do you (or anyone else) know what happens if you do an 83b election then leave the company before 4 years?
Also, this doesn't really help post A, particularly if you're getting pretty senior and have a bunch of experience. At my last place, I would have had a $50k bill to do an 83b. I could write that check but goddamn is that a lot of cash to part with.
Ask to forward exercise when joining. From what I understand, there isn't a negative impact on the employer, you are just being granted RSU's that they have an option to buy back for $0 before your cliff, and then convert to ISO's at your cliff. You can file that 83b election immediately, which will substantially drop your tax burden.
right right, but I have to (1) come up with $50k in cash (in my example), and (2) if the job isn't working out, I want the fraction of my initial payment back upon leaving and it isn't clear this happens...
Early exercise makes the most sense for seed stage companies where the exercise price is still low... at companies where you have to spend $50K or more to exercise, I've seen loans being handed out by the company to its executives to make it possible for them to take advantage of it.
Any insight into why a company wouldn't allow forward exercising? The legal/finance team at my company refused to do it, though I wasn't given an explanation why.
* Employees have less incentive to stay because they won't run into the AMT "handcuff" situation (where if they leave they have to exercise their options or lose them, and they can't afford to pay the taxes to exercise the options).
* More employees will actually exercise their options before liquidity, which means more minority shareholders.
Yep, we offered this to all of our employees at Hired after our seed round, but before our $15m Series-A. The majority took the early exercise option once they understood it.
It's a massive lift for our team (based on tax savings) when an eventual liquidity event occurs, with no downside for the company other than additional paperwork and some legal costs.
>Perhaps the best way to think about it is to try to come up with a total compensation package with the same expected value (using the company valuation of the last round, or a best-efforts guess if it’s been a long time since the round) as the employee would get at a big company like Google
Am I missing something or is this saying people should be offered an 'expected' equal compensation package to what they would get at Google? What would the incentive be? Google is a company with quite a bit of projected longevity, career progression, and very good perks. Why would I choose a startup with inherently greater risk for only the same reward?
I think he is saying to use the "expected value" calculation that guys like Michael O. Church and the others who warn of the dangers of overvaluing options. Generally, this applies a heavy discount to the potential value of the options to account for the increased risk. So the compensation package should be salary + EV(options) ~= big company. That leaves substantial upside in the case of a success (and if you are joining a company and taking any options at all instead of salary, you should be betting on this anyway).
Google may not be the best company to pin to, since they offer pretty generous stock grants from what I understand.
The problem with ev calculations is variance (as Michael O, et al, will no doubt forcibly assert.) Employees in the bay area housing market are probably better off taking a lower ev with a corresponding much much lower variance.
That's probably all true. My only point was I don't think Sam was saying to make the compensation package that equals what you'd get at Google based on the most optimistic outcomes, but on a true, expected outcome using some broader averages (which leaves room for upside).
This is a great post, and I agree with almost everything Sam wrote. I think problems #1 and #4 are unfair (you might get less than you deserve, or less than you thought you were getting), but problems #2 and #3 are extremely unfair (you can't take what you've earned with you if you leave the company, or you have to pay taxes on something that has no liquid value and might not have any value in the long run).
I'd love to get Sam's (or anyone else's) thoughts on the 10%/20%/30%/40% 4-year vesting schedule that was mentioned. I don't like this schedule for two reasons:
1) It creates larger discrepancies in what employees earn over time relative to each other. If employee #1 joins today and gets a 2% grant, and employee #20 joins in 2 years and gets a 0.2% grant, then in year 3 of the company, employee #1 will vest 30x as much as employee #20, instead of 10x with the current 25%/25%/25%/25% scheme.
2) This scheme seems to replace and/or ruin refresher grants. Currently, if you do a good job, you get refresher grants every year or two. With the 10/20/30/40 system, you're already getting higher and higher compensation over time, regardless of performance, and the bump from refresher grants while you are vesting your original grant becomes minor. Furthermore, the drop from what you vest in year 4 to what you'd vest from just refresher grants in year 5 becomes much more dramatic and much more likely to push someone to look for other work.
The back-weighted scheme is also problematic because sets up a perverse incentive to consider letting people go at the end of their second year unless they are all-stars, since the company ends up keeping 70% of that equity and gets 2 years of hard work out of the person. With an even weighted scheme there is no time-dependent tradeoff like this to be made, the employee continually earns shares at a fixed rate and as long as they are contributing managers never have a hard "decision point" to make with regards to their shares.
The problem with back weighted grants (and amazon is famous for this) is that the companies that do it are the ones who ride developers raw and are doing it to attempt to stanch horrific employee turnover. Well, I guess I'm generalizing from the example of amazon, but really, is that the company you want to keep?
My take on it as a startup employee is (1) no, (2) hell no, and (3) your company sucks and you are doing this to attempt to lock me in. Also, hell no.
The best solution I have heard is from Adam D’Angelo at Quora. The idea is
to grant options that are exercisable for 10 years from the grant date,
which should cover nearly all cases
That is an awesome idea, and really classy on Adam's part.
It's a great idea, and Adam is classy for a number of reasons, but having just left Quora, I only have 90 days to exercise my options, so it's not something Quora is doing right now, which is what the article seems to imply.
I think you should hit up Adam and see if he can provide you with a 9-year 9-month extension. If not, you should let Sam know so he can provide an update clarification on the article.
There is also a precedent for such type of clarification updates in YC family. YC founding partner, Jessica Livingston, provided a clarification with respects to Sabeer Bhatia of Hotmail vs. DFJ ventures based on the statements Bhatia made in an interview with her for the book "Founders at Work".
From a company's point of view, wouldn't that really suck, having all of these outstanding shares in limbo? I'd imagine at least part of the 90-day thing is just so that the company knows the status of those shares. For an employee, the company is holding those out as a carrot for you: someday those shares might pay off, if you work hard. For a former employee, he/she gets 90 days to decide whether to pony up the cash for the company (who gets money in exchange for the shares), or they get the stock back to give to other employees.
Having to keep track of "large" (unsure of how to quantify that) percentages of the company that might be purchased at a later date seems like a liability that the company wouldn't want to have to track, especially as a startup with other things to focus on. They're useless to the company, the only upside is for the employee.
Is it really more difficult to keep track of than regular shares? It's easy to decide if the stock might be purchased: if the IPO/acquisition is priced above strike price, then they obviously will be bought, and otherwise will not.
It is indeed not useful to the company, and a great upside for the employee. Out of all suggestions in the article, this is probably the most employee-friendly. But that's not a bad thing if it helps recruit good employees, or otherwise seems like a fair thing to do.
The usual 90-day limit makes employee vesting almost meaningless. They either wait for an acquisition (and get all their options accelerated), or leave before that (and lose all of them). Few employees have enough spare cash to buy out their shares.
that's not the only option. The company could remain privately owned - in which case you want to have below 100 shareholders so that you can remain a C corp
I think 180 - 365 days seems far more reasonable. It's ridiculous to have the company shares tied up with the inability to give them back to other employees.
180 / 365 will pose the issues as 90 days. I had to let go of my stocks since the price to exercise was too high when I left. I wasn't sure when the company would ever IPO or get bought. Though had it been 365 days, it would have worked out for me. My company got acquired 8 months after I had left.
And that's why options are (mostly) a scam. If you leave before a liquidity event for any reason (they may not come, they take a long time, life circumstances, poor career growth, employers like to give shitty raises), you're stuck either investing often tens of thousands of dollars into an illiquid investment while paying taxes on it right now, or giving up your options. Sweet deal for employers either way. So when they hand out those option grants they probably get to apply a 50% discount or more to exercise.
Not to mention employers often try to avoid even telling employees what fraction of the total company their options represent, and definitely don't care to share their participation multiples. They're often very happy to let you think that in the case if a liquidation event, you get (exit amount) * (your ownership fraction) which just isn't true.
@apta: see [1] for a numerical example. You get taxed twice (or three times if someone is stupid) on typical ISOs:
1 - on grant, if the strike is less than the fmv (there are huge tax penalties for this, both for you and your employer, so it oughtn't happen)
2 - on exercise when you convert the option to a stock, on the spread between fmv and strike (but probably amt, depending on the type of option; it's mildly complicated)
3 - on sale of the stock, on the spread between the sale price and your basis
> you're stuck either investing often tens of thousands of dollars into an illiquid investment while paying taxes on it right now
I am not really familiar about this area. It is a one time price to pay to purchase the stock options, is that correct? Furthermore, where does tax come into play? Don't you only get taxed if you decide to sell the stocks to generate income?
