Negociando opções de ações pré-ipo
Sua fonte para melhorar sua compensação.
Você é um executivo ou funcionário sênior que acaba de receber uma oferta de emprego verbal ou por escrito.
Talvez a empresa seja uma empresa de tecnologia emergente, possivelmente financiada por capital de risco. Seja você vindo de uma empresa semelhante ou de um empregador grande e tradicional, a Carta de Oferta pode ser um pouco decepcionante. Pode ter apenas algumas páginas. Pode ser lido como uma carta-modelo, com o seu nome, título, salário e informações sobre opções de ações preenchidas. Talvez você tenha recebido por e-mail.
Tenha cuidado para não deixar que a informalidade da abordagem da empresa o leve à indiferença. Esta Carta de Oferta estabelece o que você e sua família receberão em troca de seu sangue, suor e lágrimas pelo próximo número incontável de anos. A Carta de Oferta foi provavelmente redigida como um formulário por um advogado de emprego com um grande escritório de advocacia, e é cuidadosamente elaborada para proteger os interesses da empresa. (Se você recebeu um Contrato de Trabalho mais longo e mais formal, você simplesmente tem muito mais legalista para entender e entender.)
Mesmo que você tenha negociado seu salário e título, a negociação não está necessariamente terminada. Há vários outros termos de importância significativa para o candidato a emprego que a Carta de Oferta também aborda, ou falha ao abordar por design. Não desanime de negociar com os canards oft-used que a oferta é "o melhor que a empresa pode fazer" ou que "todos ao seu nível tem o mesmo negócio". Uma empresa racional sempre ouvirá atentamente as posições bem ponderadas de um candidato que ele valoriza. Além disso, você só pode ser melhor aconselhado do que as contratações anteriores.
Então, como você procede?
A seguir, pontos gerais que refletem partes do processo colaborativo que eu normalmente uso com clientes para avaliar, criar estratégias e negociar um ótimo conjunto de termos de emprego e remuneração:
1) Pense bem, encontre uma caixa de ressonância.
Envolva-se em uma avaliação do seu histórico de emprego, objetivos de carreira, conhecimento da empresa e as práticas particulares de seu setor, seu estilo de trabalho, metas financeiras e nível de conforto na negociação com seu futuro empregador. Mostre suas reações aos termos da Carta de Oferta, tanto os principais termos financeiros quanto as implicações dos obscuros termos legais. Aproveitar a experiência de alguém que tem conhecimento em primeira mão das práticas de compensação das empresas do setor e determinar um conjunto de solicitações a serem negociadas.
2) Adote uma postura.
Adotar e comunicar uma postura de negociação para a empresa. A postura deve integrar vários interesses concorrentes de uma vez - seu forte interesse na empresa e no trabalho, sua consideração sobre quais condições de compensação você precisa para assumir o emprego, sua firmeza e comportamento deliberado e uma sensibilidade projetada que aconteça o que acontecer durante o processo. as negociações não afetarão seu desempenho no trabalho futuro ou suas relações interpessoais com seus colegas. Uma vez que esta postura seja estabelecida e comunicada com sucesso, não há praticamente nada que você não possa negociar proveitosamente.
3) Controle = sucesso.
Controle o processo de negociação e conduza a resolução de problemas. Isso não é tão difícil quanto parece. O controle sobre o processo pode ser alcançado na maioria dos casos, aproveitando a carga de trabalho inicial e desenhando um roteiro claro para a resolução e conclusão do processo. Por exemplo, geralmente inicio uma negociação da seguinte maneira:
"Eu entendo que você e o Sr. Candidato chegaram a um consenso sobre as linhas gerais da remuneração e responsabilidades no trabalho. Nossos assuntos geralmente se relacionam com a redação de partes da Carta de Oferta, algumas questões em torno dos pontos de compensação e algumas questões que A Carta de Oferta não aborda diretamente o que gostaríamos de abordar, por uma questão de clareza, prepararemos um documento com nossos comentários e faremos um convite para discutir os pontos mais amplos e deixar que os advogados trabalhem com detalhes menores. - preferivelmente off-line sem envolver os diretores. Eu prevejo que o Sr. Candidato possa assinar a Carta da Oferta revisada preparada pelo seu advogado antes do final da semana. "
4) Tenha uma estratégia clara.
Priorize seus pedidos em três categorias, divisões de negócios para você, questões menores e acordos comerciais para a empresa. Não caia na armadilha de admitir um ponto isolado, simplesmente porque isso não importa para você - avalie sua concessão com base no que isso significa para a empresa. Obtenha algo de valor equivalente em retorno.
5) Criando momentum para fechar o negócio.
Comece com um livro aberto e trabalhe rapidamente para restringir a lista de problemas em aberto. A empresa, ao apresentar uma Carta de Oferta por escrito, abriu a porta para uma discussão sobre se o documento, conforme elaborado, reflete com precisão as expectativas do candidato durante o processo de recrutamento. Depois de estabelecer a legitimidade de abordar todas as questões da Carta de Oferta, você deve envidar todos os esforços para demonstrar o compromisso de obter a resolução final dos problemas que podem ser aceitos. Muitas vezes, há questões menores que podem ser sacrificadas para estabelecer boa vontade. Isso cria um senso palpável de progresso que pode se tornar uma razão poderosa para a empresa concordar com seus pedidos mais importantes, no interesse de colocá-lo rapidamente em prática.
6) Sempre negocie grandes questões.
Resista à pressão para conceder pontos importantes isoladamente. Se a empresa está à espera da palavra do Conselho em um ponto importante para você, não conceda um ponto importante para a empresa com antecedência. Eu descobri que a honestidade pode ser bastante eficaz nessa situação. "Sabemos que esse é um ponto importante para você e somos pessoas razoáveis, mas até sabermos se você pode progredir em nosso grande problema, temos que apresentar sua solicitação por enquanto."
Termos de Remuneração e Emprego.
7) Mantenha o que você já tem.
Analise sua memória, anotações e qualquer e-mail recebido da empresa em relação a questões de compensação, e cuidadosamente refira suas expectativas em relação aos termos da Carta de Oferta. A pessoa que prepara a Carta de Oferta pode ter tido apenas uma discussão superficial com o executivo contratante. Muitas vezes, detalhes cruciais são acidentalmente distorcidos ou omitidos. Não assuma que qualquer termo em desacordo com a sua expectativa seja intencional, mas suponha que a pessoa que está preparando a Carta de Oferta errará em benefício da empresa.
O salário é uma questão difícil de abordar amplamente, já que ele se concentra completamente nos fatos específicos de sua situação. Se você ficou sabendo do seu salário proposto na Carta de Oferta (o que não é tão incomum quanto você possa imaginar), considere justo negociá-lo de maneira agressiva. Se você ouviu anteriormente um número salarial negado, mas nunca expressamente negociou e aceitou uma determinada folha salarial, prossiga com mais cautela, levando em conta o fato de que as pessoas tratam os assuntos salariais de maneira diferente de qualquer outro aspecto de uma negociação de emprego. Um pouco de diplomacia vai longe - seu futuro chefe pode não se importar em lhe dar uma grande assinatura ou bônus de desempenho, mas pode não querer pagar-lhe um salário maior do que o pago ao fundador da empresa ou a eles mesmos. Se você concordou com um número de salário durante o processo de recrutamento, atenda a sua solicitação de um valor mais alto para a resistência da empresa a outras solicitações. Por exemplo, para ilustrar o conceito, você pode dizer: "Eu estava disposto a aceitar 150k quando achei que você tinha quatro anos de aquisição de ações, mas agora que eu aprendi a levar cinco anos para comprar, eu realmente preciso pedir US $ 175 mil. "
Reconheça que é muito mais fácil aumentar seu salário, bônus e opções de compra de ações antes de iniciar o seu novo emprego do que quando você entra na folha de pagamento e fica sujeito às políticas de compensação da empresa.
10) Dinheiro é dinheiro.
Considere substituir bônus pré-definidos por salário, onde a empresa parece estar genuinamente restrita em atingir sua meta salarial. O caminho de menor resistência pode ser propor uma estrutura de bonificação ou duas no lugar daquele salário mais alto.
Os bônus vão para o seu bolso e, a menos que você concorde com algum tipo de esquema de devolução caso saia da empresa, eles não retornam. Uma provisão de bônus por escrito que não forneça "outs" para a empresa valerá a pena, contanto que você ainda esteja empregado no vencimento. (Você pode tentar negociar isso também). Considere solicitar os seguintes bônus se eles se aplicarem à sua situação:
Bônus de assinatura (também conhecido como bônus de início ou início de sessão)
Bônus de relocação (mudar-se para aceitar um emprego custa mais do que apenas transferir despesas, negociar uma quantia total arrecadada por impostos para cobrir todas as despesas inesperadas de ser feliz em um novo local)
Bônus de custo de vida (quando se muda para uma área com um custo de vida notoriamente alto)
Bônus de Retenção (pagável periodicamente se você permanecer empregado da empresa)
Bônus de Desempenho (pagável ao atingir certos objetivos, negociar metas de desempenho definidas mutuamente a serem determinadas periodicamente)
Bônus de Vendas / Receita (pagável periodicamente com base no nível de receitas geradas pela empresa, seu departamento ou sua atividade, lucratividade da empresa ou outros critérios financeiros mensuráveis)
12) Participações societárias.
Interesses de capital - interesses de propriedade reais ou potenciais em seu empregador - são alguns dos elementos mais atraentes de sua remuneração, mas são difíceis de avaliar de uma maneira prática. Este artigo trata de opções de ações, mas algumas outras participações além do escopo deste artigo, como ações de fundadores, concessões de ações restritas, garantias e outros dispositivos menos comuns, merecem ser consideradas. Opções de ações são o direito de comprar ações em um empregador durante um período de tempo por um preço de exercício definido. O impacto financeiro e tributário das opções de ações, as diferenças entre opções de ações de incentivo e opções de ações não qualificadas e o impacto cada vez mais negativo do Imposto Mínimo Alternativo (AMT) sobre aqueles que exercem opções é complexo e está além do escopo deste artigo em particular. Aconselhamento profissional deve ser obtido com relação a estas questões de seus assessores jurídicos e / ou fiscais com base em sua situação financeira particular. (Continue lendo para uma discussão sobre o que pedir e como negociar mais opções de ações.)
13) Opções de ações.
Foi estabelecido que os funcionários muitas vezes supervalorizam as concessões de opções de ações que recebem, tornando-os substitutos atrativos para o dinheiro das empresas que os emitem. No entanto, a perspectiva de ganhar uma participação acionária potencial vale muitas vezes o seu salário é uma combinação que pode não ter um igual no local de trabalho americano. Os acionistas gostam do incentivo que as opções de ações criam para que os funcionários alinhem seus interesses totalmente com os do empregador e dos acionistas. Inicie uma negociação sobre opções de ações com o conhecimento de que até mesmo muitos executivos seniores não sabem exatamente como suas concessões de opções operam em todos os cenários prováveis. Quanto mais você entender sobre os detalhes de sua concessão de ações, o plano de opção de compra de ações e os princípios de governança corporativa da empresa, maior a probabilidade de negociar mais opções em condições de exercício mais favoráveis e realizar parte de cima.
14) Participação na propriedade.
Uma análise de limite de qualquer oferta de opções de compra de ações requer compreensão de qual parte da propriedade corporativa a concessão potencialmente representa. A empresa indicou um determinado número de opções a serem concedidas? Eles indicaram que porcentagem das ações atualmente emitidas e em circulação da empresa essa concessão representaria, se a concessão da opção fosse totalmente adquirida? Ao determinar se o subsídio é grande o suficiente, apenas uma análise de porcentagem de propriedade é significativa. Valores próprios nominais, como "100.000 opções", não têm significado sem comparação com essas outras figuras. Uma pessoa experiente em seu setor escolhido pode fornecer uma estimativa de faixas de propriedade típicas para executivos de determinados níveis de responsabilidade. É crucial considerar o efeito da futura diluição de seu interesse de propriedade potencial resultante de rodadas de financiamento antecipadas.
15) Potencial de vantagem.
Não basta simplesmente supor que "o céu é o limite" para o que suas opções de ações um dia poderão valer. Essa suposição pode levar a compromissos desnecessários e custosos em outras áreas importantes do seu pacote de remuneração. Em vez disso, considere um cenário de sucesso razoável, possivelmente um IPO ou uma aquisição. Lembre-se de que, a menos que a empresa tome a decisão extraordinária de conceder opções a um preço de exercício inferior ao valor de mercado atual das ações, na data de concessão, o preço de exercício e o valor da ação são os mesmos. Além do valor do tempo da opção, que pode ser bastante valioso, a opção ainda não está "no dinheiro". O valor das ações da empresa deve ser apreciado antes que suas opções estejam "no dinheiro" - isto é, vale a pena exercê-lo. Calcule sua porcentagem de propriedade do valor de mercado agregado potencial de toda a empresa no futuro, menos o custo de exercício de suas opções, descontado pela probabilidade de que esse sucesso seja realmente alcançado. Desconto adicional para contabilizar os numerosos obstáculos de liquidez que existem para os executivos que buscam vender ações. Esse número é o que você acha que precisa ser em função dos outros elementos do seu pacote de remuneração e responsabilidades de trabalho?
16) Opções de aquisição.
Quantos anos você deve trabalhar antes de investir em todo o número de opções atualmente oferecidas? Desenvolvimentos recentes indicam que, dada a volatilidade das fortunas corporativas, especialmente na área de tecnologia, as chances de permanecer felizmente empregado com uma empresa por quatro anos podem ser menores do que o previsto anteriormente. Existe um "precipício", um período de espera, antes de suas opções começarem a ser adquiridas? É comum que uma doação de ações de quatro anos seja adquirida em um trimestre após doze meses, e seja investida mensalmente nos três anos restantes. Muitos desenvolvimentos podem ocorrer tanto na vida da empresa quanto em sua vida pessoal, fazendo com que você encerre seu serviço como funcionário antes que o precipício tenha terminado, deixando você sem opções adquiridas para sua experiência. Da mesma forma, algumas bolsas são concedidas apenas anualmente. Considere negociar um melhor cronograma de aquisição. A maioria dos planos de opções de ações permite que a diretoria ou a gerência estabeleçam variações nos horários de aquisição com o toque da caneta de seu advogado.
17) Exercício de opções adquiridas.
Preste atenção em quanto tempo você deve exercer as ações adquiridas após deixar o emprego na empresa. Normalmente, esse período é de 90 dias ou menos. As opções, como incentivos para o desempenho, procuram manter os funcionários empregados da empresa. Uma vez que você sai, a empresa quer "despojá-lo" de suas opções não exercidas. Se as opções não são "in the money" - valiosas - em algum momento durante esse período, você não está economicamente motivado a exercê-las, e elas expirarão sem valor. Este período de exercício pós-emprego pode, por vezes, ser prorrogado de forma rentável através da negociação.
18) Documentos de opção de compra de ações.
Os documentos que estabelecem sua concessão de opção de compra de ações e o plano sob o qual as opções são concedidas são documentos cruciais que você (ou, mais proveitosamente, seu consultor profissional) precisa ler antes de executar uma Carta de Oferta. Questões adicionais para focar, além daquelas definidas acima, incluem o que acontece com suas opções no caso de uma fusão ou aquisição da empresa, se você pode participar de um exercício sem dinheiro, o que acontece no caso de você deixar o emprego voluntariamente, ou são rescindidos pela companhia com ou sem "causa" conforme o termo é definido e quais restrições existem sobre a venda de ações adquiridas de acordo com as opções, tanto antes quanto depois de um IPO.
19) Rescisão do emprego.
Pense muito sobre a necessidade de se proteger dos riscos de se juntar a uma empresa emergente que pode não estar em condições de controlar seu próprio destino. Executivos oriundos de empresas ou carreiras estabelecidas e lucrativas, realocando-se, juntando-se a empresas problemáticas ou desestabilizando suas carreiras para aceitar uma oferta de trabalho devem negociar um pacote de indenização e os termos sob os quais são acionados antecipadamente, na Carta de Oferta. Enquanto isso soa derrotista, é a melhor maneira de exercer controle substancial sobre o seu destino. A maioria das empresas de tecnologia cria empregos para estar à vontade nos estados que as permitem (mesmo para seus executivos mais antigos). Isso, em essência, significa que o funcionário não tem direito futuro de ser empregado pela empresa, mesmo no primeiro dia de trabalho. Embora se defina que o empregado também não tem obrigação de permanecer na empresa, esse é um direito que o funcionário já possui - é quase impossível conseguir que um tribunal exija que um indivíduo realize serviços contra sua vontade. Quando você começa a considerar todos os seus interesses profissionais e financeiros em jogo em uma relação de trabalho, reconhece que o emprego à vontade apresenta riscos significativos.
20) Mais sobre rescisão.
Embora seja possível negociar um contrato de trabalho que preveja emprego (ou salário e benefícios contínuos) por um período de tempo específico, isso está além do escopo deste artigo. Basta dizer que contratos de trabalho garantidos desse tipo são desfavoráveis no mundo das empresas de tecnologia. Em geral, as proteções são fornecidas em vez de benefícios de indenização em caso de rescisão. Como com todas as questões levantadas neste artigo, é aconselhável aconselhamento profissional para obter os resultados desejados. Reduzida aos conceitos mais básicos, a rescisão do contrato de trabalho pode ocorrer através de sua demissão voluntária, rescisão por "causa" pelo empregador (melhor definido para o empregado como limitado a algum tipo de ilegalidade ou outra conduta objetivamente imprópria por parte do empregado) , rescisão sem justa causa (abrangendo as rescisões resultantes de cortes no orçamento, demissões, mudanças na estratégia, desempenho insatisfatório no trabalho ou nenhuma razão), incapacidade ou morte. Você pode definir quais compensações devem ser pagas em cada uma das circunstâncias anteriores, com formulários de remuneração incluindo, por um período de tempo, salário continuado, pagamento contínuo de bônus, benefícios continuados do empregado incluindo seguro de saúde, aquisição continuada (ou aceleração) de opções de ações , pagamentos fixos, retenção de equipamentos ou periféricos de escritórios da empresa, fornecimento de referências de trabalho favoráveis, continuação de e-mail e correio de voz, etc.
21) Ainda mais na rescisão.
Um acordo artisticamente elaborado pode ainda fornecer proteções adicionais e consideração ao executivo no caso de uma fusão ou aquisição da empresa, insolvência iminente, uma mudança prejudicial em seu salário, oportunidade de gratificação, cargo, função, responsabilidades de trabalho ou relações de subordinação. ou o fracasso da empresa para promovê-lo para uma determinada posição dentro de um período fixo de tempo. As proteções e considerações disponíveis incluem a aquisição acelerada de opções e o pagamento dos benefícios de rescisão anteriormente discutidos. O único limite para essas proteções é a imaginação do candidato a emprego (e do orientador).
É crucial revisar sua Carta de Oferta e outros documentos oferecidos antes ou depois do início do emprego (ou melhor, tê-los revisados por um profissional) para elementos de um acordo de não concorrência. Esses acordos buscam impedi-lo de trabalhar para outra empresa por um período de tempo após deixar a empresa. Dependendo do estado em que você mora, onde o seu empregador está localizado e onde você quer trabalhar em seguida, esses acordos são válidos e exequíveis, ou praticamente inexequíveis. Eles podem catastroficamente impedi-lo de ganhar a vida em sua profissão escolhida por um período de anos. As não competições precisam ser adaptadas de maneira restrita para que sejam aceitáveis para você, e é aconselhável definir cuidadosamente quando elas são acionadas, como dependendo se o funcionário sai voluntariamente ou é demitido pela empresa. Melhor ainda, um funcionário sujeito a uma não concorrência deve exigir que a empresa forneça um montante fixo de salário e benefícios antecipadamente ao término do contrato de trabalho pelo período potencial de desemprego subsequente imposto pela empresa.
23) Não-solicitações, confidencialidade e atribuições de invenção.
Você provavelmente também será solicitado a entrar, seja na Carta de Oferta ou em documentos trabalhistas relacionados, um contrato para não solicitar direta ou indiretamente que os funcionários da empresa participem de outro empreendimento por um período de tempo, um acordo para proteger as confidências de a empresa conforme definido por um período de tempo, com penalidades e soluções para sua violação detalhados, e para atribuir a propriedade de todas as invenções e outras propriedades intelectuais criadas por você enquanto funcionário e para auxiliar a empresa na obtenção de patentes e outras expressões de propriedade de tal propriedade intelectual pela empresa. Conceitualmente, todos esses documentos são aceitos sem negociação significativa pelos funcionários. No entanto, um advogado experiente pode aconselhá-lo detalhadamente se esses tipos de disposições contêm termos não padrão que prejudicam seus direitos a um nível incomum e inaceitável.
24) Outros benefícios.
Você pode negociar para definir o número de semanas de férias a que tem direito e o seu direito a ser pago por dias de férias não utilizados no final do seu emprego. Você pode se proteger contra os períodos de espera para que os benefícios dos empregados sejam pagos, fazendo com que a empresa reembolse quaisquer despesas resultantes de tais atrasos (como pagar seu COBRA durante o período intermediário). Você pode definir equipamentos de escritório especiais a serem fornecidos a você (pagers e telefones celulares Blackberry e planos de serviços relacionados, reembolso de despesas de comunicação e equipamentos do escritório doméstico), seja na primeira viagem ou na classe executiva em viagens de negócios, essencialmente qualquer coisa importante para você e razoável para a empresa aceitar, a fim de obter seus serviços.
Espero que o precedente tenha sido útil e tenha estimulado seu pensamento sobre o que você pode procurar negociar em sua nova posição e como você pode obtê-lo com sucesso. Certamente, um livro de tamanho decente poderia explorar muito mais as nuances que surgem em cada caso. Espero sinceramente que este esforço modesto de estabelecer uma abordagem do mundo real para as negociações de compensação executiva tenha ajudado a preencher a lacuna de informações disponíveis gratuitamente sobre esse importante assunto.
Não posso exagerar quão valioso um consultor jurídico experiente pode ser na avaliação de uma Carta de Oferta ou Contrato de Trabalho, e todos os documentos relacionados (o documento do plano de opção de compra de ações, o documento de concessão de opção de compra de ações, o acordo de confidencialidade, o contrato de cessão de invenção, acordo de solvência e o acordo de não concorrência). Concentrando-se nas muitas sugestões acima, é provável que o conselheiro certo possa ajudá-lo a obter compensações adicionais e termos que cobririam e possivelmente excederiam o custo de obtenção de tais conselhos.
Quando o seu negócio terminar, não se esqueça de aproveitar sua boa sorte. As empresas emergentes oferecem uma experiência de trabalho incrivelmente desafiadora, padrões de vida respeitáveis e a rara possibilidade de obter uma riqueza real capaz de transformar a vida de você e sua família. Depois de empregar os conceitos deste artigo para fazer o que espero que seja o melhor negócio de sua carreira, tenho certeza de que você dará ao seu empregador o benefício da barganha e recompensará sua crença em suas capacidades - ganhando cada dólar e, em seguida, alguns, com excelente desempenho no trabalho.
Copyright 2002-2009 Gary A. Paranzino.
O autor representa indivíduos que estão negociando novos arranjos de emprego. Muitos clientes trabalham com Gary Paranzino nos bastidores para definir uma estratégia para melhorar suas ofertas de emprego.
Para obter informações sobre como negociar um melhor pacote de rescisão ao deixar um emprego, consulte o artigo relacionado do autor aqui.
Gary A. Paranzino, admitiu para praticar na Califórnia e Nova York.
Gary Paranzino pratica a advocacia há mais de 30 anos. Ele atuou como Conselheiro Geral e Diretor Jurídico de duas importantes empresas de tecnologia de capital de risco, PointCast e Ashford, onde negociou e elaborou cartas de oferta, contratos de emprego e acordos de separação para CEOs, executivos e funcionários.
Hoje, na prática privada, ele gasta uma proporção significativa de seu tempo representando executivos e funcionários entrando e saindo de empresas de tecnologia, empresas financeiras e corporações multinacionais. Visite o site do Paranzino para mais informações.
Este artigo fornece apenas informações básicas gerais. Não é um substituto para obter aconselhamento profissional com base nas circunstâncias únicas da sua situação pessoal e da legislação local aplicável. Nenhuma relação advogado-cliente é criada por um visitante lendo ou agindo sobre o conteúdo deste site. Um relacionamento advogado-cliente só pode ser criado comigo / meu escritório de advocacia, celebrando um contrato por escrito ou contrato de retenção. Se você estiver interessado, por favor visite o meu site para entrar em contato comigo para discutir se tornar um cliente.
