What I Wish I'd Known About Equity Before Joining a Unicorn - <AUTHOR> https://gist.github.com/yossorion/4965df74fd6da6cdc280ec57e83a202d <comment><USER2> As always the main rule you need to live by is _value the equity at zero_ and you'll be (maybe) happy. Short of being a founder (and thus not really being _offered_ equity) I have never treated these things as anything beyond a minor on paper "bonus". Given you'd be lucky to get anything more than 1% even as a first employee I find them next to worthless as early stage motivators. Which is how everyone seems to play it - "we're all in this together" \- mmm. As long as the salary is market rate I ignore equity altogether.

<comment><USER3> This advice is often given but it's easier said than done. Let's say you work at a unicorn for 3 years and in that time it goes up 10x in VC fantasy land valuation. On paper you have a lot of money and the company reasonably might go public a couple years after you leave.

Let's say you're granted about a year's salary in shares when you first join so you've vested $100K for a round number. When you leave that equity is worth $1 million. Now, you have to come to the table with the $100K to exercise and probably another $200K to pay the tax man. If the company goes belly up, you lose $100K outright and are stuck with a $200K tax credit that you get back in $3K per year deductions for the rest of your life.

Or, you could have exercised the shares as you vested and paid a bit less in tax with the lower 409A valuation..but you're still maybe looking at a $100K total tax bill.

Do you take the risk or not? Or do you end up locked in for a few more years of handcuffs while waiting it out?

It'd be really hard for me at least to walk away from this situation with nothing..so then I have to value the equity as something. And if I want to treat it as 0 it'd be really tempting to wait a few years and see..which again means the equity is worth something to me.

<comment><USER4> The whole premise of a startup in any stage hiring a technical employee and granting them $100k worth of stock options will never happen.

Typically you are granted X number of options. You are never told what the outstanding # of shares are and typically the shares themselves are valued in pennies. The idea is you think to yourself "well, it's 10k shares worth about $5k at the current valuation, but if they IPO and it does what google does...I'll be a millionaire!" You never take in to account that the likelihood of you joining a unicorn like google is near 0% and not taking in to account the time frame of such an adventure, the opportunity cost, dilution and other tricks companies play on their employees before IPOs and acquisitions like reverse stock splits.

And the likelihood of a startup valuation increasing 10x in 4 years (typical vesting schedule) after dilution is extremely extremely unlikely to the point that it is time wasted even entertaining the outcome of such a scenario.

<comment><USER5> > The whole premise of a startup in any stage hiring a technical employee and > granting them $100k worth of stock options will never happen.

That's a false assumption. If they raised $1M seed at a $6M cap, that's 1.4-1.7%. I just pulled up AngelList and there are a number of seed companies offering that along with a decent salary. Taking the $6M to $60M is the risky piece and that's going to be hard, but opportunities to try are definitely available.

> You are never told what the outstanding # of shares are and typically the > stock are valued in pennies.

If the CEO is unwilling to tell you when you ask, walk away.

</comment></comment></comment></comment><comment><USER6> This has caused me some level of sadness in the past. I worked for a startup (started 6mo after founding with only 20 people and stayed for 8 years to 200+ people and 50million in revenue). During a number of phases, I worked for months at a time giving up weekends, late nights, holidays and even vacation time to get product out the door and beat the competition. I racked up 50k options, mostly all for less than a dollar a share strike price. What was painful to me, was that when I left after 8 years (I grew weary of it all, especially management) I had 90 days to pay $34k to get my options or lose them. That was painful cause I didn't have the extra $34k I could just throw away (had no idea when they'd sell), but hated the fact that none of the thousands of extra hours I worked (I kept track) counted for anything. One could argue I was paid a decent salary. Only on paper though, since my effective hourly rate was 3/4 what I'd have made at a non-startup working a regular 40-50 hour work week (i.e., I had to work more hours to make the same pay I could have gotten for fewer hours at a non-startup).

After I left, 18 months later, the company sold and my options would have earned 10x the $34k of the strike price. I.e., I _would_ have made $300k if I could see the future. I just find it painful that at that moment, all your time is effectively worthless, and only the $34k would have counted for anything, even though I gave far more than that in extra hours.

Needless to say, I am somewhat hesitant to put in too many extra hours anymore and almost never work weekends or holidays.

<comment><USER7> 8 years of weekends, late nights, holidays and vacation for a net of $200K after taxes?

That's ~25K/year so if you would've worked a regular 40 hour week, 20 hours of contract work at anything more than $35/hour would have put you ahead. And you would've still had weekends, nights and vacation.

<comment><USER6> Yeah, that's the calculation that bums me out too. It's one of the reasons I am somewhat loathe to ever put in too much "extra" time anymore. I enjoy being a part of a startup for more than just the lottery ticket aspect, I enjoy creating things from scratch, etc. But the days of burning the candle at midnight are gone.

<comment><USER7> In startups, man exploits man. At other employers, it's the other way around.

<comment><USER8> Isn't the other way around still man exploits man?

<comment><USER7> That's the point. :)

<comment><USER9> To expand, it's a play on:

"Under capitalism, man exploits man. Under communism, it's just the opposite." which seems to be attributed (without any sources) to John Kenneth Galbraith:

[http://www.quotationspage.com/quote/810.html](http://www.quotationspage.com/quote/810.html)

I've also seen it as "Under capitalism, man exploits man - under communism it's the other way around." I always assumed it was a translated Russian proverb, along the lines of: "No truth in the news and no news in the truth" (Major Soviet papers were "Pravda" (the truth) and "Izvestia" (the news).

<comment><USER10> Enjoyed the sovietology fact :)

</comment></comment></comment></comment></comment></comment></comment></comment><comment><USER11> It has always baffled me the way founders treat employees and investors so vastly asymmetric. Ive been involved in rounds close enough to see how just the "hint" of a potential investment and all the numbers, financials, cap tables are sent in one big email to their analyst, while some early employees (who controversially have worked just as hard as the founders) have no clue who owns what and whats going on. I get it without money we can't build anything, but without good employees everything else is multiplied by 0. The math in the article is unique to the U.S but I think the "essence" behind it is quite universal.

What stops founders from offering a company wide "vested Share vs. Cash" with an equal cap for everyone on each new round ? For e.g founders planning to sell 10% of their own share while raising round in the so called "Take money off table", all employees get the 'right' to exercise the same option, hence instead of dilution to the new value its straight selling the value they created ? what are the arguments against this ? For the investors its the same, and if the cap of how much of the vested % you get to sell is kept realistically low it should not risk decreasing the value of the private stock.

while i agree with Jaymzcampbell as an employee you're better off with dropping the "hope" the paper value of what you own means anything, however its contradicting to the popular piece of employee incentive tool that is quite essential in acquiring& keeping good talent.

<comment><USER12> I think we need to coin a new term like: "early employee valley of death" [1]

Post founding, there's this time period where the early employees are expected to work pretty much like founders (long hours, wildly high expectations), but with a greatly reduced salary and the promise of large option grants.

This unfortunately places the employee in a really bad negotiating position with respect to salary increases, etc. as their starting point was so bad. I've been in this spot and a couple years on had to _fight_ just to get a market rate.

1 - Hat tip: Gail Goodman and the long slow SAAS ramp of death - [http://businessofsoftware.org/2013/02/gail-goodman- constant-...](http://businessofsoftware.org/2013/02/gail-goodman-constant- contact-how-to-negotiate-the-long-slow-saas-ramp-of-death/)

<comment><USER13> It's pretty common advice that you want to be the last founder and not the first employee for this exact reason.

</comment></comment></comment><comment><USER14> Really surprised how few people know about this legislation to fix the tax laws that cause one of the biggest issues with options.

[https://www.gop.gov/better-way-startups/](https://www.gop.gov/better-way- startups/)

It made it through the house and was approved by senate finance committee but is now stuck in a bill about retirement savings legislation.

Even finding information about the bill on the web or twitter is incredibly difficult. Please tweet, blog, etc and call your senators to support!

<comment><USER15> Wow, did not know about that. What do you think the chances are it gets passed in the forseeable future?

<comment><USER16> The chances of it getting through within the next few years, is 100%, in my opinion. There will be numerous opportunities to fix this particular problem, along with all the other items getting targeted when it comes to tax & regulation reform. It has wide bi-partisan support, and the tech industry is the largest lobbyist force on earth now, as such it'll be a matter of how soon rather than if.

<comment><USER14> One counter point... think about who is lobbying for changes. If it's primarily founders/executives at startups, know they do not stand to gain from removing these golden handcuffs. This bill will make turnover higher and hiring more expensive.

<comment><USER17> It's a double-edged sword. It also means that it will be easier to hire people away from the start-ups. Google/Facebook/Amazon, even Oracle, must be getting a lot of "nos" from start-up people who'd be interested, but are going to hold out for a year or two more (and who aren't quite valuable enough to buy out).

</comment></comment></comment></comment></comment><comment><USER18> The equity payday funnel looks bleak.

1\. Will this company succeed?

2\. Once it succeeds will my equity be valuable?

3\. If my equity could be valuable, will it be diluted before I can get paid?

4\. If not diluted will it ever be liquid?

