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Comment by kelnos | Hacker News Reader

> an equity package which is simple and standardized enough to be comprehensible by ordinary humans

> deceptive equity packages

What do you mean by "deceptive"? The standard for pre-IPO seems to me to be N number of options, at a particular strike price, 10-year expiration (or 90 days if you leave the company). That doesn't seem all that complicated to me, or deceptive.

What can get deceptive is if the company is trying to lowball you on salary and tell you that your equity will become worth millions some day as if it was a sure thing, which is of course a scummy practice. And the whole expiration after 90 days thing is garbage. But deceptive? Complicated? I don't think it is.

I really don't see what's not simple or standardized about what I described above. Granted, the last time I joined a startup (which is not a startup anymore) was 9 years ago, but I haven't read anything to suggest that this has changed drastically.

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Your answer illustrates what he's talking about

You are not even realizing what he's actually saying

HE's not talking about lowballing on salary

He is talking about what percentage of the company you are going to get, how soon you will get it, and other details

Most people won't get this. I will still try

A) What percentage of the company are you getting?

B) What dilution is going to happen?

C) When can you sell your stake in the company?

D) How soon and in what manner does it vest

* People fixate on things like 1,000 options without considering what it really means

Please consider what you wrote:

The standard for pre-IPO seems to me to be N number of options, at a particular strike price, 10-year expiration (or 90 days if you leave the company). That doesn't seem all that complicated to me, or deceptive.

NOWHERE in that is

What value do I bring the company

IN RETURN what percentage of the company am I getting

AT WHAT RATE will I be given that share of the company

You should absolutely ask about A) and be very suspicious if they refuse to tell you. No one can answer B) with any real confidence because they don’t have a crystal ball. C) is almost always going to be at IPO or when the company sells, though maybe if you’re extremely important they’ll let you negotiate to sell some at a later round, though given this complicates things in most cases they’ll likely not want to bother with it unless you have a ton of leverage. D) is almost always going to be one year cliff, then rest monthly over four years. That should also be extremely easy information to get.

Regarding C, usually you need to wait a bit post IPO until the investors had opportunity to sell their stock. Only THEN it's your turn. It's called lock-up period and lasts usually 180 days (half a year). Just keep that in mind.

Also during sale, investors might choose to execute their liquidation preferences, which means that your shares might become worthless. Employees who paid hundreds of thousands of USD annually in opportunity cost have no such clauses to get their money back.

Investors have the same lockup period post-IPO as do employees and founders.

Huh, TIL. Investopedia only says "may also include early investors" [0]. I've checked the S-1's of some companies.

Cloudflare's S-1 has a 180 day lockup for "Our executive officers, directors, and the holders of substantially all of our capital stock"

In One Medical's S-1 "We, our directors, executive officers and the holders of substantially all of our equity securities, have agreed" to 180 day lockup.

In the Unity S-1 they have "certain holders of our common stock": "All of our directors and executive officers and certain holders of our common stock and securities exercisable for or convertible into our common stock, are subject to lock-up agreements that restrict their ability to transfer such securities for a period of 180 days after the date of this prospectus", and apparently they allow selling of 30% of the stock within the first two days of trading. Couldn't find any reference on who those certain holders are.

[0]: https://www.investopedia.com/terms/i/ipolockup.asp

I suspect it may be the IPO underwriters, the big financial institutions that most companies going public will work with to make their shares available to the public. In short, the company and these institutions negotiate the initial price of the shares beforehand, and on the day of the IPO, those institutions purchase those shares from the company at that price (thus funding the company) and then immediately flip them (hopefully for a profit) to the masses.

What is a reasonable range for an answer to (A)? I know it's going to depend on what stage the company is at, and I figure 1% is probably going to be the upper bound, but I don't know what the lower bound should be.

A is one area for which there seems to be some very rough standards, if you visit Angel List you might see job offers with % equity listed, and it's usually in % terms not number of options.

1% would be quite a lot for an employee. Once the team is past the founders plus a few more, the only people getting more than 1% would be key executives.

Just look at the fair market value vs. the valuation at last fund raise. Percentages are meaningless without the valuations...

Regarding (A) I know they might tell you unofficially but they won't put it in writing necessarily. Would you know why?

Probably because if you’re joining an early stage company you’re inevitably going to get diluted if there are any later rounds. By how much will depend on how the company is performing so they won’t be able to know exactly what this will look like ahead of time. Perhaps putting the percentage in writing opens up some liability down the line as a result.

You should be able to get the number of outstanding shares at the time you join in writing though and then the percentage is trivial to calculate (though as other commenters pointed out you might not be able to get information on any existing liquidation presences investors might have that make it hard to really know what you would get if the company were to sell for x amount...