Como avaliar.
uma carta de oferta de emprego.
por Gary A. Paranzino.
Negocie seu salário, bônus,
Opções de ações, ações restritas, benefícios, férias,
CONSELHO DE OPÇÃO DE AÇÕES, P. C.
Juntando-se a uma fase inicial de inicialização? Negociar seu patrimônio e salário com dicas de conselhos de opção de ações.
A advogada Mary Russell aconselha indivíduos no capital de startups, incluindo fundadores sobre seus interesses pessoais e executivos e principais colaboradores na oferta de negociação, design de remuneração e termos de aquisição. Por favor, veja esta FAQ sobre seus serviços ou entre em contato com ela no (650) 326-3412 ou no info @ stockoptioncounsel.
Originalmente publicado em 12 de fevereiro de 2014. Atualizado em 6 de abril de 2017.
"Hey baby, qual é o seu número de funcionário?" Um baixo número de funcionários em uma startup famosa é um sinal de grandes riquezas. Mas você não pode começar hoje e ser o funcionário número 1 da Square, Pinterest ou uma das outras startups mais valiosas da Terra. Em vez disso, você terá que se juntar a uma startup em estágio inicial e negociar um grande pacote de ações. Este post aborda as questões de negociação ao ingressar em uma startup pré-série A / financiada por sementes / muito em estágio inicial.
Q: Não é uma coisa certa? Eles têm financiamento!
Não. Levantar pequenas quantias de investidores em estágios de sementes ou de amigos e familiares não é o mesmo sinal de sucesso e valor que um financiamento de milhões de dólares da Série A feito por capitalistas de risco. De acordo com Josh Lerner, especialista em VC da Harvard Business School, 90% das novas empresas não passam do estágio inicial para um verdadeiro financiamento de VC e acabam fechando por causa disso. Assim, um investimento de capital em uma startup de estágio de sementes é um jogo ainda mais arriscado do que o jogo muito arriscado de um investimento de capital em uma startup financiada pelo capital de risco.
Aqui está uma ilustração da apresentação de Dustin Moskovitz, Why to Start a Startup, da Startup School da Y Combinator, sobre as chances de "fazer" uma startup que já levantou o financiamento inicial.
Quais são as chances de uma startup financiada por uma semente tornar-se um "unicórnio" (aqui, definida como tendo 6 rodadas de financiamento, em vez da definição tradicional de uma avaliação de US $ 1 bilhão).
P: Quantas ações devo obter?
Não pense em termos de número de ações ou de valorização de ações quando você entra em uma startup de estágio inicial. Pense em você como um fundador de estágio avançado e negocie uma porcentagem específica de propriedade na empresa. Você deve basear essa porcentagem na sua contribuição antecipada para o crescimento do valor da empresa.
As empresas em estágio inicial esperam aumentar drasticamente em valor entre a fundação e a Série A. Por exemplo, uma avaliação pré-monetária comum em um financiamento de capital de risco é de US $ 8 milhões. E nenhuma empresa pode se tornar uma empresa de US $ 8 milhões sem uma grande equipe. Então pense em sua contribuição dessa maneira:
P: Como as startups em estágio inicial devem calcular minha porcentagem de participação?
Você estará negociando seu patrimônio como uma porcentagem da "Capital Totalmente Diluída" da empresa. Capital Totalmente Diluído = o número de ações emitidas para os fundadores ("Estoque do Fundador") + o número de ações reservadas para funcionários ("Conjunto de Funcionários") + o número de ações emitidas ou prometidas a outros investidores ("Notas Conversíveis"). Também pode haver garantias pendentes, que também devem ser incluídas. Seu Número de Ações / Capital Totalmente Diluído = Sua Propriedade de Porcentagem.
Esteja ciente de que muitas startups em estágio inicial provavelmente ignorarão as Notas Conversíveis quando fornecerem o número do Capital Totalmente Diluído para calcular sua porcentagem de propriedade. Notas conversíveis são emitidas para investidores anjo ou semente antes de um financiamento VC completo. Os investidores na fase de formação de sementes dão à empresa um ano ou mais antes que o financiamento de capital de risco seja esperado, e a empresa "converte" as Notas Conversíveis em ações preferenciais durante o financiamento de capital de risco com desconto do preço por ação pago pela VCs.
Como as Notas Conversíveis são uma promessa de emissão de ações, você deve pedir à empresa que inclua uma estimativa para conversão de Notas Conversíveis no Capital Totalmente Diluído para ajudá-lo a estimar com mais precisão sua Propriedade Percentual.
P: 1% é a oferta padrão de ações?
1% pode fazer sentido para um funcionário se juntar depois de um financiamento da Série A, mas não cometa o erro de pensar que um funcionário em estágio inicial é o mesmo que um funcionário pós-Série A.
Primeiro, sua porcentagem de participação será significativamente diluída no financiamento da Série A. Quando a Série A VC compra aproximadamente 20% da empresa, você terá aproximadamente 20% a menos da empresa.
Em segundo lugar, existe um enorme risco de a empresa nunca conseguir um financiamento de capital de risco. De acordo com a CB Insights, cerca de 39,4% das empresas com financiamento de sementes legítimo continuam a aumentar o financiamento. E o número é muito menor para transações de sementes nas quais VCs legítimos não estão participando.
Não se deixe enganar pelas promessas de que a empresa está "levantando dinheiro" ou "prestes a fechar um financiamento". Os fundadores são notoriamente delirantes sobre esses assuntos. Se eles não fecharem o negócio e colocarem milhões de dólares no banco, o risco é alto de que a empresa ficará sem dinheiro e não poderá mais pagar a você um salário. Como seu risco é maior do que um empregado pós-Série A, sua porcentagem de patrimônio também deve ser maior.
P: Há alguma coisa complicada que eu deva procurar em meus documentos de estoque?
A empresa mantém quaisquer direitos de recompra sobre minhas ações adquiridas ou quaisquer outros direitos que me impeçam de possuir o que eu adquiri?
Se a empresa responder "sim" a essa pergunta, você poderá perder seu patrimônio quando sair da empresa ou for demitido. Em outras palavras, você tem um investimento infinito, pois você realmente não possui os compartilhamentos, mesmo depois de adquiridos. Isso pode ser chamado de "direitos adquiridos de recompra de ações", "clawbacks", "restrições à não-concorrência no capital", ou mesmo "capitalismo maligno" ou "capitalismo vampírico".
A maioria dos funcionários que estarão sujeitos a isso não sabe até que estejam deixando a empresa (voluntariamente ou depois de demitidos) ou esperando para serem pagos em uma fusão que nunca os pagará. Isso significa que eles têm trabalhado para ganhar patrimônio que não tem o valor que eles acham que faz, enquanto eles poderiam estar trabalhando em outro lugar para a equidade real.
Segundo o especialista em equidade Bruce Brumberg, "Você deve ler todo o seu contrato de subvenção e entender todos os seus termos, mesmo que tenha pouca capacidade de negociar alterações. Além disso, não ignore novos contratos de subvenção assumindo que eles sempre ser o mesmo." Quando você está trocando alguma forma de compensação em dinheiro ou fazendo algum outro investimento, como tempo para o patrimônio, faz sentido que um advogado revise os documentos antes de se comprometer com o investimento.
Q: O que é justo para o vesting? Para aceleração após mudança de controle?
O colete padrão é o vesting mensal ao longo de quatro anos com um ano de falésia. Isso significa que você ganha 1/4 das ações após um ano e 1/48 das ações a cada mês depois disso. Mas a aquisição de direitos deve fazer sentido. Se a sua função na empresa não se estender por quatro anos, negocie um cronograma de aquisição que corresponda a essa expectativa.
Ao negociar um pacote de ações antecipando uma saída valiosa, você esperaria ter a oportunidade de ganhar o valor total do pacote. No entanto, se você for rescindido antes do final do seu cronograma de aquisição, mesmo após uma aquisição valiosa, você não poderá ganhar o valor total de suas ações. Por exemplo, se toda a sua concessão valer US $ 1 milhão no momento de uma aquisição e você tiver investido apenas metade de suas ações, você terá direito a metade desse valor. O restante seria tratado, porém a empresa concorda que será tratado na negociação de aquisição. Você pode continuar a ganhar esse valor durante a próxima metade do seu cronograma de aquisição, mas não se você for rescindido após a aquisição.
Alguns funcionários negociam “aceleração de dupla ativação mediante mudança de controle”. Isso protege o direito de receber o bloco total de ações, pois as ações se tornarão imediatamente adquiridas se ambos os seguintes forem atendidos: (1º acionador) após uma aquisição que ocorre antes de o prêmio ser totalmente adquirido (2º acionador), o empregado é demitido (conforme definido no contrato de opção de compra de ações).
P: A empresa diz que decidirá o preço de exercício das minhas opções de ações. Posso negociar isso?
A empresa definirá o preço de exercício pelo valor justo de mercado ("FMV") na data em que o conselho conceder as opções a você. Esse preço não é negociável, mas, para proteger seus interesses, você deseja ter certeza de que eles concedem as opções o mais rápido possível.
Deixe a empresa saber que isso é importante para você e acompanhe-a depois de começar. Se eles atrasarem a concessão das opções até depois de um financiamento ou outro evento importante, o FMV e o preço de exercício subirão. Isso reduziria o valor de suas opções de ações pelo aumento do valor da empresa.
Startups em estágio inicial muito comumente atrasam a concessão de doações. Eles ignoram isso como devido a "largura de banda" ou outro absurdo. Mas é realmente apenas descuido em dar aos seus funcionários o que lhes foi prometido.
O momento e, portanto, o preço das concessões não importa muito se a empresa for um fracasso. Mas se a empresa tem grande sucesso nos primeiros anos, é um grande problema para os funcionários. Eu vi indivíduos presos com preços de exercício nas centenas de milhares de dólares quando lhes foram prometidos preços de exercícios nas centenas de dólares.
P: Que salário posso negociar como funcionário em estágio inicial?
Quando você entra em uma startup em estágio inicial, talvez seja necessário aceitar um salário abaixo do mercado. Mas uma startup não é uma organização sem fins lucrativos. Você deve pagar o salário do mercado assim que a empresa levantar dinheiro real. E você deve ser recompensado por qualquer perda de salário (e o risco de que você estará ganhando salário de $ 0 em poucos meses, se a empresa não arrecadar dinheiro) em um prêmio de capital significativo quando você se juntar à empresa.
Ao ingressar na empresa, você pode querer chegar a um acordo sobre sua taxa de mercado e concordar que receberá um aumento desse valor no momento do financiamento. Você também pode pedir, quando se inscrever para a empresa, conceder um bônus no momento do financiamento para compensar seu trabalho com taxas abaixo do mercado nos estágios iniciais. Isso é uma aposta, é claro, porque apenas um pequeno percentual de startups de estágio de sementes chegaria à Série A e seria capaz de pagar esse bônus.
P: Que tipo de equidade devo receber? Quais são as consequências fiscais do formulário?
[Por favor, não confie neles como orientação fiscal para a sua situação em particular, pois eles são baseados em muitas, muitas suposições sobre a situação fiscal de um indivíduo e a conformidade da empresa com a lei. Por exemplo, se a empresa cria incorretamente a estrutura ou os detalhes de suas doações, você pode se deparar com multas de até 70%. Ou, se houver flutuações de preço no ano de venda, seu tratamento fiscal poderá ser diferente. Ou, se a empresa fizer certas escolhas na aquisição, seu tratamento fiscal poderá ser diferente. Ou você tem a ideia de que isso é complicado.]
Estas são as formas de compensação de capital mais favorecidas em impostos para um empregado em estágio inicial, da melhor para a pior:
1. [Tie] Estoque restrito. Você compra as ações pelo valor justo de mercado na data da concessão e arquiva uma eleição 83 (b) com o IRS dentro de 30 dias. Como você possui as ações, seu período de retenção de ganhos de capital começa imediatamente. Você evita ser taxado quando recebe o estoque e evita taxas de imposto de renda ordinárias na venda de ações. Mas você corre o risco de que o estoque se torne inútil ou valha menos do que o preço que você pagou para comprá-lo.
1. [Tie] Opções de Ações Não Qualificadas (Imediatamente Early Exercised). Você exerce cedo as opções de ações imediatamente e arquiva uma eleição de 83 (b) com o IRS dentro de 30 dias. Não há spread entre o valor justo de mercado da ação e o preço de exercício das opções, portanto você evita quaisquer impostos (mesmo AMT) no exercício. Você imediatamente possui as ações (sujeito a vesting), portanto evita as alíquotas de imposto de renda ordinárias na venda de ações e seu período de detenção de ganhos de capital começa imediatamente. Mas você assume o risco de investimento de que a ação se tornará inútil ou valerá menos do que o preço que você pagou para exercê-la.
3. Opções de Ações de Incentivo ("ISOs"): Você não será tributado quando as opções forem concedidas, e você não terá renda ordinária quando exercer suas opções. No entanto, você pode ter que pagar o Imposto Mínimo Alternativo ("AMT") quando exercer suas opções sobre o spread entre o valor justo de mercado ("FMV") na data do exercício e o preço de exercício. Você também receberá tratamento de ganhos de capital ao vender o estoque, desde que você venda suas ações pelo menos (1) um ano após o exercício E (2) dois anos após a concessão das ISOs.
4. Unidades de Ações Restritas ("RSUs"). Você não é tributado no subsídio. Você não precisa pagar um preço de exercício. Mas você paga o imposto de renda ordinário e os impostos do FICA sobre o valor das ações na data de vencimento ou em uma data posterior (dependendo do plano da empresa e quando as RSUs são "liquidadas"). Você provavelmente não terá escolha entre RSUs e opções de ações (ISOs ou NQSO), a menos que seja um funcionário muito antigo ou executivo sério e tenha o poder de conduzir a estrutura de capital da empresa. Então, se você está se juntando a um estágio inicial e está disposto a dispor de algum dinheiro para comprar ações ordinárias, solicite Ações Restritas.
5. Opção de Compra Não Qualificada (Não Exercida Antecipadamente): Você deve o imposto de renda ordinário e os impostos do FICA na data do exercício sobre o spread entre o preço de exercício e o FMV na data do exercício. Quando você vende a ação, você tem ganho ou perda de capital no spread entre o FMV na data do exercício e o preço de venda.
P: Quem me guiará se eu tiver mais perguntas?
A advogada Mary Russell aconselha indivíduos no capital de startups, incluindo fundadores sobre seus interesses pessoais e executivos e principais colaboradores na oferta de negociação, design de remuneração e termos de aquisição. Por favor, veja esta FAQ sobre seus serviços ou entre em contato com ela no (650) 326-3412 ou no info @ stockoptioncounsel.
Conselho de opção de compra de ações, P. c.
MARY RUSSELL • ADVOGADO.
125 avenida universitária, suite 220 • palo alto, califórnia 94301.
Negociando opções de ações pré-ipo
Ainda tem uma pergunta? Pergunte o seu próprio!
Investimento Preferencial: US $ 20 milhões.
Propriedade preferencial: 80%
Propriedade comum: 20%
Consideração total de aquisição: US $ 40 milhões.
Direitos de Participação: Não Participante.
Pagamento preferido: o maior de US $ 20 milhões (liqu pref) OU 80% x US $ 40mm = US $ 32 milhões.
Pagamento Comum: 20% x $ 40mm = $ 8mm.
Direitos de Participação: Totalmente Participante.
Pagamento preferencial: $ 20 milhões (liqu pref) E 80% x $ 20mm (o que resta após o líquido pref) = $ 20mm + $ 16mm = $ 36mm.
Pagamento Comum: 20% x $ 20mm = $ 4mm.
Direitos de participação: importa.
Pagamento preferencial: 2 x US $ 20 milhões = US $ 40 milhões.
Pagamento Comum: $ 0.0mm.
Você não pode usar os mesmos argumentos para os dois - por razões óbvias: você está dentro ou está fora?
Se você não for insubstituível, associe-se à sua saída com liquidação e, em condições desfavoráveis, será uma tragédia que assustaria os funcionários mais novos. Há muito pouco que você pode pagar que é mais valioso do que investimento para uma empresa sem dinheiro, por isso certifique-se de negociar logo após boas notícias na frente de caixa. Os investidores têm limites de fidelidade muito mais baixos, então você pode querer aproveitar isso, mas passe muito gentilmente: eles são seus aliados. Considerando ir para outra empresa em seu portfólio poderia ser um pouco antiético se você fosse insubstituível, mas tê-los perceber que você é um talento raro e um bom contato de longo prazo pode ajudar lá.
Blog de Max Schireson.
Pensamentos sobre tecnologia e negócios de tecnologia.
Opções de estoque de inicialização explicadas.
Opções de compra de ações são uma grande parte do sonho de startups, mas muitas vezes elas não são bem compreendidas, mesmo pelos executivos seniores que obtêm grande parte de sua receita com opções de ações. Aqui está minha tentativa de explicar os principais problemas que os funcionários devem conhecer.
& # 8220; Opções de ações & # 8221; Como normalmente concedido, você tem o direito de comprar ações no futuro por um preço que é determinado hoje. O preço de exercício & # 8220; & # 8221; é o preço pelo qual você pode comprar as ações no futuro. Se, no futuro, a ação valer mais do que o preço de exercício, você poderá ganhar dinheiro com o "exercício" # 8221; as opções e comprar uma ação do preço de exercício. Por exemplo, você recebe 5.000 ações de ações a US $ 4 por ação em uma startup. Cinco anos depois, a ação vai para o público e, três anos depois, a ação chega a US $ 200 por ação. Você pode exercer a opção, pagando US $ 20.000 para comprar 5.000 ações que valem US $ 1.000.000. Parabéns, você fez um lucro antes de impostos de US $ 980.000, presumindo que você vendesse as ações imediatamente.
Há um problema pequeno, mas necessário: quando você recebe suas opções, elas não estão "vestidas". Isso significa que, se você sair da empresa uma semana depois de ingressar, perderá suas opções de ações. Isso faz sentido; caso contrário, em vez de ser um incentivo para ficar, eles serão um incentivo ao job-hop tanto quanto possível, coletando opções de tantos empregadores quanto possível. Então, quanto tempo você tem que ficar para manter suas opções? Na maioria das empresas, elas são adquiridas ao longo de quatro anos. A estrutura mais comum é o & # 8220; cliff & # 8221; após um ano, quando 25% de suas ações forem adquiridas, com as ações remanescentes adquirindo pro-rata mensalmente até chegar a quatro anos. Os detalhes variam de empresa para empresa; algumas empresas investem em opções ao longo de 5 anos e algumas em outros períodos de tempo, e nem todos os empregadores têm a falésia.
O penhasco está lá para proteger a empresa & # 8211; e todos os acionistas, incluindo outros funcionários & # 8211; de ter que dar ações a indivíduos que não fizeram contribuições significativas para a empresa.
Por que você deveria se preocupar se o cara que foi demitido depois de seis meses saiu com alguma opção ou não? Porque essas opções "diluem" # 8221; sua propriedade da empresa. Lembre-se de que cada ação representa uma parte da propriedade da empresa. Quanto mais ações houver, menor será o valor de cada uma. Digamos que quando você entrar na startup e receber 5.000 compartilhamentos, haverá 25.000.000 de ações no total. Você possui .02% & # 8211; dois pontos base & # 8211; da empresa. Se a empresa emitir outras 25.000.000 opções ou ações nos cinco anos subsequentes, para que haja 50.000.000 de ações no IPO (normalmente como parte da captação de recursos, incluindo uma oferta pública inicial ou para contratar funcionários), você terá o .01% & #. 8211; um ponto base ou metade da sua porcentagem original. Você teve 50% de diluição. Agora você ganha metade do mesmo valor da empresa.
Dito isso, a diluição não é necessariamente ruim. A razão pela qual o conselho aprova qualquer transação diluidora (levantando dinheiro, comprando uma empresa, dando opções de compra de ações) é que eles acreditam que isso fará as ações valerem mais. Se sua empresa arrecada muito dinheiro, você pode ter uma porcentagem menor, mas a esperança é que a presença desse dinheiro permita que a empresa execute uma estratégia que aumente o valor da empresa o suficiente para mais do que compensar a diluição e a o preço por ação sobe. Para uma dada transação (levantando US $ 10 milhões), menos diluente é a melhor, mas levantar US $ 15 milhões pode ser mais diluente do que levantar US $ 10 milhões, enquanto aumenta o valor de cada ação existente.
Isso nos leva ao número que é muito mais importante (embora seja menos impressionante) do que o número de compartilhamentos & # 8211; que parte da empresa você possui. Isso geralmente é medido em termos percentuais, o que acho lamentável porque muito poucos funcionários além dos fundadores acabam com um por cento ou mesmo meio por cento, então você está sempre falando sobre pequenas frações, o que é irritante. Eu acho que é mais útil medi-lo em pontos de base & # 8221; & # 8211; centésimos de um por cento. Independentemente das unidades, esse é o número que importa. Por quê?
Vamos dizer que a empresa A e a empresa B são, depois de muito trabalho duro, no valor de US $ 10 bilhões (semelhante à Red Hat, por exemplo). Há muito tempo, Albert foi trabalhar na empresa A e Bob foi trabalhar na empresa B. Albert ficou desapontado por ter apenas 5.000 opções, e elas foram concedidas a um preço de US $ 4 cada. Bob estava muito feliz & # 8211; ele recebeu 50.000 opções em apenas 20 centavos cada. Quem conseguiu o melhor negócio? Depende. Vamos dizer que a empresa A tinha 25.000.000 de ações em circulação, e a empresa B tinha 500.000.000 ações em circulação. Depois de muitos anos e 50% de diluição em cada caso, a empresa A tem 50.000.000 de ações em circulação, com valor de US $ 200 cada e Albert obteve um lucro de US $ 980.000 em suas opções (valor de US $ 1 milhão menos custo de exercício de US $ 20.000). A empresa B tem 1 bilhão de ações em circulação e, portanto, vale US $ 10 cada. As opções de Bob dão a ele um lucro de US $ 9,80 cada, para um lucro total de US $ 490.000. Então, enquanto Bob tinha mais opções a um preço de exercício mais baixo, ele ganhava menos dinheiro quando sua empresa alcançava o mesmo resultado.
Isso fica claro quando você olha a porcentagem de propriedade. Albert tinha 2 pontos base, Bob tinha um. Mesmo sendo menos ações, Albert tinha mais ações da única maneira que importava.
Quantas ações em circulação são & # 8220; normal & # 8221 ;? Em algum nível, o número é totalmente arbitrário, mas muitas empresas financiadas por capital de risco tendem a permanecer em um intervalo semelhante, que varia de acordo com o estágio. Como uma empresa passa por mais rodadas de financiamento e contrata mais funcionários, ela tenderá a emitir mais ações. A & # 8220; normal & # 8221; A startup em estágio inicial pode ter de 25 a 50 milhões de ações em circulação. Um estágio intermediário normal (receita significativa e várias rodadas de financiamento, muitos funcionários com uma equipe exec completa) pode ter de 50 a 100 milhões de ações em circulação. As empresas em fase final que estão prontas para o IPO geralmente têm mais de 100 milhões de ações em circulação. No final, o número real não importa, o que importa é o número total relativo ao tamanho da sua concessão.
Eu falei brevemente sobre as opções de exercício acima. Uma coisa importante a ter em mente é que o exercício de suas opções custa dinheiro. Dependendo do preço de exercício e do número de opções que você tem, pode custar um pouco de dinheiro. Em muitas empresas públicas, você pode fazer um exercício sem dinheiro & # 8221; ou "venda no mesmo dia" & # 8221; onde você se exercita e vende em uma transação e eles enviam a diferença. Na maioria das empresas privadas, não há uma maneira simples de fazer o equivalente. Algumas empresas privadas permitem que você ceda algumas das ações que você acabou de exercer de volta para a empresa pelo seu "valor justo de mercado" & # 8221; leia o contrato de opções para ver se isso é oferecido. Eu vou falar mais sobre o valor justo de mercado & # 8221; abaixo, mas por enquanto eu vou apenas dizer que, embora seja ótimo ter essa opção, não é sempre o melhor negócio se você tiver alguma alternativa.
A outra coisa realmente importante a considerar no exercício das opções de ações são os impostos, que discutirei mais adiante.
