6 ms·

Allowing employees to make 83B elections on their options immediately after starting would help this situation a lot. Most companies don't "allow" you to do thi

by scurvy 11y ago

Allowing employees to make 83B elections on their options immediately after starting would help this situation a lot. Most companies don't "allow" you to do this. I've heard conflicting things on the subject. Some say the company has no say in the matter and it's purely in the IRS' court (exercise and notify IRS). Others say the company must allow you to do it. Second, the bogeyman of "letting some strange interloper see our books" is a myth. Every company's share plan that has share restrictions, also does not confer disclosure rights to common shareholders. That is, you have no right to see the books if you're a common shareholder in these companies. It's not the same with public equities as it is with this new round of startups. It used to be that case that you exercised 1 share of stock upon hitting your cliff. That way you could see the books and see what's really going on. The powers that be (Hello YC) have instructed their companies to remove disclosure rights as a workaround. The myth that "having lots of shareholders increases costs too much" is also just a myth. Any company with a valuation north of a few mil can afford a finance team (or person) to keep track of registered shareholders. There are services that do this for you. We're talking about companies worth billions of dollars, not the corner bakery worried about the cost of flour because any rise might drive them out of business.

enum_write2 11y ago
why would the pump and dump merchants (sorry "owners") want to do this?
joshjkim 11y ago
you're right on the disclosure issue and cost issue - but I've always been more concerned with voting rights, which a strange interloper would certainly have. Especially in the context of M&A, the risk of a rogue common shareholder can be significant. I don't think it's a show stopper, but it is an issue.
- scurvy 11y ago
  Most founder series preferred shares have voting multipliers built-in. The fear of an interloper led takeover based on voting rights is another myth.
  - joshjkim 11y ago
    hm, but i don't think most founders have founder series preferred. It was getting more popular for a few years but the trend seems to have died down - if you have evidence to the contrary, I'd be curious to see. Mine's anecdotal but not bad: last 20 cap tables with at least 5 you would recognize as "hot" companies, I didnt see one.
    - scurvy 11y ago
      I haven't looked for a few years now. Most of my current data is hearsay. Interesting to see that the trend swung the other way. Thanks!
  - manigandham 11y ago
    Most founders these days get common shares, not preferred.
- mahyarm 11y ago
  Often your shares come with proxy voting agreements that go to the CEO / Founder. So the employee stock pool becomes the founder voting pool, until IPO.
7Figures2Commas 11y ago
Just to clarify on this subject: the 83(b) election applies to stock options where early exercise is involved. Not all companies permit early exercise.
- scurvy 11y ago
  I've heard from several sources that the company has no say in the matter. That it's basically rule by fear. That said, thrusting 83b paperwork upon a company that doesn't "allow" it isn't the best way to start your new job. Also, Peter Thiel always told his portfolio companies to allow 83b elections. It's smart for the employee and the employee. I guess it's a changing of the guard from the Founders Fund types to the YC mania today.
  - 7Figures2Commas 11y ago
    I don't know who your sources are, but you can talk to an attorney about this. A company does not have to permit employees the early exercise of options that have not yet vested. Founders and key early hires, who may be receiving restricted stock (not options), are in a different camp because they're receiving stock, not options.
    - scurvy 11y ago
      Indeed, the company isn't forced to allow it. They could simply not cash your check.
