[HN Gopher] Ask HN: How to negotiate stock options?
___________________________________________________________________
Ask HN: How to negotiate stock options?
A start up is very keen to hire me and are planning on making an
offer. I am not being grandiose in saying I would be a good catch
for them (they know it and I know it). My position at present is
that I very much enjoy my current job, they are very good at
rewarding me and give a good level of autonomy to run my
engineering team that I acquired and grew myself. I don't have
anything to lose here, only (potentially) gain. However the start
up is pretty exciting and I know I could achieve a lot there. I
would really enjoy the challenge. However, the real aspect that
would make the difference for me is company stock, to the point
that if they sell the company I won't have to worry about paying
off the mortgage on my house and get a decent slice for retirement
and my kids education. Now to my question, I am don't know jack
about working out what would be a good amount of stock to shoot
for. How would I go about establishing this? I figure I need to
work out what the company could be worth and then consider what a
percentage of options would provide. Anyone have any experience
they could share?
Author : playcache
Score : 88 points
Date : 2021-09-03 08:16 UTC (14 hours ago)
| BikiniPrince wrote:
| Options are a pretty big gamble. I do and do not regret skipping
| them on my last gig. The primary issue I had was the company
| could simply deny exercising the options. I had always assumed
| the stock would grow, but at the time I didn't know if I would
| stay the long term. Even then would they let me exercise them.
| Hard to say if they would have let me get away with millions in
| the end.
| alain94040 wrote:
| How many employees are already in the company? What stage of
| funding is the company at (seed funding, round A, B...)?
|
| As a rule of thumb, there's about 15-20% of the entire company
| stock that is allocated to employees. If you are negotiating for
| employee #1-3, there's room. If you are employee #50, you are
| looking at a decimal point.
|
| Always ask for the current valuation.
| nickjj wrote:
| I only have experience from being in a recent similar position to
| you.
|
| One thing I would say is, a lot of options related decisions
| require getting board approval so it might not be as easy as
| getting your contact to agree to some figure you had in mind. You
| might also not even be allowed to know how much you're getting
| until you're already hired due to policies around how the options
| are valued / issued.
|
| Personally if I were you, if you're looking for a new long term
| position with stock options I'd try to find a publicly traded
| company. Mentally I imagine it'll be a lot easier knowing what
| you'll get based on them providing you +?? stock options per year
| that you can sell as soon as they're vested for real money. Or if
| you like it a lot where you're at, maybe they'll give you a
| better salary to compensate for not having options if you bring
| up that you're looking to leave.
| mateo411 wrote:
| Do publicly traded companies typically give stock
| options(ISOs)? I think they typically give RSUs, these are
| great because they are liquid, but they are also taxed as
| income tax which is about twice as high as the long term
| capital gains.
| nickjj wrote:
| One person I know of gets real stock (AFAIK). It took a few
| years of working there initially before they were vested but
| now he can choose to sell them immediately after they become
| available to him every year and pay income tax on it or hang
| onto them for >= 1 year and then they get treated as long
| term capital gains like regular stock. He bought his entire
| house with the stock he accumulated over the 10ish years he
| worked there.
| mysticllama wrote:
| i had the really good fortune of starting series B
| (coincidentally weeks before there was a C round) at a unicorn
| startup.
|
| at the time i was overly-optimistic about its outlook and when
| countering pushed for more shares instead of higher base.
|
| i bought all my shares before leaving a few years later and made
| out really well on the acquisition -- i think the
| sale_share_price was 50 x my_strike_price.
|
| here's the thing though, retrospectively i still don't think i'd
| ever advise someone to do what i did. there are so many factors
| that had to line up exactly right for this to be a positive
| outcome for me:
|
| * joined with particularly low valuation with company in a strong
| position
|
| * happy enough to stay n years and vest all my shares
|
| * was able to borrow $ from family to outlay the huge cost to buy
| what were at the time essentially worthless options
|
| * survive getting absolutely KILLED on taxes, i think my AMT
| obligation when i exercised ended up being almost 2x as much as
| the cost of buying the shares (it uses a company filed valuation
| to set current fair-market-value which was completely theoretical
| since the company was private when i exercised)
|
| i joined a fortune 50 company when i left and pushed for high
| base and a large performance bonus. i did the math on what my
| earnings would have looked like over time if i had spent my years
| working with big-co-pay vs. lower startup pay + good options
| outcome and even with a crazy lucky outcome i don't think the
| extra $ i earned was worth the high risk.
|
| my partner and i both agree it wasn't worth it, especially when
| we reflect on how many early mornings, long nights, and weekends
| i had to work to make it happen.
| jdavis703 wrote:
| If the company is secretive about valuation a good line is to
| say, "my current stock options are valued at X and from what I
| can find I'd need a value of Y to match my current compensation."
| Whenever I've used this line, I've gotten more stock options.
| jkingsbery wrote:
| > I figure I need to work out what the company could be worth
|
| That's how I approached things when I worked at a few startups in
| the past. If I were to work at a startup again, that's not what I
| would do. You want to look at the company's worth _now_. You are
| investing in the company. You are investing your time, you are
| investing the opportunity cost of making more elsewhere, and you
| are forgoing any dividends you 'd get from earning and saving
| elsewhere. For people early in their careers, those opportunity
| costs aren't that big, but if you are managing a team, chances
| are those opportunity costs can be quite big.