From how I understand it, when you decide to exercise your options (pay the strike price), you owe taxes on the different between your strike price and current fair market value even if you don't sell the stock. Most of the time, this counts as AMT (Alternative Minimum Tax) if you don't sell the stocks within the same tax year.
You have to report the "paper capital gains" for AMT purposes but that doesn't necessarily subject you to paying the AMT. And if it does, you will at least get AMT credits you can apply towards future tax years.
If someone won't tell you the number of shares outstanding then you should value it during hiring negotiations at zero. I've had two potential employers (over 16 years) try to pull that on me and I was sure to tell them how much I thought their equity offer was worth during salary conversations. They both eventually produced information on company structure and valuation. It always helps to ask :)
Presumably if the company is successful, the options will be exercised at some point. The company would make that assumption and expand their option pool accordingly.
As part of your compensation package when you sign up, you're granted a set of unvested options. The idea is, as you work for the company and provide the value you've promised, the options become vested and are actually yours.
So why do you need to stay there to keep them? If I work at a company for a year and 25% of my options vest, why are the terms surrounding their exercise different depending on whether I choose to stay or not? I earned those options by working there for a year. Why is it fair to take them back if I decide to leave instead of stay?
Yes, I get that you're agreeing to that up front, so it's not like you should be surprised when the 90-day limit kicks in. I just wish option grant agreements weren't structured like that, but the employee has pretty much zero power to change that; these grants are pretty much take-it-or-leave-it, and the only point of negotiation seems to be in the quantity of the options. At best.
I've been thinking of putting together something simple to analyze employee option paperwork and add some plain English annotations to help employees understand exactly what they're signing. Based on my experience, there's something like 5 or so templates that cover 90% of the startups in the valley, so shouldn't be too hard. Is there any interest in something like this?
This would be fantastically useful. Please, do this. I looked, hard, for this in the last month. If you need it, I'll talk to my employer about creating a template with dummy information based on my package.
Please do this! It's not just valley startups that are confused by this -- other cities are too. And as you say, there are usually 5 templates that cover the vast majority of cases.
I agree that a resource like this would be incredibly valuable for startups and employees outside of the valley too. Even though they may not have the same details, the annotations may help explain general concepts and terms which are important.
I had a comment on another thread recently proposing something in a similar vein to help employees understand what their stock options mean/are worth: https://news.ycombinator.com/item?id=7584320
We at Casetext are interested in this space as well. Our annotations technology will undergo some major improvements in the near future, but even the way they are today may be sufficient to meet your needs. Hit me up (jake at casetext.com) if you want to work together to make this a reality. Here's an example of what docs look like on Casetext now: https://casetext.com/contract/simple-agreement-for-future-eq...
Regarding the question of knowing what percentage of total equity your stock grant represents, most companies that are not incredibly early stage will simply not tell you.
Pushing the subject further will make you look like you're nosing around where you shouldn't, often leading to the offer being dropped (this has happened to me).
Not to say it wasn't a not-so-great company to start with, but a dropped offer is a dropped offer.
Yeah, it's crazy. But it's super-common. I always ask how many shares are outstanding, and nobody ever has the information at hand. It's like they said, "We're going to give you 10,000 units of some currency. But we won't tell you whether it's a Zimbabwe dollar (current value: $0.002) or a Euro (current value: $1.38)."
I was lucky that my first job was upfront about what I was getting (%, # options, and outstanding shares). I like to think that I have enough confidence at this point that I would refuse a company that wouldn't tell me what me equity is worth.
Very interesting. I like this train of thought. I have a lot of developer friends that would rather (and are) pursuing their own entrepreneurial ideas than join an existing company. While I wholeheartedly support that, the flip side is fewer startup-savvy developers available to join other startups.
There are a lot of reasons why they are pursuing their own ventures. A common one is: "It's not worth it to be an employee of a startup. You need to be a founder. (Or maybe employee #1-5.)" You may disagree with that belief, but it's certainly a belief many hold. Sam's suggestions may take this reason off the table.
> "It's not worth it to be an employee of a startup. You need to be a founder."
Yup. If you can get a job at a tech company that offers high compensation, you will likely make more there (and gain lots of great experience) than you will at a startup.
Look at the value over 4 years:
- Startup salary (~$100k-ish) vs. Tech co (~$140k-ish+)
- Startup equity could be worth $1,000,000 if you get 1% and the company sells for 100 million (obviously there can be other factors here, but lets just use that number)
- Large co. Stock grant could be 150k-200k+(or more!) over 4 years, and you'll likely get refresher grants on top of that each year. And the stock price will likely go up over those 4 years. So after year 4 you are making quite a bit off of your vesting stocks.
There's also a pretty good chance the startup will fail, which would net you nothing but a sub-market salary for the last few years, so it will be harder for you to negotiate a higher salary at your next gig. Or if you are acqui-hired, you'll get some small hiring bonus and then have to wait 4 more years for your new stock to vest.
To me, the only time joining a startup and taking below-market compensation is if you are just starting out and want to gain some experience you might not get at a more established company, or perhaps your skills aren't up to par so you can't get past the interviews[1].
Or maybe you just like the "startup culture", and that's cool, but why not start your own thing instead?
[1] Note that if your startup gets acqui-hired, you'll probably have to interview anyway, which could result in not getting an offer!
The problem with the 10%/20%/30%/40% thing is that if the company shoots way up in value, an employee could theoretically be fired after two years and not capture much of the value they helped to create. It also doesn't necessarily need to be malicious [1], sometimes companies change and a person's skills aren't as valuable anymore.
If I were a prospective employee I would never take a deal like this, because it is really difficult to have that much trust in a company and founders that you likely don't know that much about. I can't say the standard 4-year vest with a 1-year cliff is the most optimal situation, but from an employee perspective it is way better than 10/20/30/40.
1: Though it could be, I know there was a story about something happened at Zygna like this
Great point. In dollar terms within the respective vesting years, 10%/20%/30%/40% might look something like 5k/100k/200k/500k, which is extremely back loaded (and could help explain the Zynga 'scandal').
The scenario is little different from any other where someone lacks a controlling interest. Controlling interests can sell the company to another company they control at a price that suits their interests. They can issue shares to dilute equity and use the shares to acquire a company which they also control. Any legal action agaist such practices can be defended on the company's dime.
In other words, if scumbags control the company, scumbags control the company. Fortunately, most people aren't scumbags.
You don't know what the fuck you are talking about.
If you have actually lived in the society that actually exists, rather than the one entirely in your own head that you wish to believe in, you'll recognize that there is a positive correlation between social position and being unethical. (1) Power corrupts, (2) power attracts bad people, (3) bad people are more willing to make moral compromises to get power, (4) good people in power (it does happen) are usually not cynical enough to tell when they're being lied to by their lieutenants.
It's completely understandable that you'd rather live in your Pollyanna fantasy world, and that's fine. If you want to believe that the world is 6,000 years old, that is likewise OK with me (even if you're wrong). What I won't let you do is spread delusion to the young and gullible. If you don't know what the fuck you're talking about, then kindly quiet down and let the adults talk.
Hey. Personal attacks are not allowed on Hacker News, even when someone else flames you first.
(This originally read "regardless of how wrong you think someone is", but as someone pointed out to me, that was the wrong way to put it, and the original offender was upthread.)
But money changes things. Let's there are two best friends, you offer the first person some money to back stab the other. The guy may not agree. However keep raising the offer and at some point of time when the figure hits a $X0/$X00 million I bet the guy's intentions will change.
Every one sells, its just the number that differs.
No, some people are "scumbags". I once worked for a company that suddenly ran out of it's startup money source and was forced to do a deal with a couple of "angel" investors ... who turned out to be devils.
They wrote into the agreement certain metrics that the company would have to meet after launch, and did everything they could to prevent it reaching those, e.g. firing the guy would would have made the sales, our multi-talented lawyer stepped up and made them. When Kleiner Perkins, who's connections could have been a make or break for the company, cold called us, these devils blew them off.
Their attitude was they'd rather have 100% of nothing (well, they probably thought it would have been something), and the company essentially died when 13 of us resigned en masse from the CEO down to all but one most junior engineer. (And then we had to go to the state to get our back pay for that partial pay period.)
I was in some of the last minute, try to save things face to face negotiations; these guys were malevolent. Not sure how they achieved net worths of 100 million and 500 million, but if they retained any control, they sure didn't use that money for good.
Thinking about this another way, if the company shoots up in value immediately even 10% of your equity grant could mean a significant payout if the company is following the rest of Sam's advice by offering above market percentages and being exercisable up to 10 years after the grant date.
