7 ms·

If you have startup stock options, check your option plan

252 points by alexdevkar 12y ago

joshkpeterson 12y ago
Ideally before you accept the offer :)
- efuquen 12y ago
  True, but in the current hiring climate and if you're still at an early stage you should definitely still have leverage.
  - chrisabrams 12y ago
    Yes, if the company is early stage, then nothing should be out of the question.
deleted 12y ago
[deleted]
bluehex 12y ago
Another thing to understand (and this will sound obvious to many of you) is that your options may be worth nothing, even after a multi-million dollar acquisition if there are priority stock holders (the investors) ahead of you in line. As a young and naive engineer I learned of this fact the day the first startup I worked for was acquired. First I read the big number that was to be paid for the company, was ecstatic, and immediately starting doing "x-million times half a percent" in my head followed by a sinking feeling as I read the clause stating that common stock holders would get $0. In retrospect it sounds obvious that if the company sells for less than the money the investors put in, your x percent is worth nothing. But it's easy to get carried away thinking you actually own a percent of the company, and that a sale means a pay day for you. Don't let the first word of acquisition get you too excited, the come down sucks.
- sxp 12y ago
  The segregation between common and priority stock can be painful. I learned about it the hard way after I left the startup and paid money to exercise the vested options. When the company was acquired, all the common stock was worthless (but the execs with voting power got millions of dollars of bonuses so they didn't care) which meant I had lost the money required to exercise the options. What annoyed me more than the couple $K I lost from the options was the opportunity cost of not leaving the job earlier. Like all startups, the company paid below average wages (since startups pay a significant proportion of compensation in the form of options) so if I left earlier, I would have gotten a large pay bump from having joined a non-startup that paid a normal salary.
  - prostoalex 12y ago
    Another trick is hidden dividend accrual for preferred stock. The dividends are triggered at liquidity event, so the cap table you thought you were looking at suddenly gets diluted with a bunch of freshly issued stock which is still senior to common.
    - lawnchair_larry 12y ago
      Pure evil. Which companies have done that?
      - prostoalex 12y ago
        From reading "Venture Deals" I got the impression it's something a big VC firm tries to negotiate on a fairly regular basis. See, for example, the "Dividends" section of Houzz round http://techcrunch.com/2014/06/02/houzz-on-fire/ http://techcrunch.com/2014/06/02/houzz-on-fire/
- cylinder 12y ago
  How did that happen? The acquirer just purchased a certain class of shares, i.e. preferred stock and didn't care about owning 100% of the company?
Iftheshoefits 12y ago
Do you know what I call a 1%/4-year vestment "equity" plan? I call that an ESPP (employee stock purchase plan) by another name, with inflated valuations due to startup hype. Why would anybody agree to that? At least insist the first half percent vest proportionally over the first year with each paycheck.
- mtviewdave 12y ago
  The standard Silicon Valley employee stock option plan is X number of shares vested over 4 years, with the first 25% vesting all at once after 12 months, and the remaining 75% vesting in even installments once per month over the remaining 36 months. This has been the standard for decades. If you can arrange something more advantageous, by all means do it, but I think you're going to have a hard time negotiating away the cliff. Having the cliff ensures that employee has proved herself before getting a stake in the company, which most investors and founders believe is important.
  - jedberg 12y ago
    The cliff just creates artificial scarcity from what I've seen. When an employee is let go before 1 year, or quits because it isn't a good fit, I've always seen the company give what they would have vested in anyway (leave at 10 months? Get 10 months worth of vesting). It's really just the right thing to do, since they put work into your company.
    - lawnchair_larry 12y ago
      No one does this ever.
      - jedberg 12y ago
        My experience is very different than yours. I've never heard of anyone leaving before 1 year and not getting anything.
  - Iftheshoefits 12y ago
lquist 12y ago
"But note this doesn’t mean everything will be perfect. If the acquirer decides that you are no longer needed, they could keep your option agreement intact and terminate your employment. You wouldn’t get any further vesting unless you have single-trigger or double-trigger acceleration, and you’d be out of a job. It would be the same as if you’d been fired by your company before the acquisition." Maybe I'm reading this incorrectly, but if you don't have single-trigger or double-trigger acceleration, the employer has all the leverage they need to renegotiate your (incentive) contract.
- ploxiln 12y ago
  (without knowing anything about this stuff) it sounds like the difference is that they must fire you if they don't continue your "award" or give it all to you immediately. This takes away the possibility of bluffing on your part / calling your bluff. You can honestly say, "sorry, not my decision, I can't stay if I don't get all my options (now or on schedule)". That could be a somewhat stronger negotiating position.
- alexdevkar 12y ago
  You're right. That's true the before the acquisition and after. Your employer can say you have to accept a reduced package or get fired. The difference is the starting point of the negotiation. If the acquirer wants to keep you, the "right" language in the option plan means the starting point is your original comp package. You have to explicitly agree to a reduced package for it to change. If you have the "wrong" language, there is simply no deal in place to start the negotiation.
mcdoug 12y ago
Why worry about stock options at all? There is a spectrum of outcomes. On one end the startup flops, or is bought for so little that your share, even if paid out, is close to 0. On the other end you have Google, Facebook, Instagram, etc. Companies where 0.5% is worth quite a bit of money. The problem is that the majority fall in-between, where your stock options will be worth nothing, yet the company will sell for a decent amount of money. So what you should do is value the stock options at 0. If you have the spare cash, buy them as early as you can, but don't count them for anything. They are a lottery ticket that your company is the next Google and like any lottery ticket they are likely worth nothing. If the startup is offering to pay you half of what you'd make elsewhere, waving stock options at you telling you they'll make you rich, consider if they just handed you a pile of lottery tickets and half a paycheck. If you'd still take it (maybe you really like the people, or want to work in this field), go for it. Otherwise, they are just trying to get your for a far cheaper price than you'd get elsewhere.
