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Comment by l2c1928 | Hacker News Reader

l2c1928

It's bad for most people, but when it's good it's really good.

I was lucky to join a now unicorn as one of the first few dozen employees a few years ago. I forward exercised with a few thousand out of pocket (section 83b) an equity grant now worth around $1.5m. Because I forward exercised my options at a low valuation I didn't have to worry about paying taxes if I exercised at a later time when the company's valuation grew. It also meant that my gains became long-term capital gains, and thus taxed lower, as soon as possible after I vested each month.

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Yes, just like buying a lottery ticket is bad for most people, but when it's good it's really good.

Stock options are never a reason to join a company. They are potentially an added bonus. But they should never be valued in that initial "should I work here?" Not when first taking the job, and not when considering whether you should leave or not (barring an imminent IPO that would delay your leaving by a bearable month or two)

I have a very similar story: Was on the first 10 employees at a now unicorn, forward exercised with a few thousand dollars, and my shares are also now worth around $1.5m. But unfortunately the company blocked all attempts at selling any shares on secondary markets.

Something you might not be aware of: If you joined the company before they had $50M in assets, your stock would also qualify as QSBS [1], which means you don't have to pay any tax on gains of up to $10 million.

[1] https://www.andersentax.com/services/for-private-clients/bus...

Your story still leaves a lot of room for skepticism. For one, 1.5MM is not actually a very good deal for an engineer in your situation, and likely the company gave you very unfavorable terms. Electing 83b is a fairly irrelevant detail in your story as it only affects taxes, not the outcome of the company.

Your shares are likely going to get hugely diluted exactly because of growth investing like in the article. Investors and founders will essentially trade away your share of the company in new rounds, while they get huge payouts for it, your shares may grow a small amount, again realized over some long time horizon.

Let’s take an extreme example and say your shares double in value (not likely) through the remaining funding rounds, and eventually in another ~7 years you can actually sell them in some liquidity event.

So that’s $3 MM (gross) over 10 years. That works out to be $300,000 / yr in equity compensation.

Certainly very high. But not any kind of crazy number. Definitely there are rank and file engineers in FAANG companies, Wall Street, and other industries getting annual RSUs or bonuses well beyond that without having to wait 10 years to realize it or have the risk that it folds or you get laid off and lose a bunch of future value, and have a high base salary, good benefits, and good work/life balance the whole time.

Given that even a crazy outcome like $3 MM annualized over 10 years isn’t significantly better than other reasonable total comp opportunities, this overall paints a really bad picture for start-ups.

Your case, which is nearly about the best lottery ticket someone could get, is only slightly better than a competitive position at many public companies, finance shops, etc.

Meanwhile, almost all start-up outcomes would be far worse.

There's a myth that you can't realize gains if a company doesn't IPO...I've already sold some shares in a tender offer. There is an active secondary market for shares if I chose to sell more.

Not sure what your point is about $3MM over 10 years. Why would you divide it over anything other than the number of years you actually worked at the company?

You've assumed I was a senior engineering hire. I was in a junior non-technical role a year out of college.

Early selling for employees is exceedingly rare and also often on bad terms, this was mentioned in the OP article. Again, it’s lucky that you were able to, but is such a wildly unlikely outcome that functionally everyone else has to ignore that aspect of your story. To boot, being able to sell in a secondary market transaction only after about 3 years is even more ridiculously rare (to the point that it makes me question if your whole story is even true, or just some trolling). The few companies I’ve heard of allowing that type of thing (late pre-IPO Spotify, Squarespace), only allowed it after early employees like yourself would have waited 7-10 years before getting any payout.

> “Not sure what your point is about $3MM over 10 years.”

Please re-read my comment to help understand.

> “You've assumed I was a senior engineering hire. I was in a junior non-technical role a year out of college.”

Where did I make an assumption about junior vs senior level?

As for your claim you were given this grant for a non-technical role 1 year out of college, I think it’s more likely you’re just lying to troll this comment thread. Just in a Bayesian sense, the conditional probability that you’re lying is higher than that this is a true story.

