If founders treated their investors the same way they treated their employees

https://software.rajivprab.com/2020/08/18/if-founders-treated-their-investors-the-same-way-they-treated-their-employees/

by whack • 6 years ago

679 265 6 years ago

software.rajivprab.com

Bailin2• 6 years ago

Investor: So, 0.1% of your ($10M) company works out to $100,000

Isn't that actually $10,000, or is there some startup valuation math that I'm not aware of?

EDIT the article has since been updated with new numbers, and the math now works out as expected

drcoopster• 6 years ago

Read the rest of the article.

Bailin2• 6 years ago

I did before I posted, and the rest of the article didn't explain that disparity at all.

That being said, it looks like the article has been updated to use new numbers now.

seibelj5• 6 years ago

Valid reasons to work for a startup:

- You are a cofounder.

- You have little experience and you are using this to break into the industry, and get experience on many different technologies ("wear many hats").

- They are working on a very specific problem or using a specific technology that you strongly desire to work on and it's difficult to do it anywhere else.

- You want to work a certain way (remote, on the beach, whatever) and they are willing to go this route.

Invalid reasons for working at a startup:

- Getting rich off stock options.

- Making a lot of money in salary.

- Work / life balance.

- Stability.

kristopolous6• 6 years ago

For me I'm far too naturally transgressive to work at a large company.

I really wish I could, life would be easier, less work, less stress, pay better... None of them will take me so I keep help building and (sometimes) exiting startups.

It's really exhausting. 20 years of this... I wish more companies would value those who "challenge the book" instead of "follow the book" or that I could find a way to obediently follow it instead of challenge it.

I've honestly thought about figuring out how I could put things on ice for a few years and get a PhD, because then I'd have the proper paperwork to allow for my disposition and could finally stop this exhausting startup life.

WaxProlix• 6 years ago

You should get a therapist (or a life coach?), these sorts of problems are rarely confined to just the work space.

bluntfang• 6 years ago

I wish more companies would value those who "challenge the book" instead of "follow the book" or that I could find a way to obediently follow it instead of challenge it.

it sounds like you've identified a personal problem with a clear goal, the next logical step would be to shop around therapists who think they might help you achieve that specific goal. and i think it's very important to shop them. Maybe even read a few books on how to find the right therapist for you. It's important to not get stuck on one who you don't like or who isn't interested in help you the way you want to be helped. I've found with therapy that sunk cost fallacy is real when you've found one that really doesn't fit with your goals.

dannykwells• 6 years ago

So I have a PhD, and do empathize with being "transgressive", but I'll say I think it's less about the PhD than it is about being right.

If you are bull headed and drive really hard in a new area, you better be right because you are taking responsibility and accountability for that area (whether you think you are or not). High risk, high reward - sound familiar? This is true at Google, at startups, in academia. So it's really more of a personality thing - if you're ok being obedient, you also don't need to bear the stress of accountability. But if not, well, no degree will alleviate that stress.

elwell2• 6 years ago

I like the simplicity of your homepage.

nogabebop232• 6 years ago

> those who "challenge the book" instead of "follow the book"

This is a valid position and one I can identify with personally, but as I've gotten more emotionally mature over time find it's a little more subtle. You need to include your risk propensity and methodology into the calculation. Even within established companies roles, teams and individual situations are going to be vastly different. Are you willing to take bet-your-career risks? Have you earned some shared vulnerability with the people you want to change? Do you truly care about them and your company? I've learned these are all necessary if not sufficient regardless of the corporate landscape.

I believe there is a third way where you work within the system to affect meaningful change (or bring it down from the inside, depending on how radical your viewpoint). I've come to the realization that small minorities want either dramatic change or none at all; the vast majority are just apathetic, which is your biggest enemy. Start-ups likely skew towards the big change camp. You can make a difference in the former environment but it is exhausting and risks turning you apathetic as well.

omarhaneef2• 6 years ago

Yeah, I know what you mean. I have a similar issue: just way too good looking for large companies. I could make more money and have less stress at a large company, but my good looks keep me out. Fortunately, this dinky startup is willing to tolerate someone this handsome.

giantg27• 6 years ago

It's funny how management tells us to think outside the box and then admonishes us when we do and they don't like it.

hitekker2• 6 years ago

I'd add "Mental Health" to the bottom list.

thinkingkong• 6 years ago

The invalid reasons are all accurate. The only challenge is (almost?) everyone has a friend or colleague that worked at Slack or Uber and made stupendous amounts of money; far in advance of what they would get at a FAANG. It doesn't take into account luck & risk, but this kind of casual relationship with successful startups colours peoples expectations in a different light.

novok• 6 years ago

You might of made a stupendous amount of money if you worked at Uber 2014 or sooner. 2015 or later and you had a stock that was flat or worse for 5 years at this point.

brogrammernot2• 6 years ago

How much money do you actually need though?

I’ve worked for 5 startups now and my equity payout has been 0, 0, 0, 0, and now I stand I make low 7 figures from the equity on this last company (publicly traded now).

During those startups the following happened: - I saw my nieces and nephews so little they forgot my name. They were young, sure, but it still stung when they look at you like a stranger

- Messed up a 8+ year relationship with my significant other and we haven’t talked in years

- Let my student debt pile up to take on more equity than salary (dumbass idea for the record)

- Lost friends along the way because I could never do anything

- Missed many family/friends birthdays as I was working

- Worked 80 hour weeks for a long time

What did I feel after I saw my equity/stock rise to above 7 figures? Stupidity. I gave up a lot on my journey and money can’t get it back, in fact, the money I stand to earn doesn’t enable me to do much more than what my salary already does. I can travel, eat well, have luxury goods if I want (I’m not that type of person but anyways), and so forth.

My point being that this was a.) self-inflicted and b.) not worth the combined opportunity cost of all of those years.

So for every “friend” who made lots of money at Uber or other places, there’s a story like me or a story where someone’s never made anything from equity because profitable exits are fucking hard

giantg27• 6 years ago

I don't know anyone making stupendous amounts of money. I know of only one guy making a FAANG salary. I suck at life and I suppose the high performers socialize with their own kind.

ignoramous• 6 years ago

maps7• 6 years ago

I would like to work for a startup as a way to move/improve my stack but looking at some startup job postings show that they want Googler-tier devs with decades of experience while paying nothing

goatherders2• 6 years ago

What they want and what they end up hiring are very rarely the same.

bb88• 6 years ago

I would recommend going the consulting/contracting route.

Mostly because you get to see how different companies approach problems. When you move from company to company you take the best ideas forward.

nogabebop232• 6 years ago

to add another valid (yet totally invalid) point: You want an impressive job title. At an established company you're going to be a Software Developer or Engineer level n; at a startup you can easily be Lead, Director of or even a VP if that's important to you.