Na minha opinião, o processo pelo qual o valor de mercado justo & # 8221; de estoque inicial é determinado, muitas vezes produz avaliações em que seria muito difícil encontrar um vendedor e muito fácil de encontrar compradores & # 8211; em outras palavras, um valor que é muitas vezes inferior à definição intuitiva de valor de mercado da maioria das pessoas. O termo & ldquo; valor de mercado justo & # 8221; neste contexto, tem um significado muito específico para o IRS, e você deve reconhecer que esse significado técnico pode não corresponder a um preço pelo qual seria uma boa ideia vender suas ações.
Por que o IRS está envolvido e o que está acontecendo? A emissão de opção de compra de ações é regida, em parte, pela seção 409a do código de receita interna, que cobre a "compensação diferida não qualificada". # 8221; & # 8211; trabalhadores de compensação ganham em um ano que é pago em um ano futuro, além de contribuições para planos qualificados & # 8221; como planos 401 (k). As opções de ações representam um desafio para determinar quando a & # 8220; compensação & # 8221; é & # 8220; pago & # 8221 ;. É "pago" # 8221; quando a opção é concedida, quando se veste, quando você exerce a opção, ou quando você vende as ações? Um dos fatores que o IRS usa para determinar isso é como o preço de exercício se compara ao valor justo de mercado. Opções outorgadas abaixo do valor justo de mercado geram lucro tributável, com penalidade, sobre vesting. Isso é muito ruim; você não deseja uma fatura de imposto devida quando suas opções são cobradas, mesmo que você ainda não as tenha exercido.
As empresas geralmente preferem preços de exercício mais baixos para as opções & # 8211; isso torna as opções mais atraentes para os funcionários em potencial. O resultado disso foi um padrão de fato para definir o "valor justo de mercado" & # 8221; para fins de emissão de opções de inicialização em estágio inicial para ser igual a 10% do preço que os investidores realmente pagaram pelas ações (veja a discussão sobre classes de ações abaixo).
No caso de opções de ações iniciais, elas especificam que um método de avaliação razoável deve ser usado, o qual leva em consideração toda a informação material disponível. Os tipos de informações que eles analisam são valores de ativos, fluxos de caixa, o valor prontamente determinável de entidades comparáveis e descontos por falta de liquidez das ações. Obter a avaliação incorreta tem uma penalidade fiscal rígida, mas se a avaliação for feita por uma avaliação independente, há uma presunção de razoabilidade que é refutável somente quando a Receita Federal mostra que o método ou sua aplicação foi "extremamente irracional". # 8221 .
A maioria das startups possui ações ordinárias e preferenciais. As ações ordinárias são geralmente as ações que são de propriedade dos fundadores e empregados e as ações preferenciais são as ações que são de propriedade dos investidores. Então, qual é a diferença? Muitas vezes há três grandes diferenças: preferências de liquidação, dividendos e direitos dos acionistas minoritários, além de uma variedade de outras diferenças menores. O que isso significa e por que eles são comumente incluídos?
A maior diferença na prática é a preferência pela liquidação, o que geralmente significa que a primeira coisa que acontece com qualquer resultado de uma venda da empresa é que os investidores recuperam seu dinheiro. Os fundadores / funcionários só ganham dinheiro quando os investidores ganham dinheiro. Em alguns acordos de financiamento, os investidores obtêm um retorno de 2x ou 3x antes de qualquer outra pessoa ser paga. Pessoalmente tento evitá-los, mas eles podem fazer com que os investidores estejam dispostos a fazer o acordo por menos ações, então, em algumas situações, eles podem fazer sentido. Os investidores geralmente pedem um dividendo (semelhante a juros) sobre seu investimento, e geralmente há algumas cláusulas que exigem o consentimento do investidor para vender a empresa em determinadas situações.
Os funcionários normalmente recebem opções sobre ações ordinárias sem os dividendos ou preferência de liquidação. As ações, portanto, não valem tanto quanto as ações preferenciais que os investidores estão comprando.
Essa é, evidentemente, a grande questão. Se o valor de mercado justo & # 8221; não corresponde ao preço em que você acha razoavelmente que poderia encontrar um comprador, como você estimar o valor real de suas opções?
Se a sua empresa levantou dinheiro recentemente, o preço que os investidores pagaram pelas ações preferenciais pode ser um ponto de referência interessante. Minha experiência tem sido que um preço de mercado (não o valor de mercado justo e oficial, mas o que os VCs vão pagar) por ações ordinárias é frequentemente entre 50% e 80% do preço que os investidores pagam por ações preferenciais. Quanto maior a probabilidade de a empresa ser vendida a um preço baixo o suficiente para que os investidores se beneficiem de sua preferência, maior será a diferença entre o valor das ações preferenciais e as ações ordinárias.
A outra coisa a ter em mente é que a maioria das pessoas não tem a oportunidade de comprar ações preferenciais pelo preço que os VCs estão pagando. Muitos investidores muito sofisticados estão felizes em ter a oportunidade de investir em fundos de capital de risco de primeira linha, onde os executivos de empresas aceitam de 1 a 2% ao ano em taxas de administração e de 25 a 30% dos lucros. Ao todo, eles estão ganhando cerca de 60% do que compraram diretamente. Assim, quando um VC adquire ações ordinárias a, digamos, 70% do preço das ações preferenciais, esse dinheiro vem de um fundo de pensão ou doação de uma universidade que recebe 60% ou mais do valor dessa ação ordinária. Então, na verdade, um investidor inteligente está indiretamente comprando suas ações ordinárias por cerca do preço que os VCs pagam pela preferência.
Se não houve uma rodada recentemente, é mais difícil avaliar suas ações. O valor justo de mercado pode ser o ponto de referência mais próximo disponível, mas eu tenho visto casos em que é 30-60% (e ocasionalmente mais) abaixo do que um investidor racional pode pagar por suas ações. Se é a única coisa que você tem, você pode supor que um valor de mercado estaria mais próximo de 2x o "valor justo de mercado", embora essa lacuna tenda a diminuir à medida que você se aproxima de um IPO.
Expiração e término.
As opções normalmente expiram após 10 anos, o que significa que, nesse momento, elas precisam ser exercitadas ou se tornam inúteis. As opções também terminam normalmente 90 dias depois de você sair do seu trabalho. Mesmo se eles estiverem investidos, você precisa exercê-los ou perdê-los nesse ponto. Ocasionalmente isto é negociável, mas isso é muito raro & # 8211; Não conte com a possibilidade de negociar isso, especialmente depois do fato.
A exigência de exercer no prazo de 90 dias após a rescisão é um ponto muito importante a considerar na elaboração de planos financeiros e de carreira. Se você não for cuidadoso, você pode acabar preso por suas opções de ações; Vou discutir isso abaixo.
Ocasionalmente, as opções de ações terão o & # 8220; aceleração & # 8221; idioma onde se baseiam em certos eventos, mais freqüentemente uma mudança de controle. Essa é uma área de assimetria na qual os executivos seniores têm essas disposições com muito mais frequência do que os funcionários de base. Existem três tipos principais de aceleração: aceleração na mudança de controle, aceleração na terminação e "disparo duplo" & # 8221; aceleração que requer tanto uma mudança de controle quanto sua rescisão para acelerar seu vesting. A aceleração pode ser completa (todas as opções não investidas) ou parcial (digamos, um ano adicional de vesting ou 50% de ações não investidas).
Em geral, acho que a linguagem de aceleração faz sentido em dois casos específicos, mas não faz sentido na maioria dos outros casos: primeiro, quando um executivo é contratado em grande parte para vender uma empresa, ele fornece um incentivo apropriado para isso; segundo, quando um executivo está em um papel que é a) passível de ser despedido quando a empresa é vendida eb) estaria muito envolvido na venda, caso ocorra, pode eliminar parte da penalidade financeira pessoal que o executivo pagará e fará. É mais fácil para eles se concentrarem em fazer seu trabalho. Neste segundo caso, acho que uma aceleração parcial, double trigger é justa. No primeiro caso, a aceleração total pode ser chamada de trigger único.
Na maioria dos outros casos, acho que os executivos devem ser pagos quando e como todos os outros são pagos. Alguns executivos acham que é importante obter alguma aceleração na rescisão. Pessoalmente eu não & # 8217; t & # 8211; Eu prefiro concentrar minha negociação na obtenção de um acordo favorável no caso em que eu for bem-sucedido e permanecer por um tempo.
Quantas opções de ações você deve obter é largamente determinada pelo mercado e varia um pouco de posição para posição. Esta é uma área difícil sobre a qual obter informações e eu tenho certeza que tudo o que eu digo será controverso, mas eu farei o meu melhor para descrever o mercado como eu acredito que existe hoje. Isso é baseado na minha experiência em duas startups e uma grande empresa analisando cerca de mil opções de doações, bem como conversando com VCs e outros executivos e analisando pesquisas de compensação.
Primeiro, falarei sobre como penso sobre os tamanhos das concessões e, em seguida, dou algumas diretrizes específicas para diferentes posições.
Acredito firmemente que a maneira mais sensata de pensar sobre os tamanhos das concessões é pelo valor em dólar. Como discutido acima, o número de compartilhamentos não faz sentido. Embora a porcentagem da empresa seja melhor, ela varia enormemente com base no cenário, por isso é difícil dar conselhos amplamente aplicáveis: 1 ponto base (0,01%) do Google ou Oracle é uma grande concessão para um executivo sênior, mas ao mesmo tempo é uma pequena subvenção para um funcionário de nível básico em uma startup bruta de série A; pode ser uma concessão justa para um funcionário de nível médio em uma inicialização pré-IPO. O valor em dólar ajuda a contabilizar tudo isso.
Em geral, para esses propósitos, eu não usaria o valor de mercado justo de 409a & # 8220 ;. Eu usaria a) o valor na rodada mais recente se houvesse um ou b) o preço pelo qual você acha que a empresa poderia arrecadar dinheiro hoje se não houvesse uma rodada recentemente.
O que eu verificaria então seria o valor das ações que você está adquirindo a cada ano, e quanto elas valem se a ação fizer o que os investidores gostariam que ela fizesse “# 8211; aumenta em valor 5-10 vezes. Este não é um resultado garantido, nem é uma fantasia selvagem. Quais devem ser esses valores? Isso varia de acordo com o nível de trabalho:
Nível de entrada: espere que o valor anual de aquisição seja comparável a um pequeno bônus anual, provavelmente entre US $ 500 e US $ 2.500. Espere o valor total se a empresa fizer bem para ser suficiente para comprar um carro, provavelmente $ 25-50k.
Experiente: os funcionários mais experientes irão se enquadrar nessa faixa. Espere que o valor anual de aquisição seja comparável a um bônus anual moderado, provavelmente de US $ 2.500 a US $ 10.000, e o valor total, se a empresa fizer bem, seja suficiente para um pagamento adiantado em uma casa no Vale do Silício ou para colocar uma criança na faculdade. provavelmente em torno de $ 100-200k.
Gerenciamento de chaves: contratações em nível de diretoria e um punhado de colaboradores individuais muito experientes tipicamente se enquadram nesse intervalo. Os primeiros funcionários importantes geralmente acabam nessa faixa à medida que a empresa cresce. Espere que o valor anual de aquisição seja como um grande bônus, provavelmente entre US $ 10 e US $ 40 mil e o valor total, se a empresa se sair bem, para pagar a hipoteca do Vale do Silício, provavelmente entre US $ 500 e US $ 1 milhão.
Executivo: VP, SVP e CxO (excluindo CEO). Espere que o valor anual de aquisição seja uma fração significativa do seu pagamento, provavelmente US $ 40-100k +, e o valor se a empresa fizer um bom lucro de US $ 1 milhão ou mais.
Para aqueles que lêem isso de longe e sonham com as riquezas do Vale do Silício, isso pode parecer decepcionante. Lembre-se, no entanto, que a maioria das pessoas terá cerca de 10 empregos em uma carreira de 40 anos em tecnologia. Ao longo dessa carreira, 4 sucessos (menos da metade) em níveis crescentes de senioridade pagarão seus empréstimos estudantis, fornecerão seu pagamento inicial, colocarão uma criança na faculdade e, por fim, pagarão sua hipoteca. Não é ruim quando você considera que você vai fazer um salário também.
Você deve absolutamente perguntar quantas ações estão pendentes & # 8220; totalmente diluídas & # 8221;. Seu empregador deve estar disposto a responder a essa pergunta. Eu não colocaria nenhum valor nas opções de ações de um empregador que não responderia de forma clara e inequívoca. & # 8220; Totalmente diluído & # 8221; significa não apenas quantas ações são emitidas hoje, mas quantas ações estariam em circulação se todas as ações que foram autorizadas forem emitidas. Isso inclui opções de ações para funcionários que receberam também ações que foram reservadas para emissão para novos funcionários (um pool de ações é normal reservar um pool com captação de recursos para que os investidores possam saber quantos ações adicionais que eles deveriam esperar ter emitido), e outras coisas como garantias que poderiam ter sido emitidas em conexão com empréstimos.
Você deve perguntar quanto dinheiro a empresa tem no banco, a rapidez com que está queimando dinheiro e a próxima vez que espera arrecadar fundos. This will influence both how much dilution you should expect and your assessment of the risk of joining the company. Don’t expect to get as precise an answer to this question as the previous one, but in most cases it is reasonable for employees to have a general indication of the company’s cash situation.
You should ask what the strike price has been for recent grants. Nobody will be able to tell you the strike price for a future grant because that is based on the fair market value at the time of the grant (after you start and when the board approves it); I had a friend join a hot gaming company and the strike price increased 3x from the time he accepted the offer to the time he started. Changes are common, though 3x is somewhat unusual.
You should ask if they have a notion of how the company would be valued today, but you might not get an answer. There are three reasons you might not get an answer: one, the company may know a valuation from a very recent round but not be willing to disclose it; two the company may honestly not know what a fair valuation would be; three, they may have some idea but be uncomfortable sharing it for a variety of legitimate reasons. Unless you are joining in a senior executive role where you’ll be involved in fundraising discussions, there’s a good chance you won’t get this question answered, but it can’t hurt to ask.
If you can get a sense of valuation for the company, you can use that to assess the value of your stock options as I described above. If you can’t, I’d use twice the most recent “fair market value” as a reasonable estimate of a current market price when applying my metrics above.
One feature some stock plans offer is early exercise. With early exercise, you can exercise options before they are vested. The downside of this is that it costs money to exercise them, and there may be tax due upon exercise. The upside is that if the company does well, you may pay far less taxes. Further, you can avoid a situation where you can’t leave your job because you can’t afford the tax bill associated with exercising your stock options (see below where I talk about being trapped by your stock options).
If you do early exercise, you should carefully evaluate the tax consequences. By default, the IRS will consider you to have earned taxable income on the difference between the fair market value and the strike price as the stock vests. This can be disastrous if the stock does very well. However, there is an option (an “83b election” in IRS parlance) where you can choose to pre-pay all taxes based on the exercise up front. In this case the taxes are calculated immediately, and they are based on the difference between the fair market value and the strike price at the time of exercise. If, for example, you exercise immediately after the stock is granted, that difference is probably zero and, provided you file the paperwork properly, no tax is due until you sell some of the shares. Be warned that the IRS is unforgiving about this paperwork. You have 30 days from when you exercise your options to file the paperwork, and the IRS is very clear that no exceptions are granted under any circumstances.
I am a fan of early exercise programs, but be warned: doing early exercise and not making an 83b election can create a financial train wreck. If you do this and you are in tax debt for the rest of your life because of your company’s transient success, don’t come crying to me.
What if you leave? The company has the right, but not the obligation, to buy back unvested shares at the price you paid for them. This is fair; the unvested shares weren’t really “yours” until you completed enough service for them to vest, and you should be thankful for having the opportunity to exercise early and potentially pay less taxes.
Taxes on stock options are complex. There are two different types of stock options, Incentive Stock Options (ISOs) and Non-Qualified Stock Options which are treated differently for stock purposes. There are three times taxes may be due (at vesting, at exercise, and at sale). This is compounded by early exercise and potential 83b election as I discussed above.
This section needs a disclaimer: I am not an attorney or a tax advisor. I will try to summarize the main points here but this is really an area where it pays to get professional advice that takes your specific situation into account. I will not be liable for more than what you paid for this advice, which is zero.
For the purposes of this discussion, I will assume that the options are granted at a strike price no lower than the fair market value and, per my discussion on early exercise, I’ll also assume that if you early exercise you made an 83b election so no taxes are due upon vesting and I can focus on taxes due on exercise and on sale. I’ll begin with NSOs.
NSO gains on exercise are taxed as ordinary income. For example, if you exercise options at a strike price of $10 per share and the stock is worth $50 per share at the time of exercise, you owe income taxes on $40 per share. When you sell the shares, you owe capital gains (short or long term depending on your holding period) on the difference between the value of the shares at exercise and when you sell them. Some people see a great benefit in exercising and holding to pay long term capital gains on a large portion of the appreciation. Be warned, many fortunes were lost doing this.
O que pode dar errado? Say you have 20,000 stock options at $5 per share in a stock which is now worth $100 per share. Parabéns! But, in an attempt to minimize taxes, you exercise and hold. You wipe out your savings to write a check for $100,000 to exercise your options. Next April, you will have a tax bill for an extra $1.9 million in income; at today’s tax rates that will be $665,000 for the IRS, plus something for your state. Not to worry though; it’s February and the taxes aren’t due until next April; you can hold the stock for 14 months, sell in April in time to pay your taxes, and make capital gains on any additional appreciation. If the stock goes from $100 to $200 per share, you will make another $2 million and you’ll only owe $300,ooo in long term capital gains, versus $700,000 in income taxes. You’ve just saved $400,000 in taxes using your buy-and-hold approach.
But what if the stock goes to $20 per share? Well, in the next year you have a $1.6 million capital loss. You can offset $3,000 of that against your next years income tax and carry forward enough to keep doing that for quite a while – unless you plan to live more than 533 years, for the rest of your life. But how do you pay your tax bill? You owe $665,000 to the IRS and your stock is only worth $400,000. You’ve already drained your savings just to exercise the shares whose value is now less than the taxes you owe. Congratulations, your stock has now lost you $365,000 out of pocket which you don’t have, despite having appreciated 4x from your strike price.
How about ISOs? The situation is a little different, but danger still lurks. Unfortunately, ISOs can tempt you in to these types of situations if you’re not careful. In the best case, ISOs are tax free on exercise and taxed as capital gains on sale. However, that best case is very difficult to actually achieve. Por quê? Because while ISO exercise is free of ordinary income tax, the difference between the ISO strike price and value at exercise is treated as a “tax preference” and taxable under AMT. In real life, you will likely owe 28% on the difference between strike price and the value when you exercise. Further, any shares which you sell before you have reached 2 years from grant and 1 year from exercise are “disqualified” and treated as NSOs retroactively. The situation becomes more complex with limits option value for ISO treatment, AMT credits, and having one tax basis in the shares for AMT purposes and one for other purposes. This is definitely one on which to consult a tax advisor.
If you’d like to know if you have an ISO or NSO (sometimes also called NQSO), check your options grant paperwork, it should clearly state the type of option.
Illiquidity and being trapped by stock options.
I’ll discuss one more situation: being trapped by illiquid stock options. Sometimes stock options can be “golden handcuffs”. In the case of liquid stock options (say, in a public company), in my opinion this is exactly as they are intended and a healthy dynamic: if you have a bunch of “in-the-money” options (where the strike price is lower than the current market price), you have strong incentive to stay. If you leave, you give up the opportunity to vest additional shares and make additional gains. But you get to keep your vested shares when you leave.
In the case of illiquid options (in successful private companies without a secondary market), you can be trapped in a more insidious way: the better the stock does, the bigger the tax bill associated with exercising your vested options. If you go back to the situation of the $5 per share options in the stock worth $100 per share, they cost $5 to exercise and another $33.25 per share in taxes. The hardest part is the more they’re worth and the more you’ve vested, the more trapped you are.
This is a relatively new effect which I believe is an unintended consequence of a combination of factors: the applicability of AMT to many “ordinary” taxpayers; the resulting difficulties associated with ISOs, leading more companies to grant NSOs (which are better for the company tax-wise); the combination of Sarbanes-Oxley and market volatility making the journey to IPO longer and creating a proliferation of illiquid high-value stock. While I am a believer in the wealthy paying their share, I don’t think tax laws should have perverse effects of effectively confiscating stock option gains by making them taxable before they’re liquid and I hope this gets fixed. Until then to adapt a phrase caveat faber .
Can the company take my vested shares if I quit.
In general in VC funded companies the answer is “no”. Private equity funded companies often have very different option agreements; recently there was quite a bit of publicity about a Skype employee who quit and lost his vested shares. I am personally not a fan of that system, but you should be aware that it exists and make sure you understand which system you’re in. The theory behind reclaiming vested shares is that you are signing up for the mission of helping sell the company and make the owners a profit; if you leave before completing that mission, you are not entitled to stock gains. I think that may be sensible for a CEO or CFO, but I think a software engineer’s mission is to build great software, not to sell a company. I think confusing that is a very bad thing, and I don’t want software engineers to be trapped for that reason, so I greatly prefer the VC system.
I also think it is bad for innovation and Silicon Valley for there to be two systems in parallel with very different definitions of vesting, but that’s above my pay grade to fix.
What happens to my options if the company is bought or goes public?
In general, your vested options will be treated a lot like shares and you should expect them to carry forward in some useful way. Exactly how they carry forward will depend on the transaction. In the case of an acquisition, your entire employment (not just your unvested options) are a bit up in the are and where they land will depend on the terms of the transaction and whether the acquiring company wants to retain you.
In an IPO, nothing happens to your options (vested or unvested) per se, but the shares you can buy with them are now easier to sell. However there may be restrictions around the time of the IPO; one common restriction is a “lockup” period which requires you to wait 6-12 months after the IPO to sell. Details will vary.
In a cash acquisition, your vested shares are generally converted into cash at the acquisition price. Some of this cash may be escrowed in case of future liabilities and some may be in the form of an “earn-out” based on performance of the acquired unit, so you may not get all the cash up front. In the case of a stock acquisition, your shares will likely be converted into stock in the acquiring company at a conversion ratio agreed as part of the transaction but you should expect your options to be treated similarly to common shares.
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It’s hard to sell a company if there is a log of acceleration. That could actually be counterproductive for option holders.
Agree, that’s one of the reasons I think it is warranted only in a few specific cases.
What happens to unvested stock in the case of a cash/stock acquisition? (for a generic Silicon Valley VC funded startup)
Lot of it depends (including whether they keep the employees at all). But often they are converted to options in the new company.
What happens if the company is bought before I was granted my options?
In my employment agreement the granting is subject to board approval and that never happened.
I got new options of the acquiring company (at a SHITTY strike price ) , anything to do about that?
Probably nothing to do about it besides quit (though I am not a lawyer and you might ask one if there is a lot of money involved). How long did you work there without the options being granted? Up to a few months is normal, past that is unusual.
I worked there for 6months part time and another 6months full-time.
Basically the board of directors probably didn’t meet to approve the options of the new employees and when it did it discussed the buyout.
I assume that they said to themselves, let’s not grant these options and grant options of the buying company instead.
Ai Can you ask/have you asked asked a few questions: 1. Did the board meet during the time after you accepted the offer and started and prior to the acquisition and how many times? Did it review your proposed grant at the meetimg and if not why not? If it reviewed your proposed grant why did it not approve it? 2. On what basis was your new grant determined? Did they convert the grant in your offer letter based on the terms of the purchase or did they just give you stock in the acquiring company as a new employee of that company?
I am assuming your options dated from joining full time, so it was a 6 month delay, not a year?
While I might be popular online for saying they hosed you and they’re evil, situations like this can be complex. It is possible/likely that the board was in serious discussions about an aquisition for a number of months before it occured. This could have been ongoing from the time you joined, or started shortly afterwards but have been in progress at the first board meeting after you joined.
If this was the case, the board may have been in a very hard situation with respect to valuing the stock options. If the acquisition discussion was credible enough, it would be material information that could force a re-evaluation of the fair market value of the shares. To avoid the risk of grantees (you) being liable for huge tax penalties, they would likely have wanted to retain a third party to do the valuation. Hiring the firm takes time, the valuation takes time, and board approval of the valuation takes time. During that time, the discussions might gave progressed – maybe they got a second higher offer. That could restart the clock.
In any case, even if they were able to complete the valuation and grant the options, the valuation may well have been quite similar to the price offered by the acquirer and those options might have been converted to options in the acquiring company at a similar strike price to the price of your grant. So quite possibly what is at issue is whether your grant could have been granted at a somewhat (say 20 or 30%) lower strike price.
