6 ms·

Why do we give out options instead of stock in the first place?

rdl 11y ago
Tax reasons and complications with having >500 shareholders (and shareholder information, etc. rights in general), plus administrative costs. Early on, you issue founder grants if you want, at common stock price, paid in cash. A company is worth $100 in total, so you can buy 10% of it for $10. Common and preferred can run separately in terms of price (although there's some relationship between the two; more enforced now than in the past.) After Series A, 1% of the company would be a real amount of money -- maybe a $10mm valuation, so 1% would cost your engineer $100k at hiring. That's a lot of cash for an employee to invest.
- deleted 11y ago
  [deleted]
- scurvy 11y ago
  > 500 unaccredited share holders. The JOBS act got rid of the 500 shareholder arbitrary limit. It's now 2000 total or 500 unaccredited.
  - rdl 11y ago
    The #1 reason for all of this is actually "that's how it has always been done", which is strong motivation for non-core things in a startup.
nasalgoat 11y ago
Taxes. Stock is a capital gain, an option is only potential.
- jkarneges 11y ago
  To expand on this, if you give an employee stock rather than options, then they'd have to pay taxes on the stock value. It would suck to pay thousands in taxes for stock that ends up being worth nothing when the startup fails. With stock options, the tax issues are deferred and only come into play if the company succeeds and you want to exercise+sell.
  - scurvy 11y ago
    The employee can make an 83b election upon grant, pay for the stock up front, and not get hit with a tax bill upon vest. If the company is public (either via acquisition or IPO), the company will sell part of your vested stock to cover taxes.
    - jkarneges 11y ago
      Even with the 83b, you'd still have to pay taxes on the current value. This is practical if the stock still has negligible value (i.e. you joined pre-funding), but otherwise you face being taxed on monopoly money.
      - rstephenson2 11y ago
        My understanding is that you pay taxes not on the current value, but on the difference between the value of the stock and the price you paid for it. It's essentially treated as income.
        jkarneges 11y ago
        That's correct. But if you're buying shares at non-negligible value then you're basically an investor at that point. No employee is going to do that. More likely, the company might give away shares to an employee in lieu of salary, but then the employee has to pay taxes on the value. In other words, there's no way to obtain stock in a private company without facing some kind of expense. You're either paying money directly for shares, or paying taxes on the gift of shares. The only way to avoid any of this is: 1) Be there at the very beginning, when shares have negligible value and can be bought easily. OR 2) Be granted stock options instead of real stock.
        scurvy 11y ago
        How much is non negligible?

rdl 11y ago

Tax reasons and complications with having >500 shareholders (and shareholder information, etc. rights in general), plus administrative costs. Early on, you issue founder grants if you want, at common stock price, paid in cash. A company is worth $100 in total, so you can buy 10% of it for $10. Common and preferred can run separately in terms of price (although there's some relationship between the two; more enforced now than in the past.) After Series A, 1% of the company would be a real amount of money -- maybe a $10mm valuation, so 1% would cost your engineer $100k at hiring. That's a lot of cash for an employee to invest.

deleted 11y ago
[deleted]
scurvy 11y ago
> 500 unaccredited share holders. The JOBS act got rid of the 500 shareholder arbitrary limit. It's now 2000 total or 500 unaccredited.
- rdl 11y ago
  The #1 reason for all of this is actually "that's how it has always been done", which is strong motivation for non-core things in a startup.

nasalgoat 11y ago

Taxes. Stock is a capital gain, an option is only potential.

jkarneges 11y ago
To expand on this, if you give an employee stock rather than options, then they'd have to pay taxes on the stock value. It would suck to pay thousands in taxes for stock that ends up being worth nothing when the startup fails. With stock options, the tax issues are deferred and only come into play if the company succeeds and you want to exercise+sell.
- scurvy 11y ago
  The employee can make an 83b election upon grant, pay for the stock up front, and not get hit with a tax bill upon vest. If the company is public (either via acquisition or IPO), the company will sell part of your vested stock to cover taxes.
  - jkarneges 11y ago
    Even with the 83b, you'd still have to pay taxes on the current value. This is practical if the stock still has negligible value (i.e. you joined pre-funding), but otherwise you face being taxed on monopoly money.
    - rstephenson2 11y ago
      My understanding is that you pay taxes not on the current value, but on the difference between the value of the stock and the price you paid for it. It's essentially treated as income.
      - jkarneges 11y ago
        That's correct. But if you're buying shares at non-negligible value then you're basically an investor at that point. No employee is going to do that. More likely, the company might give away shares to an employee in lieu of salary, but then the employee has to pay taxes on the value. In other words, there's no way to obtain stock in a private company without facing some kind of expense. You're either paying money directly for shares, or paying taxes on the gift of shares. The only way to avoid any of this is: 1) Be there at the very beginning, when shares have negligible value and can be bought easily. OR 2) Be granted stock options instead of real stock.
        scurvy 11y ago
        How much is non negligible?