|
| When VCs look at how much to invest in a company, they are
| investing in what the company's worth now. For pre-revenue start-
| ups, they'll look at potential some (the founding team, the size
| of the market, stuff like that), but a company that is all
| potential today will get a low valuation. For companies that have
| revenue, they might look at what a certain amount of money might
| due to fuel future growth. But VCs aren't charities. They don't
| evaluate their stakes today based on what a company might be
| worth someday in the future. Neither should we.
|
| The other problem with figuring out what the company could be
| worth is: at what point in time? Companies are waiting longer to
| go public [1]. Are you willing to wait for an IPO? Or will the
| company have some non-public way of getting liquidity from
| shares? Depending on those details, the shares you vest a year
| from now might not only take several years to be worth something
| meaningful, but you might have to wait several more years to
| actually sell them.
|
| > and then consider what a percentage of options would provide.
|
| I recommend you read the book Venture Deals by Brad Feld. When I
| first joined a start-up, I thought, "Ah, I got X% of the equity."
| Feld talks through how it doesn't really work that way. As an
| employee, you have a chunk of the employee pool stock options,
| but what that means depends on a whole lot of variables (which he
| describes better than I could). It can also change over time.
|
| Finally, I'd offer a few other pieces of related advice:
|
| 1. The best reason to join a startup is because they are solving
| a problem that you feel like you _have_ to work on. I wouldn 't
| do it for the money, because in most cases, start-ups aren't
| successful.
|
| 2. Really, all most of us aspire to in our careers is to be able
| to say "I very much enjoy my current job, they are very good at
| rewarding me and give a good level of autonomy to run my
| engineering team that I acquired and grew myself." Don't feel the
| need to stay complacent, but also don't take that for granted.
|
| 3. At least for me, working for a large, publicly-traded tech
| company has financially paid off as well as the "What-if?"
| scenario of the start-ups I worked for, with the difference that
| start-ups don't always pan out. It's not apples-to-apples
| comparing working at a large company vs. the big payday, since
| the big payday is usually at least 5, and often more like 10
| years out. So when figuring out what the exit might be, look at
| how much stock you could be forfeiting at your current company
| (or at a different publicly traded company) over the course of
| 5-10 years (and how much that stock might grow in that time
| period).
|
| Good luck!
|
| [1] https://equityzen.com/knowledge-center/newsletter/the-ipo-
| cr...
|
| [2] https://www.amazon.com/Venture-Deals-Smarter-Lawyer-
| Capitali...
| isegrim wrote:
| First of all congratulations on finding an exciting next move in
| your career!
|
| I concur with the sentiment expressed by other commenters: be
| wary of making financial plans (e.g., paying off a mortgage) that
| depend on company equity--unless the company is public, which
| does not seem to be the case per your post.
|
| My advice to people usually is, go to a startup to learn new
| skills and aim for jobs and responsibilities that you would have
| trouble getting in larger, more risk-averse organizations.
|
| Do not expect much out of the equity you will be granted for it
| is too hard to estimate its value: it depends on the cap table
| and sundry fine print (for instance liquidation preferences can
| drastically affect how much employees get even if the company
| exits) and other factors which are hard to control like execution
| risk. And all in all the financial reward could be far away in
| the future if the company stays private longer, so your mental
| model should also take that into account.
|
| There are a lot of great resources online about startup equity,
| my favorite is the Holloway Guide to Equity, which I highly
| recommend:
|
| https://www.holloway.com/g/equity-compensation
|
| Good luck!
| dnadler wrote:
| There are many good suggestions here, though I haven't seen
| anyone consider a tradition binary model.
|
| Here's what I would do, knowing very little about the particulars
| of the options that start-ups offer vs. standard options.
|
| 1. Determine my fair market total-comp at a well established
| company. Maybe a FAANG, or some other firm in your industry.
|
| 2. Determine how much below that number the offer is for, not
| including the options. This is the discount you are accepting vs.
| a less risk comp structure. We need to make up for this discount
| in the options portion of the comp.
|
| 3. Now the fun part -- model the options payout and discount it
| back to present to determine the effective total compensation of
| the offer...
|
| 3a. A few variables to define. We'll keep this simple and pretend
| this a single period model - eg. "what's the value in 1 year",
| and not "what's the value at each exercize point?"
|
| - probabilty_of_default: the likelyhood that you get nothing
| because the company failed, or some other reason. This is the
| 'risk' variable here
|
| - strike_price: the strike of the options you're being offered
|
| - price_at_expiration: the company's share price in 1 year
|
| - number_of_shares: the number of shares you'll be able to buy
|
| - interest_rate: this is the growth of cash over the 1 year
|
| - tax_rate: what you'll need to pay in taxes if you excerize
|
| 3b. The value of the options in future dollars is then:
|
| FV = (1 - probability_of_default) * (price_at_expiration -
| strike_price) * number_of_shares * (1 - tax_rate)
|
| 3c. To discount to present-day, you can apply the interest_rate:
|
| PV = FV / (1 + interest_rate)
|
| 4. We want PV to be equal to the discount we calculated in #2 for
| it to be a fair offer. You'll note that there are a lot of
| unknowns in 3a, and that's where the tricky part is. But this at
| least gives you a framework to think about it.
