4 ms·

I want to add one more thing, doesn't happen often, but happens often enough: - Don't put call options on employee stock. And something I wish that companies

by mahyarm 13y ago

I want to add one more thing, doesn't happen often, but happens often enough: - Don't put call options on employee stock. And something I wish that companies would start doing: - Don't make vested options expire soon after the end of employment. Don't force people to take big tax hits just to buy the stock that they have earned.

djrogers 13y ago
"And something I wish that companies would start doing: - Don't make vested options expire soon after the end of employment. Don't force people to take big tax hits just to buy the stock that they have earned." That's counter to one of the main goals of a good equity comp plan - retention. If a company goes out of it's way to ensure that LEAVING the company is painless and of low cost to the employee, retention would suffer.
- asolove 13y ago
  But the plan should be structured so that what you earn is in line with the benefit you provide to the company. Making it arbitrarily harder to benefit from what you've already earned is unnecessarily cruel. This is a big difference between aligning incentives and retroactively punishing behavior you don't like.
  - harryh 13y ago
    Have you earned your equity just because you put in the time, or have you earned it when you get to the finish line (when the stock is able to be traded for actual $)? These tension between these two points of view is the source of the consternation in this area.
- nanidin 13y ago
  On the other hand, a "good" equity comp plan could lead to a toxic work environment. This even happens with people waiting out the vesting schedule on 401k's and such.
- deleted 13y ago
  [deleted]
jeremymcanally 13y ago
If they're ISOs, they're actually legally required to expire the options 90 days after termination. More information here: http://blog.jparkhill.com/2008/03/07/why-do-stock-options-expire-90-days-after-termination-of-my-employees-service/ http://blog.jparkhill.com/2008/03/07/why-do-stock-options-ex...
- mahyarm 13y ago
  Good to know, but I would still prefer if they were NSOs and just didn't expire. The tax benefit is relatively minimal compared to the tax risk & cost. The big difference here is the company is practically non-liquid and the employee is already taking a risk in working for that startup. I feel the 1 year vesting cliff alone is enough to evaluate if an employee is worthwhile and you should give the employee the full value of the vested stock compensation. Not add more gotchas to make the worth of the options even worse. If the company shares were liquid, then I wouldn't care as much. Often over a few years you get the situation where the strike price is a good chunk over the FMV price and taxes are somewhat prohibitive compared to the probability that a liquidity event would happen. It makes the shares an actual net negative in total compensation and as a result, the open secret in the bay area is that most people don't actually exercise their stock options when they leave their companies. You get things like the ESO fund popping up in response taking a good cut of your compensation because you didn't want to pay some employees to do 20 hours of extra work a year. Anyway overall, to an experienced employee who has stock option experience, it just makes your compensation package even less attractive and them less likely to work with you. If you show that you are willing to do this relatively minor & cheap thing, it will increase trust and make your company more attractive to work for, especially if your a non liquid company. I would really consider this as an early stage startup as a recruiting technique. This stuff is usually hidden in contracts, so I would bring up this feature of your company early on explaining the logic behind it.
prostoalex 13y ago
>> - Don't make vested options expire soon after the end of employment. Don't force people to take big tax hits just to buy the stock that they have earned. How would you do that exactly? Even if you take advantage of SEC's rule permitting a private company to have 2,000 shareholders, the moment you convert those options to stock units (either restricted or open), they've got a brand new tax problem. At least with ISO exercise you can juggle AMT taxation vs income taxation, RSUs or SUs are just straight bottom-line income.
- mahyarm 13y ago
  You would in the stock agreement, remove terms about how the stock expires after you stop working for the company. They would become NSO stock options. What different tax problems would they have with people exercising later? How is it different from employees exercising their stock after vesting? Unless your saying the entire structure is made to give people an incentive to not actually take their stock if they leave the company before a liquidity event to help avoid that 2000 shareholder stock limit? What I'm talking about is mainly about non-liquid companies. The problems mostly go away with liquid companies.
  - prostoalex 13y ago
    It's the IRS rule, not a company rule. I'm not super-clear what motivated IRS decision http://www.mystockoptions.com/faq/index.cfm/catID/36274DB1-D3C4-4D93-B57E8FA2916B9477/objectID/F1E4EDF6-2B05-452D-9AFD3FB64A55AE1E http://www.mystockoptions.com/faq/index.cfm/catID/36274DB1-D...
    - mahyarm 13y ago
      That is why I say they would offer them as NQSO stock options. Not ISO stock options. I would never need to actually exercise the stock options if I can never sell the things profitably anyway. I can even wait a while until after an IPO theoretically to wait and avoid a dot com bubble AMT nightmare that happened in the early 2000s. When I can actually sell the options, then the price of about %5 extra in taxes (short term vs long term capital gains) is small compared to the taxation paperwork and paying for stock that has a good chance of being worthless. If a company is liquid or soon to be liquid when I start working for them, then the extra bonus treatment of ISOs is fine and I understand putting that limit inside there, because the stock isn't worthless and I can sell it when I leave the company.
rhc2104 13y ago
One option is reverse vesting- there are no tax hits, and the company gets money upfront.
- mahyarm 13y ago
  Yes but then you are out that much money, making it a form of negative compensation with respect to it's expected value.