It’s not impossible that this could have happened for a non-tech hire with no experience, but that mere possibility also is irrelevant compared with the far greater probability that this is just made up.

I never said how many years ago I joined...by a "few years" I meant 5. I said I sold some shares via a tender offer, which are company sponsored, and last year was the first time I was offered that opportunity. Companies can't block you from selling on a secondary market unless you've specifically agreed to that as part of the initial grant. It's far more common that they have the "right of first refusal" clause which means they get the chance to buy back your shares before selling to a third party.

I don't think there's anything particularly special about my situation other than I was fortunate to join a now unicorn early on.

If you can't afford to pay for your options up front and elect 83b then is it really a startup? For example, Uber is not a startup. It was a startup but that was awhile ago.

If you go into a casino, put 1000 on green at the roulette table and win, did you get a good deal?

The fact that some people win at startup roulette doesn't mean that it's a good financial decision to join a startup, especially considering that you can make the same sort of money without the risk elsewhere.

Parent started with "It's bad for most people, but when it's good it's really good.". So yes, roulette is similarly bad for those who don't win and good for the few who do.

Article is titled "why a good deal has gone bad." My point is that winning does not make it a good deal.

To expand on it further, even if you are lucky to have joined a unicorn, you still didn't get a good deal in comparison to virtually everyone else involved in the company. The founders are likely billionaires and you made off with a low 7 figure outcome while taking on only marginally less risk. That's not a good deal by any reasonable definition.

A founder takes far more risk than an employee. It's easy to look at extremely successful outliers and say in retrospect that they are unfairly wealthy, but for every Sergey Brin or Elon Musk, there are many many people who slave away at a company for years at a very small salary, burning through their savings and getting loans (or "investments") from friends and family.

Take Jeff Bezos. He was a fairly wealthy guy, having worked at D.E. Shaw before founding Amazon. Still, he took a $250k investment from his parents to help found the company. Yes, it turned out to be a great investment, possibly worth $30 billion today, but at the time, the more likely outcome was that it would be worth $0. So not only did he risk his own money, but that of his friends and family on his new venture.

Contrast this to an early employee who starts after the first round of outside money is made. That employee often gets paid a competitive salary (maybe not a FAANG level salary, but something that's fairly easy to live comfortably on). They certainly are not expected to raise money for the company. It's just a much safer thing to do, that really doesn't involve nearly as much sacrifice as the founder.

Now, I agree that there is a point where the rewards may not justify the risks, which is joining a company in the pre-series A stage. At this point, you might be asked to take a very significant salary/benefits cut, while your share of the company is likely to be in the low single digits (percent-wise). At that stage, I personally don't think the risk/reward ratio is fair (i.e. i think that stock grants to these early employees should generally be higher than they are).

"Still, he took a $250k investment from his parents to help found the company."

Seems he is another wealthy guy who "made it on his own". I couldn't raise even a 10th of that from my family.

The rational comparison is whether you got a good deal relative to the other options open to you, not whether you got a good deal relative to the other people involved in the startup. By the time a startup has raised VC and hired employees, they've usually already passed several risky filters: they've found a market, they've built an initial proof-of-concept themselves, they've convinced investors to give them money, and they convinced you to work for them.

You have the option to swap places with the founders and become a founder yourself. But if you do that, you have to clear the same hurdles the founders did - validate a market, build an initial product, convince people to give you money. And you bear the financial risk that any one of these steps won't work out yourself.

One (productive, IME) way to look at the founder/investor/early-employee/late-employee divide is to think of it as risk apportionment. The founder risks their time & effort for a potentially large payoff if those risks succeed. The investor risks their money on the assumption that the founder can turn it into more money. The employee trades away the financial risk that the venture as a whole might not succeed for reasons outside his control in exchange for ceding most of the rewards if it does. Depending on your risk tolerance and belief in whether the company will succeed, you might choose to occupy different roles in that ecosystem. But understand that what you're being compensated for, when you have an outlandish success that nets a big payoff, is all the ways that payoff could have gone wrong and you might've ended up with nothing.