- gregrata 12y ago
  > buy them as early as you can, Careful on this one - when you buy, it's a taxable event. The spread between what the IRS thinks the company is worth and what you paid is taxable. You have to pay that NOW. I've known people that were screwed on this - strike price was around 1, value by IRS was 8 (based on funding rounds). By the time the person could sell the stock, it as worth .013. Fun!
  - ewindisch 12y ago
    IANAA (I am not an accountant)-- This is not true, or not necessarily. It's calculated for AMT, so if you're already paying AMT, or would be paying AMT with the addition of this income, then yes: You'll be paying that tax now. This is true for many in California with the high state taxes and a relatively high gross income (versus national averages). However, if the intrinsic value portion of your exercise (i.e. fair market value minus your strike price) as an addition to your AMT worksheet does not indicate you'll owe AMT for the year, then you will NOT see a tax event. This will be true for many non-Californians exercising after their first year, or even after 4 years, depending on the growth of the fair-market-value. If you are at risk of paying AMT and your intrinsic value is in the low 6-figures (or lower), one solution might be to wait until the beginning of a new tax year, exercise, and quit your job... then take a year off from wages and work for equity (i.e. form your own startup). You'll avoid paying the 26% on that money due at exercise. If you've been paying AMT in the past, you'll even get a tax credit at the end of the year. Obviously, this plan is not without risks, should only be carried-out if you believe in solid growth in the startup for which you own equity and believe in the ability of the new startup you're founding and/or joining. Also, and obviously, you should consult with an actual accountant before considering this crazy idea ;-)
AndrewKemendo 12y ago
I read a lot about how employees get screwed over with stock options, so what we decided to do was to just give employees vesting stock straight up as a buy through. Basically the way this works is that we give new employees an up front lump sum in the amount of how much it costs to purchase the shares of the company. The employee then purchases those shares from us in line with a vesting agreement. All warrants and conversions are exactly the same as the founders shares. This means that they pay tax on this purchase as regular income rather than capital gains up front with the money we give them for it. This prevents a heavy tax bill at conversion and allows them to retain their vested shares regardless of if they work for us or not after the first 12 month vesting period. We calculated that the up front taxes are magnitudes cheaper in the long run because the increased valuation will cover those differences handily and there is no waiting period like there is with capital gains tax. In the end though our intention was to make a simple way for our employees to actually own the stock we give them as compensation and it not be something that they can lose or be restructured easily. If a VC or acquisition wanted to restructure that away for employees then they would be forced to restructure everyone's, so we are all in.
- triplesec 12y ago
  I wish more companies were so transparent and decent as yours. Why do others prefer not to do it this way, if it's not just sheer greed and obfuscation?
  - ekanes 12y ago
    This approach is awesome, but (I am not a lawyer, this is not advice!) one drawback is that the whole concept of an option is that it's optional. If the company succeeds, you exercise your option and spend that money to get a much larger return. If you must buy the option, and the company does not succeed, then you've spent the money and it's gone. You've lost the "option" aspect of an option. And of course, yes, the company may say "we're spending our money to buy this for you, don't worry" the truth is money is money. Someone (company or you) is buying the option early, thus having less money to spend on other things. Alternatives could be the company pays you that money, so it's yours to spend as you see fit. Including, someday, buying the option if you want. Hope that helps!
ausjke 12y ago
Is there any generally reasonable 101 on how to do equity/share/stock-option in an early stage start-up? Tried to google for it and never found any general guidance for that. If you're paying a full salary/benefit for them, the options etc is really just trying to keep them from jumping around? I'm open to all ideas but would like to find some common/typical silicon valley way to do this for startups.
- srathi 12y ago
  I found this very helpful. http://www.fairmark.com/execcomp/index.htm http://www.fairmark.com/execcomp/index.htm
grandalf 12y ago
If you work at a startup and options stuff is not transparent -- valuation, vesting schedule, terms, etc., you should be quite worried. Founders often end up in a situation where there is significant dilution and as the hockey stick changes into a slightly different shape they know that nobody's options are worth anything. Founders with integrity will acknowledge this and make adjustments. Those without integrity pretend it isn't true and create a culture of secrecy around options grants/terms.' Edit: You should also be able to do the math on what your options are worth fairly easily as funding rounds approach and valuations occur.
- danielweber 12y ago
  Founders often end up in a situation where there is significant dilution and as the hockey stick changes into a slightly different shape they know that nobody's options are worth anything This is a very common occurrence, and unless you have a seat at the board, you are completely at the company's mercy when events like this happen. Usually they will make current employees "whole," although the definition of that varies a lot. If you've left, though, you are completely shafted. The board will say "well you are no longer contributing to the company" but the same thing applies to the VC fund that invested last round and didn't this round. There are an amazing number of hoops that you have to jump through for options in a start-up to pan out, and you have to hit essentially all of them, or else they are worthless.
jalonso510 12y ago
It would be a pretty rare company that is willing to revise their stock option plan in response to a request from a potential employee. They'd have to take the request to their board for approval, then also get a vote of the stockholders, and would have to pay the lawyers to revise the documents. Just an administrative headache regardless of the legitimacy of the request and probably not a great way to start off the relationship with your future employer.