by mahyarm 13y ago

djrogers 13y ago

"And something I wish that companies would start doing: - Don't make vested options expire soon after the end of employment. Don't force people to take big tax hits just to buy the stock that they have earned." That's counter to one of the main goals of a good equity comp plan - retention. If a company goes out of it's way to ensure that LEAVING the company is painless and of low cost to the employee, retention would suffer.

asolove 13y ago
But the plan should be structured so that what you earn is in line with the benefit you provide to the company. Making it arbitrarily harder to benefit from what you've already earned is unnecessarily cruel. This is a big difference between aligning incentives and retroactively punishing behavior you don't like.
- harryh 13y ago
  Have you earned your equity just because you put in the time, or have you earned it when you get to the finish line (when the stock is able to be traded for actual $)? These tension between these two points of view is the source of the consternation in this area.
nanidin 13y ago
On the other hand, a "good" equity comp plan could lead to a toxic work environment. This even happens with people waiting out the vesting schedule on 401k's and such.
deleted 13y ago
[deleted]

jeremymcanally 13y ago

If they're ISOs, they're actually legally required to expire the options 90 days after termination. More information here: http://blog.jparkhill.com/2008/03/07/why-do-stock-options-expire-90-days-after-termination-of-my-employees-service/ http://blog.jparkhill.com/2008/03/07/why-do-stock-options-ex...

mahyarm 13y ago
Good to know, but I would still prefer if they were NSOs and just didn't expire. The tax benefit is relatively minimal compared to the tax risk & cost. The big difference here is the company is practically non-liquid and the employee is already taking a risk in working for that startup. I feel the 1 year vesting cliff alone is enough to evaluate if an employee is worthwhile and you should give the employee the full value of the vested stock compensation. Not add more gotchas to make the worth of the options even worse. If the company shares were liquid, then I wouldn't care as much. Often over a few years you get the situation where the strike price is a good chunk over the FMV price and taxes are somewhat prohibitive compared to the probability that a liquidity event would happen. It makes the shares an actual net negative in total compensation and as a result, the open secret in the bay area is that most people don't actually exercise their stock options when they leave their companies. You get things like the ESO fund popping up in response taking a good cut of your compensation because you didn't want to pay some employees to do 20 hours of extra work a year. Anyway overall, to an experienced employee who has stock option experience, it just makes your compensation package even less attractive and them less likely to work with you. If you show that you are willing to do this relatively minor & cheap thing, it will increase trust and make your company more attractive to work for, especially if your a non liquid company. I would really consider this as an early stage startup as a recruiting technique. This stuff is usually hidden in contracts, so I would bring up this feature of your company early on explaining the logic behind it.

prostoalex 13y ago

>> - Don't make vested options expire soon after the end of employment. Don't force people to take big tax hits just to buy the stock that they have earned. How would you do that exactly? Even if you take advantage of SEC's rule permitting a private company to have 2,000 shareholders, the moment you convert those options to stock units (either restricted or open), they've got a brand new tax problem. At least with ISO exercise you can juggle AMT taxation vs income taxation, RSUs or SUs are just straight bottom-line income.

mahyarm 13y ago
You would in the stock agreement, remove terms about how the stock expires after you stop working for the company. They would become NSO stock options. What different tax problems would they have with people exercising later? How is it different from employees exercising their stock after vesting? Unless your saying the entire structure is made to give people an incentive to not actually take their stock if they leave the company before a liquidity event to help avoid that 2000 shareholder stock limit? What I'm talking about is mainly about non-liquid companies. The problems mostly go away with liquid companies.
- prostoalex 13y ago
  It's the IRS rule, not a company rule. I'm not super-clear what motivated IRS decision http://www.mystockoptions.com/faq/index.cfm/catID/36274DB1-D3C4-4D93-B57E8FA2916B9477/objectID/F1E4EDF6-2B05-452D-9AFD3FB64A55AE1E http://www.mystockoptions.com/faq/index.cfm/catID/36274DB1-D...
  - mahyarm 13y ago
    That is why I say they would offer them as NQSO stock options. Not ISO stock options. I would never need to actually exercise the stock options if I can never sell the things profitably anyway. I can even wait a while until after an IPO theoretically to wait and avoid a dot com bubble AMT nightmare that happened in the early 2000s. When I can actually sell the options, then the price of about %5 extra in taxes (short term vs long term capital gains) is small compared to the taxation paperwork and paying for stock that has a good chance of being worthless. If a company is liquid or soon to be liquid when I start working for them, then the extra bonus treatment of ISOs is fine and I understand putting that limit inside there, because the stock isn't worthless and I can sell it when I leave the company.

rhc2104 13y ago

One option is reverse vesting- there are no tax hits, and the company gets money upfront.

mahyarm 13y ago
Yes but then you are out that much money, making it a form of negative compensation with respect to it's expected value.