MaxBarraclough• 6 years ago

Is there such thing as an impressive title, in software development, if the company is unheard-of?

This is a sector where people with no relevant formal education and three years on-the-job experience sometimes get called senior.

drchopchop3• 6 years ago

That can be important, especially if you've been "under-titled" at your previous job and need to reset yourself on the career ladder. It's a lot easier to go from senior -> lead -> VP -> CTO by jumping into the startup world than it is to climb the ladder at a megacorp.

chrononaut• 6 years ago

It is interesting because people perceive titles as being inflated at start-ups compared to the "equivalent role" (using your example) at an established company, and that's partially true, but it's also not.

I'd say the extent of actual impact to business relative to the entirety of the business operations probably remains roughly the same between two people with the same title at a large company and a small company. However, the potential loss (or perhaps gain) suffered from poor (or great) decision-making is likely much smaller on an absolute scale at a start-up, although roughly the same on a relative scale.

skrebbel• 6 years ago

Frankly I'm getting tired of this drum HN keeps beating about startups not offering a good work/life balance. Some startups don't, true. Some FAANGs don't either, what's the difference?

I know plenty of startups that have a sane working culture as a key point of differentiation in the job market.

drchopchop3• 6 years ago

Agreed, I am 40+ and am a CTO at a startup which has great work/life balance. We pay approximately market (for a normal dev job, not FAANG), haven't had people do overtime in well over a year, are transparent about finances, and have practically zero politics. It is also possible for a startup to be "stable", especially if it's bootstrapped/profitable.

ownagefool• 6 years ago

In general, the difference is bucket loads of cash.

Justsignedup• 6 years ago

Critical. I have been part of multiple startups that have fantastic work/life balance.

In one case I'd get meetings like "hey, I know you have a kid and all, but we're hitting a deadline soon. Just to let you know next week you're probably gonna have to put in extra hours. But I didn't want to sneak it on you. Let me know if there are any days you can't work extra so I can make sure the other days are covered by someone else." and other times not count my hrs if I work 7.5 hrs or 8.5 hrs in a day.

Startups can be kind. It just has to come from up top.

And I'm not even talking about my current startup which is significantly better.

So yeah. Don't think that startups are all shit. I interview the founders. Are these the people I want to work for, I want to make rich, I believe in.

mdorazio3• 6 years ago

The difference is percentages. I am highly confident that if we looked at a large number of high-growth startups and then at the top ~10 paying tech companies and compared the work/life balance, the disparity would be abundantly clear. In other words, you are much more likely to have good work/life balance at a large tech company than at a high-growth startup. Individual examples to the contrary will obviously exist on both sides, but don't negate the reality of what the average employee is likely to see.

SkyPuncher• 6 years ago

Same here. I work at a startup with competitive pay and great work-life balance. I think people are becoming aware that startups should be treated like any other job (unless you're an early employee with significant equity).

pjmlp• 6 years ago

I have been at this for a while, reaching mid-40's, and the truth is while there are startups with life balance stories and corporations with unlimited overtime, the stereotypes really apply for the large majority of companies.

HelloNurse• 6 years ago

This article is about work/money balance and specifically money/money balance.

marcinzm3• 6 years ago

- Making a lot of money in salary.

Startups pay more in salary than non-tech non-finance companies do in total comp. Startups that are far enough along (pre-IPO Uber, Lyft, etc.) pay more than FAANG (the RSUs aren't liquid but you need to only wait a year or two).

trimbo2• 6 years ago

Uber employees who joined in 2015 actually saw their RSUs decrease in value by the time the lockup ended in 2019. 4 years of working at a pre-IPO unicorn for negative growth.

Heard this from multiple people but here's an article: https://www.financialsamurai.com/how-uber-employees-failed-t...

Swizec2• 6 years ago

Personally I like to work with startups because:

- they pay more than enough for my near-term financial goals

- the equity is ok

- they let me work on sidehustles

- I get to work on stuff that is truly make or break for the company, not some bullshit pet project a PM needs to get promoted

pb74• 6 years ago

Wouldn't it feel like it's a little bit bullshit if the company went out of business shortly after and all that work was for nothing? All of our work is so ephemeral.

lkbm2• 6 years ago

Main reason: it's more fun.

I could be a cog in a giant corporate machine, or I can have a measurable impact where I work.

I can stay in my lane and do my specific job tasks, or I can run around putting out fires and helping wherever help is needed.

I mindlessly build the specific design product handed me, or I can guide my own work in accordance to the needs of our customers and the business.

I can follow policy and fill out forms when making any decision, or I can just do what's right because who has time to write policies and look over approval forms?

tbf, tech is relatively good at a lot of these. As I understand it, Facebook gives a fair bit of latitude to engineers, and Google used to be famous for their 20% time. But the longer a company exists, and the bigger it gets, the more bureaucracy and controlling it'll get. Every big disaster means a new policy on how to prevent future disasters.

I think pg wrote an essay stating that the most valuable skill in an early startup employee is "helpfulness" (maybe not though -- cursory search didn't find it). You do what needs to be done.

This is roughly your "wear many hats" point, but more than just different technologies, and not just being new. If you just want to have a well-defined, steady, sane-every-day job, a startup is terrible. If you every want to say "that's my job", a start-up is terrible. If you're the sort of person people will come to for help with whatever comes up (and enjoy being that), start-ups can be great.

episteme• 6 years ago

I'm not sure you can say the startup impact is measurable either. You certainly can't measure it by monetary value.

Mindlessly building what is handed to you is a culture problem and not a company size problem. Some startups have less freedom than some corporations but both usually grant more freedom to more senior people.

You can still 'wear many hats' at some mega corps too, if the company only has 'engineer' as a title then you are expected to basically do 'everything' . The team you are on will decide what the balance is though.

I think all of what you said could apply to both sizes of the companies.

vlunkr• 6 years ago

Both of these comments make good points, but are two ends of a false dichotomy. Not every startup is going to have horrible work/life balance, and not every job at a big company is going to be boring and soul crushing. And there are all sorts of jobs in the middle and to the side of this spectrum.

bquinlan• 6 years ago

I could be a cog in a giant corporate machine, or I can have a measurable impact where I work.

I think that point can support working for either a big company or a small company depending on what type of impact you are looking for.

I've worked for startups in the past and have had a huge impact on the startup but almost no impact on the outside world because the startups just weren't tackling very visible problems.

Now I work for Google and I have basically zero impact on Google i.e. basically nothing that I can do will ever move the dial in terms of Google's revenue, etc. But I've worked on several projects that have had a big impact outside of Google. For example, I was on a small team (3 people) that developed the Python 2.7 runtime for App Engine (this was a while ago) and I was on another small team that implemented the server-side infrastructure for the Google Home. I also developed the screensaver for Chromecast - which is a tiny tiny project - but still millions of people love it.

ping_pong2• 6 years ago

It's a lot of fun until the company gets acquired and you get $80k for your 4 years of hard work, and the founders get $50M.

