Comment by mikestew | Hacker News Reader

Comment by mikestew | Hacker News Reader

many employees don't understand the basics of stock options, hence they don't value equity as much as employers / investors do

The fact that I know the basics of stock options is precisely the reason I don't value equity as much as employers or investors do. I can count on two fingers the number of companies whose stock options put money in my pocket, and one of them is Microsoft. I would need many hands to count the number of ways a company can screw me out of a payday on options.

Point is, for the vast majority of people knowing or not knowing the first thing about stock options won't make a lick of difference in their bottom line. What people need to know about options: sign the paperwork when it's given to you, and on the outside chance the options end up being worth anything your coworkers will give you some half-assed advice, which is one's trigger to go talk to a financial advisor.

Otherwise, spend your mental energy on how to increase your 401K contribution. That's guaranteed to involve real money that you can benefit from, and you should bone up on maximizing the potential.

big companies like Microsoft/Google/etc don't even offer most of their employees stock options, but instead they offer RSU (Restricted Stocks Units). Those are easier to understand, there's no exercising decision to be made, you just need to know your vesting dates. The biggest decision is : Do you want to sell your stocks before or after the 1 year Long term capital gain wait, but that decision is common to all stocks.

big companies like Microsoft/Google/etc don't even offer most of their employees stock options, but instead they offer RSU (Restricted Stocks Units).

Microsoft used stock options when I worked there, hence my use of it as an example.

MSFT was one of the big model companies for stock options and sharing the wealth around. I think they got rid of their stock option plan sometime under Blamer when the stock started paying a dividend.

That's correct. It was shortly after Steve took over as CEO. At the time a lot of options were underwater and Microsoft offered a buy-back plan where one could get a lump-sum payment in place of those options. In retrospect taking the buyback was the right decision as the Microsoft options had a 10 year expiry and most of the underwater options didn't climb back within their 10 year window.

> The biggest decision is : Do you want to sell your stocks before or after the 1 year Long term capital gain wait, but that decision is common to all stocks.

The decision is more along the lines of sell now vs. sell later. The LTCG decision is not nearly as important. The conventional wisdom is just to treat the RSU as the same as salary by selling immediately upon vesting. Since you're already employed and paid by them, holding equity in the company you work for is unnecessary additional risk.

When the RSUs vest you usually have the option to take all and pay the appropriate tax when tax season comes around OR take a reduced amount to cover the taxes. Do you recommend/have a preference? What are the pros and cons?

I'm at a company that automatically sells enough RSUs at vest date to cover withholding (the remainder is deposited alongside the regular salary). So that decision is made for me. No matter which option I'd take, I'd use the one that allows me to move as much money into retirement accounts, 401(k) etc. as quickly as possible.

If you're working in the Bay Area and making average wage for a software developer, your marginal tax rate is going to be 28%+. If waiting 12 months means you can lower your tax burden to the long term capital gains rate of 15%, that's a no brainer.

AIUI, RSUs are treated as normal W-2 income when they vest.

Right. Your cost basis is the price at vesting, so it's the same as if you bought the stock at market with cash for the same price.

so is the capital gains tax only on the profit from the stock? wouldnt it be better just to sell instantly and not have so much of your money tied up into one asset anyway? Sorry if these are basic questions

Yep and yep. Not basic at all, this stuff is only simple once you already know how it works.

Which, in turn, sets up a vicious cycle, because employers know that employees don't value equity as much as a cash-equivalent benefit, and respond rationally to that incentive by reducing equity grants. (This is a positive claim, not a normative one).

On the contrary, because it has a low perceived value they make up for it with volume. Look at how Uber throws insanely high paper-valued equity to its hires. Similarly when I worked for a startup I was promised almost a full percent of a company they expected to grow to a hundred-million dollar valuation. $1m for a year's work? Can't go wrong with that.

(Side note: I didn't get the equity as I was conveniently laid-off a few days before my cliff vesting date. Lovely...)

I haven't seen that happen but I totally believe that it does. So there's two different ways things go haywrite because nobody knows how options work.

I've done the other way around. Leaving before 1 year and not giving a f* about options.

Even if the company makes it big later (hundreds millions), a diluted infinitesimal percentage is peanuts compared to a better offer right now.

By the way, totally used the imaginary lost-stock as leverage in the negotiation. That was probably the best way to cash it out. :D

When seeking unvested equity matching, what kind of evidence does the hiring company typically seek to verify your request - or do they just take you by your word?

I wonder if I could apply to Google or Facebook and claim I have $2m of unvested equity from an unnamed startup...

Noone verifies anything. It's the usual dance where you say what it will take for you to join them and they ask your current salary.

Should be part of that conversation: The £10k of stocks you'll loose when joining them [low minimum, at current valuation].

It was named startup (that noone knows). It was featured in various news as a top X startups to watch in the UK.

Ouch. Did they reach $100MM valuation or were they below that?

They're still in submarine mode, though with fewer employees there now than when I was there. They have enough VC funding to last them a couple of years of zero revenue, though a friend of mine who is still there says they've secured a couple of high-profile business deals. That's all I know.

The founder has a good track record - though I think he's looking to sell it before it gets that big. My friend there thinks whatever stock options he has will simply be diluted by equity sales during future investment rounds anyway.

> $1m for a year's work?

It's usually 4 years vesting. So obviously, it is NOT $1M for a year work.

Sorry, yes, it was to vest over 4 years, but extra stock would be added annually - so after 4 years my equity might be $4m cumulative, which is $1m/yr on average.

No you won't... unless you've got that in writing... and even there it's not guaranteed.

Companies say all kind of fake promises, don't trust them. Sadly, being laid off on your last month is a lesson of that ^^

I've never met an entrepreneur who didn't expect their company to grow to a huge valuation. Did you believe them? Your 1% would probably be diluted down to 0.25%... maybe less... by the time they hit that valuation. Factor in the salary you possibly gave up. Factor in the taxes. Factor in the odds of even having a liquidity event. Your expected return is a lot less than $1M.

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