|
| (Now, I just did this on a whim, and I probably missed some
| details, so do let me know if there's any issue. But, this should
| be the gist of a very basic valuation)
| jplr8922 wrote:
| I have a MSc in Finance (so I understand options a bit), and I am
| currently working for my second startup. I was offered equity
| each time, and it was never part of the reason why I moved to
| work there.
|
| I consider early startup equity like lottery, and an option on
| that lottery is worth even less in my eye. The taxes and legal
| specifications make these options super hard to evaluate... At
| the end, its mostly a way to defer an uncertain employee salary
| to an uncertain future... Normal equity is a mechanism to share
| decisional power, not only money. In my mind, most startup equity
| is to equity what Avril Lavigne is to heavy metal... not the real
| thing, something else in disguise.
|
| And to be even bolder, I am actually against using options for
| any form of compensation, for employees AND for management. By
| nature, the value of an long call option does not only increase
| with the value of the underlying, but also with the volatility of
| the underlying. And if your option is way out of the money
| (Underlying <<<<<<< Strike price), your sensitivity to volatility
| is higher than the sensitivitiy to the underlying. In which
| situation would you want anybody in a business to have these
| incentives?
| synacq wrote:
| Most stock options will turn out worthless, or at least, worth
| less than the opportunity cost of joining the startup, even
| following a successful acquisition. If you're a very early
| employee and the company goes on to be very successful, you can
| get rich, but the prospect of that is very slim. That is not to
| say that options aren't worth negotiating, definitely maximise
| your grant, but do not associate a good grant with a good
| outcome.
|
| After dilution, preferences, taxes, you're going to need there to
| be an exit worth many hundreds of millions to provide you with
| retirement money as an early employee. Options mostly serve to
| benefit the company -- they're golden handcuffs.
|
| If you think the company has a very real path to an exit of 500m
| or more, you're joining early and you're willing to stay with
| them until their exit -- which, for an early stage startup, that
| could be 5 - 10 years -- you could probably retire...
|
| As you can tell, I've been through multiple acquisitions (incl. a
| 9 figure acquisition) and made pennies.
| jdavis703 wrote:
| I've been through two companies with exits. One left me with
| nothing (it was an acquihire), and the other basically
| increased my salary by about 1.5x (pre-tax, but because long
| term capital gains tax is lower than income it was probably
| more optimistic post-tax.)
| mfateev wrote:
| A lot of startups these days support early exercise or extend
| the post termination exercise period from 90 days to much
| longer period like 10 years. So there is no need to stay with
| the company for 5-10 years after your options vested. The 4
| year vesting schedule is standard.
| adtac wrote:
| Can you give a real example with numbers (fake numbers okay)? I
| can't begin to understand how owning a % of a company gets
| reduced to pennies in the end.
| molsongolden wrote:
| It's possible if a company has raised a large amount of
| funding and/or the investors have aggressive terms.
| Liquidation preferences[1] mean preferred shareholders get
| paid out before common stock holders receive any sale
| proceeds.
|
| [1] https://medium.com/@CharlesYu/the-ultimate-guide-to-
| liquidat...
| [deleted]
| squeaky-clean wrote:
| You don't really own a percentage of the company, you own a
| number of shares.
| Johnny555 wrote:
| https://www.vestd.com/blog/how-equity-dilution-affects-
| your-...
| synacq wrote:
| The article shared by Johnny555 is a good breakdown of the
| mechanics. Speaking to my own experience, my ballpark
| estimate is that I received an order of magnitude less money
| than I would have had I received my initial grant as a
| percentage of the final sale price. Pennies is hyperbole, but
| the amount I received from the 9 figure acquisition was
| thousands of dollars (instead of hundreds of thousands of
| dollars based on my original grant).
| molsongolden wrote:
| Assuming you're in the US and it's a fairly early stage company
| (one or two funding rounds), I'd look at:
|
| * Early exercise: Allowing you to exercise your options
| immediately while the strike price == grant price (tax benefits
| and lower cash outlay) then vest the shares over time.
|
| * Exercise window: Many companies only give you 90-days to use or
| lose your options if you leave down the road. Employee-friendly
| startups were giving 10-year windows for a while but these might
| have fallen out of vogue now.
|
| * Restrictions on secondary sales and transfers: Ideally, they'll
| have a short right of first refusal period but will allow
| secondary market sales before a liquidity event.
|
| * QSBS: Maybe worth looking at whether the company will qualify
| at its current size but I wouldn't worry about it too much. A
| nice perk if it works out.
|
| -
|
| Whatever % you end up at, assume some additional dilution in
| future funding rounds. The 50% to 75% mentioned below seems
| aggressive but it all depends on the strength of the company.
|
| Also make sure they don't have some abnormal vesting schedule.
| Four year vest with a one-year cliff is still the most common.
|
| Others have linked good resources and I'll add the Holloway
| guide.
|
| https://www.holloway.com/g/equity-compensation
| rmk wrote:
| Some advice:
|
| - Do not take a pay cut to work at a startup. Most startups that
| are worth working at are well-capitalised and should be able to
| pay market salaries.
|
| - If you are going to be granted ISOs (Incentive Stock Options)
| (you must ask to find out if this is the case), then it may be
| worthwhile only if combined with a) a low strike price, b) early
| exercise and c) a section 83(b) election. NSOs are generally not
| granted to full-time employees.
