As an ex-Gusto employee, let me provide another side.
Gusto also has a company bylaw where they can veto any employee sale. Not Right of First Refusal, but can flat out veto an employee selling stock to buy a home, pay off student loans, start a company, etc.
This isn't covered at the time of hiring, nor present in the option agreement provided to employees.
As an early ZenPayroll (now Gusto) employee and a leader of the culture up to 70 employees, I'm honestly embarrassed by the company's stance here. It's hypocritical (in my opinion) to the values talked about by the company.
Employees should benefit from the success of the company they worked hard to build. As a current founder, believe me I understand why founders get a much larger share. But at least be transparent.
It should be presented transparently, but that's a pretty standard term and there's a good reason for it. Those so-called secondary sales put more owners onto the cap table which can cause accounting and investor-relations headaches for small companies. Things like information rights, control issues, regulatory responsibilities. At a pre-IPO stage, it can be good for the company (including option-holders) to control who they invite in to own it.
Basically Facebook and a few others tried allowing secondary sales, had problems, and since then the industry has retreated from that idea.
In the case @tyre mentioned above, the number of owners on the cap table would have actually been reduced during the sale, not increased.
The problem is not with the spirit under which that clause was added to the company's bylaws--the problem is the knee-jerk reaction by which they halted any discussion of sales (and didn't try to find a solution that worked), whether or not the proposed sale actually had a material effect on the cap table. Not to mention that ROFRs exist to eliminate cap table problems altogether.
Employees are unaware of these "veto" clauses, and continuing to hide them is acting in bad faith. But of course companies don't want employees to be aware of these clauses--it would become crystal clear how absolutely worthless equity is for the vast majority of employees at startups (even at Valley darlings like Gusto).
As a preface, I'm as employee friendly as it comes for options and I've been through the ringer on this whole option process.
I don't think it is fair for an employee of a private company to be upset that they can't sell their shares whenever they want. There are more than just issues of the cap table. If one person wants to sell shares then isn't it only fair that everybody get the opportunity? So now it becomes a process. If the company endorses the process, then it can potentially affect the 409A valuation in addition to being a pretty big distraction and time sink.
So you can't just say because Employee X wants to sell shares and has a buyer lined up, the company shouldn't get in the way. The most fair thing for everybody might be to block the sale.
As a caveat to this, I believe that if founders sell shares then they should also give employees a right to sell shares, and not doing so is reason to get upset. However, if the founders aren't selling shares then I don't think it is wrong for them to make everybody wait for an IPO, acquisition or a other structured stock sale.
The founders of Gusto did sell shares, without a broader option for employees (they hand picked some employees that they wanted to allow to sell shares.)
Regardless I think employees should be able to sell shares. We (Seneca Systems) have a right of first refusal where we can choose to buy the shares. In that case, we do get to choose the investors, indirectly, because we can raise money to pay for it.
It really comes down to how you balance power between the two groups. Personally, we believe that founders and investors have enough rights with a RFR. We shouldn't have veto power over major life events for our employees.
Is it more inconvenient? No, not really. But it is a big deal for employees that have worked their asses off to make our company what it is.
Why shouldn't they be? Founders put in the initial blood sweat and tears for below market rates. Some guy hired at year 3 for market rate? Just an employee.
Because 95% of the time it's not market rate because the employee thinks his equity is worth something, and founders never disabuse them of this notion. And many owners pretend like the equity is some form of employee ownership. Then they never inform them of the multitude of clauses that shift all possible risk away from the company, founders, and investor onto the backs of the employees.
Again I want to reiterate that all of this is great if the the company is upfront with possible employees about how the deal is structured, and that the employee is just an employee with a few lottery tickets so they might as well be working at AmaGooBookSoft for twice as much money. And upfront the owners told the employee that they definitely should not put in their blood, sweat, tears, and family time into the startup because they're not a part owner, they are "Just an employee".
Oh 100% agree, many startups abuse employees with fake kool aid and pretend dreams. Not just startups, trading companies do this, sure other markets do too. Talk a lot about the awesome that will happen down the road, but nothing in writing (or writing that contradicts claims). Feel bad for people that sign up for such bum deals...
