Ask HN: How to negotiate stock options?
My position at present is that I very much enjoy my current job, they are very good at rewarding me and give a good level of autonomy to run my engineering team that I acquired and grew myself. I don't have anything to lose here, only (potentially) gain.
However the start up is pretty exciting and I know I could achieve a lot there. I would really enjoy the challenge.
However, the real aspect that would make the difference for me is company stock, to the point that if they sell the company I won't have to worry about paying off the mortgage on my house and get a decent slice for retirement and my kids education.
Now to my question, I am don't know jack about working out what would be a good amount of stock to shoot for. How would I go about establishing this? I figure I need to work out what the company could be worth and then consider what a percentage of options would provide.
Anyone have any experience they could share?
89 comments
[ 1.9 ms ] story [ 163 ms ] threadNote that without early exercise it's likely not worth it.
Also, for anything other than a good exit, the preferred stock holders will likely keep all the money from an exit.
Ex: You get 10,000 options @ strike of $1 vested over 4 years. You exercise all of them early and file 84(b) with the IRS to say "I bought this stock at $1 for cost of $1 = $0 gain". 4 years later the stock is worth $10 / share. Now you have a gain which, most likely, you will owe LTCG if ANYTHING on that.
It's like printing money if you get the right company at the early time with enough shares to make it worthwhile.
> ... if the stock purchased pursuant to the exercise of an option is subject to a substantial risk of forfeiture, the service provider may make an IRC §83(b) election with respect to the stock received pursuant to the exercise of the option.
https://www.irs.gov/businesses/corporations/equity-stock-bas...
Also see "Restricted Property" in Pub 525.
https://www.irs.gov/publications/p525#en_US_2020_publink1000...
I think first you need to try to work out what the approximate value of the company is and what it could be worth if all goes well -- if the company has recently raised money this would be the best way to gauge the current valuation.
If equity isn't already being offered, ask for it, perhaps in exchange for a slight a reduction in salary. If they offer you 1% and you know the current valuation of the company you know exactly what they're offering which will allow you to better assess whether that's a reasonable offer and also if it's worth making a counter offer.
The only experience I can share is that I personally don't believe it's worth asking for stock options in exchange for salary in the majority of cases. Remember, most startups fail and if they fail you're effectively receiving nothing in exchange for a reduced salary. Even if this is a larger more established company then you could always just take the extra salary and invest it in the public market in similar companies -- perhaps ones you like more.
If you really believe in the success of this particular company then go for it, but after a decade of personally being screwed over and watching friends similarly get screwed over, I promise you the dream of making bank in a few years on stock options generally doesn't play out. In fact, I'd personally recommend asking for the opposite whenever stock options are offered -- a higher salary without the stock options. If you're making $5,000 - $10,000 more per year and investing that over 5-10 years 99% of the time your personal investments will be worth more than any stock options offered.
The funny thing is that I guess I'm relatively new in the industry, and the story that left me the biggest impression is how a friend should be able to retire in a couple of years since he joined Snowflake a couple of years ago... Seems that he really really lucked out in this case indeed, since most experienced commentators in this thread unequivocally point out how luck-based this thing is.
My assumption is that if I have a class of stock that is different than that of the executive team, it's worthless. I've learned this hard way.
However if you _don't_ have the same class of stock that _is_ a pretty good sign that you're going to be last in line.
https://danluu.com/startup-options/
https://github.com/jlevy/og-equity-compensation
https://gist.github.com/yossorion/4965df74fd6da6cdc280ec57e8...
https://news.ycombinator.com/item?id=2623777
Others in this thread have posted great advice. You want to know the most recent 409A valuation, and you want to see the cap table (you might be asked to sign an NDA, which is a reasonable ask). Also, its unlikely your role is going to give you enough pull for an acceleration clause or similar (in either the event your role materially changes or an acquisition occurs), so if you do want equity and they're willing to provide it, get as much as you can so you capture as much value as possible during your tenure and vesting period. The difference between 10 basis points can be material in the event of rapid growth and eventual liquidity. The answer is always no if you don’t ask.
The equity is more likely to end up worthless or a trivial amount more often than not, but you can take steps to derisk the devaluation of this component of your compensation.
The vast majority of startup stock options end up worthless. Don't make any future plans based on it. It is a nice bonus if it amounts to something, but you should be sure you're well compensated in salary and benefits if it doesn't.
