I tend to think of options as worthless, until they vest. Which is too far in the future to count on.
Pay me money. That's actually useful.
Pay me money. That's actually useful.
So far, I think I've been in 3 decent startups that all of which failed and do not exist anymore. None of them exited cleanly. Some might, but you might not want to stick it out that long, and those are often hard commitments to make depending on the work environment.
New grads and skilled developers alike should never be seduced by "we can't pay more , because we are startup, because we'll give you more options". Not only is the probability of success a factor, but so is dillution, and so is the chance that you won't see that money for 8-10 years even if things go well (long after a company is acquired).
Many sales can end in a net-loss, or only VCs get paid out. Sometimes the CEO nets a really nice private deal to run the new company (and has also been extracting a nice salary all along, probably).
Stock is free to give out, so a company is going to try to give you that instead of money. While it can be nice, possible payouts for most are going to be low, and often enhanced salary over that N years would have been better - and especially from an expected value calculation perspective.
Obviously, there are exceptions, but I'm a big believer that companies should share profits, and probably evenly, without regard to title hierarchy instead. I'd also scrap or outlaw 'executive' bonuses when the employee bonuses are not along the same lines in terms of flat value (not % rate).
Amen. Not such a good notion to trade salary for options, when that extra salary could have been invested all that time. $10k in 2005 is equivalent to $17k in 2015, $21k if you consider dividends reinvested.
I founded and ran a good part of an A-round startup for a while.
I'm aware what stock does to equity, but it has minimal value to employees if it's not going to be a thing, and for a startup watching burn rate, it's pretty freaking free.
Are you going to give it all up and waste the option pool? Of course not. To me, I'd rather have employees with a good chunk of the equity because they were all doing a good chunk of the work, but I also want to see them treated well in stock. And you know your thing might not work out. Being stingy to employees with stock doesn't feel right.
I don't believe in founders hording stock when everybody working for them built a good chunk of what they sell. They should keep a decent chunk, but sharing stock well is basic ethics and costs nothing on the burn rate. It's the same reason I don't believe CEO's should make 50x of what an employee makes in a given year.
Stock is pretty cheap to give away in a startup. It's not cheap in a private company. I do especially object when it's used in lieu of market-rate compensation on the hope of future gain, with "we're giving you lots of stock" and then expecting the long hours and then it doesn't pay off for folks.
At any rate, employees should not take them seriously in comp negotiations until they are well into FU money territory, should they ever pay out at a reasonable valuation after accounting for underhanded shit like excessive dilution and claw-backs.
It's hard to value options. Really, really hard. Saying they're worthless, though, is lazy and counterproductive.
If you're joining a seed-stage private company, then yeah, it probably makes sense to so heavily discount the options package that maybe it is close to worthless.
But if you're joining a series C that's on the road to IPO or acquisition (look to see if their job listings include the word "compliance" anywhere), and the company has real revenue and growth, ignoring the options package just does you a disservice.
It's a lottery in the beginning... at some point later it becomes more of a calculated risk. Given a valuation and percent ownership, you have a good starting point. You can then discount based on future dilution, risk of failure, time horizon, etc. No, it's not a science, but automatically ignoring the value of an equity package is just as emotional a decision as a starry-eyed assumption of startup glamor.
Options are not how you pay people. Options are how, along with good raises, you keep them from leaving as the good parts of working for a small, nimble company leach out.
If you are coming on after a series C you won't be getting any significant equity unless you are joining as leadership, and even then you are in the club and going to be well compensated anyway.
This is the way I look at it:
A 50% chance to make $100K in 5 years with an interest rate of 5% is worth:
($100K * 0.5) / (1.05 ^ 5) = $39K
And if you have credit card debt then you should be discounting at something closer to 15%.
Let's say I'm asking for X salary. If the company offers me Y salary and W equity such that Y + W = X, then what they have done is gotten me to spend W of my salary investing in their company. If this pays off as an investment, that's great, but it isn't due to their generosity, but rather my investment. In fact, since I'm limited to investing in only their company (instead of being free to invest it in whatever I want), it is a large burden.