|
| - Look out for funky triggers in the options contract. Ask
| management up front if they have any nonstandard clauses in their
| contract, and pay a lawyer to verify this. If there is dishonesty
| or lack of clarity on this, run.
|
| - Look out for funky vesting schedules. Typical vesting schedules
| are 25% upon completion of 1 year (you get nothing if you leave
| within a year of joining) and 1/48th of the total grant every
| month thereafter. Sometimes the vesting happens quarterly, but
| not often (it's more common with RSUs + larger numbers of
| shareholders). Backloaded vesting schedule? Run.
|
| - Time to exercise after termination of employment: this is
| usually a month or 90 days, but a few companies are beginning to
| offer generous 10-year expirations. Take note of what this period
| is and decide if you can scrape up the money to exercise the
| options if you decide to exit at a chosen time in the future (or
| if you are fired).
|
| Having satisfactory answers on the above is a _pre-requisite_ to
| negotiating numbers. I 'd walk away if they are not met.
| viksit wrote:
| Having been on both sides here are my 2c. Pardon any brevity
| since i'm on mobile and in transit. Id advise reading up on these
| at this excellent guide (1).
|
| Comp at startups are generally a sliding scale of cash to equity.
| A typical offer will ask you to slide it one way or another.
|
| To judge stock, ask for,
|
| - 409a valuation to know the current strike price of the shares
|
| - total outstanding fully diluted shares to know the total shares
| available
|
| - size of the employee option pool (eg, 10-15pct)
|
| - possibility of an 83(b) election
|
| - ISO vs NSO - what kind uf options are they?
|
| - re ups, and anti dilution clauses?
|
| - triggering events (eg what happens when the company gets
| bought?)
|
| The more you know the better you judge the value. If folks are
| cagey in giving details, definitely push back and ask why.
|
| Next, consider that the company's progress is all that determines
| your shares net worth.
|
| - how much do you believe in this team, space and product?
|
| - and ask yourself - are you able to completely push this into a
| "lost cause financially" bucket in 5y? or do you need the cash?
| i'd advise being comfortable with the former :)
|
| lastly, look at how much value you bring to the table to
| determine how much you get. if you're engineer 1 with two non
| tech cofounders - you'd be worth much more than engineer 10. In
| that case, look at some of the blog posts online (esp by folks
| like Leo Polovets) on some ways to think about these numbers.
|
| good luck!
|
| (1) https://github.com/jlevy/og-equity-compensation
| lkasdlkdad wrote:
| _- 409a valuation to know the current strike price of the
| shares
|
| - total outstanding fully diluted shares to know the total
| shares available_
|
| You can ask this, but has anyone actually had success getting
| an answer to these questions? Every time I've asked questions
| like these (which are generally considered sensitive financial
| information) I've gotten laughed at.
| 908B64B197 wrote:
| > Every time I've asked questions like these (which are
| generally considered sensitive financial information) I've
| gotten laughed at.
|
| That's a red flag that the company you are talking to isn't
| serious.
| majormajor wrote:
| I've gotten answers to both of those (sometimes had them
| volunteered unprompted).
|
| Haven't been offered (or asked for) some of the other ones
| mentioned, like size of employee-specific pool.
| molsongolden wrote:
| Assuming you're through to the offer negotiation stage, the
| company should be willing to share the most recent valuation,
| fully diluted share count, and 409(a) val.
| hellcow wrote:
| My company has always provided these. Applicants are
| obviously going to find out the current strike price as soon
| as their options are granted, so hiding that seems
| particularly strange.
| dharmab wrote:
| When I've been at this stage, I've already signed an NDA for
| the interview and can be told the relevant info.
| brudgers wrote:
| Getting laughter is a tell about the high bit of company
| culture. People's mental model of other people largely
| assumes that other people are about as trustworthy as
| themselves.
|
| Trustworthy people assume other people are trustworthy.
|
| Backstabbers assume other people backstab.
|
| Don't misunderstand me, there's a difficult conversation
| about stock. A few shares doesn't give a person a say in how
| the company is run. It doesn't make a person a principal.
| Doesn't make them a "partner".
|
| Worker bees are still worker bees with shares. Trustworthy
| people offer shares because it might make you rich.
|
| If someone laughs, they don't think you deserve to be rich.
| silexia wrote:
| I agree and would never work at a company like this. They
| are basically asking you to buy in without knowing the
| price.
| [deleted]
| icedchai wrote:
| As the second employee at the company, I did get these
| answers. I also got cap table access.
| nzmsv wrote:
| Interesting to see that people do in fact receive this
| information. My guess is only the first key hires will be
| told this and not the rank and file joining after series A,
| for example.
|
| In my experience laughter may be overstating it a bit, but
| the question is brushed off with an "it's confidential" and
| you are made to feel slightly stupid for asking. And these
| weren't fly-by-night operations either, but well-respected
| startups that went on to do very well.
| lxe wrote:
| Why does dilution matter? Why would one care if your ownership
| percentage changes? Unless you're a cofounder or engineer #1, I
| don't think there's a lot of value in trying to understand
| number of shares and dilution.
