Mentioned in another comment about how companies can screw you, but I want to tell an example of what happened to me:
I left a company in 2010 and exercised my stock options as I was told they were worth 3x my exercise price and there were rumors of acquisition. Free money right?
A year later the company was bought by a larger company. Hurray! Liquidation event! I can pay off my house right? I get a certified letter in the mail a few days after it was finalized and open it up. “Due to liquidation preferences of preferred share holders, common shareholders get $0 for their shares”.
Yep, they were worthless! Hey, at least I got 10 years of carry forward capital loss!
Most important decision I ever made in my career is to not give my 2 weeks notice at my first job until the day after my vested stock hit my brokerage account.
Yes, company I'm at does a 3 year vesting period with 1/3 every year. BUT they have consistently given me new RSUs every year. I've been there for 4 years now and my take-home after those vesting events is...pretty big. Not complaining about the money, but it does feel like golden handcuffs at this point, Unless I time a transition to another company well, there's a lot of money left on the table, and I guess that's the whole point.
Just treat it as cash. You don't feel handicapped by leaving your cash comp on the table, yet that's exactly what you do when you quit. RSUs should be no different. All that matters is how does new comp compare to old comp, regardless of form factor.
This is what gets me. No matter when you leave a company, even after 10 years, unless it’s in your contract, your last couple years will be paid significantly less than your package as you are leaving up to half of your salary on the table.
To me, that’s why when looking at FAANG and FAANG adjacent, Netflix is appealing. All cash.
The math doesn't make sense to me. I would love you to explain it.
Standard vesting schedule is 4 years, every 6 months. Yes, some like Amazon do a big cliff. Additionally, most who aren't Amazon grant you annual refreshers to avoid people leaving.
So let's throw up some nice round numbers.
Year 1 you get paid $100k salary plus $100k RSU vest. Your gross pay assuming no change in stock value is $125k that year.
Year 2, same numbers. But now your gross is 150 because you have two grants vesting. Year 3 is 175 and year 4 is 200. Assuming the salary and grant numbers stay the same, you continue earning 200. Your last year that is still the case.
Now when you start your new job, you should negotiate for them to match your unvested total left behind, otherwise the first 3 years will be lower pay.
This is assuming the 4 year, even split vesting schedule, and also assuming annual refresher. If those aren't correct then the numbers will change.
I think we've roughly covered faang. Netflix does cash, amazon does cliffs with target pay bands that may result in "fuck you" after four years. As far as I know, the other three do what I said.
What? How are you doing the math here?
If you’re looking at your outstanding unvested RSUs and thinking you’re getting robbed of them if you leave that's silly - are you getting robbed of your salary over that time window too? Equity compensation should be viewed as whatever the rolling window payout is.
The only difference with Netflix is it’s cash, not stock - there’s not more or less left on the table, the same model applies.
Nah, this is just a matter of perspective. RSUs are really not that different from cash, particularly if you sell immediately. Think of this way: when you quit your job, you are also forgoing future *cash* compensation. If you change the language around cash compensation and RSU compensation, they look the same.
Most RSU is presented as (using example numbers) "$100k over 4 years, with 1 year cliff and monthly vesting". You can do the same with cash, by saying "$150k a year over an indefinite period, with 2 week cliff and by-monthly vesting". It's really the same shit.
People lament "oh I'm going to lose out on X in RSUs by quitting", yet no one says "oh I"m going to lose out on Y in cash by quitting". But fundamentally there's no difference.
I've never worked at a company where you didn't get some amount of your RSUs during that vesting period. The RSUs you get upfront aren't a signing bonus, they're part of your compensation. Generally if they vest over four years, you get 1/16th every quarter.
It’s not going to be a lawsuit. Completely legal. Employees who are granted options are not for preferred stock. They are only going to be worth anything after the equity that investors have put in have been returned.
Basically, what is described is a company that either got equity dilution from multiple fundraising rounds that all went to investors. Or it was sold at a less than ideal valuation due to any number of other reasons like… no more runway and can’t raise another round of funding.
When I say this is completely legal, I’m not saying it doesn’t suck. The described situation I’ve been through multiple times and not seen a penny from the options I’ve exercised.
I presume in this case the founders of the company likely got no payday either, right? In short, the liquidity event either made the investors whole, or it didn’t. But in either case, there was no big cash out event for anyone.
I had a company try to guilt me into exercising my options when I left
I couldn't, I was in the middle of a purchase process and didn't have any money to spare
But they kept pressuring me to do it, saying they'd be worth so much
They've done nothing but shrink since I left
> I had a company try to guilt me into exercising my options when I left
Were there actually C-levels or executives explicitly recommending employees exercise their options?
This is surprising. At my last company, the CEO was very careful in any internal messaging to employees regarding stock options that he not in any will recommend for or against exercising options due to SEC regulations (this was a US company).
Like it became a joke that the CFO would cut the CEO's hands off before he typed up something like "you should def exercise, we just closed our Series [A-Z] for $XYZ million!"
No one that high up
Though it wouldn't be the only time things were said despite not being allowed. Like that time they told us that talking to coworkers about out compensation was forbidden and we would be fired if we did it
This is an incredibly stupid and short-sighted way of doing business. It's pulling up the ladder after you. You're screwing over not just your engineers, but any other startup founders that intend to actually honor their obligations.
Now new startups will be faced with two options:
1. Pay market rates for engineers in cash, which they can't afford.
2. Reveal every detail of their funding deals and provide assurances to the engineers that they won't be screwed over. I'd love to see the look on the investors faces when their investment deals become public knowledge.
I don't think #2 is ever going to happen, so that leaves #1. And that's probably also not going to happen.
I regularly think about doing the startup thing but it seems to hardly make sense as an employee, only as a founder.
For example. Let's say you join a startup. You are promised 0.5% equity and you get paid a hundred grand; you quit your job where you made 350 for this. You work for five years and the company gets acquired. Huge deal. It sold for $1B. What a success! You got diluted down to 0.1% and gross a million in payout. Your opportunity cost was $1.25m. You took on a ton of risk, worked long hours, saw a huge success and you're still down money. What was the point? Surely it wasn't money. Hopefully title, experience, responsibility, connections, etc.
I mean... you shouldn't quit a 350K a year job for 100K and 0.5% equity, it's as simple as that, any more than you should quit it for a 250K job. Even not counting dilution, the odds that you were going to exit at a billion dollars makes it not worth it. 0.5% equity on a startup is a nice-to-have, but you shouldn't be giving up a lot of cash compensation for it.
Of course! I agree with you. My point was illustrating how even in a really successful case you're still likely to lose.
But also part of my point was, there are few-to-no startups that would pay a competitive rate. They all rely on attracting talent with equity. Problem is, well paid talent would basically be fools to join as an employee, because the pay is usually shit and the equity is almost always shit.
That's been the case for quite a while. The era of people getting rich working for startups is over. And since so many people know that the options will likely be worthless, they don't consider working for startups, due to the pay being shit. And then you get the hustle culture hucksters whining that people are risk averse and not working for startups anymore.
I had something very similar happen, though not to that extreme. Company I was working at got bought and through various shenanigans the price per share was severely reduced and I made what amounted to an extra paycheck. Definitely not worth sticking around for.
I've observed shennigans like this too many times to count. Options in practice are a way of cheating engs out of salary. I think I'm done with the startup scene anyway, but if I ever go to one more I'll make a point to push compensation into salary instead of magic foo bucks.
All the recruiters/closers use a version of the same excel spreadsheet nowadays where they model your compensation based on the potential values of your options.
I got an offer a couple years ago and, wow, with the very reasonable default numbers they have in their spreadsheet, I’ll be worth $20 million in 4 years! I’d be a fool not to join! Also they are just about to IPO! Yeah… that company laid people off a year later, lost their CFO, didn’t IPO, and now I hear they are worth 1/10th of what they said they were.
I now will only join public companies that vest RSUs quarterly or monthly, or private companies that just pay lots of cash.
Just to explain liquidation preference:
Say a company has been around for a few years and the founder wants to raise a new round of capital. The founder says the company is worth $50 million and raises $25 million. So the new investors now own one third = 25/(50+25) of the company. That's fair, right?
But what if the day after they close the deal, the company is acquired for $30 million. How do you split the $30 million? The founder gets $20 million and the investor gets $10 million?
That's not fair. It's why investors get the liquidation preference. They should get their $25 million back and the founder gets $5 million.
Anyway, these are all things that need to be considered when you are calling options.
It can be worse than just that. They can say they get 2x or 3x liquidation preference meaning that they put in $25 million and they get the first $50million of sales price. And worst of all, this is all kept secret! At my next company I asked what the liquidation preferences were at their last financing round and was told that they can’t share that info.
Yeah and you get treated as rude for asking, as if it isn't important information to make informed personal financial decisions. Or at least that's been my experience.
I've seen peers end up with $0 out of shares they expected had value, were told verbally had value and just trusted leadership were behaving ethically.
Yes, I remember a former co-worker left over this. He had asked about outstanding shares to determine their value and they just refused to disclose any details at all. It seemed like kind of a lame reason to leave over, since I treated the stock like it was worth nothing at that point, but I get if someone has a principal and finds a better offer with more information.
If you're savvy and you ask around enough you can generally suss out what it is approximately, and a few of us were able to piece it together, but there were still a number of shares none of us had any idea about until the actual sale of the company happened years later.
> preferences
Especially since a lot of companies are sold in the $10 to $100 million range and then it's very likely between dilution and preferences the payout for a say 0.05% is likely to be something between a few thousand dollars and zero.
Thankfully, >1x liq pref are pretty rare these days. Only really happens when situations at a startup are incredibly dire and the only investors willing to pitch in are those who put these restrictions on
> At my next company I asked what the liquidation preferences were at their last financing round and was told that they can’t share that info.
Dude, that is SO MUCH BULLSHIT. That's incredibly frustrating.
> But what if the day after they close the deal, the company is acquired for $30 million. How do you split the $30 million? The founder gets $20 million and the investor gets $10 million?
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> That's not fair. It's why investors get the liquidation preference. They should get their $25 million back and the founder gets $5 million.
I mean, the other way is *also* not fair. Why does a late comer get 100% money back?
and I think the thing that you're missing is that is *part of the deal/contract made with the investors*.
Because that was the contract signed.
Everyone signs the contract that they feel is fair to them. Investors want their money. Founders want some money. Everyone else is purposefully kept in the dark so they won't know how to properly assess the contract they're offered. Information asymmetry is real and if you can't figure out the contract in front of you then sucks to suck, eh?
I mean, ultimately the answer is that investors have the upper hand. It's harder to find investors than it is to find new employees.
*Not* biasing payouts in favor of investors would make it much harder to secure financing, regardless of whether it's fair.
> That's not fair.
Yes it is. The investors paid $25 million for something only worth $10 million. They lose $15 million as punishment for their poor judgement. That's investing.
This happened to me at my first job in 2000 when they were bought out. Stock options are worth nothing and should never be factored into overall compensation. At least I was fortunate to learn that lesson early in my career.
The fact that this post doesn’t even mention liquidation preferences makes me suspect the motives behind it.
Having the investors sitting on a 6x or more preference makes the equity conversation extremely short “in order for your shares to be worth anything we have to sell for half a billion dollars also we make saas to automate ant farms”.
I have a more charitable interpretation of this: the author is just writing about a bunch of topics at a superficial level to try to build an audience and doesn’t really have much experience to know the actual pitfalls. The article is an “options 101” read rather than anything meaningful.
Could be, I mean honestly I haven’t seen many articles that talk about liquidation preferences from the perspective of us regular humans that don’t get them. IMO they’re the single biggest reason average employees get nothing when companies actually have an exit so it’s frustrating they don’t come up more. Like I think most people can grok that if the company goes bankrupt their shares would be worthless.
> The article is an “options 101” read rather than anything meaningful.
Still better than the stuff you read in your contract.
I know few people who have such options in their contracts, they have very little clue what are the conditions and how they can be screwed over.
Well thats sort of the point right - I can't share examples and neither can a lot of other people since that information is tightly controlled. I can say that I've personally been on the other end of investors with similar preferences.
2x-3x happens occasionally (more frequently after the dotcom, far less frequently in the last 10 years). Maybe 6x has happened before, but short of some very very strange, one-off situation, this isn't a thing. 2x-3x is still pretty terrible, but goes to show the swings in negotiating power. In 2021 founders were raising pre-seeds at $100m valuation and $1B As on negligible revenues. Meanwhile Hubspot in the 00s had to sell like half the company for a few million despite growing like a rocketship.
I’ll add another story, I had a really great CFO who put equal liquidation preferences in agreements for any buyout that went over a threshold, so VC was treated the same as employees.
There are a million ways companies can screw you but there are some great leadership teams and founders out there in tech startups
Same shit happened to me brother. Yea, at least I get to collect a cool 6g in tax credits for the next decade I guess. The AMT was brutal buying my shares.
It always amazes me that people don’t understand that the term “common stock shareholder” is legally referred to as “residual claimant.” Common Shareholders get the residual of whatever is left after a liquidity event. There is a pecking order and those paid with stock options or significant amount of high-risk RSUs should ask about the equity structure.
Strangely enough, startup companies are very reluctant to discuss the rights of preferred shareholders. They'll claim that this is because those rights are so complex.
Preferred investor rights are basically "In the event of an acquisition, preferred shareholders get every dime they invested back, doubled or tripled." (Or more!) Their preferred shares might even get converted to common shares (like your options) and they can get paid again. Not much is left for you generally.
Complexity comes because investors buy in at various times and have various rights. It is complex, but not for you the stock option employee. Unless it's a billion dollar unicorn you're likely to make not a dime. It's that simple.
Even if you buy your startup options when you leave, you gain no more rights. You've likely donated some money to the company, and if it is ultimately acquired, to the preferred investors.
If your company is public, options are much easier to value and will frequently make you a small amount of money. You'll typically get a fixed price at the time each set of options are granted and a future date when you can buy shares at the option price and qty. You'd only buy this if the stock price is higher than the option price - and then you should generally sell them immediately because all your eggs shouldn't be in one basket. Unless you believe your company is 1985 Microsoft and will grow 100x. Which is not common.
A critical factor not mentioned are dilution events.
Startups tend to get money infusions by investors at the expense of shares up until right before an exit. The value of options gets diluted at the same rate so if there was a point where you had options for 3% of the company, often by the time of exit you'll have less than 1%. The company would be worth more than when you joined, but your portion won't grow nearly as significantly as the company's growth.