Source: happened to me with a YC startup.

moron4hire• 6 years ago

Everything you're talking about is really just small companies, not startups at all.

Go to work for an established, profitable, small company. Make a good salary and have a fulfilling career.

rpastuszak• 6 years ago

Main reason: it's more fun.

Agreed, although things can get much less fun once you end up burned out.

I think this Tweet does a decent job at describing the tradeoffs/challenges:

    > Typical designer mid-career crisis.
    > 
    > * You want to stay hands on
    > * You want a relaxed, low stress environment doing “meaningful work”
    > * You want to maximise your earning potential
    > 
    > The majority of roles you see force you to pick just two.

Source: https://twitter.com/andybudd/status/1204458288118714370

---

Minor digression: now, not all startups are completely hectic, option-fueled sweatshops. I'm talking about the default picture that comes to my mind when I hear this word. The most successful small startups I know are quite the opposite in fact. Well, I guess having an actual market, solving a real problem is important. (OK, "scale-ups" are the f*cking worst still as you end up with chaos and inability to get work done).

alecbenzer2• 6 years ago

Been at 2 series A/B startups for the past ~3.5 years. It was a really fun 3-6 months followed by 3 very not fun years.

My N is low, they were both non-Bay (NYC) startups, maybe some startups are fun, maybe I'm really bad at picking startups, but I think a startup's culture is often as much or more of a crapshoot than the startup's business.

Was at Google before, and it was fun for only a bit as well, but definitely not as actively non-fun as my last 3 years has been.

perl4ever• 6 years ago

If you're the sort of person people will come to for help with whatever comes up (and enjoy being that), start-ups can be great

That's kind of odd from my perspective, because that's exactly my niche, and yet, my very first job was at a startup (of about 3 people besides me), where I was a rapidly jettisoned cog, and every since I've gone to progressively bigger and more bureaucratic organizations while seeking, I guess, less definition of my role.

JumpCrisscross• 6 years ago

it's more fun

I recommend everyone spend some part of their career in a 1 to 20-person shop, a 20 to 200-person shop and a 2,000+ person shop. (I don’t have experience in 200 to 2,000.) They are vastly different work environments.

I thought I was a 1 to 20 guy; I’m not. I want enough structure to let me specialise without letting bureaucracy get in the way. Twenty to ~two hundred.

Start-ups are fun, but they’re also stressful. If you get unlucky, they can also leave you materially less wealthy than you could have been with more stability.

mac01021• 6 years ago

I worked as a software engineer for a large media company, outside of any tech hub.

I switched to working remotely for a San Francisco-based startup because they offered me a 30% raise over what my current employer was willing to pay.

Two years later, when working for the startup became less palatable, I went back to my old company. My manager there struggled with the HR dept as hard as they could and got them to just match my startup salary in order for me to come back.

Which I guess is just to say the parent comment is not universally correct.

znpy• 6 years ago

So far I stayed away from both startups and consulting companies (Accenture, NTT Data and similar) and it went fairly well.

One day I'll reconsider this choice, probably when I'll have a bit more of financial stability (read: bought a house and paid it in full) and can afford some more risk.

Most people seems to overlook the fact that most startups die within a year, and some more startups drag a long death march before dieing.

You might have fun or do crazy interesting things, but if the company goes bust it might not be pretty.

For the moment, I'll stay conservative about this kind of things.

johncolanduoni• 6 years ago

I mean, making a lot of money in salary is a very valid reason if they actually pay you a lot of money in salary (it does happen).

KorematsuFred• 6 years ago

I have learned this hard way.

biztos• 6 years ago

I've seen people hired into startups that just got their A-round and they made sub-FAANG market rate plus whatever crazy stock incentive they agreed to. And the exit strategy was usually acquisition by FAANG anyway.

So I would add as a valid reason:

- Startup will pay you as much as anyone else, and won't be boring.

Caveat: may only apply to early hires!

dinht• 6 years ago

Certainly you can get a considerable amount of salary, depending on your angle of working in a startup. In the recent career changes, I often look at 1-2 years old start-up where tech side has been rather stagnant. My angle is clear -> getting stuffs done, move the tech forward and make sure it is aligned with the company's direction

But this is not enough for founders to have a peace of mind regarding your commitment.

- If you have already built a reputation, then that's enough for you to argue for a market rate salary.

- Else you would need to trade for some equity.

What are you getting out of this compared to a corp job:

- The work is likely more interesting.

- Away from corporate landscape (if that's not your thing)

- Gaining experience in new domain, doing thing in new ways.

doopy1• 6 years ago

I work at a startup, not a co-founder, salary is not amazing, but pretty good - most I've ever made. Work life balance is also the best I've ever had. Just my data point.

sambroner• 6 years ago

Good read. I like the new story format to rehash the lively startup vs big tech employment debate on HN.

It could almost use a part 2 to explain aspects of the conversation (how is the employee making a $300k investment, preferred stock, etc), but I don't think anyone is missing the joke.

The story format makes it clear how employees are getting a worse deal than investors. Still, employees receive cash dividends every few weeks (a salary), isn't that a positive?

adoxyz• 6 years ago

A salary =/= dividends.

jdauriemma• 6 years ago

I think the major distinction between salary and dividends is that the latter requires no labor.

kilotaras• 6 years ago

Still, employees receive cash dividends every few weeks (a salary), isn't that a positive?

People are usually foregoing part of the salary in lieu of options. e.g. $25k paycut (really conservative compared to FAANG) will come up to $100k over 4 years.

One can consider those $100k as cost of options you get.

neltnerb• 6 years ago

The employees receive "cash dividends" that are typically lower than market rates for a salary plus the second they leave for a new job they will likely end up creatively shafted out of the difference in salary they effectively invested in good faith.

Because they're not working there anymore it's "demoralizing to others" if they retain the ownership that, again, they invested a part of their salary for in good faith. You've probably heard that one before.

It is absolutely outrageous to tell an employee that they're getting paid less in exchange for equity and then turn around and declare that the equity doesn't count the same as if they got paid market rates and just invested a portion of their salary.

PeterisP• 6 years ago

Quoting the original article, "If you’re taking a $X pay cut to join a startup, you’re really investing $X in them. Far be it from me to tell you how to spend your money, but make sure you’re happy with what you’re getting in return."