paulhauggis 12y ago
This is why I never take equity. It's just a way to dangle a carrot in front of an employee to make them think they will get a big pay day. Many times, the employee doesn't want to quit because this pay day is seemingly right around the corner. My previous employer gave me stock options on top of my salary. I never really cared about the stock options too much. A few months ago, I found out the owner created a new LLC (and moved the company to this new LLC) essentially making my options worthless overnight. I would rather get paid my true market value.
- chrisabrams 12y ago
  a good employment contract would cover this scenario...best to make friends with an attorney in the field :)
  - Kalium 12y ago
    Where would one go to set about purchasing beer for such a new friend?
- chrisabrams 12y ago
  Also, did you sign an employment contract with the new LLC? If not, then you own the IP you create, not the new LLC, assuming the old entity was dissolved.
- danielweber 12y ago
  Many times, the employee doesn't want to quit because this pay day is seemingly right around the corner. Seen this way way too many times. I've fell victim to it myself, staying at someplace for too long. I've never regretted leaving a place too soon.
birken 12y ago
For those of you that found this interesting and want to learn more about stock options, with advice that is a bit more general, I highly recommend "An introduction to stock options for the tech entrepreneur or startup employee": http://www.scribd.com/doc/55945011/An-Introduction-to-Stock-Options-for-the-Tech-Entrepreneur-or-Startup-Employee http://www.scribd.com/doc/55945011/An-Introduction-to-Stock-... It gives a detailed background of a lot of key issues related to stock options and some really well reasoned recommendations that are applicable to anybody taking a job involving stock options.
tieTYT 12y ago
The last two companies I've gotten offers from gave me very, very heavy pushback when I tried to figure out what % of equity they were giving me. They told me they were giving me 5,000 shares (for example). OK... 5,000 of how many? What % of all the shares is 5,000? My understanding is you need this information to know if the equity is worth something or nothing. Yet, they really don't want to give me this information. For one of these jobs the recruiter I was going through (this is a big recruitment company) literally told me nobody has ever asked these questions about the options they were getting. Am I doing something wrong? Do I have a misunderstanding of how these things work? Is it unreasonable for me to be told the outstanding shares?
- tedyoung 12y ago
  You are completely reasonable. I've turned down offers because of this exact reason (and it was the only problem with the offer). I tell them that if they won't give me the denominator of the equation, I'll assume it's pretty close to infinity, and value the options aspect of the offer at $0. I think it's shady and manipulative to not provide such details ("but we're giving you 50,000 options!"). What are they trying to hide?
  - chrisabrams 12y ago
    Also, why do these companies think that engineers won't try to find a way to bring math into the equation?
    - Kalium 12y ago
      They're assuming that big numbers will make engineers shut up and stop thinking.
- chrisabrams 12y ago
  No, they did something wrong: not be honest. It sounds like you didn't go there - why work for someone who can't be upfront?
- nadeemk 12y ago
cedsav 12y ago
This advice should be directed to entrepreneurs. As a founder, it's good to know what terms are "standard" and what terms are more pro-employee or more pro-management. Then you can use that information when setting up the option plan with your lawyer, and push back if you feel the lawyer is overzealous in protecting your own interest. Once the plan is in place, it's unfortunately too late for the employee to seek more favorable terms.
ChicagoDave 12y ago
Options are useless. Their value is entirely based on what the actual shareholders decide. It doesn't matter if stock gets sold to other investors or the company goes public. Options are useless. You want a stake in a business, you need to ask for actual stock. Not options.
- nemo44x 12y ago
  Well, you have the right to exercise those options and then they become stock and you have a stake in the company. The nice part of it being an option is it grants you the right to invest in the company at a static price if you choose. And you choose to do this when the company is doing very well.
  - ChicagoDave 12y ago
    No. Options can only be exercised if the owner(s) allow it. They can just as easily decide not to exercise them and revalue them at $0. This is generally considered unethical and would dramatically impact retention, but there is no explicit guarantee in options. It is implied and their value is entirely at the discretion of the owner(s).
mattgreenrocks 12y ago
Someone could probably make a nice bit of money on the side helping new engineers in SF review/deal with their stock options. You'd have to know this stuff well, but I don't think that's a big hindrance to anyone. Think of it as both giving back and pushing back on what can be predatory treatment of employees.
- saryant 12y ago
  Isn't that what lawyers are for? I paid mine a small fee to review my equity agreement before I signed and I made it clear to my potential employer that I couldn't sign until my lawyer signed off on it.
- prostoalex 12y ago
  A bunch of Silicon Valley CPAs do this as well as financial advisors/planners. This is a high-class problem to have though, which is also the point where one comes across the need to hire a financial advisor or have a professional CPA do some tax planning.
URSpider94 12y ago
This happened to me. My employer got sold, and only about half of my outstanding ISO's were vested at the time. However, I'd been there a pretty long time, and getting more ISO grants as time went on, so I wasn't too bent out of shape about it. In my opinion, you should think about instruments such as RSU's and options as accruing to you at the date of vest, not the date of grant. From an accounting standpoint, that's how the company is viewing it, or at least should be.
mallyvai 12y ago
