A Guide to Employee Equity

Gusto also has a company bylaw where they can veto any employee sale. Not Right of First Refusal, but can flat out veto an employee selling stock to buy a home, pay off student loans, start a company, etc.

This isn't covered at the time of hiring, nor present in the option agreement provided to employees.

As an early ZenPayroll (now Gusto) employee and a leader of the culture up to 70 employees, I'm honestly embarrassed by the company's stance here. It's hypocritical (in my opinion) to the values talked about by the company.

Employees should benefit from the success of the company they worked hard to build. As a current founder, believe me I understand why founders get a much larger share. But at least be transparent.

You can read about our approach to equity, and everything else, here: https://octopoedi.gitbooks.io/employee-handbook/content/

> The main point is that if someone decides to not exercise and/or is not able to exercise and they leave the company, their options typically have a three-month expiration. So, unless the person exercises them within three months after leaving, they lose those options, which is kind of crazy to think about because the person has already invested time, already contributed to the company, already meaningfully helped the business.

> So at Gusto... everyone that has stayed here at least three years, their expiration changes from three months to ten years.

Doesn't everything just said about it being "crazy" to lose your options apply if you leave at 2.5 years? You've "already invested time, already contributed..." Why should you lose vested options, ever?

I asked Adam D'Angelo about minimum service periods and he responded that it'd be more transparent to have a longer cliff. My perspective is that backloaded vesting would be closer to the probable intended effect here (a barrier to leaving early, but you don't lose everything).

Put another way... Aren't "minimum service periods" exploiting opaqueness to make them seem like friendlier terms than longer cliffs or backloaded vesting?

Now they are trying to educate people on equity? You would need a full-semester class to explain the many ways in which VCs and their "startup" cronies can screw you out of compensation (e.g, dilution, selling at a low price and then using staying bonuses to kick in liquidation preference, 30 day exercise windows making it financially prohibitive to exercise, etc). Do companies even IPO anymore? If Uber still hasn't gone public, when do you think Gusto is?

If these companies actually wanted us to value their equity, they would reimburse independent corporate lawyers to review the contract.

Higher profile people like Zach Holman are already speaking up. It's going to take a while, but I already see programmers realizing that the smart move is either being a founder or going to work for GoogMicroAppleSoft. It's still to be determined whether the VCs will finally realize their inability to hire is their own damn fault and fix equity.

Only the naive and the financially illiterate accept these equity offers as worth anything.

Some bullet points:

* Stock options for common stock mean you're dead last in line for making money. Before you are banks/lenders/creditors, investors & board members, founders and any extremely talented management that were brought in.

* Unless everything goes absolutely amazing and according to plan, your options are not going to be worth much money. All it takes is one down round or a market downturn during your lockup and you're wiped out.

* If your company goes IPO, you have a long time before you can do anything with your shares. In the meantime, the market may not be kind, and your options might be underwater.

* If you get acquired, big flashy numbers can turn sour pretty quickly. "Top-billed" numbers (e.g. Company acquired for $2bn) can have a lot of fine print. Your options very well may be worthless, or you may be subject to lots of earn-outs that A) you probably won't hit or B) the acquirer has no real reason to help you hit them.

And that's not to mention the whole ball of fun that comes along with figuring out your taxes. People (speaking mostly just about friends & coworkers) spend far too much time fussing about various outcomes and calculating things when, at the end of the day, it's not worth worrying about. You're probably not going to get rich off of stock options; negotiate for what you think you're worth, but once you have, forget about them.

Of course, if you're a founder or a first-5 employee, the situation probably warrants a lot more scrutiny and have your lawyer/accountant look over the paperwork. But if you're not, it's really probably not worth more than an hour or two of reading the paperwork and asking some questions.

IMO you should either join a super early startup that you really believe in and pay a few thousand to early exercise OR join a proven late stage startup that converted to RSUs and avoid paying for options in the first place.