B) is trivial to answer: Either the shares are going to dilute and the company may fuck you over making them worthless, or they are not going to dilute.

Does A) matter? In terms of evaluating the value I would care about the number of shares and their likely value (now and in the future). If that is 2% of the company or 1% why does that matter?

B) is going to have a bigger impact on evaluating how valuable the offer is but as another poster said, it's almost impossible to know.

(A) is the only thing that matters. How will you know a unit share value without knowing the company valuation?

That's only scratching the surface.

There are any number of terms that other investors and financiers can have that fundamentally change your own.

Participating preferences, option deals (i.e. if xyz happens, they get abc options in which case, they are not allocated yet, but are in a way 'pending'), option pools for other employees are often not counted in the % ownership, convertible debt, special cases, ratchet/anti-dilution clauses.

Effectively - you have to see every single contract the company has with other investors, financiers and executives to actually calculate the real value and risk.

You are missing one of the larger points of opacity as well, which is liquidation preference. Even if your company has only taken a small amount of investment money you may not see a dime of it unless it gets acquired for over $20m, as VCs are able to claim that first $20m. Every round the liquidation preference goes up and it does not take long for a $100m liquidation preference to come into effect.

Thank you for pointing this out. This is the main reason why so many engineers I know got basically nothing when their company was acquired after slaving away for years.

If you join a startup, you should either do it for the experience (lots of responsibility, wearing many hats), or as a founder. Anything less is a recipe for disappointment.

This even washes out earlier investors. I've had situations where I invested and the company got acquired, but there wasn't enough money to get back to my preference shares. Obviously common was wiped out. In particular, when companies seem like they might go bust new money insists on healthy (2X/3X) liq prefs. As in many situations, the golden rule applies. He who has the gold makes the rules!

I've been part of two startups that were acquired, even with options for about 3% of non-Founder shares for one of them. Total value of all of those was $0.

What was valuable was the experience I gained, and rising to VP in one of them. I got a nice package from the (>$100B, SF-based, public) acquiring company. That was an instant 200% raise, and the experience I got has really helped find future higher paying jobs.

And investors have so many tricks to grab all the value on smaller buyouts. Convertible debt for instance, which is convertible from say a 10X payback to some large number of stock shares. If its a unicorn, they choose the stock direction (no skin off your back). If its a modest buyout they chose to convert, taking say $10M for every $1M they invested, which can be 'all of it' and you get precisely nothing for your shares as an employee.

Founders can have a different stock category, so they get something, otherwise they'd not agree to the buyout.

So often, as an employee, you are given what are essentially 'sucker shares' that will likely never amount to anything. By design.

Excuse me, but you also don't get it. All the questions you are posing are knowable. (They will tell you.) It's not deceptive at all, it's just inexperienced if you don't find out all this information and use it in your decision making. OK, B is not knowable but it's estimable and you need to do that yourself.

What's not knowable, generally, (ie, they won't tell you) is the waterfall, the pref stack, pro-rata rights, how much convertible debt there is (money already in, that you are essentially pre-diluted by but just don't know it yet) future unknowns like a carve-out and total other debt.

IMHO, yes it's deceptive, but no, it doesn't matter. If the company has a successful exit, you will do well enough. I'm talking about Series A or pre-Series A hires. In the 90% of cases where the company has a fire sale or just bombs out, you won't get anything, no matter the answers to the above.

> A) What percentage of the company are you getting?

Usually you are getting something minuscule initially, well below any founder or board member's share. The logic is that, if there is going to be money made, the company will need lots of headcount and that headcount all needs to think they own something significant in the entity, which they don't because of vesting, dilution, new CEOs, etc.

> B) What dilution is going to happen?

Unknown, and depends on the performance of the management and board, if they even bother to perform later when all the money is gone (because the company is actually not profitable, shocker) and they have to suck up to someone else who wants a higher dilution so they can get a good percent of the company. Don't forget the employees will be "the problem" if the company runs out (which means RIFs or worse). Unless it's going gang busters, in which cases that minuscule amount stays the same. Oh, don't forget preferred stock.

> C) When can you sell your stake in the company?

Probably never, or maybe when it sells, if you are lucky. Besides, calling it a "stake" is really a fantasy given the stake's value is tied to whatever the investors thought it was worth, which in their mind is always more than any sane person would agree to spend on the company to make it their own company's problem. If the company is even slightly profitable (unlikely) then everyone would lose their minds thinking it's worth half a billion or something. Think two 20 something year old founders thinking their company is worth 1B+ and refusing to take an offer from Facebook for half that while today they are gone and it's not worth diddly.