5\. If there is liquidity will I be able to participate? Or only founders/investors.

6\. If employees are able to extract real dollars, will I be forced out, laid off, constructively dismissed in advance to reduce what I could take home.

All I see is a succession of methods to keep me on a treadmill chasing a carrot. Until the startup is large enough to take away the carrot.

This perception is hurting startups as a whole. Because you will not be able to convince early stage talent to work for equity. It is not enough to tell engineers 'well you should learn more about equity so you can't get ripped off so easily.'

<comment><USER19> Your funnel is so spot on it hurts. I made it all the way to number 6, and boy let me tell you, it was a shit show. People being strong armed left and right, people suddenly not showing up to work, and management offering a memo like "Larry has decided to pursue something different in his career."

<comment><USER20> Name and shame?

</comment></comment></comment><comment><USER21> > The working conditions at Silicon Valley companies are often the best in the > world

I'd take regular, sane hours and the ability to have a life over worthless perks like ping pong/foozeball tables and customized snacks. I can bring my own snacks, buy my own lunches with as long as I have a decent salary and that really doesn't bother me. The only real perks in a startup are more control over what you are building as a team, the challenges you get (or have to, depending on your outlook) to face, and the ownership you feel in the immediate product and it's future development. You sacrifice everything else for that.

<comment><USER22> Came here to quote this.

Personally when I see the phrase "working conditions" I immediately think of hours worked, aka "work/life balance." And from everything I've heard, hours at Silicon Valley companies are far from the best in the world.

Either the author ascribes a much different meaning to "working conditions" than I do, or my perception of those working conditions are way off base.

<comment><USER23> So 4 hours a day in a sweatshop is better working conditions than 8 hours a day in Google?

K.

</comment></comment></comment><comment><USER24> This is all true. I moved to San Francisco to join a startup as an early employee. The biggest surprise was when I had to empty my savings (and borrow a lot of money) to exercise my stock options. I filed an 83b election so that I didn't have to pay any taxes immediately, but $20,000 was (and still is) a huge amount of money.

I had no idea it was so expensive to join a startup. At least, if you want to avoid golden handcuffs for the next 10 years. I'm extremely glad that I made the decision to exercise my options. I left after 2 years because I couldn't stand working there anymore, and I had vested most of the shares that I had exercised.

If golden handcuffs had forced me to stay, I think I might have had a mental breakdown, and I don't think my marriage would have survived.

My former startup is now a very successful unicorn, and I'm starting to hear talk of an IPO in the next few years. I think my shares could be worth somewhere around $5 - $10 million. This is absolutely life-changing money for me, seeing as I could happily retire with $500k.

Sometimes I can make it a whole day without thinking about it, but it feels like I'm just burning time until I can finally cash in these shares and never worry about money again.

Can anyone relate to this?

<comment><USER25> Don't spend the money before you have it in your account. It's easy to get lured into the idea that the paper money is real ("worst case, it's worth 25% of that and it's still millions!"). There are still so very many things that can wipe that out, if not to zero, to something that isn't even close to life- changing money.

Easier said than done, but really the best thing to do is focus on your current work / life. Keep saving, keep working hard, enjoy yourself the same way you have. Don't get a fancy new car that you normally wouldn't get because "soon it won't matter". Don't drain savings, don't live a lifestyle you think you'll be able to afford soon, don't shop for houses, etc.

<comment><USER24> I haven't let it affect decisions like buying a new car. I've been looking at some houses, but just for fun.

I've been working on some of my own startups since I quit this job. I needed to keep my burn-rate low, so I lived in some very cheap countries in South America, South-east Asia, and/or Europe. Basically the "digital nomad" thing, except I didn't move around very much.

And then I somehow managed to find a long-term client, where they only need me to work 4 hours per week, at $150 per hour. This supports a very high standard of living in my current country, so I'm extremely happy with this arrangement. I stumbled into this completely by accident, and I never even knew it was possible. So now I'm thinking that this is a pretty good backup plan, and I've started to put down roots here.

I know this particular gig won't last forever, but I certainly don't want to go back to full-time employment. 20 hours per week would be hard enough.

I do need to keep working hard on my own projects. I still haven't been able to build something that generates passive income. Not even regular income.

I try to make a lot of time for fun projects and hobbies that don't make any money. Things like art and music, and making things. I know it's possible to have a career as an artist or a musician, but I don't think I'm _that_ lucky. I wish I could really pour all of my energy and time into those things, instead of also spending time trying to monetize various apps and websites.

I might try Patreon. I already have some pretty popular YouTube videos, so I think there is an audience for the kind of projects that I love to build. That's what I would be doing if I was retired, so maybe Patreon can help me to do that right now. I might try to set that up when I finish my next project.

<comment><USER26> I'm about to embark on almost the same path you did, leaving my job and moving somewhere cheaper to reduce burn rate while working on my own projects.

Would you mind if I picked your brain on which countries/cities you'd recommend? I've found info online (e.g. internet speeds listed on nomadlist) to contradict my real world findings, so would be great to get some first hand info.

Can you email me at firstname.lastname@example.com? If you'd prefer me to get in touch another way let me know. Or even a reply here would be hugely useful.

</comment></comment></comment></comment><comment><USER27> Should have been titled "... in the USA" as tax rules are very different in other countries.

For instance, in France, you only owe money to the taxperson when you sell your shares, for a profit. If you sell for a loss, this is tax-deducible.

<comment><USER28> The US really does have a lot of problems with their tax system to be honest.

For a country whose citizens outwardly hate tax, you'd think they would have one of the best, most straightforward, and fair tax systems in the world. But instead you have one of the most convoluted, loopholey, broken systems in the world.

Whereas in countries where taxes aren't as "hated" (Europe, Canada, etc) they don't pay a cent to file taxes, have less loopholes, it is less complicated, and overall fairer.

If I was an American I'd hate tax too, but you guys made it that way. Why does it still cost money to file taxes anyway?

<comment><USER29> It's pretty funny. You get the same tax load in most of canada compared to california, yet the tax laws have far less gotchas like these and you get universal health care.

The canada gotcha's are:

1\. Everything is more expensive.

2\. Housing is overpriced in employement metros except alberta.

3\. You get paid a lot less than the USA anyway.

4\. Canada's stock market is pretty much flat compared to the USA in the past decade.

Sometimes just raw amounts of money overcomes a lot of these kinds of issues.

<comment><USER30> Salaries are lower than the US to boot.

</comment></comment></comment></comment><comment><USER31> I've worked at several small startups, in the range of seed to C-rounds. Except for the one that I've was co-founder, I never knew when/how to ask or negotiate options things. It always felt like something that was supposed to happen at 'other companies' and not the one I was applying/negotiating to work at.

I know I should in theory ask to see the cap table, but it seems awkward and if shown it right then I'm not sure I'd entirely know how to read it properly (along with the terms), or how to immediately negotiate from it.

Stock options have been frequently presented to me as just a standard piece of paper offered, and not a thing for negotiation. It feels easier and less scary to haggle on salary (which I do quite well at generally).

Is it even reasonable to ask for twice as many options when I'm negotiating? Or is that like asking for double the salary and not reasonable?

Is it reasonable to ask for a bonus (at an A-round startup) in terms of options after being there for a year?

<comment><USER32> I really doubt any startup would let you see the cap table as a prospective employee, ahead of being hired full time.

It's better to ask what percentage of the company your X amount of shares would be. Company A could offer 1,000 shares and Company B could offer 10,000 shares but you have no idea what amount of ownership that actually is for either of them.

<comment><USER31> I've always assumed an investor would want to see the cap table prior to investing (is this true?), but thought it odd that such is hidden from prospective employees. Both are investing, just in different ways.

<comment><USER33> Yes, investors ask for cap tables. Always, in my experience.

</comment></comment></comment></comment><comment><USER34> I'd add a few things:

\- You probably won't have a 10 year horizon if you are joining a company that is now a unicorn. You likely will if you found a company that later becomes one.

\- Sarbanes-Oxley is a big villian here. It pushes the cost of legal compliance through the roof for public companies, forcing companies to delay IPOs until revenue is higher. In addition to delaying liquidity events, it prevents small traders from owning stock in companies that are ramping from ~100m valuation to ~1b, which is why there are so many unicorns now. This hurts normal investors big time, and helps people with access to private markets. (source: friendly neighborhood VC)

\- the article doesn't go into AMT, where the IRS forces you to knowingly overpay tax when you exercise ISOs, then (slowly) pays it back over the years.

<comment><USER35> > \- Sarbanes-Oxley is a big villian here.

SOX exists because investors were tired of being defrauded by the people running the companies. While SOX might make it more onerous to go for an IPO, it's still a good thing for public markets.

I suspect the real reason companies stay private for so much longer is not because SOX-compliance is too expensive, but because companies can take advantage of private investors in ways that they cannot get away with in public markets.

</comment></comment><comment><USER36> The most poignant line is near the end: "It's really tough to ask these [questions] without sounding obsessed with money, which feels unseemly, but you have to do it anyway."

Basic due diligence on a startup offer is asking for # of shares outstanding, last company valuation, strike price. Advanced due diligence is talking about things like extended exercise windows, secondary sales, and liquidation preferences.