While both of these terms do bite into the common share stake, as others have pointed out, their effect is model-able; so you can see where you stand under different exit scenarios. Ask your employer, or get access to something like Pitchbook, to find out:

1. The amount of $ raised from investors, along with the % of equity in common vs preferred shares.

2. The liquidation preference (1.0x is common) for preferred.

3. Whether the preferred stock participates (not doing so is common).

4. What % of common equity your grant represents.

You'll then be able to draw a payout diagram (like this[1], written by Andy Rachleff) showing how much you'll make for different exit prices. Be aware that under some complexities, like the fact that later rounds will cause dilution and that certain exit scenarios scenarios (like acquisitions) may trigger a different liquidation preference for preferred stock.

[1] https://blog.wealthfront.com/wildly-different-financial-outc...

I thought "equity" meant just giving stock to the employees after they worked X years, not the mess of complexity, taxes and spending your own money that it actually is...

You’re a startup founder who wants to learn the basics behind offering employee equity

You’re an employer who wants to offer equity to new hires

You want to be wildly entertained (and learn some stuff along the way)

Where can I found such guide intended for employees who are being offered equity?

Under what circumstances it is NOT a good idea to exercises as soon as possible?

Only one scenario is where you have to pay a large sum for this early exercise and you see a risk that the company might go out of business. But in such cases if the amount is large you are probably at the wrong company in first place.

We like to believe (and are told, with marketing spin) from founders/hiring managers that we're being given a block of options to purchase shares in the company. We evaluate this grant, given the commonly presenting "key terms" of strike price, company valuation, ownership %, etc., to have some value $X [1].

What we're not explained is that we're actually given a block of options with expiration date of D (where D is most commonly length of tenure + 90 days). What I hadn't realized before is that this D really makes a difference in the value of an option.

Ask any trader about the value of an option, and they'll explain to you that short dated options are the cheapest, and option contracts (ex: puts, calls) become more expensive as the expiration dates become longer. Longer expiration dates directly translate to a higher intrinsic value of those options.

So going back to the option grant given to the startup employee, we can see that the expiration date clause on those options are a "key term" that is rarely, if ever, a point of contention. People negotiate for a larger number of options all the time (often trading salary for more options), but when's the last time someone tried to negotiate and trade the number of options for a longer expiration? That would actually be trading some amount of value for another amount of value, but it's never done.

But this is something you could do if you wanted to open a position on say, $AAPL, using options. You'd intently consider both the strike and the expiration date for an $AAPL option, and look at how much each would cost. A longer expiration contract with the same strike price will always cost more. Some hedge fund managers have very long dated (3+ years), out of money (ex: the strike price is higher than the current price) call options on Oil. Those contracts would be much cheaper if they'd expire in 3 months, not 3+ years.

So when we say "we've earned those options", it's not entirely accurate. We've actually "earned those options with expiration D" (and other terms). Holding strike price constant, option grants with "equivalent value" with different expiration dates would mean that the longer the expiration date, the fewer options you should get.

Of course, figuring out the value of a longer expiration date would be incredibly difficult. I certainly have no idea how to price this, especially given that the value of the underlying asset (the company) is already a bit of a black box in the first place. But this is something worth being aware of, so that we can understand that there is real value at stake in the ongoing expiration date discussion.

BUT -- we shouldn't forget that if the founders' intent truly is to "give Z% of the company to an employee in a tax efficient manner" (like they say in all their conversations), and if "the value of the option grant as computed by the value of the underlying option contract" is not a concern, then the founders will not actually be "giving up" any value since that value was inadvertently created and was never intended to be claimed by the founders/company in the first place. In this case, a founder who wishes to be consistent with herself and her own narrative should definitely adopt a long expiration option contract to make the reality of the situation as close to the narrative as possible, given the legal limitations.

[1] I tell friends to consider their option grant as $X == $0 to simplify things and protect themselves from being mislead, but all options do have some nonzero value.

The comments here have shown some new thinking for me about employee as owner, love reading about it and welcome the input of others on building in a human first manner.