If they offer me Equity, W, such that Y + W > X, then (Y + W) - X is compensation (and X - Y is my investment in the company).
To sum up, if a company says, "We will pay you X salary, as long as you invest W in equity in our company" this is not in any way as valuable as X salary. W is a burden on me, not compensation. It is money I am giving them, not the other way around!
For this reason, I always negotiate salary independent of equity.
That is exactly right and I think what people are missing here. I mean even legally if you look at options purchases, you are literally investing. Even with stock grants, unless the company defers the strike tax through a loan mechanism, you will pay taxes as though it were real income.
There's two ways to look at this. Yes, you're locked into investing in just the company, but you're also being given the chance to invest in something that's not available to the general public. These investments are risky, but often very good.
I'm currently coming to the end of my 4-year vest in a company that was acquired 9 months after I started. I gave back some salary in exchange for more options when I started since the company looked very likely to exit. That investment, over the past 4 years, has quadrupled. Even in a bull market, there aren't many stocks that have ~40% annual returns over that time. And that's not even accounting for the fact that these kinds of investments are better from a tax standpoint (flexibility to avoid AMT, long-term cap gains, etc).
As others have said, it's not a simple decision. You're being given an investment opportunity that is normally only available to VCs. But unlike VCs, you can't diversify across a portfolio. But, also unlike VCs, you can directly influence the success of the company...I learned after our acquisition that in the few short months I was there, some of my actions played a significant part in us getting acquired. It's a really unique investment opportunity that's available to very few people. It doesn't make stock options as a class of investment good or bad bets, the exact details of every situation determine that, which makes it very hard to make blanket statements like many people are doing here.
Anyone who makes decisions based on the prospective value of options is a sucker. They are a nice bonus when they work out.
You're right that options in a reasonably well-established company can have some value, but such companies can also afford to pay a decent salary, and should.
This is a good idea, but I'm not sure it takes things far enough.
For the majority of developers, options are often not especially valuable even when they vest. The most common value outcome of a success/sale seems to be "modest bonus" (4 figures to low five figures) rather than a jump up to a different economic class. I suspect many devs could do as well by going out and getting new job offers every year or two, assuming reasonable negotiation skills.
That's all my options were worth and to get that return, I worked for about 20 startups over 2 decades... only one paid off.
Share As You Earn SAYE is a savings plan in the UK which allows employees to save money from their salary in company shares.
The UK has really weird schemes because people have historically had no pension or savings plans from their employees (most PAYE workers still do not have pension as the date mandated by law is always being deferred).
With SAYE as far as i know the employer is not allowed to grant you equity, what they can do is give a fixed yearly rate (usually heavily discounted) for share purchases, but it's not as sweet as it seems. The dividends and the equity rights from the shares belong to the employer not the employee, this is basically a way to allow employers issue shares (in large volumes) without losing control over the company, having to do payouts, and decreasing the market value of their normal shares as SAYE shares are not tradeable.
It also allows employers to bypass various laws preventing normal employees from having too high of a share of the company, and ties employees to their employer since not only do they rely on it for their salary but also as their investment/savings provider and since SAYE plans are either 5 or 3 years long it pretty much means that invested employees will not living the company during the SAYE period unless they want to lose their investment (and yes they will lose it).
BT's Sharesave is also a "unicorn" and from the current buy-in value it will probably won't repeat it self, yes a few people who saved up the max amount (225 GBP a month) gotten about 80K in return. But and this is a big but those were the 1st shares issues at 80p per share, when they matured the shares closed at over 300pp/s the last round of the SAYE program had a buyin of 250pp/s so pretty much no one will see these returns again.
P.S. The money you gain for SAYE Isn't tax free you pay capital gains tax on it if you sell them once they are matured.
Also since SAYE with all of it's bells and whistles is a company options plan (with heavy tax incentives to the employer) it's still a risk, some people got huge returns others didn't since the share price was lower than the option price.
BT has a FS scheme unfortunetly now closed to new entrants and its DC pension matches up to 8 or 10%
The shares you get from share saves are real shares none of this multiple share lasses with different voting powers.