Where do you draw the line? How about employee #1? They're probably paid the same (almost zero) as the founders, over almost the same period of time, but with 1/10 of the equity. Are they employees or founders? Neither?
But every situation is different. Some employee #1s make say 75% of market rate. Some make less. Some make more. It depends in each case if it is "fair".
I am not sure what the word founder really means. There on day1? > 33% of the company? Not sure.
If it's a headache perhaps options aren't the best form of compensation? Options do have a stigma of being used as a way to pay people less right now, while later screwing those people out of the value of those options when it comes time to cash out. Companies need to make sure they don't become hypocrites, play favorites, or just act like huge greedy assholes when it comes time to share the wealth.
This is a place where a regulatory response is probably needed.
I would like to see a law that says that if a company blocks a sale, the employee can auction their shares off to current investors and the company has the last chance to bid. It may change control if the company doesn't want to buy the shares, but it does not change investor relations or any material work the founder/team would need to do to stay in compliance.
They do, and this Agreement specified that the ROFR was the only practical limit on transfers. Indeed, the sale passed the scrutiny of outside attorneys who looked at all documents that had been given to the employees.
It wasn't until a buyer had been found and the company had been notified that they pulled out the company bylaws and revealed this extra clause deep in the bowels of that document--a document which had never been furnished before.
Precisely--this is the exact reason that ROFRs exist. They make sure that a company has the option of keeping its cap table clean in the event of a sale by an employee.
What these companies want is to have their cake and eat it too: prohibit sales of stock to outsiders without having to pay for the privilege.
The cynic in me says that this is because companies of this kind are far less likely to be in the position to exercise ROFRs and pay for it via profits simply because they are not yet profitable. And I'm sure investors don't like the idea of their capital being used to buy back shares of vested stock from employees.
It doesn't matter whether the cost is incurred on profits or otherwise, they just don't want to pay. Vetoing sales is unfair, but rational on the part of the company, so long as their recruits and employees don't understand the implications of these contracts, and therefore aren't choosing other employers on that basis.
Including this constraint in the bylaws of the company rather than the Option Agreement is particular devious, and I've actually never heard of such a trick. I'm surprised it's legal.
> It's hypocritical (in my opinion) to the values talked about by the company.
Any company paying employees with equity has the same goal: hire/retain talented people with the least amount of cash possible. Founders/CEOs will talk until they're blue in the face about values, why they give equity, how to view equity, etc, but I find all of it pretty meaningless.
Personally, having gone through the gauntlet, I would never work at a company that refused to give me a cash-heavy offer even if I didn't intend on taking it.
In my opinion, the current situation, and lack of golden standards with the employee equity, especially early employee equity poisons the atmosphere in the Silicon Valley like nothing else.
Early employees often take most of the risk that the founders take, plus they have no control, plus no access to information that founders have, plus they have the risk of negative impact on their careers even after leaving the startup (think no-compete agreements, arbitrary feedback from immature founders, etc).
I think incubators like YC should understand that in the long term it would harm their business and should act and fixit. And formalize the contracts with early employees.
Personally, I think that the golden rule should be that the equity in the startup should be determined by risk / value that every investor (including founders, employees) takes / brings in during the life time of the company. To evaluate what founders / employees bring in - just take inflation adjusted average yearly income, over previous five years. Adjust to the hours they are working, add any investments they are bringing in. Adjust, based on the risk profile of the company and their position in the company.
What we have right now, with cliffs/vesting/dilutions/option expiration is a kludge, this kludge is ridiculous. And the result is that professionals just avoid joining startups as employees.
afaik (talk to your lawyer when changing jobs! they're really not that expensive!) non-competes are unenforceable in the vast majority of cases in CA. There may be limited exceptions for executives. There is even a question if asking for it invalidates the entire employee agreement.
Yes. That is true. Over-complicated contracts, that can not be enforced. And required step of talking to a lawyer, before accepting an engineering contract in a startup.
