Update on Stock Options/RSUs Vesting Issue
avc.com
avc.com
It is seriously gross that a tax reform bill that is by basically all accounts enormously, even proudly regressive is being sold to tech nerds with a marginal improvement in stock options accounting.
Here's a fun detail of the GOP tax plan: it will, according to Senate leadership, include a repeal of the ACA's individual mandate, which is the foundation on which guaranteed-issue health insurance works.
Prior to the ACA, if you or anyone in your family had, in any previous doctor's visit, been assessed/documented as having any symptom of a very long list of disqualifying conditions, you couldn't buy individual-market insurance at any price. It was simply unavailable to you. There is no due process or meaningful appeal to these decisions, which were made mechanically and in bulk. How do I know? Because half my family --- none of whom suffers from any chronic conditions (or, really, any conditions whatsoever) turned out to be uninsurable when we started Matasano.
If you work for some gigantic startup like Github or Airbnb, and your equity turns liquid in 2 years, here's a newsflash: the GOP tax bill is going to include a windfall for you. That probably would have been the case regardless of whether it included a new perk specifically for startup employees.
But if you're starting a company now, or if you just in general care about the rationality of our public policy and the way we finance government, you should be extraordinarily wary of anyone --- especially an investment banker, even if they happen to be wearing khakis and a zip-front sweater --- trying to sell you this new bill. Their incentives are not the same as yours.
As with all things, worth remembering who's writing this: Fred Wilson is an extremely wealthy venture capitalist. He stands to benefit a great deal from provisions like the repeal of the estate tax.
EDIT: here’s the older story: https://news.ycombinator.com/item?id=15686442
"This means that the Senate has now made the tax reform bill a win for those who work in startups instead of a loss."
Not the provision about options - "the bill."
So he's clearly saying that the bill as a whole is better for startup employees than the current system. GP point is that the bill may now be better from one single perspective but on the whole is still much worse than what we have today due to other issues.
I can't fathom how a rational human being would think this is a good decision, so I can only conclude that it was a craven political ploy to put something obviously horrible in the bill in order to make the merely bad things look tolerable by comparison. The amount of evil in this tax bill is positively cartoon villainesque in quantity.
> Here's a fun detail of the GOP tax plan: it will, according to Senate leadership, include a repeal of the ACA's individual mandate, which is the foundation on which guaranteed-issue health insurance works.
> Prior to the ACA, if you or anyone in your family had, in any previous doctor's visit, been assessed/documented as having any symptom of a very long list of disqualifying conditions, you couldn't buy individual-market insurance at any price. It was simply unavailable to you. There is no due process or meaningful appeal to these decisions, which were made mechanically and in bulk. How do I know? Because half my family --- none of whom suffers from any chronic conditions (or, really, any conditions whatsoever) turned out to be uninsurable when we started Matasano.
Repealing the individual mandate doesn't remove the requirement that insurers cannot discriminate based on pre-existing conditions.
If you want to argue about the economics and sustainability of the overall market without a mandate forcing increased participation then go right ahead, but don't make false claims about what's being included in the repeal.
Without the individual mandate, insurance companies have three options for pre-existing conditions. First, they can not insure them (which would be illegal). Second, they can raise rates for everyone who does have insurance. Third, lobby to have the pre-existing conditions section of the ACA repealed (which will now be much more palatable politically because in the mean time everyone rates will have sky-rocketed in the mean time).
Since #2 is the likely outcome in the short term if this bill passes. Startup employees who have health insurance may see a windfall in the future with the options change, but they'll lose out month after month with increased insurance costs.
But #3 would be up next, and the insurance companies will lobby hard, noting that they have been clear since day 1 that covering pre-existing conditions is only possible with an individual mandate. So long term, repealing the individual mandate and not covering pre-existing conditions look pretty much the same.
Starting with a premise that that ACA is working is invalid.
In the current US health care system about 49% of people get coverage through their employers, 19% are covered by Medicaid, 14% are covered by Medicare, 2% are covered by other by other public plans (ex: VA), and 9% are uninsured (for various reasons including not being mandated to get coverage). That leaves 7% of people that get coverage on the individual market[1].
On average, the cost to insure people in that 7% is substantially higher than the 49% receiving coverage through their employers. That's for a variety of factors including them being statistically unhealthier (unemployed people tend to be sicker) and more broadly because employer's generally provide coverage through self-insurance that removes all profits from the equation. Large employers don't just buy coverage from Anthem or Horizon, they self-insure and buy an umbrella style master coverage to cover outliers.
That leaves a small percentage of the 7% on the individual market that are not receiving any subsidies to pay a grossly outsized cost for health insurance because they're bearing the costs of the wider 7% risk pool. That's what's broken in the ACA and that's who bears the full impact of the mandate. The policy as it stands now is destined to implode as at some point that top end of the market will actively avoid it anyway.