I highly, highly encourage all employees with options packages to go through our equity checklist and blog post here: http://offerletter.io/blog/201412-understanding-and-negotiating-your-startup-equity.html http://offerletter.io/blog/201412-understanding-and-negotiat... Questions: > What is the number of shares outstanding on a fully-diluted basis? > What is the fair market value (FMV) of my shares? > What is the exercise price (aka strike price)? > Do you allow early-exercise of options? > Do you allow an 83(b) Election? > What is the vesting schedule? > What are some potential exit scenarios? Equity is complicated. Options are complicated. Even well-meaning founders may inadvertently introduce disfavorable language into an employee options plan at the behest of an investor or board member. It is contingent on the individual to figure this out and stand up for themselves. I also encourage virtually every engineer i chat with these days to retain an equity lawyer to help them pore over the contents of their grant paperwork and minimize surprise. It's going to cost a few hundred bucks and potentially save you from millions in losses down the road.
- mcfunley 12y ago
  100% agreement. Startup equity is not only more complicated than you suppose, it's more complicated than you _can_ suppose. Everyone working in this industry should get an appreciation for this. And I'm not saying this for altruistic reasons. I have to exist in the job marketplace with the folks taking pay cuts for equity that's not worth anything!
shanemhansen 12y ago
I've worked for some of the largest companies in the world as well as been employee number one at multiple startups (one of which was backed by google ventures), so I hope the following advice is good: If you're going to found a company, go for it. I'd like to do the same myself someday. If you're going to work for a startup, make sure they pay you well. In dollars (or your local currency). I treat stock options as a lottery ticket, not a substitute for income. Basically working for a startup is much like working for a big company. Neither really offers you long term stability. You have to deal with politics in both. The biggest difference in my opinion is that startups typically have really long hours and some pretty big egos.
cletus 12y ago
This is an inadequate overview of options issues for startup employees. The major issues are probably: 1. Acceleration on change of control (the article covers this). 1 year acceleration is fairly common it seems. There should be something here. But fully acceleration of granted options is probably more than you realistically can hope for. After all, you didn't need to work for that year to get the options. There should be some balance here. 2. Rule 83b electoins. Particularly relevant for pre-funding startups and especially for founders. It allows you to pay all the tax on options up front rather than be hit by yearly AMT bills; 3. Clawback agreements. This is a nasty one that was most publicly brought to light with Skype (the second time around). A bunch of executives were fired before the acquisition went through, allegedly for performance reasons. Their options could be bought back at issue price, resulting in a windfall for SilverLake of possibly several hundred million. Want to sue? Well the company was incorporated overseas. Good luck with that. The moral of the story is watch out for any rights the company has to repurchase your options and at what price. Repurchases in general aren't necessarily evil. It's good to avoid having a lot of shareholders for early stage companies (due to SEC limits on number of shareholders for non-public companies) but such repurchases need to be fair. 4. You're taxed on options based on their fair market value when they're issued barring a Rule 83b election; 5. Liquidation preferences. VCs generally have some form of preferential treatment on how they're repaid in the event of a buyout. This can take a number of forms. The most reasonable is that they're simply guaranteed to get their money back. Meaning if they paid $10M for a 40% stake in a company that gets bought for $15M they're going to get their $10M back instead of 40% * $15M = $6M. That's not unreasonable. But what's not reasonable (IMHO) is "participating preferred" liquidation preferences. What this means in the above scenario is the VC will get $10M of the $15M back and then 40% of the remaining $5M. So the other 60% are divvying up $3M. That's a lot less attractive. 6. Bonuses in lieu of acquisition. You may see a headline that says your company has been bought for $100M and you own 1%. Great! You're now a millionaire! Not so fast... It may turn out the VC owns 40% participating preferred with $20M funding and the company is actually only being bought for $50M. The other $50M is incentives in the new company paid to the founders and possibly key executives. So you're only getting 1% of $30M. 7. Dilution. Your 1% may not be 1%. You may have been told something like "there are 1M shares outstanding and we're granting you 10,000 options over 4 years with 1 year cliff". So you own 1% right? Well, maybe you do and maybe you don't. The company may be reporting outstanding shares rather than outstanding shares plus any obligations it's made. It really needs to report on a fully diluted basis. There may be convertible notes and rights of existing VCs to buy in in future funding rounds, etc. So anyway there are a lot of potential traps.
pythoncloner 12y ago
I have accepted a startup offer with stock options 2 days back. The CTO told me about the number of outstanding shares in the company and the last 409(A) valuation and the current valuation they are going to raise funding. But except #options, these details are not specified in the offer letter but i have accepted. Should i consult a lawyer before i join this company? If so, can you guys recommend some lawyer contacts? I have been in bay area for last one year and i don't have much contacts. Help! Thanks
wiherek 12y ago
This is a great resource for legal advise on the case. I also was offered options on a startup that I worked at. I am adding this to my bookmarks :D some cross-reference http://www.businessinsider.com/stock-option-questions-startup-employees-should-ask-2014-4 http://www.businessinsider.com/stock-option-questions-startu... Generally I prefer to leave the legal stuff for my lawyer and focus on coding, but having a reasonable knowledge on the case is preferred.
whistlerbrk 12y ago
This stuff is simply too complex. Just like there guides that make open source licenses easier to understand I wish there was the same for startup stock options.
anonstartupemp 12y ago
I have a related question for folks here. I joined a startup around 2009 as an early employee, left after a couple years, and bought the vested stock. (The company is based in the US, and I'm not a US citizen, FYI). I've been holding on to these stocks so far. Compoany has rasied a small series A just around the time I joined. The company has raised a few rounds of funding since I left. It now looks like the company may IPO/ or be privately acquired. I have not been in touch with anyone in the company over the past couple years. What steps do I take now to ensure I don't get screwed as part of the exit, and/or my stocks diluted to become meaningless? I'm looking for general advice.

