What I would like to know about promotions and shares, before becoming part of a startup-unicorn
Disclaimer : This article is written anonymously. Some specific companies are mentioned, but only as a general example.
This post briefly talks about what I would like to know and think about before joining any closed joint-stock (private) company (it’s also a startup, it’s a “unicorn” in some cases, when valuing above $ 1 billion).
I'm not trying to show that you should not join such a company, but the inequality of the forces (capabilities) of the founder and the employee in it is extreme, and potential candidates would do well to consider alternatives.
')
The information presented here is not new or original, but the purpose of this article is to present all the main points in one place.
• After leaving such a company, you have, in general, 90 days to exercise your options - or you lose them. This seems to have been originally linked to the historical role of the US Internal Revenue Service (IRS) regarding the handling of ISO options (ISO is a premium share option), but the exact reason for the existence of this anachronism now does not really matter. The only thing that really matters is that if you ever decide to leave your company, all that share in the share capital you have worked for over the years may simply “evaporate” if you don’t at that moment of cash reserves to acquire it.
• To make matters worse, by realizing your options (buying paper on special terms), you must immediately pay a tax on the money you never had. Your options have exercise costs , and private stock companies typically have a “409A rating” (US) to determine their “fair market value”. You will have to pay a tax on the difference between these two values ​​multiplied by the number of options exercised, even if zero liquidity of the shares means that you have never received a cent from them and there is no conceivable way to do this in the foreseeable future.
• Even if you have the money to pay for your options and tax inspection requirements, then cash will be blocked in the form of securities, and it is difficult to expect a return on such an investment for a long and indefinite time. Consider the opportunity cost that can be obtained from this liquid asset.
• According to US tax law, there is a ten-year limit on the period for executing ISO options from the day they are granted. Even if the shares are illiquid by that time, then you either lose them or sell them with the implementation of all the cautions regarding cost and taxation mentioned above.
Ten years - is it a lot? Let's look at the age of some unicorns:
> Palantir is now thirteen years old.
> Dropbox this year (2017) will be ten years old.
> AirBnB, GitHub and Uber will celebrate their tenth anniversary in a year or two.
• Some companies now offer a 10-year execution window (after you leave the company), and your ISO options will automatically turn into NSO options in 90 days (stock options without tax benefits). This, of course, is better for employees than a window in 90 days, but, as stated above, ten years may still be enough.
• Gold handcuffs are chained up quickly. The longer you are in the company, the larger your share in the company's equity becomes, and the more difficult it is to decide to leave the company.
This can reach a point where long-serving employees will have rather modest liquid assets (cash with a high degree of availability), being at the same time paper-based millionaires, and will have to make a difficult decision: whether to leave it all or continue to be until the founders of the company provide them with some monetary compensation.
• There is no time limit for any kind of liquidation of debt (meaning corporate debt towards you, expressed in the form of securities in your name that have a value but are not instantly converted into cash). In fact, even the elimination of debt itself is not guaranteed , even if the company is extremely successful. This can happen after 1 year, after 5 or 10 years, or it may not happen at all. We have seen a lot of evidence of this, as well as the age of some private companies (see list above).
• The incentives for the IPO of the employer and the employee are different. Workers want some kind of liquidation (in the “debt” sense, because your “papers” are the company's debt towards you) events so that they can get something from the capital they helped to create, but employers know that Providing such an opportunity to employees may cost them some of the best employees, since they will finally be able to take on other projects. Companies have another reason to stay private longer.
> Above is one reason why the founders do not want an IPO, but it is not the only one . Many of them believe (correctly or erroneously) that the company still has 10-100-fold growth potential and that if the IPO is too early, all this potential will be lost. For a normal founder, his company is a lifelong business, and he is ready to wait a few more years to realize the potential he expected completely. Of course, this is a more noble reason for not going on an IPO, but from the point of view of the employee, it is very doubtful.
• Founders (and preferred assistants) can agree to withdraw money in a value-raising round and thus become self-rich even before they make really crazy money on a large-scale debt elimination event or IPO. Workers cannot do this. The situation is completely asymmetrical, and most of us are on the “wrong” side.