I disagree. If that's the only consideration, it creates incentive for the super rich to ensure all other options are bad; that'll ensure you pick the least bad option, the one that benefits them the most.

You have to include whether you are enabling greater income disparity, to ensure there is a disincentive for those in power to create that sort of environment for you. It is rational to consider both what benefits you, -and- what benefits society at large, and if you have sufficiently not terrible options to choose from, picking the one that does not greatly enrich another on your effort is a positive.

> To expand on it further, even if you are lucky to have joined a unicorn, you still didn't get a good deal in comparison to virtually everyone else involved in the company. The founders are likely billionaires and you made off with a low 7 figure outcome while taking on only marginally less risk. That's not a good deal by any reasonable definition.

I wouldn't see the risk of being an employee and founder as similar. Typically often founders are for time periods without salary etc. Early employee should just consider it as a job with more risk of the company going down under (that risk also exists in more established company). You can request more salary for the job or some additional perks (such as options).

I think for the employee the risks of joining to startup are quite easy to manage compared to a founder.

The issue is you can't ask for more money.

Increased risk of a startup should mean increased salary. What it has turned into is lower salary with options to get rewarded if all goes extremely well. If things go only okay then the salary is about the same.

The risk can be higher for a founder but could be more risky for an employee based on personal situations. The reward ratio is higher for founder and control over risk is in their hands.

My problem with it is that there are many scenarios that are fantastic for the founders, but only one (unicorn) that is fantastic for non-founders. You can put in the same long hours, pour your soul into it, take the same risk for years, but if there's an exit event, you'll only be feeding off crumbs while the founders feast on the rewards.

>but when it's good it's really good.

I don't think this is true. There are cases where people have broken equal or made slightly more than working at a corporation would have. It can be really good, but it can also be just okayish or not that great.

This is based off my reading of the phrase, which means that good options have to be really good. The "it is really good" that is actually written verses "it can be really good" that is closer to the truth (imo).

I too would like to win the lottery.

If you think of the Valley (or wherever you are) as a lottery then your chances of winning are about the same as those of a lottery. If you think of yourself as your personal VC then your odds approach those of a VC which while not great and moreover not diversified, they are much much better than a lottery.

How do you diversify as an employee/engineer? work for 10 startups at the same time?

You can't. That is what distinguishes you from a VC. Actually, you can. Serially. Plenty of people work for a startup through its early stage. A year here, a year there. That's diversification.

But how do you determine when it's time to jump ship? A year seems awfully short to make that determination.

If your object is diversification of your investment then one year isn't too short. However, typically your option vests monthly after the cliff. So you don't have to stay for two years unless you want to.

Bounce around until you find somewhere that has a rocketship trajectory? If you can work at 10 startups over a 20 year career, your odds aren't terrible

My point is that there are ways to manage risk as an employee, such as early exercising assuming you are joining an early stage startup where the cost is low enough.

I would've been screwed if I didn't early exercise.

Good point, although do long term cap gains apply to private company stock being held over years until the liquidity event?

You get switched to long term capital gains 1 year after exercise or two years after the grant start date, whichever is later.

I don't believe the "or" part of this statement is right. I think you still need to hold for 1 year after exercise AND two years after the grant for long term to kick in.

Not sure what the best source on this is, but a quick DDGing:

https://www.fool.com/knowledge-center/tax-rate-on-exercising...

I think we're saying the same thing.

If I early exercise my options on day 1, then I still have to wait until the 2 years after the grant date (2 years of employment) to get long term capital gains treatment.

If I wait 4 years, then exercise, then I have already satisfied the 2 years post-grant requirement, but I still have to wait a year after the exercise to get long term capital gains treatment.

The key part was my last clause: "whichever is later".

I paid long term capital gains after selling a portion of my private stock via a tender offer last year.

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