If you were committed to more equity though, this might make sense. Right now it's 25/25/25/25. An employer might want to offer above-market equity but backload the extra, so it's more like 25/50/75/100 compared to market (this example gives 2.5x the market equity rate). At year 2, pre-grant another 25/25/25/25 refresher to start after year 4.
Thought exercise: If you get 4x the equity/options, you only need to work 1/4 as longer as you would under the old regime. This means that if you get fired after the first year, you're in the same boat as if you had stayed for all four years under the old equity split. What's important to solve to make this work is some clause like the 10 year exercise window.
It's important to note that Sam also suggested an increased equity grant on top of the 10/20/30/40 schedule. The expected value of 10/20/30/40 only matches 25/25/25/25 if the overall equity grant under 10/20/30/40 is higher to begin with. Depending on the time value of money, and upon one's personal opportunity costs year over year, that equity award might need to be significantly higher. Alternatively, as Sam suggests, there are compensating mechanisms (new grants, vesting acceleration based on performance, etc.).
All things being equal, I wouldn't take a 10/20/30/40 over a 25/25/25/25, because it would be economically irrational to do so. But all things aren't supposed to be equal under the two structures.
It's quite difficult to compete with Google and their revenue/cash hordes when it comes to salary / total comp. Especially if you price the options at the last round's price and discount them some more.
Imagine a well to do company of 2 founders (in SF/Bay Area) and a team of 3-4 others that raised a seed at 10m cap. They want to grow their team headcount to 15 and are busy hiring, running servers, etc. They can offer a 100k salary (more than enough to live on) to a sort of senior engineer or PM and want to compete with Google on total comp. Let's say they need to make up the other 100k difference in comp & salary with options. Over 4 years, you're looking at a 4% equity chunk to one employee, the 6th person joining the company.
Not that I think numbers in line with this aren't realistic (I do agree with Sam that more generous equity grants are better), but for most companies that make a 15% option chunk for employees it's difficult to rationalize a number like that.
Edit: Also, that puts the equity comp of that 6th employee (or 10th, because in most cases you will have a similar equity bracket for those people) at about 1/8th of the founders, not the 1/200th that Sam mentioned. I wonder how many people have made offers to employees with a similar comp plan.
The 100k number isn't engraved in stone, to stay the same for 10 years. If there is a talent shortage and big houses raise salaries to pull it in, VC will have to follow up.
It would be more realistic if it accounted for the expected growth of the company valuation. It's unrealistic that the company should be valued at 10m for the next 4 years - it's going to grow or zero. Also their salary is likely to bump. Just doing some quick numbers it might be realistic to give the same "EV" as google by granting 2.3% with no raise or 1.5% with a salary that approaches market over 4 years. I think that's very reasonable for the kind of person who is turning down a 200k/yr job to work for you.
The valuation is the expected value. And since we're talking about investors who get preferred shares, the actual valuation for determining the value of the common shares (which employees get) is lower than that, still.
You're not wrong and that view represents the normal thinking I suppose. But don't you think it feels weird to say, "We're going to pay you next year in equity at this years valuation"? if you choose to stay in the company for year 2, it's strange to think that your risk goes down while value per share goes up. Your effective cash+stock compensation for year 2/3/4 goes way way up if you think in those terms. Then drops sharply at year 5!
I don't know, I suppose in a fair world you would be given more equity on yr1, less y2, etc. But that doesn't motivate people to stick around like the existing structure.
Value per share goes up, but presumably the employee had a significant role in making it go up, so that part seems fair. The 5th year discontinuity is an unresolved problem, though. It seems that, for the most part, people don't expect their employees to stick around that long. In the blog post, it mentions that some people are moving to 5 or 6 year vesting.
> The 5th year discontinuity is an unresolved problem, though.
By the end of year 3, you should be having "that talk" with whomever is running the show at that point. If you are a valued, productive member of the team, you'll negotiate another package that is at market. If not, it's probably time to move on to the next town 'cuz you're a rolling stone, always looking for the next adventure....
> Your effective cash+stock compensation for year 2/3/4 goes way way up
Not if the company flails or fails. If it does well, your increased comp makes up for the even more probable counterfactual, where your equity was worth bupkiss but you plugged away like a true belieber until the lights went out and the last pizza box was empty.
100K is not more than enough to live on, if you live in the Valley and have a family (say 3 kids) then 100K barely buys you a comfortable lifestyle. I know that is not the point of this thread but so much focus of these discussions seems to pivot around a 22 year old college dropout who lives with roommates in a shared apartment.
When you reach a certain point, say your mid-30s and you have kids your financial obligations can extend far beyond what people think is necessary to 'live on'. You have retirement contributions, savings for college, long term care for family (most people believe it or not, have to help their parents out at some point).
And that's why in the latter case, an early stage startup may not be for you. You join later, with a higher salary, when it has stabilized and looks to be going somewhere. And without the risk, you don't expect the equity to offset it. Pretty simple, really.
An equity offering of 1-5% doesn't offset the reduced salary. That equity typically doesn't imbue the recipient with the same authority as the founders' equity imbues them. Yet, for example, Hire #1 in a two-founder startup is pretty darn close to sharing 1/3 rd of the risk as the founders. It's just that his risk is assumed to be amortized over the term of his tenure and slightly reduced by a salary, so it has the appearance of being significantly less than it really is, even though neither component of that assumption is valid.
Being able to raise a seed round is a non-trivial hurdle and is not something most engineers can do. Compensation isn't really about risk (which is low for everyone involved given the current employment market), it's about value and opportunity cost.
I agree with the logic that gives very early employees 3-5% equity stakes. Any more than that I think is unfair to founders and angels -- there is real value in getting even a reduced salary. Most founders have worked for a year or two without any cash comp, at something that may look absolutely ridiculous on a resume. That is a humongous risk. Those coming in after that risk, plus the risk of failing to raise the seed money, are IMSHO taking about an order of magnitude less risk, therefore the 3-5-ish percent number makes sense.
Don't even get me started on this idiotic "we put 15% aside for employees" crap. Fogedaboudit. $80 to DE and you've got 10 million more shares to play with. Not my fault you failed to get the arithmetic right the first time around.
A 22 old college dropout who lives with roommates in a shared apartment can live in $50,000 a year or less, even in the Valley.
As a sibling comment mentioned, working at startups, especially early stage startups, isn't for everyone. If a person has major financial obligations a more steady job with less uncertainty (and less potential for upside) is probably the best fit.
It is not really aggressive if you are planning on growing your company. Typically, a high growth oriented venture funded startup is looking to get about 12-18 months of runway from their funding, hit some metrics and get funded for series A, repeat. 2M seed round at 5 employees means avg per employee spending of 260k / year. This is assuming you're not bringing any revenue in yourself.
I suppose it depends on whether you're running a startup with revenues or not. I am operating from the assumption that by series A you're about at the 1m arr revenue level and your revenue + funding are funneling your growth. YMMV with companies with low/no revenue.
200k is nowhere close to total comp for a lot of engineers at google. 300-400k for anyone with 7+ years experience who is worth a damn, and some are topping million+. Startups simply cannot compete with google compensation, period. No matter how much equity you give.
There may be valid reasons to work for a startup, but thinking you will be paid to the best of your ability or god-forbid, thinking you will get rich is not a valid reason.
It's easy for a startup to compete with google on compensation: just be a huge success. If you sell for $10 billion, a typical engineer with 0.1% equity will do well. A first employee with 2% equity will do very well indeed.
But yeah, on average, it's not going to be as good as Google. Pick your startup carefully.
I was underestimating the comp for google engineers just to prove the point. I strongly agree that working at google is better in terms of pure comp (though the longer term capital gain taxes do work out better than salary..)
I totally dig these ideas - is there any consensus docs floating around we can use for our employees? and/or is anybody implementing these ideas today? ( perhaps we can borrow their docs ). Thx
I don't think the 4/1 aspect of vesting is a particularly big problem. If you are enjoying your job at 4 years, the job has probably changed substantially, and you can renegotiate for a refresher grant.
I don't see any problem with restricted stock pre series A, when equity is the biggest consideration for employees. As long as financing is notes, the common hasn't yet been priced, so you can just use a very low value.
Willingness to issue refresher grants is easy for CEO and board to change.
I don't think you need to be as open as buffer, but being open with percentage ownership and financials seems obvious.
RSUs with a performance modifier already cover most of this for larger companies. Something like that for startups probably wouldn't work since so much of the risk is company-wide vs. individual.
Most people don't know how to renegotiate, and by the time they need to do it, they've negotiated their compensation at some other place and are giving a 2-week notice.