Unfortunately, basic due diligence is rare enough that if you _do_ ask a potential employer the latter kind of question, there _is_ a risk of coming off as overly mercenary.

The way of talking to potential employers that I've seen work is to ask questions in increasing complexity, sharing your conclusions along the way, and signalling why you're asking these questions.

After you ask the basic due diligence questions, you can share the math you're doing on stock value various exit scenarios (a good base assumption is to assume an exit at the current valuation).

That typically lays good groundwork for having "advanced" due diligence conversations about an extended exercise window and shows you're serious. In contrast, if the company isn't willing to share valuation or total share numbers, this is a huge red flag as it prevents you from doing the basic math.

This is a tool I built giving engineers the questions they need to ask, in order to do that basic math on what their stock is worth: [http://www.optionvalue.io/](http://www.optionvalue.io/)

<comment><USER37> This is exactly right. If a company offers you shares or options as pay for your work, they're asking you to be both an employee and an investor. If the company's executives become skittish or sullen when you ask questions any sane investor would ask ("what's my upside?"), that's a red flag. Be careful.

<comment><USER38> > If the company's executives become skittish or sullen when you ask questions > any sane investor would ask

Kind of weird because they all do, and engineers are pretty inept at anything finance.

</comment></comment></comment><comment><USER39> > The correct amount to value your options at is $0.

Agreed, but ...

Try to negotiate a deal such that the employer gives you a one-time sign-on bonus which, after taxes, will pay for the early exercise of the offered equity, and get the employer to give you the paperwork for filing 83(b) election.

This values the equity at $0, but prevents drastic financial implications (at least for the initial grant) should it actually become worth any real money.

What does HN think about such a scheme?

<comment><USER40> This is exactly what we do at my startup: our options are early-exercisable, we pay a bonus equal to the strike price, and we set up the 83(b) paperwork for you. (We don't gross up the bonus, so you will owe taxes on the strike price, but so far that hasn't been a problem for anyone; early-stage strike prices are manageable.) Are other companies doing this as well? It does seem like the sane approach.

<comment><USER39> Thanks for validating that this scheme is not crazy!

I have a follow-up question though. Every time a new employee joins, you are essentially shelling out the cash equivalent of their equity's FMV. This way, the offered equity is twice as expensive for you - once as equity itself, but then again as the cash bonus. Has this caused problems for your cash position? Is it sustainable as Scalyr grows into higher valuations?

<comment><USER40> It's cash-neutral for us. Suppose a new hire gets 10,000 options with a strike price of $1.00. (These are not real numbers.) They will pay $10,000 up front to early-exercise the options. We give them a bonus of $10,000. Net cash impact to us: zero. (As I noted, there is some cash impact to the new hire, as they will have to report $10,000 income and pay taxes on it.)

We've lost the opportunity to earn a little money from the new hire by selling them stock at a nonzero price. But that's not an opportunity we want.

As we grow into higher valuations, the tax impact may become an issue. We might have to start grossing up the bonus. Also, if someone leaves before they're fully vested, all this has to be unwound and I'm not certain of the tax implications there. We haven't worried much about that because at this stage no one is leaving. :)

<comment><USER41> This is unrelated to anything but just wanted to say how awesome your Topcoder results were, you are a legend!

</comment></comment></comment></comment></comment><comment><USER42> Early employees usually get hosed, and I wouldn't sign up again unless comp was at least equivalent. The best large companies are much better run than they were 20 years ago, generally pay much better, offer a fair chance of stock appreciation (and it's liquid!) while offering more opportunities for professional growth. I speak from a lot of experience.

True story: I was the first employee at a startup that raised > 15M from top investors and sold to a big SV company for several multiples of the total investment. I left before the company sold, but had low single digits of ownership. Terms of the sale: investors were made whole, founders made 'house- changing' money (low millions each) + really nice salaries. Common stock was zeroed.

Granted, the founders probably had to work hard to sell the company, but as an early employee, I took quite a few risks as well and the reward was definitely asymmetric.

<comment><USER43> worked hard, sure, but if the sale was for multiples of what was invested it's hard to see any argument for screwing early employees (aside from, because we can and we like more money for ourselves instead of these people we never expect to see again)

</comment></comment><comment><USER44> I was _so naive_ when I joined my first startup. When we were purchased, it came to light that the main guy never got around to signing my stock option agreement. He is a fucking mensch and signed it after the fact.

Character buys a unique, abiding respect.

<comment><USER45> At my first startup, the share option terms and conditions had a clause allowing the company to arbitrarily change any condition in the contract. Of course we signed it and didn't think much about it. At the IPO this clause was very predictably used to extend all the employees'[1] vesting schedule to many years after the IPO event. By that time the options were worthless because the company was acquired in a fire sale.

[1] Naturally by "employee" they didn't include the founder or members of his family who worked there.

<comment><USER46> That sounds like it wasn't a contract in the first place. Doesn't it have to in some way bind both parties to be considered a contract?

I would almost think that a lawyer would be able to convince a judge that that "contract" was written so adversely that the "arbitrary change" clause should be struck, since the rest of the contract is essentially illusory if it remained.

<comment><USER47> Assume you are correct and it is not a contract.

That doesn't mean the employee gets stock options. The contract granted the stock options. With no contract, there's nothing.

<comment><USER46> Sure, but if it got into a courtroom, the judge would probably be apt to rule in favor of the party that didn't write the contract, so I would guess that rather than invalidating the entire contract, they would strike that provision. Not a lawyer though, so who knows.

</comment></comment></comment></comment></comment><comment><USER48> Great post and I totally agree. I recently talked to my financial advisor about my current company and we went through all the numbers for various pricing scenarios (of a public offering) over the next 4-6 year, at various valuations. From his point of view, he encourages me to stay the course - quite the opposite from most of the tech friends I know (most usually don't stick around after a few years).

On a side note, I haven't used it in a long time, but why all the hate on Jira? I mean, I remember it does everything including making my breakfast for me, but is it really that bad? I don't remember it being that bad, but maybe others would like to chime in on why they like/dislike it?

<comment><USER49> JIRA is what you make of it. My comment is that it requires a ton of gardening to keep it useful. You probably need 1 person for every 5-10 devs who has JIRA-wrangling as a primary responsibility that eats a significant chunk of their time. Part of this is the nature of project management, but part of it is that JIRA's workflows for basic tasks like "close as duplicate" or "do this action on all issues linked to issue X" are terrible and require way too many clicks. In shops that don't properly allocate people to this task, it's extra debt that just piles up and becomes a mess, so I could definitely picture some of the hate being as a result of those experiences.

The author may also be using "JIRA" as a proxy for a heavily pre-planned waterfall culture with a big emphasis on time tracking, doing what you're told, fake-metrics success theatre, etc. (cf. [https://hackernoon.com/12-signs-youre-working-in-a- feature-f...](https://hackernoon.com/12-signs-youre-working-in-a-feature- factory-44a5b938d6a2))

<comment><USER50> Exactly. Jira UX is terrible (it've very hard to find things) and closing a ticket that was a mistake is at least 3 steps.

</comment></comment></comment><comment><USER51> I left a startup after 2 years. I was offered a contract job that had a gross salary that was twice my startup salary. Even after taking into account the cost of benefits (health, vacation, 401k, etc), I would still make about 60% more net.

I did some math and even if the company sold for a decent amount in the future, my shares wouldn't have been worth the amount in pay I would have lost between then and the liquidity even. So, I started up my own LLC and started doing consulting/contracting and I've never felt happier.

I feel like I'm in control now and I don't have to beg someone for a raise or worry about why I'm getting screwed in the next round of funding.

</comment><comment><USER52> It's really unfortunate that most startups appear to be set up with ISO shares. The company I am at now is an LLC and distributes RSUs, which meant when I joined I was able to file an 83/b form which minimizes my tax impact.

At my last company, I exercised options. I owe the IRS tens of thousands of dollars due to AMT this year (not that it was unexpected, as I did heavy research beforehand).

Can anyone shed light why companies aren't set up to distribute RSU's (and allow employees to fill out an 83/b form within 30 days of being granted?). Is it not preferrable to investors for some reason?

The worst part of the AMT and exercising ISO shares at a startup is that it is nearly impossible to make an informed decision on whether or not to exercise (and how many shares to exercise). You can't possibly know your tax liability until next tax season when all your tax forms come in.

Last year, I called maybe 5 different tax accountants for advice on how to estimate what my tax impact would be for exercising shares and got 5 different answers. This stuff is COMPLICATED.

Finally just got TurboTax and plugged in some guesses of my deductions, etc and got some type of estimate. Filed some 1040ES's last year to minimize the penalty and hopefully will get close.

Another sad fact is how few people at startups are even educated on the subject. While one can argue it is up to each employee to do their own research, I think it is in startups ethical interest to have their CFO team give an overview of the stock plan and what kinds of things employees may want to ask their accountants about.

<comment><USER53> RSUs for early employees makes a lot of sense. The problem is that by granting RSUs, you're effectively forcing the employee to accept taxable property as it vests. For folks that want to early exercise anyway, that's fine (more efficient than paying the company for the options and dealing with the AMT stuff!).