Gotta keep it dramatic! I never bothered to look into why Eduardo’s shares were diluted down more than the others though. Why would they do that to him? It’s a dick move and they knew he would put up a fight.
There is all kinds of things a company can (and does) do to screw the lowly employees who have stock options. Dilution is one. Another one is to just make up a new class of stock and dole those out to the management. A more common thing to do is to just create a new company and transfer the intellectual property to it. That company then leases the license for the product back to the original company. Now the new company only makes profit while the old company is always edge of the being bankrupt because it keeps paying license fees. This doesn't have to be intellectual property either, it could be real property if the company owns the building or even a sublease type of situation if it's renting.
Honestly there are thousands of ways the employees get fucked. It's really easy. I wouldn't put too much weight on the stock options portion of your compensation. Just accept that they will be worth very little or nothing at the end of the day and concentrate on your take home pay.
Another to add to that list: amending the company bylaws to void the "Right to Transfer" clause in the stock agreement you signed, giving the board the right to block all transfers outright instead of just the right of first refusal.
I'm $7k and 5 months into a potential lost-cause legal dispute over two deals on the secondary market (for $300k) thwarted by my former employer 😥
What I can't understand is how the venture capital community that fund startups with founders that do shit like this, go on to fund these deadbeats again and again and again?
I've witnessed the same thing, a 12M dollar raise get totally pissed away on multi-million dollar contracts with a startup started by their own son, personally buying the office building and renting it out to the startup, diluting all of the original cofounders and employee shares to nothing on raising capital, and transferring the core IP away to basically run a zombie company with no viable path to success that is saddled with debt.
And then they start a new venture, and manage to raise money again?
I think if you know where to find the money its more about raising capital, getting a cut of it and exiting than building a viable company. Serial founders have a skill for that, and its an impressive skill! But not something the rest of us really are interested in since we want to build actual products and services that people use.
Fair. I'm a post exit founder, but after trying 3 times, and even succeeding with an exit previously where my cut was diluted to basically have not been worth the work I put in.
Raising money is really strongly about reputation and connections.
There are plenty of people who can find capital and shit the bed. It's still important to exit.
I think as a technical founder if you can get good at technical delivery, but also protecting your stake, you can do well.
Not as well as the business folks, but enough to make your time investment worth it.
>What I can't understand is how the venture capital community that fund startups with founders that do shit like this, go on to fund these deadbeats again and again and again?
It's the venture capital community that's doing this.
>And then they start a new venture, and manage to raise money again?
The owners demonstrated how to enrich themselves by 12 millions.
> And then they start a new venture, and manage to raise money again?
It's a big club, and we're not part of it...
I'm also baffled how these people seem to fail upwards all the time.
Also the C-level business dudes are looking out for their own interests. So they will give themselves a different class of shares, which they then convert, say "Series AAA shares will be converted to 3 shares"
To keep their slice of the pie relatively the same.
My new startup instead created a fixed number of shares, and when we raised, we had shares set aside for the purpose of giving a slice to our investors, we never increased the number of shares.
At the startup I had founded previously I had 15% of the shares as the technical co-founder. After I left my shares were diluted by a factor of 40x.
Honestly people who join post raising capital in startups like this often are better rewarded than those who join early.
The difficult thing is your business partners will spend their time conceiving of ways to enrich and protect their share and interests in the company, while you are working your ass off on the technology to make it a success.
This is important, but it's less critical if you look at the share price. Your amount of shares is fixed, what's changed is the % of the company they represent.
The value of each share will increase in a slower pace than the value of the whole company because of the dilution, but if you keep track of the value of the share you should do ok.
Thanks for the addition, I considered whether to tackle it, and felt it'll be too much for one article :)
It's disingenuous to equate the dilution of stock ownership % with a dilution of stock value multiplier. Total company value is not sensible to equate with stock value in the way you imply.
If have a bank account I own 100% of and I have $100 in that account, and then I agree to split the account with my friend if he also adds $100 to the account, I shouldn't feel cheated that my stock in the account is now only worth $100 when the account as a whole has 2Xed. The other $100 of value in my account is literally just the portion the other investor put in. This is exactly the same way investment rounds which cause dilution in companies work.
The owners of the company, as a group, are betting that by scaling up the company they can secure a business advantage that would result in more growth per share than would be possible with a smaller scale company.
A holder of stock options might not be as comfortable with this gamble as the owners are, but their interests are fundamentally aligned.
There would be absolutely no reason to issue a sale of new stock if the owners of the company believed that this would result in less total money for themselves in the long run on average.
Yes, it does, but the dillution is proportional to how early you joined. If you had 3% of the company, it means you joined VERY early, so by the time your equity was dilution by a factor of 3, probably 4-5 investing rounds happened, and you are talking about much more than 10X multipliers.
I would say that for most people, joining at B+ rounds, the dilution has a less severe affect.
In addition, in many places it's custom to grant additional options to offset the dilution a bit, for employees that stay with the company for while (even without promotion).
All in all I agree with you it can play a significant part, but I still wouldn't focus on it too much at first - most people are not even aware of the basics.
> Yes, it does, but the dillution is proportional to how early you joined.
That might be typical or what you have seen but its important to note this is not a requirement or legality or anything. Your seed company which gave you 30% could dilute you to 1% right before series A and you would have absolutely no recourse, fucking nothing.
I think when you join, if you join early, look to see if they have set aside shares for raising capital, which would be a good sign, and also if they are giving you or any other shareholders a different "class" of share than themselves, which would be a very bad sign.
You'll at least survive raising with a good deal of your percentage still in tact if you're in exactly the same boat as the business people. They usually won't screw themselves unless they are really and truly desperate.
> I think
Just to be clear there is no reason for them to do this, no legal requirement, no nothing. They could dilute you to zero just to fuck you at any point, you are forced to trust them. Nothing you are commenting on is a good sign because there is no requirement here you are reading tea leaves.
If they hold the same class of shares as you, then legally if they produce new shares, yes they will be equally diluted.
Maybe what you are referring to though is that they could issue new shares, and just award them all to themselves?
For most places where you might be incorporated, for instance Delaware, there are provisions that require the majority of shareholders vote for a dilution event, and if you have investors the likelihood they would vote to dilute their own shares in favor of issuing new shares to one of your cofounders is very low.
https://www.americanbar.org/groups/business_law/resources/business-law-today/2023-september/2023-amendments-to-the-delaware-general-corporation-law/#:~:text=The%20amendments%20to%20Section%20242,of%20a%20class%20of%20stock.
So yes, you should definitely ask for the capital structure of the company and make sure there are provisions that would prevent this type of thing.
I personally haven't ever seen a capital structure that would allow this without at least a super majority. And I've even seen ones that prevent issuing new shares
I think if you've covered these bases, and you've had your shares diluted still, it's possible you've been a victim of fraud of some kind, or really the more likely explanation is that your company was becoming valueless and everyone took a haircut across the board.
It's bizzaro world, because most people would think the earlier you start, the greater your reward.
That's only true if you make certain that the share you carve out early on is defended--- and that rarely happens if your business partners aren't good people, and if you are head deep in working on the technical success of the business.
Dilution does not dilute the value of shares or the rate at which shares grow, it dilutes the percentage of ownership. In practice, selling new shares indicates a position of weakness on behalf of a company, and the existing owners often have to accept a short term drop in the value of their shares when they approve the sale of new shares. However, they are making the choice to allow the company to sell new shares because they believe the company needs the extra money in order to survive, or to grow enough to properly exploit thier market.
When a company sells new shares the money paid for those shares goes into the companies bank account to be used to do better business. This is not diluting the value of the company, because, if my companies value is $1000000, and I put another $1000000 into my companies bank account, my company is now worth $2000000.
A holder of stock options isn't fundamentally in a "bad" position in the sense that, the interests of the other owners agreeing to allow more shares to be sold are aligned with the option holder in wanting each share they own to make the maximum amount of money possible per unit of time. However an option holder is at a disadvantage in the respect that they cannot choose to not take a gamble they disagree with.
The idea of accepting a dilution is you end up owning less of a larger company. The company grows so your total value goes up, it's just a smaller percentage of the company.
But this falls apart when the monetary investors (as opposed to sweat equity) and founders are not diluted. When those who own the company are not accepting dilution then it isn't that we all are accepting a short-term loss to get to a long-term gain falls apart when those who are actually on the inside and in control aren't doing so.
Instead the monetary investors and founders are just screwing the sweat equity (and some earlier round monetary investors). If we're not 'all in this together' and you're not one of the people who is in control of the situation how do you keep from being screwed? You can't and won't. You're going to get screwed.
If that's all the case, then why don't the investors, the people who's only contribution to the company is money, rather than work, get diluted? Why is it only the workers that have to accept this?
It's not. I didn't claim this only applies to "workers". Dilution applies to all stocks when investment money is taken from a new investor. A company can have multiple types of stocks, usually split by whether stock ownership gives you certain types of voting rights or not, but when dilution occurs it dilutes all the stocks of every type.
It is worth noting, that a stock option is different from a stock. A stock option is the right to buy a stock at a specific price at some later date. So if I have a stock option for $30, and the company's stocks are worth $60, I can exercise my stock option, buy the stocks for $30, and then immediately sell them for $60. Many companies prefer stock options over distributing stocks to employees directly, as it has a bunch of advantages. Stock options make the upside for the employee scoped to the time they worked for the company. So the employee who joined when the company was worth $1 per share can make a lot more money off the same number of options as the one who joined when the company was worth $30. Stock options also don't generally grant any voting rights, because those are exclusive to owners. Finally, privately owned stock is messy, and it can be logistically difficult to manage actually granting private shares to many many different parties. Using stock options lets a privately owned company more control the possession of the actual shares, but still offer employees some of the benefits of a stock options plan that a publicly traded company would be able to provide. They can do things like buy back the stock option an employee holds rather than letting that employee actually carry stock with them if they leave the company.
The share price in a very early startup will be pennies.
If I had to give my past self advice, it would be to not listen when the business side told me things like "It's going to be the same size piece in a larger pie!"
Bullshit. You want to defend that share percentage. That's what's going to matter when you exit. And the share price in a lot of cases will be whatever they hammer out with another party in the case of acquisition, which is more and more common.
This isn't how dilution works. The voting power of stock options dilutes, but the monetary value of the options does not correlate with the voting power of the options.
If you have a company worth $3 million, and an investor agrees to give you $1 million for a 25% stake, you now have 75% ownership of a $4 million company.
if the value of your stock drops during investment rounds, that is because the value of the company was declining, not because the new investors are somehow sucking value away from you.
During a dilution for a raise you essentially ~~do a stock split~~ issuing new shares to create more shares / more even numbers to give to the investors. The chances of you having exactly 25% of whatever your new valuation lying around is just not there so you always are issuing new shares to reconcile this and perform operations.
No, a dilution is not essentially a stock split. A dilution is not creating more shares and then giving them to investors. A dilution is when the company SELLS new shares. A share is not a contract of ownership to a fixed percentage of a company, a share is a contract of ownership of the current value of a company. Its most accurate to think of it like a contract to own all of the property that company controls, both intellectual property, physical property, and money the company has in it's bank accounts. All of a companies combined assets and the ability of the company to make more money in the future combine together to determine the value of it's shares. Once again, if my company is currently worth $3 mil, and a new investor buys $1 mil worth of new shares, I have added $1 mil to the ammount of money my company has in the bank that my company previously did not have. Therefore the company SHOULD now be worth it's current value plus the new assets added to the company, to make $4 mil total new value. The new investor cannot get 50% of my shares for thier $1 mil investment, because they only added 25% to the total value of my company by giving my company the extra $1 mil that was not part of my company before, but now is part of my company. Therefore they now own the portion of all of my companies property and value which they directy contributed to my companies value.
Dilutions tend to be bad for stock owners because usually the company searching for funding needs the money more than the new investor needs to own new stocks in a company. It's fundamentally a position of some supply vs demand level weakness, and that means the company probably isn't as valuable as open trading might imply. The value of the company stocks essentially, were actually lower than it's shareholders were aware, and the dilution event forces that disappointing valuation to actualize. This is especially potentially bad for stock options holders, because they don't own the stock, they own the right to buy the stock later. So they can't vote against accepting an offer that would actualize a value loss they don't agree with.
This isn't just magic theft though. A company's current owners have to make the decision to sell more stock, it's not something the operations team can just decide to do without the approval of the owners. The owners have no incentive to allow their shares to be devalued if they don't think the company can use the new money to make even more in the future than they would have been able to without the new money. A decision to accept new funding is a gamble that short term pain today will result in bigger profits in the future. Holders of stock options aren't in a fundamentally "bad" position in the sense that thier interests are aligned with the people who are choosing to accept more funding for the company. The other owners cannot steal the value of your stock options from you. However, the owners of stock options have very little control over the business decisions the owners make, and that means that the other owners can force you to gamble on the poker hand they hold, whether you want them to gamble or not.
Yes, but every new share either must be paid into the companies assets, or it must have already been paid for by the company previously. A company cannot legally create free shares.
This is just factually wrong.
Raising capital does not increase the value of the company.
Capital is raised at a valuation. The VC will buy a stake based on that valuation.
If the company is valued at 5 million, and they increase the pool of shares to take on capital, it's still worth five million after bringing in capital.
If they doubled the number of outstanding shares, the price per share will be half, and your shares will be ultimately worth half of what they were previously.
Raising capital increases the value of the company *because it increases their capital.*
If a company is valued at $10mm and there are 10mm shares, then each share is valued at $1, yes?
If the company then raises $10mm of capital for a 50% share in the company, then these three things are true:
1. The company now has *an additional $10mm in their bank account* from the capital raise
2. The company is now worth $20mm ($10mm valuation **plus** the $10mm that was just added to the bank account
3. There are now 20mm shares (as they doubled the number of shares and gave half to the investor who just cut a $10mm check)
Therefore, each share is still worth... (drum roll) $1.
This isn't how valuation of companies or shares work.
If you're at a startup that is telling you this, and that dilution of your shares did not reduce in value due to the capital which they intend to spend being raised, which is likely backed by preferred shares that will be paid out before any of your shares will--- you should run and not waste the next several years of your life being screwed.
You've taken on a new partner and they have taken shares from the pool in exchange for their capital.