| devoutsalsa wrote:
| It gives you an idea of how much upside there is. If the
| stock is at $1/share, that tells you nothing. But is the
| valuation is $100 million and you think it could go over $1
| billion, that means your funny money could maybe 10x. If you
| think it's a billion dollar company and the valuation of $2
| billion, maybe your shares are inherently worthless.
| listenallyall wrote:
| While technically this is reasonable advice, it should be
| noted that what you think the correct valuation ought to
| be, is highly likely to be wildly incorrect and a poor
| basis upon which to make decisions.
| devoutsalsa wrote:
| You're not wrong. It's more like you have an opportunity
| to get inside information on a company when you are
| interviewing. If the company sounds like it's just
| plodding along and they're on a series Q down round,
| maybe that's less valuable than a startup that is about
| to blow up in the good way with a still modest valuation.
| You probably can't tell if something is a diamond or a
| polished turd, but sometimes you can smell an actual
| turd. All stock options are a lottery ticket, but maybe
| you can pick the lottery ticket with the best odds
| compared when comparing them to the other options.
| [deleted]
| BikiniPrince wrote:
| I had a friend ask for their cap sheet after they were cagey
| with responses from similar questions. He figured they would
| had some massive expenses and An IPO was impossible or
| ridiculously far off. They eventually went under after three
| terrible years.
| kypro wrote:
| This is really going to depend on the company. Generally earlier
| stage startups can be more flexible with the equity they can
| offer. More established companies are going to have limits on
| what they can offer so there will be less room to negotiate.
|
| I think first you need to try to work out what the approximate
| value of the company is and what it could be worth if all goes
| well -- if the company has recently raised money this would be
| the best way to gauge the current valuation.
|
| If equity isn't already being offered, ask for it, perhaps in
| exchange for a slight a reduction in salary. If they offer you 1%
| and you know the current valuation of the company you know
| exactly what they're offering which will allow you to better
| assess whether that's a reasonable offer and also if it's worth
| making a counter offer.
|
| The only experience I can share is that I personally don't
| believe it's worth asking for stock options in exchange for
| salary in the majority of cases. Remember, most startups fail and
| if they fail you're effectively receiving nothing in exchange for
| a reduced salary. Even if this is a larger more established
| company then you could always just take the extra salary and
| invest it in the public market in similar companies -- perhaps
| ones you like more.
|
| If you really believe in the success of this particular company
| then go for it, but after a decade of personally being screwed
| over and watching friends similarly get screwed over, I promise
| you the dream of making bank in a few years on stock options
| generally doesn't play out. In fact, I'd personally recommend
| asking for the opposite whenever stock options are offered -- a
| higher salary without the stock options. If you're making $5,000
| - $10,000 more per year and investing that over 5-10 years 99% of
| the time your personal investments will be worth more than any
| stock options offered.
| Johnny555 wrote:
| I've never been able to get sufficient numbers/projections to
| make an informed decision about stock options at an early stage
| startup (and often the company doesn't know either). And it
| doesn't matter what they offer, it can always be diluted away
| from you, if not made outright worthless by a change in ownership
| structure. No matter how much you trust the current management,
| management can change, and not always for the better, especially
| as the company grows and there's more money involved. And this is
| all assuming that the company was successful enough to have value
| for options -- many won't get that far.
|
| Unless you are already in a good financial position, I'd ask for
| more cash
| cogman10 wrote:
| The Zynga saga with options is the prime example of how a
| company can take these private promises and screw you.
|
| A bird in the hand is worth 2 in the bush.
| sokoloff wrote:
| If they are very early stage, evaluate whether to make an 83(b)
| election, including making sure that the company facts and
| circumstances support it if you decide to make it.
|
| There are significant pros and significant cons, so Google it and
| _evaluate_ is the advice. Super early (and especially pre-
| funding), it's much more beneficial than just after Series B or
| later.
| JohnFen wrote:
| Options in a startup are 100% gambling.
|
| Startups offer them in lieu of pay -- they're asking you to bet
| on the eventual success of the stock. As such, my perspective had
| been to negotiate to minimize the amount of options in exchange
| for maximizing the pay rate.
|
| I basically consider stock option to be effectively worthless,
| and the pay rate is the only thing I really consider. That said,
| it's happened many times that I've worked for a company even
| though they couldn't afford to pay me a reasonable salary,
| because I was drawing value from the work itself. In those cases,
| options are nice because they are an acknowledgement from the
| company that you're taking a risk in working for them.
| sys_64738 wrote:
| 99% of startups fail. I'd rather get RSUs from an established
| company myself having done a startup once before that crashed and
| burned.
| crmd wrote:
| "I need to make $X on the exit". Negotiate and set the
| expectation with your CEO in dollars not shares.
| konfusinomicon wrote:
| like others have mentioned, definitely go the 83b route if
| possible. if they don't offer it, and you have faith in the
| company, try to exercise your shares as early as possible. AMT is
| a bitch, and can price you out of ever getting the lower cap
| gains rate. Of course if the feds decide to raise the cap gains
| rate like they want to, then it won't really matter
| motohagiography wrote:
| Let's take an example estimate like: number_of_options = (salary
| * 0.10) / last option valuation price
|
| What's good about it, what's bad about it?