It would be cool if people got a "career manager" who helped them with this kind of stuff on an ongoing basis (at least within a given job, if not across companies for the duration of a career).
If you trust the founders, they can probably help you up to ~50 person companies like this, but there is an inherent conflict of interest.
The easiest would be if the IRS would agree to not tax illiquid private stock until it gets sold, and then tax the gain from the basis as long-term capital gains and the original value as ordinary income.
I think employees would be more than happy to treat all of this as ordinary income, if that would make it more appealing to the IRS.
It's a quid-pro-quo. Right now, if a company gives you private stock you have to treat it as income and pay taxes for it. It's not real income yet, since you can't sell it, but you pay taxes. Later on (hopefully), the stock turns into real money and you pay the (lower) long term capital gains rate.
What I was proposing was: Hey IRS, if you let me skip the taxes early on, I'll pay a higher rate down the road. I will gladly sacrifice long term upside for short term risk in this particular case (since the odds are already so heavily skewed in the other direction).
> Right now, if a company gives you private stock you have to treat it as income and pay taxes for it. It's not real income yet, since you can't sell it, but you pay taxes.
I think RSUs do exactly that. They're taxed at conversion time which typically coincides with a liquidity event. At issue time they're not treated as income precisely due to restricted nature of it.
After some googling, I agree with you. RSU's are much better than options. So... The solution to the problem of better compensating employees could simply be giving RSU's in place of options.
Yeah, from employee standpoint RSUs are generally better. Late stage companies (GOOG, FB, AMZN) universally grant RSUs. For an early stage company I could see a few counterpoints why not go the RSU route:
1) ISOs are still tax-advantageous if you have the means to exercise them. It turns out that most of the senior hires that arrive at a rapidly growing company are hired for experience, and quite often are wealthy, so for them ISOs are a better deal. Probably minor detail, but with all else being equal a wealthy hire for VP of Sales or VP of Engineering position is more motivated to go the ISO route.
2) Companies nowadays stay private for longer periods of time, and private company shares are getting more liquidity bit by bit (SecondMarket, SharesPost, Equidate). For someone who left the company selling a portion of their holdings, either to get some spare cash, or/and to cover the tax bill associated with ISO exercise, would be nice. RSUs rob employees of that opportunity - the R is gone when company says it's gone.
3) There's certain advantage to companies having golden handcuffs on people. Frequently that means that your earliest or most productive hires are not even shopping around, since they know their share of equity is material, and they are aware they cannot cover the tax bill, so might just as well enjoy the current job.
I think RSUs are universally better for employees because your downside risk is zero. You'd have to be extremely confidant to be willing to risk money for the sake of tax savings (I suppose if the exercise price is low enough it's a non issue).
There's another option that people never seem to talk about. Treat people well, give them a good working environment, and give them a fair salary based on the fact that they don't have any equity.
Most engineers I know with stock options and a discounted salary would have been much better with a higher annual salary and no stock options at all.
This is attractive for someone out of college, but if you're trying to attract someone senior with a YouTube/Google/LinkedIn/Facebook/Twitter exit in their resume (and sometimes multiple of those, not that uncommon in the Valley), your fair salary is likely to be less than the total package they can get elsewhere.
In that case odds are the startup doesn't have sufficient funds to pay for the talent it (thinks it) needs. I'd argue that this means the startup is: a) mistaken about its needs; b) poorly run; or c) a bad idea (e.g. the price the target market is willing to pay is insufficient to support even the optimally efficient startup's costs to provide service).
Well, one way to attract quality people without sufficient funds is to be generous with equity. The more senior you get, the less sensitive potential early hires are to the salary levels - their investment income alone is likely to be multiples of whatever you plan to offer salary-wise. Getting them sold on owning a larger stake in an interesting company will probably get them excited.
This misses the point. Prostoalex's point is that a senior engineer can pull $300k+ at a place like Google/Facebook/etc., all while working less than 9 hours a day with lavish perks.
When a senior engineer goes off and tries to work at a startup, it is precisely because they want to try playing the lottery (with a very fat equity slice), not because they're going out to try and get a ultra-competitive cash salary.
Sam is dead-on that the current situation isn't fair and often offers employees little to no information about how the options work.
The 90 days to exercise thing is a real bummer -- for lots of reasons. As Sam says, not every employee is in a position to relinquish that kind of money for the options and taxes. I would say that if you are looking to go someplace else, depending on the size of the company and the situation, it's not out-of-line to try to value the options you won't get to exercise (or even the exercise price) into your new salary. Most companies aren't going to be willing to give you what you need to vest-out upfront, but it is a good way to negotiate either a one-time bonus or higher salary.
#2 is the biggest one of them all. But it will be really hard to convince start ups to do this, since it has a big golden handcuffs component to it if the start up gets some decent momentum. #2 will also simplify tax planning considerably.
I am a fan of giving options every year with a performance multiplier. That way the high performers are rewarded with more options and your available options are more accurately divided amongst the employees who have made the most impact.
When you are not yet cash flow positive as a startup you can give 'bonuses' in options rather than in cash.
I don't know if we could figure out a portion that employees could contribute to additional investment rounds if they wanted to take some money off the table.
How do you define performance? It's a fantastically difficult thing to define. In my experience every attempt at this (at least for engineers) ends up in a situation where people are putting their effort into maximizing metrics as opposed to furthering business goals.
We completely decouple performance reviews from compensation. Full stop.
What? Why? Don't the overachievers then become bitter knowing that the guy next desk to them is making more by working less, just because he was better at negotiating at some point?
We solve that through careful hiring, and not being afraid to part ways with folks who can't get the job done satisfactorily.
Interestingly we decouple the two precisely because of what you're describing. When you start singling out specific people, other folks who are also doing very good work pretty quickly become disinterested in their job. That's bad.
Even worse, measuring ACTUAL value to the company is really really difficult (I'd suggest that it is impossible). So now you are in real danger of driving your most valuable people, the ones your system failed to recognize, out the door. That's bad news.
You'd think that, but in fact, it fosters such a collaborative and unselfish environment that people who might otherwise be "along for the ride" can't help but be caught up in the team.
Build a culture of productivity, not productive individuals.
In a startup / smallish company it is pretty easy to evaluate relative impact for a given quarter. I would agree its really really hard to do that algorithmically.
This is where having a startup outside of the valley is nice. Nobody where we are (KC) really even expects stock options. We just pay a good competitive salary and don't have to compete with someone like Google paying 2x as much. We have given some people stock incentives but because we pay well and competitively it isn't the primary compensation. The costs of running a startup are so much lower here.
I'm curious why the people who are not in the valley don't go to the valley.
Is it because they:
a) aren't motivated to
b) don't know what the potential is there may not even know
what is going on. May not even know about YC or VC's etc.
c) don't think there is potential there (think it's all over hyped and focuses on a few people who win).
d) have family obligations which prevent them from
moving to the valley
e) Other reasons?
Some cities are really nice places to live with unique resources of their own. In Pittsburgh, for instance, there are fewer interesting software jobs but a beautiful city with a lot of exciting non-technical things going on, a healthy ecosystem around Carnegie Mellon, and very nice 1-BR apartments in the best, most central and walkable parts of town for $800/month. Not everything needs to circulate around the moonshot opportunities of the VC ecosystem.
As a software developer I worked and lived in multiple states. In spite of business appeal of the valley I never went to California.
Here are my reasons (in order of declining importance):
1) Crazy real estate prices (and as a result higher salaries do not compensate for higher cost of living).
2) Higher taxes. Income, sale, and excise taxes in California are high. In addition to that, federal income tax is higher, because in order to compensate for higher cost of living I need to earn more, which brings me into higher tax bracket.
If you're making $100K in Pittsburgh, you're doing quite well. And you might want to increase your salary by a tremendous amount, perhaps 5x-10x because obviously some costs don't change, to justify moving to Palo Alto and buying real estate. (Yes, there are other places to live in Silicon Valley, but speaking as a homeowner here, there aren't any that are non-coastal cheap.)
I'm in New York and don't intend to go to the valley any time soon. Four reasons:
a) The compensation game is less ridiculous here. With pressure from the finance industry, all companies (including startups) tend to offer decent salary and don't over-rely on equity compensation.
b) I don't like driving. From my limited experiences, it seems that it's necessary to (occasionally) drive in the Valley.
c) SV seems way over-hyped. Yes, people are building some cool things—but far more people are just making knock-off apps and it's all a bit of a bubble. When the tech bubble pops, SV will be hit the hardest.
d) I don't want to live in a (tech) monoculture. It's interesting interacting with people from other industries and living in a real metropolis.