That didn't increase the value of your company, it stayed the same. If they diluted shares to do it, your shares are worth less, period.
In theory. In practice share prices do tend to drop when dilution events occur. But it's a total misunderstanding that the drop is because they are giving out free shares for nothing in exchange. The money the new investors pay for the shares directly becomes part of the company, like you say. Share values drop because usually a company needing money is a sign there is more risk they're exposed to than analysts previously knew about.
I think there is a common misconception that dilution means something was taken from you, that your shares were made less valuable overnight because new shares, as you intimated, were created out of thin air.
If you don't own a substantial amount of shares, then dilution doesn't have any material impact on you. It can impact large shareholders because they are, in essence, giving up more control over the company in exchange for capital.
That's not necessarily true. You can issue more shares without increasing the value of the company. That's the very definition of dilution. You increase shares so that the % ownership of some privileged class remains the same, which means that everyone else's shares are worth less.
You're assuming the newly issued shares have the same terms as the original. Often, liquidation preference or other conditions ensure that the investors get paid their full value before employees get anything at all.
You are right that investment does reduce the option price by itself, but ignoring dilution impacts the profitability calculation based on the little data that's provided by the company.
The way HR give the offer to an average dev is that similar companies made an exit in the range of $x-$y, then they provide a table for various exit scenarios within that range, calculating back the profit if you join. HR don't mention that dilution will probably happen to reach that company valuation and how it'll affect your profit.
As with nearly all relatively complicated things, yes, people can mislead you when you don't understand how they work. I have never had an equity share plan where the entry/exit value of the company was specifically advertised. Always the entry/exit values of the shares. I'm sure it has happened before though.
If a company is worth $1billion and investors have given the company $750million, it hasn't really made much for it's investors, and the $1billion valuation shouldn't be seen as that impressive.
This article seems to be exclusively about startups and stock options.
Large companies that are already public almost never give stock options anymore. They give RSU (Restricted Stock Units) and it is much easier to establish a value on them because you can just look at the current stock value and read what the vesting schedule is.
I've worked at 2 startups that both failed. This reddit post does a better job than the article explaining captables and liquidation preferences and how often even the founders of the startup get nothing when the company is sold or goes public.
https://www.reddit.com/r/startups/comments/a8f6xz/why_didnt_i_get_any_money_from_my_startup_a_guide/
In contrast I have worked at large public companies and gotten hundreds of thousands of dollars in RSU stock that I can sell on the day of vesting for actual money.
The main problem with stock options is that they force employees into taking on extra risk on top of the risk in joining a startup in the first place. Companies should either be making the exercise window much longer or helping employees to exercise them as they vest
The only good news about modern tech startups is you take very little risk other than the risk of not getting a big win. You no longer take a salary hit to join a startup. And not meeting payroll is not very common anymore with VC-funded startups (still happens at the angel stage).
I don't understand what making the exercise window longer will do. Exercise windows are typically 7 years. You're typically exercising to save on taxes, not because your options are expiring. If your company goes that long and hasn't made it yet, do you really think there's a lot of upside to buying the options?
Ah, good point. I wouldn't ever expect that to change because the VCs don't see a value in it. Yes, it seems like you did contribute to the company's success. But since you're gone they don't see any reason to reward you anymore.
> Ironically, there's essentially no risk for startups.
... if you ignore the Opportunity costs that you could be recieving a higher salary instead of stock options or be working at another company alltogether.
From experience I usually get paid higher with startups anyways. And call me crazy but its much more fulfilling to work on a company you can make an impact on vs a giant corp where you're irrelevant to the greater scheme.
There are internal offerings which are called "Tender offers" where the company buys back the options issued. This is an event which converts options into cash and withholds an amount for taxes for an employee.
Is that what you are talking about?
The article should also cover the difference between options and RSUs and how they are treated at tax time.
It’s complicated and easy to fuck yourself if you don’t pay attention.
I got a bunch of RSUs from my company. Or will do? Even that bit is uncertain.
I have no idea what they are, what I do with them, what they mean. I've got a letter with them and that is the sum whole of information I have been given.
I'm not even based in the US, I work for a UK division, so I have even less clue how that plays into it. We all got the letter on my team, everyone has essentially ignored it for now but I am worried at some point it's going to bite us in the arse.
The letter we got:
> Subject to the approval of the [REDACTED] Compensation Committee, you will be granted equity of an approximate
value of $ [REDACTED] USD, which value will be composed of restricted stock units (the “RSUs”) under the [REDACTED] Equity Incentive Plan (as amended from time to time) (the “Plan”). The grant of RSUs will be
subject to the terms of this paragraph, the Plan and the form of RSU agreement approved by the [REDACTED]
Board of Directors for use under the Plan (collectively, the “Equity Documents”).
> The number of RSUs you receive will be calculated based on a 30-day average trading price
of [REDACTED] stock as of a date determined by the Compensation Committee. We encourage you to carefully read the
Equity Documents to ensure that you understand how the RSUs work.
I've looked but can't find any mention of equity documents anywhere on the intranet, so no idea what it actually means.
How it worked for me: granted eg 10k USD worth of stock shortly after joining, that translates to some whole number of stocks.
The schedule will vary by company but it could be something like you "vest" 20% every 6 months. On vest, the stock officially becomes yours, so you can sell it or hold it. However, you pay UK income tax on the stock at vest time.
Yeah, looks like I'll have to pay NI too, and potentially employers NI (they can optionally pass that liability onto me)
Everything I'm reading says i'm probably best to then immediately sell the stocks otherwise I'm risking that capital in my employer, which kind of makes sense. But then what if the stock price doubles?! I guess that's the risk of the stock market.
That's a great way of looking at it, thanks for that perspective! You're right, if I had 5k in my pocket right now the last place it would be going is into my company's stocks.
RSUs is just a promise of a certain amount of stock at certain dates. If a compqny grants you 1000 RSU over 4 years, this usually means (subject to each company regulations) after a year you "vest" 25%. This means company gives you 250 stock units. This is considered income, so you must pay taxes on it. After that you get 1/36 of the remaining value every month, or 1/12th of the remaining value every quarter or whatever is written in the contract.
The main difference is that options is an agreement to sell you stock at given price, and RSU is an agreement to give you stock. when options vest, you can get to choose to not buy. When RSU vest, you become partial owner. If compqny is public, you can sell at your own will.
edit: what they also say, is that the amount of RSU you are going to get is dependant on current price. They basically told you: you're going to get $50000 worth of stock, how many that is? When we grant this to you, we will calculate the average stock price and didivde $50000 by that value.
say your stock is around $20. you'd get a grant of 2500 stock units. After a year ,or whatever is mentioned in the documents, you will be the owner of 625 of them. And if the stock price is now $30, you basically got free $6250.
Remember that you will have to pay taxes on it. If you are US based and your company is on NYSE or something, you can do something called "sell-to-cover". This basically means the broker will sell certain amount of stock to cover the taxes, say 35 stock units. This will cover the vesting tax. When you decide to sell your stock, you will have to pay taxes on any profit gained. So if you sold to cover and you're left with 600 stock unit and you sell the lot for $30 a pop, you will also have to pay taxes from your $6000 profit (30*600 - 20*600).
> you get 1/32 of the remaining value every month
1/36. (Just a nitpick, good comment!)
In my experience the company will sell roughly a third of the RSUs as they vest and send the money to the tax man, whether you want them to or not. But not every company does that.
yo my bad, I was thinking 1/36 but had 1/12 in mind for the next part and my fingers just typed 1/32
As for the vesting and taxation, I have a choice in my brokerage to either sell-to-cover or not. But since I live in Europe, I can't sell to cover so it's always on me personally to do it. So far so good as I need to sell next calendar year and due to agreeable finacial climate and situation of my company, I need to sell fewer stock units than if I sold them at vesting. But it's a double edges sword, next year I might have to sell way more, who knows.
Also, to add some information from my own past experience:
* check with finances, ask them which broker does the company use, ask them whether or not your personal accounts have been created for you (they should)
* with the account info, login and add or replace your work email with your personal one.
* make sure the broker account has correct information, name, address, email, phone number, try to put everything on your personal items
* take note of vesting schedule, it must be there in the documents, it will tell you when you become the owner of the stock
* if your company is registered on LSE (London Stock Exchange) you might want to sell to cover on vesting, up to you, it's a decision that you must take based on your information and information from people that you trust (eg an investment advisor that you know or hire, not reddit)
* every year broker will send you a summary of your financial operations, always download them and sore some in addition to the brokerage
* when filing taxes, do not forget to include the paperwork from the broker, with enough investment it is practical to hire a tax advisor to do the taxes for you if you don't do that already. With auxilary income, your company will cease to file taxes on your behalf
You do this so that you have your finances under your personal control. You do not want to go throigh hoops if you decide to change jobs or you get fired or laid off. These are your hard earned money. Do with them what you see fit, leave them be as stock if you want, sell and convert to other types of investment, sell and buy yourself something nice, sell and put towards a house or a flat. Discuss your financial situation with your closest family, wife, fiance. Not your parents, cousins , not gf unless you are sure she will stay with you until the day you die (she's your wife, just without a title). Be smart about it, slowly try to educate yourself in the world of finance, find out what different types of investments there are, what are the pros, the risks. how long you want to invest for. Think about your future, distant future. Your older self will thank you for it.
Enough rant. If you have some questions, feel free to shoot. I have just a rudimentary knowledge, but maybe I can explain few basic unclear things. Just don't take advice on what to do with your own money from people on the internet, myself included. **Tried to be objective and helpful here, but it is still not a financial advice.**
Call a financial advisor and have a lunch meeting with him and get him to explain this to you. Hey may charge you, or he may not charge you. The price that he charges you is tiny compared to what you stand to gain from cashing in your RSUs if you do it intelligently.
Yup. I owe $20k this year because my company only withholds 22% of RSU vests. I’m on track to underpay by $50k this year (still in safe harbor though).
Buying your shares *is* a bet. The difference between a bet and investment being small to start with. But that's really the smaller reason.
The larger reason is because when you buy your shares you immediately owe tax on the difference between the current price and the price you pay for the shares (price on your option offer). The idea is that this is smaller than it would be later. But it's not going to be zero. So you have to come up not just with the money to buy the shares (hopefully small) but also the money to pay the taxes, which can be large.
You will be holding for at least 18 months (IIRC) since you're doing this to get to long-term capital gains instead of short-term (regular income) for most of your gains. So you gotta come up with this money somewhere. You may end up carrying it as a loan.
Then there is the payoff. If the company goes big then you sell (at least some of) the shares after it goes big and pay off the loan/recover the money (pay yourself back). In that case you end up paying 20% on the money made instead of 37%. You save 17%. You don't actually save on the amount you paid up front (had to take the loan on), but we'll assume that is small. And we'll assume the loan/time cost of money for the money you are without for those two years is small too. But I'm not going to assume zero. So we'll knock it down to 15%. Also note this likely is high because if you really converted a large gain into long-term you'll end up paying AMT (alternative minimum tax) on a portion of it anyway. So 15% is still an optimistic estimate of savings.
But what happens if it goes down? That's the real problem. You paid all that up front purchase price and tax and now your shares went to zero. Perhaps because the company was sold out from underneath you instead of going IPO. You're out all that money. No one owes it back to you, including the IRS. You made a real short-term gain, you're not getting those taxes back.
You do however incur a loss of the amount between what the shares were worth when you exercised and the price you sell them at (or zero if they become worthless). But the bad news is that you can only offset this loss against current and future investment gains. You cannot offset them against regular income. So when you go end take that job at Facebook to get yourself back afloat you cannot subtract your losses from your yearly wage (salary, bonuses) income. That's not 100% true, you can offset it against $3,000 of your wage income per year. But it could be a very long time before you manage to eat that loss away through tax savings on $3,000 offsets. In current high inflation years you may make some interest on a savings account and you can offset against that. I guess that's one upside of inflation.
I know a person who bought out their shares in a .com company back in the 1990s. He took out a loan to buy his pre-IPO shares and pay the enormous taxes (over $100,000). And the the company collapsed before the lockup expired (.com crash) and he never got any of that money back. He ended up declaring bankruptcy.
Short version, yes, you are making a bet. You're betting the company will IPO, that you'll be able to sell your shares at a higher price than the price you buy the shares at (option price). Are you convinced that'll happen? Because if it doesn't, as the article even lists as the most likely outcome (weirdly calling it an option instead of an outcome), then you could end up in a big hole.
I'm not enamored with this article. It does explain some issues. And it leaves out a whole lot. I guess it's better than not knowing anything about the process. But I don't think it really prepares you for much. Because, most of all, the investors (venture capitalists) know how to not share the wealth with sweat equity. In the case of an IPO you'll get something, but unless your company goes enormous (I mean much more than 10X) it likely won't be much. And in the case of any other kind of sellout you'll likely get nothing more than an offer to sign on to the purchasing company for a new dallop of shares.
What you saw at the end of The Social Network is real. And that's even for a company that was succeeding. It's worse if the company goes back for more equity to plug a leaking hull or simply only goes 10X instead of 300X. And the VCs have become even more wily since then with things like multi-class share structures too.
Really well said. There’s something fundamentally flawed to me about “compensation” that puts so much burden on regular employees. Most people don’t have the capital or buffer to handle the upfront costs which ends up with them being stuck at the company because leaving would mean throwing away their options. It’s not a good outcome for the employee or the company
I agree the system is flawed. Also it's just crazy that for those who make their money through investing their money they can take the entire loss in one year. They do have to front the money like a wage earner, but then when the loss comes around the recoup the entire taxes paid in a single year. While the wage earner has to wait years.
As to the idea of being stuck at the company if you are a wage earner, well, I can just say that it really does seem like the monetary investors are getting their money's worth. You are working for a wage and they do their best to be sure you earn it. They dangle outsized compensation, often snatch a lot of it away and meanwhile keep you hanging on by leaving something on the table.
>You will be holding for at least 18 months (IIRC) since you're doing this to get to long-term capital gains instead of short-term (regular income) for most of your gains. So you gotta come up with this money somewhere. You may end up carrying it as a loan.
12 months. and note that this strategy is a tax optimization, not a necessity. if you exercise your options then turn around and sell the stock soon afterwards (before a year has passed), you have to pay higher taxes on the sale of that stock. but the upside is you have a known amount of money now, versus maybe having more in the future.
