[HN Gopher] Guide to Equity Compensation
___________________________________________________________________
Guide to Equity Compensation
Author : DyslexicAtheist
Score : 103 points
Date : 2020-02-20 09:51 UTC (1 days ago)
(HTM) web link (github.com)
(TXT) w3m dump (github.com)
| ditonal wrote:
| Startup ISOs are totally broken, and VCs and founders would
| rather write 30 page treatises on all their complexities (of
| course, glossing over the 99 ways to screw employees), than
| actually try to improve them.
|
| A small percentage of people got rich off options a handful of
| times a long times ago, and since then countless people have been
| screwed.
|
| Public RSUs for stock you can sell immediately on the open market
| are fantastic.
|
| Common ISOs are toilet paper. At a _minimum_ you should get a 10
| year exercise window, and if the CEO tries to say that would make
| it so early employees can hurt cap tables for future rounds, he's
| basically saying he doesn't consider your equity grant to be real
| equity as it deserves to be clawed back for the sin of not
| wanting to stick around for the 15 years it takes startups to IPO
| these days.
|
| These exact same people will try to convince you that their ISOs
| are a valid subsitute to liquid RSUs, THEN say that they don't
| deserve to be "preferred" instead of "common" because the VCs put
| in actual money (hint: so did you if you turned down a public
| company to work at the startup. Biggest difference is only that
| you're way less diversified).
|
| Am I ranting? Of course, but if VCs and founders are going to
| continually "educate" engineers on their equity offers, engineers
| need to stand up and inform each other of the pitfalls. I know
| countless people, myself included, who have been screwed by ISOs.
| You can actually lose money because the 30 day window forces you
| to pay strike price + taxes on gains, then you find out that the
| CEO sold the company at a bargain so liquidation preference
| kicked in and he just took a huge retention bonus instead.
|
| The way out of this mess is not Github treatises on how to
| evaluate your equities. The way out is for engineers to
| continually tell founders/VCs that they will pick public
| companies instead of startups until ISOs get fixed. If ISOs
| screwed over VCs instead of engineers, they would have gone to DC
| and gotten this fixed 10 years ago. At an absolute minimum you
| shouldn't have to pay a dime in taxes until you've actually
| realized some money in your checkings account. VCs/founders don't
| care because they don't have to care because engineers are still
| too gullible and accept these bogus deals.
| jiveturkey wrote:
| > Startup ISOs are totally broken.
|
| > Public RSUs for stock you can sell immediately on the open
| market are fantastic.
|
| Both correct statements, but apples and oranges.
| alakin wrote:
| Employees should have capped liquidation prefs!
| ericd wrote:
| I agree that the way a lot of companies structure their equity
| compensation is terrible. How would you structure equity
| compensation at a mid-stage startup where a share grant would
| come with a real, substantial tax hit, without any possibility
| of liquidity in the near future?
|
| I'm asking because we're just starting to think about how to do
| this ourselves, and I agree that most equity plans are giving
| engineers a raw deal. The answer might just be large share
| grants, at least until the share value makes that unattractive.
| I'd love to hear other peoples' thoughts on this.
|
| IIRC, much of the reason ISOs work the way they do is because
| of the way the IRS treats them, and companies that offer much
| longer exercise windows are having to work around these
| limitations to do so.
| bradleyjg wrote:
| How about double trigger RSUs?
|
| The downside is that employees pay ordinary income on the
| full IPO value, but there are no upfront taxes and no
| exercise dilemma for people that leave after vesting.
| jagged-chisel wrote:
| Are options considered an equity grant? I hadn't thought so,
| but maybe I need to update my own vocabulary.
| ng12 wrote:
| Exactly this. As far as I'm concerned the purpose of ISOs at
| companies more than a year old is to trick junior engineers
| into accepting a lower salary than they would receive
| elsewhere. Unless you have at least half a percent of a company
| you really, truly believe in I'd just ignore this article and
| put the value somewhere between $0 and a roll of lottery
| tickets.
| UncleMeat wrote:
| Worse, as OP states, they can cause you to lose money. They
| can be worth less than zero dollars. Pay piles of taxes on
| the exercised options and then watch the company get gutted
| and preferred investors take everything.
| pjbk wrote:
| Sadly, examples from the dotcom burst and housing crisis
| abound. It's a double edged sword. I have always preferred
| to go for early exercising.
|
| "Many of these workers now owe far more in taxes than their
| stock is worth. Former Cisco engineer Jeffrey Chou, 32,
| owes $2.5 million in taxes on company stock he purchased
| last year that has since withered in value. Chou figures
| that if he were to sell everything he owns, including the
| three-bedroom Foster City, Calif., townhouse that he shares
| with his wife and 8-month-old daughter, the family still
| could not pay the bill."