|
| Realistically, as an employee, your total comp has a bunch of
| factors that include bonuses, insurance, benefits, travel rewards
| and flight/hotel choices, expense discretion, charity support,
| the list goes on to contain a lot of things.
|
| These frame the question in terms of what portion of that total
| package value to _you_ do you want a in the form of lottery
| tickets? (and not their price or claim of value on it)
|
| Maybe you say, "nice salary, I'd like an additional notional 20%
| in options over 4 years," etc.
|
| Maybe you are doing fine and you see a near term exit and you
| say, "This company has a 2-3 year horizon, I don't need the
| salary as much and I'll trade 25% of your offer for options
| provided you provide me and my lawyer with the full cap table. If
| not cap table, I need to price that in to the risk on the salary
| and I'm going to need 20% more."
|
| If you don't have negotiating leverage or skill, you just say,
| "thank you!" and throw them in your change jar with old lottery
| tickets.
| anm89 wrote:
| My advice. Make sure you have the exact same class of stock that
| the CEO holds. That way you know the decisions they are making
| are designed to maximize the value of stock and there is not a
| conflict of interest.
|
| My assumption is that if I have a class of stock that is
| different than that of the executive team, it's worthless. I've
| learned this hard way.
| dbuxton wrote:
| Even if you have the same class of stock, vesting, good/bad
| leaver provisions and strike price make that a false comfort.
| Remember that you don't typically get stock itself but rather
| options to buy stock.
|
| However if you _don't_ have the same class of stock that _is_ a
| pretty good sign that you're going to be last in line.
| TechBro8615 wrote:
| This is pretty standard anyway (the founders and employees all
| have common stock while investors get preferred shares - and
| that's only after a priced round).
| coliveira wrote:
| CEOs can change the class of their own shares, this happened
| even with Google. I wouldn't think of this as any guarantee.
| anm89 wrote:
| Not in all cases.
| tptacek wrote:
| You're not generally going to be able to negotiate share
| classes in serious companies.
| anm89 wrote:
| Agreed. I assumed this is an early stage startup. I should
| have been more specific. This advice only applies in that
| scenario.
| sokoloff wrote:
| 100% true. However, in evaluating the offer, understanding
| whether you're getting the same class of shares or not is
| germane. (In a startup small enough where an employee can
| meaningfully negotiate their grant, it usually is.)
| glassconclusion wrote:
| Anyone experience with companies in the Netherlands? I have
| something that's called STAK but it's shrinking round after
| round.
| toomuchtodo wrote:
| Some resources I've collected on the topic:
|
| https://danluu.com/startup-options/
|
| https://github.com/jlevy/og-equity-compensation
|
| https://gist.github.com/yossorion/4965df74fd6da6cdc280ec57e8...
|
| https://news.ycombinator.com/item?id=2623777
|
| Others in this thread have posted great advice. You want to know
| the most recent 409A valuation, and you want to see the cap table
| (you might be asked to sign an NDA, which is a reasonable ask).
| Also, its unlikely your role is going to give you enough pull for
| an acceleration clause or similar (in either the event your role
| materially changes or an acquisition occurs), so if you do want
| equity and they're willing to provide it, get as much as you can
| so you capture as much value as possible during your tenure and
| vesting period. The difference between 10 basis points can be
| material in the event of rapid growth and eventual liquidity. The
| answer is always no if you don't ask.
|
| The equity is more likely to end up worthless or a trivial amount
| more often than not, but you can take steps to derisk the
| devaluation of this component of your compensation.
| throwawayboise wrote:
| The last sentence here should be the top sentiment in this
| thread.
|
| The vast majority of startup stock options end up worthless.
| Don't make any future plans based on it. It is a nice bonus if
| it amounts to something, but you should be sure you're well
| compensated in salary and benefits if it doesn't.
| up_and_up wrote:
| You can try to negotiate but the options bands are usually
| predetermined and approved by the board of directors. Trying to
| get an exception passed through can be difficult and usually only
| for leadership positions.
| frellus wrote:
| At a startup though, although there are bands, there is almost
| always the ability to go up from what is first offered.
|
| I would always try to negotiate up by 50% from whatever it is.
| With startups, it's harder to go up by 50% on cash, but options
| are more fluid, and the worst they can do is say, "I can't move
| from X" but in a lot of cases you will probably get, "I can go
| up to <+25%>".
|
| Negotiation around options is also the best thing to do if you
| think about it. It shows you think the company has value and
| that value will be higher in the future, even higher than
| straight base comp. Would you rather have $1000 more on your
| salary or $1000 more in options which could have a multiplier
| in the future. Cash won't. The value of cash is going down over
| time -- especially recently.
| fred_is_fred wrote:
| You should always negotiate - agree there. But you should
| negotiate cash specifically because the value of it goes down
| over time. More now is good because you need to pay rent and
| buy food. Additionally cash comp becomes the basis of: 401k
| match, bonus, some other benefits (life insurance some times)
| and more importanty future raises.
| up_and_up wrote:
| > but options are more fluid
|
| Not always at medium-big startups. It is fixed depending on
| the position.
|
| I have worked at like 6 different companies now from 20-1400
| people. Smaller companies definitely have some flexibility
| but its usually a cash vs equity conversation.
| 1penny42cents wrote:
| It's so interesting to see the amount of
| pessimism/skepticism/realism in the comments, considering how
| much employee stock options are touted as this magic alignment of
| incentives in tech.