This is exactly why forward looking entities, like YC should look at it, and standardize it in a reasonable way. Rewarding risk of employees, founders and investors alike.
Non-competes, as far as I understand, are not enforcible, in the job contract. The area is pretty gray, if it is in the conditions are on the equity/options ownership. And obviously that's what the companies are doing - moving non-competes and IP grabs into the equity ownership, because, it is non-enforcible in the work contract.
Your handbook mentions nothing about a ROFR, buyback options in bylaws, access to company bylaws or a complete lack of restrictions on equity ownership. All I can see is your equity vesting schedule.
You also do not talk about what employees could do with their options / stock and how the company would probably react to it. Like how would you react if they did a ESO fund style purchase of their options? Sold them on second market? Just purchased it personally?
I could be missing it but I can't see it right now.
Correct--these things are spelled out in the Stock Purchase Agreement each employee is given. I can tell you, however, that all limits imposed are spelled out clearly in that document, and not hidden in our bylaws.
But you're right--we should put it in the handbook as well, because that's our living document for past, present, and future employees.
Yep. I linked to that because we do some things, like vesting, a bit differently. We want potential employees to have access to that information before applying.
For the standard stuff, we walk through that with the employee during onboarding.
Given that companies are starting to add these unfriendly clauses, we will spell out clearly that we only have a ROFR.
Hi, thanks for the lucid interview. Why the 3 year minimum service period to extend the exercise window?
> The main point is that if someone decides to not exercise and/or is not able to exercise and they leave the company, their options typically have a three-month expiration. So, unless the person exercises them within three months after leaving, they lose those options, which is kind of crazy to think about because the person has already invested time, already contributed to the company, already meaningfully helped the business.
> So at Gusto... everyone that has stayed here at least three years, their expiration changes from three months to ten years.
Doesn't everything just said about it being "crazy" to lose your options apply if you leave at 2.5 years? You've "already invested time, already contributed..." Why should you lose vested options, ever?
I asked Adam D'Angelo about minimum service periods and he responded that it'd be more transparent to have a longer cliff. My perspective is that backloaded vesting would be closer to the probable intended effect here (a barrier to leaving early, but you don't lose everything).
Put another way... Aren't "minimum service periods" exploiting opaqueness to make them seem like friendlier terms than longer cliffs or backloaded vesting?
> The thought process is that if hypothetically, an employee has to move home to live with their family or they’re getting married to a childhood sweetheart across the country, these are all things that are great decisions that should not be punished
Unless you have only been at the company only 2 years 11 months. Then you have earned nothing. Don't let the door hit you on the way out.
> My perspective is that backloaded vesting would be closer to the probable intended effect here (a barrier to leaving early, but you don't lose everything).
Why is the approach of a cliff followed by getting a small amount of your stock every month afterwards not sufficient?
> Why is the approach of a cliff followed by getting a small amount of your stock every month afterwards not sufficient?
I think it is. My point is either a longer cliff or backloaded vesting would be a more transparent replacement for "90 day exercise window for X years, 10 year window after that".
What you may not realize is that under the 90 day exercise window term, you don't actually "get" a small amount of stock every month. But that's exactly what most people think happens. In truth, you may lose it all.
It is clearer to say "vesting = you get it", and then spell out the vesting terms clearly and directly. If you think people should actually be able to walk with 20%-25% of their grant after 1 year, like what their vesting schedule implies, then cool. If you think people should actually stay longer than that like what the 90 day rule kind of enforces as a side effect, then ok, no judgement, but make it transparent. Call it a multi-year cliff or a 10/20/30/40 vesting schedule, whatever clearly states the expectations. But "vesting" should always mean "you get it".
Well if you vest, then you do "get it". But you vest options, which is not shares. You "get" the option to buy shares in the company at $X strike price.
The confusion seems to lie more in ISOs vs RSUs (or just plain equity, which is what most people have exposure to via the public market), rather than what "vesting" means. The problem is that vesting to most will inaccurately imply "getting" something they are not.