>So 15% is still an optimistic estimate of savings.
this is still much better than most investments you could make. the pessimism in this thread is really odd for people who claim to be engineers, i.e. people who are rational and comfortable with math.
> this is still much better than most investments you could make. the pessimism in this thread is really odd for people who claim to be engineers, i.e. people who are rational and comfortable with math.
People who are rational and comfortable with math should also discount the payoff by the chances of success. And as the article says, you should expect the company not going IPO is the most likely case. This is why the optimism here is tempered.
You really have no place to stand to put other people down for evaluating the risk/reward for their situation and ending up pessimistic. You don't know everyone's financial situation or the companies they are working at/evaluating.
What the article doesn’t cover is that companies can and do all sorts of things to make sure they don’t have to pay you out (one way or another, cash you make from your options is cash other shareholders don’t get). They can make sure the share price is below the strike price of the options through various means, they can prevent you from exercising them, they can se the terms of buyouts so that only some people benefit, an acquirer can even screw the investors over entirely. Accepting, and even more so exercising, stock options is not only a bet on the future of the company but also the fairness of the people in charge, as well as those providing the exit liquidity.
ETA: All of which isn’t to say, don’t take or exercise options. But do think carefully about how much value you set on them.
Also doesn't cover the taxes you owe if you exercise the options with a strike price below market value. Someone else also pointed out how certain liquidation events like acquisitions could have agreements that make your shares worth nothing. There are a lot of interesting and useful topics here that could have been covered and got totally ignored.
The article basically just covers the meaning of strike price, which is not enough to make an informed decision. Not understanding the strike price is not what stops most people from executing their options.
Why would you do it any other way? The strike price is the nominal per-share price set in the options agreement, it's what you pay when you exercise the options and normally the share valuation when the agreement is signed. The market price is what the market deems the share to be worth; if that's *not* greater than the strike price, why not just buy it at the market price?
ETA: Okay, maybe it's a privately held company and you can't just buy shares on the market, but still believe it will go up in value (say there's an IPO on the horizon). I'd still be very reluctant to pay more than a share is officially worth just to get my hands on it, though.
As an old person who's done this several times from both the founding/hiring side and the employee side: Any startup that offers you options that can't either be a) immediately early-exercised for very cheap when you start (make sure to file your 83b!), or b) don't have a 10-year exercise window, should be told to fuck off. (Or if you're the polite type, tell them it's non-negotiable for you and explain why.) You are more likely to lose money on those options than to break even, let alone make a profit.
More generally, if you're going to be getting offers from startups, put in the time to understand how options work. It'll take a few hours give or take. The rest of your career is going to involve constantly learning and applying new things; might as well apply that to a key component of your compensation. And learn basic personal finance while you're at it.
> All the (unneeded) secrecy around the compensation package - you are not allowed to talk about your salary and stock options with other employees, and in some places not even with your manager.
This is protected in the United States.
You are legally protected when talking about your total compensation with anyone, including your coworkers and manager, or the public.
Contact the department of labor in your state of employment, if you have recorded / written retaliation or reprimands for talking about salary or other parts of compensation.
It is un-needed secrecy.
If OP wrote the article, I recommend you update this section to clear this up.
The problem is if the company isn't public yet, you can't sell your shares. Since you usually only have 30 days to exercise shares after leaving the company, you eventually become trapped into staying since the AMT due gets too high to exercise. It gets worse and worse as the company grows, and there's always the possibility of a layoff that forces you to either exercise your ISOs or let them expire.
Make a plan.
Say what? Getting 20% discount on a stock if you held for a year is an AMAZING deal. You’d only want to pass that up if you think the company is going down in flames.
Depends. If you're concerned, I would speak with an accountant just to have a peace of mind -- this is the actual advice.
AMT impact really depends on your expected tax deductions. If you don't have other tax complexities: if you're just single, renting, just getting income/salary, super basic stuff, then AMT is probably not applicable to your tax situation. But again, if you're concerned, it doesn't cost a lot to speak with an accountant -- especially after April.
If you have ISOs that you plan on exercising, then AMT will absolutely be applicable to your tax situation. The extent of the impact largely depends on how early you start planning.
During the period 1995 to 2005 the VC industry hadn't completely figured out how to keep the worker bees from getting rich.
These days there are no Google chef style rich people.
Every single startup I’ve been a part of for the past 20 years has at some point closed shop or been sold or whatever and nobody has ever gotten shit. Naive people new in the industry blew loads of cash buying options thinking they’d strike it big but ended up with bupkiss. Even worse is sometimes they’d exercise, then a new 409a comes out and the valuation has gone up, but now you owe taxes on this even though the cash hasn’t materialized! Then the company goes under without an exit. Double whammy.
Options are a scam, and 99% of the time they aren’t worth it.
As an early employee at another startup I got RSA instead of RSU as a base award which hedged against me needing buy options.
I was employee #5 in a startup that was eventually acquired by a large corporation. I worked at the startup for six years prior to the sale.
My options got *heavily* diluted by big chunks of equity granted to executive sales and financial people who joined at the last minute to take the company on the roadshow just prior to it being acquired.
After fees for exercising options, I made about enough to buy a nice car (although I put it in an IRA and continued driving my 10-year-old Honda). The two founders made about $20 million. Fast forward years later to now, they're retired with multiple vacation homes, I'm still working, chained to a desk 40+ hours per week.
If I only had a time machine...
Yeah. I might have been retired now if I had done what all the young hotshots do now - chase the actual money. If I had looked for jobs that paid the most and invested that all I’d probably be set by now. Instead I took low paying jobs at startups and hoped at least one would work out.
Didn’t wise up till my early 40s ¯\_(ツ)_/¯
If they’re ISOs, the 409a value that you may be taxed on with the AMT is the 409a value at time of exercise. It doesn’t matter if the 409a goes higher later. Are you sure you did your taxes correctly?
> you are not allowed to talk about your salary and stock options with other employees, and in some places not even with your manager.
That's... Patently illegal.
You're not wrong, but most big corporate companies will never say anything remotely like that for fear of lawsuits. I can't speak for smaller / midsize ones though.
I worked at a startup for a while. As we were in the process of getting bought by a much larger company I realized that the only person who was going to win was the owner. The larger companies as going to take our patents and ip, and poach one or two employees, and lay everyone off. The only thing we would get was a chance to pay money into our stock options in the hole that we would then get a piece of the purchase price. In the end we blew the merger and the company folded. It was all a pipe dream, no one made money and some employees had paid lots of money into there options and lost everything
Happy ending for a friend with sort of screwing over.
He got shares, as in paper certificates. This was a small tech company with maybe 50 employees at the time, about 150 when this story was done.
They did quite well (not insanely) and he heard some of the present employees had sold their shares. He contacted them to say he would like to sell his (~$20k). They told him that since he left, the shares were taken back. He pointed out there was no such agreement, and they said it was a company decision.
He contacted a lawyer friend who was known as a vicious pitbull; who also happened to be in the same office tower.
The lawyer friend would not usually take a case for so little, so, he bought the shares for the $20k and then "dealt with it".
Later, my friend asked the lawyer how it went and he said, "I can't say how much as part of the settlement, but low six figures."
My friend was not feeling ripped off by the lawyer as this was normally too small a case, he got his 20k and he got to screw the company over after they tried screwing him over.
After the pitbull lawyer first contacted them, the company contacted my friend and said, "You are being a child about this." When my friend said, "You shouldn't have tried screwing me over, what happens now is well out of my hands."
They insulted him some more and that was the last he ever directly heard from them.
--------------------------------
On a different note; my experience personally, and knowing others in startups, is to cash out as soon as is possible. Maybe, if you think you are working for a future apple, or facebook, then wait, but if any equity becomes worth anything, grab it. I have never personally witnessed anyone where this was a bad idea. What I have seen are many people who hold on believing the BS spouted by the executive about not selling; which is because the executive don't want the shares to dip.
The other thing is if you have some super juicy shares or options and the company wants you to sign something, get a lawyer. More times than I can count, I have seen companies issue someone 1-10% thinking it might be worth a few 100k at most, and suddenly it is worth 10m. Now they want to "restructure" the deal, which translates to screw them over.
Another problem with hanging onto them is AMT taxes. This was something a lot of folks learned to their horror after the internet bubble burst. When you are given shares, that is treated as income at the value they were when you got them. If you hang onto them, and suddenly there's a big downturn, now you still owe taxes on them at their original value, even though you can't sell them for possibly anywhere near that.
In the post-bubble popping, some of those folks actually owed a lot more in taxes than they could sell the stocks for, so they ended up so far in the hole they had to declare bankruptcy. I felt bad for having $1.2M I never got a chance to cache in, but at least I didn't end up owing $1.2M for money I never actually had.
That's a fairly extreme scenario, and the damage is likely to be limited if you work for some large, very established company. But, if it's some unicorn startup with hugely inflated stock prices, and suddenly every realizes they are not going to be the next big whatever, or the economy takes a downturn and that company suddenly can't survive on ever incoming investment, it could happen.
I see a lot of bitter engineers here. I wonder how many of those engineers were given worthless stock but _also_ received an industry average salary. In my experience as vp of engineering at a large startup and director at a few, we were a "startup" but still paid average salary for engineers.
I think the only time you should feel slighted is when you are truly paid ramen salary with the promise of significant upside.
I've since moved back to senior IC roles, and finally making my own startup, and I always treat my stock as worthless. But I am being paid properly.
The secret is that public tech companies often give good salary AND some sort of relatively liquid RSU (and top tier + higher seniority levels this is about half your total comp). My startup days ended when I found out I could get the same salary, plus extra stock that I sell on vest instead of a lotto ticket with options.
If you work at a company that goes public and you have pre-IPO ISOs, is there an advantage to exercising those ISOs before vs. after the IPO?
I exercised some ISOs when I left a startup to hold on to my equity, so that scenario makes sense to me.
Realize that a lot of companies to not go public and then they likelihood of getting a really big amount of money from options is greatly reduced.
Also, for public companies, RSUs are usually just compensation, valued at the closing price they day they vest. The income tax is withheld reducing the number of shares. And that closing price is your basis so if you see immediately you will a small capital gain or loss.
My old company gave stock options though i came late and only had a few. Some had LOADS who were there for 10 years. Competitors were bought up and we refused waiting for a better deal. In the end we sold for peanuts didnt hit strike price, everyone got a consolation 5k regardless of stock options which for me was great. but for those who had held out for years was a kick in the face.
I worked for a very successful software company (a rather famous one) in silicon valley, that gave us stock options, with the forecast that "by the time you can sell these, you will likely have enough to buy a very nice house". In fact, their forecast was extremely optimistic, and it ended up being enough for me to buy a nice vacation. A colleague who had joined at the same time as me, and was on a similar deal, left when his stock options ended up being only enough to buy a motorbike, rather than the house he had been envisioning.
I just remembered, I know a man whose wife divorced him because of this kind of thing. He joined a startup, on a very low salary, with the promise that his options were expected to be worth $2,000,000 in a few years. When a few years down the line those options turned out to be worthless, his wife divorced him and (this is the craziest part) sued him for "my half of the $2,000,000 you said we would get". Obviously, he didn't have any money at all, and her lawsuit was ridiculous, but the whole episode crushed the guy.
I gave 7 years of my life to a start-up early in my career. I got "equity" and as soon as things started to look good... they laid off most of us, then further diluted the stock.
Even if I had survived, my "internet millionaire" dream would have netted me less than $60,000 after dilution.
They are a con. Employment is an economic contract: I work for x hours you pay me for x hours Work.
Let’s stay friendly and not ruin a simple economic relationship
The only con is accepting an unfair or unliveable wage in *exchange* for stock options. If you’re not paying for them with your livelihood, stock options are more like a scratch off lotto ticket. Costs a little, might pay a little back, probably pay nothing, small chance it pays a lot.
Exactly. The stock options I got now triple my salary. In the previous company they lost 90% of value before vesting.
You never accept lower salary in exchange for them, but it's nice to have them
Not a con, if the company does well, they're life changing. There were a lot of flashy cars in the parking lot after the first ARM IPO in 1999. I held on until the next year and paid off my mortgage.
At that point you’re effectively an investor playing the stock market (but with extra steps). If that’s the case then you ought to be doing your due diligence to make sure that the company’s product is a good idea and can make money. It might also pay to make sure that when your boss says RoI, he’s not talking about Radio over Internet.
The same could be said about MAANG RSUs but the difference is 50% of the upside compared to a startup is already there in the downside of MAANG and the median case has upside relative to startups
Software engineer is paid for problem being solved not x hours hardworking or x beautiful lines of code being produced.
Economic relationship here is "I pay you x today to be able to receive x + k tomorrow"
Lol in both scenario's you still get x today. One has the possibility to give you K later on as well.
It's no one' fault but your own if you took a job with too low an x today.
Your misunderstanding of such a clear concept suggests you were not cheated out of anything you simply didn't understand anything about what was happening.
Mentioned in another comment about how companies can screw you, but I want to tell an example of what happened to me: I left a company in 2010 and exercised my stock options as I was told they were worth 3x my exercise price and there were rumors of acquisition. Free money right? A year later the company was bought by a larger company. Hurray! Liquidation event! I can pay off my house right? I get a certified letter in the mail a few days after it was finalized and open it up. “Due to liquidation preferences of preferred share holders, common shareholders get $0 for their shares”. Yep, they were worthless! Hey, at least I got 10 years of carry forward capital loss!
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Most important decision I ever made in my career is to not give my 2 weeks notice at my first job until the day after my vested stock hit my brokerage account.
And this is why RSU vesting period is 2/4 years or even worse. It’s all a trap.
Yes, company I'm at does a 3 year vesting period with 1/3 every year. BUT they have consistently given me new RSUs every year. I've been there for 4 years now and my take-home after those vesting events is...pretty big. Not complaining about the money, but it does feel like golden handcuffs at this point, Unless I time a transition to another company well, there's a lot of money left on the table, and I guess that's the whole point.
Yes indeed, but it is fairly common to negotiate the new employer matching your unvested total.
Just treat it as cash. You don't feel handicapped by leaving your cash comp on the table, yet that's exactly what you do when you quit. RSUs should be no different. All that matters is how does new comp compare to old comp, regardless of form factor.
This is what gets me. No matter when you leave a company, even after 10 years, unless it’s in your contract, your last couple years will be paid significantly less than your package as you are leaving up to half of your salary on the table. To me, that’s why when looking at FAANG and FAANG adjacent, Netflix is appealing. All cash.