The Bay Area is a ridiculously expensive place to live.
I live in a small northeast city. I have a 4 bedroom, 2500 ft^2 house that cost about $200k, and is in a great school district. I'll own it outright in about 10 years.
In SV, I'd probably make 2x the salary, but my cost of living would be about 5x. The taxes are probably higher than even New York.
For better or for worse, those chances actually are related, because the #1 source of >$1BB exits is being acquired by other billion dollar tech companies, most of which are heavily networked in SV.
That changes the negotiating perspective of the job seeker. If you're surrounded by a rather large number of companies in that range - http://graphics.wsj.com/billion-dollar-club/ - and are skillful enough to enjoy offers from multiple suitors, you're bound to do your analysis, perhaps employing some backchannel communication.
If the theoretical maximum of company exit is in single millions, then spending time negotiating 0.25% vs 0.3% equity package is meaningless.
Probably a similar number if you looked at it as an actual percentage of new companies. My next door neighbor is the founder of a little company called Garmin. Cerner was also founded here.
I don't understand why options are taxed at exercise. You aren't getting money out of the transaction. If you have an option to buy a share at $1 (when the share is valued at $10), and later you sell at $50, why isn't the tax treatment just that you have a $49 capital gain? Why do we instead do a $1 -> $10, and then a $10 -> $50 tax thing?
The stock is an asset that has value. This view makes a lot more sense when the stock is liquid and you can go and get rid of it right after you exercise your option.
I agree that this totally sucks if there is no easy/public market for the stock.
The option was an asset that had value as well. We do not generally charge capital gains on assets with values until they actually get turned into money. If a stock that you bought traditionally appreciates, or your house does, you don't pay cap gains on it unless you sell the asset in question.
I appreciate that in this case you're turning an asset into a slightly different asset, and that's not like just ordinary appreciation, but I don't know why it really matters. A rule of "capital gains gets charged when you turn an asset into cash" makes sense.
This is indeed what happens if the option itself (and not just the underlying security) is actively traded. [1] However in that case, when you receive the option, you have taxable income equal to the current FMV of the option (determined by looking at the market). To do the analogous thing with startup options would (a) result in employees getting taxed even earlier and (b) require using Black-Scholes or something to estimate the value of the option, resulting in "income" that is even more divorced from reality than the current status quo.
I think there is so way to abuse the shares by using them as collateral without having to sell them. I'm not sure of the details, but I'm pretty sure people found ways to take advantage.
> Founders certainly deserve a huge premium for starting the earliest, but probably not 100 or 200x what employee number 5 gets.
When the founders started the company, their equity was pretty much worthless. When employee #5 is hired and gets 0.50% of the company, her equity presumably has some dollar value. Employee #5 gets a better deal than the founders, even though the founders have 100x more equity.
The only thing that matters is the dollar value of the equity at the time it's awarded.
The dollar value at the time it is awarded matters zero. As an employee the only time a dollar value matters is when I can cash out. The problem is that you have to predict the percentage contribution of an employee from now until liquidation before they do any work. (This is why we vest options, so that if they don't contribute they don't get anything.)
The employee typically gets options, not equity. They are valued at the current market value of the company and cost that amount to acquire. So the value upon grant is 0[1].
It depends on what you mean by value; if you mean the price someone is willing to pay for them this is clearly not correct -- otherwise every out-of-the-money option would sell for 0.
You might want to re-evaluate your understanding of how karma on HN works. It is rare for people making factually correct statements to be that heavily downvoted.
You know, it's funny, I read things like this from time to time: "so if I have 0.5% of company and it gets acquired tomorrow for $100 million dollars, will I get $500,000?" and I remember that I am in this exact scenario, and have no idea what the answer is. I've been an employee at a startup for 2 years now. I joined when I was young, naive, and broke — I don't even remember if I read the paperwork before signing it.
Does anyone have any advice for how to go about learning more about employee options? I realize I sound dumb, but better late than never.
Some questions I've always had but have been too afraid to ask:
- How does one exercise their options?
- What taxes are there and when do you have to pay those?
- In the above scenario, what factors are involved in me actually getting that $500k?
- What questions aren't I thinking of because I don't know enough about any of this? For example, I've never asked about my options since signing the paperwork: was there something I would have had to do already that I haven't, and will likely screw me in the future?
P.S. Throwaway for anonymity (because I am embarrassed to have to ask!).
I've exercised before. Typically, you email hr and say, "I want to exercise"; they send you some paperwork which you fill out; you write the company a check. DO NOT DO THIS BEFORE UNDERSTANDING TAX CONSEQUENCES. You will typically pay tax on the spread between strike (your price per option) and the fair market value (fmv) which is set by the board and often updated quarterly. This can also be a backdoor way of a board tightening those golden handcuffs; if you where early enough the taxes may well exceed the strike price. You should also be able to get the fmv by asking. Keep in mind these shares you're buying may well be completely illiquid and the irs wants their taxes right now anyway.
A numerical example: 20k shares with a strike of $0.11; fmv of $0.39. Then I write the company a check for 2e4 x 0.11 = $2200 dollars and report income to the irs of 2e4 x (0.39-0.11) = $5600 (for amt).
A nuance is if the company is succeeding, it can be worth it to buy options when they vest; it starts the clock ticking on long term capital gains and can roughly half your tax bill if and when you can actually sell the share. Which reminds me: you will pay taxes twice: once when you exercise the option to turn into a share, and again when you sell the share. If you are lucky enough to go public the company will often get a firm that handles all this for you and just gives you a check net of all taxes.
A good accountant will cost $500-ish (or less) to go over your situation in detail. It's worth the money. If you already pay ab accountant, not someone at hr block or similar people who just know how to fill out paperwork, they may go over your situation for much less money.
Also, you must understand amt; that can bite hard. If you don't understand amt, see that accountant.
And be sure the accountant knows what he's talking to. I did that and it was still fail, because they didn't understand ISO+AMT Tax Trap.
As someone who's lived through this, immediately (as in the same hour you purchase the ISOs) sell the ISOs. All of them. Take the short-term capital gains hit. The alternative can and will destroy you.
Going for long term capital gains will only destroy you if the stock falls, which can happen in any investment.
If there is enough confidence in the stock, a happy medium can be to sell enough ISO's at the time of exercise to cover the tax cost for that year. However, if the stocks you have are a massive % of your overall (potential) wealth, short term tax on a big # is still better than long term gains on a volatile #.
> Typically, you email hr and say, "I want to exercise";
What happens when they ignore all emails related to exercising? I had this problem and I even followed up by CCing the controller and CFO. It turns out they didn't want anything on "paper" so they just ignored me. My offer had the options in it, but they never gave me the option paperwork. I hear they finally granted the options a year ago to people still there. I think they were playing games trying to lower the FMV or something. I'm not sure it was all legit.
assume you'll end up with nothing, because you probably will. Or maybe you'll be able to eat a few nice dinners if you are lucky. If you are being paid under-market, leave ASAP
No reason to be embarrassed. You don't know something. There is always something you aren't going to know. Also, the smartest people are the ones that always ask questions. They are not satisfied accepting things, they seek to understand. And that means saying "I'm ignorant of this. Teach me."
Anyways, I'd ask whoever handles this for your company. Whether it's your founder, CEO, HR, or whatever department depending on the size. Someone is handling this for them, and I guarantee if you don't understand it, someone else doesn't either.
And, if the company hasn't made clear the value of what you have, then they aren't benefiting from it. After all, if you knew that if the company succeeded, you'd get $500k for it, you might want to work harder. What's the point of an incentive if it doesn't incentivize.
There are a lot of things in this post that deserve to be addressed, like the fact that the 90 day exercise period for ISOs after termination is based on IRS rules, not arbitrary company policy.
But what really needs to be addressed is the fact that employee startup equity rarely produces the kind of reward that one would expect it to given the outsize attention that is paid to it. Sam writes:
> As an extremely rough stab at actual numbers, I think a company ought to be giving at least 10% in total to the first 10 employees, 5% to the next 20, and 5% to the next 50. In practice, the optimal numbers may be much higher.
It's worth testing these numbers against real-world data. For this, I'll use CB Insights' 2013 Global Tech Exits Report[1], which shows that:
1. 1,825 private tech companies exited in 2013.
2. Only 19 of them exited at a $1 billion-plus valuation.
3. 45% of exits were under $50 million, and 72% of exits were under $200 million.