I would always try to negotiate up by 50% from whatever it is. With startups, it's harder to go up by 50% on cash, but options are more fluid, and the worst they can do is say, "I can't move from X" but in a lot of cases you will probably get, "I can go up to <+25%>".
Negotiation around options is also the best thing to do if you think about it. It shows you think the company has value and that value will be higher in the future, even higher than straight base comp. Would you rather have $1000 more on your salary or $1000 more in options which could have a multiplier in the future. Cash won't. The value of cash is going down over time -- especially recently.
Not always at medium-big startups. It is fixed depending on the position.
I have worked at like 6 different companies now from 20-1400 people. Smaller companies definitely have some flexibility but its usually a cash vs equity conversation.
One thing I would say is, a lot of options related decisions require getting board approval so it might not be as easy as getting your contact to agree to some figure you had in mind. You might also not even be allowed to know how much you're getting until you're already hired due to policies around how the options are valued / issued.
Personally if I were you, if you're looking for a new long term position with stock options I'd try to find a publicly traded company. Mentally I imagine it'll be a lot easier knowing what you'll get based on them providing you +?? stock options per year that you can sell as soon as they're vested for real money. Or if you like it a lot where you're at, maybe they'll give you a better salary to compensate for not having options if you bring up that you're looking to leave.
After dilution, preferences, taxes, you're going to need there to be an exit worth many hundreds of millions to provide you with retirement money as an early employee. Options mostly serve to benefit the company -- they're golden handcuffs.
If you think the company has a very real path to an exit of 500m or more, you're joining early and you're willing to stay with them until their exit -- which, for an early stage startup, that could be 5 - 10 years -- you could probably retire...
As you can tell, I've been through multiple acquisitions (incl. a 9 figure acquisition) and made pennies.
[1] https://medium.com/@CharlesYu/the-ultimate-guide-to-liquidat...
Unless you are already in a good financial position, I'd ask for more cash
A bird in the hand is worth 2 in the bush.
There are significant pros and significant cons, so Google it and evaluate is the advice. Super early (and especially pre-funding), it’s much more beneficial than just after Series B or later.
That said, it depends on seniority and what number employee you are. A very early employee (first 5) can get 1.5-3% that starts to drop pretty quickly where even if you're a senior level employee but employee number 50 after a series A or something you're likely at less than 1% no matter how valuable you are.
A good move is to go on angel.co job boards and see what other similar sized companies are offering for equity for similar positions and make a move from there. And to talk in percentage terms of common stock (because 100/10,000 is better than 1,000/1,000,000).
Like, if you’re offering them a market-valued $300k worth of engineering skill over the next year for $150k, that’s a $150k investment in the company.
What kind of terms would an angel investor offering $150k get?
RE:Preferred shares, Investors get preferred shares -- first money out -- to protect against something like someone raising a round and instantly selling. If the investors were common, the founders would be self-enriching at the direct cost of the investors (and the pension funds etc. funding them.) Your protection against that sort of thing is initially worse -- vesting cliff means no stock for 1yr. This generally gets compensated by a signing bonus to the new firm, but not a big win/loss either way, beyond being grounds to get a new lottery ticket elsewhere (losing you say 6mo on that ground: it was a dud).
After that, more about whether the company has raised more (including participation multiples) than it sells for. With today's megarounds at all stages, this is quite the danger. So it's about knowing how much they need to exit for before common shares convert, and who has the voting rights on that/when, which is a very fair question (vs. seeing the cap table, which is unlikely). Likewise, another protection here is on dilution, like how much of the employee pool is remaining vs will increase dilution on next round... but that that's much less of an existential risk than the trend of revenueless startups raising $3-10M seeds on bad terms (so a quick $10-15M buyout won't work) and unprofitable ones raising $20M+ A's (so a VC-packed board with a drinking-their-own-kool-aid will veto a < $100M deal), and then racing to a unicorn status that prices out most previously viable acquirers who'd only do $100M-300M.
I concur with the sentiment expressed by other commenters: be wary of making financial plans (e.g., paying off a mortgage) that depend on company equity—unless the company is public, which does not seem to be the case per your post.
My advice to people usually is, go to a startup to learn new skills and aim for jobs and responsibilities that you would have trouble getting in larger, more risk-averse organizations.