My solution to all of this is to ban employer provided coverage entirely and require the same open access provisions for health insurance to all plans. That would widen the risk pool substantially, eliminate issues with fragmented markets, and open the door for more job mobility (health insurance wouldn't be tied to your job). Throw in Medicaid for free at the low end and a public option with which one could buy into a Medicaid-lite to add additional competition in underserved markets and you've got a working healthcare system that can be layered upon our existing one.
[1]: https://www.kff.org/other/state-indicator/total-population/?...
From where do you draw the conclusion that the 7% individual market customers (if not 7% + 9% uninsured) are unemployed?
Regardless of that: we already know what happens when the economics of health insurance for a region become unfavorable for insurers: they simply exit the individual (and, ultimately, the small-group) marketplace. No law requires insurers to offer products on the individual and small-group marketplace, and, without the mandate, it's reasonably straightforward to predict that many/most insurers will leave those markets.
According to this Wikipedia article it's 81% of workers getting health insurance through an employer are self-insure plans[1].
There's also an inherent bias towards healthier small organizations going the self-insure route. If I'm running a small shop and intimately know all the people involved (ex: family business), I know more about our healthcare needs and risks than any insurance company could. Based on that I can self insure and keep costs down or defer to getting policies on the individual market. Rational actors who are "more sick" will do that latter.
> Regardless of that: we already know what happens when the economics of health insurance for a region become unfavorable for insurers: they simply exit the individual (and, ultimately, the small-group) marketplace. No law requires insurers to offer products on the individual and small-group marketplace, and, without the mandate, it's reasonably straightforward to predict that many/most insurers will leave those markets.
And that's what congress needs to solve. Keeping the mandate might delay the implosion but it doesn't stop it.
[1]: https://en.wikipedia.org/wiki/Self-insurance#Size_of_self-fu...
The 2017 edition of the underlying report is available at https://www.kff.org/health-costs/report/2017-employer-health... . The report states multiple times that "Sixty percent of covered workers are in a self-funded health plan." The following portion is relevant to your discussion a few comments up: "Eighty-one percent of covered workers in firms with 1,000 to 4,999 workers and 91% of covered workers in firms with 5,000 or more workers are in self-funded plans in 2017". Figures 10.1 and 10.2 show these numbers in graphical form.
Pretend you are solely concerned with the success of your business venture and nothing else.
Reducing general healthcare drives up your labor costs both directly and indirectly. Fewer vaccinations, longer infectious periods, reduced herd immunity, less work, more expensive.
Most people in the US don't have RSUs. Everybody needs healthcare.
It's in a messy state right now, it has been since an unsustainable system was put in place.
Please don't conflate issues.
They are certainly out of touch by calling the bill a "net positive for startups". https://twitter.com/nvca
That said, can anyone give me a compelling reason why Options/RSUs are better than getting the equivalent amount of straight cash (even with tax considerations) from an employees point of view?
At this point I feel like anyone who chooses stock options over cash is naive, delusional, or misled.
Ditto, but I’ve also had two good success stories in my career too.
> At this point I feel like anyone who chooses stock options over cash is naive, delusional, or misled.
Why does everyone think it’s an either / or scenario? I’ve negotiated to have both more than once, salary at where I feel I should be and options/RSU where it might be a very nice bonus at a future date. Don’t be afraid to say no and keep looking if a company is taking advantage of you. I realize it’s hard sometimes, but the folks on HN generally can have the upper hand negotiating as tech employees are in such demand.
But I worry that many new to the industry are selling themselves short with an "or" and not realizing that an "and" is possible.
There are a number of self-imposed mechanisms that put downward pressure on compensation for developers. Willingness to take what are effectively lottery tickets and rationalizing it as discounted or future potential earnings is one of them.
Your salary should ALWAYS be the highest possible salary the market can support.
Equity or options compensation at a startup should be used to defray the risk of the company failing in the near and midterm.
So if Google is offering you $100k, then you should be asking Startup X for $100k plus equity.
Anti-dilution is usually for A or B rounds against a possible later round. A cap (I hate caps) is a form of anti-dilution. None of this is available to employees at least that I've ever heard of. As a founder I'd never expect it from a VC nor would I ever give it to employees.
Founders can get something called Series FF that grants them a supermajority of voting which allows them to retain control even as they give up their majority. You have to do really well in the seed round to get it in A. I think Larry+Sergey got this.
That's what should be changed, especially if you're asking someone to take a below market salary for something that, statistically won't make it.
"As a founder I'd never expect it from a VC nor would I ever give it to employees."