|
| * https://www.chicagotribune.com/sns-tech-taxes-story.html
| alecbenzer wrote:
| > don't deserve to be "preferred" instead of "common" because
| the VCs put in actual money
|
| I agree with most of what you said, but a nit: one perspective
| I've heard on the motivation for preferred stock is this:
|
| Suppose I give you $10M to start a company in exchange for 10%
| of it. You then easily sell the company for $9M, keeping 90% *
| $9M = $8.1M for yourself and returning $900k to me. Preferred
| (non-participating, 1x) shares prevent this problem by making
| sure you can't just run away with the money: you have to
| actually use it to build the business.
|
| People investing in the company in non-liquid ways (e.g., the
| founders or engineers, via opportunity costs) aren't in the
| same boat, because their opportunity cost can't be immediately
| liquidated.
| zyang wrote:
| VCs and startup founders are shooting themselves in the foot.
| It makes very little financial sense to work at a startup vs
| FAANG these days.
| spurdoman77 wrote:
| Ok cool, Il tired of seeing these startups popping up. Great
| thing that they are now thing of a past as they wont be able
| to hire anyone. /s
| pjbk wrote:
| A few startups are realizing it is a rigged, unfair game
| and are trying to balance things a bit. They are offering
| stock purchase and exercise windows valid for several
| years, instead of just months or even days. Unfortunately
| it is still not a widespread practice. I have yet to see a
| company equalizing stock priorities of employees vs VCs.
| notJim wrote:
| Yeah exactly. Early in my career, I loved working at
| startups, and aside from compensation would prefer to do so
| again, but the opportunity cost now is way too high. The one
| advantage I see at a startup is that if you pick one with a
| decent engineering culture, you can learn a lot more than
| most FAANG roles (although you'll probably learn more at the
| best FAANG roles than at good startup roles? Unclear.)
| alecbenzer wrote:
| I think startups are a bit of a crapshoot even in this
| regard. You'll learn a lot at a good one, but could
| potentially learn a lot of bad habits at a bad one.
| bradleyjg wrote:
| Indeed. Real upside is the only thing that lets them at all
| compete for employees. Investors facilitating deals that
| screw early employees are poisoning the well for all their
| future investments.
| tptacek wrote:
| Some of the reasons VCs get a better class of shares than
| employees are structural and unlikely to go away no matter how
| ISOs are structured; for instance, VCs get liquidation
| preferences for reasons that are sort of intrinsic to the
| concept of equity investment.
|
| The exercise window thing is a valid point and is a reason to
| devalue employee options.
| fountainofage wrote:
| Then perhaps the start up should just pay above market rate
| in salary and not offer any ISOs since those ISOs are so dang
| valuable but couldn't possibly be given the same liquidation
| preference?
| tptacek wrote:
| I mean, I agree. I think employees generally under-value
| equity, for understandable reasons, and that it's probably
| more efficient to compensate them in cash. That does mean
| that when the company sells, the upside goes entirely to
| management and investors, but I guess you can't have it
| both ways.
| simonebrunozzi wrote:
| Fully agree with you. How would you solve it then - besides
| engineers being more explicit with founders? (not trying to be
| smart with you; honest question).
| corporateslave5 wrote:
| Basically everyone knows by now, being an employee at an early
| stage startup is a suckers bet. You're literally working to make
| someone else rich. Just go work for FAANG, or highest cash comp,
| and jam that money into tech stocks.
| majormajor wrote:
| It sucks if you want to work on new ideas, and not just be a
| cog in a giant machine, but don't have an idea of your own you
| think is worth founding. The money is the trade-off for the big
| corporate shenanigans and relative lack of intrinsically
| motivating work.
| ska wrote:
| This is often true from a raw compensation point of view, but
| it isn't as if the jobs are fungible.
|
| Nothing wrong with deciding a startup is best for you, so long
| as you are going into eyes open and don't believe some nonsense
| like "the options will make up for the salary difference".
| tempsy wrote:
| I got lucky though at 2 startups, and day to day probably a lot
| more interesting than working as another cog in a big co.
|
| Definitely made more than I would've given my level.
| jacobschein wrote:
| So many of my friends have been screwed over by the technical
| nuances of equity compensation.
|
| Started Compound (https://withcompound.com) to solve this problem
| (we generate personalized analyses to help you understand your
| equity - tax implications, potential value, etc).
|
| If you have any questions/feedback, email me:
| jacob@withcompound.com.
| wtvanhest wrote:
| Just out of curiosity, how does compound make money?
| [deleted]
| juliend2 wrote:
| I wish there was a canadian version of this.
| ska wrote:
| Canadian isn't much different really in practice, but there
| isn't an 83(b) equivalent iirc. The specific tax detail vary,
| but from 30,000 feet it looks pretty similar.