The appropriate consideration when working for most startups is not that you're getting a cash dividend, quite the opposite - it's equivalent to the startup withholding a significant amount from each paycheck, and "buying" options/stock/whatever with that withheld money - you honestly earned that money, but you're not getting cash but something else instead. Is that something else a good value for that money?

shehryarrr• 6 years ago

That 90-day expiry window is the most archaic bullshit. Can't come up with 200K cash? Too bad, and thanks for all that hard work and long hours you put in.

virgilp• 6 years ago

Another thing that may be hard to understand for non-US citizens. For me, exercising options costs me just that, the option price + bank fees; I owe no tax. I have to pay full tax when & if I sell the shares. This seems like a much fairer taxation regime - I pay tax when I earn something - just having un-sellable shares didn't suddenly increase my wealth.

With this, it actually makes sense to exercise options and stay employed at the startup: you now may not be qualified as a short-term seller when you sell the stock, since you held on to it for a while.

jagged-chisel2• 6 years ago

One should exercise at the earliest possible convenience. If I'd exercised on day 1 when I joined a startup, I wouldn't have owed tax because I wasn't getting a discount, but a locked-in price. So when I exercised after the value increased, I then owed tax.

I've seen it suggested that one should exercise on day 1. But that doesn't have to mean you pay for them immediately (after all, you don't get to keep them immediately - you have to wait for vesting...), so you work out a payment plan with deductions every paycheck so that you've pay fully for whatever is vested at the time it vests.

kentonv4• 6 years ago

FWIW it's rooted in US tax law. Unexercised Incentive Stock Options (ISOs) are required to expire 90 days after an employee leaves.

The way some companies get around it is that, after 90 days, they replace the expired ISOs with nonstatutory stock options which, as their name implies, are not recognized by the tax code. Tax code is complicated but NSOs are ultimately worth maybe 10%-20% less than "equivalent" ISOs.

But, at least until recently, there wasn't standard paperwork for doing this, so the only companies that did it were those willing to innovate on their stock plan. I think a lot of founders weren't trying to screw their employees, but their lawyers weren't comfortable going off the beaten path.

But I think that excuse is fading now. Enough companies have done it to provide precedent.

My circa-2015 startup looked at this and fretted a bit but ultimately sidestepped the problem by giving everyone restricted stock instead of options. That's only really possible at the very early stages when the 409(a) valuation is nearly zero. But for anyone joining a seed-stage startup today, that's what I strongly recommend: Ask for restricted stock, and if the purchase cost is non-zero, ask them to comp you for it as a signing bonus (which is "free" for them since they're buying the stock from themselves). You'll have to pay income tax on the value but that should be pretty small (maybe you can even get the company to "gross it up", but that's real dollars for them). Then you'll never have to worry about exercising stock options or paying AMT. Don't forget to file your 83(b) election within 30 days.

ipnon• 6 years ago

Is there a website that contains all of this information in one place? Could any founder be expected to know about the 409(a) and 83(b) without a lawyer?

chris11• 6 years ago

NSOs are ultimately worth maybe 10%-20% less than "equivalent" ISOs

I'm at a company that gives NSOs. Can you explain what you mean when you say that NSOs are worth less than ISOs?

nautilus12• 6 years ago

This hits me right in the tendies. How many times have I had this conversation to no avail

mdnahas• 6 years ago

I think I had this conversation word-for-word with one company. I told the CEO my salary demand and he could pay me in cash or in stock at the previous valuation (which had happened a week earlier, so I knew the price and that they had cash). He just kept blowing smoke at me. I decided I couldn't work for someone who lied to me (or, perhaps, believed his own BS?).

brd5292• 6 years ago

Bravo bravo bravo! This piece neatly encapsulates all the problems with ISOs. The biggest one is mentioned at the beginning - information asymmetry. I don’t really understand why most companies, especially small ones less than 100 people, can’t be transparent about their cap table with employees.

I do think the culture around 90 day exercise Windows is changing. Here is a list of companies with extended windows [1]. At this point I would never join a company with 90 day windows.

[1] https://github.com/holman/extended-exercise-windows

alecbenzer2• 6 years ago

AFAIK the 90 day thing was more of a legal thing than something the companies themselves wanted to enforce?

brd5292• 6 years ago

It's true that a company can't issue ISOs if the termination window is more than 90 days, they have to be NSOs instead. IMO the downside of the NSOs (pay tax immediately upon exercise instead of at next year's tax deadline - ISOs don't actually change the amount of tax that is due, just the timing of when you pay it) is small compared to the very real risk that your options will go poof if you don't have the cash to exercise and pay tax if there is a termination event.

C1sc0cat3• 6 years ago

The UK is much better in this regard as the HMRC has rules for approved option schemes - I have EMI shares in my current employer

rsanek2• 6 years ago

No, by law ISOs just convert to NSOs at 90 days. Startups themselves decided to expire them, there is nothing preventing them simply allowing them to change. You get worse tax treatment, of course, but at least you get to retain the ability to participate in the upside.

seibelj5• 6 years ago

I missed over $1 million in options when one of my former companies was acquired. I still made good money but nowhere near the same. I was pretty sure it was going to sell, but I didn't know how long it would take (over 1 year for sure) and nothing in life is guaranteed.

If I had exercised all the options I would have had over $300k in paper gains for a tax bill. Instead I exercised 10% of what I had the ability to exercise. This is one major reason I will never work at a startup again unless I am the cofounder.

sky_rw2• 6 years ago

Depending on the size of the startup at the time you join, I found it fairly easy to negotiate an extension to the exercise window. Likely because so few people even bring it up.

seibelj5• 6 years ago

There was 0% chance of that occurring as the CEO was a total shark. You would be shocked at how much of the cap table he retained vs. all the crazy funding shenanigans that happened. Very astute player of the game, he did very well. I will invest in his future companies but never work for him again.

cs-szazz6• 6 years ago

I joined very early (~15 people total at the company) and have been unsuccessful negotiating an increase. I guess the lawyers have to get involved, board has to sign off, and that's tough. Or at least, that's what I've been told.

jacquesm• 6 years ago

Beware of the 'almost a co-founder' trap where the company is already incorporated and you join 48 hours later and find yourself with 1% instead of 25% and the three MBA types that are now CEO, CFO and COO tell you that those are founder shares too.

This still happens way too often to tech people. Another way in which that can be arranged is that everybody puts some money in relative to your inability to do so as well.

