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Comment by lostdog | Hacker News Reader

The compensation model for pre-RSU startups is broken right now. The combination of late exits, short exercise windows, and heavy taxes on illiquid gains, means you can wind up deeply in the red as often as in the black.

In my last job search all the startup founders whined about not being able to keep up with big company comp, but I can't justify giving up X00,000 RSU's for the real possibility of going deeply into debt. The reward structure needs to change so there's good chances of being rewarded.

It's a shame. I love working in these tiny startups, but I can no longer justify it.

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Work at tiny startups as a contractor, I highly recommend it! All the motivation and autonomy and sense of achievement and none of the messy complicated risky stock option stuff :)

Dont you have to constantly find new gigs because these tiny startups keep going out of biz?

That’s happened once so far yeah :) so generally I tend to move on before companies go under

Same as if you were working for the startup directly, and as a contractor nobody will complain if you line up additional gigs on the side.

I'm kind of doing the same thing, usual stint at each of them range between 1-2 years, I'm fine jumping at that point as the company already grew too big for me to be comfortable. All of them are still ongoing, runways have been 6-12 months each time I joined.

Is this as financially viable as being an engineer at FAANG? E.g. you’re getting paid $400k+ liquid for senior/e5 roles.

Yeah I’m earning very roughly half that. 400k liquid sounds like a stretch to me though, you sure that’s not total comp?

I’ve been on both sides of that negotiating table. It’s ok to say the role won’t match a bigco compensation package, and if that’s you priority you should probably take the bigco offer. An early stage startup is a fundamentally different experience, with pluses and minuses relative to big co’s. If the +’s outweigh the minuses, take the job.

No whining need be involved, on either side :)

(Fwiw, I do think it is important for early stage startups to be even handed and fair on pay, but that doesn’t mean you necessarily have to go toe to toe with the biggest offers)

The problem is that the expected value of the equity itself is negative in the current environment.

If the tradeoff were to give up some guaranteed money for a low shot at a big payoff, then that would be a reasonable tradeoff! But right now it's prohibitively expensive to exercise.

I'm surprised that YC doesn't lobby to fix the tax code so startup's can attract experienced people, but maybe YC is just about supporting founders, and there still enough employees willing to take a bad deal and work at an early stage startup.

I should have been clearer. I’m saying it is ok that the expected comp is lower. If the other things add up for you, it’s not necessarily a bad deal. (But it can be, you have to evaluate with clear eyes)

Another way of thinking about this: developers aren’t really fungible , neither are roles.

For clarity, although this is probably buried by now: I definitely think that if there is real upside at some point it should be shared with early employees, not just key senior hires later - and I push for this wherever I am. I just don't believe you can make this stick in a expectation-value sense. Certainly not rigorously.

> that doesn’t mean you necessarily have to go toe to toe with the biggest offers

Most startups insist that their world changing idea can be built only by engineers from MIT or Stanford. That is where the whining on both sides come from.

My philosophy is if you think they're wrong and you don't need those people, then they have poor judgement, and you're better off not working with them in that case, and in fact could beat them by pursuing similar goals while not using that strategy.

And if they're right, well then what's there to be upset about?

I am not upset. I, as you said, avoid them.

I was offering it as an explanation.

I believe that there are startups that need special engineering skills. The 40-for-founders-40-for-VCs-20-for-employees math don't incentivize those, though. Which is a shame.

At the turn of the century, a new crop of VCs with founder-friendly terms came about. The industry benefited from it. Many startups that would not have otherwise been founded, were successful.

I am hoping that the market will eventually bring about VCs and founders with employee-friendly terms.

Me commenting here is towards that goal. You have a right to disagree with me, but why argue that I should not be making this point?

I wish someone would explain the rise of the the "everyone is an insider" trading windows thing. There's really no legitimate reason that I can come up with for the lack of proper controls that creates and perpetuates this situation. I imagine executive insiders like it for the stability it brings the stock, but still.