252 points by alexdevkar 12y ago

joshkpeterson 12y ago

Ideally before you accept the offer :)

efuquen 12y ago
True, but in the current hiring climate and if you're still at an early stage you should definitely still have leverage.
- chrisabrams 12y ago
  Yes, if the company is early stage, then nothing should be out of the question.

deleted 12y ago

[deleted]

bluehex 12y ago

Another thing to understand (and this will sound obvious to many of you) is that your options may be worth nothing, even after a multi-million dollar acquisition if there are priority stock holders (the investors) ahead of you in line. As a young and naive engineer I learned of this fact the day the first startup I worked for was acquired. First I read the big number that was to be paid for the company, was ecstatic, and immediately starting doing "x-million times half a percent" in my head followed by a sinking feeling as I read the clause stating that common stock holders would get $0. In retrospect it sounds obvious that if the company sells for less than the money the investors put in, your x percent is worth nothing. But it's easy to get carried away thinking you actually own a percent of the company, and that a sale means a pay day for you. Don't let the first word of acquisition get you too excited, the come down sucks.

sxp 12y ago
The segregation between common and priority stock can be painful. I learned about it the hard way after I left the startup and paid money to exercise the vested options. When the company was acquired, all the common stock was worthless (but the execs with voting power got millions of dollars of bonuses so they didn't care) which meant I had lost the money required to exercise the options. What annoyed me more than the couple $K I lost from the options was the opportunity cost of not leaving the job earlier. Like all startups, the company paid below average wages (since startups pay a significant proportion of compensation in the form of options) so if I left earlier, I would have gotten a large pay bump from having joined a non-startup that paid a normal salary.
- prostoalex 12y ago
  Another trick is hidden dividend accrual for preferred stock. The dividends are triggered at liquidity event, so the cap table you thought you were looking at suddenly gets diluted with a bunch of freshly issued stock which is still senior to common.
  - lawnchair_larry 12y ago
    Pure evil. Which companies have done that?
    - prostoalex 12y ago
      From reading "Venture Deals" I got the impression it's something a big VC firm tries to negotiate on a fairly regular basis. See, for example, the "Dividends" section of Houzz round http://techcrunch.com/2014/06/02/houzz-on-fire/ http://techcrunch.com/2014/06/02/houzz-on-fire/
cylinder 12y ago
How did that happen? The acquirer just purchased a certain class of shares, i.e. preferred stock and didn't care about owning 100% of the company?

Iftheshoefits 12y ago

Do you know what I call a 1%/4-year vestment "equity" plan? I call that an ESPP (employee stock purchase plan) by another name, with inflated valuations due to startup hype. Why would anybody agree to that? At least insist the first half percent vest proportionally over the first year with each paycheck.

mtviewdave 12y ago
The standard Silicon Valley employee stock option plan is X number of shares vested over 4 years, with the first 25% vesting all at once after 12 months, and the remaining 75% vesting in even installments once per month over the remaining 36 months. This has been the standard for decades. If you can arrange something more advantageous, by all means do it, but I think you're going to have a hard time negotiating away the cliff. Having the cliff ensures that employee has proved herself before getting a stake in the company, which most investors and founders believe is important.
- jedberg 12y ago
  The cliff just creates artificial scarcity from what I've seen. When an employee is let go before 1 year, or quits because it isn't a good fit, I've always seen the company give what they would have vested in anyway (leave at 10 months? Get 10 months worth of vesting). It's really just the right thing to do, since they put work into your company.
  - lawnchair_larry 12y ago
    No one does this ever.
    - jedberg 12y ago
      My experience is very different than yours. I've never heard of anyone leaving before 1 year and not getting anything.
- Iftheshoefits 12y ago

lquist 12y ago

"But note this doesn’t mean everything will be perfect. If the acquirer decides that you are no longer needed, they could keep your option agreement intact and terminate your employment. You wouldn’t get any further vesting unless you have single-trigger or double-trigger acceleration, and you’d be out of a job. It would be the same as if you’d been fired by your company before the acquisition." Maybe I'm reading this incorrectly, but if you don't have single-trigger or double-trigger acceleration, the employer has all the leverage they need to renegotiate your (incentive) contract.

ploxiln 12y ago
(without knowing anything about this stuff) it sounds like the difference is that they must fire you if they don't continue your "award" or give it all to you immediately. This takes away the possibility of bluffing on your part / calling your bluff. You can honestly say, "sorry, not my decision, I can't stay if I don't get all my options (now or on schedule)". That could be a somewhat stronger negotiating position.
alexdevkar 12y ago
You're right. That's true the before the acquisition and after. Your employer can say you have to accept a reduced package or get fired. The difference is the starting point of the negotiation. If the acquirer wants to keep you, the "right" language in the option plan means the starting point is your original comp package. You have to explicitly agree to a reduced package for it to change. If you have the "wrong" language, there is simply no deal in place to start the negotiation.

mcdoug 12y ago

Why worry about stock options at all? There is a spectrum of outcomes. On one end the startup flops, or is bought for so little that your share, even if paid out, is close to 0. On the other end you have Google, Facebook, Instagram, etc. Companies where 0.5% is worth quite a bit of money. The problem is that the majority fall in-between, where your stock options will be worth nothing, yet the company will sell for a decent amount of money. So what you should do is value the stock options at 0. If you have the spare cash, buy them as early as you can, but don't count them for anything. They are a lottery ticket that your company is the next Google and like any lottery ticket they are likely worth nothing. If the startup is offering to pay you half of what you'd make elsewhere, waving stock options at you telling you they'll make you rich, consider if they just handed you a pile of lottery tickets and half a paycheck. If you'd still take it (maybe you really like the people, or want to work in this field), go for it. Otherwise, they are just trying to get your for a far cheaper price than you'd get elsewhere.