Putting $10K of your own money or not in at the beginning of a start-up should not have a 90% discrepancy in share allocation as a result.

technofiend• 6 years ago

I'm surprised a secondary market hasn't sprung up that lets you cash out options and pay the taxes via a margin loan of some kind. I guess the risk is too high that the options will end up worthless.

dlubarov• 6 years ago

There are some companies that facilitate this, like EquityZen and Forge Global. It seems to be a legal gray area, since the options are legally non-transferable, so creatively structured contracts are used in an attempt to work around that.

readams• 6 years ago

Don't forget: Even if they are a unicorn, they won't IPO for 15 years and you'll be trapped because you can't afford the taxes to leave the company. Imagine working for Palantir.

zebrafish• 6 years ago

Isn't this capitalism? Labor and capital are two different factors of production. If you're willing to take the pay cut and risk associated w/ joining a startup, but are unhappy with the returns, why wouldn't you just keep your job, invest the $100,000, and get access to the preferential terms given to capital?

ahelwer2• 6 years ago

Good luck investing in private companies with $100k. The only way us serfs can get access to those opportunities is to chain our futures to the company and go work for them. Also means we can't diversify our portfolio like the VCs can.

C1sc0cat3• 6 years ago

Are there no listed PE funds

icedchai5• 6 years ago

You can diversify by investing in public markets, where you have actual liquidity. I've made more off of the Facebook stock I bought after the IPO than I have from any of the startups I worked for. One did have a "successful" exit, meaning the returns were positive, though nothing to write home about. I would've been better investing that money into Apple or AMD. All the people complaining about their worthless stock options need to realize that generally, the investors all got screwed, too.

StreamBright2• 6 years ago

It would be classical free market capitalism if anybody with any money could be investing in anything. This is not the case in the US where you need to qualify as an investor prior of being able to invest in startups or companies.

yourapostasy• 6 years ago

It is possible to form Reg D 506 (d) or (b) syndicates with up to 35 non-accredited investors for example, but risks and costs pretty much steer most offerings towards only accredited investors. The costs of sustaining the deal flow and associated compliance to work with 100 non-accredited investors who stump up the same amount as 1-10 accredited investors, plus the increased legal risks, make it very financially unattractive to cater to non-accredited investors.

This is the "no one comes away happy" outcome of bad actors on both sides of the desk in the past.

motohagiography• 6 years ago

This is perfect.

I looked at working for startups as though I were an investor, because while an investor is putting maybe 1/30th of their fund into a company, I'm putting %100 of my time into it and it will be my sole source of income and wealth, which means I have way more to lose as an employee than someone who YOLO'd a few million of hedged, other people's money into it. As an employee, my risk/reward has fixed upside (+lottery tickets) and an asymmetric downside that includes opportunity cost.

Most people are just doing jobs, and that's how they manage, but money is made in direct inverse proportion to how much physical work you do. If you are doing work, you are rarely providing as much value as someone delivering just the value of yours and others' work. Arguably, the most value is provided by people who do the breadth-first search for opportunities than the depth-first search for technical "solution" leverage. A company needs both, but as the post implies, figure out if you would invest in a company before deciding to work for them.

StreamBright2• 6 years ago

Some of these problems are coming from the reason that many of the startups are unicorns, with other words pyramid schemes.

https://www.forbes.com/sites/forbescommunicationscouncil/201...

https://www.linkedin.com/pulse/how-tech-startups-behaving-ne...

colinrand• 6 years ago

A few things I have noticed missing from discussion of why/why not to join a start up is prestige and lineage. Early engineers from start ups that get traction carry an aura of prestige (warranted or not is a separate question) that they were witness to 'something special' that happened.

Second is lineage. Like it or not, cohorts of engineers often stick together and create informal networks that help populate their careers with better opportunities in the future. Going through the crucible with a team is a great way to form bonds that can last decades.

dpeck• 6 years ago

The first part I’d say is even less likely than a big payout. That is only going to be true if it’s at a very well known consumer brand or just within a very specific niche

bjornsing• 6 years ago

This is the first “employee perspective” criticism of equity incentives I’ve read that makes perfect sense. Hat off for that! :)

Sadly in the country where I’ve founded startups (Sweden) the government mandates that the terms must be really shitty, or there are immediate tax consequences that somebody has to swallow.

C1sc0cat3• 6 years ago

Strange Sweden has a strong private investor culture possibly employees should be lobbying for a change in the law.

goatherders2• 6 years ago

I was employee ~150 at a company that essentially had it's exit event with a massive GE investment a couple years ago. DUring that investment, employees were required to sell their stock/options. To the credit of the VP who hired me, the result was exactly as he had told me: "when this company has it's event, you'll likely get enough off your options to put the kids through college or for a big down payment on a really nice house. But the only people who will sniff 7 figure paydays are the VP/C-suite and the only person getting rich(er) is the CTO/founder."

mdorazio3• 6 years ago

Always absent in these kinds of essays/posts is the reason why startups are able to get away with this. If it didn't work, obviously the options games would have stopped a long time ago. A lot of people don't want to admit that there's a small army of young, naive employees who are enamored with startups and are perfectly willing to sign up for below-market salary and extremely unfavorable options terms in exchange for "the startup experience". And importantly, this small army is constantly renewing itself. Repeatedly bringing up how much the game is rigged doesn't really do much to change anything.

qntty• 6 years ago

It's also possible to pass laws that protect employees

VRay• 6 years ago

Repeatedly bringing up how much the game is rigged doesn't really do much to change anything.

Au contraire! I stumbled across one of these semi-monthly kludgeposts with a comment section full of angry people early in my career, and it helped me avoid getting mired in any bad startup situations.

I think that getting the word out about this stuff is one of the best things we can do, since it'd be really hard to try and legislate this problem away

a13n6• 6 years ago

Options aren't a game. They're preferable to employees, for tax reasons. If startups gave employees shares, then employees would have to pay taxes on those shares, even though they're illiquid - so you're paying taxes on something you can't even sell!

Options solve this problem well, by delaying the tax burden until the equity is actually worth something. If it ends up worth nothing, you don't exercise your options and you don't pay any taxes.

actuator6• 6 years ago

I doubt that's the reason. Like some FAANGs do with stocks, can't you always deduct a part of RSUs as tax liability and add the remaining into the employee's account?

mdorazio3• 6 years ago

Counterpoint: options are a game when the alternative is not shares, but more actual salary.

jacques_chester• 6 years ago

If startups gave employees shares, then employees would have to pay taxes on those shares, even though they're illiquid - so you're paying taxes on something you can't even sell!

Executives get gross-ups, so the tax thing is basically a smokescreen.

rdlecler1• 6 years ago

As an investor I don’t ever recall getting a paycheck from a company.

pb74• 6 years ago

How many hours of work do you do for each company you invest in?

cs-szazz6• 6 years ago

This hits home. I'm a fairly early employee at a unicorn, with no exit in sight. I've talked to the cofounders about extending my exercise window, and got the response of "We can probably do that when the time comes". Of course if that turns out to not be the case, well then I'm now stuck leaving behind a huge portion of my equity to cover the taxes, assuming I can sell to cover.