| s0rce wrote:
| The top comments basically mirrored my thoughts. I understand
| that companies starting out with minimal funding can't really
| pay you as much so they pay you in future earnings. However,
| from the employee perspective its a huge risk and likely you
| don't get paid that difference.
| MarioT wrote:
| I have built a remote team and 99% of the time the people I hire
| have not ever had a chance to own options in a company before so
| I always end up teaching them how they work.
|
| The best way to negotiate options, in my opinion and experience,
| is to choose a number that you want your options to be worth in 4
| years. For example "Hey CEO/Boss, if I work here and blow it out
| of the water for the next 4 year, I want the options you give me
| today to be worth at least X number" - This is a fair way to
| structure the conversation for a few reasons.
|
| 1. It sets up a timeline that is inline with your realistic
| amount of time at the business. If I tell you your options will
| be worth 100k for example after we IPO for 3B, that is not
| realistic or fair to you - it only justifies me shafting you
| today because I'm talking 10 years out and best case scenario.
|
| 2. You can walk through the future states (ie 1 to 2 funding
| rounds) and project the current value out based on expected
| increases of valuation at these subsequent fundraising rounds.
|
| 3. You set the number that you think your effort is with.
|
| 4. it is not talking about % points which people have weird
| biases around due to internet
|
| Note: Assume 20% dolution at each fundraising round.
|
| ---
|
| My rec's: If its your first startup, tell your boss after 4 years
| you want your equity to be around 200-300k. This gives you a way
| to walk backwards to today and come up with a real number of
| options to hit it.
|
| If its your second and you want a home run be in the 750k-1m
| range
|
| If you're an exec/leader - aim higher and talk it over.
|
| VP at early stage are coming in around .8-1%
| France_is_bacon wrote:
| You have to think long and hard if the company will actually be
| able to be sold, or go public.
|
| Venture capitalists are professional company evaluators. They
| probably only fund 1 out of every 10,000 applications, and of
| those, of every 100 or more, do they get their money back.
|
| So you have to look at your business evaluation skills and know
| if it yours are better than venture capitalists, who have seen it
| all, and have many expert evaluators, and the fact that they have
| a very small fraction of their companies making money.
|
| Those companies that try to get venture capital and can't,
| probably are not a good bet. Now, there are probably some
| companies that couldn't get venture capital, but succeeded
| anyways, but that's not the way to bet. So if they hav venture
| capitalists, I'd ask them if they have any venture capital
| companies invested into their company, and what are the names of
| the venture capital companies. Then you go to that website and
| learn about those venture capitalists, and if they have a track
| record in the type of company you are considering. If not, then
| look askance at it. If it is one of the huge venture capital
| companies, that is better than a small one that doesn't normally
| invest in the type of company that you are considering. Also ask
| if the company you are considering working at has _tried_ to get
| venture capital in the past, but were not able to. That is bad
| news.
|
| The reason for all this is that if a company is not viable for
| either an acquisition from a larger company, or to go public,
| which is most of the time, then the stocks are 100% worthless. It
| will all be a waste of your time, especially if you take a lower
| salary for the stock options. You will lose a lot of your
| potential income during that time you are at the start up, if you
| are giving up up-front salary for stock. This is no fun at all if
| the company doesn't get acquired or go public. You probably will
| chalk it up to a "learning experience" but I don't agree with
| that. Because you just learned from what I just wrote above, and
| below.
|
| Additionally, worse than the company's product or service
| itself...don't count out the worst thing of all - the
| incompetence of the founders and management. People can talk a
| good game, but the sh-t I've seen. Just think about companies
| that you have worked for and the incompetence of some people,
| managers and others. People think that companies are in it to
| increase the value of stock for the shareholders, and in some
| cases it just might be, and while everyone _says_ that it is the
| reason, there are almost always hidden agendas. Many managers and
| owners are in it for the ego strokes, or power hungry, or have a
| horrible idea of the valuations of the company and don 't sell at
| the best price, and actually prefer to have the whole thing go
| down in flames if their ego is not stroked. You will die a
| thousand deaths in this case, because you see all your hard work,
| and the stock you had planned for, go kaput, when it should have
| and cold have been acquired or gone public. There are thousands
| of these stories. One of those stories is about DR-DOS - the guy
| who owned it, Gary Kildall, went out to fly his airplane when IBM
| came calling to buy his OS. He wasn't there, so they went to Bill
| Gates, who actually bought MSDOS from another company for
| $30,000, licensed it to IMB,and the rest is history.
|
| Finally, and I did read this somewhere a few years ago, someone
| correct me if I'm wrong, is that if you get 50,000 shares of
| stock options with a exercise price of $25 per share, which is
| $1.25 million, and when you are ready to sell, if the price goes
| up to $75 per share, an increase of $50/share, that would be
| worth $2.5 million again, IF you can sell them for $75 per share.
