I read a lot about how employees get screwed over with stock options, so what we decided to do was to just give employees vesting stock straight up as a buy through.<p>Basically the way this works is that we give new employees an up front lump sum in the amount of how much it costs to purchase the shares of the company. The employee then purchases those shares from us in line with a vesting agreement. All warrants and conversions are exactly the same as the founders shares.<p>This means that they pay tax on this purchase as regular income rather than capital gains up front with the money we give them for it. This prevents a heavy tax bill at conversion and allows them to retain their vested shares regardless of if they work for us or not after the first 12 month vesting period.<p>We calculated that the up front taxes are magnitudes cheaper in the long run because the increased valuation will cover those differences handily and there is no waiting period like there is with capital gains tax.<p>In the end though our intention was to make a simple way for our employees to actually own the stock we give them as compensation and it not be something that they can lose or be restructured easily. If a VC or acquisition wanted to restructure that away for employees then they would be forced to restructure everyone's, so we are all in.
Another thing to understand (and this will sound obvious to many of you) is that your options may be worth nothing, even after a multi-million dollar acquisition if there are priority stock holders (the investors) ahead of you in line.<p>As a young and naive engineer I learned of this fact the day the first startup I worked for was acquired. First I read the big number that was to be paid for the company, was ecstatic, and immediately starting doing "x-million times half a percent" in my head followed by a sinking feeling as I read the clause stating that common stock holders would get $0.<p>In retrospect it sounds obvious that if the company sells for less than the money the investors put in, your x percent is worth nothing. But it's easy to get carried away thinking you actually own a percent of the company, and that a sale means a pay day for you. Don't let the first word of acquisition get you too excited, the come down sucks.
Why worry about stock options at all? There is a spectrum of outcomes. On one end the startup flops, or is bought for so little that your share, even if paid out, is close to 0. On the other end you have Google, Facebook, Instagram, etc. Companies where 0.5% is worth quite a bit of money. The problem is that the majority fall in-between, where your stock options will be worth nothing, yet the company will sell for a decent amount of money.<p>So what you should do is value the stock options at 0. If you have the spare cash, buy them as early as you can, but don't count them for anything. They are a lottery ticket that your company is the next Google and like any lottery ticket they are likely worth nothing. If the startup is offering to pay you half of what you'd make elsewhere, waving stock options at you telling you they'll make you rich, consider if they just handed you a pile of lottery tickets and half a paycheck. If you'd still take it (maybe you really like the people, or want to work in this field), go for it. Otherwise, they are just trying to get your for a far cheaper price than you'd get elsewhere.
The last two companies I've gotten offers from gave me very, very heavy pushback when I tried to figure out what % of equity they were giving me.<p>They told me they were giving me 5,000 shares (for example). OK... 5,000 of how many? What % of all the shares is 5,000? My understanding is you need this information to know if the equity is worth something or nothing. Yet, they really don't want to give me this information.<p>For one of these jobs the recruiter I was going through (this is a big recruitment company) literally told me nobody has ever asked these questions about the options they were getting.<p>Am I doing something wrong? Do I have a misunderstanding of how these things work? Is it unreasonable for me to be told the outstanding shares?
If you work at a startup and options stuff is not transparent -- valuation, vesting schedule, terms, etc., you should be quite worried.<p>Founders often end up in a situation where there is significant dilution and as the hockey stick changes into a slightly different shape they <i>know</i> that nobody's options are worth anything.<p>Founders with integrity will acknowledge this and make adjustments. Those without integrity pretend it isn't true and create a culture of secrecy around options grants/terms.'<p>Edit: You should also be able to do the math on what your options are worth fairly easily as funding rounds approach and valuations occur.
For those of you that found this interesting and want to learn more about stock options, with advice that is a bit more general, I highly recommend "An introduction to stock options for the tech entrepreneur or startup employee":<p><a href="http://www.scribd.com/doc/55945011/An-Introduction-to-Stock-Options-for-the-Tech-Entrepreneur-or-Startup-Employee" rel="nofollow">http://www.scribd.com/doc/55945011/An-Introduction-to-Stock-...</a><p>It gives a detailed background of a lot of key issues related to stock options and some really well reasoned recommendations that are applicable to anybody taking a job involving stock options.