Love that this seems to be getting more popular, hope it becomes the norm for companies in the future.

chii2• 6 years ago

Options being dangled in front of employees to trick them (only later to find out they can't afford to exercise it) is infuriating - it's almost fraud imo.

cs-szazz6• 6 years ago

100% agree. I'm in the low 7-figures right now (on paper), and will probably be mid-7 with the next round of funding. So I have 0 chance of affording the taxes if I wanted to leave, and am kind of at the whim of the board if they want to extend my window.

It's not a great feeling, especially when you contributed a lot to the company at a very early stage. I am glad there's companies popping up to help with this problem, like ESO Fund, but in my opinion the companies should be trying to fix this instead.

steindavidb• 6 years ago

Hi cs-szazz. I remember being in your situation; it's frustrating because you can't Google for answers. Here is advice I was given when in a similar situation.

- Find the other people at the company in your situation (size of grant, type of options). Share your learnings with each other. Consider getting professional advice, the Bay is full of attorneys and CPAs for whom this is a familiar situation.

- If you're at a unicorn, you probably have co-workers who are veterans of other unicorns and have been through this before. Ask them for advice (or an introduction to their source of professional advice)

- As a group, consider asking your board to arrange a limited second market sale to cover exercise costs and taxes. Many institutional investors are happy to buy a little extra stock, especially if it helps with keeping senior staff happy and focused on the right things.

- If you're going to be doing anything involving stock without board approval (like trying to build some kind off house-of-cards, pseudo-legal collateral package for a loan shark) you really need to hire an attorney.

- if you only have options, you might not be a shareholder. Your rights and access to information might be different once you've exercised a share.

- You can't extend the 90 day exercise window on ISOs, that's a federal law thing. The company can convert to NSOs to extend the window, but the setup for that conversion is complicated and expensive.

cs-szazz6• 6 years ago

I think you hit the nail on the head, it's frustrating because there's no clear answers, very little resources on the topic.

I'm actually in Canada, so I'm not sure on the ISO -> NSO distinction.

I do think your advice about coworkers is good though, I know of a couple other early employees in my position (similar grant sizes, also unable to afford to fully exercise). I've often considered what would happen if all of us decided to push for an extended window (and convert to NSO's)

As for the secondary, I don't actually want to sell. I want the ability to wait until there's liquidity to sell, and do it on my terms. Selling now significantly reduces future upside. What I'm really trying to avoid is getting stuck at one company because I can't afford to leave in the future.

I do appreciate your advice though, always good to chat with someone who's been in a similar situation!

nostrademons• 6 years ago

So founders do treat some of their investors like this - look at every ICO, and a lot of dumb overseas money, and a good number of friends/family/fools rounds. And conversely, there are some employees that they treat with kid gloves, who basically get the investor treatment. Look at executive hires.

The difference is basically two letters: "No". Most institutional investors have the ability and inclination to say no to a deal. Many executives - or even high-level FAANG engineers - have the ability and inclination to say no to a deal. Your average engineer a couple years out of college does not, or if they do, they don't understand the power of declining a job offer. Start your negotiations with "no". Be curious and open to opportunities, and show a lot of enthusiasm during the interview process, but whenever you feel you're treated unfairly, walk away. People will stop treating you unfairly.

smattiso2• 6 years ago

The problem is that some people need money and can't say no. That's why anybody works for minimum wage...

The executives and investors and FAANG engineers have all made good money and seen decent RSU terms, you can't pull the wool over their eyes. Someone who is just getting into tech may be allured by a 50k salary and "1 MILLION OPTIONS!!!!" (There are ten trillion in the option pool).

I think engineers would do well to know that you are a COST CENTER to the business and the people who run it. They need you to make their product so they can make money but they hire you begrudgingly. You are in their power and they want to take advantage of you by paying you the least they can (shady options awards) and working you as much as possible (why did you slip on this feature you story pointed!!!).

Put yourselves in their shoes and you would do the same. Starting a successful business is all about customer growth and making money. If you aren't directly responsible for a part of that then you are a cost. Make sure you are getting paid what you are worth because nothing in this world gets built without great engineers, but the system is run by people who want to have power over you. Be careful.

chii2• 6 years ago

The problem is that some people need money and can't say no.

If they need money, and this is the best offer they got, then what's the problem with accepting it? They are still better off than not accepting it.

xur17• 6 years ago

Someone who is just getting into tech may be allured by a 50k salary and "1 MILLION OPTIONS!!!!"

This reminds me of a job offer from a startup I interviewed with that offered me a specific number of options, but wouldn't tell me anything that I could use to value them, effectively forcing me to value them at $0.

lumost• 6 years ago

I've seen startups willingly train their new employees to think about equity in broken or meaningless terms. Early in my career I sat through a discussion of equity with a VP of engineering where they explained that our options would always be priced ~$4 on acquisition and $12 on IPO. The finance people would always just make it work that way regardless of the number of options in the pool and the total valuation.

I also once joined a company to be told 3 months in that the board was not approving any new-hire grants as the valuation/appraisal work had expired - and that it wasn't reasonable for me to ask them to pay 90k just to approve the options they had granted.

At this point in my career having worked in FAANG, I wouldn't value private equity at all unless I could take 20-50% of the company. It's not even a lottery ticket anymore, and has just become a way for executives to exploit information asymmetry.

I'd be curious if any startups have explored venture debt arrangements with employees to guarantee that they receive meaningful deferred compensation. Or if there are other mechanisms to publicly show that the equity is meaningful in most successful outcomes.

mooreds2• 6 years ago

I think engineers would do well to know that you are a COST CENTER to the business and the people who run it. They need you to make their product so they can make money but they hire you begrudgingly.

I don't agree. Engineers are sometimes a cost center, but they can also be a profit center. You can help revenue by decreasing expenses by automating something or noticing how the business is wasting money w/r/t tech and taking steps to help fix that.

You can also help revenue by increasing sales by building something, internal or external, that can either be sold or help sales.

But your larger point is correct. When you are starting at a company, know how your efforts are connected to revenue and sales. If your interviewer can't answer how they will be, find someone who can.

I wrote a bit more about understanding the business here: https://letterstoanewdeveloper.com/2018/10/12/understand-the...

vinay_ys• 6 years ago

Engineers consume capital that was raised to produce highly valuable products that create enterprise value that justify the capital that was raised. Those who call engineers as cost centers in today's world are doomed because they don't understand what's the most value creating activity in their value chain.

owenmarshall• 6 years ago

Knowing your BATNA is critical for negotiating anything, including employment.

