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Comment by asabjorn | Hacker News Reader

Personally I chose to join a famous later stage startup instead of a startup for this very reason. Both offered great compensation and fun roles, but while the later stage startup gives me a lot of RSUs that will soon be liquid the earlier stage startup gives me stock options that expire under these kind of unfavorable terms.

There is a bit of a double standard on stock vesting between founders and early stage employees. Both take about the same amount of risk and the employees frequently give up more salary for less equity. However, while founders owns all vested stock outright the employee stock options most often expire after 30 to 90 days.

The quick stock option expiration is especially problematic since the termination might not be voluntary, and might be a result of changing life circumstances or a company-initiated termination.

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The best practice is for founders to vest at the same schedule as employees, so founder shares also vest at the same rate over 4 years. This is recommended by YC and many others, and most startups follow this. Founder shares do not vest outright in most cases.

vesting over 4 years in monthly increments with a year cliff is standard, so I did not make a point about that. Founders normally pre exercise their stock at low cost so they are not subject to expiration of vested stock. Employee stock options are often too expensive for that, and combined with the 30 to 90 day expiration this makes the employee terms undesirable versus the founder terms.

No, founders usually BUY restricted stock, not options. This can be offered to employees, too, as long as the price is reasonable.

At the beginning, a company is usually $100 or so in total, and the founders pony up $20 or so each to buy their shares. The company can buy back the portion of unvested stuff for the balance of the $20 until it vests.

83b election gets you out of tax hell, too.

Talk to your lawyer.

That is correct, but the difference between the instruments is not relevant to my statement. I bought restricted stock when I founded a company, which vested over four years, and have taken options when joining as an employee. Almost chose to do an 83b election on my options using a loan from a startup I joined, in order to improve my tems, but I am happy I did not do so. Considering the risk of failure it is generally advisable to diversify your investments more than that.

Edit: rdl , for the loan from the company to do the 83b election to be a considered a loan by the irs it must have almost full recourse. You will be liable for it and the creditors will ask for the loan amount in case of failure.

Yeah, but in an early company it shouldn't matter as much -- these guys are pre-409A so you could easily argue $500k corp valuation and thus the guy with 1% of the company has $5k of options to exercise. And in a later company you probably don't get 1%. It's probably in the $1k-50k to exercise options in most companies.

A loan which is somehow forgivable for the stock seems like it could solve this; if the stock is worthless, return it instead of the loan. (I thought you can do that? But I guess you can't?)

Wow, this is stupid tax crap, but there seems to be a workaround.

http://www.ecjlaw.com/22505/ecj-viewpoints/taxing-matters/ho...

"Here is how it works: The employer transfers the stock to the employees at no cost, and the employees make the Section 83(b) election to accelerate the taxable event to the date of transfer. That requires the employees to recognize ordinary income in an amount equal to the value of the stock and enables the employer to report an ordinary noncash deduction equal to the same amount.

The employer then finances the employees’ income-tax liability with a nonrecourse loan to the employees (at today’s low interest rates) secured by the restricted stock. Since this doesn’t involve the financing of the employees’ purchase price of the stock, the restricted stock grant would be considered a “transfer” of the stock, thus closing the compensation element of the transaction upon transfer because the Section 83(b) election is made. This avoids the tax uncertainty created by financing the actual stock acquisition with a nonrecourse loan and the requirement of a substantial cash down payment by the employees or, alternatively, a substantial portion of the acquisition note’s being recourse.

Although employees must still pay the ordinary income tax incurred on the date of grant, they have deferred the payment of the tax by means of the employer’s nonrecourse loan. The employer is permitted a noncash deduction in the same amount and at the same time, while the employees are required to include the compensation element of the restricted stock grant in income."

Ianal, but this might work. However, the irs might look at it as tax evasion if the loan was given at the same time as the election.

I would love to buy those lawyers a beer for being such great hackers, even if it's denied. But they said private letter rulings had been given...

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