Why? Why should the people who are actually doing the work not receive that protection? Why should the value of their compensation go down over time, while the value of what they're doing goes up?
About anti-dilution clauses, imagine yourself as a founder. You have a patent on a hyperistor which will make transistors look like warmed over MySpace. Awesome. You and a couple of grad school buddies raise a $3M Series Seed round and run through that. Damn! It works! You've proved your thesis and now you need to scale. For that you need more money, another funding round.
This is where everyone wants to be. This is a success scenario but it is not success. You need more money, say $20M to scale your technology.
Someone has to give you that $20M and they will want something. If the founders+employees all had anti-dilution clauses, the VC who wrote the Seed term sheet would have to suffer. A lot. A lot a lot. So they would never agree to this in the first place.
Instead, everyone, founders, employees and VC, all dilute but then the company also gets the $20M. Anti-dilution clauses show up when a startup really needs money and the VC can force them to accept it as a term. It's not a good sign.
Sharing dilution is in its way, very equitable. This is in fact, the way things work. Startups are about risk and anything structural which you attempt to engineer out that risk will come back and bite you.
And, quite frankly, if you're not willing to imagine yourself as an employee that is getting their hard earned equity diluted to hell and back, I'm not interested in what it's like for founders.
> At this point I feel like anyone who chooses stock options over cash is naive, delusional, or misled.
People consistently make irrational decisions with money all of the time. The reality for many people is taking the stock option route makes them emotionally more vested in the success in the company. Companies know this and regularly exploit it.
Lastly - it is OK to join a startup early on to "mint" yourself professionally (e.g. "I was employee #4 at Google" or "I was employee #4 at a company that was bought by Google"). People's eyes perk up (in the Valley especially) because they assume that because you were an early employee you were more likely to contribute to the successful exit of the company. Thus, "minting" yourself in the job market. Whether that's true or not in reality is another point...
>I have a drawer full of stock option paperwork from various start ups I’ve worked with over my career, all of which were “confident” in their growth prospects and none of which exist anymore.
>At this point I feel like anyone who chooses stock options over cash is naive, delusional, or misled.
First let's assume you're a 10,000x engineer who was also able to change the course of small startups through your personality. Then if this has happened once or twice it might be bad luck. But a drawerful of times, and we should perhaps revisit the assumption that you are a 10,000x engineer who is able to change the course of small startups. Maybe this is about you.
You conclude:
> I feel like anyone who chooses stock options over cash is naive, delusional, or misled.
But there is a hidden assumption there that if you are not a 10,000x engineer, then nobody is. Do you think this is a fair generalization for you to make? If the startups you picked and joined failed is it fair to say had anyone else been the one to pick and join startups (not necessarily the ones you picked and joined) they could fare no better? That you're the best there is, at the task of picking a startup to join and lighting its boosters on fire?
Basically it is like dating: if someone says every single person has left them severely disappointed, that says more about them than it does about dating. To stick with the analogy: we know people enter happy successful and long-lived relationships.
We know there are successful startups whose destinies early hires helped set.
If every one of the ones you've tried with have failed, a drawerful over the course of a career - could this be more about you than them? Are you not perhaps the "truly excellent" husband who has given up on marriage, after 5 divorces.
If so, then perhaps it is not fair for you to generalize and say that anyone who gets married is delusional. Because you've been married 5 times, you know how to pick 'em, you know how to make it work: and it just does not work.
I tried to be a bit polite but I hope you can see the analogy. I get that it doesn't work for you.
But is it really fair to generalize your experience?
>anyone who chooses stock options over cash is naive, delusional, or misled.
What you've written also applies to founders. Why not write: "any founder is delusional. Unless they succeed, in which case they're just lucky."
But if that is true, nobody should admit being a founder during the delusional phase. If they succeed, they should never give advice.
Except that 10,000x multipliers exist, and the reason I listen to successful founders is to learn from them.
The gp poster isn't a 10,000x-er. That says more about them and their career than it does about startups.
This is also ignoring the fact that most companies will dilute the hell out of your options, so even if the company does make it, odds are you'll just have broken even from working for a regular company.
The real issue was with ISOs, which are most common in early startups with no liquidation options. If you can’t liquidate your shares (and may never be able to), but you get taxed on the spread between 409A valuation / strike price, you could easily become bankrupt or go heavily into debt.
As for why anyone would prefer a lottery ticket over straight cash, that comes down to personal preference. If you’d rather take the cash, good for you. But consider that Silicon Valley was built on decades of employees becoming millionaires from early stock options. Clearly some people prefer to take the risk. And if they take that risk, they should be able to capitalize on its returns. Of course they should pay tax on those returns. The problem was the original bill (and the current status quo, to some degree) expected that tax before the employee saw any money, which they may never see.