And I certainly get the divi from mine. And yes this years BT is a v good one. And I did 400% roi from my REL shares a couple of years back and you can normaly mitigate any tax by sensible use of ISAs and using your CGT Alowance.
And there are share schemes for high performers on top of that I know people that got some the share save is what everyone gets.
The shares you got from Sharesave would be "real" shares only if you bought them at the end of the maturation period if you cashed out you wouldn't get to keep any shares, and you don't have voting rights or dividends for those shares while they are in Sharesave.
There are quite a few schemes for this https://www.gov.uk/tax-employee-share-schemes/company-share-...
But any how, this again ins't the same thing as the equity most people get for startups, so again not really a good comparison.
1. High risk fund backed pension. Probably will decline in value due to fund saturation.
2. Low risk fund backed pension. You pay more in yearly fees and decline in value.
I killed mine dead. Stupid idea.
If base rate was higher, perhaps but its a stupid stupid idea now.
The tax relief was nullified instantly by the discussion with my employers that sort of went "give me another £10k or I go work somewhere else".
Meh.
I don't actually have a problem paying tax. I've learned to consider my income after tax, not before. Maximising the difference is easier through getting the initial captial larger than it is reducing the difference and doing the associated paperwork (and periodically getting buggered by HMRC). I can still move up another £30k if I want to but the current place is convenient.
And saving tax now at 40-50% and only paying standard rate later is a no brainer and if you can do it via salary sacrifice and get some or all of the NI added to the pensions
It's entirely crazy. I just asked for more cash and chucked the money on the commodities market. My portfolio is worth 178% what it was 12 months ago. Sod tax. Sod pensions.
That cash goes into house. That house I live in. Better interest rate. Sell when the kids have moved out. Live off cash, dumping bits of it in various other investments to avoid inheritance tax in the future.
The main differences are that for approved schemes HMRC doesn't screw you like the IRS does and if you leave early you can exercise your options and the is far less chance of being diluted.
SAYE allows the employer to deduct upto 225 GBP a month (pre tax) from the employees salary and put it into an investment scheme that ties that money into a share options plan.
The shares have a set value at the entry into the scheme and the company "allocates" an amount of shares based on the end savings projects for that period.
At the end of the period when the options mature you can decide to cash out get your "deposit" + a proportional revenue from the shares maturation value, or to buy out the option at the set price and own the shares fully.
The payout out, the control over the stock, and some other factors are quite different than just a simply option scheme when a company allows employees to buy option/shares or gives it to them as pure compensation.
Basically the best way to describe SAYE is like an ISA/401K but one which the employer controls, and also greatly benefits from.
Now don't get me wrong SAYE schemes especially for low paid employees in freshly privatized organizations can yield good payouts, not always, but they usually do especially when the organizations are too big to fail like BT. It also allows companies in industries which are barred from regular employee share/options like banks for example to grant employees a share investment plan. But it's not some magic nifty employee empowerment plan, it's much more beneficial to most employers than it is to employees.
And BT does have other share schemes I know as my PM got some as a bonus for his work for the millennium dome - these tend to be kept quiet in fact my pm though it was a joke by some of v senior mates
Basically BT gave you a very wierd option, the strike price is granted when you enter the SAYE contract e.g. 2010, but the actual share option is given when the contract matures 2013/2015.
To put it in a more simple term, SAYE is a fancy "ISA", basically some one in the British government figured it out that most employees cannot buy into stock options at any reasonable strike price, SAYE only allows you to give a discount of 20% from the stock price on contract entry. After 3/5 years you get a lump sum which you saved + the interest rate and a bonus which is derived from the tax allowance SAYE savings. You can use that bonus to exercise the option you got based on the strike price you had 3 or 5 years ago if the difference is good enough and you buy the stocks and sell them you might get a very nice amount which you pay capital gain tax on, if there's not much difference or the stock price is lower than the option strike price well then you pretty much saved about as much as you would in your minimal interest cash ISA.
What you'r PM got i think is SIP, Share Incentive Plan it's another approved scheme that allows companies to grant company stock to employees, it's works very differently than SAYE. No fixed rate, no tax free bonus, it's taxed as income tax yada yada.