If you assume that the first 10 employees receive 10% of a company's equity, and that each employee in that group receives 1%, a $200 million exit produces up to $2 million before taxes for each of the early employees. A $50 million exit produces $500,000. If you're making $125,000/year as a senior engineer, $500,000 gross after 4 years is the equivalent of what you earned in salary over the past 4 years. That's a nice bonus, but not life-changing wealth. $2 million is nicer, but if you plan to stay in the Bay Area, you might spend half or more of that on a modest house or condo.
Once you factor in the cost of exercising your options, taxes, dilution, liquidation preferences, lack of acceleration and the fact that a good portion of employees leave before fully vesting, you can see that even in a scenario where 10% of the company is given to the first 10 employees, employees aren't likely to see the type of compelling returns that Silicon Valley dreams are made of. Facebook and Twitter-like exits, where thousands of employees become paper millionaires overnight and the earliest gain tens or hundreds of millions of dollars, are the exception, not the rule.
What's worth considering further is the fact that 66% of the companies that exited in 2013 had raised no institutional capital according to CB Insights. So, as a prospective employee, in joining a venture-backed company (or a company coming out of a prominent accelerator), you may be putting yourself at a disadvantage even before you take into account the fact that employee equity is most vulnerable to dilution and liquidation preferences at these companies.
Final note: CB Insights' 2012 Global Tech Exits Report[2] shows similar trends to the 2013 report. In fact, in 2012, over half of exits were under $50 million and 76% of the companies that had an exit had not raised institutional capital.
341 comments
[ 3.2 ms ] story [ 308 ms ] threadAlso, this doesn't really help post A, particularly if you're getting pretty senior and have a bunch of experience. At my last place, I would have had a $50k bill to do an 83b. I could write that check but goddamn is that a lot of cash to part with.
edit: thank you @rosser
* Employees have less incentive to stay because they won't run into the AMT "handcuff" situation (where if they leave they have to exercise their options or lose them, and they can't afford to pay the taxes to exercise the options).
* More employees will actually exercise their options before liquidity, which means more minority shareholders.
It's a massive lift for our team (based on tax savings) when an eventual liquidity event occurs, with no downside for the company other than additional paperwork and some legal costs.
Am I missing something or is this saying people should be offered an 'expected' equal compensation package to what they would get at Google? What would the incentive be? Google is a company with quite a bit of projected longevity, career progression, and very good perks. Why would I choose a startup with inherently greater risk for only the same reward?
Google may not be the best company to pin to, since they offer pretty generous stock grants from what I understand.
I'd love to get Sam's (or anyone else's) thoughts on the 10%/20%/30%/40% 4-year vesting schedule that was mentioned. I don't like this schedule for two reasons:
1) It creates larger discrepancies in what employees earn over time relative to each other. If employee #1 joins today and gets a 2% grant, and employee #20 joins in 2 years and gets a 0.2% grant, then in year 3 of the company, employee #1 will vest 30x as much as employee #20, instead of 10x with the current 25%/25%/25%/25% scheme.
2) This scheme seems to replace and/or ruin refresher grants. Currently, if you do a good job, you get refresher grants every year or two. With the 10/20/30/40 system, you're already getting higher and higher compensation over time, regardless of performance, and the bump from refresher grants while you are vesting your original grant becomes minor. Furthermore, the drop from what you vest in year 4 to what you'd vest from just refresher grants in year 5 becomes much more dramatic and much more likely to push someone to look for other work.
What do others think?
My take on it as a startup employee is (1) no, (2) hell no, and (3) your company sucks and you are doing this to attempt to lock me in. Also, hell no.
There is also a precedent for such type of clarification updates in YC family. YC founding partner, Jessica Livingston, provided a clarification with respects to Sabeer Bhatia of Hotmail vs. DFJ ventures based on the statements Bhatia made in an interview with her for the book "Founders at Work".
Having to keep track of "large" (unsure of how to quantify that) percentages of the company that might be purchased at a later date seems like a liability that the company wouldn't want to have to track, especially as a startup with other things to focus on. They're useless to the company, the only upside is for the employee.
It is indeed not useful to the company, and a great upside for the employee. Out of all suggestions in the article, this is probably the most employee-friendly. But that's not a bad thing if it helps recruit good employees, or otherwise seems like a fair thing to do.
The usual 90-day limit makes employee vesting almost meaningless. They either wait for an acquisition (and get all their options accelerated), or leave before that (and lose all of them). Few employees have enough spare cash to buy out their shares.
that's not the only option. The company could remain privately owned - in which case you want to have below 100 shareholders so that you can remain a C corp
Don't agree: the company already got the benefit.
Not to mention employers often try to avoid even telling employees what fraction of the total company their options represent, and definitely don't care to share their participation multiples. They're often very happy to let you think that in the case if a liquidation event, you get (exit amount) * (your ownership fraction) which just isn't true.
@apta: see [1] for a numerical example. You get taxed twice (or three times if someone is stupid) on typical ISOs:
1 - on grant, if the strike is less than the fmv (there are huge tax penalties for this, both for you and your employer, so it oughtn't happen)
2 - on exercise when you convert the option to a stock, on the spread between fmv and strike (but probably amt, depending on the type of option; it's mildly complicated)
3 - on sale of the stock, on the spread between the sale price and your basis
[1] https://news.ycombinator.com/item?id=7611512
I am not really familiar about this area. It is a one time price to pay to purchase the stock options, is that correct? Furthermore, where does tax come into play? Don't you only get taxed if you decide to sell the stocks to generate income?
Actually that's pretty telling. If they don't give a number it means it's ~0%.
As part of your compensation package when you sign up, you're granted a set of unvested options. The idea is, as you work for the company and provide the value you've promised, the options become vested and are actually yours.
So why do you need to stay there to keep them? If I work at a company for a year and 25% of my options vest, why are the terms surrounding their exercise different depending on whether I choose to stay or not? I earned those options by working there for a year. Why is it fair to take them back if I decide to leave instead of stay?
Yes, I get that you're agreeing to that up front, so it's not like you should be surprised when the 90-day limit kicks in. I just wish option grant agreements weren't structured like that, but the employee has pretty much zero power to change that; these grants are pretty much take-it-or-leave-it, and the only point of negotiation seems to be in the quantity of the options. At best.
I had a comment on another thread recently proposing something in a similar vein to help employees understand what their stock options mean/are worth: https://news.ycombinator.com/item?id=7584320
Pushing the subject further will make you look like you're nosing around where you shouldn't, often leading to the offer being dropped (this has happened to me).
Not to say it wasn't a not-so-great company to start with, but a dropped offer is a dropped offer.
"Here are options to buy 10,000 shares"
"Umm. Thanks. Is that a lot ? Is it peanuts ?"
Without knowing the second number you might as well not be having that discussion.
Simply knowing how many shares you were granted without knowing how many total were issued tells you nothing about what your shares are worth.
If a company wants to issue you shares as compensation but won't tell you how many total are outstanding, run.
There are a lot of reasons why they are pursuing their own ventures. A common one is: "It's not worth it to be an employee of a startup. You need to be a founder. (Or maybe employee #1-5.)" You may disagree with that belief, but it's certainly a belief many hold. Sam's suggestions may take this reason off the table.
Yup. If you can get a job at a tech company that offers high compensation, you will likely make more there (and gain lots of great experience) than you will at a startup.
Look at the value over 4 years: - Startup salary (~$100k-ish) vs. Tech co (~$140k-ish+) - Startup equity could be worth $1,000,000 if you get 1% and the company sells for 100 million (obviously there can be other factors here, but lets just use that number) - Large co. Stock grant could be 150k-200k+(or more!) over 4 years, and you'll likely get refresher grants on top of that each year. And the stock price will likely go up over those 4 years. So after year 4 you are making quite a bit off of your vesting stocks.
There's also a pretty good chance the startup will fail, which would net you nothing but a sub-market salary for the last few years, so it will be harder for you to negotiate a higher salary at your next gig. Or if you are acqui-hired, you'll get some small hiring bonus and then have to wait 4 more years for your new stock to vest.
To me, the only time joining a startup and taking below-market compensation is if you are just starting out and want to gain some experience you might not get at a more established company, or perhaps your skills aren't up to par so you can't get past the interviews[1].
Or maybe you just like the "startup culture", and that's cool, but why not start your own thing instead?
[1] Note that if your startup gets acqui-hired, you'll probably have to interview anyway, which could result in not getting an offer!
If I were a prospective employee I would never take a deal like this, because it is really difficult to have that much trust in a company and founders that you likely don't know that much about. I can't say the standard 4-year vest with a 1-year cliff is the most optimal situation, but from an employee perspective it is way better than 10/20/30/40.
1: Though it could be, I know there was a story about something happened at Zygna like this
In other words, if scumbags control the company, scumbags control the company. Fortunately, most people aren't scumbags.