gregrata 12y ago
> buy them as early as you can, Careful on this one - when you buy, it's a taxable event. The spread between what the IRS thinks the company is worth and what you paid is taxable. You have to pay that NOW. I've known people that were screwed on this - strike price was around 1, value by IRS was 8 (based on funding rounds). By the time the person could sell the stock, it as worth .013. Fun!
- ewindisch 12y ago
  IANAA (I am not an accountant)-- This is not true, or not necessarily. It's calculated for AMT, so if you're already paying AMT, or would be paying AMT with the addition of this income, then yes: You'll be paying that tax now. This is true for many in California with the high state taxes and a relatively high gross income (versus national averages). However, if the intrinsic value portion of your exercise (i.e. fair market value minus your strike price) as an addition to your AMT worksheet does not indicate you'll owe AMT for the year, then you will NOT see a tax event. This will be true for many non-Californians exercising after their first year, or even after 4 years, depending on the growth of the fair-market-value. If you are at risk of paying AMT and your intrinsic value is in the low 6-figures (or lower), one solution might be to wait until the beginning of a new tax year, exercise, and quit your job... then take a year off from wages and work for equity (i.e. form your own startup). You'll avoid paying the 26% on that money due at exercise. If you've been paying AMT in the past, you'll even get a tax credit at the end of the year. Obviously, this plan is not without risks, should only be carried-out if you believe in solid growth in the startup for which you own equity and believe in the ability of the new startup you're founding and/or joining. Also, and obviously, you should consult with an actual accountant before considering this crazy idea ;-)

AndrewKemendo 12y ago

I read a lot about how employees get screwed over with stock options, so what we decided to do was to just give employees vesting stock straight up as a buy through. Basically the way this works is that we give new employees an up front lump sum in the amount of how much it costs to purchase the shares of the company. The employee then purchases those shares from us in line with a vesting agreement. All warrants and conversions are exactly the same as the founders shares. This means that they pay tax on this purchase as regular income rather than capital gains up front with the money we give them for it. This prevents a heavy tax bill at conversion and allows them to retain their vested shares regardless of if they work for us or not after the first 12 month vesting period. We calculated that the up front taxes are magnitudes cheaper in the long run because the increased valuation will cover those differences handily and there is no waiting period like there is with capital gains tax. In the end though our intention was to make a simple way for our employees to actually own the stock we give them as compensation and it not be something that they can lose or be restructured easily. If a VC or acquisition wanted to restructure that away for employees then they would be forced to restructure everyone's, so we are all in.

triplesec 12y ago
I wish more companies were so transparent and decent as yours. Why do others prefer not to do it this way, if it's not just sheer greed and obfuscation?
- ekanes 12y ago
  This approach is awesome, but (I am not a lawyer, this is not advice!) one drawback is that the whole concept of an option is that it's optional. If the company succeeds, you exercise your option and spend that money to get a much larger return. If you must buy the option, and the company does not succeed, then you've spent the money and it's gone. You've lost the "option" aspect of an option. And of course, yes, the company may say "we're spending our money to buy this for you, don't worry" the truth is money is money. Someone (company or you) is buying the option early, thus having less money to spend on other things. Alternatives could be the company pays you that money, so it's yours to spend as you see fit. Including, someday, buying the option if you want. Hope that helps!

ausjke 12y ago

Is there any generally reasonable 101 on how to do equity/share/stock-option in an early stage start-up? Tried to google for it and never found any general guidance for that. If you're paying a full salary/benefit for them, the options etc is really just trying to keep them from jumping around? I'm open to all ideas but would like to find some common/typical silicon valley way to do this for startups.

srathi 12y ago
I found this very helpful. http://www.fairmark.com/execcomp/index.htm http://www.fairmark.com/execcomp/index.htm

grandalf 12y ago

If you work at a startup and options stuff is not transparent -- valuation, vesting schedule, terms, etc., you should be quite worried. Founders often end up in a situation where there is significant dilution and as the hockey stick changes into a slightly different shape they know that nobody's options are worth anything. Founders with integrity will acknowledge this and make adjustments. Those without integrity pretend it isn't true and create a culture of secrecy around options grants/terms.' Edit: You should also be able to do the math on what your options are worth fairly easily as funding rounds approach and valuations occur.

danielweber 12y ago
Founders often end up in a situation where there is significant dilution and as the hockey stick changes into a slightly different shape they know that nobody's options are worth anything This is a very common occurrence, and unless you have a seat at the board, you are completely at the company's mercy when events like this happen. Usually they will make current employees "whole," although the definition of that varies a lot. If you've left, though, you are completely shafted. The board will say "well you are no longer contributing to the company" but the same thing applies to the VC fund that invested last round and didn't this round. There are an amazing number of hoops that you have to jump through for options in a start-up to pan out, and you have to hit essentially all of them, or else they are worthless.

jalonso510 12y ago

It would be a pretty rare company that is willing to revise their stock option plan in response to a request from a potential employee. They'd have to take the request to their board for approval, then also get a vote of the stockholders, and would have to pay the lawyers to revise the documents. Just an administrative headache regardless of the legitimacy of the request and probably not a great way to start off the relationship with your future employer.

