Our Stock Option pledge | Hacker News Reader

Our Stock Option pledge

blog.clearbit.com

200 pointsmaccman34 comments

I appreciate the thinking here and message but am concerned about this line "This will cost a few hundred dollars at most".

Clearbit has raised a $2M seed round from top-tier investors implying a post-money valuation likely over $6M. A conservative FMV of the common shares would suggest a $1.2M valuation. To exercise a 0.5% of total equity grant would cost $6,000. Something doesn't add up here.

If I am correct, will Clearbit help its employees exercise their options?

See: https://www.fenwick.com/publications/pages/playing-with-fire...

I believe it depends on how they raised the seed round. If it's $2M in debt (with a $6M cap), then technically the value of the company has not been determined yet -- and won't be until there is a proper priced round. This affords them some flexibility... but they still need to determine the Fair Market Value of the options.

Even if they raised a convertible note or pure debt (which is atypical of a First Round Capital led round), it is unlikely that their 409A led to an extremely low FMV. Even a company that raises $2M in debt at a $6M cap would likely have a common share valuation over $500K.

Source: I'm a previous founder of a startup that raised a $1.5M convertible note and have done a 409A valuation based on it.

Yes, and the tax on that is a fraction of that... which is a small cost compared with cost of recruiting. remember the cash from excising the options goes back to the company so it's not really a cost (you just have to pay tax)

Does one end up paying double taxes in such a case? Because you're "getting" the money to buy the stock and then immediately buying the shares--is that first step technically income?

It would have to be (meaning the first step is income)

The taxes aren't double though. A highly simplified example:

  1. Your company gives you $1400 to exercise options (I don't think Clearbit is doing this, to be clear)
  2. You pay $400 in taxes and early exercise $1000 of options in exchange for 1000 shares at $1 each
  3. Later you sell those 1000 shares for $1m total

At step 3, you will pay capital gains tax only on the $999,000 of actual gain. You don't have to pay taxes again on the original $1k.

I agree. I think that in the earliest stages, startups should consider "bonus-ing" out the employees to exercise their options early. I'm wondering what the consequences/disadvantages would be for the startup.

It could aid recruiting if they explain the value of this benefit. In the longer term it probably reduces retention of people that had to stay to keep options from expiring.

I think the problem is with your $1.2M valuation. You have a company with $2m in preferences or debt which is first in line before any common stockholder, and most likely their liquid assets are less than $2m, and they have negative net income. That makes the common stock effectively worthless at this time.

Also, if you keep reading;

  Once our valuation rises and the cost becomes prohibitive, we’ll move to an
  extended exercise period model instead, where you will have 10 years to
  purchase your options. By that time we’ll either have had an exit (in which
  case you can do a cashless exercise), or we will have arranged some other
  form of liquidity.

I'm not suggesting that the valuation is truly worth $1.2M but if they did a 409A valuation or had their board decide on the FMV to determine strike price, the value would be at least 15% of the post-money valuation. My point is simply that if they've issued a reasonable number of options (over 0.25% of the total authorized shares), there is no way that their employees would only pay a few hundred dollars to exercise.

In an extended exercise period model, there's still the issue of Alternative Minimum Tax on exercise or long-term vs. short term capital gains. There will also likely be lockups on those shares whether inherently built in or in an eventual IPO.

This is likely convertible debt/equity so the company hasn't been valued in the manner of a traditional priced equity round. You can use other valuation methods to determine a much lower 409A valuation.

If they say "several hundred dollars", this is likely coming from actual knowledge of their own 409A valuation number.

Yeah, if you're handing out 50 basis points to all of your employees. you would rapidly run out of equity to give out. I think paying a signing bonus of 6K to those who you do hire at 50 basis points (maybe with reduced salary spread out over 4 years) is not out of the question.

As someone who recently got stuck in poor option execution situation, this is great. It is certainly better for companies to compete with each other on transparency and honesty - rather than foosball and free meals.

A big problem is all the inertia in the marketplace where Option Pools, and policies of many companies are already established and written into investment rounds, legal paperwork and usually needs a board decision that may not be in their own interests.