If the value of the stock underlying your new grant (number of shares times strike price) is well in to the six figures or beyond, it may be worth consulting an attorney just in case, but my guess (and I am not a lawyer) is they are going to say that you just had bad timing. If it’s five figures or less, I don’t think its worth spending the legal fees for a small chance at a medium settlement.
What I described is the way this happened in completely good faith with everyone involved trying to do what’s fair and legal for you in a complex situation. That’s not always the case, but I’d start by asking.
You’re thinking the same as I do.
Since the company have been planning an IPO and this buyout came in I’m sure the board have met several times since I joined.
I too think that I should have gotten either an approval or decline of my options , neither was delivered to me, hence I believe this is a direct violation of my employment agreement.
My options never materialized, I basically got the buying company options at a strike price which is the share price in the day of the buyout which means zero profit!
I’m getting really pissed here and I think that this might even have legal implications.
This is 5 figures but I think that the determining factor is that I think this isn’t completely legal , I don’t think they can just ignore this term of the contract just because they’re busy or not sure about the price.
My guess is that you make some enemies with this post. It is clearly to the advantage of the company that the terms of stock options and vesting periods remain opaque.
What if there were liquidity in options? That would be interesting, and wildly dangerous, I imagine, because such liquidity would be so predominantly speculative in the absence of knowledge of company fundamentals.
Possible I suppose, but.
Possible I suppose, but only ill advised companies and VC’s that I’m happy to stay away from.
A successful growing company grants millions of dollars worth of options each year, and I think it works to their advantage to have people understand their value and thus make rational decisions about them.
Re: liquidity, the illiquidity of the _options_ stems from the fact that they are subject to cancellation if you quit as well as some specific contractual terms. Your _shares_ should you exercise your stock can sometimes be liquid even before the company is public. That is certainly the case for well known private companies (eg, Facebook), and sometimes is the case for smaller companies as well; question is can you find an investor who wants to buy the shares.
The biggest issue in liquidity of pre-IPO shares is the company’s cooperation in allowing a potential buyer to see the books. Often this will be restricted for current employees but more open for ex-employees. This can be very complex and the SEC has rules about shareholder counts, how the shares can be offered etc.
Hello, I just received an employee stock option that would allow me to buy shares within five years. Do I have to buy the shares right away? or wait until my company goes public or another company (that is currently in stock trading) will aquire us? If I buy the shares now and after 2 years I left the company or they fired me, do I still have the right for my shares? If still have the right for my shares then I’m willing to expend few thousand dollars for it. I really appreciate your advice.
Really sorry for the delayed reply. Usually you have all 5 years. Usually you can buy some now and some later. Tax issues vary, research them carefully.
well written, and easy to understand…thanks very much.
Well written for sure. An scenario I’d appreciate your feedback on. A small company was bought by a larger one and the employee was given her recalculated options. There are 2 years left on this employees vesting schedule. Without any prior negotiation at time of hire regarding acceleration of vesting, is there any way receive acceleration in case of termination?
Unfortunately for the subject of your story, probably not.
Most folks in small companies are employed “at will”. That means that their employer is under no obligation to keep them employed until the end of their vesting period or for any other reason. They can be fired because of a lack of work for them to do, a desire to hire someone less expensive to do the same job, a desire to restructure and eliminate their job, or because the company is unsatisfied with their work. The same holds true once they’ve joined the big company.
Sometimes companies will offer “packages” to employees that they lay off. This is not done out of obligation but rather to help retain the employees who aren’t being laid off – who might otherwise fear being laid off with nothing and instead take another job. By treating the terminated employees nicely, the remaining employees are less likely to panic.
Normally one should expect to vest only as long as their employment continues. The most common exceptions where acceleration can make sense but usually needs to be negotiated up front are positions where the individual is directly involved in selling the company (CEO, CFO etc) and/or is very likely not to be retained after the acquisition.
How do unvested options work post-IPO? Is an IPO an event that can trigger acceleration, or is this reserved for acquisition typically? Can unvested shares be canceled post-IPO?
Usually they continue vesting through the IPO as normal, with restrictions on selling them for some period of time (
6 months is normal) post-IPO.
It is very unusual for an IPO to trigger acceleration. While it is easy to see an IPO as a destination for a startup, it is really the beginning of a much longer journey. An IPO means that a company is ready to have a broader base of shareholders – but it needs to continue to deliver to those shareholders, thus it needs to continue to retain its employees.
Most options are not cancelable other than by terminating the optionee’s employment or with the optionee’s consent. Details vary and there are some corner cases, but the typical situation is if the company doesn’t want you to collect any further options they’ll fire you. Occasionally companies will give people the option to stay for reduced option grants but that is unusual.
By the way when I say “most” or “usually” I am referring to the typical arrangements in startups funded by reputable silicon-valley-type VCs. Family businesses and business that exist outside that ecosystem of startup investors, lawyers, etc may have different arrangements. If you read some of my posts on private equity owned companies and options, you’ll see that they have a somewhat different system for example.
What happens if you exercise pre-IPO stock options (within 90 days of quitting) and the company never goes public?
Then you own shares that may be hard to sell. The company may be acquired and you might grt something for your shares, or in some circumsances you can sell shares of private companies. But the money you pay to exercise the shares is at risk.
Thank you Max! This entire article and your answer to my question has been the best write up on this topic that I could find on the Internet. Obrigado novamente!
Great summary Max, i found it very useful.
wow i personally know someone (well i guess many people do) who lost everything in the bubble and still owed $$$ in tax due to the exercise and hold you described here. he went bankrupt and had to flee out of state but still writes a hefty check to the IRS each and every month.
Excellent…very well explained. Thanks Max.
Ótimo artigo! I’m trying to learn more about employee stock options. I was granted options 4 years ago and now I’m being laid off so I wanted to make sure I’m taking advantage of the benefits (if there are any.) I received the agreement, signed it, and got a copy of it back signed by the corporate secretary. I never received any other documentation since. The company isn’t doing well, but the options were priced at a penny in the agreement. Should I contact HR or a financial advisor? Just slightly concerned since the company seems a little secretive to me. I have been with them for over 6 years. Thoughts are appreciated 🙂
Sorry for the delay in getting back to you.
Usually after you sign your options agreement, there’s no further paperwork until you exercise.
Usually you have 90 days after leaving until you have to exercise the options, but this varies from plan to plan and the details should be in the paperwork you signed. HR or Finance should be able to help you exercise your options if you want to; If you exercise you’ll pay a penny per share and the shares turn out to be worthless or may turn out to be valuable.
If your instinct is that the company isn’t doing well and the shares will likely not be worth much, the question is whether its worth a gamble. If for example you have 20,000 options at $.01 each, its only $200 to exercise them so it may be worth it even if the odds are against you.
One data point that you will need to finalize your decision is the FMV (fair market value) of the shares for tax purposes. The company should be willing to tell you this; if it is quite a bit more than a penny some taxes will be due on exercise but the shares are more likely to be worth something.
If you can get more specifics about number of shares outstanding, debt, preferences, revenue, cash etc a financial advisor may be able to help; without that they’d would probably be shooting in the dark.
Eu espero que isso ajude,
Thanks Max, I really appreciate it. After reading your article and doing some research I found out I was looking at the par value, not the exercise price. So in my case, I would be severely underwater. Agora eu entendo! Thanks again for sharing your knowledge!
Max, thanks for the great info. I am considering joining a tech startup and wonder if there are enough benefits for both the company and myself for me to be brought on as an independent contractor vs. an employee? Any info you have or can refer me to would be helpful. Obrigado!
Desculpe o atraso. There are quite a few qualifications that you must meet to work as an independent contractor; I don’t have them handy but a quick google search might turn them up. If you plan to work there full time for the long term, usually employment makes the most sense – though sometimes companies have more leeway to pay much more money to contractors; if that’s the case and they’re willing to do it and you qualify, it might make sense. But even then, you will probably not get benefits or stock options. Boa sorte com sua decisão.
Why shareholder needs to pay again 50% the difference between of subscription price Convertible Prefered Stock (pre-IPO) and common stock IPO price?
The terms of preferred stock vary, not only from company to company but also across different series of preferred stock in a company. I am not quite sure what you’re referring too but it may well be specific to the structure of those securities at your company. A bit of context could help, but the answer is probably going to be some form of “because that’s the rule defined for this form of stock in this situation”.
Very informative post, thank you for sharing! May I contact you off-post for questions?
Desculpe o atraso. I may not have time to answer but feel free to try me first initial last name at gmail.
Hi Max – thanks for the insightful article. I work for a private company (PE owned) that’s expecting an IPO in about 12 months. Half of my stock options have vested. I got them at a price of 3 and the current valuation is now at 4.5 or so. What happens if I leave AFTER the IPO but BEFORE the employee lock-up ends. Do I get to leave with my vested (as of departure date) options or do I need to pay the company to buy them at the granted strike PLUS pay the tax on the gains etc. Thanks.
Putting aside any idiosyncrasies of your specific options agreement, typically you have 90 days after departure to exercise. So within that 90 days you need to pay the strike price and you incur a tax liability. Keep in mind the stock could decline before you can sell, so its not just acash flow exposure, you may wind up selling for less than you paid to exercise. Waiting until you are less than 90 days from the lockup ending reduces risk a lot, but I don’t know the opportunity cost to you.
Obrigado pela ajuda! Pergunta & # 8211; I purchased stock and then my company got purchased. by another private company. My understanding is that the main investors lost money on their sale (they sold below what they put into the company). I had common shares, is that why I haven’t seen any payout?
Also, the purchaser then got purchased by a public company…how crappy.
Sorry to hear you didn’t get anything for your shares. Without knowing all the details, it sounds like you’re correct; typically if there isn’t enough to repay the investors, the common shareholders won’t get anything.
Max thank you for the terrific article.
Do you have any experience with seeing employees receive additional option grants with promotions? Is this common or only at key-level positions? I joined the sales team of a 50-person startup at an entry level position about 2 years ago. We’re now at about 100 employees and I’ve been promoted about 1.5 times (first from a lead-gen position to an Account Executive, then after good performance had my quota raised and salary increased, though no title change). I haven’t received any additional option grants but also haven’t asked. Is it reasonable to ask?
Also, say they’ll agree to give me more, what are typical steps that have to happen until they’re officially granted? Is this something that needs to be discussed at the next board meeting, or does the CEO/Exec team have discretion to do this on an ad-hoc basis?
Ótima pergunta. It is common but not universal to receive additional grants with significant promotions, but there is wide variety in how these are handled:
& # 8211; Some companies give them shortly after the promotion (approvals take some time)
& # 8211; Some companies review follow-on grants on a semi-annual or annual basis; people who are promoted are typically good candidates to get them.
& # 8211; Some companies (unfortunately, in my view) operate on a squeaky wheel basis where they are only given when people complain.
I would ask your employer what the process is to ensure that your stock is commensurate with your current contribution to the company. Without knowing all the details, it sounds like it may not be given the progress you’ve made.
One situation to consider is that if the value of the company has increased dramatically, it is possible that the grant you got earlier in the company’s history for a more junior position is larger than the grant someone in your current position would get today. For example, if when you joined an entry level employee received 1000 shares and an account exec received 2500, but today an entry level employee receives 250 shares and an account exec receives 600. If this is the case, many companies would not give you additional shares to go with the promotion (but would increase your salary). While this example may sound exaggerated, if the company has twice as many employees, grants may be half the size per employee – often the board will think about how much stock should go to all employees as a whole per year, and now there are twice as many to share the same number of shares. Also often the grants for different roles aren’t nearly as precise as I described, but the principle remains valid even if the grants per level are ranges.
Options grants almost always have to be approved by the board.
Good luck; it sounds like you’re doing well at a growing company so congratulations.
Thanks again Max, very helpful.
i got an offer to work for a startup on a part-time basis keeping my full time job at my current employer. i will be paid only in the form of stock options (0.1%). not sure if this is a good deal.
I’d look at it 2 ways:
1. What is the startup ‘worth’? If its an unfunded early stage idea it may be something like $1-2 million, in which case .1% is $1-2k for example. Of course if the ‘startup’ is Twitter its worth a lot more. In any case whatever that value is, is it fair compensation for your time? How long do you have to stay to vest the options? 1 month? 1 year? 4 years? And how much work are you expected to do?
2. How does your stake compare to other participants and their contribution? Did your two roommates found it in their garage two weeks ago and they’ll each own 49.95 to your 0.1? Or are there 100 full time employees sharing 50% and investors share the rest?
the startup is in a very early stage with about 13 employees. the options vest at 1/48th of the total shares every month for 4 years. i think i need ask more details before i start the work.
this is my first time working for a startup so i am not very clear..
I am new to this whole equity & stock options.. your article is the only basis for my reasoning.. I need your help! My company is a Green Sustainable clothes recycling company.. relatively new Green field.. not sure what are the general vesting schedules like.. any advice?
we negotiated $1k / week + 5% vested equity.. initially when i started back in Oct/ Nov.. now that its time to draft the actual contract, they are saying how 1%/ year vesting is standard, while for whatever reason i thought the 5% would vest over 1-2 years.. how do i approach this? as of now company is worth $1 million. we are constantly loosing $, it will take at least 6 months - 1 year until we start being profitable..
does the evaluation of what i think im worth from what the company is worth today, or based on projections of what we will make in the future?
we only have 1 kind of stock.. any provisions you are recommending to include?
can i ask for a provision to protect myself from taxes and have it be deducted from my equity instead of paying for it our of my pocket?
Thank you soo much.
Desculpe o atraso. I think 4 years is most common, maybe 5 next most, 1-2 years is unusual. I am not sure what else you are asking. If you are asking about taxes on the equity, if it is options there is typically no tax on vesting if the plan is set up properly (which will almost certainly require an attorney).
The IRS will require cash for your tax payments, they don’t accept stock 🙂
How often should a company revalue their privatly held stock options? Any guidelines around that in the accounting standards?
I am not a tax lawyer but I think for tax purposes the valuations are good for a year. If things change (eg, financing, offer to buy the company, or other significant events) you may want to do it more frequently, and for rapidly growing companies that might go public soon you may want to do it more frequently.
Terrific article thank you !
With startups becoming a global tendency, it becomes complicated to create one model that fits all.
Any thoughts on adjusting vesting schedules, cliff periods and accelerations to ventures occurring in high-risk geographical areas? i. e High-risk understood as high volatility & political unrest.
One thing that I do see adjusted globally is some of the details to fit local tax laws – even US-based companies have to administer their plans differently in different jurisdictions.
I am not expert at all but it may make sense to adjust some other parameters; I don’t know how much they vary from the US. Maybe a reader knows??
Great article, now for my question. Been working for a company 3 years, been vested, for example, 100,000 shares, at 5 cents a share. Leaving company, It looks like the period to exerci se, buying the shares will have about 7 more years. When I leave, how long does one usually, have to buy the shares, if they choose. I am a little confused about the 90days mentioned ealier in the article.
Usually the option period is 10 years but only while you are employed. When you leave, the unvestef options go away and you have 90 days to exercise the vested options. Of course it depends on your specific option plan which may be completely different.
I have some vested preferred shares. I’m not sure if or when the company will be acquired or go IPO. What are my options to liquidate them before any event ?
Your option may be to find someone who wants to buy the stock in a private transaction with limited data. Or it may be that the company has to give permission even if you find a buyer. Trading private stock is difficult. Also if you have options, typically you will have to exercise them before you can sell them.
How would you explain this scenario?
Employee shall be entitled to 25,000 Company common share stock options at an exercise price of $6.25 per common share. These stock options shall be deemed to have been granted January 31, 2012 and shall have a term of 3 years from the effective date granted. These stock options shall remain vested for a period of 24 months in which Employee remains in his current position with the Company.
It sounds like you have between 2 and 3 years in which to exercise them. The vesting language is a bit unclear to me. You may want to get some legal advice, I cannot interpret that clearly.
Let me elaborate on this as I am in the middle of an asset acquisition (a division of the company is being bought) that will close on Jan 31, 2015. I am still trying to understand the language above and below and what my options will be once the transaction is complete. The strike price above given seems a bit high. The division is $5mil and was sold for 7x $35mil. How does this work in terms of an asset being acquired as opposed to the entire company?
“In the event that the Company is acquired or successfully undertakes an initial public offering or reverse takeover, the vesting period relating to the stock options shall be removed and Employee shall have the full and unrestricted ability to exercise the stock options.”
As Twitter is going public soon and I am in the last round of interview. If they offer me a job, will there be any impact to my equity offering if I join before they go IPO or will it be the same after they go IPO? Which will be most beneficiary to me?
Typically people expect the price to increase on I and thus try to get in prior. Predicting what actually happens is hard, for example Facebook went down. But generally joining before IPO is viewed as a better bet.
On the day of my 7hrs in person interview conclusion, HR mentioned that they are not the highest paid company around, they come in like 60th percentile… But their RSU are at great offer. So I am guessing RSU is equal to Stock option they are referring to?
Also, if they offer me RSU/Options, is that something I have to pay for at the evaluation of the company even prior to they going IPO?
Great article, I didn’t know anything about stocks, vesting, options, shares until reading this so it’s helped me understand a bit better! I have been working for a start-up for 5 months and am on the typical vesting schedule of 25% after 1 year and another 6% each month after that. I have been offered just over 5000 shares for .0001.
Our company is expecting to be acquired in the next 90 days so I could end up with no vested options… What happens if we get acquired before I am vested? I am sure there a few different scenarios that could play out depending on who buys us but I’d like to know what COULD happen so I can approach HR about it and see what their plan is. I have read on other ‘stock options explained’ websites that my shares could be wiped out, I’ve read they could be accelerated and I have read they could be absorbed into the new company that acquires us… is that correct? The other thing that complicates it is that our company has a few different products we offer and the one that is getting acquired is the one I work on.. so I’ve heard that when that product/company is acquired in 90 days, our team is going to ‘break off’ and move to a different product (within the same company) and continue on as normal. Isso faz sentido?
Depende. Typically if the acquiring company does not want to keep you they can terminate you and your unvested options will not vest. If they want to keep you they would typically exchange your options for options in the new company. They will have some discretion in how to do this. Hopefully they will want to keep you and will treat you well.
Hi Max.. great article.. a quick question.. after 4 years in a startup i changed the jobs and bought all my vested incentive stock options. Now after 6 months the company is acquired by another company for cash buyout. Since I exercised my stock options just 4 months ago, will I be not considered for Long term Capital gain taxes? Or can I hold on to my share certificates for 9 more months and then will I eligible for Long term capital gain tax rate?
My strong suspicion is that you can’t wait 9 months. Check with an attorney to be sure, it could depend on the details of that specific transaction but usually they close faster than that.
Interesting article! Question for you: I was part of a startup that was acquired and had ISO’s. We received an initial payout and had a subsequent release of the escrow amount withheld. This escrow payout was received over 1 year after the sale of the company. What is this payout considered? Is it a long term capital gains? We were paid out through the employer via the regular salary system (taxes taken) and it was labeled as “Other bonus” but it was clearly part of the escrow. Also, what about a milestone payout that falls under similar circumstance? Obrigado!
I am not a tax attorney so I am not sure. If it came through regular payroll as a bonus my guess is that it is not long term capital gains. If it is a lot of money I would talk to a CPA and / or a tax attorney.
Hi Max – Ótimo artigo! Obrigado. Eu tenho uma pergunta. I joined a company as one of the first 3 sales directors hired and was told in my offer letter I have 150,000 stock options pending board approval. I have now been working for the company for 18 months and have not received any documentation regarding my options. I am continually told that they will be approved at the next board meeting but that has not happened and I was recently told they would be approved after the next round of funding but that did not happen either. What is happening here and what is your recommendation? Thank you in advance for your assistance.
Something is not right. Sometimes the approval will be left out of a board meeting. With really bad luck you could be skipped twice. There is no good explanation for 18 months. The ‘best’ situation from a they-are-not-screwing-you perspective that I can think of is that the next round of funding will be a ‘down’ round and they are waiting to give you a lower price. But something is wrong with your company and I would be looking hard for something new. Sorry to be the bearer of bad news. If the CEO has an explanation that really makes sense feel free to share it and I will let you know what I think, maybe I have missed an innocent explanation but this does not sound right.
Thanks so much for confirming what I was thinking, Max. To my knowledge the board has met several times and our CEO repeatedly states the valuation of our company is going up so I have not heard about a down round. We have had the same original investors for a few years and have recently had a new influx of cash in the form of loan but are still seeking that outside VC investment. I may have another start up offer coming soon and this information will help when I make the decision whether to accept the new position. Thank you again for your help!!
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09 August 2017.
Legislative Update: Empowering Employees Through Stock Ownership Act Resurfaces In The Senate.
Alert: A version of this bill was enacted as part of the Tax Cuts & Job Act, though with a five-year deferral period. See our blog commentary on the adopted legislation.
While stock options continue to be popular at startups and other pre-IPO companies, employees cannot sell stock at exercise to pay the exercise price and the taxes on the income. Moreover, under current law those taxes cannot be delayed. Last year, an encouraging legislative proposal was introduced in the House of Representatives to address this issue. Approved by a House vote in September 2016, the Empowering Employees Through Stock Ownership Act (HR 5719) sought to give employees in pre-IPO companies extra time to pay federal income taxes on the spread at exercise with nonqualified stock options and on the income at vesting with restricted stock units. (See the myStockOptions blog commentaries in July 2016 and October 2016.)
Under the proposal, the permitted deferral of taxation would be considerable. The legislation would allow an employee to defer taxes for up to seven years as long as the company's equity awards met certain conditions (for example, "Qualified Equity Grants" would need to be made to at least 80% of employees). In the feedback we at myStockOptions receive from stock plan participants and financial advisors, we understand that the current tax treatment does deter employees from exercising options and becoming true company owners. Although the proposal appears to be good news for employees at private companies who have equity comp, some provisions in the law could hinder its effectiveness, as we explained in our commentary on HR 5719 last October.
After its House approval last year, the Empowering Employees Through Stock Ownership Act went to the Senate, which did not take it up. However, in late June 2017, it was reintroduced as a separate bill with the same title in the Senate (S.1444). The Senate legislation is very similar to the House bill of last year and has bipartisan support: Its sponsors are two members of the Senate Finance Committee, Mark Warner (D–VA) and Dean Heller (R–NV), and two members of the House Ways and Means Committee, Eric Paulsen (R–MN) and Joseph Crowley (D–NY). Details of the proposals are available in the press release on it that was issued by Senator Warner's staff.
Although more than 70 companies have expressed support for the legislation, the prospects for its enactment remain somewhat uncertain in the current Congress, which seems to be preparing for a major effort at comprehensive tax reform (see the myStockOptions FAQ on how that could affect stock compensation). One obstacle could be finding a way to offset the cost of the proposed tax provisions. Although the legislation would allow only the deferral of taxes, not their elimination, the delay in tax payment would impose a revenue cost on the federal government.
20 October 2016.
Legislative Update: Senate Considering Tax Change For Options And RSUs In Pre-IPO Companies.
We wrote a blog commentary in July about the Empowering Employees Through Stock Ownership Act (HR 5719), which was subsequently approved by the House of Representatives, through a vote of 287 to 124. The bill is now in the Senate for consideration. In short, HR 5719 seeks to give employees in privately held companies extra time to pay taxes on the income they recognize at option exercise or RSU vesting. Instead of paying taxes at the exercise of nonqualified options or at the vesting of stock-settled RSUs, employees would be allowed to elect to defer the resulting income, and thus the taxes on that income, for up to seven years.
A staff member for Congressman Erik Paulsen (R–MN), the bill's leading sponsor in the House, told myStockOptions that "Rep. Paulsen is hopeful that the Senate will pass the legislation soon and that it will make its way to the President's desk sometime in the lame-duck session, either as a standalone bill or as part of a larger package." He added that Rep. Paulsen is not aware of any timetable for Senate consideration. When we checked with the office of Senator Mark Warner (D–VA), a leading sponsor of the bill in the Senate, his staff confirmed that the legislation had just been introduced. With Congress now in recess ahead of the general election on Nov. 8, it is very unlikely that anything will happen with the legislation until after the election. There is a chance that the bill will be adopted during the lame-duck session, a busy time when many laws with populist intentions tend to be hastily enacted while the outgoing president is still in office. At Congress. gov, you can follow the progress of the legislation in the House and the Senate.
Details Of The Proposed Law Could Unintentionally Discourage Its Effectiveness.