Most people aren't, perhaps. Most people who have the connections to be VC-funded startup founders are scumbags.
If you have actually lived in the society that actually exists, rather than the one entirely in your own head that you wish to believe in, you'll recognize that there is a positive correlation between social position and being unethical. (1) Power corrupts, (2) power attracts bad people, (3) bad people are more willing to make moral compromises to get power, (4) good people in power (it does happen) are usually not cynical enough to tell when they're being lied to by their lieutenants.
It's completely understandable that you'd rather live in your Pollyanna fantasy world, and that's fine. If you want to believe that the world is 6,000 years old, that is likewise OK with me (even if you're wrong). What I won't let you do is spread delusion to the young and gullible. If you don't know what the fuck you're talking about, then kindly quiet down and let the adults talk.
Mixing in a gender slur makes it worse.
This is the kind of thing we ban people for, especially when they don't have a history as a positive contributor on the site.
(This originally read "regardless of how wrong you think someone is", but as someone pointed out to me, that was the wrong way to put it, and the original offender was upthread.)
No one is.
But money changes things. Let's there are two best friends, you offer the first person some money to back stab the other. The guy may not agree. However keep raising the offer and at some point of time when the figure hits a $X0/$X00 million I bet the guy's intentions will change.
Every one sells, its just the number that differs.
They wrote into the agreement certain metrics that the company would have to meet after launch, and did everything they could to prevent it reaching those, e.g. firing the guy would would have made the sales, our multi-talented lawyer stepped up and made them. When Kleiner Perkins, who's connections could have been a make or break for the company, cold called us, these devils blew them off.
Their attitude was they'd rather have 100% of nothing (well, they probably thought it would have been something), and the company essentially died when 13 of us resigned en masse from the CEO down to all but one most junior engineer. (And then we had to go to the state to get our back pay for that partial pay period.)
I was in some of the last minute, try to save things face to face negotiations; these guys were malevolent. Not sure how they achieved net worths of 100 million and 500 million, but if they retained any control, they sure didn't use that money for good.
All things being equal, I wouldn't take a 10/20/30/40 over a 25/25/25/25, because it would be economically irrational to do so. But all things aren't supposed to be equal under the two structures.
Imagine a well to do company of 2 founders (in SF/Bay Area) and a team of 3-4 others that raised a seed at 10m cap. They want to grow their team headcount to 15 and are busy hiring, running servers, etc. They can offer a 100k salary (more than enough to live on) to a sort of senior engineer or PM and want to compete with Google on total comp. Let's say they need to make up the other 100k difference in comp & salary with options. Over 4 years, you're looking at a 4% equity chunk to one employee, the 6th person joining the company.
Not that I think numbers in line with this aren't realistic (I do agree with Sam that more generous equity grants are better), but for most companies that make a 15% option chunk for employees it's difficult to rationalize a number like that.
Edit: Also, that puts the equity comp of that 6th employee (or 10th, because in most cases you will have a similar equity bracket for those people) at about 1/8th of the founders, not the 1/200th that Sam mentioned. I wonder how many people have made offers to employees with a similar comp plan.
I don't know, I suppose in a fair world you would be given more equity on yr1, less y2, etc. But that doesn't motivate people to stick around like the existing structure.
By the end of year 3, you should be having "that talk" with whomever is running the show at that point. If you are a valued, productive member of the team, you'll negotiate another package that is at market. If not, it's probably time to move on to the next town 'cuz you're a rolling stone, always looking for the next adventure....
Not if the company flails or fails. If it does well, your increased comp makes up for the even more probable counterfactual, where your equity was worth bupkiss but you plugged away like a true belieber until the lights went out and the last pizza box was empty.
When you reach a certain point, say your mid-30s and you have kids your financial obligations can extend far beyond what people think is necessary to 'live on'. You have retirement contributions, savings for college, long term care for family (most people believe it or not, have to help their parents out at some point).
Don't even get me started on this idiotic "we put 15% aside for employees" crap. Fogedaboudit. $80 to DE and you've got 10 million more shares to play with. Not my fault you failed to get the arithmetic right the first time around.
As a sibling comment mentioned, working at startups, especially early stage startups, isn't for everyone. If a person has major financial obligations a more steady job with less uncertainty (and less potential for upside) is probably the best fit.
Low-single-digit percent equity stakes vesting over 4 years for those employees is pretty in-line with what I've seen on https://angel.co/salaries.
I suppose it depends on whether you're running a startup with revenues or not. I am operating from the assumption that by series A you're about at the 1m arr revenue level and your revenue + funding are funneling your growth. YMMV with companies with low/no revenue.
There may be valid reasons to work for a startup, but thinking you will be paid to the best of your ability or god-forbid, thinking you will get rich is not a valid reason.
But yeah, on average, it's not going to be as good as Google. Pick your startup carefully.
I don't see any problem with restricted stock pre series A, when equity is the biggest consideration for employees. As long as financing is notes, the common hasn't yet been priced, so you can just use a very low value.
Willingness to issue refresher grants is easy for CEO and board to change.
I don't think you need to be as open as buffer, but being open with percentage ownership and financials seems obvious.
RSUs with a performance modifier already cover most of this for larger companies. Something like that for startups probably wouldn't work since so much of the risk is company-wide vs. individual.
Founders/management need to be proactive about this. Good school of thought on this is Andy Rachleff of Benchmark / Wealthfront https://blog.wealthfront.com/the-right-way-to-grant-equity-t...
If you trust the founders, they can probably help you up to ~50 person companies like this, but there is an inherent conflict of interest.
I think employees would be more than happy to treat all of this as ordinary income, if that would make it more appealing to the IRS.
What I was proposing was: Hey IRS, if you let me skip the taxes early on, I'll pay a higher rate down the road. I will gladly sacrifice long term upside for short term risk in this particular case (since the odds are already so heavily skewed in the other direction).
I think RSUs do exactly that. They're taxed at conversion time which typically coincides with a liquidity event. At issue time they're not treated as income precisely due to restricted nature of it.
1) ISOs are still tax-advantageous if you have the means to exercise them. It turns out that most of the senior hires that arrive at a rapidly growing company are hired for experience, and quite often are wealthy, so for them ISOs are a better deal. Probably minor detail, but with all else being equal a wealthy hire for VP of Sales or VP of Engineering position is more motivated to go the ISO route.
2) Companies nowadays stay private for longer periods of time, and private company shares are getting more liquidity bit by bit (SecondMarket, SharesPost, Equidate). For someone who left the company selling a portion of their holdings, either to get some spare cash, or/and to cover the tax bill associated with ISO exercise, would be nice. RSUs rob employees of that opportunity - the R is gone when company says it's gone.
3) There's certain advantage to companies having golden handcuffs on people. Frequently that means that your earliest or most productive hires are not even shopping around, since they know their share of equity is material, and they are aware they cannot cover the tax bill, so might just as well enjoy the current job.
Most engineers I know with stock options and a discounted salary would have been much better with a higher annual salary and no stock options at all.
When a senior engineer goes off and tries to work at a startup, it is precisely because they want to try playing the lottery (with a very fat equity slice), not because they're going out to try and get a ultra-competitive cash salary.
Sam is dead-on that the current situation isn't fair and often offers employees little to no information about how the options work.
The 90 days to exercise thing is a real bummer -- for lots of reasons. As Sam says, not every employee is in a position to relinquish that kind of money for the options and taxes. I would say that if you are looking to go someplace else, depending on the size of the company and the situation, it's not out-of-line to try to value the options you won't get to exercise (or even the exercise price) into your new salary. Most companies aren't going to be willing to give you what you need to vest-out upfront, but it is a good way to negotiate either a one-time bonus or higher salary.
If anyone here has any ideas of how else we can be more friendly to employees with regard to equity I'm all ears.
When you are not yet cash flow positive as a startup you can give 'bonuses' in options rather than in cash.
I don't know if we could figure out a portion that employees could contribute to additional investment rounds if they wanted to take some money off the table.
We completely decouple performance reviews from compensation. Full stop.
Interestingly we decouple the two precisely because of what you're describing. When you start singling out specific people, other folks who are also doing very good work pretty quickly become disinterested in their job. That's bad.
Even worse, measuring ACTUAL value to the company is really really difficult (I'd suggest that it is impossible). So now you are in real danger of driving your most valuable people, the ones your system failed to recognize, out the door. That's bad news.
Build a culture of productivity, not productive individuals.