One of the best ways to accomplish this is to avoid shopping for a job when you’re unhappy with the one you have; when your best alternative is “I keep working at the place I like with the people I’m on good terms with” it’s far easier to start from that no and let yourself be convinced.

quickthrower22• 6 years ago

You can always bluff. I don’t think people do this enough! I mean a shit job is still a BATNA, and you simply don’t tell the next guy you hate the job. Which is as good as you loving your job and “just dipping my toe in the market” from a negotiation point of view.

richardbrevig2• 6 years ago

BATNA

Best alternative to a negotiated agreement [1]

[1] https://en.wikipedia.org/wiki/Best_alternative_to_a_negotiat...

rurp• 6 years ago

avoid shopping for a job when you’re unhappy with the one you have.

The problem with this is that bad jobs don't often turn into good jobs, so job hunting under those circumstances is usually the best option. I do agree that it's worthwhile to actively look for other jobs even when you're happy with your current one.

ashtonkem2• 6 years ago

I think you’ve got cause and effect a bit backwards.

whenever you feel you’re treated unfairly, walk away. People will stop treating you unfairly.

Walking away from a bad deal certainly prevents you from being taken advantage of in that moment, but it will do nothing to prevent the next company who knows nothing about you from trying to hoodwink you again. While the ability to say no to a bum deal is important, it’s no substitute for actual leverage in these situations.

Executives and highly valued FAANG engineers have more leverage not because they say “no”, they have more leverage because both parties know they can say no, and they’re valued enough for that no to hurt. The startup needs not just an engineer, but that specific one. The threat of a “no” those with leverage gets far more results than from someone without it.

pc86• 6 years ago

but it will do nothing to prevent the next company who knows nothing about you from trying to hoodwink you again

But what it does means is you won't leave until you get a good deal. And when's the last time someone left a good deal for a bad one?

vmception3• 6 years ago

ICOs aren’t investments, they are consumer products, sold into a hot consumer market where the consumers want to flip them. But where the consumers don’t actually know they are consumers.

This isn’t semantics, token sales are counted for as revenue.

Yes, its too bad that there is a colloquial action called “invest” and a legal term called “investor”

H8crilA• 6 years ago

This isn’t semantics, token sales are counted for as revenue.

This is obvious when you think about it for a second, but also - lol. ICOs created a capital structure level that's completely outside of the capital structure :)

wtracy2• 6 years ago

In these situations, I think it's meaningful to differentiate between "investors" and "speculators".

sharklazer• 6 years ago

Founder: Sure. We’re looking for a $100,000 commitment, and in return, you would be getting 0.1% of the company.

Founder: Sure. We’re looking for a $100,000 commitment, and in return, you would be getting 0.1% of the company on top of $100,000 in pay.

FTFY

tylerhou• 6 years ago

No, the $100,000 commitment represents the opportunity cost compared to a higher paying job.

That is, if the distinction is between:

1) $150,000 + 0.1%, or

2) $250,000

Picking (1) would equal trading $100,000 for 0.1%.

madamelic• 6 years ago

0.1% on top of $60,000 in pay.

Or if you are lucky to join later, 0.01% on top of $100,000.

blobbers• 6 years ago

This is so true, and incredibly frustrating. I joined a start up as the first employee, and the amount of equity they gave me was ridiculous. I got blinded by the notion of them raising a large amount of money and hiring at a rapid pace; the reality was they failed to raise an A round, then diluted employees despite giving a better valuation for their seed "friends and family" round.

When confronted just talked about how that was the business. Was super frustrating. Once I realized how the CEO operated, I left. I waited for my 1 year cliff though.

borski• 6 years ago

Early exercise and ISOs fix a lot of these problems.

codingdave• 6 years ago

The last time I got hired into a startup with options, they didn't tell me what percentage of equity the options represented, they just said, "You get 50K." I didn't even ask for any more details because their choice to give numbers instead of a meaningful metric made me think to myself, "OK, so I'm deciding whether to take this based solely on salary, and anything else is just a future bonus, not a deciding factor." I did take the job, but never banked on the options.

To me, failing to give you all the information isn't a deal-killer on a potential job. But it should flavor your approach to the job, and help you decide exactly how committed you are to the work.

rosywoozlechan• 6 years ago

I never even think about options. They're a non-factor when deciding to work at a startup or any company. I don't even know why they bother to give them out. As an alternative to tiny options they could opt to give people a bonus on acquisition or IPO or find some other incentive to keep talent. I'm honestly more interested in 401k contributions.

laser2• 6 years ago

I think startups would have a lot easier time recruiting great people if they offered Stock Appreciation Rights [1] instead of typical options. I didn’t even know SARs existed, they’re so non-standard in the startup industry, until as a founder considering an open-ended hiring offer for the first time I desperately looked for some legal upside compensation system that wouldn’t screw me in all likely scenarios. Stock would mean tax bill upfront with high chance of failure. Options would likely expire before I could securely exercise and liquidate to cover costs.

I ultimately decided to stay the founder course, but glad to have found what I think is an acceptable compensation structure. Even if requiring it adds friction to deals until docs are standardized, at least people should know it’s an option. I’d be curious to understand if anyone has found a downside, except to the investors that build these anti-employee systems to arbitrage on knowledge asymmetry.

[1] https://en.m.wikipedia.org/wiki/Stock_appreciation_right

a13n6• 6 years ago

One downside here is that SARs are taxed as ordinary income. This means you might end up paying 30-50% taxes instead of the 15-20% long term capital gains rate you'd pay on ISOs, RSUs, or selling shares from exercised NSOs.

foobiekr• 6 years ago

Also, I don't think there's a secondary market option for SARs or similar.

olliej• 6 years ago

yuuuup.

This is the reason I won't work for startups. If you want me to take a below market rate job then I'm an investor, and you can treat me as such.

I would argue early employees are investing much more, $ for $ than any VC.

yalogin• 6 years ago

Are these terms for stock any different for even the first 20-30 employees? Or are they also get the same terms? Why do people say being the first 20-30 employees in a start up is good?

cybersol• 6 years ago

The terms are often the same, but the percentage is more like 1% than 0.1%. Also the easy way up the management chain is to be a warm body in a rapidly growing company.

fredgrott• 6 years ago

I ran into this example recently by some startup in Las Vegas, job said junior flutter dev at $80k plus corp apt paid oh BUT no relocation expenses paid you have to move out their with just your clothes on your back and yet they are still looking past their Aug 1 deadline because they thing they will find a senior flutter dev on those terms..

wskinner3• 6 years ago

For those in the comments who are confused about how various equity compensation schemes work, the best guide I'm aware of is https://www.holloway.com/g/equity-compensation/about. It covers all the common types - RSUs, NSOs, ISOs, 83b elections, and more.

htrp• 6 years ago

This is a great resource.

Only annoying thing is the constant prompt to login with your social accounts.

rexreed2• 6 years ago

The oft-cited quote is that it's very, very, very rare to make money working as an employee at a Startup. The farther you are away from the founding team, the harder it is. And 99 times out of a 100 even the founding team doesn't make anything, if there's an upside exit at all.