But as you get even a little bit down the line, and your company valuation goes up, that's real liability for the employee. Said another way, not everyone early exercises their options, so some folks would prefer not to definitely owe taxes.

A lot of these later stage companies (like say Dropbox, and famously Facebook pre-IPO), start blending towards RSUs for exactly this reason though. Shares are nicer than options, but you need to be cognizant of the tax implications (I believe, but haven't experienced it, that even Dropbox does RSU withholding, so employees aren't left figuring out how to pay the IRS thousands of dollars for their illiquid shares).

Disclaimer: I'm not a tax professional, lawyer, accountant, or any of that (like you, I just wish at least early employees would get RSUs).

</comment></comment><comment><USER54> These books on the subject of term sheets are solid

[https://www.amazon.com/Term-Sheets-Valuations-Intricacies- Bi...](https://www.amazon.com/Term-Sheets-Valuations-Intricacies- Bigwig/dp/1587620685/ref=as_li_ss_tl?ie=UTF8&qid=1484751040&sr=8-1&keywords=terms+sheets&linkCode=ll1&tag=akhn-20&linkId=87107bd4b2cead32b7b7130e4deb6b92)

[https://www.amazon.com/Venture-Deals-Smarter-Lawyer- Capitali...](https://www.amazon.com/Venture-Deals-Smarter-Lawyer- Capitalist/dp/1119259754/ref=as_li_ss_tl?ie=UTF8&qid=1484751094&sr=8-3&keywords=term+sheets&linkCode=ll1&tag=akhn-20&linkId=c31b08f1c34007a6a2d35f251a9deeb8)

<comment><USER55> Also:

[http://web.mit.edu/tytso/www/OPTIONS-HOWTO/OPTIONS- HOWTO.htm...](http://web.mit.edu/tytso/www/OPTIONS-HOWTO/OPTIONS-HOWTO.html)

[https://news.ycombinator.com/item?id=2623777](https://news.ycombinator.com/item?id=2623777)

[https://gist.github.com/jdmaturen/5830b83c1425c4767f7e1bd4c9...](https://gist.github.com/jdmaturen/5830b83c1425c4767f7e1bd4c9561718)

[https://github.com/jlevy/og-equity-compensation](https://github.com/jlevy/og- equity-compensation)

</comment></comment><comment><USER56> > fixed PTO

Why on earth is this a downside? "Unlimited vacation" is a scam.

<comment><USER25> If you ever wanted confirmation of this, suggest to your company that instead of "unlimited vacation", which is really vague and hard to understand, the company give 8 weeks vacation that doesn't accrue or roll over year to year.

<comment><USER57> Interestingly, that's not legal in California. Vacation is a form of earned income, and must accrue and be paid out at separation. (You can cap accruals, but vacation accrued must be paid, and can't expire.)

<comment><USER58> There's a legal workaround to that, though: reduce the next year's vacation allotment by the amount of unused vacation the previous year. Raytheon uses this trick to implement their use-it-or-lose-it PTO policy.

<comment><USER59> Do you think it would survive a legal challenge?

<comment><USER25> Even if it doesn't, do you have the money to pay the lawyer(s) enough to get it that far? And is it something you care enough about that if you were offered $25k to drop it, you would reject it?

</comment></comment></comment></comment></comment></comment><comment><USER60> Apparently, "forward exercise" (also called an 83(b) election) isn't something The Fine Article's author has ever heard of. Nearly every one of the tax consequences this article bemoans could have been avoided, with just that one move.

Yes, it means you need to have the cash on hand, but honestly, taking out a _bank loan_ to forward exercise your option grant would probably be orders of magnitude cheaper than wrestling with the 409a valuation or AMT or any of that garbage — especially for very early stage employees.

And it starts the long term capital gains counter earlier, too.

<comment><USER15> I don't think you can do an 83b for options from a _private_ company, which is what the article is about.

<comment><USER61> Yes, you can. I did precisely this. I even had to take out a personal loan to cover some of the costs, as the value was just starting to ramp leading to the IPO.

In the end, I paid hundreds of dollars (or perhaps a thousand?) in interest, but it paid off handsomely as the spread between short term and long term capital gains is large enough to make it worthwhile.

But, of course, there's always risk.

<comment><USER60> Exactly. Imagine you were talking with a very early-stage company (say, to be employee number < 10), with a ~1% grant, at current dilution.

It would be so profoundly painful, financially — and in so many different ways at once — to exercise at any other time but immediately upon hire (or at a minimum, in advance of any subsequent liquidity event), in that circumstance.

</comment></comment></comment></comment><comment><USER62> I see the current cold climate as the direct result of companies now taking a long time to sell or go public. The frameworks setup for early employees to make good on their loyalty and hard work were designed during a time when companies would only stay in startup mode for 4 to 5 years max.

Now that companies are planning on 10+ years to IPO or sellout, they aren't changing their employee incentives to match expectations. No one wants to work for free, or cheap for an entire decade at one company.

I actually applaud Snap Inc. for pushing ahead with an IPO early on in its lifetime. It's going to make millionaires out of all its early employees and start a 2nd wave to startups in LA that San Francisco hasn't had since Facebook and Twitter.

People in SF are still waiting for AirBNB and Uber, Lyft, Stripe, Github, etc, these companies are turning over employees already that should have minted local millionaires ready to start the next wave.

</comment><comment><USER63> "The correct amount to value your options at is $0. Think of them more as a lottery ticket. If they pay off, great, but your employment deal should be good enough that you'd still join even if they weren't in your contract."

Totally agree with this and I think it's the core of the whole piece. I tell everyone who asks about options the same thing before getting in to the details.

</comment><comment><USER64> I've been sucked in to paying money to exercise my stock options after I left a company. On paper I could pay off my house today... except I'll most likely never see that money.

Nowadays I ignore equity and look at the bona fide package they offer and how enticing the challenge they have can be and decide based on that. Equity promises just don't fall in the balance anymore.

<comment><USER65> This. I would also optimise on cash compensation. Stock options are a nice to have but the windfall is ultimately very hypothetical since most startups fail.

Don't fall for the stock options trap if you are an employee: you are just as fortunate (or not) with a lottery ticket.

Obviously if you are a founder it's a different story...

<comment><USER64> What's even more frustrating is that the startup in question is actually doing pretty well for itself. It just doesn't have a liquidity event in the near future. On paper my stock looks really good right now but is just out of reach.

</comment></comment></comment><comment><USER66> When I joined zenefits they offered me 500 shares before raising the 500MM round.

Then after the 500MM round they were 5000 shares.

When I was negotiating my offer, I didn't budge on getting a market rate salary and in the end, I got it.

Why? Because they did some hand wavy arithmetic and told me my 5000 shares would be worth 500K at some point. Yeah no thanks. As employee #500, I knew better.

What happened? I hated it there. Left after a year. Company lost half of its valuation.

Moral of the story: don't compromise your salary for equity, even for a unicorn. The only exceptions are if you are truly an early employee. If you're not sure whether or not that's you, then it's not you.

Even then you aren't safe, I saw them fire other engineers for no other reason other than they had too much equity.

Careers are messy. Even the people who WERE one of the early employees and got a shitload of equity eventually got their salaries adjusted.

Don't compromise on your salary.

<comment><USER67> "Don't compromise on your salary."

It's the damn truth. Cash is freedom - cash is king.

</comment></comment><comment><USER68> Startups are a great way to get rich - if you're a founder.

</comment><comment><USER69> "If the company sells for a more modest $250M, between taxes and the dilution that inevitably will have occurred, your 1% won't net you as much as you'd intuitively think. It will probably be on the same order as what you might have made from RSUs at a large public company, but with far far more risk involved. Don't take my word for it though; it's pretty simple math to run the numbers for a spread of sale prices and dilution factors for yourself before joining, so do so."

This is key when you are thinking about joining a startup. If you can land a job at $BigTechCompany that pays a bonus and RSUs that refresh every year, it's likely a much safer bet and will have much lower risk.

</comment><comment><USER70> > How many outstanding shares are there? (This will allow you to calculate > your ownership in the company.)

Is it not true that company can (and usually will) issue new shares and dilute your stake at every investment round? (I am just a layman like you)

<comment><USER34> Hiring is the primary source of dilution at new companies. Stock packages have to come from somewhere.

Also, equity rounds reduce your percentage ownership, but (usually) not the current value of the stock you hold. If a $100M company raises $100M, the number of outstanding shares doubles. However the company is now worth $200M (the cash in the bank counts towards valuation). Now, your 1% share is a 0.5% share, but it is still worth $1M. If the company spends the $100M without growing, then the funding round was a mistake, and your shares are now worth $0.5M

So, spending money lowers the value of your stock. Issuing shares lowers your upside at a fixed future valuation. If management knows what it is doing, raising cash should increase the chances the company grows, and so should hiring.

(these calculations are oversimplifications, but the intuition is right)

<comment><USER25> > Hiring is the primary source of dilution at new companies.

Is that true? Generally don't companies set aside ~5% of the company for employees? Even the first 5 employees probably get a combined total of less than 10%, whereas the first investors probably get 10+%.

<comment><USER47> I agree with you. The dilution events happen because something unexpected happens, not because "we had to hire people."