In general, we support a beneficial tax-law change for equity awards at pre-IPO companies and favor broad-based stock plans. However, in the report on the bill from the House Ways & Means Committee (see pages 10–14, "Explanation of Provision"), we do see some aspects of the legislation that might somewhat dampen enthusiasm for the proposed tax-qualified grants. The tax deferral would not apply to Medicare, Social Security, or state taxes. It would not apply to early-exercise options. As we interpret it, the deferral election apparently would turn ISOs into NQSOs. Furthermore, clarifications are needed on various aspects of the proposed law. For example, the House report states that an "inclusion deferral election" would be required within 30 days of vesting but does not mention that for options the election would need to be 30 days from exercise (not vesting). Also, the numerous rules that companies would have to follow to grant what the bill calls "qualified stock" might make these awards appealing only to large pre-IPO companies and not to true early-stage startups.
Moreover, companies currently already have a way to structure pre-IPO RSU grants so they do not trigger taxes until there is a liquidity event. Without liquidity and the ability to trade their stock, employees who exercise options in pre-IPO companies face the risk of tying up their money in stock that could be worthless. The proposed tax-deferral feature includes a seven-year period before taxes are owed, but for some employees this may not be long enough to encourage them to exercise options and create the widespread employee ownership that the bill wants to promote.
For additional analysis on the bill and the issues it raises, see a commentary from the consulting firm Compensia and an article by columnist Kathleen Pender in the San Francisco Chronicle .
18 July 2016.
Stock Options In Startup Companies Could Become More Popular Than Ever Under Proposed Tax Change.
Stock options continue to be very popular at startups and other pre-IPO companies, where they are often broadly granted to most or all employees. While these options can have wealth-creating potential, one big challenge is lack of liquidity: employees cannot sell the stock at exercise to pay the exercise price and any taxes owed. As the IRS confirmed in regulations issued during 2014, the tax measurement date (at exercise for options and at vesting for restricted stock) is not delayed by any lack of liquidity or securities law restrictions on resales of stock.
The fact that the tax treatment for stock grants at pre-IPO and large publicly traded companies is identical seems oddly unfair when you consider the vastly differing liquidity situations of private and public companies. Seeking to address this imbalance, recently proposed bipartisan legislation could provide a new optional tax treatment (pun intended) and make stock options more appealing than ever at startups and other pre-IPO companies. Introduced in the House of Representatives and the Senate on July 12, as explained by an article at The Hill , the Empowering Employees Through Stock Ownership Act seeks to give employees in privately held companies extra time to pay taxes on the income they recognize at exercise. The proposed extra time is considerable. Instead of paying taxes at exercise with nonqualified options (or at RSU vesting when settled in stock), this legislation would allow tax deferral for up to seven years.
Senators Mark Warner (D–VA) and Dean Heller (R–NV), members of the Senate Finance Committee, sponsored the bill in the Senate, while Representative Erik Paulsen (R–MN) is the sponsor in the House. In the press release supporting the bill, Sen. Warner states that "extending employee stock programs to a broader universe of workers will strengthen business growth and create new economic opportunities, especially for rank-and-file workers." For his part, Sen. Heller asserts that "it's important to give employees the flexibility to pay their taxes on stock options."
Company And Employee Requirements.
To make the new deferral election available (under Section 83 of the Internal Revenue Code), a company would have to issue what the bill calls "Qualified Equity Grants." These grants would need to be made to at least 80% of the company's employees annually. The company would have to provide information or a warning about the tax impact, especially if the share price should decline, and it would be required to report future tax liability on each employee's Form W-2. Qualified grants would be unavailable to major owners, corporate officers, and the highest-paid executives.
Sounding in some ways similar to the procedure for the Section 83(b) election, the deferral election for qualified equity grants would need to be made by employees within 30 days of either when the shares became transferable or when they were no longer subject to a substantial risk of forfeiture, whichever occurred earlier. If the company were to go public or the employee were to sell the shares for cash during the seven-year period, taxes would have to be paid at the time of the liquidity event. The deferral election could also be revoked by the employee at any time, triggering taxes at that point.
Details Still Need To Be Worked Out.
Open issues remain. A few questions that occurred to us:
How, exactly, would these grants be structured? Why is the deferral for seven years? What information would be required in the election, and how would it be filed? How would this deferral election apply to early-exercise stock options that result in restricted stock which must then vest? Would Social Security and Medicare taxes be deferrable as well as income tax?
Nevertheless, this bill is a good way to start a discussion about changing the tax treatment of stock options and restricted stock units in startups and other pre-IPO companies. The approach of this legislation is more understandable than that of the Expanding Employee Ownership Act of 2016, which recently proposed another new type of stock option (covered at the end of a recent commentary elsewhere on this blog).
08 de setembro de 2014.
Test Your Equity Comp Knowledge: New Quizzes Expand The Fun Interactive Content Of myStockOptions.
Put your books away, class. Time for a pop quiz:
Can you define a corporate change of control? In what ways can equity awards be handled in a corporate merger, acquisition, divestiture, or spinoff? How can a pre-IPO company create liquidity for its stock other than being acquired? Why do some privately held companies grant early-exercise stock options? How soon after an IPO can you sell company shares? What is a lockup, and how do the lockup requirements differ from those under Rule 144?
The current back-to-school climate makes this an appropriate time to announce two new quizzes at myStockOptions. Bringing our total number of quizzes to a dozen, the recent additions test your knowledge of equity compensation issues in M&A transactions and pre-IPO companies.
Our quizzes are free to all users of our website (companies can license and customize them for their stock plan participants). All 12 are available by links from our home page, and each quiz also appears on the landing page the relevant content section. The answer key of each quiz has links to relevant articles and/or FAQs, making the quizzes not just gateways to our award-winning content but also helpful learning tools in themselves—and much more fun than homework.
Our short quizzes are separate from our Learning Center, which has in-depth courses and exams offering continuing education credits for Certified Equity Professionals (CEPs) and Certified Financial Planners (CFP). Our quizzes are also part of our growing body of interactive and multimedia content, which includes podcasts and videos.
03 June 2014.
Here We Grow Again: myStockOptions Expertise Expands With New Articles On Diversification, IPOs, And Foreign-Asset Reporting For Employees With Equity Compensation.
At myStockOptions, our array of award-winning articles on all aspects of equity compensation has grown. In recent weeks, we have welcomed new contributions from expert authors on three crucial topics.
Importance Of Diversification For Employees With Equity Awards And Company Stock.
Through its author's personal example, a new article at myStockOptions presents the dangers of a concentrated stock position, discusses why diversification may be hard for employees with shares from equity compensation, and explores strategies for preserving your net worth. In Your Company Stock: The Importance Of Diversification , CFP Laura Tanner recounts her experience with stock compensation at a company where she used to work as a research scientist, and she explains the lessons she learned.
To read the article and find more insights into investment diversification for employees with stock options, restricted stock/RSUs, or ESPPs, see our section Financial Planning: Diversification.
Careful Planning For Pre-IPO Equity Comp When The Company Goes Public.
Initial public offerings (IPOs) are on the rise. The high-profile IPOs of Facebook and Twitter are just two of many IPOs that have been launched over the past couple of years, including several in Silicon Valley. In the newest installment of our Stockbrokers' Secrets series, our pseudonymous financial advisor W. E.B. Bantling provides a pep talk about smart planning for pre-IPO stock options, restricted stock, or RSUs when the company goes public. At the time of the IPO, when the company finally pours long-awaited liquidity into those grants, planning considerations must be carefully weighed.
In the author's experience, clients at companies preparing for an IPO are often giddy with thoughts of the wealth and opportunities it will provide. Many of them have worked at these companies since the startup stage, and the IPO represents a long-awaited event that may be life-altering for both their company and them. However, the author always emphasizes five planning points that may help to manage employee expectations in an IPO situation. He shares some of this wisdom in the new article, Stockbrokers' Secrets: Financial Planning For Equity Compensation At IPO Companies , available in our section Pre-IPO: Going Public.
International Equity Awards And Company Stock: Tricky Rules Of IRS Reporting For Assets And Income In Foreign Financial Accounts.
United States citizens and resident aliens are taxable on their worldwide income. The related IRS reporting rules are complicated, and mistakes can lead to costly penalties. In fact, the IRS has launched an aggressive initiative to identify taxpayers with unreported foreign income and/or assets in foreign financial institutions. Charges of tax evasion stemming from unreported foreign income have been brought against dozens of individual taxpayers, including bankers, lawyers, and advisors.
In a new article at myStockOptions, compensation and tax expert Richard Friedman presents the rules and related issues of IRS reporting for assets and income that an international US taxpayer may hold in a foreign financial account—including those acquired through stock options, restricted stock, RSUs, or other equity awards. The article, International Equity Awards And Company Stock: The Confusing World Of IRS Reporting For Overseas Assets And Income , is available in our section Financial Planning: High Net Worth.
License Our Expertise For Your Employees.
For companies, education is vital for ensuring that stock compensation motivates and retains highly valued employees and executives. All of our expert yet reader-friendly articles, FAQs, and other content are available for licensing by companies that want to improve their stock plan education and communications for participants. Content licensing is just part of the suite of corporate services that we offer.
22 October 2013.
Stock Compensation At Twitter: IPO Registration Statement Reveals Twitter's Extensive Use Of Restricted Stock Units.
When a high-profile company prepares for an initial public offering (IPO), its SEC filings provide an opportunity to analyze the company's stock compensation practices. The IPO of Twitter—about as high-profile as you can get—is expected to occur by mid-November. Twitter's Form S-1 (Amendment No. 1, filed on Oct. 15, 2013) discloses its extensive use of restricted stock units over stock options (see the table on page 88). Apart from awarding stock options to its senior executives (see page 128) and using options in relation to acquisitions (see pages 136–138), Twitter seems to exclusively grant RSUs.
Under Twitter's 2007 equity incentive plan, RSUs granted to domestic employees before Feb. 2013, and all RSUs granted to international employees (the pre-2013 RSUs), vest upon the satisfaction of both a time-based service condition (mainly four years) and what Twitter considers a "performance condition," which is actually more like a vesting condition based on a liquidity event for the company. The performance condition is satisfied on the earlier of either (1) the date that is ( a ) six months after the effective date of this offering or ( b ) Mar. 8 of the calendar year after the effective date of the offering (which the company may elect to accelerate to Feb. 15), whichever comes first; and (2) the date of a change in control. (Details about the company's prior RSU grants appear in a letter Twitter submitted to the SEC in September 2011 to request a Section 12(g) exemption from registering its RSU plan under the Securities Act of 1934.)
While the vesting of these RSUs will cause dilution (see page 47), the amount of dilution will be is much less than it would have been with stock options. (Grants of options have to be much larger to deliver the same compensation grant-date value as RSUs.) The vesting of the post-2013 RSUs is not subject to a performance condition. Instead, the grants have just the standard time-based vesting over a period of four years (see page 86). For future grants after the IPO, Twitter is adopting a stock plan for 2013 that will be effective on the business day immediately before the effective date of the registration statement; it will then no longer make grants under its 2007 plan (see pages 130–132). Twitter is also planning to roll out an ESPP with appealing features (see pages 133–134).
Earnings Charge For Stock Grants.
As of Sept. 30, 2013, no stock-based compensation expense had been recognized for the pre-2013 RSUs because a qualifying event meeting the performance condition was not probable (i. e. the grants had not fully vested). In the quarter during which the offering is completed, Twitter will begin recording a stock-based compensation expense based on the grant-date fair value of the pre-2013 RSUs. If this offering had been completed on September 30, 2013, the company would have recorded $385.2 million of cumulative stock-based compensation expense related to the pre-2013 RSUs on that date; and an additional $199.6 million of unrecognized stock-based compensation expense related to the pre-2013 RSUs would have been recognized over a weighted-average period of about three years. In addition to the stock-based compensation expense associated with the pre-2013 RSUs, as of Sept. 30, 2013, the company had an unrecognized stock-based compensation expense of approximately $698.3 million related to other outstanding equity awards (see pages 24 and 86–87).
See myStockOptions for additional information on restricted stock units, pre-IPO stock grants, and the rules on the timing of employee stock sales after the IPO.
14 August 2012.
Facebook Stock Comp: A Status Update.
Earlier this year, we blogged about the potential stock comp wealth (and related tax issues) that seemed certain to blossom for Facebook employees amid the company's much-hyped initial public offering in May. Time and the market have popped these balloons of expectation. Although investors were predicted to "like" Facebook stock in huge numbers, skepticism about the company's valuation and prospects has prompted significant investor flight over the past few weeks. The surprising plunge in the stock price has created unexpected difficulties for the company's equity compensation.
Angst among Facebook employees about their equity awards has been widely reported (e. g. by Reuters and Business Insider ). While the expiration date of the lockup on most employee shares (almost 50% of total shares outstanding) is still fairly far off (Nov. 14), Reuters notes that some employees are already adjusting their expectations because of the poor post-IPO performance. Many now plan to sell a smaller portion of their stake in the company than they otherwise would have if the stock price had risen or even just stayed flat. "I will definitely take some," said an employee anonymously quoted in the news report. "But my debate is how much." The article in Business Insider wonders whether Facebook may develop problems with employee retention, at least in the short term.
Additionally, Facebook needs to raise cash for the taxes ($2.5–4 billion) incurred by its share withholding at RSU vesting, and it has been planning to sell shares to cover this. Because of the fallen stock price, financing that tax bill will now be more difficult than expected.
Facebook employees who joined the company during the past 18 months (perhaps half its workforce) were granted restricted stock units (RSUs). This is fortunate for them. Unless the underlying stock price drops to zero, RSUs always have some value. Stock options, by contrast, would be well underwater, as the exercise price would reflect the pre-IPO stock valuation—much higher than the current depressed price. Before the IPO, various option-valuation models gave Facebook stock a worth of $24.10 during the first quarter of 2011 and around $31 in the first quarter of 2012. Now that the stock price is below these thresholds, the golden handcuff would have lost its lure for restless employees.
In this blog we have also discussed Zynga's pre-IPO demand for nonproductive employees to give back large unvested stock grants. Bloomberg has revealed that Zynga is now broadly granting stock options to retain staff after a fall in the company's stock price. Like Facebook, Zynga had previously granted mostly RSUs. The reasoning behind the switch seems clear. Stock options have much more upside than restricted stock. In short, you get more options per grant, and the fixed purchase (exercise) price provides investment leverage. As a result, options have the power to generate much greater wealth from stock-price appreciation than restricted stock/RSUs do. This, in turn, may help to keep employees at the company.
If Facebook believes its stock is unreasonably depressed, we wonder whether it too will start proffering the golden carrot of stock options to motivate and retain employees. This move could also signal some much-needed optimism about Facebook stock. If or when the stock price does rise, these options would be much more valuable and attractive than RSU grants.
25 May 2012.
Million-Dollar Question: A Week After The IPO, What's The Latest On Facebook's Stock Comp?
It's been one week since Facebook's initial public offering. Last month, this blog provided various insights into the company's stock grants and the related tax issues for Facebook employees.
As we mentioned then, and as Facebook's registration statement (page 48) explains, the restricted stock units granted by the company before 2011 will not pay out and fully vest until six months after the IPO. They face two vesting hurdles: time worked at company and a liquidity event (i. e. the IPO). We have seen these types of vesting requirements in grants made by some other pre-IPO companies, such as Twitter (see an FAQ at myStockOptions).
Facebook continues to rely on the broad use of RSU grants, though these will vest in the standard time-based way. In the 6th amendment to its S-1 registration statement, the company disclosed that in early May it awarded more than 25 million RSUs in what it termed "employee refresher grants" (see page 78 of the S-1 and an article at the blog TechCrunch ).
Now for the million-dollar question (literally). How much wealth has the IPO created for employees at Facebook? How many are now millionaires? According to Aaron Boyd, Director of Research at the compensation research firm Equilar, at the time of the IPO the average paper value of equity per employee was $4.9 million (excluding CEO Mark Zuckerberg's vast holdings). Equilar used the information in the prospectus for the most recently completed quarter for the number of options and restricted stock outstanding as of March 31, 2012, and calculated the values with the IPO price. In an article on May 21, The Washington Post reported that 600 of Facebook's 3,700 employees and 250 former employees will become millionaires, according to PrivCo, a research firm.
The wealth created for senior executives will be much greater. An insider of a company registering stock for the first time under Section 12 of the Securities Exchange Act must file Form 3 under the SEC's Section 16 rules no later than the effective date of the registration statement. It's worth looking at the data in these fillings by Facebook insiders for the stock grants and outright stock holdings and how they are reported with the SEC on Form 3.
For example, the Form 3 for CFO David Ebersman shows he holds 1.2 million RSUs that vest quarterly between early 2012 and early 2019, along with options to buy 4.5 million shares at $3.23 per share. These began vesting in 2010, starting with a fifth of the grant, followed by monthly tranches that will bring the grant to full vesting by 2015. In a footnote, the Form 3 also discloses that the RSUs he holds in which vesting is based on both continued service and liquidity (additional 6.75 million RSUs) are not considered reportable under SEC rules. The Form 3 for COO Sheryl Sandberg also contains new details on her options and RSU grants, such as the vesting provisions. Mark Zuckerberg's Form 3 discloses his stock options, along with the company stock he owns through various trusts (an estate-planning technique to minimize taxes).
When these executives and other senior executives at Facebook get more stock grants or sell company stock, they will have to make filings on Form 4. In addition, sales will also need to follow the SEC's Rule 144 requirements. These will be worth following, as they may reveal some information about individual financial planning, such as whether sales are made under Rule 10b5-1 trading plans, along with showing any changes in Facebook's stock compensation practices after the IPO.
[For more on Facebook stock compensation, see our blog entry of October 29 about the end of the lockup.]
23 April 2012.
Stock Compensation At Facebook: What Facebook's SEC Registration Statement Reveals.
With Facebook planning to go public next month, its S-1 registration statement is worth perusing for details about its stock plans and some of the tax issues the company and its employees face (other than the obvious fact that they will be very rich and can thus afford the best tax and financial advisors!).
Below are a few of the tidbits that can be gleaned from the SEC filing to go public.
Switch To RSUs; Tax Bill Due.
Facebook initially granted stock options to employees during its early days but switched almost entirely to restricted stock units in 2007. RSUs granted by Facebook before January 1, 2011, vest after two conditions: a specified length of employment at the company plus a liquidity event such as an IPO (see page 48). Grants made after that date do not have this liquidity condition, as they vest over four or five years (see page 60). We have been seeing this two-part vesting grant structure at other large pre-IPO companies.
Vesting will occur six months after Facebook's IPO. At that time, employees will owe taxes on the income from these pre-IPO RSUs at ordinary income rates. (In comparison, employees who had stock options before the move to RSUs will see most of the stock's appreciation taxed at capital gains rates, assuming they exercised them more than one year ago.) The company expects that many of its employees with RSUs will see 45% of the value of their shares withheld for taxes (see page 56).
Facebook intends to net-settle the shares at vesting, instead of leaving employees to sell shares for the taxes they owe. To come up with the cash needed to meet its withholding obligations and remit the funds to the IRS, the company plans to sell stock near the settlement date in an amount that is roughly equivalent to the number of shares of common stock that it withholds for taxes (see page 21).
Stock Option Grant Held By Mark Zuckerberg.
In 2005 Mark Zuckerberg, the CEO and founder of Facebook, received nonqualified stock options to acquire 120 million shares of Facebook class B (voting) stock (see page 113). These have all vested, and the option term is scheduled to expire on November 7, 2015. With the exercise price of 6 cents per share and Facebook's valuation of over $100 billion, he will owe a giant amount of taxes at exercise. Some of the tax issues he faces are covered in The Federal Taxation Developments Blog.
Company's Tax Deduction & Earnings Charge.
The company's tax deduction for the income realized by employees, from both RSU vesting and NQSO exercise, could generate a tax refund of up to $500 million in the first six months of 2013 (see page 63). This attracted attention when Senator Carl Levin again proposed his bill to limit the corporate tax deduction for stock compensation. According to an article on this in The Washington Post , some analysts calculate that the tax savings from stock compensation at Facebook could be much higher than the figures mentioned in the company's registration statement. (Estimates run up to $7.5 billion in deductions, translating into $3 billion in federal and state tax savings.)
According to Amendment 4 of Facebook's S-1 registration statement, as of March 31, 2012, Facebook had $2.381 billion in unrecognized stock compensation expenses on its income statement, with $2.319 billion for RSUs and $62 million for restricted stock and options (see page 53 of Amendment 4). For pre-2011 RSUs that met the first vesting trigger of a service condition on or before March 31, 2012, Facebook will recognize a $965 million expense when it goes public at the start of the IPO (see page 53), though net of income taxes this amount will be $640 million (see page 37 in Amendment 4).
Would Stock Options Have Been Better?
The move to granting restricted stock units instead of stock options may have been better for the company for many reasons, including the prospect of minimizing share dilution, along with the relief of having fewer post-IPO multi-millionaire employees to retain and motivate (well, fewer with gains of $10–$100 million, anyway). Depending on the size of the RSU grants relative to previously made stock options grants at Facebook, a basic calculation shows that, given the stock-price appreciation, employees with RSUs would be sitting on much larger gains if they had received stock options.
Example: Regardless of whether employees exercise options earlier or later after the IPO, the following example shows the potential magnitude of their gains from receiving stock options instead of restricted stock (pre - and post-tax calculations are easy to do with the tools on myStockOptions). For this example, let's use the exercise price of 6 cents for the options Mr. Zuckerberg received in 2005 (other employees would have received grants at same price at that time, assuming these were not discounted stock options). Let's assume Facebook granted four times as many stock options as RSUs (the actual ratio may have been much greater). With the current value of Facebook stock at $30.89 (see page 77 of Amendment 4), the following shows the pre-tax gains: Current gains/spread for grant of 400,000 stock options made in 2005 ($0.06 exercise price): $12.332 million (400,000 x [$30.89 – $0.06]) Grant of 100,000 RSUs: $3.089 million.
The blog Inside Facebook also wonders whether Facebook employees would have been better off with options, at least from a tax perspective. While employees would have had the opportunity to exercise shares earlier, when the spread was small, and to start the capital gains holding period sooner, they would also have had to come up with cash to hold the stock while risking the possibility that a liquidity event did not occur.
Given the big tax bills that employees at Facebook will incur, along with the much larger upside they would have realized if they had received stock options instead of RSUs, we wonder whether other pre-IPO companies will rethink whether to grant stock options again. Some private companies use a special type of stock option grant that allows immediate exercise, after which the stock received is subject to vesting. One reason for granting this type of option is to let employees start the capital gains holding period earlier and to allow them to decide when they want to pay the taxes (i. e. early if the options are granted with little or no spread, or later if employees are certain the stock will eventually have real value).
[For more on Facebook stock compensation, see our blog entry of October 29 about the end of the lockup.]
28 December 2011.
Looking For Data On Stock Grants At Privately Held Companies?
We all are. However, in-depth information about specific stock comp practices at private companies seldom comes to light. This is why we like the 2011 Private Company Equity Compensation Survey, recently published by the National Center for Employee Ownership. It amasses data from 201 privately held companies with equity plans, broken down by industry, company age, and number of employees (57% had over 100 employees, while 53% had fewer). Assessing grant practices at all levels, from senior executives to hourly employees, the report gives a detailed narrative description of its key findings. It even comes with an Excel spreadsheet containing all the raw data, so you can sort and analyze the data according to your own research criteria.
Among the findings of interest:
93% of companies give at least some of their C-level employees equity; 81% of companies give all of these employees equity. 82% of companies give at least some managers equity grants, while 50% give equity to all managers. 48% of the companies provide equity to at least some hourly/nonsupervisory employees, and 65% give equity to at least some supervisory/technical employees. C-level executives receive an average of 56% of the awards, other management 19%, supervisory and technical 11%, and hourly/nonsupervisory 4%. 74% of companies grant equity to C-level personnel upon hiring, and 61% do so for other managers, but only 44% grant equity upon hiring supervisory employees and only 29% upon hiring hourly/nonsupervisory employees. About half of the companies make occasional or periodic grants to eligible groups. Two thirds of the companies use stock options. Restricted stock was far less common, at just 29%. Phantom stock, stock appreciation rights, and restricted stock units are all used by under 10% of the companies. The mean percentage of equity held by nonfounders through awards was 15%.
For summaries of other surveys on stock grants at privately held companies, including grant practices at pre-IPO companies before and after they go public, see the FAQs in the section Pre-IPO: Basics at myStockOptions.