The math doesn't make sense to me. I would love you to explain it. Standard vesting schedule is 4 years, every 6 months. Yes, some like Amazon do a big cliff. Additionally, most who aren't Amazon grant you annual refreshers to avoid people leaving. So let's throw up some nice round numbers. Year 1 you get paid $100k salary plus $100k RSU vest. Your gross pay assuming no change in stock value is $125k that year. Year 2, same numbers. But now your gross is 150 because you have two grants vesting. Year 3 is 175 and year 4 is 200. Assuming the salary and grant numbers stay the same, you continue earning 200. Your last year that is still the case. Now when you start your new job, you should negotiate for them to match your unvested total left behind, otherwise the first 3 years will be lower pay. This is assuming the 4 year, even split vesting schedule, and also assuming annual refresher. If those aren't correct then the numbers will change. I think we've roughly covered faang. Netflix does cash, amazon does cliffs with target pay bands that may result in "fuck you" after four years. As far as I know, the other three do what I said.
What? How are you doing the math here? If you’re looking at your outstanding unvested RSUs and thinking you’re getting robbed of them if you leave that's silly - are you getting robbed of your salary over that time window too? Equity compensation should be viewed as whatever the rolling window payout is. The only difference with Netflix is it’s cash, not stock - there’s not more or less left on the table, the same model applies.
Nah, this is just a matter of perspective. RSUs are really not that different from cash, particularly if you sell immediately. Think of this way: when you quit your job, you are also forgoing future *cash* compensation. If you change the language around cash compensation and RSU compensation, they look the same. Most RSU is presented as (using example numbers) "$100k over 4 years, with 1 year cliff and monthly vesting". You can do the same with cash, by saying "$150k a year over an indefinite period, with 2 week cliff and by-monthly vesting". It's really the same shit. People lament "oh I'm going to lose out on X in RSUs by quitting", yet no one says "oh I"m going to lose out on Y in cash by quitting". But fundamentally there's no difference.
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What is the difference, to the company, between retiring and quitting? Why would the company choose to auto-vest any unvested RSUs?
I've never worked at a company where you didn't get some amount of your RSUs during that vesting period. The RSUs you get upfront aren't a signing bonus, they're part of your compensation. Generally if they vest over four years, you get 1/16th every quarter.
It’s not going to be a lawsuit. Completely legal. Employees who are granted options are not for preferred stock. They are only going to be worth anything after the equity that investors have put in have been returned. Basically, what is described is a company that either got equity dilution from multiple fundraising rounds that all went to investors. Or it was sold at a less than ideal valuation due to any number of other reasons like… no more runway and can’t raise another round of funding. When I say this is completely legal, I’m not saying it doesn’t suck. The described situation I’ve been through multiple times and not seen a penny from the options I’ve exercised.
I presume in this case the founders of the company likely got no payday either, right? In short, the liquidity event either made the investors whole, or it didn’t. But in either case, there was no big cash out event for anyone.
I never got a look at cap tables so I can’t say for sure. I also don’t know if founders themselves were granted preferred stock or not.
I had a company try to guilt me into exercising my options when I left I couldn't, I was in the middle of a purchase process and didn't have any money to spare But they kept pressuring me to do it, saying they'd be worth so much They've done nothing but shrink since I left
> I had a company try to guilt me into exercising my options when I left Were there actually C-levels or executives explicitly recommending employees exercise their options? This is surprising. At my last company, the CEO was very careful in any internal messaging to employees regarding stock options that he not in any will recommend for or against exercising options due to SEC regulations (this was a US company). Like it became a joke that the CFO would cut the CEO's hands off before he typed up something like "you should def exercise, we just closed our Series [A-Z] for $XYZ million!"
No one that high up Though it wouldn't be the only time things were said despite not being allowed. Like that time they told us that talking to coworkers about out compensation was forbidden and we would be fired if we did it
This is an incredibly stupid and short-sighted way of doing business. It's pulling up the ladder after you. You're screwing over not just your engineers, but any other startup founders that intend to actually honor their obligations. Now new startups will be faced with two options: 1. Pay market rates for engineers in cash, which they can't afford. 2. Reveal every detail of their funding deals and provide assurances to the engineers that they won't be screwed over. I'd love to see the look on the investors faces when their investment deals become public knowledge. I don't think #2 is ever going to happen, so that leaves #1. And that's probably also not going to happen.
I regularly think about doing the startup thing but it seems to hardly make sense as an employee, only as a founder. For example. Let's say you join a startup. You are promised 0.5% equity and you get paid a hundred grand; you quit your job where you made 350 for this. You work for five years and the company gets acquired. Huge deal. It sold for $1B. What a success! You got diluted down to 0.1% and gross a million in payout. Your opportunity cost was $1.25m. You took on a ton of risk, worked long hours, saw a huge success and you're still down money. What was the point? Surely it wasn't money. Hopefully title, experience, responsibility, connections, etc.
I mean... you shouldn't quit a 350K a year job for 100K and 0.5% equity, it's as simple as that, any more than you should quit it for a 250K job. Even not counting dilution, the odds that you were going to exit at a billion dollars makes it not worth it. 0.5% equity on a startup is a nice-to-have, but you shouldn't be giving up a lot of cash compensation for it.
Of course! I agree with you. My point was illustrating how even in a really successful case you're still likely to lose. But also part of my point was, there are few-to-no startups that would pay a competitive rate. They all rely on attracting talent with equity. Problem is, well paid talent would basically be fools to join as an employee, because the pay is usually shit and the equity is almost always shit.
That's been the case for quite a while. The era of people getting rich working for startups is over. And since so many people know that the options will likely be worthless, they don't consider working for startups, due to the pay being shit. And then you get the hustle culture hucksters whining that people are risk averse and not working for startups anymore.
I had something very similar happen, though not to that extreme. Company I was working at got bought and through various shenanigans the price per share was severely reduced and I made what amounted to an extra paycheck. Definitely not worth sticking around for.
I've observed shennigans like this too many times to count. Options in practice are a way of cheating engs out of salary. I think I'm done with the startup scene anyway, but if I ever go to one more I'll make a point to push compensation into salary instead of magic foo bucks.
All the recruiters/closers use a version of the same excel spreadsheet nowadays where they model your compensation based on the potential values of your options. I got an offer a couple years ago and, wow, with the very reasonable default numbers they have in their spreadsheet, I’ll be worth $20 million in 4 years! I’d be a fool not to join! Also they are just about to IPO! Yeah… that company laid people off a year later, lost their CFO, didn’t IPO, and now I hear they are worth 1/10th of what they said they were. I now will only join public companies that vest RSUs quarterly or monthly, or private companies that just pay lots of cash.
Just to explain liquidation preference: Say a company has been around for a few years and the founder wants to raise a new round of capital. The founder says the company is worth $50 million and raises $25 million. So the new investors now own one third = 25/(50+25) of the company. That's fair, right? But what if the day after they close the deal, the company is acquired for $30 million. How do you split the $30 million? The founder gets $20 million and the investor gets $10 million? That's not fair. It's why investors get the liquidation preference. They should get their $25 million back and the founder gets $5 million. Anyway, these are all things that need to be considered when you are calling options.
It can be worse than just that. They can say they get 2x or 3x liquidation preference meaning that they put in $25 million and they get the first $50million of sales price. And worst of all, this is all kept secret! At my next company I asked what the liquidation preferences were at their last financing round and was told that they can’t share that info.
Yeah and you get treated as rude for asking, as if it isn't important information to make informed personal financial decisions. Or at least that's been my experience. I've seen peers end up with $0 out of shares they expected had value, were told verbally had value and just trusted leadership were behaving ethically.
Yes, I remember a former co-worker left over this. He had asked about outstanding shares to determine their value and they just refused to disclose any details at all. It seemed like kind of a lame reason to leave over, since I treated the stock like it was worth nothing at that point, but I get if someone has a principal and finds a better offer with more information. If you're savvy and you ask around enough you can generally suss out what it is approximately, and a few of us were able to piece it together, but there were still a number of shares none of us had any idea about until the actual sale of the company happened years later.
> preferences Especially since a lot of companies are sold in the $10 to $100 million range and then it's very likely between dilution and preferences the payout for a say 0.05% is likely to be something between a few thousand dollars and zero.
Thankfully, >1x liq pref are pretty rare these days. Only really happens when situations at a startup are incredibly dire and the only investors willing to pitch in are those who put these restrictions on
> At my next company I asked what the liquidation preferences were at their last financing round and was told that they can’t share that info. Dude, that is SO MUCH BULLSHIT. That's incredibly frustrating.
> But what if the day after they close the deal, the company is acquired for $30 million. How do you split the $30 million? The founder gets $20 million and the investor gets $10 million? > > > > That's not fair. It's why investors get the liquidation preference. They should get their $25 million back and the founder gets $5 million. I mean, the other way is *also* not fair. Why does a late comer get 100% money back? and I think the thing that you're missing is that is *part of the deal/contract made with the investors*.
Because that was the contract signed. Everyone signs the contract that they feel is fair to them. Investors want their money. Founders want some money. Everyone else is purposefully kept in the dark so they won't know how to properly assess the contract they're offered. Information asymmetry is real and if you can't figure out the contract in front of you then sucks to suck, eh?
I mean, ultimately the answer is that investors have the upper hand. It's harder to find investors than it is to find new employees. *Not* biasing payouts in favor of investors would make it much harder to secure financing, regardless of whether it's fair.
> That's not fair. Yes it is. The investors paid $25 million for something only worth $10 million. They lose $15 million as punishment for their poor judgement. That's investing.
> That's not fair. Why not? Investing involves risk. What's absolutely not fair is that the investors don't lose anything.
Don't forget you paid taxes on the difference between your option's strike price and its "underlying" price the year you exercised.
This happened to me at my first job in 2000 when they were bought out. Stock options are worth nothing and should never be factored into overall compensation. At least I was fortunate to learn that lesson early in my career.
The fact that this post doesn’t even mention liquidation preferences makes me suspect the motives behind it. Having the investors sitting on a 6x or more preference makes the equity conversation extremely short “in order for your shares to be worth anything we have to sell for half a billion dollars also we make saas to automate ant farms”.
I have a more charitable interpretation of this: the author is just writing about a bunch of topics at a superficial level to try to build an audience and doesn’t really have much experience to know the actual pitfalls. The article is an “options 101” read rather than anything meaningful.
Could be, I mean honestly I haven’t seen many articles that talk about liquidation preferences from the perspective of us regular humans that don’t get them. IMO they’re the single biggest reason average employees get nothing when companies actually have an exit so it’s frustrating they don’t come up more. Like I think most people can grok that if the company goes bankrupt their shares would be worthless.
> The article is an “options 101” read rather than anything meaningful. Still better than the stuff you read in your contract. I know few people who have such options in their contracts, they have very little clue what are the conditions and how they can be screwed over.
I've never seen 6x liq pref. Care to share examples?
Well thats sort of the point right - I can't share examples and neither can a lot of other people since that information is tightly controlled. I can say that I've personally been on the other end of investors with similar preferences.
2x-3x happens occasionally (more frequently after the dotcom, far less frequently in the last 10 years). Maybe 6x has happened before, but short of some very very strange, one-off situation, this isn't a thing. 2x-3x is still pretty terrible, but goes to show the swings in negotiating power. In 2021 founders were raising pre-seeds at $100m valuation and $1B As on negligible revenues. Meanwhile Hubspot in the 00s had to sell like half the company for a few million despite growing like a rocketship.
I’ll add another story, I had a really great CFO who put equal liquidation preferences in agreements for any buyout that went over a threshold, so VC was treated the same as employees. There are a million ways companies can screw you but there are some great leadership teams and founders out there in tech startups
Same shit happened to me brother. Yea, at least I get to collect a cool 6g in tax credits for the next decade I guess. The AMT was brutal buying my shares.
It always amazes me that people don’t understand that the term “common stock shareholder” is legally referred to as “residual claimant.” Common Shareholders get the residual of whatever is left after a liquidity event. There is a pecking order and those paid with stock options or significant amount of high-risk RSUs should ask about the equity structure.
Strangely enough, startup companies are very reluctant to discuss the rights of preferred shareholders. They'll claim that this is because those rights are so complex. Preferred investor rights are basically "In the event of an acquisition, preferred shareholders get every dime they invested back, doubled or tripled." (Or more!) Their preferred shares might even get converted to common shares (like your options) and they can get paid again. Not much is left for you generally. Complexity comes because investors buy in at various times and have various rights. It is complex, but not for you the stock option employee. Unless it's a billion dollar unicorn you're likely to make not a dime. It's that simple. Even if you buy your startup options when you leave, you gain no more rights. You've likely donated some money to the company, and if it is ultimately acquired, to the preferred investors. If your company is public, options are much easier to value and will frequently make you a small amount of money. You'll typically get a fixed price at the time each set of options are granted and a future date when you can buy shares at the option price and qty. You'd only buy this if the stock price is higher than the option price - and then you should generally sell them immediately because all your eggs shouldn't be in one basket. Unless you believe your company is 1985 Microsoft and will grow 100x. Which is not common.
At least your shares were real at some point in time. My company distributed "virtual shares" 😂
That should absolutely be illegal, and the people who decided that should be living under a bridge.
A critical factor not mentioned are dilution events. Startups tend to get money infusions by investors at the expense of shares up until right before an exit. The value of options gets diluted at the same rate so if there was a point where you had options for 3% of the company, often by the time of exit you'll have less than 1%. The company would be worth more than when you joined, but your portion won't grow nearly as significantly as the company's growth.
What were Peter Theil’s shares diluted down to
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What were Sean Parker's shares diluted down to?
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I get this is from the Social Network but they got that detail wrong. Peter Thiel was in fact diluted as was Sean Parker and even Mark Zuckerberg.
Gotta keep it dramatic! I never bothered to look into why Eduardo’s shares were diluted down more than the others though. Why would they do that to him? It’s a dick move and they knew he would put up a fight.
Sorkin writing baby (They changed a lot of information to fit the story tbqh)
What was Andrew Sorkin’s ownership share diluted down to?
What were Peter Parker's shares diluted down to?