Obviously it's highly variable depending on the role. #24 could be a COO or could be a receptionist. But for the sake of argument let's assume they're a mid level engineer (taking a stab at what MCRed might have been at the gig in question).
Remember, in a lot of companies, the founders are diluted way back below 10%.
Make good decisions. Join the right team.
For instance, when youtube got bought, VCs were all interested in investing in online video companies. At that point, though, Youtube had already been bought! They were like 5 years too late.
-- Either be a founder if you want to be there in the early days.
-- Or join a "sure thing". EG: Google, Twitter, Facebook about a couple years before they went public were already household names and really well known.
I don't know how much upside you get joining a sure thing like that, but that's how you make sure your options will come into money.
Being employee number 5-100 of the average Silicon Valley startups is a losing proposition because the risk adjusted value of your options will never compensate you for your lost salary. (especially if you have to live in California- you're better off working for a startup in Austin than California due to the cost of living and tax situation. The higher salaries in California don't cover the difference.)
And yes, blame me, I turned down being employee number 13 at what became a $6B enterprise software company. Would have been CTO or way up in the executive team because they were a bunch of biz guys who needed a hacker. Instead I worked for just a year for a small business (not really a startup this was before "startups")
But it's damn hard to tell the difference at those early stages.
And when questions like "what's the total number of shares outstanding on a fully diluted basis?" (back when companies would say "You'll get 10,000 shares!!!!111!!") are met with "sorry that's confidential" during the hiring process, it is a bit difficult to do proper due diligence.
(I started at Google in 2004 and did pretty well.)
There is another facet to your second point, I think. Even if the upside from the "sure thing" two years before they IPO is not great from a financial perspective, the career growth is much faster than joining a mature mega-corp. For example, many people who joined Google/FB/Twitter a year or two before the IPO are very senior at those companies now. Granted, not everyone who joined Google in 2004 is a VP, but the probability of rapidly growing your career as the company grows is much higher than for someone joining Microsoft in 2004.
That fast career growth leads to either 1) High compensation ten years later as a director/VP or 2) Exec roles at sure-thing unicorns with meaningful equity, should they choose to leave Google/FB/Twitter.
I think there are two justifications to go early stage if you care about the financial aspects:
1) Be the founder, as you said
OR
2) You have concrete reasons to believe that the company has a meaningful competitive advantage in a large market.
These examples are far and few. For example, Google in 1998 had a meaningful competitive advantage, but Facebook in 2004 certainly did not. WhatsApp in 2010 did not, but I'd argue with Carmack, Oculus might have had (although unsure in this case). As you said, it's really hard to say at such an early stage.
Of course, if financial upside is not a major concern, then impact, agility, working on interesting stuff, avoiding mega-corp red tape, are all valid reasons to go early stage.
My equity at hiring time was probably %1.5, I think. But there was vesting, of course, and also a whole lot of unsavory business, mostly perpetrated by the VCs.
Trying to go into the detail and tangle out exactly why I got what I got would be just airing a lot of drama from the past and not really applicable to others.
I only presented those numbers because they're two objective facts from the best payout I got working for a startup.
I got a huge windfall from a year and a half I worked for just 50bp, as employee #5 and a principal contributor.
Do the math. Cut 30MM in half, and give half to investors. That leaves 15MM. Divide that 24 ways and nobody's getting 7 figures. But of course, that's not how it works; at 30MM, even an extremely egalitarian division of what's left after investors recoup is still going to get you into low 6 figures.
The problem for this person isn't that 30bp is a stingy allocation. It's that for a company with 24 employees - or, very conservatively, a 4-5MM annual burn - 30MM simply isn't a very good exit, no matter how big that number sounds.
Of course in crazy VC world this is probably supposed to be $12billion valuation or some nonsense to be worth it.
* VC funded company
* 24 employees
* <80th percentile of SFBA burn rate (ie: in Portland)
It doesn't matter how the VCs feel about the company. 30MM is not a very lucrative outcome for that company, mathematically.
You can make 30MM be an amazing outcome, but not if you bought yourself to an exit at barely-profitable on 6MM annual revenue using VC money.