If people are getting diluted from shares being issued to employees like you, you have already entered a death spiral.

</comment></comment></comment></comment><comment><USER71> _> The correct amount to value your options at is $0. Think of them more as a lottery ticket._

This is trivially false. Lottery tickets are not worth $0. Take that into account when evaluating this commentary.

Basically, 90 day exercise windows are evil and the source of great pain. However my view is the author is folding in a bunch of anxiety around the general risk of startups. They seem to imply that a primary reason for delaying an IPO is employee retention. This is a poorly supported theory. Golden handcuffs are not a great retention tool as a poorly motivated employee is minimally productive. Rather the primary reasons to stay private are higher valuations afforded by the private market and less regulatory oversight.

Look, if you can get an awesome RSU offer from a super solid public company then go for it. But don't buy into the implication here that startups barely offer better deals. Do look for an extended exercise window since companies are staying private longer these days. But generally speaking you're going to get a significantly bigger chunk of options in a startup than a mature company, with commensurate risk. Do it if you believe in the startup and handle the uncertainty. It is not the same as a lottery ticket; you can improve the odds with your own labor.

</comment><comment><USER72> Imo it's the unspoken truth in our industry that nowadays the real opportunity costs aren't held by the founders nor investors but by (non- junior/experienced) employees.

It comes down to a very strong but important question: why should anyone work for your company

</comment><comment><USER73> There's a simple solution to this. Just, don't take any salary that's below the highest market rate you can get. The second you start taking "equity" as compensation, you're putting yourself at extreme risk, needlessly. If you take a 10K salary cut for options, it's the equivalence of taking the higher salary and investing 10K in that single company. No self respecting financial advisor would ever tell you to take 10K or More per year and invest it in 1 single company - especially if it's the very same company your actually working for! That's just compounding High risk ontop of already high risk.

Even if you wanted to do this, you don't need to be an employee of a company to do that. Just join some venture Seed fund that you can invest your 10,20,30K per year, etc. Your chance of success is approximately the same, but at least you won't loose your job when it doesn't work out.

And, if your just out of school, or have no other options, then by all means go work for the start up. In this situation your not giving up a higher salary to do so.

And always make sure you have work/life balance - the company won't do that for you, you have to make it happen.

</comment><comment><USER74> Yeah I had 1,000 shares of yahoo in 99, then you had IPOs but the price crashed so rapidly I lost my shirt before I was able to exercise and the shares never recoverd it took me 8 years of hard work to pay off the huge tax bill.

</comment><comment><USER75> I've recently left a company and am within my 90 day window to exercise my options.

It feels much more like playing roulette than making an investment. I have no idea if there will be a liquidation event at all, nor do I know how much that'll end up being if I can hold on for that long. Oh, and I'll be paying taxes on those shares all along the way (assuming the value goes up, which is another uncertainty).

The odds of coming out on top are not in my favor -- and I've chosen to not exercise my options. I came to this decision based off

a) plainly looking at the odds -- the company isn't going to be a unicorn no matter what bullshit the founder and investors are spouting

b) given a non-unicorn style exit, the cash these stocks would earn me probably wouldn't be significant anyway.

We live in an age where not only are investors letting themselves be taken for a ride, but the employees are as well. I'm now concerned with salary exclusively in my negotiations -- I can take an that extra $XXk per year and put it into the stock market with more reliable results.

</comment><comment><USER76> About trying to find an answer to: "Does the company's leaders want it to be sold or go public? And [ ..] time horizon" I think it's impossible to find the right answer. I worked in a startup where every year the founders would tell us that next year we'd go to IPO. Then that year comes, and they wouldn't: one year it was another company's big IPO that had sucked the market dry, one year it was that valuations were low, one year it was that the cost of IPO was high, and on and on. I don't think the founders were intentionally lying, but this question in advance, was not the right question because no one knew the answer. This question basically only begs for an answer to please the audience. So instead I think you have to look into the market and stats of that year as a whole to guesstimate where the company may be headed.

</comment><comment><USER77> Let me save you some reading: bargain down the options and go for the increased salary instead. I suppose that's not true if you're planning on staying long enough until you can exercise them, but I've been very happy doing that at the last few places I've worked at.

</comment><comment><USER78> I had 26,000 share in a company TouchCommerce that got bought out by Nuance for about $250-million. I netted about $9,000.

What did I learn? Start your own company is best. second best is to license a trademark or a patent to the startup to ensure that you are square in the center of the equity pie. YMMV

</comment><comment><USER79> Imho without asking a lawyer, which should be an expert in this field, you will never be able to understand the value of the offered deal.

<comment><USER25> Just to expand on this more, there are some reasons why this is. The biggest one is that even if you have all cap-table information available at the time of your offer (which you almost certainly don't), you don't have to be told when things happen (bank loans, bridge loans from investors, terms of new investments, new employee hires, expansion of the employee pool of stock, more shares issued to officers, new stock classes and more).

And that is just as an employee; you can't possibly be on top of all of this information without being a C-level employee, and if you're constantly asking for updates on this, you're probably not doing your regular job. Even so, you may not be privileged to some information (investors getting more shares issued if target revenue numbers aren't hit, for instance). And you definitely don't get a say in any decisions that affect this (unless you're a C-level employee, again).

When you are leaving the company, there are so many ways you can get screwed. Regardless of the 90 day exercise window, unless the company is on the very precipice of IPO-ing, you're never going to find out the terms of new investments / bank loans / (see above). And honestly, the easiest segment of people to screw over are the former-employees. The company can issue new classes of shares to current employees that render former employees' stock worth effectively $0. The company has nothing to lose; current employees are happy because they get a bigger slice of the pie, investors are happy because they didn't have to give up anything; the only people upset are the people who aren't around anymore.

</comment></comment><comment><USER80> There's a lot of advice to value your options at $0. I'm curious how people do the math when considering moving from a big company with RSUs that are liquid at vest to a startup (doesn't have to be a unicorn). Big company RSUs can be a big part of your annual total compensation. Do thinking about a "fair market salary" do folks consider that their base + risk adjusted RSUs? Seems like the best advice I've seen here that might be applicable would be to negotiate down equity in favor of base comp. especially if you consider that equity will likely be granted as bonuses during your tenure.

<comment><USER81> Multiply your RSU quantity by the company's current stock price and consider them part of your salary when comparing. If your company's stock is not very volatile, they're pretty much equivalent to cash, since you can (and some would argue you should) sell them the day they vest, converting them to cash.

Don't forget RSUs usually fully vest (stop coming in) after a few years, so if you're looking at an offer where you get 25% of your salary in RSUs that fully vest in 4 years, then keep in mind you're looking at a 25% pay cut after 4 years. I'm told some companies issue "evergreen" equity to counteract that problem, but I've never seen it in practice.

<comment><USER80> FWIW, at LinkedIn evergreen grants are fairly common but not guaranteed. That's prior to the MS acquisition though which has a reputation for being less generous with equity.

</comment></comment></comment><comment><USER82> What's the better option to motivate employees then? Profit-sharing rather than equity?

<comment><USER83> This seems to remain the best way to motivate employees from the founders' eyes. Everyone loves the idea of striking it rich, especially young workers just out of college, even if it's unlikely to happen.

</comment></comment><comment><USER84> Interestingly I've had the opposite experience. I work in the crypto space. My monthly comp is a combination of bitcoin, and some units of the crypto token that we invented that will power the app we are developing. When I first signed on, the token was not yet released, but the plan was for it to be minted and released on crypto exchanges way before our app is actually complete. This allows people to speculate on the future success of our app. Once the coin is out there, we have no control of it, it becomes an independent asset that anyone can trade without our approval or knowledge. This makes the coin perfectly liquid with an actual value.

Since when I first signed on, the token wasn't out yet, we had to negotiate a value for it. The value we agreed on ended up being much lower than the actual value when it was finally released. This created a strange situation. My monthly salary, which was at one point a combination of money (bitcoin) and some pie-in-the-sky uncertain token, simply became money + money since it was all liquid. I was therefore getting paid much more than expected, and more than another engineer of similar skill would require. This creates pressure on the founders to consider letting me go - even though I was a critical component of getting it to where it was. The psychology when the equity is not liquid seems very different. Even if a company's valuation starts to become much higher than expected, the fact that there still has to be an unlikely far-in-the-future liquidity event for any of it to be worth anything, significantly changes the dynamics. But when your engineer is simply getting paid quadruple market value in real liquid money, thoughts start to materialize that they can simply exchange me for 4 other engineers.

</comment><comment><USER85> > _depending on the company you join, they may have restricted your ability to > trade private shares without special approval from the board_

If your shares have this restriction they are practically worthless. Also be wary of sneaky language on page 40 of a random document signing away your ability to sell--have seen this from otherwise-reputable Silicon Valley names.

</comment><comment><USER86> If you are thinking about starting a company AND doing right by your employees, consider using alternative ownership structures like ESOP ([https://www.nceo.org/articles/esop-employee-stock- ownership-...](https://www.nceo.org/articles/esop-employee-stock-ownership- plan)).