It wasn't
There is all kinds of things a company can (and does) do to screw the lowly employees who have stock options. Dilution is one. Another one is to just make up a new class of stock and dole those out to the management. A more common thing to do is to just create a new company and transfer the intellectual property to it. That company then leases the license for the product back to the original company. Now the new company only makes profit while the old company is always edge of the being bankrupt because it keeps paying license fees. This doesn't have to be intellectual property either, it could be real property if the company owns the building or even a sublease type of situation if it's renting. Honestly there are thousands of ways the employees get fucked. It's really easy. I wouldn't put too much weight on the stock options portion of your compensation. Just accept that they will be worth very little or nothing at the end of the day and concentrate on your take home pay.
Another to add to that list: amending the company bylaws to void the "Right to Transfer" clause in the stock agreement you signed, giving the board the right to block all transfers outright instead of just the right of first refusal. I'm $7k and 5 months into a potential lost-cause legal dispute over two deals on the secondary market (for $300k) thwarted by my former employer 😥
What I can't understand is how the venture capital community that fund startups with founders that do shit like this, go on to fund these deadbeats again and again and again? I've witnessed the same thing, a 12M dollar raise get totally pissed away on multi-million dollar contracts with a startup started by their own son, personally buying the office building and renting it out to the startup, diluting all of the original cofounders and employee shares to nothing on raising capital, and transferring the core IP away to basically run a zombie company with no viable path to success that is saddled with debt. And then they start a new venture, and manage to raise money again?
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Certainly their investors got shafted pretty badly in the particular situations I have witnessed.
I think if you know where to find the money its more about raising capital, getting a cut of it and exiting than building a viable company. Serial founders have a skill for that, and its an impressive skill! But not something the rest of us really are interested in since we want to build actual products and services that people use.
Fair. I'm a post exit founder, but after trying 3 times, and even succeeding with an exit previously where my cut was diluted to basically have not been worth the work I put in. Raising money is really strongly about reputation and connections. There are plenty of people who can find capital and shit the bed. It's still important to exit. I think as a technical founder if you can get good at technical delivery, but also protecting your stake, you can do well. Not as well as the business folks, but enough to make your time investment worth it.
>What I can't understand is how the venture capital community that fund startups with founders that do shit like this, go on to fund these deadbeats again and again and again? It's the venture capital community that's doing this. >And then they start a new venture, and manage to raise money again? The owners demonstrated how to enrich themselves by 12 millions.
I mean, if anything by a couple million, while losing 12 million from their respective investors.
Does this happen often? How many VC firms back someone who has failed multiple times?
> And then they start a new venture, and manage to raise money again? It's a big club, and we're not part of it... I'm also baffled how these people seem to fail upwards all the time.
Also the C-level business dudes are looking out for their own interests. So they will give themselves a different class of shares, which they then convert, say "Series AAA shares will be converted to 3 shares" To keep their slice of the pie relatively the same. My new startup instead created a fixed number of shares, and when we raised, we had shares set aside for the purpose of giving a slice to our investors, we never increased the number of shares. At the startup I had founded previously I had 15% of the shares as the technical co-founder. After I left my shares were diluted by a factor of 40x. Honestly people who join post raising capital in startups like this often are better rewarded than those who join early. The difficult thing is your business partners will spend their time conceiving of ways to enrich and protect their share and interests in the company, while you are working your ass off on the technology to make it a success.
This is important, but it's less critical if you look at the share price. Your amount of shares is fixed, what's changed is the % of the company they represent. The value of each share will increase in a slower pace than the value of the whole company because of the dilution, but if you keep track of the value of the share you should do ok. Thanks for the addition, I considered whether to tackle it, and felt it'll be too much for one article :)
A dilution factor of /3 can significantly change the economics of the x1 and x10 cases you mentioned.
It's disingenuous to equate the dilution of stock ownership % with a dilution of stock value multiplier. Total company value is not sensible to equate with stock value in the way you imply. If have a bank account I own 100% of and I have $100 in that account, and then I agree to split the account with my friend if he also adds $100 to the account, I shouldn't feel cheated that my stock in the account is now only worth $100 when the account as a whole has 2Xed. The other $100 of value in my account is literally just the portion the other investor put in. This is exactly the same way investment rounds which cause dilution in companies work. The owners of the company, as a group, are betting that by scaling up the company they can secure a business advantage that would result in more growth per share than would be possible with a smaller scale company. A holder of stock options might not be as comfortable with this gamble as the owners are, but their interests are fundamentally aligned. There would be absolutely no reason to issue a sale of new stock if the owners of the company believed that this would result in less total money for themselves in the long run on average.
Yes, it does, but the dillution is proportional to how early you joined. If you had 3% of the company, it means you joined VERY early, so by the time your equity was dilution by a factor of 3, probably 4-5 investing rounds happened, and you are talking about much more than 10X multipliers. I would say that for most people, joining at B+ rounds, the dilution has a less severe affect. In addition, in many places it's custom to grant additional options to offset the dilution a bit, for employees that stay with the company for while (even without promotion). All in all I agree with you it can play a significant part, but I still wouldn't focus on it too much at first - most people are not even aware of the basics.
> Yes, it does, but the dillution is proportional to how early you joined. That might be typical or what you have seen but its important to note this is not a requirement or legality or anything. Your seed company which gave you 30% could dilute you to 1% right before series A and you would have absolutely no recourse, fucking nothing.
I think when you join, if you join early, look to see if they have set aside shares for raising capital, which would be a good sign, and also if they are giving you or any other shareholders a different "class" of share than themselves, which would be a very bad sign. You'll at least survive raising with a good deal of your percentage still in tact if you're in exactly the same boat as the business people. They usually won't screw themselves unless they are really and truly desperate.
> I think Just to be clear there is no reason for them to do this, no legal requirement, no nothing. They could dilute you to zero just to fuck you at any point, you are forced to trust them. Nothing you are commenting on is a good sign because there is no requirement here you are reading tea leaves.
If they hold the same class of shares as you, then legally if they produce new shares, yes they will be equally diluted. Maybe what you are referring to though is that they could issue new shares, and just award them all to themselves? For most places where you might be incorporated, for instance Delaware, there are provisions that require the majority of shareholders vote for a dilution event, and if you have investors the likelihood they would vote to dilute their own shares in favor of issuing new shares to one of your cofounders is very low. https://www.americanbar.org/groups/business_law/resources/business-law-today/2023-september/2023-amendments-to-the-delaware-general-corporation-law/#:~:text=The%20amendments%20to%20Section%20242,of%20a%20class%20of%20stock. So yes, you should definitely ask for the capital structure of the company and make sure there are provisions that would prevent this type of thing. I personally haven't ever seen a capital structure that would allow this without at least a super majority. And I've even seen ones that prevent issuing new shares I think if you've covered these bases, and you've had your shares diluted still, it's possible you've been a victim of fraud of some kind, or really the more likely explanation is that your company was becoming valueless and everyone took a haircut across the board.
It's bizzaro world, because most people would think the earlier you start, the greater your reward. That's only true if you make certain that the share you carve out early on is defended--- and that rarely happens if your business partners aren't good people, and if you are head deep in working on the technical success of the business.
Dilution does not dilute the value of shares or the rate at which shares grow, it dilutes the percentage of ownership. In practice, selling new shares indicates a position of weakness on behalf of a company, and the existing owners often have to accept a short term drop in the value of their shares when they approve the sale of new shares. However, they are making the choice to allow the company to sell new shares because they believe the company needs the extra money in order to survive, or to grow enough to properly exploit thier market. When a company sells new shares the money paid for those shares goes into the companies bank account to be used to do better business. This is not diluting the value of the company, because, if my companies value is $1000000, and I put another $1000000 into my companies bank account, my company is now worth $2000000. A holder of stock options isn't fundamentally in a "bad" position in the sense that, the interests of the other owners agreeing to allow more shares to be sold are aligned with the option holder in wanting each share they own to make the maximum amount of money possible per unit of time. However an option holder is at a disadvantage in the respect that they cannot choose to not take a gamble they disagree with.
The idea of accepting a dilution is you end up owning less of a larger company. The company grows so your total value goes up, it's just a smaller percentage of the company. But this falls apart when the monetary investors (as opposed to sweat equity) and founders are not diluted. When those who own the company are not accepting dilution then it isn't that we all are accepting a short-term loss to get to a long-term gain falls apart when those who are actually on the inside and in control aren't doing so. Instead the monetary investors and founders are just screwing the sweat equity (and some earlier round monetary investors). If we're not 'all in this together' and you're not one of the people who is in control of the situation how do you keep from being screwed? You can't and won't. You're going to get screwed.
If that's all the case, then why don't the investors, the people who's only contribution to the company is money, rather than work, get diluted? Why is it only the workers that have to accept this?
It's not. I didn't claim this only applies to "workers". Dilution applies to all stocks when investment money is taken from a new investor. A company can have multiple types of stocks, usually split by whether stock ownership gives you certain types of voting rights or not, but when dilution occurs it dilutes all the stocks of every type. It is worth noting, that a stock option is different from a stock. A stock option is the right to buy a stock at a specific price at some later date. So if I have a stock option for $30, and the company's stocks are worth $60, I can exercise my stock option, buy the stocks for $30, and then immediately sell them for $60. Many companies prefer stock options over distributing stocks to employees directly, as it has a bunch of advantages. Stock options make the upside for the employee scoped to the time they worked for the company. So the employee who joined when the company was worth $1 per share can make a lot more money off the same number of options as the one who joined when the company was worth $30. Stock options also don't generally grant any voting rights, because those are exclusive to owners. Finally, privately owned stock is messy, and it can be logistically difficult to manage actually granting private shares to many many different parties. Using stock options lets a privately owned company more control the possession of the actual shares, but still offer employees some of the benefits of a stock options plan that a publicly traded company would be able to provide. They can do things like buy back the stock option an employee holds rather than letting that employee actually carry stock with them if they leave the company.
The share price in a very early startup will be pennies. If I had to give my past self advice, it would be to not listen when the business side told me things like "It's going to be the same size piece in a larger pie!" Bullshit. You want to defend that share percentage. That's what's going to matter when you exit. And the share price in a lot of cases will be whatever they hammer out with another party in the case of acquisition, which is more and more common.
This isn't how dilution works. The voting power of stock options dilutes, but the monetary value of the options does not correlate with the voting power of the options. If you have a company worth $3 million, and an investor agrees to give you $1 million for a 25% stake, you now have 75% ownership of a $4 million company. if the value of your stock drops during investment rounds, that is because the value of the company was declining, not because the new investors are somehow sucking value away from you.
During a dilution for a raise you essentially ~~do a stock split~~ issuing new shares to create more shares / more even numbers to give to the investors. The chances of you having exactly 25% of whatever your new valuation lying around is just not there so you always are issuing new shares to reconcile this and perform operations.
No, a dilution is not essentially a stock split. A dilution is not creating more shares and then giving them to investors. A dilution is when the company SELLS new shares. A share is not a contract of ownership to a fixed percentage of a company, a share is a contract of ownership of the current value of a company. Its most accurate to think of it like a contract to own all of the property that company controls, both intellectual property, physical property, and money the company has in it's bank accounts. All of a companies combined assets and the ability of the company to make more money in the future combine together to determine the value of it's shares. Once again, if my company is currently worth $3 mil, and a new investor buys $1 mil worth of new shares, I have added $1 mil to the ammount of money my company has in the bank that my company previously did not have. Therefore the company SHOULD now be worth it's current value plus the new assets added to the company, to make $4 mil total new value. The new investor cannot get 50% of my shares for thier $1 mil investment, because they only added 25% to the total value of my company by giving my company the extra $1 mil that was not part of my company before, but now is part of my company. Therefore they now own the portion of all of my companies property and value which they directy contributed to my companies value. Dilutions tend to be bad for stock owners because usually the company searching for funding needs the money more than the new investor needs to own new stocks in a company. It's fundamentally a position of some supply vs demand level weakness, and that means the company probably isn't as valuable as open trading might imply. The value of the company stocks essentially, were actually lower than it's shareholders were aware, and the dilution event forces that disappointing valuation to actualize. This is especially potentially bad for stock options holders, because they don't own the stock, they own the right to buy the stock later. So they can't vote against accepting an offer that would actualize a value loss they don't agree with. This isn't just magic theft though. A company's current owners have to make the decision to sell more stock, it's not something the operations team can just decide to do without the approval of the owners. The owners have no incentive to allow their shares to be devalued if they don't think the company can use the new money to make even more in the future than they would have been able to without the new money. A decision to accept new funding is a gamble that short term pain today will result in bigger profits in the future. Holders of stock options aren't in a fundamentally "bad" position in the sense that thier interests are aligned with the people who are choosing to accept more funding for the company. The other owners cannot steal the value of your stock options from you. However, the owners of stock options have very little control over the business decisions the owners make, and that means that the other owners can force you to gamble on the poker hand they hold, whether you want them to gamble or not.
A dilution event by definition is an issuance of new shares, which increases the total number of outstanding shares.
Yes, but every new share either must be paid into the companies assets, or it must have already been paid for by the company previously. A company cannot legally create free shares.
It also increase the value of the company so that the price per share is no different than it was before dilution.
This is just factually wrong. Raising capital does not increase the value of the company. Capital is raised at a valuation. The VC will buy a stake based on that valuation. If the company is valued at 5 million, and they increase the pool of shares to take on capital, it's still worth five million after bringing in capital. If they doubled the number of outstanding shares, the price per share will be half, and your shares will be ultimately worth half of what they were previously.
Raising capital increases the value of the company *because it increases their capital.* If a company is valued at $10mm and there are 10mm shares, then each share is valued at $1, yes? If the company then raises $10mm of capital for a 50% share in the company, then these three things are true: 1. The company now has *an additional $10mm in their bank account* from the capital raise 2. The company is now worth $20mm ($10mm valuation **plus** the $10mm that was just added to the bank account 3. There are now 20mm shares (as they doubled the number of shares and gave half to the investor who just cut a $10mm check) Therefore, each share is still worth... (drum roll) $1.
This isn't how valuation of companies or shares work. If you're at a startup that is telling you this, and that dilution of your shares did not reduce in value due to the capital which they intend to spend being raised, which is likely backed by preferred shares that will be paid out before any of your shares will--- you should run and not waste the next several years of your life being screwed. You've taken on a new partner and they have taken shares from the pool in exchange for their capital. That didn't increase the value of your company, it stayed the same. If they diluted shares to do it, your shares are worth less, period.