30MM is a fantastic outcome for a bootstrapped company.
I think the question of what is a good return these days is a bit crazy. For this size company VC's should be looking at wanting a $150-300m exit on the low end. But unicorns are polluting this kind of idea.
For non-VC funded (bootstrapped, etc.) it's about an expected sale price for an established minimally growing company.
VCs can want $100M or $1B, but it was the VCs that chose to sell this company for $30M when it could have been $300B
Here's the ground truth: VCs are idiots. Yes, that one too.
They have money, though, so people pretend otherwise.
Hopefully, nobody is saying employees shouldn't be wary of VC funded companies. They definitely should.
If you take someone else's money, they should get ownership proportional to their investment, yes. Their impact on whether original management retains control should be proportional to their ownership.
The problem is, the crazy ideology of VC worship that has taken hold allows VCs to get disproportional control and chunk of the proceeds.
People are saying that founders shouldn't be wary of VCs. VC blogs are full of propaganda and rationalizations for giving them more control and more upside than is proportional to their investment. When the blogs make it to HN, the commentary is universally in support wit the rationalization that "they're taking risk, they need to protect it". They are taking a lot less risk than the founders who can only work for one company, nota portfolio... and the risk VCs are taking is covered by their equity. They don't need second and third helpings of control and equity to cover the risk.
I'm getting downvoted for saying VCs are idiots. (elsewhere people are getting upvoted for saying "Deniers are morons", so it's not the name calling. Its' the "if I can just get thur YC and get VC funding I'll have it made!" ideology that pervades HN.
No, there's a critical difference between your statement and that one: VCs are an identifiable class of people. Saying they're all idiots (something you don't know, couldn't possibly know, and indeed is not only false but obviously so) is attacking a specific group of people. "Deniers are morons", while obviously not a high-quality thing to say, is closer to a tautology. Both break the HN guidelines, but the former is worse.
This is not ideological. One needn't agree with everything every VC ever did to insist that calling them all idiots is wrong, breaks the site rules, and is correctly downvoted.
Sam once wondered whether we should make it explicitly against the HN guidelines to attack whole classes of people. At the time I said that sounded too legalistic. But it stuck in my head, and I have to say that every example I've seen come up in practice since then has suggested the value of such a rule. This is a good example.
-- Set us back by 6-18 months. One of the decisions forced on us by the VCs was to build on top of [another one of their portfolio companies technologies, we'll call it FOO], but FOO didn't have the performance or features we needed. Literally lost at least half a year on the product because of this (And a whole lot of money paid to FOO and their consulting arm.)
-- Forced us to sell before we were ready. When the economy looked like it was turning the VCs needed to raise cash to make their funds look successful, and decided that we weren't going to get 5 years after investment, since they could offload us now for a nice multiple they did so.
It happens this company could have gone without the VC round and bootstrapped its way. If it had done so, it probably would have exited for around $1B, maybe much more given that it was kicking google's ass.
There's not a lot you can do as an employee about mismanagement that results in crappy outcomes. But it's an orthogonal concern to how equity is allocated. The commenter upthread was right when they said: part of your job as an employee is to pick the right company to work for.
The reality is, VCs are herd animals, and when the herd is spooked they make a lot of stupid decisions.
I've seen this more than once-- a later company was forced to sell for $10M, by the VCs, during another "oh the money spigot might be turning off!"
It is not an orthogonal concern-- how was I to know the VCs were going to screw us over? The return would have been dramatically better if that hadn't happened.
So the lesson learned is-- the right company to work for is one where the founders either don't take VC money or are very distrustful of VCs and only take it on favorable terms.
Nobody is entitled to venture capital. Plenty of people start companies without it.
From a founder view, we shouldn't be carrying the weight of the effective cost of the fact that the VCs can't pick companies worth a damn and want to make it up on us, if we happen to be good.
Nobody is entitled to venture capital, and starting a company without it is a good idea.
And VCs are not entitled to more equity & control than makes economic sense for the founders. That's what I'm opposing, but I don't think you disagree.