• Even if you come to a company with a good understanding of the capitalization table, the financial situation may radically change. At any time new shares may be issued, diluting your position. In fact, such dilution is commonplace in any round of fundraising.
• There are closed markets that trade in private stocks and even help to cope with relevant tax liabilities. However, it is important to bear in mind that this kind of assistance costs a lot and you will almost certainly lose a significant part of your premium. In addition, some companies are allowed to sell private shares only after receiving special approval from the board of directors.
• Shares, especially at the early stage of the company's development, are offered on the basis of, to a large extent, the theoretical future value of the valuation. Sam Altman recommends giving the first ten employees 10% (~ 1% each), which can be a large amount if the company is worth $ 10 billion, but see how many companies reach this level.
If the company costs a more modest $ 250 million, then, taking into account taxes and inevitable dilution, your 1% will not earn you as much as you intuitively expect. This will be about the same as you would give to stocks with restrictions (RSU) from a large public company (that is, simply buying Apple or Google papers), but with much greater risk. Don't take my word for it though; This is a fairly simple arithmetic — examine the price variance and dilution factors for yourself before joining a company offering you securities. Do it.
• Some companies recognize the impact of long-term illiquidity phases on workers and make a tender offer to give workers some compensation (look online for examples of this). I do not want to overestimate it, because the receipt of such an offer is, of course, better than the existing alternative, but keep in mind that it will probably be constructed so as to minimize the amount that you can extract. Also, this event is extremely infrequent. Read the fine print, look at the numbers and think about what your annual compensation will actually be today (including all the time you worked in the company, not just the year of the offer). It is likely that it will be less than you would get from investing in stocks with restrictions (RSU) of a large public company.
• It is not related to stocks, but it is worth considering that the working conditions in a large unicorn company will not differ markedly from those in a large public company. You will have a small return on the employee, the same draconian policy of information security, many meetings and a fixed vacation. In the worst case, you even have to use the JIRA task and project management system.
So you decided to enter a private company anyway. Here are a few questions, the answers to which I would recommend to receive before accepting any offer (you would be very surprised to know how rarely an employer provides this information at will):
• How big is my option window if I leave the company?
• How many shares have been issued? (This will allow you to calculate your share in the company.)
• Do company executives want to sell it or make it public? If the answer to any of the questions is yes, then when can this event happen approximately? (Do not take "We do not know" for the answer.)
• Have there been any secondary sales of shares from employees or founders? (Try this way to find out if the founders take money for the growth round and if there was a tender offer for employees.)
• Assuming there is no liquidation, are my shares allowed to be sold in the private market?
• Does the company have a debt or investment with a liquidation privilege greater than 1x? (It is possible that investors were attracted with a liquidation privilege> 1x, which means that payments to them will be made in a multiple amount before someone else gets at least something.)
• Will you provide me with an extended execution window? (After joining the company, I learned that the majority had a standard 90-day window, but not all . Unfortunately, by that time I had lost the opportunity to influence the negotiations to request an extended window.)
It is really difficult to learn about all this so as not to look obsessed with money and not create an unattractive image, but you have to do it anyway. You are today simply obliged to protect yourself tomorrow.
Work in a startup can be attractive, useful, interesting and, perhaps, even profitable. Operating conditions in Silicon Valley companies are often the best in the world; it is quite possible that you would wish to be there even without payment. But do not forget that with regard to the shares, each card in the deck stacks against you.
The correct estimate of your options is $ 0. Think of them more as a lottery ticket. If they are paid, then this is great, but your contract for work must be sufficiently thought out for you to join, even if they were originally absent from this contract.
I'm not saying that your startup can fail, but if successful, there are many scenarios in which it will be difficult to get paid. Say, for example, in five years you want to try something new or you want to start a family and you need work that brings enough money to buy your first home in the bay area (and San Francisco is oh how expensive). Playing Monopoly with a start-up employer will put you in a difficult position.
If you are lucky and you have a good demand so that you can choose between a public company with good liquidity of securities or a unicorn for a billion dollars, pay serious attention to the first one.