</comment><comment><USER87> Not familiar with the US tax system but does the concept of "growth shares" exist over there? They're a fairly standard thing in the UK and negate most of the income tax and social security issues mentioned in the post. You're just left with CGT to pay on an eventual sale (and there are ways to reduce even that). Also, because they're shares there's no 90 day problem on leaving, you're awarded them on a simple vesting schedule and that's that.

Bonus: the IRS recognises them so American employees of UK companies can enjoy the tax benefits too.

[https://www.twobirds.com/~/media/pdfs/expertise/employment/e...](https://www.twobirds.com/~/media/pdfs/expertise/employment/employment- incentive/growth-shares.pdf) is a nice primer if anyone is interested.

</comment><comment><USER88> "Your options have a strike price and private companies generally have a 409A valuation to determine their fair market value. You owe tax on the difference between those two numbers multiplied by the number of options exercised, even if the illiquidity of the shares means that you never made a cent, and have no conceivable way of doing so for the forseeable future."

This is either incorrect or I'm misunderstanding it. The purpose of the 409a valuation is to set the strike price of the options. The strike price is the fair market value of the common stock.

Also, to parrot everything everyone else is saying, equity should be valued at zero. Out of the 200 or so 409a valuations I've performed, there might be 10 companies where I would consider the equity to be valuable in the long term.

<comment><USER89> I think the problem is if you exercise the options after another financing round when the 409a will be higher. You then likely owe AMT on the difference of that value and your strike price.

</comment></comment><comment><USER90> >"Private markets do exist that trade private stock and even help with the associated tax liabilities. However, it's important to consider that this sort of assistance will come at a very high cost, and you'll almost certainly lose a big chunk of your upside. Also, depending on the company you join, they may have restricted your ability to trade private shares without special approval from the board."

It is true that you might lose a big chunk of your upside by going to a secondary market but if the alternative is to leave the ISOs on the table it might not matter.

Also firms that provide a secondary market will give you a loan to purchase those shares if they line up a buyer for you so you don't have to come up with this money on the spot yourself. SharesPost does this.

</comment><comment><USER91> I've really appreciated how Quora handled stock options, especially in contrast to all these horror stories. Quora uses 10-year exercise periods[1], and provided me with a spreadsheet regarding what the outcome for me would be given some valuation and dilution (with some example outcomes from other companies of similar size). The last round of funding allowed employees to liquidate some of their options/stock as well.

[1] [https://dangelo.quora.com/10-Year-Exercise-Periods-Make- Sens...](https://dangelo.quora.com/10-Year-Exercise-Periods-Make-Sense)

</comment><comment><USER92> "Worse yet, by exercising options you owe tax immediately on money that you never made."

For NQSO this is true, for ISO this is false. The exercise of an ISO grant is not treated as ordinary income.

<comment><USER15> Yes, but for ISO you owe AMT. It amounts to ~28% federal tax rather than ~39%. But it's still a big number.

<comment><USER93> This is correct. To put some concrete numbers on it, I'm in my 6th year at a startup. In 2016, I spent $6,400 to exercise ~50,000 options that had a total FMV of ~$60,000. This is going to add over $7,000 to my 2016 taxes due to AMT.

If you're single and your income is over $115K, or if you're married and your total income is over $150K, there will be tax implications for exercising your options, unless you exercise them when the spread is $0.

<comment><USER94> That's not quite how AMT works. AMT is not added to your taxes, it's an entirely alternative tax system (hence the A in AMT). You'll pay the larger of the two values (AMT vs ordinary tax), and given the taxation rates, you may not have made enough to actually trigger AMT. The rate for AMT is lower than ordinary tax, and there's an exemption for the first $N (where N varies based on several factors).

<comment><USER93> I understand how AMT works; these numbers are from actually calculating my 2016 taxes. With the exercise, I'm paying over $7,000 more than I otherwise would have.

</comment></comment></comment></comment></comment><comment><USER95> I have a question: I know for sure that my company is going to IPO this year and I plan to stick around to see it happen. By the time it happens I will have about 30% of my options vested which I could choose to exercise.

Is there any reason why it might be advantageous to exercise early? My current plan is just to see how the IPO goes and then consider exercising at that point - it means a lower risk for me because I'll know exactly what they're worth and if they're even worth buying.

<comment><USER67> You would begin to qualify for long term capital gains which is taxed lower than the higher end of your income, presumably. You can sell your stock 6 months after it goes public so if by then you qualify for a long term capital gain (1 year holding an asset) you get taxed at this advantaged rate. If you will likely make a substantial amount of money (100k+) this could be a lot of money you save.

Of course you assume the risk of being an investor and you could lose money if it all goes south!

</comment></comment><comment><USER96> On the same topic, [https://www.scribd.com/doc/55945011/An-Introduction-to- Stock...](https://www.scribd.com/doc/55945011/An-Introduction-to-Stock- Options-for-the-Tech-Entrepreneur-or-Startup-Employee) has detailed advice on what to do as a startup employee in the section about options. (tl;dr: early exercise, 83(b) election, ask for nonstatutory stock options instead of incentive stock options).

</comment><comment><USER97> > Your options have a strike price and private companies generally have a 409A > valuation to determine their fair market value.

Is this exactly accurate? My understanding was that you owe gains tax on the difference between the 409A and (strike price + wages traded for options).

In other words, if you take a $1000 / month cut for one year in exchange for options, you get to add $12,000 to your cost basis for the purpose of calculating gains taxes.

Is this incorrect?

<comment><USER98> Salary doesn't come into play when calculating gains taxes in the USA.

In other words, the article has it correct.

<comment><USER97> Wow. That's terrible. My gains tax for 2017 just went up. :-)

So, what if you work 100% for equity? Even then, you don't get to declare any part of that?

<comment><USER99> Declare as what? It's treated as income - you declare it, and you pay tax on it.

<comment><USER97> I meant declare as part of the cost basis.

IE, if you are paid $5000 / week and you can optionally take $1000 of that as options, and you do so, why doesn't that $1000 become part of your cost basis?

<comment><USER98> That's just one of the problems with the whole stock options tax rules. You really have to pay to play (triple taxation!), and it makes the golden handcuffs so much more more worse. You see a lot of people doing short term sales because they can't afford to hold onto the stock for a year and take the AMT hit.

</comment></comment></comment></comment></comment></comment><comment><USER100> "The 'you' of today needs to protect the 'you' of tomorrow."

Amen. Don't ever be afraid of looking out for your own financial interests. If you aren't, you are at a disadvantage. Anyone who makes you feel "unseemly" for minding your own benefit (which tends to be a lot of people) is either naive, a stooge, or someone else looking out for their own best interests.

</comment><comment><USER101> > Founders (and favored lieutenants) can arrange take money off the table > while raising rounds and thus become independently wealthy

How does this work?

<comment><USER32> When the company raises an additional round, the new investors build in provisions that allow the founders to take money off the table.

One example of this is IVP leading a round in Snapchat, and the two co- founders splitting $10M in exchange for some amount of personal stock.

<comment><USER101> What's the benefit of doing it this way, as opposed to selling some of their own shares from a previous round to the funding VC, or on the secondary market? Is it just a cleaner deal this way?

<comment><USER32> I don't think it's actually that common, and typically used with really hot companies.

A few reasons: it makes the new investor more competitive to the founders if there are others vying for the investment, but it also prevents selling too early.

If you have $5M in the bank, you'll be more likely to try to go for the home run rather than sell to facebook for $3B (which was rebuffed by the founders of snapchat).

<comment><USER101> Makes sense - it's sort of a psychological exploit to make the deal more enticing. Of course founders can always sell their shares on a secondary market, but it's much harder to turn down $5M cash.

</comment></comment></comment></comment></comment><comment><USER102> The first use of the acronyms should be defined. It's hard to read write ups that have acronyms that are not defined on first use.

</comment><comment><USER103> I'm a bit surprised cashless exercising wasn't mentioned (although perhaps the author isn't aware of the option).

Here is a link to a HN discussion on equity compensation from about a year ago: [https://news.ycombinator.com/item?id=10880726](https://news.ycombinator.com/item?id=10880726)

<comment><USER34> Cashless exercies aren't really an option pre-IPO.

This ends up creating a regressive tax on people that don't have cash laying around for early exercising.

People with more cash on hand can exercise before the stock goes up, so they pay much lower taxes, but they pay them earlier, and lose more if the company tanks.

</comment></comment><comment><USER104> Confirmation, I think, of many of these observations from the VC/HR perspective: [https://medium.com/positiveslope/dont-get-trampled-the- puzzl...](https://medium.com/positiveslope/dont-get-trampled-the-puzzle-for- unicorn-employees-8f00f33c784f#.1eh9bgttu)

</comment><comment><USER105> I found it funny he slagged on using JIRA, as oftentimes I found startups using Rally, which is a lot more painful :( .

<comment><USER106> Never heard of Rally, but it's not an unheard-of coincidence for startups to use software from sibling companies funded by their investors.

</comment></comment><comment><USER107> Accepting equity instead of cash is like asking for your paycheck to be denominated in Bison Dollars. If they want to add some options _on top_ of my salary for the full amount I'm worth each year, that's one thing. But options in lieu of part or all of one's salary is tantamount to a cut in pay.