People don't sell equity to VCs because they've been snake-charmed by them. They do it because if you need 2MM+ for your company, they're the only realistic option. Ever talk to a bank about a line of credit against receivables? That's a fun conversation.
But they weren't chasing a unicorn.
There's a lot of delusion among "unicorn chasers" that I've seen-- but that may not be the same group you're referring to.
If you can bootstrap, you virtually always should.
Its all about luck. Things can go either way.
That's why they are trying to pay you with them. For them it's a one-way bet. It's sadly just another case of pushing risk onto the worker and not really passing on much of the upside.
There's 10 ways for you to get devalued to 0 and you have to avoid all of them to make a payout.
In fact: for this reason, I'd be especially wary of companies trying to buy a few thousand dollars of annual fully loaded cost with large amounts of equity --- it suggests extreme naivete.
In the life of every company there is a moment when there is not enough money to hire the next two people, but there is also a feeling that hiring those two people would take the company to the next stage so much faster as to make the hiring worthwhile. At that point you either raise more money directly from investors, or offer more equity to prospect employees, or hold back on the growth.
Raising extra money takes time, so it may not fit with the timing of things. Holding back should probably be preferential to giving away equity, however somethings growth is unusually important, for example when you're in the middle of a land-grab.
She had rejected his salary + equity offer which was a %50 salary cut from her current position.
Irrespective of what the equity portion was I thought the founder's response was disgusting and pretty much validated her decision to pass.
Every dollar taken in investment reduces the likelihood of regular employees cashing out unless it boosts the ultimate stock price and success chance of the company significantly.
Too much money is chasing too many companies so the founders are tempted to take the money, roll the dice and hope they become a Facebook, even though the odds of that are extremely slim.
This is the difference between a "startup" and a business. Startups used to be a phase of business, but it's become it's own thing now.
A business will not take money it doesn't have to, realizing that profitability will fund growth. (And to be honest, I don't see a lot of mechanisms by which VC money funds growth-- all of the successes hit a viral growth loop or opened a massive unmet need... the VC money just made product development easier... mostly after the tornado started.)
Actually you should count on them always being worth $0. Not only for compensation purposes but for your personal psychology. It's better to tie yourself to reality.
options should be seen in the same vein as bonus money - they don't exist until the money is in your hands. Some people work at places where bonuses can be relied on like bedrock, but usually I see people struggle to get their promised bonuses.
I don't know how strictly true that is in most cases, but it's a factor worth considering.
Options in already-public companies are quite a bit less risky. I consider employee stock grants in a healthy public company to be worth about 75% of the current value of the stock. (The discount is because of the vesting period. If I change jobs, I lose some of the stock. If I stay at the job just to get the stock, when there's a better opportunity elsewhere, I lose that opportunity.)
There's multiple layers of risk and trust, too many dependencies. The transaction is too complicated and takes too long to complete. So the probability for exceptions to occur is great, and handling for those exceptions will likely fail due to the complicated nature of the transaction.
http://www.startupcompanylawyer.com/2009/01/11/should-a-comp...
If you exercise and sell at the same time, you will pay short-term income taxes, but without any AMT to worry about.
I agree that exercising and selling can be a good strategy but we're (mostly) talking about private companies here where that may not be an option due to a lack of liquidity.
That would be a Big Red Flag for me.
In somewhere with a high cost of living like SV increases in pay can significantly increase what you can save each year.
Say you take a $100k offer and equity compared to a $120k salary offer. Now lets say on $100k you save $10k year, and if you're on $120k between tax and a bit of extra spending you save $20k.
You've doubled your savings which you can put towards other investments. In this example its another $10k/year you could put into an investment property, stocks or whatever.
Or just go to Vegas each year and play a game of roulette.
The type of asset doesn't matter. Could be vested 10% options in an apparently great startup or Van Gogh's Starry Night.
If you can't sell it when you want (because of restrictions or because nobody wants it or for whatever reason), its market worth is exactly zero.
If you're joining as the 5th or 50th guy, your options are probably a long-shot and they're not really worth considering. But if you're joining a pre-IPO company i suggest that you minimize salary and maximize options. There are a lot of great outcomes in the $50-250k/year range in option value. It's no lotto ticket, more like an extra salary in addition to your base salary. And it's tax advantaged!
https://blog.wealthfront.com/college-vs-retirement-savings-s...
