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Comment by nbclark | Hacker News Reader

Agree with you on this. We do that at my company Divvy. Each prospective hire is given 3 different options (varying levels of cash / equity). The "implied" value of all three at the current valuation is the same, but as you mention some people prefer more equity upside and some prefer more cash in hand.

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But why not give everyone cash consistently and then allow them to buy equity as they desire, when they desire, by reinvesting in the business at the current prevailing rate?

As even Homer Simpson figured out "Money can be exchanged for goods and services."

Isn't there a tax implication? Tax is one reason part why people choose non-monetary remuneration. I'm not American, but my guess is in all jurisdictions that tax would vary based on the type of non-monetary remuneration.

I guess it would depend how you structure the purchases. If you allow for the purchasing of a common share at the 409 valuation, you wouldn't have a tax hit until you sell it. You would be taxed on the salary used to purchase the share, however.

I'm not aware of any tax advantages of equity compensation in the US versus cash compensation. If anything, it could be a liability in the case that it's not actively traded, or if you trigger AMT and aren't able to sell the stock to pay the taxes.

The type of compensation that comes with tax benefits is things such as subsidized health insurance, 401k retirement savings, commuter benefits, dependent care expenses, tuition, etc. That type of stuff is basically non taxed income.

If you get lucky and your options both appreciate and become liquid, this windfall is taxed at long term capital gains rates.

That depends on the facts and circumstances. If they become liquid and valuable before you exercise them, you’re taxed as wages or short-term capital gains rates on those gains.

I’m no expert but I thought the worst case was AMT, which taxes the bargain element when you exercise an option (rather than when you sell the received shares and recognize the gain). Are you talking about a tax on granted options, or when options are in the money but you haven’t exercised yet?

There is no tax due on unexercised options (which is not what I meant to imply above, but I left it ambiguous).

If you have non-qualified stock options (NQSOs), on the day you exercise, the difference between the strike price and the fair market price is taxed as ordinary income. That's what I was talking about.

If you have Incentive Stock Options (ISOs), the tax treatment can be more favorable if you follow certain rules, primarily that you have to sell the shares no earlier than two years after the option grant AND one year after you exercise them. The AMT calculation comes into play between the exercise and sale.

Basically, figure out exactly what you have, as the type of instrument you have changes the taxation, and read the tax laws on that. This is not tax advice.

ISOs with an 83(b) election (and then “hit”) are much more valuable than W-2 income from a tax perspective. (Whether that W-2 income is cash salary or RSUs.)

But that comes with the risk of over paying taxes, so not exactly comparable to cash compensation.

In the current tax code. Wouldn’t some of the proposals to consider more capital gains as income change that?

Interesting thought. We're a private company, so the stock is still illiquid. That wouldn't prevent purchasing stock, but the question is where it would come from. Option pools are used for new employee grants so that could work, but when that runs out you need to typically create additional shares and dilute the other holders. Will put a little more thought into this.

There typically is no "prevailing rate" for a startup. So just figuring out the tax implications is too much work to do it like this. Also, usually you're giving people options rather than equity; you can afford to give people larger option grants because of vesting than you could afford to sell them equity.

One issue here is insider trading. Not necessarily in a breaking-the-law sense, but people who work at a startup may have a better and more up to date sense of how things are going than whoever performed the last valuation.

This 3-tier presentation is used at a couple places and would caution it as a way to anchor you on salary and equity. A lot of hires will negotiate the “salary high” and “equity high” option, saying they want no sacrifices, get both and join thinking they got a great deal.

Interesting. I wonder how this plays out in practice - what choices people tend to make.

I wonder if there are politics for people who take more cash and less stock - does mgmt assume it implies less good will, since the employee is literally “less invested” in the outcome?

Can only speak to my experience, but I am completely indifferent to their choice. Either of the 3 tend to be relatively substantial in equity, so everyone is invested in some regard. I also believe that in the long run, unvested options aren't the best retention strategy and that a challenging and rewarding work environment coupled with competitive compensation is the way to build an invested team.

Awesome! Any lessons learned? (The main one I’ve seen and worried about is sophistication of employees with their equity. Options are confusing! But that’s true whether it’s a single offer or multiple perspectives).

In general, it seems to be appreciated. We initially set it up this way to help take some of the stress out of negotiation (as that favors certain people over others). A few learnings off the top of my mind:

1. Regardless of the structure, the offer needs to be competitive. This wouldn't really help with lowballing offers.

2. Across the ~30 offers I've given out, I don't think that either of the 3 variants is more common. I suppose that indicates that different candidates are indeed optimizing for different situations.

3. Our hiring has intentionally skewed more senior and I think the variants of offers has helped create more family friendly offers.

Regarding options, I tend to make sure to offer to spend a good bit of time laying out the details of how they work (strike price, preferred value, vesting, cliffs, early exercise, etc.). They are indeed confusing and I find that people typically either overvalue the value of the options today, or undervalue the potential upside.

How much do you space out the three variants? Have you gone beyond the endpoints? (But followed the same curve)

Depends on the role/level, but ~10-15k annually between each tier. I have gone beyond the endpoints (within reason) by just linearly extrapolating, though that tends to be pretty uncommon.

Wow. That's an absolutely fantastic way to do this.

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