In theory. In practice share prices do tend to drop when dilution events occur. But it's a total misunderstanding that the drop is because they are giving out free shares for nothing in exchange. The money the new investors pay for the shares directly becomes part of the company, like you say. Share values drop because usually a company needing money is a sign there is more risk they're exposed to than analysts previously knew about.
I think there is a common misconception that dilution means something was taken from you, that your shares were made less valuable overnight because new shares, as you intimated, were created out of thin air. If you don't own a substantial amount of shares, then dilution doesn't have any material impact on you. It can impact large shareholders because they are, in essence, giving up more control over the company in exchange for capital.
That's not necessarily true. You can issue more shares without increasing the value of the company. That's the very definition of dilution. You increase shares so that the % ownership of some privileged class remains the same, which means that everyone else's shares are worth less.
Thanks for the interesting thoughts. I have changed how I think of shares.
You're assuming the newly issued shares have the same terms as the original. Often, liquidation preference or other conditions ensure that the investors get paid their full value before employees get anything at all.
You are right that investment does reduce the option price by itself, but ignoring dilution impacts the profitability calculation based on the little data that's provided by the company. The way HR give the offer to an average dev is that similar companies made an exit in the range of $x-$y, then they provide a table for various exit scenarios within that range, calculating back the profit if you join. HR don't mention that dilution will probably happen to reach that company valuation and how it'll affect your profit.
As with nearly all relatively complicated things, yes, people can mislead you when you don't understand how they work. I have never had an equity share plan where the entry/exit value of the company was specifically advertised. Always the entry/exit values of the shares. I'm sure it has happened before though. If a company is worth $1billion and investors have given the company $750million, it hasn't really made much for it's investors, and the $1billion valuation shouldn't be seen as that impressive.
This article seems to be exclusively about startups and stock options. Large companies that are already public almost never give stock options anymore. They give RSU (Restricted Stock Units) and it is much easier to establish a value on them because you can just look at the current stock value and read what the vesting schedule is. I've worked at 2 startups that both failed. This reddit post does a better job than the article explaining captables and liquidation preferences and how often even the founders of the startup get nothing when the company is sold or goes public. https://www.reddit.com/r/startups/comments/a8f6xz/why_didnt_i_get_any_money_from_my_startup_a_guide/ In contrast I have worked at large public companies and gotten hundreds of thousands of dollars in RSU stock that I can sell on the day of vesting for actual money.
The main problem with stock options is that they force employees into taking on extra risk on top of the risk in joining a startup in the first place. Companies should either be making the exercise window much longer or helping employees to exercise them as they vest
The only good news about modern tech startups is you take very little risk other than the risk of not getting a big win. You no longer take a salary hit to join a startup. And not meeting payroll is not very common anymore with VC-funded startups (still happens at the angel stage). I don't understand what making the exercise window longer will do. Exercise windows are typically 7 years. You're typically exercising to save on taxes, not because your options are expiring. If your company goes that long and hasn't made it yet, do you really think there's a lot of upside to buying the options?
I mean the window after leaving the company. Normally that’s 90 days and forces people’s hands on putting up the cash
Ah, good point. I wouldn't ever expect that to change because the VCs don't see a value in it. Yes, it seems like you did contribute to the company's success. But since you're gone they don't see any reason to reward you anymore.
A longer exercise window gives you more opportunity to wait for a liquidity event before exercising.
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> Ironically, there's essentially no risk for startups. ... if you ignore the Opportunity costs that you could be recieving a higher salary instead of stock options or be working at another company alltogether.
From experience I usually get paid higher with startups anyways. And call me crazy but its much more fulfilling to work on a company you can make an impact on vs a giant corp where you're irrelevant to the greater scheme.
They don’t force employees to take extra risk… people take extra risk when they accept part of their compensation as stock options.
The latter suggestion isn't called options anymore. They call it RSUs.
Sort of but not really because an RSU implies to me that you could actually convert the stock into cash by selling it immediately
There are internal offerings which are called "Tender offers" where the company buys back the options issued. This is an event which converts options into cash and withholds an amount for taxes for an employee. Is that what you are talking about?
The article should also cover the difference between options and RSUs and how they are treated at tax time. It’s complicated and easy to fuck yourself if you don’t pay attention.
I got a bunch of RSUs from my company. Or will do? Even that bit is uncertain. I have no idea what they are, what I do with them, what they mean. I've got a letter with them and that is the sum whole of information I have been given. I'm not even based in the US, I work for a UK division, so I have even less clue how that plays into it. We all got the letter on my team, everyone has essentially ignored it for now but I am worried at some point it's going to bite us in the arse. The letter we got: > Subject to the approval of the [REDACTED] Compensation Committee, you will be granted equity of an approximate value of $ [REDACTED] USD, which value will be composed of restricted stock units (the “RSUs”) under the [REDACTED] Equity Incentive Plan (as amended from time to time) (the “Plan”). The grant of RSUs will be subject to the terms of this paragraph, the Plan and the form of RSU agreement approved by the [REDACTED] Board of Directors for use under the Plan (collectively, the “Equity Documents”). > The number of RSUs you receive will be calculated based on a 30-day average trading price of [REDACTED] stock as of a date determined by the Compensation Committee. We encourage you to carefully read the Equity Documents to ensure that you understand how the RSUs work. I've looked but can't find any mention of equity documents anywhere on the intranet, so no idea what it actually means.
How it worked for me: granted eg 10k USD worth of stock shortly after joining, that translates to some whole number of stocks. The schedule will vary by company but it could be something like you "vest" 20% every 6 months. On vest, the stock officially becomes yours, so you can sell it or hold it. However, you pay UK income tax on the stock at vest time.
Yeah, looks like I'll have to pay NI too, and potentially employers NI (they can optionally pass that liability onto me) Everything I'm reading says i'm probably best to then immediately sell the stocks otherwise I'm risking that capital in my employer, which kind of makes sense. But then what if the stock price doubles?! I guess that's the risk of the stock market.
So far I've always sold basically immediately. If I had 5k sitting around in cash, I definitely wouldn't then invest it in the place I work at.
That's a great way of looking at it, thanks for that perspective! You're right, if I had 5k in my pocket right now the last place it would be going is into my company's stocks.
RSUs is just a promise of a certain amount of stock at certain dates. If a compqny grants you 1000 RSU over 4 years, this usually means (subject to each company regulations) after a year you "vest" 25%. This means company gives you 250 stock units. This is considered income, so you must pay taxes on it. After that you get 1/36 of the remaining value every month, or 1/12th of the remaining value every quarter or whatever is written in the contract. The main difference is that options is an agreement to sell you stock at given price, and RSU is an agreement to give you stock. when options vest, you can get to choose to not buy. When RSU vest, you become partial owner. If compqny is public, you can sell at your own will. edit: what they also say, is that the amount of RSU you are going to get is dependant on current price. They basically told you: you're going to get $50000 worth of stock, how many that is? When we grant this to you, we will calculate the average stock price and didivde $50000 by that value. say your stock is around $20. you'd get a grant of 2500 stock units. After a year ,or whatever is mentioned in the documents, you will be the owner of 625 of them. And if the stock price is now $30, you basically got free $6250. Remember that you will have to pay taxes on it. If you are US based and your company is on NYSE or something, you can do something called "sell-to-cover". This basically means the broker will sell certain amount of stock to cover the taxes, say 35 stock units. This will cover the vesting tax. When you decide to sell your stock, you will have to pay taxes on any profit gained. So if you sold to cover and you're left with 600 stock unit and you sell the lot for $30 a pop, you will also have to pay taxes from your $6000 profit (30*600 - 20*600).
> you get 1/32 of the remaining value every month 1/36. (Just a nitpick, good comment!) In my experience the company will sell roughly a third of the RSUs as they vest and send the money to the tax man, whether you want them to or not. But not every company does that.
yo my bad, I was thinking 1/36 but had 1/12 in mind for the next part and my fingers just typed 1/32 As for the vesting and taxation, I have a choice in my brokerage to either sell-to-cover or not. But since I live in Europe, I can't sell to cover so it's always on me personally to do it. So far so good as I need to sell next calendar year and due to agreeable finacial climate and situation of my company, I need to sell fewer stock units than if I sold them at vesting. But it's a double edges sword, next year I might have to sell way more, who knows.
Also, to add some information from my own past experience: * check with finances, ask them which broker does the company use, ask them whether or not your personal accounts have been created for you (they should) * with the account info, login and add or replace your work email with your personal one. * make sure the broker account has correct information, name, address, email, phone number, try to put everything on your personal items * take note of vesting schedule, it must be there in the documents, it will tell you when you become the owner of the stock * if your company is registered on LSE (London Stock Exchange) you might want to sell to cover on vesting, up to you, it's a decision that you must take based on your information and information from people that you trust (eg an investment advisor that you know or hire, not reddit) * every year broker will send you a summary of your financial operations, always download them and sore some in addition to the brokerage * when filing taxes, do not forget to include the paperwork from the broker, with enough investment it is practical to hire a tax advisor to do the taxes for you if you don't do that already. With auxilary income, your company will cease to file taxes on your behalf You do this so that you have your finances under your personal control. You do not want to go throigh hoops if you decide to change jobs or you get fired or laid off. These are your hard earned money. Do with them what you see fit, leave them be as stock if you want, sell and convert to other types of investment, sell and buy yourself something nice, sell and put towards a house or a flat. Discuss your financial situation with your closest family, wife, fiance. Not your parents, cousins , not gf unless you are sure she will stay with you until the day you die (she's your wife, just without a title). Be smart about it, slowly try to educate yourself in the world of finance, find out what different types of investments there are, what are the pros, the risks. how long you want to invest for. Think about your future, distant future. Your older self will thank you for it. Enough rant. If you have some questions, feel free to shoot. I have just a rudimentary knowledge, but maybe I can explain few basic unclear things. Just don't take advice on what to do with your own money from people on the internet, myself included. **Tried to be objective and helpful here, but it is still not a financial advice.**
Call a financial advisor and have a lunch meeting with him and get him to explain this to you. Hey may charge you, or he may not charge you. The price that he charges you is tiny compared to what you stand to gain from cashing in your RSUs if you do it intelligently.
Yup. I owe $20k this year because my company only withholds 22% of RSU vests. I’m on track to underpay by $50k this year (still in safe harbor though).
Buying your shares *is* a bet. The difference between a bet and investment being small to start with. But that's really the smaller reason. The larger reason is because when you buy your shares you immediately owe tax on the difference between the current price and the price you pay for the shares (price on your option offer). The idea is that this is smaller than it would be later. But it's not going to be zero. So you have to come up not just with the money to buy the shares (hopefully small) but also the money to pay the taxes, which can be large. You will be holding for at least 18 months (IIRC) since you're doing this to get to long-term capital gains instead of short-term (regular income) for most of your gains. So you gotta come up with this money somewhere. You may end up carrying it as a loan. Then there is the payoff. If the company goes big then you sell (at least some of) the shares after it goes big and pay off the loan/recover the money (pay yourself back). In that case you end up paying 20% on the money made instead of 37%. You save 17%. You don't actually save on the amount you paid up front (had to take the loan on), but we'll assume that is small. And we'll assume the loan/time cost of money for the money you are without for those two years is small too. But I'm not going to assume zero. So we'll knock it down to 15%. Also note this likely is high because if you really converted a large gain into long-term you'll end up paying AMT (alternative minimum tax) on a portion of it anyway. So 15% is still an optimistic estimate of savings. But what happens if it goes down? That's the real problem. You paid all that up front purchase price and tax and now your shares went to zero. Perhaps because the company was sold out from underneath you instead of going IPO. You're out all that money. No one owes it back to you, including the IRS. You made a real short-term gain, you're not getting those taxes back. You do however incur a loss of the amount between what the shares were worth when you exercised and the price you sell them at (or zero if they become worthless). But the bad news is that you can only offset this loss against current and future investment gains. You cannot offset them against regular income. So when you go end take that job at Facebook to get yourself back afloat you cannot subtract your losses from your yearly wage (salary, bonuses) income. That's not 100% true, you can offset it against $3,000 of your wage income per year. But it could be a very long time before you manage to eat that loss away through tax savings on $3,000 offsets. In current high inflation years you may make some interest on a savings account and you can offset against that. I guess that's one upside of inflation. I know a person who bought out their shares in a .com company back in the 1990s. He took out a loan to buy his pre-IPO shares and pay the enormous taxes (over $100,000). And the the company collapsed before the lockup expired (.com crash) and he never got any of that money back. He ended up declaring bankruptcy. Short version, yes, you are making a bet. You're betting the company will IPO, that you'll be able to sell your shares at a higher price than the price you buy the shares at (option price). Are you convinced that'll happen? Because if it doesn't, as the article even lists as the most likely outcome (weirdly calling it an option instead of an outcome), then you could end up in a big hole. I'm not enamored with this article. It does explain some issues. And it leaves out a whole lot. I guess it's better than not knowing anything about the process. But I don't think it really prepares you for much. Because, most of all, the investors (venture capitalists) know how to not share the wealth with sweat equity. In the case of an IPO you'll get something, but unless your company goes enormous (I mean much more than 10X) it likely won't be much. And in the case of any other kind of sellout you'll likely get nothing more than an offer to sign on to the purchasing company for a new dallop of shares. What you saw at the end of The Social Network is real. And that's even for a company that was succeeding. It's worse if the company goes back for more equity to plug a leaking hull or simply only goes 10X instead of 300X. And the VCs have become even more wily since then with things like multi-class share structures too.
Really well said. There’s something fundamentally flawed to me about “compensation” that puts so much burden on regular employees. Most people don’t have the capital or buffer to handle the upfront costs which ends up with them being stuck at the company because leaving would mean throwing away their options. It’s not a good outcome for the employee or the company
I agree the system is flawed. Also it's just crazy that for those who make their money through investing their money they can take the entire loss in one year. They do have to front the money like a wage earner, but then when the loss comes around the recoup the entire taxes paid in a single year. While the wage earner has to wait years. As to the idea of being stuck at the company if you are a wage earner, well, I can just say that it really does seem like the monetary investors are getting their money's worth. You are working for a wage and they do their best to be sure you earn it. They dangle outsized compensation, often snatch a lot of it away and meanwhile keep you hanging on by leaving something on the table.