Apparently companies saw all the employees getting rich from private companies like Palantir and Facebook pre-IPO and considered that a problem to be solved. Check your contract, you probably don't "own" the stock you think you do.
Ultimately the company (the issuer of the options) holds the cards on these transactions. For a robust secondary private market, you need to:
- keep the company aware of the transactions, and understand their transaction process (right of first refusal, board approval, other transfer restrictions)
- provide that the buyer has been vetted and is an appropriate entrant on the company's Cap Table
- ensure that you are non encroaching on the company's own plans to provide systematic liquidity to their employees
- keep an audit trail of the transaction process to ensure no leakage of sensitive (or non-public) information
We're headed in the right direction. Pinterest deserves credit on a few different fronts:
1) Allowing employees to extend their window to exercise their options once they leave the company 2) Providing liquidity to their employees
I'm curious to hear from any hiring managers on this thread: do you think that offering liquidity/financing solutions for exercising options/helps attract better talent?
Let's be perfectly frank and talk about the facts here:
1) There is zero cost to the company to allowing 83b elections. All it does is remove the possibility of golden handcuffs (which are very effective when a new unicorn is minted every week).
2) There is no more "500 shareholder rule" after the JOBS act. It removed that. There is no penalty for having lots of shareholders -- especially when most stock transferred has no voting rights and no disclosure rights. Facebook "paid the price" for having lots of shareholders but in reality they did not. GS's investor vehicle took care of that. Facebook was not "forced" to go public. They went public at an incredibly old age as far as growth companies go.
3) There's an almost non-zero cost to have another company (like SecondMarket) handle share registration and transfers. It's not a huge overhead. Consider it your Nerf ammunition cost for the quarter.
4) The state of current stock option agreements is not to help you the employee. It's for the benefit of the company. Option agreements in the 80's and 90's did grow out of an altruistic "hey we're all in this together" theme. Today, it's "hey I have to give you these things because everyone else does, but if it were up to me, you would get bupkis and free meals."
Full disclosure, I work at a YC funded, non-unicorn. My shares (on paper) are worth a fair amount of money, and I need several $100k to buy the shares and pay taxes. I feel like I'm in a not-uncommon state. I know my options are technically worth zero right now since I can't sell them for anything (that is the definition of worth), but I know my wife will divorce me if I quit and walk away from them.
I've heard that Uber is supposedly the worst at this. There's no timeline specified in the option agreement. You must offer them right of first refusal, but there's no mention of timeliness. They can (and do) choose to ignore every share transfer that comes up in a board meeting (unless you're in the elite inner circle and are allowed to sell shares).
tl;dr Don't even consider a position at a company whose option agreement won't let you early exercise and won't let you freely transfer shares.
1) 409A (option pricing) valuation problems
2) Increase in # of shareholder problems
3) Legal issues (for both the company and employee) if buyers of shares later felt deceived by sellers
4) Team cohesion issues if different employees were getting radically different prices for there sales
You might disagree with the solution, but these are definitely real problems worthy of consideration.
as an employee, if you are lucky/skilled enough to end up at a successful startup, and you aren't very careful with tax issues, you can find yourself stuck: if you leave, you have to exercise, and immediately owe hundreds of thousands of dollars (or more!) on a completely illiquid asset that you can't sell. Which doesn't even take into account the potential for that asset to become less valuable.
That's not a decent way to treat people. Startups don't write the tax code, but many are willing to take advantage of it to control people this way.
After you put your 4 years in, you should be free to re-up or leave. Not free to leave if you are willing to risk all your liquid assets and/or borrow heavily.
And if one person leaves it's not likely to materially affect the business as everyone else keeps it going.
Another point of view is that if all the early employees disappear at the 4 year mark (or whenever they feel they've vested "enough") that could cause very serious problems for the business. There is an element of a prisoner's dilemma here and it's not unreasonable to think about ways to keep people from defecting.
As I said, it's complicated.
No. That's not the way it works.