You are arguing technical details when the issue is one of exploiting laypeoples' misunderstanding of technical details. It's not about confusing options for shares. It's confusion about how the 90 day window works. It is not at all obvious that the tax consequences may be many times greater than the strike price, resulting in you losing your vested options.
This has been a surprise for many otherwise smart people. If you replaced it with more transparent terms, such as a "cliff that goes all the way to the IPO" or a heavily backloaded vesting schedule, I'd say most would consider it a below-market offer, even though it's roughly comparable. That's a reflection of the opacity and poor understanding of the standard terms.
A major difference between a 3 month window and a 10 month window is that with the former, you "get" to purchase lottery tickets. With the latter you have massively reduced downside risk.
This is a really tough policy to get right because there is a continuum of cases. At one end, someone has vested shares and is pushed out for being harmful to the company. At the other you have a valued loyal employee that is going to business school for two years and hopefully coming back. It is a no-brainer that the employee going to school should get the exercise period extended--but if the toxic employee doesn't want to risk cash, why should the staying employees take dilution on what was probably unhelpful service?
It is really hard to make a contract that fully reflects what's fair.
I think the thing that gets missed a lot in these discussions is that just because default docs are super company favorable (i.e. assuming the former rather than the latter), in the opposite case one can make an exception.
> It is a no-brainer that the employee going to school should get the exercise period extended--but if the toxic employee doesn't want to risk cash, why should the staying employees take dilution on what was probably unhelpful service?
Because in both cases, they earned their options. You can't take back their salary compensation, why should you be able to take back their options?
> It is really hard to make a contract that fully reflects what's fair.
No, it isn't. If you've earned your compensation, you have earned it. Unless you mean its difficult to write a contract where a company can weasel out of their obligations when its suits their purposes; I would agree with that.
Yes, and that option expires in 3 months after departing... In the same way that publicly traded stock options (ie calls) typically have expiration dates.
Part of the conflict here is that "options" aren't "shares" -- the option, including all terms (such as execution windows) are what is earned. Everything is known upfront. If you wanted comp to be around shares, then just issue shares via RSPA and deal with the cap table consequences and extra legal wrangling.
This entire "problem" is caused by tax code: you owe the IRS on gains from option conversion, even though the underlying asset is entirely illiquid and frequently non-transferrable. Sounds like a "real" solution is to lobby for tax code changes.
EDIT: to be clear... I'm not saying I agree with short expirations after departure. But there needs to be a clear distinction between shares, options, and 'intent'. Clearly the existing two ways of comp are lacking since there are either tax consequences (options) or out of pocket employee expenses to purchase (shares).
No, the whole point of this uproar is that the standard terms are opaque around the tax consequences of the 90-day window. It is not generally well-understood upfront by recruits that they may lose vested options on exit.
You don't need to change the tax code to fix it. You can simply extend the exercise window.
There are legal limitations on exercise windows for ISOs that complicate matters (trickiness involving NQO conversion) that must be accounted for even in your "simple" solution (ask your attorney). It's a shitty situation for companies that want to do right too. No one wants to innovate on corporate structure (time, cost, and headache) when you're already trying to solve major product market fit problems...
Y Combinator has made this the standard for their companies and even provides boilerplate documents.[1] So not much of a distraction from product-market fit, and considerably simpler than altering the tax code.
I haven't seen YC incorporation docs since 2013... But either way, these are Triplebyte's docs, not YC standard's (though I'm open to evidence that proves otherwise).
Ah, I was confused by this ambiguous statement from harj.[1] I thought he was speaking for YC but I guess at this point he had moved on to triplebyte. Anyway, point is they've made it easier to adopt these terms and many are.
And there really isn't any free lunch. Extended exercise periods have a real cost to everyone that stays (the people who are increasing the value of the option) at no cost to the departed person.
Right but the person who left was their earlier, during a riskier time, then probability of failure was greater. So they jumped in when others might have thought twice (remember most startups fail). Aren't those options a reward for that?
Most employees will leave their employer at some point. It's not as though there are employees here that are paying the cost but not receiving the benefit.