<i>"But note this doesn’t mean everything will be perfect. If the acquirer decides that you are no longer needed, they could keep your option agreement intact and terminate your employment. You wouldn’t get any further vesting unless you have single-trigger or double-trigger acceleration, and you’d be out of a job. It would be the same as if you’d been fired by your company before the acquisition."</i><p>Maybe I'm reading this incorrectly, but if you don't have single-trigger or double-trigger acceleration, the employer has all the leverage they need to renegotiate your (incentive) contract.
Do you know what I call a 1%/4-year vestment "equity" plan? I call that an ESPP (employee stock purchase plan) by another name, with inflated valuations due to startup hype.<p>Why would anybody agree to that? At least insist the first half percent vest proportionally over the first year with each paycheck.
Is there any generally reasonable 101 on how to do equity/share/stock-option in an early stage start-up? Tried to google for it and never found any general guidance for that.<p>If you're paying a full salary/benefit for them, the options etc is really just trying to keep them from jumping around? I'm open to all ideas but would like to find some common/typical silicon valley way to do this for startups.
I've worked for some of the largest companies in the world as well as been employee number one at multiple startups (one of which was backed by google ventures), so I hope the following advice is good:<p>If you're going to found a company, go for it. I'd like to do the same myself someday. If you're going to work for a startup, make sure they pay you well. In dollars (or your local currency). I treat stock options as a lottery ticket, not a substitute for income.<p>Basically working for a startup is much like working for a big company. Neither really offers you long term stability. You have to deal with politics in both. The biggest difference in my opinion is that startups typically have really long hours and some pretty big egos.
I have a related question for folks here.<p>I joined a startup around 2009 as an early employee, left after a couple years, and bought the vested stock. (The company is based in the US, and I'm not a US citizen, FYI). I've been holding on to these stocks so far. Compoany has rasied a small series A just around the time I joined. The company has raised a few rounds of funding since I left.<p>It now looks like the company may IPO/ or be privately acquired. I have not been in touch with anyone in the company over the past couple years.<p>What steps do I take now to ensure I don't get screwed as part of the exit, and/or my stocks diluted to become meaningless? I'm looking for general advice.
It would be a pretty rare company that is willing to revise their stock option plan in response to a request from a potential employee. They'd have to take the request to their board for approval, then also get a vote of the stockholders, and would have to pay the lawyers to revise the documents. Just an administrative headache regardless of the legitimacy of the request and probably not a great way to start off the relationship with your future employer.
Someone could probably make a nice bit of money on the side helping new engineers in SF review/deal with their stock options. You'd have to know this stuff well, but I don't think that's a big hindrance to anyone.<p>Think of it as both giving back and pushing back on what can be predatory treatment of employees.
Options are useless. Their value is entirely based on what the actual shareholders decide. It doesn't matter if stock gets sold to other investors or the company goes public. Options are useless. You want a stake in a business, you need to ask for actual stock. Not options.