06 December 2011.
Griping About IPOs: Too Much Upside?
After a formerly private company has gone public, new riches among employees can cause problems, as noted by a recent piece in the San Jose Mercury News (IPOs Give Companies Instant Wealth But Lots Of Headaches, Nov. 13). The article chronicles some of the distractions: excessive scrutiny of the stock price, envy among employees, or disengagement at work by the newly wealthy. Things can be even worse at companies with broadly granted stock options and restless investors (angels and/or venture capital) who do not see an opportunity to realize any liquidity from their equity grants or investment.
Not surprisingly, the article considers the need for a pre-IPO company to educate employees on the various financial-planning issues they face when the company goes public, along with quickly teaching them the rules against insider trading. At myStockOptions, employees and their financial advisors can find educational material on both financial planning with equity awards and the securities laws that apply to people with stock compensation.
21 November 2011.
Zynga's Zinger: Reducing The Size Of Grants Already Made To Employees.
As the online-games company Zynga approaches its initial public offering, it has garnered attention for reasons far removed from the innocent fun of FarmVille and Mafia Wars 2. When the headline Zynga Leans On Some Workers To Surrender Pre-IPO Shares appeared in The Wall Street Journal on Nov. 10, observers across the worlds of compensation and pre-IPO business sat up and took notice. Allegedly, Zynga is demanding that certain unproductive employees with large early-stage stock grants give back some of their unvested grants. If they don't return these grants, they will be fired.
The WSJ article does not make it clear why the company is taking this hard-line approach. Its share pool for grants may need replenishment to make new grants to more skilled employees. However, the article seems to imply another reason: the company may find it unfair that certain employees should greatly profit from the upcoming IPO merely because they started working there before better-performing employees were hired.
Avoiding the temptation to criticize Zynga's move, some observers have proposed the consoling idea that through the giveback Zynga is actually making an effort to keep some employees it otherwise might have fired. This was the view put forth by Dan Primack of CNN Money on Nov. 10. He finds it reasonable that Zynga is willing to give these employees another chance, perhaps in another position, as long as they give back some of their unvested stock.
However, much of the reaction to Zynga's move has been grumpy. The reasons become clear when you read some of the internet comment forums frequented by tech employees with experience in the startup arena. See, for example, the remarks at HackerNews in response to the WSJ report. As one commenter points out, "getting a chance of a huge upside is one of the reasons employees take lower salaries and work longer hours at startups in the first place. A company that abused its bargaining position like this should not expect to be able to hire good employees in the future."
Zynga's move underscores the risks that many employees joining startup companies may not consider or fully understand, whether they receive stock options, restricted stock, or outright grants of pre-IPO shares. The risk of company failure at a startup is obvious enough. Less well understood, however, may be the problems of share dilution and the demands of cash investors (preferred shareholders) who want most of the sale proceeds in an acquisition. A recent informal employee survey that we found at another blog indicates some of these issues in pre-IPO companies, and shows that employees often don't know enough about them.
In the Pre-IPO section of myStockOptions, articles and FAQs cover some of the risks with suggestions on how to handle them. The steps employees can take with their equity grants depend on their leverage and what the company is willing to negotiate. Whatever the case, they should set foot in the pre-IPO employment world with a realistic understanding of the risks as well as the potential upside.
23 August 2011.
With IPOs On The Way, Questions Arise On Post-IPO Stock Sales.
As fast-growing young companies such as Facebook, Groupon, and Zynga prepare to follow their peer LinkedIn down the road of an initial public offering (IPO), we at myStockOptions expect lots of questions in the coming months about post-IPO stock sales. In particular, shareholding employees often want to know how soon after the IPO they can sell their company stock, given SEC rules and contractual restrictions.
The answer depends on:
the registration exemption the company used to issue the pre-IPO company options or restricted stock whether a form S-8 registration statement is now filed with the SEC for the stock-plan shares the terms of the lockup period.
If the company went public without filing an S-8 registration form for the shares under the stock plan, employees will have to adhere to the waiting period and other requirements for resales under Rule 701. This federal securities-law registration exemption, used for stock plans in privately held companies, allows post-IPO resales without the need to follow certain requirements of Rule 144, such as the holding period.
Therefore, 90 days after the date when the company becomes subject to the ongoing SEC reporting requirements, usually the public offering date, employees can sell their shares. Almost all companies try to fit their pre-IPO option and stock grants into Rule 701. Otherwise, the company would need to make a rescission offer, as Google did before its IPO. (See its SEC filing amendment and later SEC settlement, which explain what happened.) If there is no lockup or if the shareholder is no longer an employee, the holding period rules can be different under Rule 144.
In addition, even when the company registers the stock-plan shares on Form S-8, employees must hold shares for the duration of any contractual lockup agreement with the underwriters. Regardless of when the company went public, your sales will also be limited by company policy for preventing insider trading.
Finally, people considered affiliates of the company for the purposes of securities laws will be generally required to sell shares in accordance with the volume restrictions and notice requirements of SEC Rule 144.
As even this brief explanation showed, stock compensation issues surrounding an IPO can be complex. A full suite of clearly written articles and FAQs on these topics, see the section Pre-IPO at myStockOptions.
08 September 2010.
From The Files Of Frequently Asked Questions.
However, some questions really do come up repeatedly. One of these recurring inquiries prompted an FAQ we published just today: Do I need to sell my shares at the vesting of restricted stock, RSUs, or performance shares?
In short, no. The vesting of restricted stock, RSUs, or performance shares is separate from the sale of the shares. Whether you sell the shares at vesting depends on various factors, some of which you can control:
Methods of tax withholding available to you through your company's stock plan, or any mandatory share surrender. The shares can be a source of the proceeds needed to pay the taxes. Tax planning. Whether you hold the shares and for how long will affect your capital gains tax at sale. Any holding period after vesting does not affect the amount of income tax due for the value of the shares at vesting. Your needs for the cash proceeds and other financial-planning goals, such as diversification, dividends paid on your stock, and alternative investments. Whether your company is publicly traded or privately held. In a privately held company, you will not be able to sell the shares immediately at vesting because of restrictions that are likely to exist in your grant and/or because of the SEC rules on resales.
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Startup stock options explained.
Stock options are a big part of the startup dream but they are often not well understood, even by senior execs who derive much of their income from stock options. Here’s my attempt to explain the main issues employees should be aware of.
“Stock options” as typically granted give you the right to buy shares of stock in the future for a price which is determined today. O preço de exercício & # 8220; & # 8221; is the price at which you can buy the shares in the future. If in the future the stock is worth more than the strike price, you can make money by “exercising” the options and buying a share of stock for the strike price. For example, your are granted 5,000 shares of stock at $4 per share in a startup. 5 years later, the stock goes public and three years after that it’s run up to $200 per share. You can exercise the option, paying $20,000 to buy 5,000 shares of stock which are worth $1,000,000. Congrats, you’ve made a $980,000 pretax profit, assuming you sell the shares immediately.
There is a small but necessary catch: when you are granted your options, they are not “vested”. This means that if you leave the company the week after you join, you lose your stock options. This makes sense; otherwise rather than being an incentive to stay, they’d be an incentive to job-hop as much as possible, collecting options from as many employers as you can. So, how long do you have to stay to keep your options? In most companies, they vest over four years. The most common structure is a “cliff” after one year when 25% of your shares vest, with the remaining shares vesting pro-rata on a monthly basis until you reach four years. Details vary from company to company; some companies vest options over 5 years and some over other periods of time, and not all employers have the cliff.
The cliff is there to protect the company – and all the shareholders, including other employees – from having to give shares to individuals who haven’t made meaningful contributions to the company.
Why should you care about whether that guy who got fired after six months walked away with any options or not? Because those options “dilute” your ownership of the company. Remember each share represents a piece of ownership of the company. The more shares there are, the less value each one represents. Lets say when you join the startup and get 5,000 shares, there are 25,000,000 total shares outstanding. You own .02% – two basis points – da empresa. If the company issues another 25,000,000 options or shares over the intervening five years so there are 50,000,000 shares at the IPO (typically either as part of fundraising including an IPO or to hire employees), you’re left with .01% – one basis point or half of your original percentage. You have had 50% dilution. You now make half as much for the same company value.
That said, dilution is not necessarily bad. The reason the board approves any dilutive transaction (raising money, buying a company, giving out stock options) is that they believe it will make the shares worth more. If your company raises a lot of money, you may own a smaller percentage, but the hope is that the presence of that cash allows the company to execute a strategy which enhances the value of the enterprise enough to more than compensate for the dilution and the price per share goes up. For a given transaction (raising $10 million) the less dilutive it is the better, but raising $15 million may be more dilutive than raising $10 million while increasing the value of each existing share.
This brings us to the number which is much more important (though it is less impressive sounding) than the number of shares – what portion of the company do you own. This is often measured in percentage terms, which I think is unfortunate because very few employees other than founders wind up with one percent or even half a percent, so you’re often talking about tiny fractions, which is irritating. I think it is more useful to measure it in “basis points” & # 8211; hundredths of a percent. Regardless of units, this is the number that matters. Por quê?
Lets say company A and company B are both, after lots of hard work, worth $10 billion (similar to Red Hat, for example). Long ago Albert went to work at company A and Bob went to work at company B. Albert was disappointed that he only got 5,000 options, and they were granted at a price of $4 each. Bob was very happy – he was granted 50,000 options at only 20 cents each. Who got the better deal? Depende. Lets say company A had 25,000,000 shares outstanding, and company B had 500,000,000 shares outstanding. After many years and 50% dilution in each case, company A has 50,000,000 shares outstanding so they are worth $200 each and Albert has made a profit of $980,000 on his options ($1 million value minus $20,000 exercise cost). Company B has 1 billion shares outstanding, so they are worth $10 each. Bob’s options net him a profit of $9.80 each, for a total profit of $490,000. So while Bob had more options at a lower strike price, he made less money when his company achieved the same outcome.
This becomes clear when you look at ownership percentage. Albert had 2 basis points, Bob had one. Even though it was less shares, Albert had more stock in the only way that matters.
How many shares outstanding is “normal”? At some level the number is totally arbitrary, but many VC funded companies tend to stay in a similar range which varies based on stage. As a company goes through more rounds of funding and hires more employees, it will tend to issue more shares. A “normal” early stage startup might have 25-50 million shares outstanding. A normal mid-stage (significant revenue and multiple funding rounds, lots of employees with a full exec team in place) might have 50-100 million shares outstanding. Late stage companies that are ready to IPO often have over 100 million shares outstanding. In the end the actual number doesn’t matter, what matters is the total number relative to your grant size.
I talked briefly about exercising options above. One important thing to keep in mind is that exercising your options costs money. Depending on the strike price and the number of options you have, it might cost quite a bit of money. In many public companies, you can do a “cashless exercise” or “same-day-sale” where you exercise and sell in one transaction and they send you the difference. In most private companies, there is no simple way to do the equivalent. Some private companies allow you to surrender some of the shares you’ve just exercised back to the company at their “fair market value”; read your options agreement to see if this is offered. I’ll talk more about “fair market value” below, but for now I’ll just say that while its great to have this option, it isn’t always the best deal if you have any alternative.
The other really important thing to consider in exercising stock options are taxes, which I will discuss later.
In my opinion, the process by which the “fair market value” of startup stock is determined often produces valuations at which it would be very difficult to find a seller and very easy to find buyers – in other words a value which is often quite a bit lower than most people’s intuitive definition of market value. The term “fair market value” in this context has a very specific meaning to the IRS, and you should recognize that this technical meaning might not correspond to a price at which it would be a good idea to sell your shares.
Why is the IRS involved and what is going on? Stock option issuance is governed in part by section 409a of the internal revenue code which covers “non-qualified deferred compensation” & # 8211; compensation workers earn in one year that is paid in a future year, other than contributions to “qualified plans” like 401(k) plans. Stock options present a challenge in determining when the “compensation” is “paid”. Is it “paid” when the option is granted, when it vests, when you exercise the option, or when you sell the shares? One of the factors that the IRS uses to determine this is how the strike price compares to the fair market value. Options granted at below the fair market value cause taxable income, with a penalty, on vesting. This is very bad; you don’t want a tax bill due when your options vest even if you haven’t yet exercised them.
Companies often prefer lower strike prices for the options – this makes the options more attractive to potential employees. The result of this was a de-facto standard to set the “fair market value” for early stage startup options issuance purposes to be equal to 10% of the price investors actually paid for shares (see discussion on classes of stock below).
In the case of startup stock options, they specify that a reasonable valuation method must be used which takes into account all available material information. The types of information they look at are asset values, cash flows, the readily determinable value of comparable entities, and discounts for lack of marketability of the shares. Getting the valuation wrong carries a stiff tax penalty, but if the valuation is done by an independent appraisal, there is a presumption of reasonableness which is rebuttable only upon the IRS showing that the method or its application was “grossly unreasonable”.
Most startups have both common and preferred shares. The common shares are generally the shares that are owned by the founders and employees and the preferred shares are the shares that are owned by the investors. So what’s the difference? There are often three major differences: liquidation preferences, dividends, and minority shareholder rights plus a variety of other smaller differences. What do these mean and why are they commonly included?
The biggest difference in practice is the liquidation preference, which usually means that the first thing that happens with any proceeds from a sale of the company is that the investors get their money back. The founders/employees only make money when the investors make money. In some financing deals the investors get a 2x or 3x return before anyone else gets paid. Personally I try to avoid those, but they can make the investors willing to do the deal for less shares, so in some situations they can make sense. Investors often ask for a dividend (similar to interest) on their investment, and there are usually some provisions requiring investor consent to sell the company in certain situations.
Employees typically get options on common stock without the dividends or liquidation preference. The shares are therefore not worth quite as much as the preferred shares the investors are buying.
That is, of course, the big question. If the “fair market value” doesn’t match the price at which you reasonably believe you could find a buyer, how do you about estimating the real world value of your options?
If your company has raised money recently, the price that the investors paid for the preferred shares can be an interesting reference point. My experience has been that a market price (not the official “fair market value”, but what VCs will pay) for common shares is often between 50% and 80% of the price the investors pay for preferred shares. The more likely that the company will be sold at a price low enough that the investors benefit from their preference the greater the difference between the value of the preferred shares and the common shares.
The other thing to keep in mind is that most people don’t have the opportunity to buy preferred shares for the price the VCs are paying. Lots of very sophisticated investors are happy to have the opportunity to invest in top-tier VC funds where the VC’s take 1-2% per year in management fees and 25-30% of the profits. All told, they’re netting around 60% of what they’d net buying the shares directly. So when a VC buys common shares at say 70% of the price of preferred shares, that money is coming from a pension fund or university endowment who is getting 60% or so of the value of that common share. So in effect, a smart investor is indirectly buying your common shares for around the price the VCs pay for preferred.
If there hasn’t been a round recently, valuing your shares is harder. The fair market value might be the closest reference point available, but I have seen cases where it is 30-60% (and occasionally further) below what a rational investor might pay for your shares. If its the only thing you have, you might guess that a market value would be closer to 2x the “fair market value”, though this gap tends to shrink as you get close to an IPO.
Expiration and termination.
Options typically expire after 10 years, which means that at that time they need to be exercised or they become worthless. Options also typically terminate 90 days after you leave your job. Even if they are vested, you need to exercise them or lose them at that point. Occasionally this is negotiable, but that is very rare – don’t count on being able to negotiate this, especially after the fact.
The requirement to exercise within 90 days of termination is a very important point to consider in making financial and career plans. If you’re not careful, you can wind up trapped by your stock options; I’ll discuss this below.
Occasionally stock options will have “acceleration” language where they vest early upon certain events, most frequently a change of control. This is an area of asymmetry where senior executives have these provisions much more frequently than rank-and-file employees. There are three main types of acceleration: acceleration on change of control, acceleration on termination, and “double trigger” acceleration which requires both a change of control and your termination to accelerate your vesting. Acceleration can be full (all unvested options) or partial (say, 1 additional year’s vesting or 50% of unvested shares).
In general, I think acceleration language makes sense in two specific cases but doesn’t make sense in most other cases: first, when an executive is hired in large part to sell a company, it provides an appropriate incentive to do so; second when an executive is in a role which is a) likely to be made redundant when the company is sold and b) would be very involved in the sale should it occur it can eliminate some of the personal financial penalty that executive will pay and make it easier for them to focus on doing their job. In this second case, I think a partial acceleration, double trigger is fair. In the first case, full acceleration may be called for, single trigger.
In most other cases, I think executives should get paid when and how everyone else gets paid. Some executives think it is important to get some acceleration on termination. Personally I don’t – I’d rather focus my negotiation on obtaining a favorable deal in the case where I’m successful and stick around for a while.
How many stock options you should get is largely determined by the market and varies quite a bit from position to position. This is a difficult area about which to get information and I’m sure that whatever I say will be controversial, but I’ll do my best to describe the market as I believe it exists today. This is based on my experience at two startups and one large company reviewing around a thousand options grants total, as well as talking to VCs and other executives and reviewing compensation surveys.
First, I’ll talk about how I think about grant sizes, then give some specific guidelines for different positions.
I strongly believe that the most sensible way to think about grant sizes is by dollar value. As discussed above, number of shares doesn’t make sense. While percent of company is better it varies enormously based on stage so it is hard to give broadly applicable advice: 1 basis point (.01 percent) of Google or Oracle is a huge grant for a senior exec but at the same time 1 basis point is a tiny grant for an entry level employee at a raw series-A startup; it might be a fair grant for a mid-level employee at a pre-IPO startup. Dollar value helps account for all of this.
In general for these purposes I would not use the 409a “fair market value”. I would use either a) the value at the most recent round if there was one or b) the price at which you think the company could raise money today if there hasn’t been a round recently.
What I would then look at is the value of the shares you are vesting each year, and how much they are worth if the stock does what the investors would like it to do – increases in value 5-10 times. This is not a guaranteed outcome, nor is it a wild fantasy. What should these amounts be? This varies by job level:
Entry level: expect the annual vesting amount to be comparable to a small annual bonus, likely $500-$2500. Expect the total value if the company does well to be be enough to buy a car, likely $25-50k.
Experienced: most experienced employees will fall in to this range. Expect the annual vesting amount to be comparable to a moderate annual bonus, likely $2500-$10k, and the total value if the company does well to be enough for a down-payment on a silicon valley house or to put a kid through college, likely around $100-200k.
Key management: director-level hires and a handful of very senior individual contributors typically fall into this range. Key early employees often wind up in this range as the company grows. Expect the annual vesting amount to be like a large bonus, likely $10k-40k and the total value if the company does well to be enough to pay off your silicon valley mortgage, likely $500k-$1 million.
Executive: VP, SVP, and CxO (excluding CEO). Expect the annual vesting amount to be a significant fraction of your pay, likely $40-100k+, and the value if the company does well to be $1 million or more.
For those reading this from afar and dreaming of silicon valley riches, this may sound disappointing. Remember, however, that most people will have roughly 10 jobs in a 40 year career in technology. Over the course of that career, 4 successes (less than half) at increasing levels of seniority will pay off your student loans, provide your downpayment, put a kid through college, and eventually pay off your mortgage. Not bad when you consider that you’ll make a salary as well.
You should absolutely ask how many shares are outstanding “fully diluted”. Your employer should be willing to answer this question. I would place no value on the stock options of an employer who would not answer this clearly and unambiguously. & # 8220; Totalmente diluído & # 8221; means not just how many shares are issued today, but how many shares would be outstanding if all shares that have been authorized are issued. This includes employee stock options that have been granted as well shares that have been reserved for issuance to new employees (a stock “pool”; it is normal to set aside a pool with fundraising so that investors can know how many additional shares they should expect to have issued), and other things like warrants that might have been issued in connection with loans.
You should ask how much money the company has in the bank, how fast it is burning cash, and the next time they expect to fundraise. This will influence both how much dilution you should expect and your assessment of the risk of joining the company. Don’t expect to get as precise an answer to this question as the previous one, but in most cases it is reasonable for employees to have a general indication of the company’s cash situation.
You should ask what the strike price has been for recent grants. Nobody will be able to tell you the strike price for a future grant because that is based on the fair market value at the time of the grant (after you start and when the board approves it); I had a friend join a hot gaming company and the strike price increased 3x from the time he accepted the offer to the time he started. Changes are common, though 3x is somewhat unusual.
You should ask if they have a notion of how the company would be valued today, but you might not get an answer. There are three reasons you might not get an answer: one, the company may know a valuation from a very recent round but not be willing to disclose it; two the company may honestly not know what a fair valuation would be; three, they may have some idea but be uncomfortable sharing it for a variety of legitimate reasons. Unless you are joining in a senior executive role where you’ll be involved in fundraising discussions, there’s a good chance you won’t get this question answered, but it can’t hurt to ask.
If you can get a sense of valuation for the company, you can use that to assess the value of your stock options as I described above. If you can’t, I’d use twice the most recent “fair market value” as a reasonable estimate of a current market price when applying my metrics above.
One feature some stock plans offer is early exercise. With early exercise, you can exercise options before they are vested. The downside of this is that it costs money to exercise them, and there may be tax due upon exercise. The upside is that if the company does well, you may pay far less taxes. Further, you can avoid a situation where you can’t leave your job because you can’t afford the tax bill associated with exercising your stock options (see below where I talk about being trapped by your stock options).
If you do early exercise, you should carefully evaluate the tax consequences. By default, the IRS will consider you to have earned taxable income on the difference between the fair market value and the strike price as the stock vests. This can be disastrous if the stock does very well. However, there is an option (an “83b election” in IRS parlance) where you can choose to pre-pay all taxes based on the exercise up front. In this case the taxes are calculated immediately, and they are based on the difference between the fair market value and the strike price at the time of exercise. If, for example, you exercise immediately after the stock is granted, that difference is probably zero and, provided you file the paperwork properly, no tax is due until you sell some of the shares. Be warned that the IRS is unforgiving about this paperwork. You have 30 days from when you exercise your options to file the paperwork, and the IRS is very clear that no exceptions are granted under any circumstances.
I am a fan of early exercise programs, but be warned: doing early exercise and not making an 83b election can create a financial train wreck. If you do this and you are in tax debt for the rest of your life because of your company’s transient success, don’t come crying to me.
What if you leave? The company has the right, but not the obligation, to buy back unvested shares at the price you paid for them. This is fair; the unvested shares weren’t really “yours” until you completed enough service for them to vest, and you should be thankful for having the opportunity to exercise early and potentially pay less taxes.
Taxes on stock options are complex. There are two different types of stock options, Incentive Stock Options (ISOs) and Non-Qualified Stock Options which are treated differently for stock purposes. There are three times taxes may be due (at vesting, at exercise, and at sale). This is compounded by early exercise and potential 83b election as I discussed above.
This section needs a disclaimer: I am not an attorney or a tax advisor. I will try to summarize the main points here but this is really an area where it pays to get professional advice that takes your specific situation into account. I will not be liable for more than what you paid for this advice, which is zero.
For the purposes of this discussion, I will assume that the options are granted at a strike price no lower than the fair market value and, per my discussion on early exercise, I’ll also assume that if you early exercise you made an 83b election so no taxes are due upon vesting and I can focus on taxes due on exercise and on sale. I’ll begin with NSOs.
NSO gains on exercise are taxed as ordinary income. For example, if you exercise options at a strike price of $10 per share and the stock is worth $50 per share at the time of exercise, you owe income taxes on $40 per share. When you sell the shares, you owe capital gains (short or long term depending on your holding period) on the difference between the value of the shares at exercise and when you sell them. Some people see a great benefit in exercising and holding to pay long term capital gains on a large portion of the appreciation. Be warned, many fortunes were lost doing this.
O que pode dar errado? Say you have 20,000 stock options at $5 per share in a stock which is now worth $100 per share. Parabéns! But, in an attempt to minimize taxes, you exercise and hold. You wipe out your savings to write a check for $100,000 to exercise your options. Next April, you will have a tax bill for an extra $1.9 million in income; at today’s tax rates that will be $665,000 for the IRS, plus something for your state. Not to worry though; it’s February and the taxes aren’t due until next April; you can hold the stock for 14 months, sell in April in time to pay your taxes, and make capital gains on any additional appreciation. If the stock goes from $100 to $200 per share, you will make another $2 million and you’ll only owe $300,ooo in long term capital gains, versus $700,000 in income taxes. You’ve just saved $400,000 in taxes using your buy-and-hold approach.