> D) How soon and in what manner does it vest

Usually to the advantage of the company. Most people never vest their full amount of shares because the company doesn't sell and over 4 years (typical vest scheduling) the chances are the company will re-up its coiffures, which means dilution and besides which you can't stand working for these idiots for more than 2 and a half years, tops.

What can get deceptive is if the company is trying to lowball you on salary and tell you that your equity will become worth millions some day as if it was a sure thing, which is of course a scummy practice. And the whole expiration after 90 days thing is garbage. But deceptive? Complicated? I don't think it is.

For people fresh out of school or people who have spent many years in public companies and haven't had to think about how much the options are actually worth, there's likely to be a disconnect between what is written on paper and what is perceived.

The equity clauses in the typical employment contract, for example, won't tell you about AMT taxes, liquidation preferences, how hard it actually is to decide to exercise 90 days after you leave (you'll mostly likely leave before the cash-out), or how unlikely that equity is to be worth much. Those things aren't said or written but are important to understand. The recruiter won't tell you that either because they want you to join.

That last item is entirely about your ability to accurately assess the value of the company, which is usually a crapshoot even when you have complete information, which you don't. Plenty of people I know/knew, including a younger version of myself, think about it subjectively and don't have a cynical enough view on the chances of cashing out.

It might not be deceptive, but it certainly is complex, and you're probably not being told the most important parts of the deal. The saying "caveat emptor" comes to mind, which is definitely about surprises showing up after you commit.

> What do you mean by "deceptive"?

A package which appears to the novice to be worth N dollars, but where statistically speaking many employees end up in the hole because they mishandle the tax implications, or where statistically speaking many employees end up in difficulty attempting to sell their shares because they miss some deadline or fail to meet some other condition, etc.

There is a need for simplification and standardization because the average employee offered options today does not have the qualifications to assess the value of an equity package — it's not like direct monetary compensation which is easy to understand.

Or at least there's such a need for reform from the perspective of the employee. From the perspective of an employer, if statistically speaking many employees mishandle their complex options packages, then the company ends up money ahead, having driven down labor costs by offloading hidden risk onto their employees.

I think dilution is something that makes the package deceptively complex. Subsequent rounds of funding diminish a previously healthy looking equity package.

How should you factor that into your expectations for the future of your equity package? I think that's complicated.

Does anyone ask for or receive a re-calculated salary based on the change in equity that results from dilution?

Assuming an up round, dilution causes you to own less of a company on a percentage basis, but the actual dollar values of your shares will be worth more. If things are going well (which is admittedly rare, and the lightning you’re trying to bottle) dilution just makes your piece of the pie grow somewhat sub-linearly to the overall equity value creation, but certainly isn’t making it negative.

I find it much easier to reason about equity comp on a per share basis rather than a percentage ownership basis (and frankly don’t understand the constant advice to try and think about it on a percentage basis - though will always happily share that with job candidates).

Additional equity grants are what can make up for dilution, not additional cash comp. I also believe that cash and equity are fundamentally different types of compensation, given for different reasons, and are not particularly fungible. I always try to make equity as comprehensible as possible, but the reality is that it IS complicated - and worth spending time to actually understand because, while there are ways to get misled, it’s also the path to wealth creation.

> reason about equity comp on a per share basis The one reason I find this highly skeptical, is that this is in some sense a made-up figure. In Options, It's an estimate of a per share once the company goes public. In other cases, it's something the founders have estimated based on market potential and other things.

> Assuming an up round, dilution causes you to own less of a company on a percentage basis, but the actual dollar values of your shares will be worth more.

If you're at a $10M company and you're thinking "I will own 0.1%, so in a few years I can look forward to a payday of $10,000" then you're right: getting diluted 10x to own 0.01% of a $100M company is the same value.

But if your thinking is "I will own 0.1%, and if I owned that much of WhatsApp when it sold to Facebook I'd have made $16M" then a 10x dilution would reduce that to $1.6M

Now, you might argue the second line of thinking is wrong and a fantasy valuation, but we all know no-one's getting hired away from FAANG by the promise of an uncertain, one-off $10k in a few years.

How often is the strike price the fair market value of the employee equity pool? Most VCs carry preference stacks to either 1x or 2x of the current valuation, Leaving the options structurally underwater unless the company increases in value by 3x. To take home the strike price equivalent per option could require up to a 6x increase in valuation.

This is a non-obvious way that employees are often screwed on options.