paulhauggis 12y ago

This is why I never take equity. It's just a way to dangle a carrot in front of an employee to make them think they will get a big pay day. Many times, the employee doesn't want to quit because this pay day is seemingly right around the corner. My previous employer gave me stock options on top of my salary. I never really cared about the stock options too much. A few months ago, I found out the owner created a new LLC (and moved the company to this new LLC) essentially making my options worthless overnight. I would rather get paid my true market value.

chrisabrams 12y ago
a good employment contract would cover this scenario...best to make friends with an attorney in the field :)
- Kalium 12y ago
  Where would one go to set about purchasing beer for such a new friend?
chrisabrams 12y ago
Also, did you sign an employment contract with the new LLC? If not, then you own the IP you create, not the new LLC, assuming the old entity was dissolved.
danielweber 12y ago
Many times, the employee doesn't want to quit because this pay day is seemingly right around the corner. Seen this way way too many times. I've fell victim to it myself, staying at someplace for too long. I've never regretted leaving a place too soon.

birken 12y ago

For those of you that found this interesting and want to learn more about stock options, with advice that is a bit more general, I highly recommend "An introduction to stock options for the tech entrepreneur or startup employee": http://www.scribd.com/doc/55945011/An-Introduction-to-Stock-Options-for-the-Tech-Entrepreneur-or-Startup-Employee http://www.scribd.com/doc/55945011/An-Introduction-to-Stock-... It gives a detailed background of a lot of key issues related to stock options and some really well reasoned recommendations that are applicable to anybody taking a job involving stock options.

tieTYT 12y ago

The last two companies I've gotten offers from gave me very, very heavy pushback when I tried to figure out what % of equity they were giving me. They told me they were giving me 5,000 shares (for example). OK... 5,000 of how many? What % of all the shares is 5,000? My understanding is you need this information to know if the equity is worth something or nothing. Yet, they really don't want to give me this information. For one of these jobs the recruiter I was going through (this is a big recruitment company) literally told me nobody has ever asked these questions about the options they were getting. Am I doing something wrong? Do I have a misunderstanding of how these things work? Is it unreasonable for me to be told the outstanding shares?

tedyoung 12y ago
You are completely reasonable. I've turned down offers because of this exact reason (and it was the only problem with the offer). I tell them that if they won't give me the denominator of the equation, I'll assume it's pretty close to infinity, and value the options aspect of the offer at $0. I think it's shady and manipulative to not provide such details ("but we're giving you 50,000 options!"). What are they trying to hide?
- chrisabrams 12y ago
  Also, why do these companies think that engineers won't try to find a way to bring math into the equation?
  - Kalium 12y ago
    They're assuming that big numbers will make engineers shut up and stop thinking.
chrisabrams 12y ago
No, they did something wrong: not be honest. It sounds like you didn't go there - why work for someone who can't be upfront?
nadeemk 12y ago

cedsav 12y ago

This advice should be directed to entrepreneurs. As a founder, it's good to know what terms are "standard" and what terms are more pro-employee or more pro-management. Then you can use that information when setting up the option plan with your lawyer, and push back if you feel the lawyer is overzealous in protecting your own interest. Once the plan is in place, it's unfortunately too late for the employee to seek more favorable terms.

ChicagoDave 12y ago

Options are useless. Their value is entirely based on what the actual shareholders decide. It doesn't matter if stock gets sold to other investors or the company goes public. Options are useless. You want a stake in a business, you need to ask for actual stock. Not options.

nemo44x 12y ago
Well, you have the right to exercise those options and then they become stock and you have a stake in the company. The nice part of it being an option is it grants you the right to invest in the company at a static price if you choose. And you choose to do this when the company is doing very well.
- ChicagoDave 12y ago
  No. Options can only be exercised if the owner(s) allow it. They can just as easily decide not to exercise them and revalue them at $0. This is generally considered unethical and would dramatically impact retention, but there is no explicit guarantee in options. It is implied and their value is entirely at the discretion of the owner(s).

mattgreenrocks 12y ago

Someone could probably make a nice bit of money on the side helping new engineers in SF review/deal with their stock options. You'd have to know this stuff well, but I don't think that's a big hindrance to anyone. Think of it as both giving back and pushing back on what can be predatory treatment of employees.

saryant 12y ago
Isn't that what lawyers are for? I paid mine a small fee to review my equity agreement before I signed and I made it clear to my potential employer that I couldn't sign until my lawyer signed off on it.
prostoalex 12y ago
A bunch of Silicon Valley CPAs do this as well as financial advisors/planners. This is a high-class problem to have though, which is also the point where one comes across the need to hire a financial advisor or have a professional CPA do some tax planning.