If you want to work at a startup as a non-founder employee, go into it knowing that you're taking the risk and getting little of the potential upside reward. If the pay is good and you like the company and the work, then do it. But any stock options will be mostly meaningless.

I wish Founders would just let Employees participate in seed stage financing and be in with the same terms as early investors if the employees want to truly risk it.

Shorel• 6 years ago

Your last sentence is key. I think it was a way of financing enterprises some centuries ago. Why is it no longer accepted?

rexreed2• 6 years ago

Yes it's a curiosity.

I mean it makes sense. Let's say your salary would be $120k plus $30k in stock. Rather than giving you stock as options, you could just be given that stock as equivalent value (subject to a vesting schedule) and on the same terms of the Seed Round. No money out of pocket... am I missing something?

eximius2• 6 years ago

This thread has reminded me of a concept (whose term I am struggling and failing to remember) that is as important, if not more, than what is traditionally thought of as the cap table.

In the case of a sale, investors with <this term> would get their money back (possibly at an inflated ratio) before the rest of the money from the sale is distributed via equity.

This is important because it means that even if you get favorable stock terms, you might still be screwed (or at least disadvantaged) if there is no money left after this money is paid out.

Can anyone remind me of the term?

amsilprotag• 6 years ago

Preferred stock? Priority?

plasma• 6 years ago

Liquidation preference

eximius2• 6 years ago

Ah, yes, I think it was this. The startup I left had unfavorable liquidation preference seniority for employees (standard) but most of the investors had a liquidation multiplier.

https://angel.co/blog/liquidation-preference-your-equity-cou...

xondono• 6 years ago

Seniority?

jbay808• 6 years ago

I believe those are the "preferred shares" that the founder in the article declined to offer to the investor protagonist.

a13n6• 6 years ago

It's interesting that this post is falling off the front page so quickly. At the time of writing it has 537 points and is 8 hours old. There are many above it with much fewer points, that are much older (eg. 127 points, 12 hours).

It makes me wonder if YC intentionally penalizes posts like these, because ideas like these make it harder for their portfolio companies to hire employees.

pyrophane• 6 years ago

I believe it penalizes articles that have a large number of comments relative to votes.

laser2• 6 years ago

That doesn't hold explanatory power in this case, look at the points, comments, and age. For "Modeling a Wealth Tax", "Canon's Cloud..." and "If founders treated...": https://www.dropbox.com/s/vk1i2q8mlbs5x2s/Screen%20Shot%2020...

I'm also suspicious, although most suspect as sibling comment to yours suggests, that it's likely something automated rather than malicious. Perhaps there's too few comments?

kevinskii• 6 years ago

It's a good question, but Sam Altman has written about the need to compensate startup employees more fairly (see the link at the bottom of the article). Also, these types of "startup equity is worthless" articles tend to pop up frequently on HN, where they often linger on the front page for hours and generate the same discussions in the comments.

If this article is being penalized at all, that's probably the reason. HN generally penalizes articles about recurring topics. I suspect YC realizes it's in their best interest for their portfolio companies to be fair and transparent in their equity offers.

TedShiller2• 6 years ago

Well, employees are not investors, even if the author is implying that they should be the same, or should be treated the same. Employment contracts are at-will, nobody is forced to agree to compensation.

Of course, if the compensation is horrendously unfair, the top talent will not accept it.

ClumsyPilot• 6 years ago

Employment contracts are at-will, nobody is forced

What is the point you are making here, other than stating the obvious? It's the same for investment, what am I missing?

TedShiller2• 6 years ago

The point was that it's a free market, like it or not. Companies won't treat investors the same as employees. They never have. If they do, let me know.

faithfulcat• 6 years ago

I have a question on this. I am employed in a startup since the last 3 years. I already have 100k shares vested (5 year window, 3 years passed). I can buy them at a low strike price (<$100 for all shares). However, I think that when I buy the options, I'll have to pay the tax on the amount?

What happens if I don't pay the tax but just buy the options? Will I lose my options because I haven't paid the tax?

bialczabub• 6 years ago

In the US, any stock held past December 31 of the year in which it was obtained by exerciing an ISO (the most common kind of startup option) generates "income" according to the Alternative Minimum Tax (AMT).

AMT is essentially a completely different taxation system that runs in parallel to regular income tax in America. If the shares you exercise are worth a good amount, you will probably wind up paying AMT, especially if you live in a place with high state and local taxes.

After calculating your tax liability for both systems, you have to pay whichever is larger of regular income tax or AMT. Usually this payment, or part of it, comes due April 15th of the next year. Your company is not involved in your reporting and paying these taxes, but it's a federal crime to either misrepresent your income (which omitting the exercise from your filing would be) or not to pay the appropriate taxes.

If you haven't realized yet, a lot of this is complicated, so do your own due dilligence and/or work with a tax professional.

The AMT tax rate is 26% or 28%. The "income" considered by AMT for exercising and holding is equal to the difference between your strike price and the fair market value (FMV) of the stock on the day you exercised. FMV is based on a 409a valuation for companies that are still private. For public companies it's the market price for the stock on that day.

I'm not sure what you mean by your having "a low strike price (<$100 for all shares). For 100k shares, a strike price of $0.001 would cost $100 to exercise 100k shares.

To make the math easy, I'll give a hyptothetical...

You have 100k vested shares with a strike price of $0.10. The company has done well for the past 3 years and now has a FMV of $3.10 per share. To exercise 100k shares, you would need to pay $10k. However, if you're still holding these shares on 1/1/2021, you will have an AMT tax liability due 4/15/2021 of ~28% * ($3.10 - $0.10) * 100k = $84k.

Now it's weird how AMT works, so the above number isn't exactly what you wind up paying, but it's close. In general, the case stated above implies you would owe a sizeable amount in taxes if you exercised and held the stock.

People do this if they're leaving a company and their options will otherwise expire, or if they strongly believe the company will IPO or be acquired soon. Exercising starts a clock on the stock you're holding. If you hold the stock for a year after you exercise, your earnings will then only be taxed at the long term capital gains rate (probably 20%) rather than the ordinary income tax rate (usually higher than 20%). Earnings are the sale price minus the strike price (what you paid to acquire the stock or your "cost basis").

The downside of exercising now is 1) you have to pay cash to exercise, 2) you will generate a tax liability without necessarily having a way to sell your stock, and 3) if the price of the stock falls, the AMT you paid winds up being an even greater percent of the value. There is a way to receive credit on future tax bills for previously paid AMT tax that wound up like this, but it's complicated and best to be avoided.

The upside is mostly to obtain the a lower tax rate on the eventual sale. Most employees still with the company who didn't exercise their stock early don't exercise it until they plan to sell it.

If founders treated their investors the same way they treated their employees

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