So nobody here is advocating for taking away anything granted by contract. What you're asking for though, is the ability to sit on an option to see if it keeps going up in value, while not taking any risk or adding any value. The point of the 90 day exercise period is that since the departed employee is no longer adding value to the company, they need to take the risk on the gain to lock it in. The employees and founders that stay are putting in more than just money. If exercise periods were unlimited, you could make it more attractive to walk around collecting lottery tickets than picking a boat and rowing in it, which is what equity grants are supposed to incentivize.
> So nobody here is advocating for taking away anything granted by contract.
You can't really say that when the contract is opaque. Most recruits do not understand that the tax consequences of the 90 day window supersede the vesting schedule, to the point where vesting is effectively meaningless.
You're concerned that if employees can actually keep their options that they will be more mercenary and diversify their startup portfolio. Ok, that's not an unreasonable concern. Diversification is a smart investment strategy with high-risk assets.
But the issue here is firstly one of transparency. The reasoning you laid out is opaque. What does it mean to require employees to buy their options "to take the risk on the gain" when in most cases they can't afford to buy them? Furthermore, haven't they already risked their time and effort? Why would "no longer adding value to the company" justify the loss of previously vested options?
Look, if what you're aiming for is a disincentive for mercenary employees, that's totally fine. But make it transparent. Make it a backloaded vesting schedule. Make it a cliff. Make it a cliff all they way out to the IPO if you want. But that's how you need to present it to recruits: clearly and transparently. Otherwise you are simply misleading recruits into thinking they will keep more than they really can.
"The point of the 90 day exercise period is that since the departed employee is no longer adding value to the company"
So all of the work they've done until then disappears? It's gone? It's no longer helping the company?
If companies don't want people to leave once their options are vested, then maybe they should concentrate on being a better place to work. Not by handcuffing someone by threatening a crazy short expiry date on their hard earned options.
"but if the toxic employee doesn't want to risk cash, why should the staying employees take dilution on what was probably unhelpful service?"
Why don't you make them pay back their salary during that period while you're at it?
It really does not matter what kind of employee they were. The agreement was Salary + Stock for work done. Saying they shouldn't get the stock is just crazy.
Your mindset is very scary to me because a lot of others think like you. If someone earns options over one, two, two and a half year period and then is deemed "toxic" to the company, why should they not receive similar compensation to someone who lasts 3 years in this system? 3 month exercise windows are strictly for investor class and thus founder class.
Employees aren't facing dilution problems from their fellow employees who get to exercise their options while exiting, they face dilution from the investor class trying to own as much of the company as they can.
I thought the point of the one year cliff is to weed out toxic employees. If you're around more than a year, why shouldn't you get to keep your vested options, even if issues emerge later? What's the point of a vesting schedule then?
Look, if you think the company should have the right to determine how much equity employees get to keep when they leave, that's fine. But if you're an honest company then you have to be transparent about it. It is not "tough" to be transparent if you are proud about what you are saying. You can simply say, "Look, vesting doesn't really mean anything until we have a liquidity event. Before that, you aren't guaranteed anything, but we can make exceptions."
So, will you start saying it that way to your recruits?
Somewhat of a nit - in many cases the remaining employees don't pay via dilution for a fired employee keeping his/her stock.
The option pool is set up beforehand and if the company sells or goes public and there is still equity left in the pool, there are a lot of things that can happen such as the founders or investors getting the chance to buy it out. Only if the company ends up expanding the options pool by allocating more shares would the employees (as well as founders) get diluted. And if the company is public they might do a buyback to expand the employee equity pool so nobody gets diluted.
Gusto (people being interviewed) formerly known as ZenPayroll, fired an acquaintance about a week before their options vested.
Now they are trying to educate people on equity? You would need a full-semester class to explain the many ways in which VCs and their "startup" cronies can screw you out of compensation (e.g, dilution, selling at a low price and then using staying bonuses to kick in liquidation preference, 30 day exercise windows making it financially prohibitive to exercise, etc). Do companies even IPO anymore? If Uber still hasn't gone public, when do you think Gusto is?
