preferential shares are in the money. i.e. buying common shares is as risky as investing in call options. Angel investing is extreme risk, call options are extreme risk, and as a sweeping generalisation: common shares are riskier than those. I'm only mentioning Angel investing because we all know how risky that is, so it is a baseline to compare against. You answered JonChesterfield who's point was "here's some tokens". Your reply is entirely sensible and you are rightly saying those tokens can end up winning and you explain a good strategy to get valuable tokens and gamble some of your pot. I am attempting to amplify JonChesterfield's comment, perhaps I'm failing! Aside: I really appreciate your comment and I am commenting to help my own thinking. I have been trending towards doing Angel investments which requires understanding VC incentives. I'm past being an employee so I'm not sure how relevant my comments are to anyone! VCs and the VC ecosystem use the confusion between the details of public market shares, common shares, and preferential shares to the advantage of the VCs.
  - jjav 3y ago
    I guess you're equating being an early employee to being an angel investor in that startup? In some sense, that's kind of true. But still, not how most employees of the company are going to think about it. You have to work somewhere. > If exercising your shares is a trivial cost, then it doesn't matter. Well yes, that was my point. That's why you'd ideally join very early, so you can early exercise and buy all the options up front for very little money.

rustcleaner 3y ago

>The worst time to join a startup is anywhere in between. The exercise price of your options is too high on day 1 you can't afford to buy them, then you work there for years and become vested on paper but can't do anything about it, then you leave prior to an IPO and you still can't afford to buy the options so they cancel and you are left with nothing. Hedge with far OTM (1-5 delta?) LEAPS puts in same-industry/sector competitors or market indices? At least reduce some crash risk, though I am not sure how you run your stock options compensation through BSM without a market to price against. Probably should figure what your VaR is for an x-sigma crash and try to get a hedge which will roughly balloon to that level under high vanna.