The theory at least, especially at a smaller public company, is that a fair number of people potentially have access to information about things, including some feel for where financial results are ending up. Therefore, rather than shrug and tell people to use their own best judgment about their trading on material non-public information, you put a trading window in place that takes a fair bit of judgment out of it.

Is there a reason these companies can't award stock and have to stick with options?

Taxed as “wages” according to the IRS even though it actually has no present value because it’s not liquid / has no market / has no arms length value.

“Earned income” is the absolute worst way to receive an asset with tax rates over 50% in some cases.

The only thing worse than wages is getting an illiquid/unsellable and highly risky asset that counts as wages based on a made-up valuation which the company is incentivized to inflate.

No reason the company cant do that, usually, but it's not advantageous for (most) employees. RSU comp is taxable on vest, but if the stock is not liquid the employee must pay out of pocket at each vesting event to cover the taxes.

Using the 83(b) election, when you’re granted RSUs you are able to pay tax on the value at the time of grant. This can mitigate a lot of the pitfalls mention in the thread.

Disclaimer: this is not financial advice.

https://www.investopedia.com/terms/1/83b-election.asp

By the time a company is issuing RSUs instead of options, the cost to pay those taxes at time of grant is likely out of reach for all but the most already-well-off employees.

Not necessarily - I’ve worked for two startups now that issued RSUs to early employees first, and later switched to an option based package.

Your experiene may be different, but I've only even heard of this (RSUs before options) at the very early, pre-fundraising, stage. And this only works because the taxable value of these RSUs at grant is basically $0.

I'm not sure if this approach would make sense after any sort of traction/fundraising.

> RSU comp is taxable on vest

I’m in the job interview process right now

Looking at a pre-IPO company with RSUs

Does this mean that I pay taxes on those RSUs when I get them, _even_ if I don’t sell them?

You have to pay taxes on RSU when they vest, regardless of whether you sell or not. It's basically considered cash compensation, but instead of cash you receive shares.

Since your company is pre IPO, they may have a dual trigger vesting schedule, where shares vest over time but require an actual liquidity event for you to actually receive the shares, giving you no tax liability while the company isn't public. However, this means that once the company goes public, you'll have to pay all of that liability at once, at ordinary income tax rates.

Disclaimer: not an accountant, much less your accountant, this is not financial advice, seek proper advice from a qualified professional.

The tax rates will probably not be what most people consider "ordinary". In CA, the top marginal bracket is about 52%.

If you're getting N years of windfall-level income in one year, some of the income is likely to be in that top bracket. This means that all sorts of tax stragegies you probably are not familiar with will kick in.

For instance, it might make sense to move charitable contributions into that year, since the IRS will effectively be matching them.

Also, AMT will probably kick in, so consider hiring an accountant.

Depends on if they are set up with a double trigger. Here is a decent explainer, but you can research more about RSU double triggers that can help avoid taxes for large-but-private companies: https://www.parkworth.com/blogs/pre-ipo-tech-giants-using-do...

What this does mean, though, is that until the second trigger is hit you haven't technically vested the RSUs. So you get around the taxation but there may be additional conditions on your equity.

Basically - make sure you read the stock plan

> So you get around the taxation

And pay a lot more tax in the process, than if you were able to exercise early. IRS always has to have its cake and eat it.

Early exercise is rarely ever an option except for very early stage companies. Most are ISOs with 90d window (which if you’re lucky converts to NSOs with a longer window) which is worst of both world bc of AMT

Yes, because of IRS taxation rules

pre-IPO RSUs usually come with a double trigger. meaning you vest them monthly or quarterly etc but a liquidity event such as an IPO, is needed to actually "vest" them in a taxable sense.

This actually works pretty well at the very beginning when the stock isn’t worth anything. However, as soon as there is a supportable valuation, you can’t just give people stock with a nominal value for 0.01 or whatever, which means either they have to buy it at “market” or you are giving them a taxable benefit of same. This latter is terrible because you are getting taxed as income with an illiquid and risky, locked in, asset…

(All this depends on jurisdiction of course)

Why would you go into debt? Unless you borrow to exercise your stock options or get hit with the alternative minimum tax?

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