Do not expect much out of the equity you will be granted for it is too hard to estimate its value: it depends on the cap table and sundry fine print (for instance liquidation preferences can drastically affect how much employees get even if the company exits) and other factors which are hard to control like execution risk. And all in all the financial reward could be far away in the future if the company stays private longer, so your mental model should also take that into account.
There are a lot of great resources online about startup equity, my favorite is the Holloway Guide to Equity, which I highly recommend:
https://www.holloway.com/g/equity-compensation
Good luck!
* Early exercise: Allowing you to exercise your options immediately while the strike price == grant price (tax benefits and lower cash outlay) then vest the shares over time.
* Exercise window: Many companies only give you 90-days to use or lose your options if you leave down the road. Employee-friendly startups were giving 10-year windows for a while but these might have fallen out of vogue now.
* Restrictions on secondary sales and transfers: Ideally, they’ll have a short right of first refusal period but will allow secondary market sales before a liquidity event.
* QSBS: Maybe worth looking at whether the company will qualify at its current size but I wouldn’t worry about it too much. A nice perk if it works out.
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Whatever % you end up at, assume some additional dilution in future funding rounds. The 50% to 75% mentioned below seems aggressive but it all depends on the strength of the company.
Also make sure they don’t have some abnormal vesting schedule. Four year vest with a one-year cliff is still the most common.
Others have linked good resources and I’ll add the Holloway guide.
https://www.holloway.com/g/equity-compensation
Comp at startups are generally a sliding scale of cash to equity. A typical offer will ask you to slide it one way or another.
To judge stock, ask for,
- 409a valuation to know the current strike price of the shares
- total outstanding fully diluted shares to know the total shares available
- size of the employee option pool (eg, 10-15pct)
- possibility of an 83(b) election
- ISO vs NSO - what kind uf options are they?
- re ups, and anti dilution clauses?
- triggering events (eg what happens when the company gets bought?)
The more you know the better you judge the value. If folks are cagey in giving details, definitely push back and ask why.
Next, consider that the company’s progress is all that determines your shares net worth.
- how much do you believe in this team, space and product?
- and ask yourself - are you able to completely push this into a “lost cause financially” bucket in 5y? or do you need the cash? i’d advise being comfortable with the former :)
lastly, look at how much value you bring to the table to determine how much you get. if you’re engineer 1 with two non tech cofounders - you’d be worth much more than engineer 10. In that case, look at some of the blog posts online (esp by folks like Leo Polovets) on some ways to think about these numbers.
good luck!
(1) https://github.com/jlevy/og-equity-compensation
- total outstanding fully diluted shares to know the total shares available
You can ask this, but has anyone actually had success getting an answer to these questions? Every time I've asked questions like these (which are generally considered sensitive financial information) I've gotten laughed at.
Haven't been offered (or asked for) some of the other ones mentioned, like size of employee-specific pool.
That's a red flag that the company you are talking to isn't serious.
Trustworthy people assume other people are trustworthy.
Backstabbers assume other people backstab.
Don’t misunderstand me, there’s a difficult conversation about stock. A few shares doesn’t give a person a say in how the company is run. It doesn’t make a person a principal. Doesn’t make them a “partner”.
Worker bees are still worker bees with shares. Trustworthy people offer shares because it might make you rich.
If someone laughs, they don’t think you deserve to be rich.
In my experience laughter may be overstating it a bit, but the question is brushed off with an "it's confidential" and you are made to feel slightly stupid for asking. And these weren't fly-by-night operations either, but well-respected startups that went on to do very well.
Great filter question because it's very easy to just walk away from them without any further consideration.
Speaking firsthand, Glowforge will always share fully diluted options and the last 409a valuation. What we do is not uncommon, and IMHO is the only ethical course of action.
Note, however, that options are granted by the board, and until they approve the grant, the 409a and hence the strike price may change. For example, if the company got a buyout offer between your conversation and the board action, the board would likely have to order a new 409a before granting.
