5 ms·

employees aren't shareholders they get options, not equity personally, I never understood why they don't get actualy equity (in particular, given that the opt

by tomp 2y ago

employees aren't shareholders they get options, not equity personally, I never understood why they don't get actualy equity (in particular, given that the options are "fairly priced" i.e. the call price is the latest equity round price, making them worth literally $0!) and that equity should have the same terms as investors get (no "liquidation preference" lol) because - guess what - you're literally exchanging your labour (== money) for them!

georgeecollins 2y ago
That's elective. It's fine and not uncommon to just give employees stock (actual shares, not options) in a company as compensation. Famously Wizards of the Coast gave shares to employees and vendors to create alignment. Someone is going to point out that giving actual shares is a taxable event. And that is sometimes the rational for options. But there are work arounds: you can put shares in a 401k for example. 401ks were originally created to be employee incentives, but morphed into being used for retirement, but you can still do it either way.
- bluGill 2y ago
  There are a lot of ways to do this. However you should NEVER have any significant value in the stock of the company you work for. It has happened - and will happen again - that the company you work for goes bankrupt unexpectedly and now not only are you out of a job but your savings has vanished as well! Even if the company is doing well you need to diversify your savings out of that one basket. There is one exception: if you are high enough in the company that you actually know the non-public information as it happens (not either because you need to know or months later in the all-employee meeting). Then the shareholders demand you hold a lot of value in the company so that if you do something bad for the company it hurts. Most of us will never be that high.
  - georgeecollins 2y ago
    Financial advisors will advise you against the risk of having all your wealth in the company you work for for just the reason you describe. If you have a net worth of $10m and it is all in the company you work for you could in one moment loose your job and be broke. So you should diversify. However, employees often have virtually no net worth (why else are they worried about paying taxes on share, except they can't take the risk of loss? I can say from experience that when I worked for a startup but had previous personal financial success I just absorbed the tax bill for exercising options knowing that the shares I paid taxes on could ultimately be worthless.). So if all their net worth is in a company its not ideal but it is a risk you can take when you are young. I see the argument of avoiding taxes and not taking ownership until the shares are liquid-- good arguments, it is true-- as being used as ways to justify giving employees shares or options that are likely to be less valuable then the ones held by founders and investors.
    - bluGill 2y ago
      If you have almost no net worth than put it in a bank savings account. If you have more than almost nothing put it in 401k or IRA plans - a house is sometimes a good option too (but only if you will live there for a decade, and of course location location location). Only when you have the above in great shape should you thinking about anything else more risky.
efnx 2y ago
Because that’s the racket! They can’t pay you top dollar because they’re a lean startup, so they make up for it by adding “equity” to remuneration. But that equity is in the form of options which you have to buy with your not-top-dollar salary, so it’s unlikely you will. Then you leave the company before an event and those options expire after a month or so, going back into the pool for another engineer to do the same. The house always wins!
- 0xB31B1B 2y ago
  its not done this way because the founders want to screw you, its done this way because of a bunch of arcane tax laws. Its complicated to explain, but the origin of all of these weird "options not equity" and "90 days to expire" type things are because of US tax law. If the startup could give you shares without putting the employee and the company both in a very puntantive tax situation they would.
  - AlwaysBCoding 2y ago
    This isn't true. Company executives don't owe a fiduciary duty to employees or holders of stock options in a company, they only owe a fiduciary duty to concrete shareholders. There are a lot of founders of less than high moral character who want to keep it this way. I sent a Section 220 demand letter to the founders of this company to get transparency on the money that was taken during the secondary stock sale and they're currently fighting me on it because I wasn't a shareholder at the time the secondary sale took place, I only held options in the company at the time. This anecdote is illustrating a real world situation in which it is being used as a way for founders to try to screw their employees, not because their hands are tied by some arcane tax law.
    - indoordin0saur 2y ago
      I'm pretty unknowledgeable when it comes to tax law but... If you're an employee at a series A start-up valued at $50 million and part of your annual salary pay package is being issued equity worth $100,000 do you have to pay tax on that immediately? If you can't cash out because there hasn't been a liquidity event how do you pay the tax?
OJFord 2y ago
They're not a subset no, but the two aren't mutually exclusive. They can get options, they can get equity, they can get nothing (beyond salary). Options are common probably because it gives (the company) more or easier control over what happens when.
matuszeg 2y ago
I have received equity as an employee. When I started, the company was very early and their evaluation was still very low. The way it worked was that I had to pay for the equity grant upfront. I forget exactly how much but it was<$200. This is also how it worked for me as a founder of a company. That same company eventually raised a sizeable equity round and then began issuing options for new employees. If they were to continue issuing equity grants, the cost to purchase the grant would be much more than $200 (likely tens or hundreds of thousands of dollars). Alternatively, if the company were to give employees equity grants directly instead of having to buy them then that would count as income and the employees would owe taxes on the equity gained. The tax bill could also easily be tens or hundreds of thousands of dollars. Options avoid all of that and defer the upfront costs that come with an equity grant. Imo, the real problem is that options can be clawed back once you no longer work for the company.
- indoordin0saur 2y ago
  IMO, the real problem with options seems to be that you have no idea what they are truly worth. You have the option for 10k shares and you know the company is worth $200 million, but you have no idea how many shares are outstanding. Meanwhile, shares are being diluted, or maybe they aren't. You're just kept in the dark as to what is happening. At least that was my experience.
fardo 2y ago
Actual equity is hard cash, options are a potentiality of cash. As the company with equity, any calls you’re selling are guaranteed covered, which hedges against downside loss of having given away equity and it exploding in value. Calls also theoretically align incentives better than equity because it gets the staff member personally interested in seeing the stock rise, rather than just selling immediately to take profit if they’re short your company’s future outlook. Lots of other nice properties - If you sell the option, either discounted or at some full price, you make a money premium, which helps runway. If the stock falls, you make money from having chosen options and basically don’t have to give the employees anything. If the stock rises, you’re probably making great sums from your (much larger) equity share, and your losses versus just giving them equity are essentially capped at the difference between the current price and strike price, instead of theoretically unlimited cost. This is easily quantified with some multiplication when issuing the options, meaning in a growing company, you have knowably limited exposure, and essentially are just giving them the equity you would’ve given them anyways.
- tomp 2y ago
  I think you're confusing a few things. First of all, we're talking about pre-IPO startups, so you can't just sell the stock. Second, talking about "company loses money because it gave equity to employees" is as non-sensical as saying "company loses money because it gave equity to investors". You're not giving away equity, you're exchanging equity (at present value) for cash (from investors) or labour (from employees). They're both investors (investing either their money, or their time/skills), and by investing, they're taking ownership of any potential future gains or losses (and by letting them invest, the company is giving up that potential).
  - fardo 2y ago
    >First of all, we're talking about pre-IPO startups, so you can't just sell the stock This is often but not universally true - about 40% of companies allow you to do so, and about 40% of those that allow you to do so allow those sales on secondary markets [1] >company loses money because it gave equity to employees is nonsensical You lose money in the sense that the gains beyond the strike price which you would have realized had you not sold the call option are your losses: you could’ve not sold the option and profited on that rise instead. You have lost the difference in the profit between these two investment plans. > You're not giving away equity I was responding to someone asking “why don’t they just give the equity instead as compensation?”, as opposed to writing call options against it - assuming that as a company you want to incentivize workers to work by setting aside some fraction of your equity which they may receive, these are the reasons a company might prefer to “give” employees that equity with options, instead of discounted equity or stock grants [1] See page 8 footer of https://www.gsb.stanford.edu/sites/default/files/publication-pdf/cgri-closer-look-73-private-company-exchanges.pdf https://www.gsb.stanford.edu/sites/default/files/publication...

