How to deal with my startup stock options?

https://news.ycombinator.com/item?id=29599566

by gretzkyoil • 5 years ago

6 2 5 years ago

news.ycombinator.com

I started at a small but growing startup about 8 months ago. I know that equity was in my contract and I hit my "vesting cliff" soon. The trouble is, I don't really know what all of this means.

I left equity at my old startup job because I'm not even sure what it means much less how to cash out on it. We hear so much about startup equity and how it can be "life-changing". Is this ever really possible? Do most startup employees leave their equity on the table?

enigmatic02• 5 years ago

You're not alone, a lot of people don't understand the contract they sign (myself included). The first thing to know is that the contract isn't designed with you in mind. It protects the company by default. There are companies like secfi (https://www.secfi.com/) etc. that specialize in answering questions and have lots of free content

As for whether it can be "life-changing", yes. I know a number of people who are liquid/paper multimillionaires from startup equity. It's one of the few ways to build a ton of wealth. Hard to get this rich on salary alone

TLDR on equity is try to get a 10-year exercise window so if you leave the company before a liquidity event, you're not forced to come up with a ton of cash to buy them out or give them up: https://www.productlessons.xyz/article/how-stock-options-for...

Nearly all employees leave equity on table by virtue of not staying for 4 years, but many more simply can't afford to exercise which is far more disappointing

tedmiston• 5 years ago

Here are some short answers:

- The cliff is when you begin to actually own your stock options.

- You (typically) need a liquidity event e.g., an acquisition or IPO or similar in order to actually sell your options, so even though you will own them soon, you (typically) cannot actually decide when to realize the benefit of selling them.

- I say typically above because it completely depends on your company's equity agreement, and the details vary quite a bit from one to the next.

- You can value the equity and determine the price per share you would need for it to hit by knowing a total valuation of the company and what percentage of it you own on a fully diluted basis.

- Whether that amount is life-changing or not is fairly unique to the individual, but of actually getting to that stage is pretty uncommon unless you are either a founder or otherwise own a significant percentage of the company.

- It's difficult to generalize about what most people do with respect to choosing to exercise when they leave a company because: (1) every situation is unique, and (2) the data is very private. You can imagine that a very high percentage of startups fail, so you essentially have to place a bet on whether you think your startup will succeed or fail, and if they do succeed, will they do significantly enough to provide a meaningful return against your cost. There are also tax consequences associated with the timing of exercising.

This guide from Holloway is an excellent canonical reference on startup equity compensation compiled from many, many experienced people in tech. Well worth the $25. You may be able to find a promo code etc to make it even cheaper, but what you're asking are all common questions that are well addressed in it.

https://www.holloway.com/g/equity-compensation/about

I don't know of an equally high quality open source repository of knowledge or I would point you there as well, but I do highly recommend the guide and think the value it provides is far beyond its price point.

How to deal with my startup stock options?

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