Startup Equity For Employees

http://www.payne.org/index.php/Startup_Equity_For_Employees

by abstractbill • 18 years ago

44 17 18 years ago

johnrob• 18 years ago

"My Advice: politely ask for the shares outstanding, or for what percentage your share offer represents (then confirm the approximate shares outstanding). If the company won't provide you with this necessary information, it's unlikely they're going to be straight with you on other issues; go work somewhere else."

The number of jobs just shrunk by 90%.

marcus• 18 years ago

Not really, offering you a number of shares but refusing to tell you the number of shares outstanding is like offering to pay you 100,000 a year but not being willing to tell in which currency the 100,000 are. Might be in GBP (about 200k USD) might be in Yens (about 1000 USD)

paul• 18 years ago

Eliminating bad options is a good thing. (Also, 90% is way off)

dkokelley2• 18 years ago

Very good article, but it's incorrect in some areas.

"Companies raise money by selling new stock after the board of directors authorizes the sale to investors. Those new shares are created out of thin air by the company, and will dilute all of the current stockholders."

These shares are not created out of "thin air" as the article states. When a corporation is formed, it requests and is granted a certain number of shares by the state in which it is created. These are the authorized shares. At this point, the company may sell shares from their authorized pool of shares. The shares that are sold to raise money are called the issued shares.

This is the point of error. The shares are not created out of thin air, but are rather moved from the authorized shares to the issued shares pool.

Additionally, the company may decide to buyback some of their shares from the people who they sold the shares to. Shares that are repurchased are called treasury stock. The shares that are not repurchased are considered outstanding. Only the issued and outstanding shares have any voice in the company. Authorized and treasury shares can not vote.

To recap, here is a quick diagram:

Authorized

|-Issued

|--Outstanding

|--Treasury

Outstanding is highlighted because that is the only category that has an influence on voting and percentage of ownership. For most young companies, you won't have to worry about the other classes of stock, but for medium+ companies, it's a good thing to understand going into a negotiation for equity compensation.

payne922• 18 years ago

I'll concede that 'thin air' is probably an oversimplification, for the purposes of this essay.

My point is that the company sells new shares up to the amount authorized, to raise money. In my experience, the authorized number of shares is a minor point; the board/majority shareholders will increase it if it's ever a limiting factor.

Before those shares are sold (issued), they don't really exist -- nobody votes them, they're not compensated if company is acquired, etc. Hence, the simplified "thin air" description.

dkokelley2• 18 years ago

Sure, for the purposes of the essay it works fine. I just didn't want people to misunderstand the process of dilution. This site is geared towards hackers - many of whom are or will be founders. They will have to deal with significant ownership and dilution between investors and other founders. I thought it was a good idea to clarify how stocks work for them.

Also, the board of directors can't exactly increase the number on their own. They have to get permission from the state to do so, since it could have an effect on ownership. If I had a 49% stake in a company, the 51% couldn't authorize and issue themselves more stock to keep me from getting control, but they could dilute my ownership by bringing stock out of treasury or issuing stock from their authorized amount.

A last note, I believe that most companies issue stock compensation directly out of their treasury stock, so if you'll be getting a good deal of ownership, it will probably be from that stock pool. Take that into account to figure out your ownership percentage.

tptacek3• 18 years ago

Liquidation preferences are always important, regardless of size; if your prospective employer has taken 5 and is only doing 1-2 in revenue, prefs will still keep you from making more than a token amount. They also often have multipliers attached.

tptacek3• 18 years ago

This article advises employees to exercise their shares as soon as they are vested as long as they're bullish on the company. I know several people who've been fucked over doing this. The thing you need to remember is, your private-company common shares grant basically no enforceable rights.

dcurtis4• 18 years ago

Care to elaborate?

You can't say you know someone who was "fucked" by doing something, and then not tell us what fucked them-- that's teasing!

ardit33• 18 years ago

simple scenario: when you join your company gives you 1000 options valued at $1 per share (at the time of issuing), vesting in 4 years.

Assuming after 2 years, you decide you want to exercise the options that are vested, so you pay your company $500 to get your 500 shares.

Company start going down the tube, and folds out, or is selled at fire price. You end up with basically worthless paper on your hands. So, instead of earning money, you lost. Imagine, that instead of $500 that was 5000, 50000. It is a lot of money.

There are also tax implication, depending what kind of taxing schedule you choose. You can find yourself actually paying taxes, for those shares at the time of excercising, yet when you want to sell, they are worthless.

Double ouch. Also, one thing to consider is that when you exercise options, you have buy those shares. If your company is iliquid (not gone ipo), it might take a long time when (if) you are able to sale them (either it goes IPO, or the company is sold). So, you are tying a chunk of your money, in these shares.

So, as always, buyer beware. Do your own math when it comes in cases like this.

payne922• 18 years ago

My point was a tax point not a "rights" point -- if you exercise (and are bullish and can afford to), then you have the advantage of getting the long term capital gains timer going which can be hugely advantageous.

Stated differently, I've much more people screwed by the inverse case -- they DON'T exercise, the leave the company, they have 90 days to exercise vested shares or lose the options, the fair market value has crept up, and they end up with a huge AMT tax hit to keep the stock they worked for.

bobp• 18 years ago

By my experience (I've gotten job offers from a few startups), most startups (especially after their series A) offer employees (at least engineers) a miniscule amount of equity (a small fraction of a percent). Even if these companies would have great exits (tens of millions), their engineers would hardly get enough for a down payment on a house in the Bay Area.

Summary: don't expect the equity you get from working at a startup (unless you're a VP or an executive) to be worth much. Google-like events where many employees got rich are few and far between. If you do work for an existing company, I suggest looking at salary more than equity as a means of making money. The difference between making 120k vs 80k over 4 years is 160k -- more than you're likely to get from options, and less risky.

Startup Equity For Employees

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