beagle3 11y ago
> The myth that "having lots of shareholders increases costs too much" is also just a myth. No, it isn't a myth. I used to work for a company which had to re-incorporate for various reasons, and had three shareholders too many; They managed to buy them out before the reincorporation, but it was a big problem (with lots of drama), and if an agreement wasn't reached, the company might have had to fold, and would definitely not have been as profitable, if it couldn't reincorporate. IIRC, in the US it's 500 shareholders; We were subject to laws in several countries, the minimum of which had 40 shareholders trigger these problems. Regardless, it is not a myth -- having lots of shareholders has weird and unexpected costs.
- scurvy 11y ago
  It's a myth. The US JOBS act removed the 500 shareholder disclosure trigger. It's 500 unaccredited or 2000 total now. You might have been forced to fold for reasons, but having 500 shareholders wasn't one of them. Going out on a limb here, but it sounds like there were lots of other serious problems and cap table length was a minor one.
  - ekanes 11y ago
    > We were subject to laws in several countries, the minimum of which had 40 shareholders trigger these problems. They couldn't have more than 40 shareholders, and they quite clearly were affected by this.
  - beagle3 11y ago
    This was 2007, before the JOBS act. The company had 43 shareholders. It was subject to laws in a different country, that had the same "500 shareholder disclosure" trigger at 40 people (but the disclosure would have made it to the US as well, being public). Also, the JOBS act is from April 2012. Almost every ESOP, ISO etc. plans in effect today were prepared and enacted before the JOBS act.
jalonso510 11y ago
It's not a matter of a company choosing to allow an 83(b) election. It's a personal tax election that you make by mailing a filing in to the IRS and you can do it without the company's involvement or permision. The problem is that 83(b) elections just aren't applicable unless (i) you own stock, not options, and (ii) that stock is subject to vesting. Longer explanation: When you buy something, if you are paying less than the fair market value for that thing, then the spread is taxable income to you. Typically this spread is calculated at the time of the sale, so if you're buying shares at $0.0001 per share and they are currently worth $0.0001 per share, you'd think there would be no problem. But the IRS says that if shares are subject to vesting then the spread is actually calculated at the time that the shares vest. So a common case would be that you buy shares now for $0.0001/share, next year you hit your cliff and a bunch of shares vest, and at that point the price has gone up to say $0.001/share, and you would then owe taxes on the difference between $0.0001 and $0.001 per share. The 83(b) election gets you out of this trouble by letting you say at the very beginning that you want to be taxed on all shares up front, so the spread is calculated on day one, and is 0, and there's no tax liability. So if you own shares and they are subject to vesting, either by a purchase of restricted stock or an option exercise, then yeah, make an 83(b) election and you can do that with or without the company's permission. But if you just own an option that you haven't yet exercised then an 83(b) election just doesn't apply and it's not something the company chooses to allow or not allow.
- mahyarm 11y ago
  With vesting options, can you still exercise all of your options all at once even though you haven't vested yet? It's just you have to return the unvested stock when you leave?
  - kevinpet 11y ago
    It's up to the company writing the options agreement.
  - jalonso510 11y ago
    It's up to the board at the time they make the grant. Some companies prefer not to allow early exercise to save the minor administrative burden, but it's employee friendly to allow it so lots of places do. Your option paperwork will mention it if you have this right.