The “at a valuation of” numbers you see thrown around in funding rounds are preferred shares and have a higher cost than employee equity. As a result, companies can use that risk factor to push down on employee strike price, aka 409(a) valuation of common shares, to keep buy in costs low until a liquidity event that equalizes risk preferences (or, if it’s a crappy exit, doesn’t).

The company and employees have a common interest in keeping that price low.

Unfortunately the only options I've seen in 2 private companies were post-preference with a strike price tied to the valuation of the common equity. At the end of the day the company is acquired for a fixed price which goes to the preferenced shares first, leaving little on the table. Straight IPOs have become rare, and the few times I've been a part of one my grants per year increased following IPO as the value was clear.

It's possible there was a mechanic at work that would have made the equity worth more at the ~6x valuation increase, however these companies were already worth ~200 million-1 billion. If the company wanted to incentivize extreme upside they should have increased the strike price, and increased the number of options granted. Spotify provides this option to employees where you can choose cash, RSUs, options, or "high-risk" options. You can get 8x options relative to RSUs with a strike price that's double the current stock price. If the company 4x'd in value over 4 years you'd make 4x on these compared to RSU's enabling a public company to offer "lottery" ticket equity packages.

Ultimately if a startup is trying to offer a lottery ticket to employees to lure them from top-tier companies, then they'll need to make real lottery tickets with real payouts at the end. That means that a startup with an expected 100 million dollar exit in 5 years will need to grant 2% of the company at exit to a top-tier engineer in the average case ( with appropriate vesting ).

> How often is the strike price the fair market value of the employee equity pool?

Always. If by FMV you mean 409(A) valuation.

If you mean something else, the answer is 'never' because for privately held companies we don't know the "fair market value".

Your point about VCs seems irrelevant, because the valuation they hold shares at is not that of the "employee equity pool".

To take home a strike price equivalent per option requires only 2x (to cover taxes) increase over your strike price, and for the equity to be tradeable. This is not a simple calculation, as implied by your 3X/6X multiple.

If you only took home a strike price equivalent per option, you'd never, ever, ever take one of these jobs. Options are priced at 409(A) and for the type/stage of company we're talking about here, are typically 2%-10% of the preferred price. IOW, incredibly low-valued.

I don't think you're wrong. I think your comment is malformed.

That's completely fair. Does this math change depending on the exit though? e.g. When the company IPOs or is bought out, the preference pool and the employee pool has to be merged. The implication of your comment is that the slope of the employee gain once the preferenced shares have met their obligations will be substantially higher than in my math above. On the other hand, subsequent rounds increase the number of outstanding preference shares and your employee strike price could have been set at a time when all preferences would be satisfied, The math will then shift back to a 6x required gain (for a strike price equivalent).

On a 10-year liquidity horizon, the employee option pool can be pushed into the underwater state by subsequent issuance of preferenced shares.

In my Experience, this effect explains how startup employees who have stayed with a firm from 10 million dollar valuations to Billion+ valuations do not get anything better than a down payment for their trouble, and a 3x increase in a publicly traded companies stock can easily push an engineer's RSUs to 1.5x+ their salary per year.

Thanks for the followup, much more well formed. To a few specific points:

> the slope of the employee gain once the preferenced shares have met their obligations will be substantially higher than in my math above.

Yes. This is all but required by "the rules".

> subsequent rounds increase the number of outstanding preference shares

Yes, but by lesser and lesser amounts of dilution, and at higher and higher valuations. Ignoring down rounds, which are much more common than up rounds. But here I think we are talking about a "successful" exit, which as rare as they are, in the majority still leave option holders high and dry anyway.

> your employee strike price could have been set at a time when all preferences would be satisfied, The math will then shift back to a 6x required gain (for a strike price equivalent).

True, however in these cases almost everyone (actually everyone, AFAIK) receives RSUs, not options. RSUs have an actual, current value, and do not require any appreciation in price at all. In fact, a loss in price is still valuable to the holder. You can't go underwater with RSUs. (And you can't face uncertain taxes; be forced to make awful decisions; etc.)

> On a 10-year liquidity horizon,

This is the real problem with equity compensation today. We've outgrown the system under which options were a great incentive. Golden handcuffs, that most exceedingly often, turn into fool's gold. Honestly, it's time for YC to insist on 10 year termination-exercise rights. The appeal of ISOs is still there for early stage companies, but AIUI one can convert from ISOs to NQ's after the 90 day legal requirement, without penalty. win-win.

With a 10 year rights, companies are forced to offer sufficient refreshers to keep staff. This is completely fair and will push companies to earlier exits. On the employee side, people need to insist on it as well ...

I don't see it happening because it destroys the VC business model.