If these companies actually wanted us to value their equity, they would reimburse independent corporate lawyers to review the contract.
Higher profile people like Zach Holman are already speaking up. It's going to take a while, but I already see programmers realizing that the smart move is either being a founder or going to work for GoogMicroAppleSoft. It's still to be determined whether the VCs will finally realize their inability to hire is their own damn fault and fix equity.
Only the naive and the financially illiterate accept these equity offers as worth anything.
> If Uber still hasn't gone public, when do you think Gusto is?
IPO is only one of the exit strategies available, acquisitions being another one (selling to the private market being another one, etc). A company doesn't necessarily have to IPO in order to return a value to its shareholders.
Not guaranteed. If you exercise your options at company X, say $20 per share, left company X, and company Y buys company X for $10 per share, then you just lost money.
I imagine this is pretty rare but it's possible for a company to acquire another and strictly buy all preferred stock instead of common stock and then all employees get nothing [0].
[0] This happened to a friend of mine where all execs had preferred stock and were totally fine selling the company and screwing over the employees. Make sure your founders/execs have common stock so that everyone is on the same playing field...
This actually happened to me during the first bubble. A large, public company acquired a former employer for less than the most recent valuation. None of the common stock holders got anything. Some of the preferred holders were paid out.
Wrong. Have you ever been part of an acquisition? More than likely you are given stock (or options, if you're still vesting) in the acquiring company. This can happen several times over, as your acquirer is acquired. You may, infact, never make any cash...
Depends on who's point you look at it from. The investors and the founders get to make out pretty well, so to them it's a success. The acquiring company doesn't have to pay a lot of employees actual money, and they give them something which handcuffs them to the company for a while, so to them it's a success.
When I left my last company (which acquired the startup I was an early employee at), I did exercise most of my options (all the ones at the lowest strike price.) Just in case. It cost me about $5K. Maybe it will amount to something...
Or you may make even more money if the acquirer is a public company and you know when to sell. Stocks are an opportunity that can accelerate your net worth by a double digit multiplier if you, as an employee, know where to bet your time and expertise.
I'm sincerely surprised that they did this. My understanding is that termination so close to a substantial vesting cliff opens you up to potential lawsuits.
I once gave notice to a startup employer before my vest date, where my last day would be after my vest date. My performance up until then had been (by their measure) exemplary, but they tried to move to terminate just before the vest date.
That was a phone call I won't soon forget, especially the part where they admitted over the phone that the termination was motivated by the vesting event.
Suffice it to say, I kept my original last day.
Many startups behave in sketchy ways on the premise that their employees are rubes who don't know any better. And in 95% of cases, they're right.
No explicit law - a termination in this instance would not be intrinsically illegal.
But it opens up the company to legal liability - the combination of absolutely no records of performance problems, no change in needs of the company, as well as the very obvious motivation to avoid paying a contractual payout, makes this a gaping liability hole if someone wanted to bring suit to the company.
For the record I never even hinted at suing the company, my impression is that this muscling-out move was done by the CTO and once HR caught wind of it they put the kibosh on it. As for why the CTO did it, I don't think I'll ever know - it may have to do with him trying (and failing) to leverage my immigration status (H-1B) to keep me at the company.
> Gusto (people being interviewed) formerly known as ZenPayroll, fired an acquaintance about a week before their options vested.
So what? That was a deal both parties agreed to. Implicit was the caveat that your future EV to the employer has to exceed the value of the options that would vest. Why should they pay you money if they don't want to?
These articles make front-page HN every couple of weeks and I find it very tiresome. Stock options most likely aren't going to be "worth it" (which is not to say that they're going to be entirely worthless, but $25k before taxes isn't turning any heads).
Some bullet points:
* Stock options for common stock mean you're dead last in line for making money. Before you are banks/lenders/creditors, investors & board members, founders and any extremely talented management that were brought in.