Good luck!
at the time i was overly-optimistic about its outlook and when countering pushed for more shares instead of higher base.
i bought all my shares before leaving a few years later and made out really well on the acquisition -- i think the sale_share_price was 50 x my_strike_price.
here's the thing though, retrospectively i still don't think i'd ever advise someone to do what i did. there are so many factors that had to line up exactly right for this to be a positive outcome for me:
* joined with particularly low valuation with company in a strong position
* happy enough to stay n years and vest all my shares
* was able to borrow $ from family to outlay the huge cost to buy what were at the time essentially worthless options
* survive getting absolutely KILLED on taxes, i think my AMT obligation when i exercised ended up being almost 2x as much as the cost of buying the shares (it uses a company filed valuation to set current fair-market-value which was completely theoretical since the company was private when i exercised)
i joined a fortune 50 company when i left and pushed for high base and a large performance bonus. i did the math on what my earnings would have looked like over time if i had spent my years working with big-co-pay vs. lower startup pay + good options outcome and even with a crazy lucky outcome i don't think the extra $ i earned was worth the high risk.
my partner and i both agree it wasn't worth it, especially when we reflect on how many early mornings, long nights, and weekends i had to work to make it happen.
Startups offer them in lieu of pay -- they're asking you to bet on the eventual success of the stock. As such, my perspective had been to negotiate to minimize the amount of options in exchange for maximizing the pay rate.
I basically consider stock option to be effectively worthless, and the pay rate is the only thing I really consider. That said, it's happened many times that I've worked for a company even though they couldn't afford to pay me a reasonable salary, because I was drawing value from the work itself. In those cases, options are nice because they are an acknowledgement from the company that you're taking a risk in working for them.
The best way to negotiate options, in my opinion and experience, is to choose a number that you want your options to be worth in 4 years. For example "Hey CEO/Boss, if I work here and blow it out of the water for the next 4 year, I want the options you give me today to be worth at least X number" - This is a fair way to structure the conversation for a few reasons.
1. It sets up a timeline that is inline with your realistic amount of time at the business. If I tell you your options will be worth 100k for example after we IPO for 3B, that is not realistic or fair to you - it only justifies me shafting you today because I'm talking 10 years out and best case scenario.
2. You can walk through the future states (ie 1 to 2 funding rounds) and project the current value out based on expected increases of valuation at these subsequent fundraising rounds.
3. You set the number that you think your effort is with.
4. it is not talking about % points which people have weird biases around due to internet
Note: Assume 20% dolution at each fundraising round.
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My rec's: If its your first startup, tell your boss after 4 years you want your equity to be around 200-300k. This gives you a way to walk backwards to today and come up with a real number of options to hit it.
If its your second and you want a home run be in the 750k-1m range
If you're an exec/leader - aim higher and talk it over.
VP at early stage are coming in around .8-1%
On the other hand, this disregards liquidity: specifically, that vast majority of startups tend to die, vast majority of rest stagnate in funded but non-liquid form, liquidity events are boolean, and are happening generally years beyond fully vesting into stock options.
So, I feel, this too would lead to significant misunderstandings as people vest fully into their options, but can't get a penny for them.
I consider early startup equity like lottery, and an option on that lottery is worth even less in my eye. The taxes and legal specifications make these options super hard to evaluate... At the end, its mostly a way to defer an uncertain employee salary to an uncertain future... Normal equity is a mechanism to share decisional power, not only money. In my mind, most startup equity is to equity what Avril Lavigne is to heavy metal... not the real thing, something else in disguise.
And to be even bolder, I am actually against using options for any form of compensation, for employees AND for management. By nature, the value of an long call option does not only increase with the value of the underlying, but also with the volatility of the underlying. And if your option is way out of the money (Underlying <<<<<<< Strike price), your sensitivity to volatility is higher than the sensitivitiy to the underlying. In which situation would you want anybody in a business to have these incentives?
What's good about it, what's bad about it?
Realistically, as an employee, your total comp has a bunch of factors that include bonuses, insurance, benefits, travel rewards and flight/hotel choices, expense discretion, charity support, the list goes on to contain a lot of things.
These frame the question in terms of what portion of that total package value to you do you want a in the form of lottery tickets? (and not their price or claim of value on it)
Maybe you say, "nice salary, I'd like an additional notional 20% in options over 4 years," etc.
Maybe you are doing fine and you see a near term exit and you say, "This company has a 2-3 year horizon, I don't need the salary as much and I'll trade 25% of your offer for options provided you provide me and my lawyer with the full cap table. If not cap table, I need to price that in to the risk on the salary and I'm going to need 20% more."
If you don't have negotiating leverage or skill, you just say, "thank you!" and throw them in your change jar with old lottery tickets.