<comment><USER108> The upside is if you hoard enough of this fake money, you may never have to play a game of Monopoly again where the banker is out of cash.

<comment><USER109> And if Bison's scheme to take over the world worked the Bison dollars would make you totally rich.

<comment><USER107> Options work the same way. Your equity in Bronygram could be worth millions _if_ Bronygram's world-domination schemes go off without a hitch and _if_ they IPO. But those are big ifs, and when you're employee #7 or even #107, you really can't assign meaningful value to those stocks, because they are simultaneously worth "zero" and "a fuckton", and the wave function hasn't collapsed.

<comment><USER109> Yes, that was the intended implication.

</comment></comment></comment></comment></comment><comment><USER110> This is the natural consequence of founders keeping board control.

Remember all those evil VCs who ousted founders, meddled in companies, and endlessly pushed for bigger and bigger risks in the hope of a massive one in a million IPO?

Turns out some of that was good for employees. No one who makes decisions needs liquidity events like they used to.

</comment><comment><USER111> I remember interviewing at one of the biggest Unicorns and a recruiter told me "we pay lower salaries, but we make up for that with generous stock options" to me it sounded as, "we don't want to pay you much, so here is some over bloated Monopoly money to keep your dumb ass happy"

</comment><comment><USER112> "A modest $250M".

Uhh, "modest" is surely 20-50M. $250m is quite a bit even for a fast growing company.

</comment><comment><USER113> When pre-ipo options are granted, is the company required to tell the number of fully diluted shares outstanding? Without the denominator it is impossible to estimate the value. If they refuse to tell it or are secretive, does the employee have any recourse?

<comment><USER106> In the US, I believe the answers are "no" and "no."

</comment></comment><comment><USER114> Why don't companies fight the IRS to allow the tax from exercising stock options of non-public companies to be deferred till the stocks are traded. After all if there is no real gain why be taxed on theoretical gain?

Time for a Bay Area tea party?

</comment><comment><USER115> This is the reason I have declined couple of unicorn offers. I treat equity portion as 0. Especially, options. I will rather work for public companies, who can actually compensate using liquid RSUs that let me buy nice things.

</comment><comment><USER116> Maybe I'm naive but when someone is paying me with equity which I can't really sell to anyone else but him, I want him to buy them back, to the money I would have gotten if it were actual pay.

Everything else is just a pay cut.

</comment><comment><USER117> Is there anyone here who sold pre-IPO equity using companies like [https://equityzen.com](https://equityzen.com)? Can you describe your experience?

</comment><comment><USER118> Are there any stats about the average return on the options handed out? It seems most people have a few fail stories, or an unusual success story... not much of a sample size to go on.

</comment><comment><USER119> Wow, I've started working in a startup and this is really helpful to understand some processes and to start speaking the same language they speak. Thank you!

</comment><comment><USER120> I really do not see the point of joining a startup; you can earn more money contracting and it's guaranteed money, not some imaginary future payoff.

</comment><comment><USER121> I thought I could exercise my options 5 years after sign date, regardless of liquidation. Have I misunderstood or do I have some special deal?

<comment><USER53> The discussion here is about what happens when you _quit_. If you didn't exercise your options early, then you quit, the usual term says you have 90 days after you've quit. Pinterest and others have recently been highlighted for making much longer arrangements (years after quitting). If yours says the repurchase right doesn't kick in until 5 years after your employment is terminated, that's unusual and good for you!

</comment></comment><comment><USER10> Could someone point me in the direction of a good basic introduction to the mechanics of options, rounds, dilution etc?

</comment><comment><USER122> "In the worst cases, you might even have to use JIRA."

that's funny... but seriously, what's the big deal about Jira?

</comment><comment><USER123> Thank you!!

</comment><comment><USER124> so what happened in the last 10 years? Low interest rate venture capital (basically rich peeps trying to get richer using even richer peeps monies) have caused a market discrepancy which is now showing signs of major correction.

Now VC funded folks who were told they could be the next Zuckerberg have finally figured it out-your life is being commoditized into hedged call options for the rich with high probability of recouping their speculative bets. Your time is always going to be cheaper than a VC's and they've figured out a way to make it even cheaper at your expense and for their own gain.

People are figuring out their stock options aren't actually worth much and that they've just spent a huge chunk of their life helping the rich get richer with the illusive dreams of becoming the next Larry Page or Zuckerberg.

It's almost identical to the ebb and flow of workers in startups. Following this logic, we can clearly see these zombie unicorns are not going to be able to monetize like they've been able to raise money. We will see the rise of bootstrapped companies fighting each other to gobble up the vacant marketshare.

The worst that can come out of this is loss of economic productivity (VC investments have yielded economic returns for the 0.1% at the expense of the rest).

And of course lot of Venture Capital partners finding out their portfolio of 10 variants of Uber or Tinder is going to need more money to keep their share valuation high as capital is drying up due to global uncertainty.

They might not be able to buy a Lamborghini SV Roadster and a penthouse in downtown Vancouver. The world's smallest violin for the rich is always expensive and at great costs to society. Kevin O'leary worshippers call wining and dining "free market forces". A free market that serves less than 1% of the population with none of the benefits trickling down to the rest.

I had a blast not reading the article.

</comment><comment><USER125> > Worse yet, by exercising options you owe tax immediately on money that you > never made. Your options have a strike price and private companies generally > have a 409A valuation to determine their fair market value. You owe tax on > the difference between those two numbers multiplied by the number of options > exercised, even if the illiquidity of the shares means that you never made a > cent, and have no conceivable way of doing so for the forseeable future.

Is this a rule that should be changed? Why can't these just be capital gains taxes owed when you sell?

</comment><comment><USER126> Never work at a startup. A book could be written about the pervasive amount of bullshit and lying that exists in startups. Many of the people enfolded in these vehicles are no longer passionate about tech, but rather passionate about money.

</comment><comment><USER126> I would never work for a start up or a startup environment. A book could be written about the bullshit and lying that goes on in some of these companies.

</comment><comment><USER127> Excellent writeup.

</comment><comment><USER128> I am just an engineer. I don't understand a lot of the terms and concepts necessary to understand the linked article. I tried going through the Wikipedia articles for the terms I was interested in but I don't think I can make sense of it all without a kind teacher to help me out. So here I am turning to you, HN, to be my teacher. Here are the questions I have. If one of you could answer just one question from this list, it would help me a lot. I am sure it would help other people like me.

While answering, please quote my entire question with the Q<number> so that people don't have to scroll up and down to correlate the answers with the question.

Q1. Quote from article: "Your options have a strike price and private companies generally have a 409A valuation to determine their fair market value. You owe tax on the difference between those two numbers multiplied by the number of options exercised." My question: What is strike price? If I have accumulated say $30K worth of options, but I can afford only $10K, can I buy only $10K worth of options while leaving the startup?

Q2. Quote from article: "Due to tax law, there is a ten year limit on the exercise term of ISO options from the day they're granted. Even if the shares aren't liquid by then, you either lose them or exercise them, with exercising them coming with all the caveats around cost and taxation listed above." My question: Say I get buy ISO options for 30000 options for $30K from a startup while I leave the startup in 2017. Say, that startup still remains private in 2027. What are my options? Am I going for a total loss of $30K? If the startup hasn't gone IPO, how can I possibly exercise my 30000 options in 2027? What does the article mean by "exercise them" in this case? Does "exercise" mean buy the 30000 options for $30K or does "exercise" mean selling the options for a possibly larger price after the startup goes IPO?

Q3. Quote from article: "Some companies now offer 10-year exercise window (after you quit) whereby your ISOs are automatically converted to NSOs after 90 days." My question: How is NSO different from ISO? When the article mentions that NSOs are "strictly better" does it mean that I don't have to pay a penny to buy the NSOs but they remain in my account for free?

Q4. Quote from article: "Employees want some kind of liquidation event so that they can extract some of the value they helped create" My question: What are the events that count as liquidation events?

Q5. Quote from article: "Even if you came into a company with good understanding of its cap table" My question: What is the cap table? Why do I need to know this number? Can you explain this with some examples?

Q6. Quote from article: "New shares can be issued at any time to dilute your position. In fact, it's common for dilution to occur during any round of fundraising." My question: How does additional funding dilute my position? If I bought 30000 ISO options at say $1 per option, and I can sell it one day for say $2 per option, I am still making money. Why does it matter if additional funding occurred between buying and selling?

Q7. Quote from article: "If the company sells for a more modest $250M, between taxes and the dilution that inevitably will have occurred, your 1% won't net you as much as you'd intuitively think. It will probably be on the same order as what you might have made from RSUs at a large public company, but with far far more risk involved." Can someone show some approximate calculation for this? This is what I see: 1% of $250M is $2.5M. Say I lose 30% in tax I am still left with 0.70 * $2.5M = $1.75M. Can one really earn $1.75M from RSUs? The RSUs I have got at large public companies are of the order of $10K to $50K only.

Q8: Quote from the article: "Tender Offers". Can someone elaborate this? Can a startup force me to return my options in exchange for tender offers? Or is it a choice I have to make, i.e. to keep the options or go with the tender offer?