by scurvy 11y ago

enum_write2 11y ago

why would the pump and dump merchants (sorry "owners") want to do this?

joshjkim 11y ago

you're right on the disclosure issue and cost issue - but I've always been more concerned with voting rights, which a strange interloper would certainly have. Especially in the context of M&A, the risk of a rogue common shareholder can be significant. I don't think it's a show stopper, but it is an issue.

scurvy 11y ago
Most founder series preferred shares have voting multipliers built-in. The fear of an interloper led takeover based on voting rights is another myth.
- joshjkim 11y ago
  hm, but i don't think most founders have founder series preferred. It was getting more popular for a few years but the trend seems to have died down - if you have evidence to the contrary, I'd be curious to see. Mine's anecdotal but not bad: last 20 cap tables with at least 5 you would recognize as "hot" companies, I didnt see one.
  - scurvy 11y ago
    I haven't looked for a few years now. Most of my current data is hearsay. Interesting to see that the trend swung the other way. Thanks!
- manigandham 11y ago
  Most founders these days get common shares, not preferred.
mahyarm 11y ago
Often your shares come with proxy voting agreements that go to the CEO / Founder. So the employee stock pool becomes the founder voting pool, until IPO.

7Figures2Commas 11y ago

Just to clarify on this subject: the 83(b) election applies to stock options where early exercise is involved. Not all companies permit early exercise.

scurvy 11y ago
I've heard from several sources that the company has no say in the matter. That it's basically rule by fear. That said, thrusting 83b paperwork upon a company that doesn't "allow" it isn't the best way to start your new job. Also, Peter Thiel always told his portfolio companies to allow 83b elections. It's smart for the employee and the employee. I guess it's a changing of the guard from the Founders Fund types to the YC mania today.
- 7Figures2Commas 11y ago
  I don't know who your sources are, but you can talk to an attorney about this. A company does not have to permit employees the early exercise of options that have not yet vested. Founders and key early hires, who may be receiving restricted stock (not options), are in a different camp because they're receiving stock, not options.
  - scurvy 11y ago
    Indeed, the company isn't forced to allow it. They could simply not cash your check.

beagle3 11y ago

> The myth that "having lots of shareholders increases costs too much" is also just a myth. No, it isn't a myth. I used to work for a company which had to re-incorporate for various reasons, and had three shareholders too many; They managed to buy them out before the reincorporation, but it was a big problem (with lots of drama), and if an agreement wasn't reached, the company might have had to fold, and would definitely not have been as profitable, if it couldn't reincorporate. IIRC, in the US it's 500 shareholders; We were subject to laws in several countries, the minimum of which had 40 shareholders trigger these problems. Regardless, it is not a myth -- having lots of shareholders has weird and unexpected costs.

scurvy 11y ago
It's a myth. The US JOBS act removed the 500 shareholder disclosure trigger. It's 500 unaccredited or 2000 total now. You might have been forced to fold for reasons, but having 500 shareholders wasn't one of them. Going out on a limb here, but it sounds like there were lots of other serious problems and cap table length was a minor one.
- ekanes 11y ago
  > We were subject to laws in several countries, the minimum of which had 40 shareholders trigger these problems. They couldn't have more than 40 shareholders, and they quite clearly were affected by this.
- beagle3 11y ago
  This was 2007, before the JOBS act. The company had 43 shareholders. It was subject to laws in a different country, that had the same "500 shareholder disclosure" trigger at 40 people (but the disclosure would have made it to the US as well, being public). Also, the JOBS act is from April 2012. Almost every ESOP, ISO etc. plans in effect today were prepared and enacted before the JOBS act.

jalonso510 11y ago

It's not a matter of a company choosing to allow an 83(b) election. It's a personal tax election that you make by mailing a filing in to the IRS and you can do it without the company's involvement or permision. The problem is that 83(b) elections just aren't applicable unless (i) you own stock, not options, and (ii) that stock is subject to vesting. Longer explanation: When you buy something, if you are paying less than the fair market value for that thing, then the spread is taxable income to you. Typically this spread is calculated at the time of the sale, so if you're buying shares at $0.0001 per share and they are currently worth $0.0001 per share, you'd think there would be no problem. But the IRS says that if shares are subject to vesting then the spread is actually calculated at the time that the shares vest. So a common case would be that you buy shares now for $0.0001/share, next year you hit your cliff and a bunch of shares vest, and at that point the price has gone up to say $0.001/share, and you would then owe taxes on the difference between $0.0001 and $0.001 per share. The 83(b) election gets you out of this trouble by letting you say at the very beginning that you want to be taxed on all shares up front, so the spread is calculated on day one, and is 0, and there's no tax liability. So if you own shares and they are subject to vesting, either by a purchase of restricted stock or an option exercise, then yeah, make an 83(b) election and you can do that with or without the company's permission. But if you just own an option that you haven't yet exercised then an 83(b) election just doesn't apply and it's not something the company chooses to allow or not allow.

mahyarm 11y ago
With vesting options, can you still exercise all of your options all at once even though you haven't vested yet? It's just you have to return the unvested stock when you leave?
- kevinpet 11y ago
  It's up to the company writing the options agreement.
- jalonso510 11y ago
  It's up to the board at the time they make the grant. Some companies prefer not to allow early exercise to save the minor administrative burden, but it's employee friendly to allow it so lots of places do. Your option paperwork will mention it if you have this right.