It would be awesome if Glassdoor has some sort of info about this(Option Exercise Policy: XXXX) per company.

Yes it would be great to get more public exposure about stock option policies and encourage the status quo to change.

@holman has started a GitHub project listing companies with favorable exercise windows. https://github.com/holman/extended-exercise-windows

I came across a very good article on HN about funding. It gives you a complete explanation to know what happen to your stocks through each series. The charts and the dynamic ones at the end are making it even better:

http://dlopuch.github.io/venture-dealr/

Loved this. They are also creating a tool for those actually designing rounds:

"Like what you saw? Send some social love and encouragement for Venture Makr: a full editor to create your own rounds with custom valuations and equity distributions. Turn the knobs on your own creations and see how scenarios might unfold differently."

Author of that thing here, glad you guys found it helpful!

There's an original HN thread with some discussion on it around here somewhere, but if you have anything on your wishlist, let me know!

Very cool visualizations. It would be interesting in the last interactive one (illustrating liquidation preference) to see how a liquidation multiplier affects things. I'm a little unclear on the calculations for the preferred stock holders continuing to get money after their liquidation preferences are fulfilled.

This is obviously good for recruiting. BUT: It would be helpful for employees relying on the representations in this letter to have the commitment of the lead investors to this policy. It would also be helpful to see an accounting set-aside to cover the costs of the policy.

The problem here is that the CEO is "fighting the good fight" on behalf of insiders, but he may be fighting that fight against the investors.

Guess who wins in that case?

I'm glad more companies are removing the stock option golden handcuffs. Pinterest made a similar move last year: https://medium.com/@michaeldeangelo/unlocking-the-golden-han...

Don't forget Quora (who are often forgotten in this conversation), who were the first ones to implement such a plan and set the number at the maximum 10 year exercise period allowed by law.

Good point. sama points that out here: http://blog.samaltman.com/employee-equity

This is a great trend that I'm seeing a lot of YC companies do. Early Exercise + 83b is an absolute must for all seed stage companies.

I really like the notion of helping employees exercise their options too with cash compensation and it's something we're looking into too at Pachyderm as we just started hiring.

What's the legal structure of that cash repayment? Is it a bonus or can the company just pay the exercise price themselves and that's that?

You can do whatever you want. If your FMV is much higher than the strike, the bigger problem is the tax bill.

That's why it makes sense if you're at the seed round and the FMV is still peanuts.

Post-A round makes it much harder.

I would ask the OP to consider going even further and figuring out a way to facilitate some liquidity so the employees could sell enough to cover their taxes even if they don't do early exercise.

You have employees who own shares but need a nontrivial amount of cash to cover taxes. You have investors who may be interested in acquiring more shares (or the company may want to buy them itself). You have a notion of a current valuation of the shares. Broker a sale at a price that's beneficial to both parties.

What is the company's incentive to block such a transaction?

I'd love to see this become standard.

"Once our valuation rises and the cost becomes prohibitive, we’ll move to an extended exercise period model instead, where you will have 10 years to purchase your options. By that time we’ll either have had an exit (in which case you can do a cashless exercise), or we will have arranged some other form of liquidity."

The 10 year exercise window likely makes this unnecessary, but if not he says they will arrange for some form of liquidity.

Yeah, that seems good, but I'm suggesting the plan for "some other form of liquidity" be a little more explicitly stated. I know this isn't what plays well with the HN crowd, but there are other paths to success besides the explosive exit, and one of those is spending a long time building a good solid business, which can take more than 10 years.

If there's a good path to the employee owning their shares (or some fraction thereof) outright, that is more desirable in some ways than an outstanding option agreement with a ticking clock.

Is this a binding contractual commitment, or just PR that can be repudiated later?

As a startup founder, I have every intention on following suit here. I really appreciate Alex for his transparency and for fighting the good fight.

That's great! Would you be willing to share the paperwork you used, so others can build off your docs?

This doesn't address equity preference which is another common problem. But still a good statement.

> People should stay because they want to, not because they have to.

"From each according to his ability, to each according to his needs". Just reminded me.

Reply on news.ycombinator.com