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I'm curious about how equity/options vesting work in the general silicon valley startup (I'm sure details will vary). Actually, I'm curious how it works general

I'm curious about how equity/options vesting work in the general silicon valley startup (I'm sure details will vary). Actually, I'm curious how it works generally, period. But most people reading HN is probably more familiar with SV startups than, say, New Delhi startups. Say I'm granted 10 shares of options in a company (for the sake of the example, say this is 10% pre-dilution. So there are 100 shares currently). This vests over 4 years. Are you 'granted' these shares, or do you have to purchase them? Presumably, you purchase them at the 'strike' price? Is this something determined when you are hired and sign the employment contract? Or when the equity starts vesting? In other words, if I'm getting this correctly, you have to pay to own a portion of the company, despite the fact that you're an early employee? Do the founders have to do the same? If the strike price is $1/share, then you have to pay out $10 to own that 10% over the course of 4 years? Or will the 'strike' price change over time?

gibybo 14y ago
You do have to pay to own a portion of the company. The founders did not have to do this. The strike price is set when they give you the options. If they vest over 4 years, the strike price is decided when they are issued, before they vest. The strike price is usually set to the value of the common stock at the time of issuance, so they have a value of $0 (as far as the IRS is concerned) when they are issued. If the company IPOs before you exercise your options, you generally won't have to provide the capital to purchase the shares, as any brokerage will be able to cover that for you (by subtracting it from the sale proceeds).
- outericky 14y ago
  While the founders may not have had to do this, in all likelihood they did self fund at least some of the startup, and/or put in a lot more legwork initially.
saalweachter 14y ago
Stock options are pretty much the norm in my experience. The usual explanation for this is taxes. When you are granted stocked, it is taxed as income upon being granted. Since the stock is illiquid because the company is a startup, there is no way to sell it to pay the taxes, so granting stock just reduces your already meager salary. You can usually exercise your options any time after they vest. However, most people don't and this is sometimes discouraged. If the company is sold for cash money, you may not ever formally exercise your options: the lawyers and the accountants will automatically exercise them for you, deduct the strike price from the sale price, and just deposit the net in your bank account.
- Pwnguinz 14y ago
  I'm slightly confused on one point. If the options need not be exercised, why then, would any employee with a minority stake want to spend his own money to exercise them? Why not wait until the company exits and have it, as you say, be 'automatically exercised'? The other (much more probable) outcome is that the paper options are worth nothing, and the employee is out nothing either. However, if the employee exercises, and the company goes under, he's out however much he paid for those options + opportunity cost of working at a lower 'early employee' wage. Is there any real reason to exercise those stock options and hold onto common stock of a non-publicly traded company? I guess if there's enough demand, those stocks can be traded on 'secondary' private markets (like FB, pre-IPO), but I would imagine this to be the exception and not the rule, correct? Clearly the best option is to not exercise those options until absolutely necessary, or am I missing something here?
  - rdouble 14y ago
    If you've vested some of your options and don't want to stick around, but there's a good chance there will be a liquidity event at some point in the future.
    - saalweachter 13y ago
      To clarify: most stock options evaporate if you leave the company. Usually you have 30 or 90 days to exercise them or lose them after you quit or are fired. Companies like this aspect. Stock is yours forever. The other reason to exercise early is also taxes. When you exercise the option, buy stock at $0.01, and sell it at $10 milliseconds later, that is a short term capital gain. If you exercise them years before selling them, you have long term capital gains, which are taxed at a lower rate. You increase your after-tax payout by (say) 10%, with the risk that your payout will be $0. Or less than the cost to exercise your shares. Or the opportunity cost (you can't use money tied up in illiquid startup stock to buy houses or APPL at $10) is too high.

gibybo 14y ago

You do have to pay to own a portion of the company. The founders did not have to do this. The strike price is set when they give you the options. If they vest over 4 years, the strike price is decided when they are issued, before they vest. The strike price is usually set to the value of the common stock at the time of issuance, so they have a value of $0 (as far as the IRS is concerned) when they are issued. If the company IPOs before you exercise your options, you generally won't have to provide the capital to purchase the shares, as any brokerage will be able to cover that for you (by subtracting it from the sale proceeds).

outericky 14y ago
While the founders may not have had to do this, in all likelihood they did self fund at least some of the startup, and/or put in a lot more legwork initially.

saalweachter 14y ago

Stock options are pretty much the norm in my experience. The usual explanation for this is taxes. When you are granted stocked, it is taxed as income upon being granted. Since the stock is illiquid because the company is a startup, there is no way to sell it to pay the taxes, so granting stock just reduces your already meager salary. You can usually exercise your options any time after they vest. However, most people don't and this is sometimes discouraged. If the company is sold for cash money, you may not ever formally exercise your options: the lawyers and the accountants will automatically exercise them for you, deduct the strike price from the sale price, and just deposit the net in your bank account.

Pwnguinz 14y ago
I'm slightly confused on one point. If the options need not be exercised, why then, would any employee with a minority stake want to spend his own money to exercise them? Why not wait until the company exits and have it, as you say, be 'automatically exercised'? The other (much more probable) outcome is that the paper options are worth nothing, and the employee is out nothing either. However, if the employee exercises, and the company goes under, he's out however much he paid for those options + opportunity cost of working at a lower 'early employee' wage. Is there any real reason to exercise those stock options and hold onto common stock of a non-publicly traded company? I guess if there's enough demand, those stocks can be traded on 'secondary' private markets (like FB, pre-IPO), but I would imagine this to be the exception and not the rule, correct? Clearly the best option is to not exercise those options until absolutely necessary, or am I missing something here?
- rdouble 14y ago
  If you've vested some of your options and don't want to stick around, but there's a good chance there will be a liquidity event at some point in the future.
  - saalweachter 13y ago
    To clarify: most stock options evaporate if you leave the company. Usually you have 30 or 90 days to exercise them or lose them after you quit or are fired. Companies like this aspect. Stock is yours forever. The other reason to exercise early is also taxes. When you exercise the option, buy stock at $0.01, and sell it at $10 milliseconds later, that is a short term capital gain. If you exercise them years before selling them, you have long term capital gains, which are taxed at a lower rate. You increase your after-tax payout by (say) 10%, with the risk that your payout will be $0. Or less than the cost to exercise your shares. Or the opportunity cost (you can't use money tied up in illiquid startup stock to buy houses or APPL at $10) is too high.