I've opened up a PR with the change here (https://github.com/clef/handbook/pull/56), though it may be 10 years rather than 7, so I'm waiting for confirmation from our CEO before merging :)
EDIT: Our CEO's response was: "this is more complicated than just changing that number, give me some time to write the fully change up." Incoming!
EDIT #2: Updated with the 7 year number and a more depth explanation :) - thanks @brennenHN!
Personally i also believe it's a huge marketing/hiring benefit.
Startups live of implicit trust of their employees (imo their core asset)
Larger companies require explicit agreements with them
Very often when startups become larger companies, this trust breaks.
Having those explicit agreements upfront & transparent (before even joining a company) increases this trust a lot.
Kudos for doing so
but from my pov: doesnt really make sense as content on PH
it's more comparable to an really awesome blogpost
HN is by far the better place for it
That said, it's irrelevant if you exercise and sell an ISO at the same time, because short-term cap gains are taxed as income tax, too.
The real interesting term is having the ability to early exercise your entire stock grant, before it vests and before there is a spread between its strike price and fair market value. (The company would have a repurchase right, to implement the vesting schedule.) That way the cost is very low, and there's no worry of having to exercise in the future when it could be taxed unfavorably, and the clock for long-term capital gains starts early.
The way to fix this is an 83(b) election, which lets you say, "No, I'm taking the risk of this all up front. I want to pay taxes on it, even though the asset is at risk." In this specific case, it's a no-brainer: there are no taxes today, so of course I'll pay that $0.
If you want to do this with employee options, you have to set up early exercise rights. I think early exercise is done via 83(b) for employees, but I'm not 100% on that. My company isn't big enough that we've had to cross that bridge :)
Yes, if you early exercise ISOs, you would want to file an 83(b) to pay the $0 ordinary income tax burden up front (and get long term capital gains later). I'm not sure if you can file an 83(b) on an NSO.
You should definitely soak up some credit for having that term. :)
How am I supposed to sell a stock immediately if I have no market to sell it on because the company is private?
In my opinion, ISO's drastically favor the employer. If I am unhappy and wish to leave, but have vested two years of options, I am forced to either a) throw them away after 30 days or b) purchase them and take on a potentially enormous tax burden unless I do actually have the ability to sell them immediately.
Additionally, by waiting to exercise at a later date I further push back the amount of time it takes to qualify for long term capital gains when selling the remaining portion of the stock.
I was in the exact situation I describe about three years ago when I was very unhappy and wished to look for something new. I had vested an extremely generous ISO grant that, should I have exercised it, would have bankrupted me from the tax bill. My stock was worth 100x what my strike price was, so in essence, I was the "victim" of the company being extremely successful. My way out of this problem was simply luck: we got bought four months after this personal crisis started.
I also found myself feeling like a second class citizen as time wore on. I had been a first employee and helped build the company into what it was, and I felt involved and informed with most everything going on. As time wore on, we became successful and grew substantially and I found myself in a situation where I was becoming simply a senior member of the engineering team. I was certainly not an owner, despite what my time, acceptance of risk, and vested options would imply after four years of hard work.
If companies really believed in the value of an ISO they would put their money where their mouth is and have a stock purchase program that helps alleviate the tax burden over time. It's that, or allow option holders to keep their options for many years after employment terminates. As an owner, what do you want -- option holders that happily stick around even when they could leave or employees who feel they are forced to stay regardless of what happens?
Startups by and large have held fast to this requirement.
A few, such as Pinterest, have agreed to extend the 90-day expiration period out for several years. This allows employees who hold vested options having potentially significant value to leave their employment and not have to face the choice of losing such options, on the one hand, or doing an immediate exercise that might trigger a large tax while being left with no near-term ability to liquidate the underlying stock so as to pay that tax (and further facing the risk that the underlying stock might decline in value, leaving them having paid a gratuitous tax on stock that may subsequently have little or no value).
This is an important and very good fix but it does destroy the ISO status of the options and converts them to NQOs.
If the 90-day restriction, therefore, is not built into default plan documents, the company cannot offer ISOs to its employees. It is thus not normally an option for startups to eliminate the restriction wholesale. Any discussion of this issue needs to take this into account because there are various trade-offs in doing it one way or the other, at least one of which may not be good for employees.
> You have 7 years to exercise your [ISOs] after you stop working at Clef, but by law the options only count as ISOs for 90 days after you stop working. Once those 90 days are up, the options count as non-qualified stock options
https://github.com/clef/handbook/blob/master/Hiring%20Docume...
There is a bit of a double standard on stock vesting between founders and early stage employees. Both take about the same amount of risk and the employees frequently give up more salary for less equity. However, while founders owns all vested stock outright the employee stock options most often expire after 30 to 90 days.
The quick stock option expiration is especially problematic since the termination might not be voluntary, and might be a result of changing life circumstances or a company-initiated termination.