Is it because they:
a) aren't motivated to b) don't know what the potential is there may not even know what is going on. May not even know about YC or VC's etc. c) don't think there is potential there (think it's all over hyped and focuses on a few people who win). d) have family obligations which prevent them from moving to the valley e) Other reasons?
Thoughts?
- Cost of living relative to expected salary is too low.
- Can work for big public companies that pay well in lower-cost areas.
- Weather preferences.
- Family lives thousands of miles away from SF.
- Over 30, still interested in doing technical work.
- Want to own a home, not a millionaire.
- Interested in starting a business, low-cost matters if not going for VC.
- Found interesting & challenging technical work elsewhere.
Etc.
This is kind of like asking why people didn't all move to NYC in the 2000s, or Texas during the oil boom, etc.
Here are my reasons (in order of declining importance):
1) Crazy real estate prices (and as a result higher salaries do not compensate for higher cost of living).
2) Higher taxes. Income, sale, and excise taxes in California are high. In addition to that, federal income tax is higher, because in order to compensate for higher cost of living I need to earn more, which brings me into higher tax bracket.
3) Weather. Too cold for my taste.
In Pittsburgh the median sale price for a house is $129,000, according to Trulia.
In Palo Alto the median sale price is 17x higher, about $2.2 million, with significant yoy increases: http://www.paloaltoonline.com/news/2013/12/24/real-estate-ma.... "In
If you're making $100K in Pittsburgh, you're doing quite well. And you might want to increase your salary by a tremendous amount, perhaps 5x-10x because obviously some costs don't change, to justify moving to Palo Alto and buying real estate. (Yes, there are other places to live in Silicon Valley, but speaking as a homeowner here, there aren't any that are non-coastal cheap.)
a) The compensation game is less ridiculous here. With pressure from the finance industry, all companies (including startups) tend to offer decent salary and don't over-rely on equity compensation.
b) I don't like driving. From my limited experiences, it seems that it's necessary to (occasionally) drive in the Valley.
c) SV seems way over-hyped. Yes, people are building some cool things—but far more people are just making knock-off apps and it's all a bit of a bubble. When the tech bubble pops, SV will be hit the hardest.
d) I don't want to live in a (tech) monoculture. It's interesting interacting with people from other industries and living in a real metropolis.
I live in a small northeast city. I have a 4 bedroom, 2500 ft^2 house that cost about $200k, and is in a great school district. I'll own it outright in about 10 years.
In SV, I'd probably make 2x the salary, but my cost of living would be about 5x. The taxes are probably higher than even New York.
If the theoretical maximum of company exit is in single millions, then spending time negotiating 0.25% vs 0.3% equity package is meaningless.
It sucks and doesn't make economic sense, but that is what I observe
I agree that this totally sucks if there is no easy/public market for the stock.
I appreciate that in this case you're turning an asset into a slightly different asset, and that's not like just ordinary appreciation, but I don't know why it really matters. A rule of "capital gains gets charged when you turn an asset into cash" makes sense.
[1] http://www.irs.gov/publications/p525/ar02.html#en_US_2013_pu...
When the founders started the company, their equity was pretty much worthless. When employee #5 is hired and gets 0.50% of the company, her equity presumably has some dollar value. Employee #5 gets a better deal than the founders, even though the founders have 100x more equity.
The only thing that matters is the dollar value of the equity at the time it's awarded.
[1] modulo accounting tricks
http://www.mbbp.com/resources/business/stock_option_pricing....
You might want to re-evaluate your understanding of how karma on HN works. It is rare for people making factually correct statements to be that heavily downvoted.
Does anyone have any advice for how to go about learning more about employee options? I realize I sound dumb, but better late than never.
Some questions I've always had but have been too afraid to ask:
- How does one exercise their options?
- What taxes are there and when do you have to pay those?
- In the above scenario, what factors are involved in me actually getting that $500k?
- What questions aren't I thinking of because I don't know enough about any of this? For example, I've never asked about my options since signing the paperwork: was there something I would have had to do already that I haven't, and will likely screw me in the future?
P.S. Throwaway for anonymity (because I am embarrassed to have to ask!).
2) Take the documents to an attorney for advice on how to proceed.
A numerical example: 20k shares with a strike of $0.11; fmv of $0.39. Then I write the company a check for 2e4 x 0.11 = $2200 dollars and report income to the irs of 2e4 x (0.39-0.11) = $5600 (for amt).
A nuance is if the company is succeeding, it can be worth it to buy options when they vest; it starts the clock ticking on long term capital gains and can roughly half your tax bill if and when you can actually sell the share. Which reminds me: you will pay taxes twice: once when you exercise the option to turn into a share, and again when you sell the share. If you are lucky enough to go public the company will often get a firm that handles all this for you and just gives you a check net of all taxes.
A good accountant will cost $500-ish (or less) to go over your situation in detail. It's worth the money. If you already pay ab accountant, not someone at hr block or similar people who just know how to fill out paperwork, they may go over your situation for much less money.
Also, you must understand amt; that can bite hard. If you don't understand amt, see that accountant.
As someone who's lived through this, immediately (as in the same hour you purchase the ISOs) sell the ISOs. All of them. Take the short-term capital gains hit. The alternative can and will destroy you.
If there is enough confidence in the stock, a happy medium can be to sell enough ISO's at the time of exercise to cover the tax cost for that year. However, if the stocks you have are a massive % of your overall (potential) wealth, short term tax on a big # is still better than long term gains on a volatile #.
What happens when they ignore all emails related to exercising? I had this problem and I even followed up by CCing the controller and CFO. It turns out they didn't want anything on "paper" so they just ignored me. My offer had the options in it, but they never gave me the option paperwork. I hear they finally granted the options a year ago to people still there. I think they were playing games trying to lower the FMV or something. I'm not sure it was all legit.
No reason to be embarrassed. You don't know something. There is always something you aren't going to know. Also, the smartest people are the ones that always ask questions. They are not satisfied accepting things, they seek to understand. And that means saying "I'm ignorant of this. Teach me."
Anyways, I'd ask whoever handles this for your company. Whether it's your founder, CEO, HR, or whatever department depending on the size. Someone is handling this for them, and I guarantee if you don't understand it, someone else doesn't either.
And, if the company hasn't made clear the value of what you have, then they aren't benefiting from it. After all, if you knew that if the company succeeded, you'd get $500k for it, you might want to work harder. What's the point of an incentive if it doesn't incentivize.
But what really needs to be addressed is the fact that employee startup equity rarely produces the kind of reward that one would expect it to given the outsize attention that is paid to it. Sam writes:
> As an extremely rough stab at actual numbers, I think a company ought to be giving at least 10% in total to the first 10 employees, 5% to the next 20, and 5% to the next 50. In practice, the optimal numbers may be much higher.
It's worth testing these numbers against real-world data. For this, I'll use CB Insights' 2013 Global Tech Exits Report[1], which shows that:
1. 1,825 private tech companies exited in 2013.
2. Only 19 of them exited at a $1 billion-plus valuation.
3. 45% of exits were under $50 million, and 72% of exits were under $200 million.
If you assume that the first 10 employees receive 10% of a company's equity, and that each employee in that group receives 1%, a $200 million exit produces up to $2 million before taxes for each of the early employees. A $50 million exit produces $500,000. If you're making $125,000/year as a senior engineer, $500,000 gross after 4 years is the equivalent of what you earned in salary over the past 4 years. That's a nice bonus, but not life-changing wealth. $2 million is nicer, but if you plan to stay in the Bay Area, you might spend half or more of that on a modest house or condo.
Once you factor in the cost of exercising your options, taxes, dilution, liquidation preferences, lack of acceleration and the fact that a good portion of employees leave before fully vesting, you can see that even in a scenario where 10% of the company is given to the first 10 employees, employees aren't likely to see the type of compelling returns that Silicon Valley dreams are made of. Facebook and Twitter-like exits, where thousands of employees become paper millionaires overnight and the earliest gain tens or hundreds of millions of dollars, are the exception, not the rule.
What's worth considering further is the fact that 66% of the companies that exited in 2013 had raised no institutional capital according to CB Insights. So, as a prospective employee, in joining a venture-backed company (or a company coming out of a prominent accelerator), you may be putting yourself at a disadvantage even before you take into account the fact that employee equity is most vulnerable to dilution and liquidation preferences at these companies.
Final note: CB Insights' 2012 Global Tech Exits Report[2] shows similar trends to the 2013 report. In fact, in 2012, over half of exits were under $50 million and 76% of the companies that had an exit had not raised institutional capital.
[1] https://www.cbinsights.com/blog/global-tech-exits-report-201...
[2] https://www.cbinsights.com/blog/tech-mergers-acquisitions-de...