3 ms·

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

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.

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.