Startup Stock Option Changes
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I would not even think of proposing a backloaded vesting schedule to an employee. There's nothing wrong with an even vesting schedule in terms of employee alignment. If you cannot retain an early employee after year 1 or 2 you have other problems.
What this analysis omits is that the expected value calculation ignores the fact that the equity far exceeding the expected value is correlated with a desire to stay at the company, which makes the backloaded vesting irrelevant.
If you interpolate a bit to account for that correlation, I personally started concluding the $100k offer became more like $50-60k, which dropped the offer below market rate and I walked.
Frontloaded vesting would make the most sense, but that could be tricky to get right.
Also, re: #3 after 90 days (3 months technically) the SEC eliminates many tax benefits you get from your options being classified as ISOs, so while extending the time you have to purchase is helpful, it's not like it's as simple as giving you more time to exercise. Many things change after those 90 days that have nothing to do with your company's policy.
Side effects are always important to consider. The "law of unintended consequences" is powerful.
I'd consider lack of #1 and #2 as dealbreakers. Any company that doesn't allow early exercise is being unfair to early employees for no reason, and not providing basic cap table information makes stock options numbers impossible to value.
#3 is great, but it is much more progressive. I'd value a company's offer more highly if they offered this, but it wouldn't be a dealbreaker if the company didn't.
As for number #4, I think 10/20/30/40 vesting is way too bottom heavy. The problem is the employer can always fire you if they want, and if the company blows way up in value in 2-3 years, they might prefer to fire you than give you so much stock. This reportedly happened at Zynga so it isn't unheard of. You'd hope to never join a company with this type of leadership, but as an employee you don't have much power so it is good to be defensive about it. Maybe I wouldn't mind a minor tweak like 20%/25%/25%/30%, but I'd prefer 25%/25%/25%/25% with a culture of refresher grants to high performers (which accomplishes the same thing).
The difference between founder stock and employee stock options is already so large, I don't think option holders really need to make any concessions (like bottom heavy vesting) to get some common sense benefits to stock options.
It also is important to educate people about these differences. I hope that companies that do #1, #2 and #3 have a nice guide on their offer letters explaining why this is beneficial to potential employees.
First, if you have 7 years to decide if you want to exercise it, then every stock option has risk-free upside regardless of the strike price. Without the 7-year rule then the upside isn't so clear cut, but that doesn't mean they are near worthless at all.
Second, companies really don't grow that quickly. Over a 1 or 2 year time horizon, even a really successful company will 2x-4x in value (and the common stock might grow even less than this). If the strike price was low on the original grant, the strike price will also probably be pretty low on the refresher grant. Especially at early stages of a company's life when the options are priced at essentially zero, even if you 5 or 10x the value, the strike price will still be very low.
When you have more established companies and higher strikes prices, it is less of an issue because there might be a shorter term path to liquidity which takes away risk of exercising without being able to sell the stock.
That said, your point about having 7 years to decide is entirely fair, and mostly negates that downside.
On the other hand, if it's an amount of options you can afford to exercise (e.g. 1k shares @ $5 = $5k… most people could scrap together the funds for that.), your profit is unlikely to be more that 2-5x, which likely would return $10k, and at the most $25k on your $5k investment. A lot of risk and trouble to go through for very little gain…
That said, with a 7+ year time period to exercise after leaving the company, it's not an issue
The reason is this: These days, founders are more likely to try to make their companies look attractive as acquisition targets than try to grow their businesses long-term. Therefore, except for rare companies with exceptional growth potential, an employee can expect the company to either fail quickly or get acquired. So, rarely do typical startups last 4 years.
Further, since it's up to the board and the acquiring company to trigger full vesting on acquisition, and since boards and acquiring companies have no incentive to do so, most employees are left with much less than 4 years of vested options.
1) The money cannot be touched until retirement. So… if it turns out to be Uber and worth hundreds of millions, you can't touch any of it! It's probably a good idea to only put 25-50% of your stock in the account.
2) You can only contribute a tiny amount yearly to an IRA ($6k I think). So, the options strike price must be dirt-cheap for this to make sense.
3) Actually doing it is quite complex, and requires a third-party account custodian. If you're accepting a random startup offer pre-funding (the only time you'd have essentially free options, allowing #2 above not to be an issue), you're unlikely to go through that trouble.
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The huge benefit, however, is that if you do succeed in hitting in big with something that way, you'll have a gigantic Roth IRA balance, tax-free, and you'll be able to use it to make other investments, whose cost basis and profits will all be tax-free.
I wasn't sure if you could do it with a Roth IRA vs. with a (non-Roth) 401k, though.
Early on, you issue founder grants if you want, at common stock price, paid in cash. A company is worth $100 in total, so you can buy 10% of it for $10.
Common and preferred can run separately in terms of price (although there's some relationship between the two; more enforced now than in the past.)
After Series A, 1% of the company would be a real amount of money -- maybe a $10mm valuation, so 1% would cost your engineer $100k at hiring. That's a lot of cash for an employee to invest.
If the company is public (either via acquisition or IPO), the company will sell part of your vested stock to cover taxes.
More likely, the company might give away shares to an employee in lieu of salary, but then the employee has to pay taxes on the value.
In other words, there's no way to obtain stock in a private company without facing some kind of expense. You're either paying money directly for shares, or paying taxes on the gift of shares.
The only way to avoid any of this is:
1) Be there at the very beginning, when shares have negligible value and can be bought easily. OR 2) Be granted stock options instead of real stock.