by tomp 2y ago

georgeecollins 2y ago

That's elective. It's fine and not uncommon to just give employees stock (actual shares, not options) in a company as compensation. Famously Wizards of the Coast gave shares to employees and vendors to create alignment. Someone is going to point out that giving actual shares is a taxable event. And that is sometimes the rational for options. But there are work arounds: you can put shares in a 401k for example. 401ks were originally created to be employee incentives, but morphed into being used for retirement, but you can still do it either way.

bluGill 2y ago
There are a lot of ways to do this. However you should NEVER have any significant value in the stock of the company you work for. It has happened - and will happen again - that the company you work for goes bankrupt unexpectedly and now not only are you out of a job but your savings has vanished as well! Even if the company is doing well you need to diversify your savings out of that one basket. There is one exception: if you are high enough in the company that you actually know the non-public information as it happens (not either because you need to know or months later in the all-employee meeting). Then the shareholders demand you hold a lot of value in the company so that if you do something bad for the company it hurts. Most of us will never be that high.
- georgeecollins 2y ago
  Financial advisors will advise you against the risk of having all your wealth in the company you work for for just the reason you describe. If you have a net worth of $10m and it is all in the company you work for you could in one moment loose your job and be broke. So you should diversify. However, employees often have virtually no net worth (why else are they worried about paying taxes on share, except they can't take the risk of loss? I can say from experience that when I worked for a startup but had previous personal financial success I just absorbed the tax bill for exercising options knowing that the shares I paid taxes on could ultimately be worthless.). So if all their net worth is in a company its not ideal but it is a risk you can take when you are young. I see the argument of avoiding taxes and not taking ownership until the shares are liquid-- good arguments, it is true-- as being used as ways to justify giving employees shares or options that are likely to be less valuable then the ones held by founders and investors.
  - bluGill 2y ago
    If you have almost no net worth than put it in a bank savings account. If you have more than almost nothing put it in 401k or IRA plans - a house is sometimes a good option too (but only if you will live there for a decade, and of course location location location). Only when you have the above in great shape should you thinking about anything else more risky.

efnx 2y ago

Because that’s the racket! They can’t pay you top dollar because they’re a lean startup, so they make up for it by adding “equity” to remuneration. But that equity is in the form of options which you have to buy with your not-top-dollar salary, so it’s unlikely you will. Then you leave the company before an event and those options expire after a month or so, going back into the pool for another engineer to do the same. The house always wins!