As an aside, if you want cash over options, you’re probably better off just working at $BigCo for a higher salary and immediately liquidatable shares of one of the top companies in the world.
This is already the case.
What the bill would have changed: it would have taxed this at the point of vesting, rather than the point of exercise.
The stink was because the sorts of options executives and directors often receive (NSOs) had their tax treatment changed. This is about the rich getting richer.
I suspect coupling the tax bill with repeal of the healthcare mandate will mean it goes nowhere, though.
[Over 25% of the stock grants that we track are NSO, and most of those are not executives or directors. Disclaimer: I work at Carta, fka eShares, and we track a lot of grants.]
This bill would’t have changed my compensation at all of the startups where I’ve worked except for one aspect — the removal of AMT.
Honestly we have way bigger things to be worried about in this bill, even if you focus narrowly on issues startups have. For instance, removing the individual mandate likely means the ACA health care market will collapse. This will make it less likely that people who need healthcare coverage will be able to start companies. I’d love to see the startup community up in arms about THAT.
Cynical view? Corporations and rich people rule the current US political landscape, and the legislation would’ve negatively impacted both’s interests.
Even boring big companies in the UK have returned 400% over 5 years with some of their share scheme's - a successful ipo where you have shares early on can produce life changing amounts of return.
One VC backed company I worked for back in 2000 everyone was at one point a $Millionaire if only the coop movement wasn't so stick in the mud :-)
NVCA (mentioned in a reply in the article) appears to be a lobbying firm for venture capitalists and appears to have been behind it according to their twitter page.
https://nvca.org/pressreleases/nvca-cheers-changes-senate-ta...
They don't say anything about the bill as a whole. Yes, the bill is pure unadulterated shite. But the NVCA is a trade group lobbying for changes (from pure unadulterated shite) in the narrow interests of their group.
I get this. But it doesn't mean the NVCA is signing up for ObamaCare repeal. Indeed every VC I've met loathes Trump (I haven't met Thiel.) I was in a startup forum at Berkeley when ObamaCare repeal was broached by a startup tax lawyer. That was met with a resentful utter stone silence from the crowd. Coulda heard a pin drop.
But I get how the NVCA could lobby for this narrow change in an otherwise piece of pure unadulterated shite.
Grossly inaccurate statement. Nearly all of the analysis of the tax bill throughout its many iterations so far find that it is a long term net loss for all but very, very high income earners.
Provided, of course, that incomes stay exactly the same, ignoring predicted increases, and inflation continues at predicted rates.
This is in contrast to current law, which requires only 90 days of grace period.
This effectively legislates what AirBnB, Pinterest and others have been doing due to free market pressure [0].
This is good for employees, since you might not have enough money to pay for the taxes on the stock that you vested and exercised (due when you exercise under current and proposed law). But arguably, it’s not really important for the government to mandate this; it’s sufficient for the government to allow deferred option exercise dates (which is the case in current law).
As tptacek wrote, this has a stench of pandering to it; the new tax law is IMO largely bad (and I say this as someone who probably stands to benefit from it). But this wrinkle is most certainly better than the proposal from yesterday, which I believe would have been stifling to startups and would have pushed most startups to either defer any fund-raising to keep valuation low and thus options affordable to new hires (bad for startups and VCs; good for incumbent companies due to reduced competition), or to do huge raises to compete on salary alone (bad for startup founders and employees due to presumed higher percentagowned by VCs; perhaps good for VCs if it didn’t damage startups too much; good for incumbents since it again makes startups higher-friction).
Would it require companies to provide a 5 year deferral, or would it be up to the company to decide any time up to 5 years?
[0] https://www.finance.senate.gov/imo/media/doc/Master%20Tax%20...
Unless they decide to use the cap as valuation for tax purposes. But then I imagine one could give up the cap in favor of a better liquidation preference.
The amendment provides that certain employees who receive stock options or restricted stock units as compensation for the performance of services and later exercise such options or units may elect to defer recognition of income for up to 5 years, if the corporation’s stock is not publicly traded.
Perhaps the amendment itself makes this clear, but it sounds like this does not in any way affect option exercise timelines. It sounds like this just lets you defer recognition of the income resulting from an exercise.
From the government's point of view, they were trying to maximize tax revenue, right? And theoretically that occurs when the security price is at a (local) maximum, which would also likely be when employees choose to exercise.
Or is the idea here that they can tax options at the short-term rate as opposed to the long-term rate?
And even then, does that really make up for the substantial difference in market price (and thus taxes)? The "market price" (whatever that means here) of an early-stage startup's options has to be significantly lower than a post-IPO company.
This is a GOP tax bill, so no, not really.
No; there's basically no political faction that is interested in revenue maximization.