* Unless everything goes absolutely amazing and according to plan, your options are not going to be worth much money. All it takes is one down round or a market downturn during your lockup and you're wiped out.
* If your company goes IPO, you have a long time before you can do anything with your shares. In the meantime, the market may not be kind, and your options might be underwater.
* If you get acquired, big flashy numbers can turn sour pretty quickly. "Top-billed" numbers (e.g. Company acquired for $2bn) can have a lot of fine print. Your options very well may be worthless, or you may be subject to lots of earn-outs that A) you probably won't hit or B) the acquirer has no real reason to help you hit them.
And that's not to mention the whole ball of fun that comes along with figuring out your taxes. People (speaking mostly just about friends & coworkers) spend far too much time fussing about various outcomes and calculating things when, at the end of the day, it's not worth worrying about. You're probably not going to get rich off of stock options; negotiate for what you think you're worth, but once you have, forget about them.
Of course, if you're a founder or a first-5 employee, the situation probably warrants a lot more scrutiny and have your lawyer/accountant look over the paperwork. But if you're not, it's really probably not worth more than an hour or two of reading the paperwork and asking some questions.
I help friends with assessing their job offers on a monthly basis and I agree. (in fact I am meeting one friend this evening to silently be on a call with him as they discuss his offer).
I tell them "Don't join unless you are happy with your base salary and won't get anything else. Consider your options to be worth $0 when making a decision to join or not join."
IMO medium sized startups that have raised a lot of money are the worst to join - still giving out options but are too expensive to consider early exercise and too expensive to exercise if you end up leaving after 1 year.
IMO you should either join a super early startup that you really believe in and pay a few thousand to early exercise OR
join a proven late stage startup that converted to RSUs and avoid paying for options in the first place.
Several comments allude to liquidation preference / stock-participation for preferred stock holders.
While both of these terms do bite into the common share stake, as others have pointed out, their effect is model-able; so you can see where you stand under different exit scenarios. Ask your employer, or get access to something like Pitchbook, to find out:
1. The amount of $ raised from investors, along with the % of equity in common vs preferred shares.
2. The liquidation preference (1.0x is common) for preferred.
3. Whether the preferred stock participates (not doing so is common).
4. What % of common equity your grant represents.
You'll then be able to draw a payout diagram (like this[1], written by Andy Rachleff) showing how much you'll make for different exit prices. Be aware that under some complexities, like the fact that later rounds will cause dilution and that certain exit scenarios scenarios (like acquisitions) may trigger a different liquidation preference for preferred stock.
I thought "equity" meant just giving stock to the employees after they worked X years, not the mess of complexity, taxes and spending your own money that it actually is...
Even with RSUs, you'd have a tax obligation on illiquid RSUs if not for the terminology used in the contract to delay the actual "vesting event" in order to delay a tax event.
Depends on where you are - I believe that's the case in the US, but for example in Australia when RSUs fully vest the value at vesting is included as income on your tax return at the end of that financial year, so you don't actually pay the tax until after you file and are assessed.
Despite reading many such articles there is one thing I have never understood.
Under what circumstances it is NOT a good idea to exercises as soon as possible?
Only one scenario is where you have to pay a large sum for this early exercise and you see a risk that the company might go out of business. But in such cases if the amount is large you are probably at the wrong company in first place.
My understanding is that you may have taken a lot of equity in exchange for salary, so much so that you literally can't afford to exercise any significant portion of the options.
Here's a cynical realization I had regarding options. It may be an unpopular position but one worth articulating.
We like to believe (and are told, with marketing spin) from founders/hiring managers that we're being given a block of options to purchase shares in the company. We evaluate this grant, given the commonly presenting "key terms" of strike price, company valuation, ownership %, etc., to have some value $X [1].
What we're not explained is that we're actually given a block of options with expiration date of D (where D is most commonly length of tenure + 90 days). What I hadn't realized before is that this D really makes a difference in the value of an option.
Ask any trader about the value of an option, and they'll explain to you that short dated options are the cheapest, and option contracts (ex: puts, calls) become more expensive as the expiration dates become longer. Longer expiration dates directly translate to a higher intrinsic value of those options.