Q9: Quote from the article: "How many outstanding shares are there? (This will allow you to calculate your ownership in the company.)" How? Can you provide an example to calculate my ownership? Can you also provide an example of what that ownership means for me, if the company is sold for say $200M? Can you also provide another example of what that ownership means for me, if the company goes public and the price of each stock option is $10 after it goes public?

Q10: Quote from article: "Have there been any secondary sales for shares by employees or founders? (Try it route out whether founders are taking money off the table when they raise money, and whether there has been a tender offer for employees.)" What does this mean? How does it affect me?

</comment><comment><USER129> If you believe in the company, be like David Choe (painted Facebook murals) and take compensation in stock.

<comment><USER59> Could you explain why this is practical advice and how it addresses any of the points on the article about long-term equity dilution and liquidation deferral?

<comment><USER129> Sure. The article is about the problems that one faces if given stock options. If instead you get stock certificates then you don't have those problems.

<comment><USER130> Is getting actual stock instead of stock options even a choice?

<comment><USER80> Some pre-IPO companies offer RSUs. Facebook did this I believe</comment></comment></comment></comment></comment>


How Ember.js Enables Us to Focus on Shipping Features - <AUTHOR> http://blog.nightwatch.io/ember-js-shipping-features <comment><USER2> Out of interest: what backend are you using with ember? And also do you actually use ember data and if so in which adapter-mode (json-api, rest)?</comment>


Learning Graph Structure with a Finite-State Automaton Layer - <AUTHOR> https://arxiv.org/abs/2007.04929 <comment><USER2> Is a way to understand the general theme here as, "For the class of static analyses representable by ~datalog relations, we can increasingly infer them, with potential applications for verification + synthesis?"

<comment><AUTHOR> I would say that's becoming increasingly plausible, but it's not exactly what the authors show in this paper. In order to translate from Datalog queries, you would need to show how to encode arbitrary propositional formulae as a graph reachability problem. This appears to be possible following Reps et al. [1], but is still far away from becoming a push-button solution. Here, they are proposing a new architecture which is capable of inferring abstract relations between program states (e.g. variables), trained on a synthetic dataset of pairwise relations, and empirically showing its generalization performance on those specific tasks.

This is a promising early result, but does not show how to encode arbitrary static analyses at runtime. The authors have related work (Shrivastava et al. [2]) applying few-shot learning to source code, which (just speculating) might be amenable to a graph representation, by accepting as input (1) a graph program and (2) static analysis / reachability query, and returning the answer (a la NLP question-answering, but for code). It might also be possible to synthesize new static analyses from a dataset of labeled examples. Maybe you can reach out to the authors to discuss their broader goals for this work?

[1]: [http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.61....](http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.61.8958&rep=rep1&type=pdf)

[2]: [https://arxiv.org/pdf/2003.11768v1.pdf](https://arxiv.org/pdf/2003.11768v1.pdf)

</comment></comment><comment><USER3> This is in the subfield of "neural program synthesis" right? Or do they call it something else usually?

<comment><AUTHOR> Yes, "program synthesis" or "program induction" are the broader topics, which span automata theory, type theory and (more recently) representation learning. Prior work has relied on classical algorithms like proof search, SMT solvers and learning automata. Recently there has been a lot of progress in applying statistical learning algorithms to program synthesis, as researchers began to realize it shares a lot in common with linear algebra and graph representation learning. I wrote a blog post about some of those connections in case you're interested in learning more:

[http://breandan.net/2020/06/30/graph- computation/](http://breandan.net/2020/06/30/graph-computation/)

<comment><USER4> Thank you for a blog, very much enjoyed reading it!

By any chance do you know how Graphcore generates beautiful graph plots ? (seems like this are graph plots)

link: [https://www.graphcore.ai/hs- fs/hubfs/Graphcore%20open%20sour...](https://www.graphcore.ai/hs- fs/hubfs/Graphcore%20open%20sources%20poplar%20graph%20libraries.png?width=2400&name=Graphcore%20open%20sources%20poplar%20graph%20libraries.png)</comment></comment></comment>


Ask HN: Is Signal still a good app to use for encrypted messaging? - <AUTHOR> How secure is it? <comment><USER2> Its use of SGX for secure value recovery is highly problematic [1].

@matthew_d_green twitter feed has a regular stream of high-quality Signal commentary.

[1] [https://arstechnica.com/information- technology/2020/06/new-e...](https://arstechnica.com/information- technology/2020/06/new-exploits-plunder-crypto-keys-and-more-from-intels- ultrasecure-sgx/)

[2] [https://twitter.com/signalapp/status/1262844332278603777](https://twitter.com/signalapp/status/1262844332278603777)

</comment><comment><USER3> Probably at least as secure and very likely moreso than pretty much any other option. cite as "random redneck off the internet" and due yer own dilligencing, of course.

I must say its preferable for plain old SMS messaging, if nothing else, for the options it offers and the stable sane behavior.

</comment><comment><USER4> Depends on what you need. EFF previously used to have a scorecard[1] for all the messaging applications, but they reconsidered the model of their recommendation and put together a good set of articles on the topic which ask questions to consider and provide privacy and tech context. Here's one: [https://www.eff.org/deeplinks/2018/03/thinking-about-what- yo...](https://www.eff.org/deeplinks/2018/03/thinking-about-what-you-need- secure-messenger)

The rest are linked from here[2].

[1]: [https://www.eff.org/pages/secure-messaging- scorecard](https://www.eff.org/pages/secure-messaging-scorecard)

[2]: [https://www.eff.org/de/deeplinks/2018/03/secure-messaging- mo...](https://www.eff.org/de/deeplinks/2018/03/secure-messaging-more-secure- mess)

<comment><USER5> [1] Out of date for archival purposes only.

<comment><USER4> Quoting my own message:

> EFF previously used to have a scorecard[1] for all the messaging > applications, but they reconsidered the model of their recommendation

</comment></comment></comment><comment><USER6> It all depends on the context / your threat model. Do you want to prevent a service provider from reading your messages? It's good. Do you want to be the next Snowden? Probably not. Do you trust people you talk to? Etc.

<comment><USER7> Maybe this is a bit nitpicky, but Snowden himself does offer Signal to people [1] and is listed on the Signal homepage as "using Signal every day" [2].

      [1]:https://twitter.com/Snowden/status/986277159252750336?s=20
      [2]:https://signal.org

<comment><USER8> Not nitpicky. It was quite relevant to the thread.

</comment></comment></comment><comment><USER9> Pretty much anything will fail if the end device is compromised. It's probably good up to that point. Otherwise you will have to look into some sort of air gapping to a physically secure device dedicated to messaging (e.g. Yubikey).

As always, it depends on the threat model...

</comment><comment><USER10> If you have to ask, you'll just have to trust it.

</comment><comment><USER11> Yes. Signal is the gold standard of messaging apps.

</comment><comment><USER12> Rather than conspiracies theories of, depends if you are a spy or not.

Anyone want to explain where Signal fails for top level spying and Nation States are coming after you?

And what the safer alternative is?

<comment><USER13> The biggest issue with signal is the forced reveal of your phone number. There are several good alternatives. Wickr and session come to mind.

<comment> noman-land If your adversary is a nation state, hiding your phone number is not an option. They already know it and might compromise a device. Perhaps another service is better or the use of a burner phone is preferred.

<comment><USER14> How can a nation-state adversary compromise a device only knowing the phone number?

<comment><USER15> 1\. Track locations of phones in contact.

2\. Rubber hose.

3\. Obtain copies of your messages still retained in your contacts' phones.

</comment></comment></comment></comment></comment><comment><USER16> What about [https://status.im/](https://status.im/) instead - OSS, e2e encrypted by default.

</comment><comment><USER17> you have to understand and read their security model in order to assess whether it is an appropriate technology for your context. every time you use a security advertised platform read the threat/security model.

</comment><comment><USER18> Wickr is another alternative with really tight security throughout it's app to stack.

</comment><comment><USER19> Signal is still considered the gold standard for secure messaging on mobile.

</comment><comment><USER20> Depends on threat model. For most people. Yes.

</comment><comment><USER21> Best way to avoid interference or maintain security is to adopt old school tactics. Look at the war games the military played to prepare for Iraq and how the low tech red team comms worked.

<comment><USER22> Exactly. If you think you need Signal, you probably really need to STFU.

<comment><USER21> Or you can communicate outside of electronic channels.

My point is if you are concerned that the government is monitoring your communications (presumably related to the protests), then electronic methods are not reliable. Even if the encryption is solid, they could start jamming the frequencies used.

<comment><USER22> Good point. But this stuff is always cat and mouse. The mafia bigshots figured out that they couldn't talk on the phone in the 60s and 70s once the FBI started aggressively pursuing wiretaps. So they shifted.

In the 2000s, drug dealers figured out that Nextel direct connect weren't tracable... so Nextel kiosks sprung up in the hood and you'd see them all over. After that, prepaid burners were the next thing, followed by BlackBerry, etc.

If your organizing protests in such a way that are going to attract surveillance, "Use X" is dumb advice. It depends on the situation and what consequences you can sustain. An activist may _want_ to be arrested. A Federal employee may sacrifice their career just for being present. Context matters, but the smart path is to leave your phone at home.</comment></comment></comment></comment>