At the beginning, a company is usually $100 or so in total, and the founders pony up $20 or so each to buy their shares. The company can buy back the portion of unvested stuff for the balance of the $20 until it vests.
83b election gets you out of tax hell, too.
Talk to your lawyer.
Edit: rdl , for the loan from the company to do the 83b election to be a considered a loan by the irs it must have almost full recourse. You will be liable for it and the creditors will ask for the loan amount in case of failure.
A loan which is somehow forgivable for the stock seems like it could solve this; if the stock is worthless, return it instead of the loan. (I thought you can do that? But I guess you can't?)
http://www.ecjlaw.com/22505/ecj-viewpoints/taxing-matters/ho...
"Here is how it works: The employer transfers the stock to the employees at no cost, and the employees make the Section 83(b) election to accelerate the taxable event to the date of transfer. That requires the employees to recognize ordinary income in an amount equal to the value of the stock and enables the employer to report an ordinary noncash deduction equal to the same amount.
The employer then finances the employees’ income-tax liability with a nonrecourse loan to the employees (at today’s low interest rates) secured by the restricted stock. Since this doesn’t involve the financing of the employees’ purchase price of the stock, the restricted stock grant would be considered a “transfer” of the stock, thus closing the compensation element of the transaction upon transfer because the Section 83(b) election is made. This avoids the tax uncertainty created by financing the actual stock acquisition with a nonrecourse loan and the requirement of a substantial cash down payment by the employees or, alternatively, a substantial portion of the acquisition note’s being recourse.
Although employees must still pay the ordinary income tax incurred on the date of grant, they have deferred the payment of the tax by means of the employer’s nonrecourse loan. The employer is permitted a noncash deduction in the same amount and at the same time, while the employees are required to include the compensation element of the restricted stock grant in income."
It would be so highly unfair that after joining as an early employee and getting somewhere around 1-2%, if you leave after 4-5 yrs, that all your options expire 30 days after. I understand you can execute them but circumstances or policies may be such that it may not be favorable to do so.
I'm starting to think equity is essentially a sucker's game and you'd be stupid to play it and hope to win the lottery. A good salary and profit-sharing is just way better any day than the hope of overnight striking it rich one fine day.
The craziness is that you cannot actually do that. But you pay the tax anyway, and if they company goes away, or has an exit where the common stock gets no value, you can record the "loss" $3,000 a year until you have used it up.
So worst case is your out both the exercise money and the tax money. Wham wham!
Also, has anyone ever had trouble with the "speculatively execute one option buy a share to get access to the books for a sanity check" thing? That's normal practice, right?
It's an extremely risky situation to be an employee stockholder. You are at the mercy of the founders, board, and investors. Usually founders also hold common stock, so that is somewhat reassuring, since they're in the same boat as employees from that perspective. However--and not saying this happens often--there is nothing preventing founders from being given the option, say in an acquisition or financing round, to cash out while employees are stuck without liquidity.
There are startups that offer options that don't even give you the choice to exercise them even after they 'vest'. In this case, exercising can only occur after either a sale or IPO event AND the company has to give its blessing; and the company in question wonders why they have trouble with both hiring and retention.
I know it sucks but read all the legal terms related to your employment, ideally before you join.
If you want to capture upside, then you must believe that there is upside, so then surely you can offset the cost of buying the options into your expected return?
Why is that a bad thing? If not exercised, those options disappear, and essentially everyone else is not diluted. If the options remain on the books, it affects everyone else.
Also, from a company perspective, that's a rough go, because earlier shares tend to be worth quite a bit more (whether because of lower strike prices or whether the early employee got a bigger percentage of the company), so you end up with cases of someone who put in a year early on and left holding a significant portion of the company when people who stick it out for longer get much less.
Of course, in any case, the company can always issue more shared to dilute out the early shareholders who left, while dishing out the new shares to everyone who is still employed, but then you're right back to square one.
When a company sells, it negotiates with its buyer for a long time to come up with a price and terms for the deal. Former employee stockholders are iced out of that negotiation. The buyer and sellers have levers to pull that improve the outcome for themselves at the expense of former employees; for instance, the terms of the deal can include retention bonuses paid to employees, and in fact are sometimes dominated by those bonuses. Nobody needs to decide to be evil to make something like this happen! It's rational for the buyer to want to extend additional benefits to keep employees, and management is numbered among those employees.
I've had friends who paid significant amounts of money for their stock only to have it end up worth 0 in subsequent high-8-figure sales.
This market standard provision in startup employee equity agreements is probably the single biggest obstacle to realizing a gain from employee equity.
What it means is that when you leave your job, if you want to capture any potential upside from your options, you're required to execute them, paying your own money for actual shares. Depending on the amount of equity you have, this may or may not be a meaningful amount of money, but it is in any case a painful decision to have to make.
Companies like Pinterest have done things to address this flaw; they allow employees who no longer work at the firm to retain their vested options without executing them for several years.