This post briefly talks about what I would like to know and think about before joining any closed joint-stock (private) company (it’s also a startup, it’s a “unicorn” in some cases, when valuing above $ 1 billion).
I'm not trying to show that you should not join such a company, but the inequality of the forces (capabilities) of the founder and the employee in it is extreme, and potential candidates would do well to consider alternatives.
')
The information presented here is not new or original, but the purpose of this article is to present all the main points in one place.
the main problem
Lock
• After leaving such a company, you have, in general, 90 days to exercise your options - or you lose them. This seems to have been originally linked to the historical role of the US Internal Revenue Service (IRS) regarding the handling of ISO options (ISO is a premium share option), but the exact reason for the existence of this anachronism now does not really matter. The only thing that really matters is that if you ever decide to leave your company, all that share in the share capital you have worked for over the years may simply “evaporate” if you don’t at that moment of cash reserves to acquire it.
• To make matters worse, by realizing your options (buying paper on special terms), you must immediately pay a tax on the money you never had. Your options have exercise costs , and private stock companies typically have a “409A rating” (US) to determine their “fair market value”. You will have to pay a tax on the difference between these two values ​​multiplied by the number of options exercised, even if zero liquidity of the shares means that you have never received a cent from them and there is no conceivable way to do this in the foreseeable future.
• Even if you have the money to pay for your options and tax inspection requirements, then cash will be blocked in the form of securities, and it is difficult to expect a return on such an investment for a long and indefinite time. Consider the opportunity cost that can be obtained from this liquid asset.
• According to US tax law, there is a ten-year limit on the period for executing ISO options from the day they are granted. Even if the shares are illiquid by that time, then you either lose them or sell them with the implementation of all the cautions regarding cost and taxation mentioned above.
Ten years - is it a lot? Let's look at the age of some unicorns:
> Palantir is now thirteen years old.
> Dropbox this year (2017) will be ten years old.
> AirBnB, GitHub and Uber will celebrate their tenth anniversary in a year or two.
• Some companies now offer a 10-year execution window (after you leave the company), and your ISO options will automatically turn into NSO options in 90 days (stock options without tax benefits). This, of course, is better for employees than a window in 90 days, but, as stated above, ten years may still be enough.
• Gold handcuffs are chained up quickly. The longer you are in the company, the larger your share in the company's equity becomes, and the more difficult it is to decide to leave the company.
This can reach a point where long-serving employees will have rather modest liquid assets (cash with a high degree of availability), being at the same time paper-based millionaires, and will have to make a difficult decision: whether to leave it all or continue to be until the founders of the company provide them with some monetary compensation.
Liquidity events
• There is no time limit for any kind of liquidation of debt (meaning corporate debt towards you, expressed in the form of securities in your name that have a value but are not instantly converted into cash). In fact, even the elimination of debt itself is not guaranteed , even if the company is extremely successful. This can happen after 1 year, after 5 or 10 years, or it may not happen at all. We have seen a lot of evidence of this, as well as the age of some private companies (see list above).
• The incentives for the IPO of the employer and the employee are different. Workers want some kind of liquidation (in the “debt” sense, because your “papers” are the company's debt towards you) events so that they can get something from the capital they helped to create, but employers know that Providing such an opportunity to employees may cost them some of the best employees, since they will finally be able to take on other projects. Companies have another reason to stay private longer.
> Above is one reason why the founders do not want an IPO, but it is not the only one . Many of them believe (correctly or erroneously) that the company still has 10-100-fold growth potential and that if the IPO is too early, all this potential will be lost. For a normal founder, his company is a lifelong business, and he is ready to wait a few more years to realize the potential he expected completely. Of course, this is a more noble reason for not going on an IPO, but from the point of view of the employee, it is very doubtful.
Inequality of the powers and capabilities of the founder / employee
• Founders (and preferred assistants) can agree to withdraw money in a value-raising round and thus become self-rich even before they make really crazy money on a large-scale debt elimination event or IPO. Workers cannot do this. The situation is completely asymmetrical, and most of us are on the “wrong” side.