So going back to the option grant given to the startup employee, we can see that the expiration date clause on those options are a "key term" that is rarely, if ever, a point of contention. People negotiate for a larger number of options all the time (often trading salary for more options), but when's the last time someone tried to negotiate and trade the number of options for a longer expiration? That would actually be trading some amount of value for another amount of value, but it's never done.
But this is something you could do if you wanted to open a position on say, $AAPL, using options. You'd intently consider both the strike and the expiration date for an $AAPL option, and look at how much each would cost. A longer expiration contract with the same strike price will always cost more. Some hedge fund managers have very long dated (3+ years), out of money (ex: the strike price is higher than the current price) call options on Oil. Those contracts would be much cheaper if they'd expire in 3 months, not 3+ years.
So when we say "we've earned those options", it's not entirely accurate. We've actually "earned those options with expiration D" (and other terms). Holding strike price constant, option grants with "equivalent value" with different expiration dates would mean that the longer the expiration date, the fewer options you should get.
Of course, figuring out the value of a longer expiration date would be incredibly difficult. I certainly have no idea how to price this, especially given that the value of the underlying asset (the company) is already a bit of a black box in the first place. But this is something worth being aware of, so that we can understand that there is real value at stake in the ongoing expiration date discussion.
BUT -- we shouldn't forget that if the founders' intent truly is to "give Z% of the company to an employee in a tax efficient manner" (like they say in all their conversations), and if "the value of the option grant as computed by the value of the underlying option contract" is not a concern, then the founders will not actually be "giving up" any value since that value was inadvertently created and was never intended to be claimed by the founders/company in the first place. In this case, a founder who wishes to be consistent with herself and her own narrative should definitely adopt a long expiration option contract to make the reality of the situation as close to the narrative as possible, given the legal limitations.
[1] I tell friends to consider their option grant as $X == $0 to simplify things and protect themselves from being mislead, but all options do have some nonzero value.
The comments here have shown some new thinking for me about employee as owner, love reading about it and welcome the input of others on building in a human first manner.
because today there are bigger problems with taking options than a 5 year schedule? a 4 year schedule was important when a company wanted to go IPO quickly, but today, where startups are private for 8+ years, and option terms make selling the options in the secondary market very difficult, it doesn't matter if you vest in 4 or 5 years: next liquidity event might be in 10 for all you know.
I work for a company that is very likely to make it, but given that I don't know when in the world we'd even attempt to go public, I count my options at zero. Will I still be happy here in 2 years? 5? 8? I better get used to being happy here until there is a liquidity event, or the equity is worthless to me.
I know people with 7 digits in paper vested options, but they can't exercise them: It's hard to afford them, the taxes are killers. Until there is a liquidity event, they have nothing, and all the promise of riches goes away 90 days after they leave the company. In practice, they might have a 10 year real vesting schedule. I don't know about you, but I don't know that many people that have stayed 10 years at a tech company.
So that's why the long vesting cycle is fine in practice: The real cycle to getting cash out is even longer.
I'm curious where this site came up with this 33% number. For California, I calculated 20 (federal) + 3.8 (federal net investment) + 13.3 (state) = 37.1%
For states with no income tax (Texas, Nevada, etc.), I calculated 23.8% (20 + 3.8), but the site you referred to lists 25.0%
Gusto also has a company bylaw where they can veto any employee sale. Not Right of First Refusal, but can flat out veto an employee selling stock to buy a home, pay off student loans, start a company, etc.
This isn't covered at the time of hiring, nor present in the option agreement provided to employees.
As an early ZenPayroll (now Gusto) employee and a leader of the culture up to 70 employees, I'm honestly embarrassed by the company's stance here. It's hypocritical (in my opinion) to the values talked about by the company.
Employees should benefit from the success of the company they worked hard to build. As a current founder, believe me I understand why founders get a much larger share. But at least be transparent.
You can read about our approach to equity, and everything else, here: https://octopoedi.gitbooks.io/employee-handbook/content/