|
| Overall it's pretty comparable to the non-SV US. There is less
| VC & PE money floating around (generally investment is more
| conservative). Common stock options or grants are going to be a
| gamble for the same reasons as in the US.
|
| Tax wise, you capital rates rather than normal (i.e. 50%
| treated as regular income). You may get a gain/loss relative to
| FMV in year you exercise, same as US.
|
| Most of the advice carries over directly, mutatis mutandis.
| H8crilA wrote:
| Most of those things are pretty international. Finance is a
| very old domain, and as a famous man once said (albeit
| specifically about speculation, but it also applies to the
| structure of the contracts): "There is nothing new in Wall
| Street. There can't be because speculation is as old as the
| hills. Whatever happens in the stock market today has happened
| before and will happen again."
| mmxmb wrote:
| Another good resource: https://www.holloway.com/g/equity-
| compensation
| daenz wrote:
| I worked for a startup founder and personally watched him screw
| advisers out of stock agreements using different tactics, from
| technicalities in the agreements to outright not honoring the
| agreements when he knew it was disadvantageous for them to pursue
| him legally. He gloated about it and would speak very highly of
| all the ways he could manipulate situations.
|
| In the end, I left and the startup went under, and I told him
| directly that I didn't trust him (to his surprise). The lesson
| that I learned was that I'd be a fool to take equity in a
| startup, given all the ways I could be screwed, and my lack of
| resources to pursue any legal recourse. Cash only, from now on.
| fossuser wrote:
| I think this is the wrong lesson and people are generally too
| extreme when valuing this.
|
| Are there risks with ISOs? Yes.
|
| Should you value them 1:1 with cash? Probably not.
|
| Should you value them at $0? Probably not.
|
| People should make decisions based on the company, what they're
| doing, and how much they trust the board/founders.
|
| It'd be a mistake to categorically dismiss equity since that's
| the best way to leverage your human capital into wealth.
|
| It's also a mistake to think that equity is valued exactly at
| what the company is advertising it as when trying to hire you.
|
| There's some risk, but engineers should consider their options.
| sub7 wrote:
| Your problem wasn't the structure of your comp, it was the
| payer of your comp.
| jldugger wrote:
| > In the end, I left and the startup went under, and I told him
| directly that I didn't trust him (to his surprise).
|
| A classic example of an individual who would be 10x richer if
| they were 10 percent less greedy.
| andrew311 wrote:
| Selling private shares / options on the secondary market is near
| impossible if the company isn't on something like SecondMarket.
| Right of First Refusal, Co-sale Agreements, and the challenges of
| sharing information with a 3rd party make this difficult. That
| said, has anyone succeeded and written about their experience?
| spurdoman77 wrote:
| If company is valuable enough smart investors will flock around
| the shareholders who even have very minor ownership. I was
| sceptical at first but then saw it happening with a profitable
| company I was following. I thought people were stuck with their
| shares, but since the company was profitable it attracted
| investors looking for better returns than public stocks.
| ska wrote:
| People show up when the risk gets low enough.
| CalChris wrote:
| De-risking is something a company will go through
| progressively. 1. An idea? Risky. 2.
| + funding? Less risky. 3. + proof of concept? More
| less risky. 4. + an MVP? Less risky still. 5. +
| paying customers and metrics? Less risky again.
| ska wrote:
| Right. And when there is a bunch of illiquid stock around
| but the risk has reduced enough people will sniff around
| for (or create) a secondary market. Usually well past
| your #5 though.
|
| If the risk is too high they are all happy to let you
| carry it for a while.
| CalChris wrote:
| If the risk is low then the rewards will be low as well.
| I think the problem that VCs face in seed is the deluge
| of pitches. In A rounds, things have settled down.
| ska wrote:
| We are specifically talking about secondary markets,
| though. They only really happen I think when the risk is
| low but people are illiquid, or occasionally when the
| hype is insane.
|
| This is a separate thing from the natural evolution of
| risk over startup life. That happens to every one. Viable
| secondary markets letting you take some money out early
| don't happen in most cases.
| djannzjkzxn wrote:
| It's hard in theory, easy in practice if your options are worth
| millions. I have friends who did it. I don't know too many of
| the details but they made some kind of contract with a
| financial firm to sell the upside from the stock without
| actually "selling" the stock. The fees are not terrible, like
| single digit percentages. These firms don't want to talk to you
| if you have a small amount of equity because it isn't worth the
| overhead to make a transaction.
| tempsy wrote:
| No it's not. If that were true none of these marketplaces would
| exist.
| andrew311 wrote:
| I should clarify that it is certainly doable for widely
| recognized companies, but it's very difficult for the
| majority of startups that no one has heard of even if they
| have some success. Also, getting on these marketplaces also
| goes much better with company cooperation and many startups
| don't have the time or willingness.
___________________________________________________________________
(page generated 2020-02-21 23:00 UTC)