But what if the stock goes to $20 per share? Well, in the next year you have a $1.6 million capital loss. You can offset $3,000 of that against your next years income tax and carry forward enough to keep doing that for quite a while – unless you plan to live more than 533 years, for the rest of your life. But how do you pay your tax bill? You owe $665,000 to the IRS and your stock is only worth $400,000. You’ve already drained your savings just to exercise the shares whose value is now less than the taxes you owe. Congratulations, your stock has now lost you $365,000 out of pocket which you don’t have, despite having appreciated 4x from your strike price.
How about ISOs? The situation is a little different, but danger still lurks. Unfortunately, ISOs can tempt you in to these types of situations if you’re not careful. In the best case, ISOs are tax free on exercise and taxed as capital gains on sale. However, that best case is very difficult to actually achieve. Por quê? Because while ISO exercise is free of ordinary income tax, the difference between the ISO strike price and value at exercise is treated as a “tax preference” and taxable under AMT. In real life, you will likely owe 28% on the difference between strike price and the value when you exercise. Further, any shares which you sell before you have reached 2 years from grant and 1 year from exercise are “disqualified” and treated as NSOs retroactively. The situation becomes more complex with limits option value for ISO treatment, AMT credits, and having one tax basis in the shares for AMT purposes and one for other purposes. This is definitely one on which to consult a tax advisor.
If you’d like to know if you have an ISO or NSO (sometimes also called NQSO), check your options grant paperwork, it should clearly state the type of option.
Illiquidity and being trapped by stock options.
I’ll discuss one more situation: being trapped by illiquid stock options. Sometimes stock options can be “golden handcuffs”. In the case of liquid stock options (say, in a public company), in my opinion this is exactly as they are intended and a healthy dynamic: if you have a bunch of “in-the-money” options (where the strike price is lower than the current market price), you have strong incentive to stay. If you leave, you give up the opportunity to vest additional shares and make additional gains. But you get to keep your vested shares when you leave.
In the case of illiquid options (in successful private companies without a secondary market), you can be trapped in a more insidious way: the better the stock does, the bigger the tax bill associated with exercising your vested options. If you go back to the situation of the $5 per share options in the stock worth $100 per share, they cost $5 to exercise and another $33.25 per share in taxes. The hardest part is the more they’re worth and the more you’ve vested, the more trapped you are.
This is a relatively new effect which I believe is an unintended consequence of a combination of factors: the applicability of AMT to many “ordinary” taxpayers; the resulting difficulties associated with ISOs, leading more companies to grant NSOs (which are better for the company tax-wise); the combination of Sarbanes-Oxley and market volatility making the journey to IPO longer and creating a proliferation of illiquid high-value stock. While I am a believer in the wealthy paying their share, I don’t think tax laws should have perverse effects of effectively confiscating stock option gains by making them taxable before they’re liquid and I hope this gets fixed. Until then to adapt a phrase caveat faber .
Can the company take my vested shares if I quit.
In general in VC funded companies the answer is “no”. Private equity funded companies often have very different option agreements; recently there was quite a bit of publicity about a Skype employee who quit and lost his vested shares. I am personally not a fan of that system, but you should be aware that it exists and make sure you understand which system you’re in. The theory behind reclaiming vested shares is that you are signing up for the mission of helping sell the company and make the owners a profit; if you leave before completing that mission, you are not entitled to stock gains. I think that may be sensible for a CEO or CFO, but I think a software engineer’s mission is to build great software, not to sell a company. I think confusing that is a very bad thing, and I don’t want software engineers to be trapped for that reason, so I greatly prefer the VC system.
I also think it is bad for innovation and Silicon Valley for there to be two systems in parallel with very different definitions of vesting, but that’s above my pay grade to fix.
What happens to my options if the company is bought or goes public?
In general, your vested options will be treated a lot like shares and you should expect them to carry forward in some useful way. Exactly how they carry forward will depend on the transaction. In the case of an acquisition, your entire employment (not just your unvested options) are a bit up in the are and where they land will depend on the terms of the transaction and whether the acquiring company wants to retain you.
In an IPO, nothing happens to your options (vested or unvested) per se, but the shares you can buy with them are now easier to sell. However there may be restrictions around the time of the IPO; one common restriction is a “lockup” period which requires you to wait 6-12 months after the IPO to sell. Details will vary.
In a cash acquisition, your vested shares are generally converted into cash at the acquisition price. Some of this cash may be escrowed in case of future liabilities and some may be in the form of an “earn-out” based on performance of the acquired unit, so you may not get all the cash up front. In the case of a stock acquisition, your shares will likely be converted into stock in the acquiring company at a conversion ratio agreed as part of the transaction but you should expect your options to be treated similarly to common shares.
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It’s hard to sell a company if there is a log of acceleration. That could actually be counterproductive for option holders.
Agree, that’s one of the reasons I think it is warranted only in a few specific cases.
What happens to unvested stock in the case of a cash/stock acquisition? (for a generic Silicon Valley VC funded startup)
Lot of it depends (including whether they keep the employees at all). But often they are converted to options in the new company.
What happens if the company is bought before I was granted my options?
In my employment agreement the granting is subject to board approval and that never happened.
I got new options of the acquiring company (at a SHITTY strike price ) , anything to do about that?
Probably nothing to do about it besides quit (though I am not a lawyer and you might ask one if there is a lot of money involved). How long did you work there without the options being granted? Up to a few months is normal, past that is unusual.
I worked there for 6months part time and another 6months full-time.
Basically the board of directors probably didn’t meet to approve the options of the new employees and when it did it discussed the buyout.
I assume that they said to themselves, let’s not grant these options and grant options of the buying company instead.
Ai Can you ask/have you asked asked a few questions: 1. Did the board meet during the time after you accepted the offer and started and prior to the acquisition and how many times? Did it review your proposed grant at the meetimg and if not why not? If it reviewed your proposed grant why did it not approve it? 2. On what basis was your new grant determined? Did they convert the grant in your offer letter based on the terms of the purchase or did they just give you stock in the acquiring company as a new employee of that company?
I am assuming your options dated from joining full time, so it was a 6 month delay, not a year?
While I might be popular online for saying they hosed you and they’re evil, situations like this can be complex. It is possible/likely that the board was in serious discussions about an aquisition for a number of months before it occured. This could have been ongoing from the time you joined, or started shortly afterwards but have been in progress at the first board meeting after you joined.
If this was the case, the board may have been in a very hard situation with respect to valuing the stock options. If the acquisition discussion was credible enough, it would be material information that could force a re-evaluation of the fair market value of the shares. To avoid the risk of grantees (you) being liable for huge tax penalties, they would likely have wanted to retain a third party to do the valuation. Hiring the firm takes time, the valuation takes time, and board approval of the valuation takes time. During that time, the discussions might gave progressed – maybe they got a second higher offer. That could restart the clock.
In any case, even if they were able to complete the valuation and grant the options, the valuation may well have been quite similar to the price offered by the acquirer and those options might have been converted to options in the acquiring company at a similar strike price to the price of your grant. So quite possibly what is at issue is whether your grant could have been granted at a somewhat (say 20 or 30%) lower strike price.
If the value of the stock underlying your new grant (number of shares times strike price) is well in to the six figures or beyond, it may be worth consulting an attorney just in case, but my guess (and I am not a lawyer) is they are going to say that you just had bad timing. If it’s five figures or less, I don’t think its worth spending the legal fees for a small chance at a medium settlement.
What I described is the way this happened in completely good faith with everyone involved trying to do what’s fair and legal for you in a complex situation. That’s not always the case, but I’d start by asking.
You’re thinking the same as I do.
Since the company have been planning an IPO and this buyout came in I’m sure the board have met several times since I joined.
I too think that I should have gotten either an approval or decline of my options , neither was delivered to me, hence I believe this is a direct violation of my employment agreement.
My options never materialized, I basically got the buying company options at a strike price which is the share price in the day of the buyout which means zero profit!
I’m getting really pissed here and I think that this might even have legal implications.
This is 5 figures but I think that the determining factor is that I think this isn’t completely legal , I don’t think they can just ignore this term of the contract just because they’re busy or not sure about the price.
My guess is that you make some enemies with this post. It is clearly to the advantage of the company that the terms of stock options and vesting periods remain opaque.
What if there were liquidity in options? That would be interesting, and wildly dangerous, I imagine, because such liquidity would be so predominantly speculative in the absence of knowledge of company fundamentals.
Possible I suppose, but.
Possible I suppose, but only ill advised companies and VC’s that I’m happy to stay away from.
A successful growing company grants millions of dollars worth of options each year, and I think it works to their advantage to have people understand their value and thus make rational decisions about them.
Re: liquidity, the illiquidity of the _options_ stems from the fact that they are subject to cancellation if you quit as well as some specific contractual terms. Your _shares_ should you exercise your stock can sometimes be liquid even before the company is public. That is certainly the case for well known private companies (eg, Facebook), and sometimes is the case for smaller companies as well; question is can you find an investor who wants to buy the shares.
The biggest issue in liquidity of pre-IPO shares is the company’s cooperation in allowing a potential buyer to see the books. Often this will be restricted for current employees but more open for ex-employees. This can be very complex and the SEC has rules about shareholder counts, how the shares can be offered etc.
Hello, I just received an employee stock option that would allow me to buy shares within five years. Do I have to buy the shares right away? or wait until my company goes public or another company (that is currently in stock trading) will aquire us? If I buy the shares now and after 2 years I left the company or they fired me, do I still have the right for my shares? If still have the right for my shares then I’m willing to expend few thousand dollars for it. I really appreciate your advice.
Really sorry for the delayed reply. Usually you have all 5 years. Usually you can buy some now and some later. Tax issues vary, research them carefully.
well written, and easy to understand…thanks very much.
Well written for sure. An scenario I’d appreciate your feedback on. A small company was bought by a larger one and the employee was given her recalculated options. There are 2 years left on this employees vesting schedule. Without any prior negotiation at time of hire regarding acceleration of vesting, is there any way receive acceleration in case of termination?
Unfortunately for the subject of your story, probably not.
Most folks in small companies are employed “at will”. That means that their employer is under no obligation to keep them employed until the end of their vesting period or for any other reason. They can be fired because of a lack of work for them to do, a desire to hire someone less expensive to do the same job, a desire to restructure and eliminate their job, or because the company is unsatisfied with their work. The same holds true once they’ve joined the big company.
Sometimes companies will offer “packages” to employees that they lay off. This is not done out of obligation but rather to help retain the employees who aren’t being laid off – who might otherwise fear being laid off with nothing and instead take another job. By treating the terminated employees nicely, the remaining employees are less likely to panic.
Normally one should expect to vest only as long as their employment continues. The most common exceptions where acceleration can make sense but usually needs to be negotiated up front are positions where the individual is directly involved in selling the company (CEO, CFO etc) and/or is very likely not to be retained after the acquisition.
How do unvested options work post-IPO? Is an IPO an event that can trigger acceleration, or is this reserved for acquisition typically? Can unvested shares be canceled post-IPO?
Usually they continue vesting through the IPO as normal, with restrictions on selling them for some period of time (
6 months is normal) post-IPO.
It is very unusual for an IPO to trigger acceleration. While it is easy to see an IPO as a destination for a startup, it is really the beginning of a much longer journey. An IPO means that a company is ready to have a broader base of shareholders – but it needs to continue to deliver to those shareholders, thus it needs to continue to retain its employees.
Most options are not cancelable other than by terminating the optionee’s employment or with the optionee’s consent. Details vary and there are some corner cases, but the typical situation is if the company doesn’t want you to collect any further options they’ll fire you. Occasionally companies will give people the option to stay for reduced option grants but that is unusual.
By the way when I say “most” or “usually” I am referring to the typical arrangements in startups funded by reputable silicon-valley-type VCs. Family businesses and business that exist outside that ecosystem of startup investors, lawyers, etc may have different arrangements. If you read some of my posts on private equity owned companies and options, you’ll see that they have a somewhat different system for example.
What happens if you exercise pre-IPO stock options (within 90 days of quitting) and the company never goes public?
Then you own shares that may be hard to sell. The company may be acquired and you might grt something for your shares, or in some circumsances you can sell shares of private companies. But the money you pay to exercise the shares is at risk.
Thank you Max! This entire article and your answer to my question has been the best write up on this topic that I could find on the Internet. Obrigado novamente!
Great summary Max, i found it very useful.
wow i personally know someone (well i guess many people do) who lost everything in the bubble and still owed $$$ in tax due to the exercise and hold you described here. he went bankrupt and had to flee out of state but still writes a hefty check to the IRS each and every month.
Excellent…very well explained. Thanks Max.
Ótimo artigo! I’m trying to learn more about employee stock options. I was granted options 4 years ago and now I’m being laid off so I wanted to make sure I’m taking advantage of the benefits (if there are any.) I received the agreement, signed it, and got a copy of it back signed by the corporate secretary. I never received any other documentation since. The company isn’t doing well, but the options were priced at a penny in the agreement. Should I contact HR or a financial advisor? Just slightly concerned since the company seems a little secretive to me. I have been with them for over 6 years. Thoughts are appreciated 🙂
Sorry for the delay in getting back to you.
Usually after you sign your options agreement, there’s no further paperwork until you exercise.
Usually you have 90 days after leaving until you have to exercise the options, but this varies from plan to plan and the details should be in the paperwork you signed. HR or Finance should be able to help you exercise your options if you want to; If you exercise you’ll pay a penny per share and the shares turn out to be worthless or may turn out to be valuable.
If your instinct is that the company isn’t doing well and the shares will likely not be worth much, the question is whether its worth a gamble. If for example you have 20,000 options at $.01 each, its only $200 to exercise them so it may be worth it even if the odds are against you.
One data point that you will need to finalize your decision is the FMV (fair market value) of the shares for tax purposes. The company should be willing to tell you this; if it is quite a bit more than a penny some taxes will be due on exercise but the shares are more likely to be worth something.
If you can get more specifics about number of shares outstanding, debt, preferences, revenue, cash etc a financial advisor may be able to help; without that they’d would probably be shooting in the dark.
Eu espero que isso ajude,
Thanks Max, I really appreciate it. After reading your article and doing some research I found out I was looking at the par value, not the exercise price. So in my case, I would be severely underwater. Agora eu entendo! Thanks again for sharing your knowledge!
Max, thanks for the great info. I am considering joining a tech startup and wonder if there are enough benefits for both the company and myself for me to be brought on as an independent contractor vs. an employee? Any info you have or can refer me to would be helpful. Obrigado!
Desculpe o atraso. There are quite a few qualifications that you must meet to work as an independent contractor; I don’t have them handy but a quick google search might turn them up. If you plan to work there full time for the long term, usually employment makes the most sense – though sometimes companies have more leeway to pay much more money to contractors; if that’s the case and they’re willing to do it and you qualify, it might make sense. But even then, you will probably not get benefits or stock options. Boa sorte com sua decisão.
Why shareholder needs to pay again 50% the difference between of subscription price Convertible Prefered Stock (pre-IPO) and common stock IPO price?
The terms of preferred stock vary, not only from company to company but also across different series of preferred stock in a company. I am not quite sure what you’re referring too but it may well be specific to the structure of those securities at your company. A bit of context could help, but the answer is probably going to be some form of “because that’s the rule defined for this form of stock in this situation”.
Very informative post, thank you for sharing! May I contact you off-post for questions?
Desculpe o atraso. I may not have time to answer but feel free to try me first initial last name at gmail.
Hi Max – thanks for the insightful article. I work for a private company (PE owned) that’s expecting an IPO in about 12 months. Half of my stock options have vested. I got them at a price of 3 and the current valuation is now at 4.5 or so. What happens if I leave AFTER the IPO but BEFORE the employee lock-up ends. Do I get to leave with my vested (as of departure date) options or do I need to pay the company to buy them at the granted strike PLUS pay the tax on the gains etc. Thanks.
Putting aside any idiosyncrasies of your specific options agreement, typically you have 90 days after departure to exercise. So within that 90 days you need to pay the strike price and you incur a tax liability. Keep in mind the stock could decline before you can sell, so its not just acash flow exposure, you may wind up selling for less than you paid to exercise. Waiting until you are less than 90 days from the lockup ending reduces risk a lot, but I don’t know the opportunity cost to you.
Obrigado pela ajuda! Pergunta & # 8211; I purchased stock and then my company got purchased. by another private company. My understanding is that the main investors lost money on their sale (they sold below what they put into the company). I had common shares, is that why I haven’t seen any payout?
Also, the purchaser then got purchased by a public company…how crappy.
Sorry to hear you didn’t get anything for your shares. Without knowing all the details, it sounds like you’re correct; typically if there isn’t enough to repay the investors, the common shareholders won’t get anything.
Max thank you for the terrific article.
Do you have any experience with seeing employees receive additional option grants with promotions? Is this common or only at key-level positions? I joined the sales team of a 50-person startup at an entry level position about 2 years ago. We’re now at about 100 employees and I’ve been promoted about 1.5 times (first from a lead-gen position to an Account Executive, then after good performance had my quota raised and salary increased, though no title change). I haven’t received any additional option grants but also haven’t asked. Is it reasonable to ask?
Also, say they’ll agree to give me more, what are typical steps that have to happen until they’re officially granted? Is this something that needs to be discussed at the next board meeting, or does the CEO/Exec team have discretion to do this on an ad-hoc basis?
Ótima pergunta. It is common but not universal to receive additional grants with significant promotions, but there is wide variety in how these are handled:
& # 8211; Some companies give them shortly after the promotion (approvals take some time)
& # 8211; Some companies review follow-on grants on a semi-annual or annual basis; people who are promoted are typically good candidates to get them.
& # 8211; Some companies (unfortunately, in my view) operate on a squeaky wheel basis where they are only given when people complain.
I would ask your employer what the process is to ensure that your stock is commensurate with your current contribution to the company. Without knowing all the details, it sounds like it may not be given the progress you’ve made.
One situation to consider is that if the value of the company has increased dramatically, it is possible that the grant you got earlier in the company’s history for a more junior position is larger than the grant someone in your current position would get today. For example, if when you joined an entry level employee received 1000 shares and an account exec received 2500, but today an entry level employee receives 250 shares and an account exec receives 600. If this is the case, many companies would not give you additional shares to go with the promotion (but would increase your salary). While this example may sound exaggerated, if the company has twice as many employees, grants may be half the size per employee – often the board will think about how much stock should go to all employees as a whole per year, and now there are twice as many to share the same number of shares. Also often the grants for different roles aren’t nearly as precise as I described, but the principle remains valid even if the grants per level are ranges.
Options grants almost always have to be approved by the board.
Good luck; it sounds like you’re doing well at a growing company so congratulations.
Thanks again Max, very helpful.
i got an offer to work for a startup on a part-time basis keeping my full time job at my current employer. i will be paid only in the form of stock options (0.1%). not sure if this is a good deal.
I’d look at it 2 ways:
1. What is the startup ‘worth’? If its an unfunded early stage idea it may be something like $1-2 million, in which case .1% is $1-2k for example. Of course if the ‘startup’ is Twitter its worth a lot more. In any case whatever that value is, is it fair compensation for your time? How long do you have to stay to vest the options? 1 month? 1 year? 4 years? And how much work are you expected to do?
2. How does your stake compare to other participants and their contribution? Did your two roommates found it in their garage two weeks ago and they’ll each own 49.95 to your 0.1? Or are there 100 full time employees sharing 50% and investors share the rest?
the startup is in a very early stage with about 13 employees. the options vest at 1/48th of the total shares every month for 4 years. i think i need ask more details before i start the work.
this is my first time working for a startup so i am not very clear..
I am new to this whole equity & stock options.. your article is the only basis for my reasoning.. I need your help! My company is a Green Sustainable clothes recycling company.. relatively new Green field.. not sure what are the general vesting schedules like.. any advice?
we negotiated $1k / week + 5% vested equity.. initially when i started back in Oct/ Nov.. now that its time to draft the actual contract, they are saying how 1%/ year vesting is standard, while for whatever reason i thought the 5% would vest over 1-2 years.. how do i approach this? as of now company is worth $1 million. we are constantly loosing $, it will take at least 6 months - 1 year until we start being profitable..
does the evaluation of what i think im worth from what the company is worth today, or based on projections of what we will make in the future?
we only have 1 kind of stock.. any provisions you are recommending to include?
can i ask for a provision to protect myself from taxes and have it be deducted from my equity instead of paying for it our of my pocket?
Thank you soo much.
Desculpe o atraso. I think 4 years is most common, maybe 5 next most, 1-2 years is unusual. I am not sure what else you are asking. If you are asking about taxes on the equity, if it is options there is typically no tax on vesting if the plan is set up properly (which will almost certainly require an attorney).
The IRS will require cash for your tax payments, they don’t accept stock 🙂
How often should a company revalue their privatly held stock options? Any guidelines around that in the accounting standards?
I am not a tax lawyer but I think for tax purposes the valuations are good for a year. If things change (eg, financing, offer to buy the company, or other significant events) you may want to do it more frequently, and for rapidly growing companies that might go public soon you may want to do it more frequently.
Terrific article thank you !
With startups becoming a global tendency, it becomes complicated to create one model that fits all.
Any thoughts on adjusting vesting schedules, cliff periods and accelerations to ventures occurring in high-risk geographical areas? i. e High-risk understood as high volatility & political unrest.
One thing that I do see adjusted globally is some of the details to fit local tax laws – even US-based companies have to administer their plans differently in different jurisdictions.
I am not expert at all but it may make sense to adjust some other parameters; I don’t know how much they vary from the US. Maybe a reader knows??
Great article, now for my question. Been working for a company 3 years, been vested, for example, 100,000 shares, at 5 cents a share. Leaving company, It looks like the period to exerci se, buying the shares will have about 7 more years. When I leave, how long does one usually, have to buy the shares, if they choose. I am a little confused about the 90days mentioned ealier in the article.
Usually the option period is 10 years but only while you are employed. When you leave, the unvestef options go away and you have 90 days to exercise the vested options. Of course it depends on your specific option plan which may be completely different.
I have some vested preferred shares. I’m not sure if or when the company will be acquired or go IPO. What are my options to liquidate them before any event ?
Your option may be to find someone who wants to buy the stock in a private transaction with limited data. Or it may be that the company has to give permission even if you find a buyer. Trading private stock is difficult. Also if you have options, typically you will have to exercise them before you can sell them.
How would you explain this scenario?
Employee shall be entitled to 25,000 Company common share stock options at an exercise price of $6.25 per common share. These stock options shall be deemed to have been granted January 31, 2012 and shall have a term of 3 years from the effective date granted. These stock options shall remain vested for a period of 24 months in which Employee remains in his current position with the Company.
It sounds like you have between 2 and 3 years in which to exercise them. The vesting language is a bit unclear to me. You may want to get some legal advice, I cannot interpret that clearly.
Let me elaborate on this as I am in the middle of an asset acquisition (a division of the company is being bought) that will close on Jan 31, 2015. I am still trying to understand the language above and below and what my options will be once the transaction is complete. The strike price above given seems a bit high. The division is $5mil and was sold for 7x $35mil. How does this work in terms of an asset being acquired as opposed to the entire company?
“In the event that the Company is acquired or successfully undertakes an initial public offering or reverse takeover, the vesting period relating to the stock options shall be removed and Employee shall have the full and unrestricted ability to exercise the stock options.”
As Twitter is going public soon and I am in the last round of interview. If they offer me a job, will there be any impact to my equity offering if I join before they go IPO or will it be the same after they go IPO? Which will be most beneficiary to me?
Typically people expect the price to increase on I and thus try to get in prior. Predicting what actually happens is hard, for example Facebook went down. But generally joining before IPO is viewed as a better bet.
On the day of my 7hrs in person interview conclusion, HR mentioned that they are not the highest paid company around, they come in like 60th percentile… But their RSU are at great offer. So I am guessing RSU is equal to Stock option they are referring to?
Also, if they offer me RSU/Options, is that something I have to pay for at the evaluation of the company even prior to they going IPO?
Great article, I didn’t know anything about stocks, vesting, options, shares until reading this so it’s helped me understand a bit better! I have been working for a start-up for 5 months and am on the typical vesting schedule of 25% after 1 year and another 6% each month after that. I have been offered just over 5000 shares for .0001.
Our company is expecting to be acquired in the next 90 days so I could end up with no vested options… What happens if we get acquired before I am vested? I am sure there a few different scenarios that could play out depending on who buys us but I’d like to know what COULD happen so I can approach HR about it and see what their plan is. I have read on other ‘stock options explained’ websites that my shares could be wiped out, I’ve read they could be accelerated and I have read they could be absorbed into the new company that acquires us… is that correct? The other thing that complicates it is that our company has a few different products we offer and the one that is getting acquired is the one I work on.. so I’ve heard that when that product/company is acquired in 90 days, our team is going to ‘break off’ and move to a different product (within the same company) and continue on as normal. Isso faz sentido?