This is an inadequate overview of options issues for startup employees. The major issues are probably:<p>1. Acceleration on change of control (the article covers this). 1 year acceleration is fairly common it seems. There should be something here. But fully acceleration of granted options is probably more than you realistically can hope for. After all, you didn't need to work for that year to get the options. There should be some balance here.<p>2. Rule 83b electoins. Particularly relevant for pre-funding startups and especially for founders. It allows you to pay all the tax on options up front rather than be hit by yearly AMT bills;<p>3. Clawback agreements. This is a nasty one that was most publicly brought to light with Skype (the second time around). A bunch of executives were fired before the acquisition went through, allegedly for performance reasons. Their options could be bought back at <i>issue</i> price, resulting in a windfall for SilverLake of possibly several hundred million. Want to sue? Well the company was incorporated overseas. Good luck with that.<p>The moral of the story is watch out for any rights the company has to repurchase your options and at what price.<p>Repurchases in general aren't necessarily evil. It's good to avoid having a lot of shareholders for early stage companies (due to SEC limits on number of shareholders for non-public companies) but such repurchases need to be fair.<p>4. You're taxed on options based on their fair market value when they're issued barring a Rule 83b election;<p>5. Liquidation preferences. VCs generally have some form of preferential treatment on how they're repaid in the event of a buyout. This can take a number of forms.<p>The most reasonable is that they're simply guaranteed to get their money back. Meaning if they paid $10M for a 40% stake in a company that gets bought for $15M they're going to get their $10M back instead of 40% * $15M = $6M. That's not unreasonable.<p>But what's not reasonable (IMHO) is "participating preferred" liquidation preferences. What this means in the above scenario is the VC will get $10M of the $15M back and then 40% of the remaining $5M. So the other 60% are divvying up $3M. That's a lot less attractive.<p>6. Bonuses in lieu of acquisition. You may see a headline that says your company has been bought for $100M and you own 1%. Great! You're now a millionaire! Not so fast...<p>It may turn out the VC owns 40% participating preferred with $20M funding and the company is actually only being bought for $50M. The other $50M is incentives in the new company paid to the founders and possibly key executives.<p>So you're only getting 1% of $30M.<p>7. Dilution. Your 1% may not be 1%. You may have been told something like "there are 1M shares outstanding and we're granting you 10,000 options over 4 years with 1 year cliff". So you own 1% right? Well, maybe you do and maybe you don't.<p>The company may be reporting outstanding shares rather than outstanding shares plus any obligations it's made. It really needs to report on a fully diluted basis. There may be convertible notes and rights of existing VCs to buy in in future funding rounds, etc.<p>So anyway there are a lot of potential traps.
I have accepted a startup offer with stock options 2 days back. The CTO told me about the number of outstanding shares in the company and the last 409(A) valuation and the current valuation they are going to raise funding. But except #options, these details are not specified in the offer letter but i have accepted.<p>Should i consult a lawyer before i join this company? If so, can you guys recommend some lawyer contacts? I have been in bay area for last one year and i don't have much contacts. Help! Thanks
This is a great resource for legal advise on the case. I also was offered options on a startup that I worked at. I am adding this to my bookmarks :D some cross-reference <a href="http://www.businessinsider.com/stock-option-questions-startup-employees-should-ask-2014-4" rel="nofollow">http://www.businessinsider.com/stock-option-questions-startu...</a><p>Generally I prefer to leave the legal stuff for my lawyer and focus on coding, but having a reasonable knowledge on the case is preferred.
This happened to me. My employer got sold, and only about half of my outstanding ISO's were vested at the time. However, I'd been there a pretty long time, and getting more ISO grants as time went on, so I wasn't too bent out of shape about it.<p>In my opinion, you should think about instruments such as RSU's and options as accruing to you at the date of vest, not the date of grant. From an accounting standpoint, that's how the company is viewing it, or at least should be.
This stuff is simply too complex. Just like there guides that make open source licenses easier to understand I wish there was the same for startup stock options.
This advice should be directed to entrepreneurs.<p>As a founder, it's good to know what terms are "standard" and what terms are more pro-employee or more pro-management. Then you can use that information when setting up the option plan with your lawyer, and push back if you feel the lawyer is overzealous in protecting your own interest.<p>Once the plan is in place, it's unfortunately too late for the employee to seek more favorable terms.
This is why I never take equity. It's just a way to dangle a carrot in front of an employee to make them think they will get a big pay day. Many times, the employee doesn't want to quit because this pay day is seemingly right around the corner.<p>My previous employer gave me stock options on top of my salary. I never really cared about the stock options too much. A few months ago, I found out the owner created a new LLC (and moved the company to this new LLC) essentially making my options worthless overnight.<p>I would rather get paid my true market value.