• Even if you come to a company with a good understanding of the capitalization table, the financial situation may radically change. At any time new shares may be issued, diluting your position. In fact, such dilution is commonplace in any round of fundraising.
Private markets
• There are closed markets that trade in private stocks and even help to cope with relevant tax liabilities. However, it is important to bear in mind that this kind of assistance costs a lot and you will almost certainly lose a significant part of your premium. In addition, some companies are allowed to sell private shares only after receiving special approval from the board of directors.
Determination of cost
• Shares, especially at the early stage of the company's development, are offered on the basis of, to a large extent, the theoretical future value of the valuation. Sam Altman recommends giving the first ten employees 10% (~ 1% each), which can be a large amount if the company is worth $ 10 billion, but see how many companies reach this level.
If the company costs a more modest $ 250 million, then, taking into account taxes and inevitable dilution, your 1% will not earn you as much as you intuitively expect. This will be about the same as you would give to stocks with restrictions (RSU) from a large public company (that is, simply buying Apple or Google papers), but with much greater risk. Don't take my word for it though; This is a fairly simple arithmetic — examine the price variance and dilution factors for yourself before joining a company offering you securities. Do it.
Tender offers
• Some companies recognize the impact of long-term illiquidity phases on workers and make a tender offer to give workers some compensation (look online for examples of this). I do not want to overestimate it, because the receipt of such an offer is, of course, better than the existing alternative, but keep in mind that it will probably be constructed so as to minimize the amount that you can extract. Also, this event is extremely infrequent. Read the fine print, look at the numbers and think about what your annual compensation will actually be today (including all the time you worked in the company, not just the year of the offer). It is likely that it will be less than you would get from investing in stocks with restrictions (RSU) of a large public company.
Working conditions
• It is not related to stocks, but it is worth considering that the working conditions in a large unicorn company will not differ markedly from those in a large public company. You will have a small return on the employee, the same draconian policy of information security, many meetings and a fixed vacation. In the worst case, you even have to use the JIRA task and project management system.
I'll do it anyway!
So you decided to enter a private company anyway. Here are a few questions, the answers to which I would recommend to receive before accepting any offer (you would be very surprised to know how rarely an employer provides this information at will):
• How big is my option window if I leave the company?
• How many shares have been issued? (This will allow you to calculate your share in the company.)
• Do company executives want to sell it or make it public? If the answer to any of the questions is yes, then when can this event happen approximately? (Do not take "We do not know" for the answer.)
• Have there been any secondary sales of shares from employees or founders? (Try this way to find out if the founders take money for the growth round and if there was a tender offer for employees.)
• Assuming there is no liquidation, are my shares allowed to be sold in the private market?
• Does the company have a debt or investment with a liquidation privilege greater than 1x? (It is possible that investors were attracted with a liquidation privilege> 1x, which means that payments to them will be made in a multiple amount before someone else gets at least something.)
• Will you provide me with an extended execution window? (After joining the company, I learned that the majority had a standard 90-day window, but not all . Unfortunately, by that time I had lost the opportunity to influence the negotiations to request an extended window.)
It is really difficult to learn about all this so as not to look obsessed with money and not create an unattractive image, but you have to do it anyway. You are today simply obliged to protect yourself tomorrow.
Total
Work in a startup can be attractive, useful, interesting and, perhaps, even profitable. Operating conditions in Silicon Valley companies are often the best in the world; it is quite possible that you would wish to be there even without payment. But do not forget that with regard to the shares, each card in the deck stacks against you.
The correct estimate of your options is $ 0. Think of them more as a lottery ticket. If they are paid, then this is great, but your contract for work must be sufficiently thought out for you to join, even if they were originally absent from this contract.
I'm not saying that your startup can fail, but if successful, there are many scenarios in which it will be difficult to get paid. Say, for example, in five years you want to try something new or you want to start a family and you need work that brings enough money to buy your first home in the bay area (and San Francisco is oh how expensive). Playing Monopoly with a start-up employer will put you in a difficult position.
If you are lucky and you have a good demand so that you can choose between a public company with good liquidity of securities or a unicorn for a billion dollars, pay serious attention to the first one.
Source: https://habr.com/ru/post/320946/
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