URSpider94 12y ago

This happened to me. My employer got sold, and only about half of my outstanding ISO's were vested at the time. However, I'd been there a pretty long time, and getting more ISO grants as time went on, so I wasn't too bent out of shape about it. In my opinion, you should think about instruments such as RSU's and options as accruing to you at the date of vest, not the date of grant. From an accounting standpoint, that's how the company is viewing it, or at least should be.

mallyvai 12y ago

I highly, highly encourage all employees with options packages to go through our equity checklist and blog post here: http://offerletter.io/blog/201412-understanding-and-negotiating-your-startup-equity.html http://offerletter.io/blog/201412-understanding-and-negotiat... Questions: > What is the number of shares outstanding on a fully-diluted basis? > What is the fair market value (FMV) of my shares? > What is the exercise price (aka strike price)? > Do you allow early-exercise of options? > Do you allow an 83(b) Election? > What is the vesting schedule? > What are some potential exit scenarios? Equity is complicated. Options are complicated. Even well-meaning founders may inadvertently introduce disfavorable language into an employee options plan at the behest of an investor or board member. It is contingent on the individual to figure this out and stand up for themselves. I also encourage virtually every engineer i chat with these days to retain an equity lawyer to help them pore over the contents of their grant paperwork and minimize surprise. It's going to cost a few hundred bucks and potentially save you from millions in losses down the road.

mcfunley 12y ago
100% agreement. Startup equity is not only more complicated than you suppose, it's more complicated than you _can_ suppose. Everyone working in this industry should get an appreciation for this. And I'm not saying this for altruistic reasons. I have to exist in the job marketplace with the folks taking pay cuts for equity that's not worth anything!

shanemhansen 12y ago

I've worked for some of the largest companies in the world as well as been employee number one at multiple startups (one of which was backed by google ventures), so I hope the following advice is good: If you're going to found a company, go for it. I'd like to do the same myself someday. If you're going to work for a startup, make sure they pay you well. In dollars (or your local currency). I treat stock options as a lottery ticket, not a substitute for income. Basically working for a startup is much like working for a big company. Neither really offers you long term stability. You have to deal with politics in both. The biggest difference in my opinion is that startups typically have really long hours and some pretty big egos.

cletus 12y ago

This is an inadequate overview of options issues for startup employees. The major issues are probably: 1. Acceleration on change of control (the article covers this). 1 year acceleration is fairly common it seems. There should be something here. But fully acceleration of granted options is probably more than you realistically can hope for. After all, you didn't need to work for that year to get the options. There should be some balance here. 2. Rule 83b electoins. Particularly relevant for pre-funding startups and especially for founders. It allows you to pay all the tax on options up front rather than be hit by yearly AMT bills; 3. Clawback agreements. This is a nasty one that was most publicly brought to light with Skype (the second time around). A bunch of executives were fired before the acquisition went through, allegedly for performance reasons. Their options could be bought back at issue price, resulting in a windfall for SilverLake of possibly several hundred million. Want to sue? Well the company was incorporated overseas. Good luck with that. The moral of the story is watch out for any rights the company has to repurchase your options and at what price. Repurchases in general aren't necessarily evil. It's good to avoid having a lot of shareholders for early stage companies (due to SEC limits on number of shareholders for non-public companies) but such repurchases need to be fair. 4. You're taxed on options based on their fair market value when they're issued barring a Rule 83b election; 5. Liquidation preferences. VCs generally have some form of preferential treatment on how they're repaid in the event of a buyout. This can take a number of forms. The most reasonable is that they're simply guaranteed to get their money back. Meaning if they paid $10M for a 40% stake in a company that gets bought for $15M they're going to get their $10M back instead of 40% * $15M = $6M. That's not unreasonable. But what's not reasonable (IMHO) is "participating preferred" liquidation preferences. What this means in the above scenario is the VC will get $10M of the $15M back and then 40% of the remaining $5M. So the other 60% are divvying up $3M. That's a lot less attractive. 6. Bonuses in lieu of acquisition. You may see a headline that says your company has been bought for $100M and you own 1%. Great! You're now a millionaire! Not so fast... It may turn out the VC owns 40% participating preferred with $20M funding and the company is actually only being bought for $50M. The other $50M is incentives in the new company paid to the founders and possibly key executives. So you're only getting 1% of $30M. 7. Dilution. Your 1% may not be 1%. You may have been told something like "there are 1M shares outstanding and we're granting you 10,000 options over 4 years with 1 year cliff". So you own 1% right? Well, maybe you do and maybe you don't. The company may be reporting outstanding shares rather than outstanding shares plus any obligations it's made. It really needs to report on a fully diluted basis. There may be convertible notes and rights of existing VCs to buy in in future funding rounds, etc. So anyway there are a lot of potential traps.

pythoncloner 12y ago

I have accepted a startup offer with stock options 2 days back. The CTO told me about the number of outstanding shares in the company and the last 409(A) valuation and the current valuation they are going to raise funding. But except #options, these details are not specified in the offer letter but i have accepted. Should i consult a lawyer before i join this company? If so, can you guys recommend some lawyer contacts? I have been in bay area for last one year and i don't have much contacts. Help! Thanks

wiherek 12y ago

This is a great resource for legal advise on the case. I also was offered options on a startup that I worked at. I am adding this to my bookmarks :D some cross-reference http://www.businessinsider.com/stock-option-questions-startup-employees-should-ask-2014-4 http://www.businessinsider.com/stock-option-questions-startu... Generally I prefer to leave the legal stuff for my lawyer and focus on coding, but having a reasonable knowledge on the case is preferred.

whistlerbrk 12y ago

This stuff is simply too complex. Just like there guides that make open source licenses easier to understand I wish there was the same for startup stock options.

anonstartupemp 12y ago

I have a related question for folks here. I joined a startup around 2009 as an early employee, left after a couple years, and bought the vested stock. (The company is based in the US, and I'm not a US citizen, FYI). I've been holding on to these stocks so far. Compoany has rasied a small series A just around the time I joined. The company has raised a few rounds of funding since I left. It now looks like the company may IPO/ or be privately acquired. I have not been in touch with anyone in the company over the past couple years. What steps do I take now to ensure I don't get screwed as part of the exit, and/or my stocks diluted to become meaningless? I'm looking for general advice.