| But, IF the price happens to go DOWN to $5 per share for whatever
| reason, that $20/share loss, and a value of $250,000 on your
| shares at $5/share. So, when you decide to leave the company when
| this is the situation, I believe you generally have 90 days to
| exercise for those options. When you sell the options, I'm almost
| positive ( and someone correct me if I am wrong) that you then
| realize the gain as far as the IRS is concerned, but they use the
| original price as the basis and you will have to pay taxes on the
| $1.25 million of the 50,000 shares with original price of
| $25/share. So, most employees leave their stock behind and don't
| exercise their options, because they would have to pay taxes on
| $1.25 million, with only a $250,000 that you can get from selling
| them, so you immediately have to pay taxes on $1 million, which
| is $350,000 or whatever. Maybe I'm wrong on this, but somehow,
| since it is in the interest of the company to screw employees,
| you can get really, really screwed when you sell your stock.
| BlueTie wrote:
| Fair Warning: It's not uncommon for a company to get bought for
| the price it costs to pay back preferred stock (investors) and
| essentially 0 out the common stock and/or offer new equity
| options (and new vesting period) at the new company as "payment"
| for your common stock holdings. It's happened to me twice. Common
| stock is last money out. So even if you're successful in that you
| grow the company until it's gets purchased - even that doesn't
| mean you're paying off any mortgages.
|
| That said, it depends on seniority and what number employee you
| are. A very early employee (first 5) can get 1.5-3% that starts
| to drop pretty quickly where even if you're a senior level
| employee but employee number 50 after a series A or something
| you're likely at less than 1% no matter how valuable you are.
|
| A good move is to go on angel.co job boards and see what other
| similar sized companies are offering for equity for similar
| positions and make a move from there. And to talk in percentage
| terms of common stock (because 100/10,000 is better than
| 1,000/1,000,000).
| jameshart wrote:
| Given that the implicit bargain being made when you join an
| early startup is 'I'm going to take a paycut to invest my time
| into the successful growth of this venture', is there any kind
| of framework that exists that lets you put that investment into
| a more secure basis than common stock options?
|
| Like, if you're offering them a market-valued $300k worth of
| engineering skill over the next year for $150k, that's a $150k
| investment in the company.
|
| What kind of terms would an angel investor offering $150k get?
| lmeyerov wrote:
| Yes: Similar to the startup's financial investors, take a
| portfolio approach to spreading risk. As you are investing
| time instead of money, that means spreading risk over time:
| decide at 3mo, 1yr, and 2yr if this is the outlier to double
| down on. Likewise, if senior and in a non-engineering role,
| negotiate a single/double trigger in the case of an early
| exit / acquihire: https://www.cooleygo.com/what-are-single-
| and-double-trigger-... .
|
| RE:Preferred shares, Investors get preferred shares -- first
| money out -- to protect against something like someone
| raising a round and instantly selling. If the investors were
| common, the founders would be self-enriching at the direct
| cost of the investors (and the pension funds etc. funding
| them.) Your protection against that sort of thing is
| initially worse -- vesting cliff means no stock for 1yr. This
| generally gets compensated by a signing bonus to the new
| firm, but not a big win/loss either way, beyond being grounds
| to get a new lottery ticket elsewhere (losing you say 6mo on
| that ground: it was a dud).
|
| After that, more about whether the company has raised more
| (including participation multiples) than it sells for. With
| today's megarounds at all stages, this is quite the danger.
| So it's about knowing how much they need to exit for before
| common shares convert, and who has the voting rights on
| that/when, which is a very fair question (vs. seeing the cap
| table, which is unlikely). Likewise, another protection here
| is on dilution, like how much of the employee pool is
| remaining vs will increase dilution on next round... but that
| that's much less of an existential risk than the trend of
| revenueless startups raising $3-10M seeds on bad terms (so a
| quick $10-15M buyout won't work) and unprofitable ones
| raising $20M+ A's (so a VC-packed board with a drinking-
| their-own-kool-aid will veto a < $100M deal), and then racing
| to a unicorn status that prices out most previously viable
| acquirers who'd only do $100M-300M.
| markphip wrote:
| You do not mention salary. Is the startup also paying more than
| your current position? I would put a lot of weight on the real
| money you are receiving now. Especially if you like your current
| team. I've had stock options pay out OK for a relatively small
| exit but it amounted to a really good bonus, not retirement and
| pay off the mortgage money.
| lostdog wrote:
| Yes, a good way to think about the value of the offer is to take
| the percentage, multiply by 1/2 to 1/4 for dilution, and then
| figure out what you get in a good exit ($1B or more). That's
| probably a best-case scenario.
|
| Note that without early exercise it's likely not worth it.
|
| Also, for anything other than a good exit, the preferred stock
| holders will likely keep all the money from an exit.
| frellus wrote:
| +1 on the point about "early exercise". The ability to exercise
| and file the $0 value increase with an 84(b) (assuming the
| company is < $50M capital) is the way the game is played in the
| Valley.
|
| Ex: You get 10,000 options @ strike of $1 vested over 4 years.
| You exercise all of them early and file 84(b) with the IRS to
| say "I bought this stock at $1 for cost of $1 = $0 gain". 4
| years later the stock is worth $10 / share. Now you have a gain
| which, most likely, you will owe LTCG if _ANYTHING_ on that.
|
| It's like printing money if you get the right company at the
| early time with enough shares to make it worthwhile.
| viksit wrote:
| I believe you mean the 83(b) election.
| sb8244 wrote:
| I'm confused here because my understanding is that 83b is
| specifically for shares and not options.
___________________________________________________________________
(page generated 2021-09-03 23:03 UTC)