90 days if you leave is deceptive and will lock you to the company unless you're independently wealthy. A less deceptive thing is a 7-10 year window if you leave, because that isn't "you forfeit your equity when you leave if you aren't already wealthy."

Equity pricing is also nonsense for many private companies. I was offered 1 million dollars in equity in a company 4 years ago assuming a multi-billion dollar valuation. It's unclear if the company has even achieved that valuation now, four years on. And they're still private.

90 days for ISOs is US law. They can be converted to NSOs to get a longer exercise term, but there are different tax implications too. Some companies are offering the conversion now.

A link going into further details: https://carta.com/blog/pte-90-day-window/

Yeah, agreed, I don't really think the core premise is that deceptive.

I will say though one trick I've seen (I should write about this) is multiplying your common stock through by the latest price of the preferred stock and presenting this as the "current value" of your equity offer. Your common stock is not worth as much as the preferred stock.

Any thoughts on the AMT trap, and the potential inability to exercise (or go bankrupt with AMT) when you leave? It's not exactly written in red warning letters on offer packages, right?

If you’re hitting ATM you’re doing extremely well for yourself and are privileged.

You seem to be unfamiliar with the AMT trap? I would recommend Googling it. It impacts people who are not well-off prior to exercising their options by triggering AMT upon exercise.

Right, but why exercise the option without next selling it? If you’re quitting, that’s a risk. And AMT is applied on the gains. So your strike is $1, valuation currently at $100 and you pay tax on the $99 gain. Unless it’s Theranos that valuation wont go back to $1, so yes, you’re privileged.

You need to read up on the issue. Links to get you started:

- https://www.holloway.com/g/equity-compensation/sections/the-...

- https://thestartuplawblog.com/immediately-exercisable-isos-t...

In private companies, you often are unable to sell your shares because it requires board approval. The AMT trap, in oversimplified terms, is being wealthy enough on paper, due to shares, to trigger AMT but unable to sell shares to cover the taxes.

Because you literally can’t sell it. This is why we people get stuck at startups. You must immediately exercise upon leaving but cannot sell, incurring huge tax bills but zero cash in your wallet.

If you are rich you can afford it. If you aren’t, you are forced to take zero.

This entire subthread is about "people who are doing well" getting shafted.

Solution is to get rid of the 90 day limit for ex-employees, which is also just the right thing to do in general.

Doesn't totally solve AMT, as there are other reasons to want to exercise other than "because your options are about to expire", but it does fix the worst common issue.

AMT has changed a lot since Trump adjusted the tax rules. I suspect it isn't relevant any more.

> The number of households owing AMT rose from 200,000 in 1982 to 5.2 million in 2017, but was reduced back to 200,000 in 2018 https://en.wikipedia.org/wiki/Alternative_minimum_tax

Less relevant on the margins, but for the people who get hosed the worst (ie. owe the IRS millions when you never seen cash anywhere near that) the trap is very much still there.

If you have ISOs with a low strike price with a private company that is approaching IPO—especially considering the insanity in the stock market right now—you better take a long hard look at the numbers before exercising (or leaving your company and being forced to exercise)

It's usually deceptive all the way throughout:

1. Not disclosing the valuation details

2. Not disclosing who owns what and with what liquidation preference (this alone means you don't know what you're getting even in the unlikely event the startup succeeds)

3. Creating unrealistic expectations about the value of your "equity" package ("0.5% is a lot of money, man, we'll be a unicorn"). Quoted because if it's not equity if you can't sell it or can't get a dividend from it.

4. Requiring that you sell your _exercised_ shares back to the company at the price of board's choosing if you left voluntarily or otherwise. This is called the "clawback" clause.

5. Requiring that you forfeit your _vested_ but unexercised shares if you were terminated "for a cause", in addition to #4. A "cause" can easily be manufactured shortly before acquisition. There are precedents.

6. Abusive terms in case of acquisition

7. No acceleration in case of acquisition

8. Super short exercise window if you leave on your own volition.

With all of the above combined, you're at the complete mercy of the company in whether you get anything at all even if you work there for years.

Do I need to continue? I had all of these at one point or another and I only evaluated offers from 2 startups so far. My lawyer extensively redlined both of them. In one case the board agreed to the revised offer. In another it did not, so I did not join.

Such redlining only works if you're a very early employee and you're very senior. But regardless, I'd argue that if you're taking a pay cut, you should at least know what you're getting yourself into, and $500-700 for counsel is not too bad. If you don't like the underwater rocks your lawyer identified, demand more cash or walk away.

how do you find a lawyer that does this sort of thing? how specific of a speciality should I be looking for if interested in finding one?

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