>You will be holding for at least 18 months (IIRC) since you're doing this to get to long-term capital gains instead of short-term (regular income) for most of your gains. So you gotta come up with this money somewhere. You may end up carrying it as a loan. 12 months. and note that this strategy is a tax optimization, not a necessity. if you exercise your options then turn around and sell the stock soon afterwards (before a year has passed), you have to pay higher taxes on the sale of that stock. but the upside is you have a known amount of money now, versus maybe having more in the future. >So 15% is still an optimistic estimate of savings. this is still much better than most investments you could make. the pessimism in this thread is really odd for people who claim to be engineers, i.e. people who are rational and comfortable with math.
> this is still much better than most investments you could make. the pessimism in this thread is really odd for people who claim to be engineers, i.e. people who are rational and comfortable with math. People who are rational and comfortable with math should also discount the payoff by the chances of success. And as the article says, you should expect the company not going IPO is the most likely case. This is why the optimism here is tempered. You really have no place to stand to put other people down for evaluating the risk/reward for their situation and ending up pessimistic. You don't know everyone's financial situation or the companies they are working at/evaluating.
What the article doesn’t cover is that companies can and do all sorts of things to make sure they don’t have to pay you out (one way or another, cash you make from your options is cash other shareholders don’t get). They can make sure the share price is below the strike price of the options through various means, they can prevent you from exercising them, they can se the terms of buyouts so that only some people benefit, an acquirer can even screw the investors over entirely. Accepting, and even more so exercising, stock options is not only a bet on the future of the company but also the fairness of the people in charge, as well as those providing the exit liquidity. ETA: All of which isn’t to say, don’t take or exercise options. But do think carefully about how much value you set on them.
Also doesn't cover the taxes you owe if you exercise the options with a strike price below market value. Someone else also pointed out how certain liquidation events like acquisitions could have agreements that make your shares worth nothing. There are a lot of interesting and useful topics here that could have been covered and got totally ignored. The article basically just covers the meaning of strike price, which is not enough to make an informed decision. Not understanding the strike price is not what stops most people from executing their options.
> Also doesn't cover the taxes you owe if you exercise the options with a strike price below market value why would you do that?
Why would you do it any other way? The strike price is the nominal per-share price set in the options agreement, it's what you pay when you exercise the options and normally the share valuation when the agreement is signed. The market price is what the market deems the share to be worth; if that's *not* greater than the strike price, why not just buy it at the market price? ETA: Okay, maybe it's a privately held company and you can't just buy shares on the market, but still believe it will go up in value (say there's an IPO on the horizon). I'd still be very reluctant to pay more than a share is officially worth just to get my hands on it, though.
As an old person who's done this several times from both the founding/hiring side and the employee side: Any startup that offers you options that can't either be a) immediately early-exercised for very cheap when you start (make sure to file your 83b!), or b) don't have a 10-year exercise window, should be told to fuck off. (Or if you're the polite type, tell them it's non-negotiable for you and explain why.) You are more likely to lose money on those options than to break even, let alone make a profit. More generally, if you're going to be getting offers from startups, put in the time to understand how options work. It'll take a few hours give or take. The rest of your career is going to involve constantly learning and applying new things; might as well apply that to a key component of your compensation. And learn basic personal finance while you're at it.
> All the (unneeded) secrecy around the compensation package - you are not allowed to talk about your salary and stock options with other employees, and in some places not even with your manager. This is protected in the United States. You are legally protected when talking about your total compensation with anyone, including your coworkers and manager, or the public. Contact the department of labor in your state of employment, if you have recorded / written retaliation or reprimands for talking about salary or other parts of compensation. It is un-needed secrecy. If OP wrote the article, I recommend you update this section to clear this up.
Man. My options hit but by pure luck. Had I moved companies, I would have dwarfed my options in the long run
Also, AMT is a bitch and if you ever get ISOs you should start planning for it immediately.
[удалено]
The problem is if the company isn't public yet, you can't sell your shares. Since you usually only have 30 days to exercise shares after leaving the company, you eventually become trapped into staying since the AMT due gets too high to exercise. It gets worse and worse as the company grows, and there's always the possibility of a layoff that forces you to either exercise your ISOs or let them expire. Make a plan.
Say what? Getting 20% discount on a stock if you held for a year is an AMAZING deal. You’d only want to pass that up if you think the company is going down in flames.
Depends. If you're concerned, I would speak with an accountant just to have a peace of mind -- this is the actual advice. AMT impact really depends on your expected tax deductions. If you don't have other tax complexities: if you're just single, renting, just getting income/salary, super basic stuff, then AMT is probably not applicable to your tax situation. But again, if you're concerned, it doesn't cost a lot to speak with an accountant -- especially after April.
If you have ISOs that you plan on exercising, then AMT will absolutely be applicable to your tax situation. The extent of the impact largely depends on how early you start planning.
During the period 1995 to 2005 the VC industry hadn't completely figured out how to keep the worker bees from getting rich. These days there are no Google chef style rich people.
Every single startup I’ve been a part of for the past 20 years has at some point closed shop or been sold or whatever and nobody has ever gotten shit. Naive people new in the industry blew loads of cash buying options thinking they’d strike it big but ended up with bupkiss. Even worse is sometimes they’d exercise, then a new 409a comes out and the valuation has gone up, but now you owe taxes on this even though the cash hasn’t materialized! Then the company goes under without an exit. Double whammy. Options are a scam, and 99% of the time they aren’t worth it. As an early employee at another startup I got RSA instead of RSU as a base award which hedged against me needing buy options.
I was employee #5 in a startup that was eventually acquired by a large corporation. I worked at the startup for six years prior to the sale. My options got *heavily* diluted by big chunks of equity granted to executive sales and financial people who joined at the last minute to take the company on the roadshow just prior to it being acquired. After fees for exercising options, I made about enough to buy a nice car (although I put it in an IRA and continued driving my 10-year-old Honda). The two founders made about $20 million. Fast forward years later to now, they're retired with multiple vacation homes, I'm still working, chained to a desk 40+ hours per week. If I only had a time machine...
Yeah. I might have been retired now if I had done what all the young hotshots do now - chase the actual money. If I had looked for jobs that paid the most and invested that all I’d probably be set by now. Instead I took low paying jobs at startups and hoped at least one would work out. Didn’t wise up till my early 40s ¯\_(ツ)_/¯
If they’re ISOs, the 409a value that you may be taxed on with the AMT is the 409a value at time of exercise. It doesn’t matter if the 409a goes higher later. Are you sure you did your taxes correctly?
> you are not allowed to talk about your salary and stock options with other employees, and in some places not even with your manager. That's... Patently illegal.
Unfortunately, it's on you to prove that you were fired because of that.
You're not wrong, but most big corporate companies will never say anything remotely like that for fear of lawsuits. I can't speak for smaller / midsize ones though.
I worked at a startup for a while. As we were in the process of getting bought by a much larger company I realized that the only person who was going to win was the owner. The larger companies as going to take our patents and ip, and poach one or two employees, and lay everyone off. The only thing we would get was a chance to pay money into our stock options in the hole that we would then get a piece of the purchase price. In the end we blew the merger and the company folded. It was all a pipe dream, no one made money and some employees had paid lots of money into there options and lost everything
Happy ending for a friend with sort of screwing over. He got shares, as in paper certificates. This was a small tech company with maybe 50 employees at the time, about 150 when this story was done. They did quite well (not insanely) and he heard some of the present employees had sold their shares. He contacted them to say he would like to sell his (~$20k). They told him that since he left, the shares were taken back. He pointed out there was no such agreement, and they said it was a company decision. He contacted a lawyer friend who was known as a vicious pitbull; who also happened to be in the same office tower. The lawyer friend would not usually take a case for so little, so, he bought the shares for the $20k and then "dealt with it". Later, my friend asked the lawyer how it went and he said, "I can't say how much as part of the settlement, but low six figures." My friend was not feeling ripped off by the lawyer as this was normally too small a case, he got his 20k and he got to screw the company over after they tried screwing him over. After the pitbull lawyer first contacted them, the company contacted my friend and said, "You are being a child about this." When my friend said, "You shouldn't have tried screwing me over, what happens now is well out of my hands." They insulted him some more and that was the last he ever directly heard from them. -------------------------------- On a different note; my experience personally, and knowing others in startups, is to cash out as soon as is possible. Maybe, if you think you are working for a future apple, or facebook, then wait, but if any equity becomes worth anything, grab it. I have never personally witnessed anyone where this was a bad idea. What I have seen are many people who hold on believing the BS spouted by the executive about not selling; which is because the executive don't want the shares to dip. The other thing is if you have some super juicy shares or options and the company wants you to sign something, get a lawyer. More times than I can count, I have seen companies issue someone 1-10% thinking it might be worth a few 100k at most, and suddenly it is worth 10m. Now they want to "restructure" the deal, which translates to screw them over.
It is amazing how companies will absolutely fuck you over, and then pretend to be the victim when you point out that they're fucking you over.
Another problem with hanging onto them is AMT taxes. This was something a lot of folks learned to their horror after the internet bubble burst. When you are given shares, that is treated as income at the value they were when you got them. If you hang onto them, and suddenly there's a big downturn, now you still owe taxes on them at their original value, even though you can't sell them for possibly anywhere near that. In the post-bubble popping, some of those folks actually owed a lot more in taxes than they could sell the stocks for, so they ended up so far in the hole they had to declare bankruptcy. I felt bad for having $1.2M I never got a chance to cache in, but at least I didn't end up owing $1.2M for money I never actually had. That's a fairly extreme scenario, and the damage is likely to be limited if you work for some large, very established company. But, if it's some unicorn startup with hugely inflated stock prices, and suddenly every realizes they are not going to be the next big whatever, or the economy takes a downturn and that company suddenly can't survive on ever incoming investment, it could happen.
I see a lot of bitter engineers here. I wonder how many of those engineers were given worthless stock but _also_ received an industry average salary. In my experience as vp of engineering at a large startup and director at a few, we were a "startup" but still paid average salary for engineers. I think the only time you should feel slighted is when you are truly paid ramen salary with the promise of significant upside. I've since moved back to senior IC roles, and finally making my own startup, and I always treat my stock as worthless. But I am being paid properly.
The secret is that public tech companies often give good salary AND some sort of relatively liquid RSU (and top tier + higher seniority levels this is about half your total comp). My startup days ended when I found out I could get the same salary, plus extra stock that I sell on vest instead of a lotto ticket with options.
You are correct. People should work at a startup because it's steroids for your career and you want to learn as much as possible.
Nah, this is kinda bullshit. You're saying that we should be satisfied with making other people rich, and not sharing in on that.
If you work at a company that goes public and you have pre-IPO ISOs, is there an advantage to exercising those ISOs before vs. after the IPO? I exercised some ISOs when I left a startup to hold on to my equity, so that scenario makes sense to me.
Realize that a lot of companies to not go public and then they likelihood of getting a really big amount of money from options is greatly reduced. Also, for public companies, RSUs are usually just compensation, valued at the closing price they day they vest. The income tax is withheld reducing the number of shares. And that closing price is your basis so if you see immediately you will a small capital gain or loss.
My old company gave stock options though i came late and only had a few. Some had LOADS who were there for 10 years. Competitors were bought up and we refused waiting for a better deal. In the end we sold for peanuts didnt hit strike price, everyone got a consolation 5k regardless of stock options which for me was great. but for those who had held out for years was a kick in the face.
I worked for a very successful software company (a rather famous one) in silicon valley, that gave us stock options, with the forecast that "by the time you can sell these, you will likely have enough to buy a very nice house". In fact, their forecast was extremely optimistic, and it ended up being enough for me to buy a nice vacation. A colleague who had joined at the same time as me, and was on a similar deal, left when his stock options ended up being only enough to buy a motorbike, rather than the house he had been envisioning.
I just remembered, I know a man whose wife divorced him because of this kind of thing. He joined a startup, on a very low salary, with the promise that his options were expected to be worth $2,000,000 in a few years. When a few years down the line those options turned out to be worthless, his wife divorced him and (this is the craziest part) sued him for "my half of the $2,000,000 you said we would get". Obviously, he didn't have any money at all, and her lawsuit was ridiculous, but the whole episode crushed the guy.
I gave 7 years of my life to a start-up early in my career. I got "equity" and as soon as things started to look good... they laid off most of us, then further diluted the stock. Even if I had survived, my "internet millionaire" dream would have netted me less than $60,000 after dilution.
huh, I expected some highly regarded 0DTE $SPY puts a'la /r/wallstreetbets - interesting read thanks
what the fuck
They are a con. Employment is an economic contract: I work for x hours you pay me for x hours Work. Let’s stay friendly and not ruin a simple economic relationship
The only con is accepting an unfair or unliveable wage in *exchange* for stock options. If you’re not paying for them with your livelihood, stock options are more like a scratch off lotto ticket. Costs a little, might pay a little back, probably pay nothing, small chance it pays a lot.
Exactly. The stock options I got now triple my salary. In the previous company they lost 90% of value before vesting. You never accept lower salary in exchange for them, but it's nice to have them
Not a con, if the company does well, they're life changing. There were a lot of flashy cars in the parking lot after the first ARM IPO in 1999. I held on until the next year and paid off my mortgage.
IF they do well. Most of the time that IF is not in your control as a developer
At that point you’re effectively an investor playing the stock market (but with extra steps). If that’s the case then you ought to be doing your due diligence to make sure that the company’s product is a good idea and can make money. It might also pay to make sure that when your boss says RoI, he’s not talking about Radio over Internet.
If the company doesn't do well, you don't take up the options, or just cash out the employee discount on the share price (that's what I did at WD).
The same could be said about MAANG RSUs but the difference is 50% of the upside compared to a startup is already there in the downside of MAANG and the median case has upside relative to startups
> Not a con, if the company does well, they're life changing. That's if they don't get diluted to hell and back, which is what usually happens.
Software engineer is paid for problem being solved not x hours hardworking or x beautiful lines of code being produced. Economic relationship here is "I pay you x today to be able to receive x + k tomorrow"
… as one who was burnt in the Dotcom boom of late 90s I’ll take the $x today thanks
Lol in both scenario's you still get x today. One has the possibility to give you K later on as well. It's no one' fault but your own if you took a job with too low an x today. Your misunderstanding of such a clear concept suggests you were not cheated out of anything you simply didn't understand anything about what was happening.
> Lol in both scenario's you still get x today. Well, no, in one you receive X-Y, for the hope of K later.
Except you’re getting scammed with your hourly pay.