0xB31B1B 2y ago
its not done this way because the founders want to screw you, its done this way because of a bunch of arcane tax laws. Its complicated to explain, but the origin of all of these weird "options not equity" and "90 days to expire" type things are because of US tax law. If the startup could give you shares without putting the employee and the company both in a very puntantive tax situation they would.
- AlwaysBCoding 2y ago
  This isn't true. Company executives don't owe a fiduciary duty to employees or holders of stock options in a company, they only owe a fiduciary duty to concrete shareholders. There are a lot of founders of less than high moral character who want to keep it this way. I sent a Section 220 demand letter to the founders of this company to get transparency on the money that was taken during the secondary stock sale and they're currently fighting me on it because I wasn't a shareholder at the time the secondary sale took place, I only held options in the company at the time. This anecdote is illustrating a real world situation in which it is being used as a way for founders to try to screw their employees, not because their hands are tied by some arcane tax law.
  - indoordin0saur 2y ago
    I'm pretty unknowledgeable when it comes to tax law but... If you're an employee at a series A start-up valued at $50 million and part of your annual salary pay package is being issued equity worth $100,000 do you have to pay tax on that immediately? If you can't cash out because there hasn't been a liquidity event how do you pay the tax?

OJFord 2y ago

They're not a subset no, but the two aren't mutually exclusive. They can get options, they can get equity, they can get nothing (beyond salary). Options are common probably because it gives (the company) more or easier control over what happens when.

matuszeg 2y ago

I have received equity as an employee. When I started, the company was very early and their evaluation was still very low. The way it worked was that I had to pay for the equity grant upfront. I forget exactly how much but it was<$200. This is also how it worked for me as a founder of a company. That same company eventually raised a sizeable equity round and then began issuing options for new employees. If they were to continue issuing equity grants, the cost to purchase the grant would be much more than $200 (likely tens or hundreds of thousands of dollars). Alternatively, if the company were to give employees equity grants directly instead of having to buy them then that would count as income and the employees would owe taxes on the equity gained. The tax bill could also easily be tens or hundreds of thousands of dollars. Options avoid all of that and defer the upfront costs that come with an equity grant. Imo, the real problem is that options can be clawed back once you no longer work for the company.

indoordin0saur 2y ago
IMO, the real problem with options seems to be that you have no idea what they are truly worth. You have the option for 10k shares and you know the company is worth $200 million, but you have no idea how many shares are outstanding. Meanwhile, shares are being diluted, or maybe they aren't. You're just kept in the dark as to what is happening. At least that was my experience.

fardo 2y ago

Actual equity is hard cash, options are a potentiality of cash. As the company with equity, any calls you’re selling are guaranteed covered, which hedges against downside loss of having given away equity and it exploding in value. Calls also theoretically align incentives better than equity because it gets the staff member personally interested in seeing the stock rise, rather than just selling immediately to take profit if they’re short your company’s future outlook. Lots of other nice properties - If you sell the option, either discounted or at some full price, you make a money premium, which helps runway. If the stock falls, you make money from having chosen options and basically don’t have to give the employees anything. If the stock rises, you’re probably making great sums from your (much larger) equity share, and your losses versus just giving them equity are essentially capped at the difference between the current price and strike price, instead of theoretically unlimited cost. This is easily quantified with some multiplication when issuing the options, meaning in a growing company, you have knowably limited exposure, and essentially are just giving them the equity you would’ve given them anyways.

tomp 2y ago
I think you're confusing a few things. First of all, we're talking about pre-IPO startups, so you can't just sell the stock. Second, talking about "company loses money because it gave equity to employees" is as non-sensical as saying "company loses money because it gave equity to investors". You're not giving away equity, you're exchanging equity (at present value) for cash (from investors) or labour (from employees). They're both investors (investing either their money, or their time/skills), and by investing, they're taking ownership of any potential future gains or losses (and by letting them invest, the company is giving up that potential).
- fardo 2y ago
  >First of all, we're talking about pre-IPO startups, so you can't just sell the stock This is often but not universally true - about 40% of companies allow you to do so, and about 40% of those that allow you to do so allow those sales on secondary markets [1] >company loses money because it gave equity to employees is nonsensical You lose money in the sense that the gains beyond the strike price which you would have realized had you not sold the call option are your losses: you could’ve not sold the option and profited on that rise instead. You have lost the difference in the profit between these two investment plans. > You're not giving away equity I was responding to someone asking “why don’t they just give the equity instead as compensation?”, as opposed to writing call options against it - assuming that as a company you want to incentivize workers to work by setting aside some fraction of your equity which they may receive, these are the reasons a company might prefer to “give” employees that equity with options, instead of discounted equity or stock grants [1] See page 8 footer of https://www.gsb.stanford.edu/sites/default/files/publication-pdf/cgri-closer-look-73-private-company-exchanges.pdf https://www.gsb.stanford.edu/sites/default/files/publication...