Don't options typically vest after one year of employment? Is that "too far in the future?"
Also if you leave the company early, you will usually have to pay some trivial amount (possibly thousands though) to keep the options.
This has at least been the case at all startups I've seen.
With the 1-year cliff in place, I'd rather options just be given to departing employees, as it seems like payment for their work.
More companies are now switching to converting ISO grants to NSO after you leave a company, and allowing a longer term to exercise. Pinterest famously allows, in some cases, employees to have up to 7 years to exercise vested shares after leaving [0]. Most companies do not do this (yet). Exercising an ISO grant can be much more favorable taxation wise than exercising a non-qualified NSO grant.
If you give shares to an employee, it will likely be a taxable event, as the IRS sees this as taxable compensation.
Also, most grants are at non-trivial strike prices. If you're a super early employee, you might have grants at a very low price, usually a few cents. However, the vast majority of grants are at much higher strike prices where exercise costs are processed in the tens to hundreds of $thousands.
Exercising and taxation are a difficult topic that very few fully grok.
Source: work at eShares.
NSO also has a few other downsides. For employees, when you exercise an NSO, you actually have to pay tax at the time of exercise - the company withholds it and reports it as ordinary income tax (pay taxes in addition to the cost to exercise).
ISO grants can also have horrible tax implications, but you at least get a bit more flexibility as an employee -- this is also why November/December tend to have a disproportionally high number of exercises, as people get a full picture of their potential AMT liability caps.
When a company's valuation is skyrocketing and liquidation is highly likely (IPO or other M&A event), you'll often see companies offering early exercise, which can help avoid huge AMT hits, so employees are exercising when their strike price == the company's current fair market value.
And that's as only a part time investor. I like sure things (like I knew in 2001 from an understanding of economics that there would be a housing bubble and that it would eventually burst. I was never able to buy CDOs against the market, but I did profit from it until 2007 when things got crazy and I got out of the market-- a year early but I'll take it.)
I suspect most people can't do this... but they can buy a house or two in up and coming areas, and put extra salary into that. Rent one out, get your mortgage paid by your tenants and you're building a real estate empire... slowly, but it can make you rich.
Calling it gambling, however, is dishonest, and is popular among those who want to use that characterization to serve the purpose of denying people the opportunity to invest. For instance, despite working in startups for 20 years, regulations prevent me from being an angel investor (though it seems its common in california to simply ignore those regulations) ... because people like you think that I shouldn't be allowed to decide where to invest my money. Yet I could go to Las Vegas and blow $100k in a weekend.
So, no, it's not gambling. It's investing. And shame on you for saying otherwise.
Gambling is defined as "an enterprise undertaken or attempted with a risk of loss and a chance of profit or success." That's exactly what people do when they buy a stock or invest in a start-up. They just go to sites like E-trade and Schwab to do it rather than PokerStars. Unless you know of some risk-free stock where chance is not a factor (I'm all ears).
A gambling game where the house historically doesn't win (if you don't try to day trade). And historically, your money doubles in ~7 years.
> Sure, there are plenty of people who hit that jackpot too
Yes, many people hit that jackpot.
> let's not lump that together with the idea that 9-5 salary is a way to get rich.
There are many well off upper middle class that own multiple homes this way and retire at a reasonable if not early age, with a net worth that will leave substantial amounts to their kids.
Useful advice for a micro-fraction of the population, but this sounds like advice on "How best to wax your yachts" compared to even the average developer.
It's even more surprising when I find 30 year olds who haven't figured out to use the company match on their 401k yet.
These people called "executives" can. Programmers generally don't, unless they're very good and very mercenary, and even then "rich" means "7-figure net worth and the ability to consult at a decent rate as much as one wants". Which isn't bad at all but isn't VC MegaBux.
It might not be your definition of "rich" depending on how you grew up.
You invest half of your take-home salary, so $40k, $60k, $75k.
You invest everything at 4% real return.
That about $1 million after those fifteen years.
It's....... pretty rich, sure. It's also a LOT of savings. I'd say it's possible to get rich on salary if your salary gets high early and fast, or by the time you retire, maybe less so in fifteen years.