Depende. Typically if the acquiring company does not want to keep you they can terminate you and your unvested options will not vest. If they want to keep you they would typically exchange your options for options in the new company. They will have some discretion in how to do this. Hopefully they will want to keep you and will treat you well.
Hi Max.. great article.. a quick question.. after 4 years in a startup i changed the jobs and bought all my vested incentive stock options. Now after 6 months the company is acquired by another company for cash buyout. Since I exercised my stock options just 4 months ago, will I be not considered for Long term Capital gain taxes? Or can I hold on to my share certificates for 9 more months and then will I eligible for Long term capital gain tax rate?
My strong suspicion is that you can’t wait 9 months. Check with an attorney to be sure, it could depend on the details of that specific transaction but usually they close faster than that.
Interesting article! Question for you: I was part of a startup that was acquired and had ISO’s. We received an initial payout and had a subsequent release of the escrow amount withheld. This escrow payout was received over 1 year after the sale of the company. What is this payout considered? Is it a long term capital gains? We were paid out through the employer via the regular salary system (taxes taken) and it was labeled as “Other bonus” but it was clearly part of the escrow. Also, what about a milestone payout that falls under similar circumstance? Obrigado!
I am not a tax attorney so I am not sure. If it came through regular payroll as a bonus my guess is that it is not long term capital gains. If it is a lot of money I would talk to a CPA and / or a tax attorney.
Hi Max – Ótimo artigo! Obrigado. Eu tenho uma pergunta. I joined a company as one of the first 3 sales directors hired and was told in my offer letter I have 150,000 stock options pending board approval. I have now been working for the company for 18 months and have not received any documentation regarding my options. I am continually told that they will be approved at the next board meeting but that has not happened and I was recently told they would be approved after the next round of funding but that did not happen either. What is happening here and what is your recommendation? Thank you in advance for your assistance.
Something is not right. Sometimes the approval will be left out of a board meeting. With really bad luck you could be skipped twice. There is no good explanation for 18 months. The ‘best’ situation from a they-are-not-screwing-you perspective that I can think of is that the next round of funding will be a ‘down’ round and they are waiting to give you a lower price. But something is wrong with your company and I would be looking hard for something new. Sorry to be the bearer of bad news. If the CEO has an explanation that really makes sense feel free to share it and I will let you know what I think, maybe I have missed an innocent explanation but this does not sound right.
Thanks so much for confirming what I was thinking, Max. To my knowledge the board has met several times and our CEO repeatedly states the valuation of our company is going up so I have not heard about a down round. We have had the same original investors for a few years and have recently had a new influx of cash in the form of loan but are still seeking that outside VC investment. I may have another start up offer coming soon and this information will help when I make the decision whether to accept the new position. Thank you again for your help!!
Ainda tem uma pergunta? Pergunte o seu próprio!
Investimento Preferencial: US $ 20 milhões.
Propriedade preferencial: 80%
Propriedade comum: 20%
Consideração total de aquisição: US $ 40 milhões.
Direitos de Participação: Não Participante.
Pagamento preferido: o maior de US $ 20 milhões (liqu pref) OU 80% x US $ 40mm = US $ 32 milhões.
Pagamento Comum: 20% x $ 40mm = $ 8mm.
Direitos de Participação: Totalmente Participante.
Pagamento preferencial: $ 20 milhões (liqu pref) E 80% x $ 20mm (o que resta após o líquido pref) = $ 20mm + $ 16mm = $ 36mm.
Pagamento Comum: 20% x $ 20mm = $ 4mm.
Direitos de participação: importa.
Pagamento preferencial: 2 x US $ 20 milhões = US $ 40 milhões.
Pagamento Comum: $ 0.0mm.
Você não pode usar os mesmos argumentos para os dois - por razões óbvias: você está dentro ou está fora?
Se você não for insubstituível, associe-se à sua saída com liquidação e, em condições desfavoráveis, será uma tragédia que assustaria os funcionários mais novos. Há muito pouco que você pode pagar que é mais valioso do que investimento para uma empresa sem dinheiro, por isso certifique-se de negociar logo após boas notícias na frente de caixa. Os investidores têm limites de fidelidade muito mais baixos, então você pode querer aproveitar isso, mas passe muito gentilmente: eles são seus aliados. Considerando ir para outra empresa em seu portfólio poderia ser um pouco antiético se você fosse insubstituível, mas tê-los perceber que você é um talento raro e um bom contato de longo prazo pode ajudar lá.
Blog de Max Schireson.
Pensamentos sobre tecnologia e negócios de tecnologia.
Opções de estoque de inicialização explicadas.
Opções de compra de ações são uma grande parte do sonho de startups, mas muitas vezes elas não são bem compreendidas, mesmo pelos executivos seniores que obtêm grande parte de sua receita com opções de ações. Aqui está minha tentativa de explicar os principais problemas que os funcionários devem conhecer.
& # 8220; Opções de ações & # 8221; Como normalmente concedido, você tem o direito de comprar ações no futuro por um preço que é determinado hoje. O preço de exercício & # 8220; & # 8221; é o preço pelo qual você pode comprar as ações no futuro. Se, no futuro, a ação valer mais do que o preço de exercício, você poderá ganhar dinheiro com o "exercício" # 8221; as opções e comprar uma ação do preço de exercício. Por exemplo, você recebe 5.000 ações de ações a US $ 4 por ação em uma startup. Cinco anos depois, a ação vai para o público e, três anos depois, a ação chega a US $ 200 por ação. Você pode exercer a opção, pagando US $ 20.000 para comprar 5.000 ações que valem US $ 1.000.000. Parabéns, você fez um lucro antes de impostos de US $ 980.000, presumindo que você vendesse as ações imediatamente.
Há um problema pequeno, mas necessário: quando você recebe suas opções, elas não estão "vestidas". Isso significa que, se você sair da empresa uma semana depois de ingressar, perderá suas opções de ações. Isso faz sentido; caso contrário, em vez de ser um incentivo para ficar, eles serão um incentivo ao job-hop tanto quanto possível, coletando opções de tantos empregadores quanto possível. Então, quanto tempo você tem que ficar para manter suas opções? Na maioria das empresas, elas são adquiridas ao longo de quatro anos. A estrutura mais comum é o & # 8220; cliff & # 8221; após um ano, quando 25% de suas ações forem adquiridas, com as ações remanescentes adquirindo pro-rata mensalmente até chegar a quatro anos. Os detalhes variam de empresa para empresa; algumas empresas investem em opções ao longo de 5 anos e algumas em outros períodos de tempo, e nem todos os empregadores têm a falésia.
O penhasco está lá para proteger a empresa & # 8211; e todos os acionistas, incluindo outros funcionários & # 8211; de ter que dar ações a indivíduos que não fizeram contribuições significativas para a empresa.
Por que você deveria se preocupar se o cara que foi demitido depois de seis meses saiu com alguma opção ou não? Porque essas opções "diluem" # 8221; sua propriedade da empresa. Lembre-se de que cada ação representa uma parte da propriedade da empresa. Quanto mais ações houver, menor será o valor de cada uma. Digamos que quando você entrar na startup e receber 5.000 compartilhamentos, haverá 25.000.000 de ações no total. Você possui .02% & # 8211; dois pontos base & # 8211; da empresa. Se a empresa emitir outras 25.000.000 opções ou ações nos cinco anos subsequentes, para que haja 50.000.000 de ações no IPO (normalmente como parte da captação de recursos, incluindo uma oferta pública inicial ou para contratar funcionários), você terá o .01% & #. 8211; um ponto base ou metade da sua porcentagem original. Você teve 50% de diluição. Agora você ganha metade do mesmo valor da empresa.
Dito isso, a diluição não é necessariamente ruim. A razão pela qual o conselho aprova qualquer transação diluidora (levantando dinheiro, comprando uma empresa, dando opções de compra de ações) é que eles acreditam que isso fará as ações valerem mais. Se sua empresa arrecada muito dinheiro, você pode ter uma porcentagem menor, mas a esperança é que a presença desse dinheiro permita que a empresa execute uma estratégia que aumente o valor da empresa o suficiente para mais do que compensar a diluição e a o preço por ação sobe. Para uma dada transação (levantando US $ 10 milhões), menos diluente é a melhor, mas levantar US $ 15 milhões pode ser mais diluente do que levantar US $ 10 milhões, enquanto aumenta o valor de cada ação existente.
Isso nos leva ao número que é muito mais importante (embora seja menos impressionante) do que o número de compartilhamentos & # 8211; que parte da empresa você possui. Isso geralmente é medido em termos percentuais, o que acho lamentável porque muito poucos funcionários além dos fundadores acabam com um por cento ou mesmo meio por cento, então você está sempre falando sobre pequenas frações, o que é irritante. Eu acho que é mais útil medi-lo em pontos de base & # 8221; & # 8211; centésimos de um por cento. Independentemente das unidades, esse é o número que importa. Por quê?
Vamos dizer que a empresa A e a empresa B são, depois de muito trabalho duro, no valor de US $ 10 bilhões (semelhante à Red Hat, por exemplo). Há muito tempo, Albert foi trabalhar na empresa A e Bob foi trabalhar na empresa B. Albert ficou desapontado por ter apenas 5.000 opções, e elas foram concedidas a um preço de US $ 4 cada. Bob estava muito feliz & # 8211; ele recebeu 50.000 opções em apenas 20 centavos cada. Quem conseguiu o melhor negócio? Depende. Vamos dizer que a empresa A tinha 25.000.000 de ações em circulação, e a empresa B tinha 500.000.000 ações em circulação. Depois de muitos anos e 50% de diluição em cada caso, a empresa A tem 50.000.000 de ações em circulação, com valor de US $ 200 cada e Albert obteve um lucro de US $ 980.000 em suas opções (valor de US $ 1 milhão menos custo de exercício de US $ 20.000). A empresa B tem 1 bilhão de ações em circulação e, portanto, vale US $ 10 cada. As opções de Bob dão a ele um lucro de US $ 9,80 cada, para um lucro total de US $ 490.000. Então, enquanto Bob tinha mais opções a um preço de exercício mais baixo, ele ganhava menos dinheiro quando sua empresa alcançava o mesmo resultado.
Isso fica claro quando você olha a porcentagem de propriedade. Albert tinha 2 pontos base, Bob tinha um. Mesmo sendo menos ações, Albert tinha mais ações da única maneira que importava.
Quantas ações em circulação são & # 8220; normal & # 8221 ;? Em algum nível, o número é totalmente arbitrário, mas muitas empresas financiadas por capital de risco tendem a permanecer em um intervalo semelhante, que varia de acordo com o estágio. Como uma empresa passa por mais rodadas de financiamento e contrata mais funcionários, ela tenderá a emitir mais ações. A & # 8220; normal & # 8221; A startup em estágio inicial pode ter de 25 a 50 milhões de ações em circulação. Um estágio intermediário normal (receita significativa e várias rodadas de financiamento, muitos funcionários com uma equipe exec completa) pode ter de 50 a 100 milhões de ações em circulação. As empresas em fase final que estão prontas para o IPO geralmente têm mais de 100 milhões de ações em circulação. No final, o número real não importa, o que importa é o número total relativo ao tamanho da sua concessão.
Eu falei brevemente sobre as opções de exercício acima. Uma coisa importante a ter em mente é que o exercício de suas opções custa dinheiro. Dependendo do preço de exercício e do número de opções que você tem, pode custar um pouco de dinheiro. Em muitas empresas públicas, você pode fazer um exercício sem dinheiro & # 8221; ou "venda no mesmo dia" & # 8221; onde você se exercita e vende em uma transação e eles enviam a diferença. Na maioria das empresas privadas, não há uma maneira simples de fazer o equivalente. Algumas empresas privadas permitem que você ceda algumas das ações que você acabou de exercer de volta para a empresa pelo seu "valor justo de mercado" & # 8221; leia o contrato de opções para ver se isso é oferecido. Eu vou falar mais sobre o valor justo de mercado & # 8221; abaixo, mas por enquanto eu vou apenas dizer que, embora seja ótimo ter essa opção, não é sempre o melhor negócio se você tiver alguma alternativa.
A outra coisa realmente importante a considerar no exercício das opções de ações são os impostos, que discutirei mais adiante.
Na minha opinião, o processo pelo qual o valor de mercado justo & # 8221; de estoque inicial é determinado, muitas vezes produz avaliações em que seria muito difícil encontrar um vendedor e muito fácil de encontrar compradores & # 8211; em outras palavras, um valor que é muitas vezes inferior à definição intuitiva de valor de mercado da maioria das pessoas. O termo & ldquo; valor de mercado justo & # 8221; neste contexto, tem um significado muito específico para o IRS, e você deve reconhecer que esse significado técnico pode não corresponder a um preço pelo qual seria uma boa ideia vender suas ações.
Por que o IRS está envolvido e o que está acontecendo? A emissão de opção de compra de ações é regida, em parte, pela seção 409a do código de receita interna, que cobre a "compensação diferida não qualificada". # 8221; & # 8211; trabalhadores de compensação ganham em um ano que é pago em um ano futuro, além de contribuições para planos qualificados & # 8221; como planos 401 (k). As opções de ações representam um desafio para determinar quando a & # 8220; compensação & # 8221; é & # 8220; pago & # 8221 ;. É "pago" # 8221; quando a opção é concedida, quando se veste, quando você exerce a opção, ou quando você vende as ações? Um dos fatores que o IRS usa para determinar isso é como o preço de exercício se compara ao valor justo de mercado. Opções outorgadas abaixo do valor justo de mercado geram lucro tributável, com penalidade, sobre vesting. Isso é muito ruim; você não deseja uma fatura de imposto devida quando suas opções são cobradas, mesmo que você ainda não as tenha exercido.
As empresas geralmente preferem preços de exercício mais baixos para as opções & # 8211; isso torna as opções mais atraentes para os funcionários em potencial. O resultado disso foi um padrão de fato para definir o "valor justo de mercado" & # 8221; para fins de emissão de opções de inicialização em estágio inicial para ser igual a 10% do preço que os investidores realmente pagaram pelas ações (veja a discussão sobre classes de ações abaixo).
No caso de opções de ações iniciais, elas especificam que um método de avaliação razoável deve ser usado, o qual leva em consideração toda a informação material disponível. Os tipos de informações que eles analisam são valores de ativos, fluxos de caixa, o valor prontamente determinável de entidades comparáveis e descontos por falta de liquidez das ações. Obter a avaliação incorreta tem uma penalidade fiscal rígida, mas se a avaliação for feita por uma avaliação independente, há uma presunção de razoabilidade que é refutável somente quando a Receita Federal mostra que o método ou sua aplicação foi "extremamente irracional". # 8221 .
A maioria das startups possui ações ordinárias e preferenciais. As ações ordinárias são geralmente as ações que são de propriedade dos fundadores e empregados e as ações preferenciais são as ações que são de propriedade dos investidores. Então, qual é a diferença? Muitas vezes há três grandes diferenças: preferências de liquidação, dividendos e direitos dos acionistas minoritários, além de uma variedade de outras diferenças menores. O que isso significa e por que eles são comumente incluídos?
A maior diferença na prática é a preferência pela liquidação, o que geralmente significa que a primeira coisa que acontece com qualquer resultado de uma venda da empresa é que os investidores recuperam seu dinheiro. Os fundadores / funcionários só ganham dinheiro quando os investidores ganham dinheiro. Em alguns acordos de financiamento, os investidores obtêm um retorno de 2x ou 3x antes de qualquer outra pessoa ser paga. Pessoalmente tento evitá-los, mas eles podem fazer com que os investidores estejam dispostos a fazer o acordo por menos ações, então, em algumas situações, eles podem fazer sentido. Os investidores geralmente pedem um dividendo (semelhante a juros) sobre seu investimento, e geralmente há algumas cláusulas que exigem o consentimento do investidor para vender a empresa em determinadas situações.
Os funcionários normalmente recebem opções sobre ações ordinárias sem os dividendos ou preferência de liquidação. As ações, portanto, não valem tanto quanto as ações preferenciais que os investidores estão comprando.
Essa é, evidentemente, a grande questão. Se o valor de mercado justo & # 8221; não corresponde ao preço em que você acha razoavelmente que poderia encontrar um comprador, como você estimar o valor real de suas opções?
Se a sua empresa levantou dinheiro recentemente, o preço que os investidores pagaram pelas ações preferenciais pode ser um ponto de referência interessante. Minha experiência tem sido que um preço de mercado (não o valor de mercado justo e oficial, mas o que os VCs vão pagar) por ações ordinárias é frequentemente entre 50% e 80% do preço que os investidores pagam por ações preferenciais. Quanto maior a probabilidade de a empresa ser vendida a um preço baixo o suficiente para que os investidores se beneficiem de sua preferência, maior será a diferença entre o valor das ações preferenciais e as ações ordinárias.
A outra coisa a ter em mente é que a maioria das pessoas não tem a oportunidade de comprar ações preferenciais pelo preço que os VCs estão pagando. Muitos investidores muito sofisticados estão felizes em ter a oportunidade de investir em fundos de capital de risco de primeira linha, onde os executivos de empresas aceitam de 1 a 2% ao ano em taxas de administração e de 25 a 30% dos lucros. Ao todo, eles estão ganhando cerca de 60% do que compraram diretamente. Assim, quando um VC adquire ações ordinárias a, digamos, 70% do preço das ações preferenciais, esse dinheiro vem de um fundo de pensão ou doação de uma universidade que recebe 60% ou mais do valor dessa ação ordinária. Então, na verdade, um investidor inteligente está indiretamente comprando suas ações ordinárias por cerca do preço que os VCs pagam pela preferência.
Se não houve uma rodada recentemente, é mais difícil avaliar suas ações. O valor justo de mercado pode ser o ponto de referência mais próximo disponível, mas eu tenho visto casos em que é 30-60% (e ocasionalmente mais) abaixo do que um investidor racional pode pagar por suas ações. Se é a única coisa que você tem, você pode supor que um valor de mercado estaria mais próximo de 2x o "valor justo de mercado", embora essa lacuna tenda a diminuir à medida que você se aproxima de um IPO.
Expiração e término.
As opções normalmente expiram após 10 anos, o que significa que, nesse momento, elas precisam ser exercitadas ou se tornam inúteis. As opções também terminam normalmente 90 dias depois de você sair do seu trabalho. Mesmo se eles estiverem investidos, você precisa exercê-los ou perdê-los nesse ponto. Ocasionalmente isto é negociável, mas isso é muito raro & # 8211; Não conte com a possibilidade de negociar isso, especialmente depois do fato.
A exigência de exercer no prazo de 90 dias após a rescisão é um ponto muito importante a considerar na elaboração de planos financeiros e de carreira. Se você não for cuidadoso, você pode acabar preso por suas opções de ações; Vou discutir isso abaixo.
Ocasionalmente, as opções de ações terão o & # 8220; aceleração & # 8221; idioma onde se baseiam em certos eventos, mais freqüentemente uma mudança de controle. Essa é uma área de assimetria na qual os executivos seniores têm essas disposições com muito mais frequência do que os funcionários de base. Existem três tipos principais de aceleração: aceleração na mudança de controle, aceleração na terminação e "disparo duplo" & # 8221; aceleração que requer tanto uma mudança de controle quanto sua rescisão para acelerar seu vesting. A aceleração pode ser completa (todas as opções não investidas) ou parcial (digamos, um ano adicional de vesting ou 50% de ações não investidas).
Em geral, acho que a linguagem de aceleração faz sentido em dois casos específicos, mas não faz sentido na maioria dos outros casos: primeiro, quando um executivo é contratado em grande parte para vender uma empresa, ele fornece um incentivo apropriado para isso; segundo, quando um executivo está em um papel que é a) passível de ser despedido quando a empresa é vendida eb) estaria muito envolvido na venda, caso ocorra, pode eliminar parte da penalidade financeira pessoal que o executivo pagará e fará. É mais fácil para eles se concentrarem em fazer seu trabalho. Neste segundo caso, acho que uma aceleração parcial, double trigger é justa. No primeiro caso, a aceleração total pode ser chamada de trigger único.
Na maioria dos outros casos, acho que os executivos devem ser pagos quando e como todos os outros são pagos. Alguns executivos acham que é importante obter alguma aceleração na rescisão. Pessoalmente eu não & # 8217; t & # 8211; Eu prefiro concentrar minha negociação na obtenção de um acordo favorável no caso em que eu for bem-sucedido e permanecer por um tempo.
Quantas opções de ações você deve obter é largamente determinada pelo mercado e varia um pouco de posição para posição. Esta é uma área difícil sobre a qual obter informações e eu tenho certeza que tudo o que eu digo será controverso, mas eu farei o meu melhor para descrever o mercado como eu acredito que existe hoje. Isso é baseado na minha experiência em duas startups e uma grande empresa analisando cerca de mil opções de doações, bem como conversando com VCs e outros executivos e analisando pesquisas de compensação.
Primeiro, falarei sobre como penso sobre os tamanhos das concessões e, em seguida, dou algumas diretrizes específicas para diferentes posições.
Acredito firmemente que a maneira mais sensata de pensar sobre os tamanhos das concessões é pelo valor em dólar. Como discutido acima, o número de compartilhamentos não faz sentido. Embora a porcentagem da empresa seja melhor, ela varia enormemente com base no cenário, por isso é difícil dar conselhos amplamente aplicáveis: 1 ponto base (0,01%) do Google ou Oracle é uma grande concessão para um executivo sênior, mas ao mesmo tempo é uma pequena subvenção para um funcionário de nível básico em uma startup bruta de série A; pode ser uma concessão justa para um funcionário de nível médio em uma inicialização pré-IPO. O valor em dólar ajuda a contabilizar tudo isso.
Em geral, para esses propósitos, eu não usaria o valor de mercado justo de 409a & # 8220 ;. Eu usaria a) o valor na rodada mais recente se houvesse um ou b) o preço pelo qual você acha que a empresa poderia arrecadar dinheiro hoje se não houvesse uma rodada recentemente.
O que eu verificaria então seria o valor das ações que você está adquirindo a cada ano, e quanto elas valem se a ação fizer o que os investidores gostariam que ela fizesse “# 8211; aumenta em valor 5-10 vezes. Este não é um resultado garantido, nem é uma fantasia selvagem. Quais devem ser esses valores? Isso varia de acordo com o nível de trabalho:
Nível de entrada: espere que o valor anual de aquisição seja comparável a um pequeno bônus anual, provavelmente entre US $ 500 e US $ 2.500. Espere o valor total se a empresa fizer bem para ser suficiente para comprar um carro, provavelmente $ 25-50k.
Experiente: os funcionários mais experientes irão se enquadrar nessa faixa. Espere que o valor anual de aquisição seja comparável a um bônus anual moderado, provavelmente de US $ 2.500 a US $ 10.000, e o valor total, se a empresa fizer bem, seja suficiente para um pagamento adiantado em uma casa no Vale do Silício ou para colocar uma criança na faculdade. provavelmente em torno de $ 100-200k.
Gerenciamento de chaves: contratações em nível de diretoria e um punhado de colaboradores individuais muito experientes tipicamente se enquadram nesse intervalo. Os primeiros funcionários importantes geralmente acabam nessa faixa à medida que a empresa cresce. Espere que o valor anual de aquisição seja como um grande bônus, provavelmente entre US $ 10 e US $ 40 mil e o valor total, se a empresa se sair bem, para pagar a hipoteca do Vale do Silício, provavelmente entre US $ 500 e US $ 1 milhão.
Executivo: VP, SVP e CxO (excluindo CEO). Espere que o valor anual de aquisição seja uma fração significativa do seu pagamento, provavelmente US $ 40-100k +, e o valor se a empresa fizer um bom lucro de US $ 1 milhão ou mais.
Para aqueles que lêem isso de longe e sonham com as riquezas do Vale do Silício, isso pode parecer decepcionante. Lembre-se, no entanto, que a maioria das pessoas terá cerca de 10 empregos em uma carreira de 40 anos em tecnologia. Ao longo dessa carreira, 4 sucessos (menos da metade) em níveis crescentes de senioridade pagarão seus empréstimos estudantis, fornecerão seu pagamento inicial, colocarão uma criança na faculdade e, por fim, pagarão sua hipoteca. Não é ruim quando você considera que você vai fazer um salário também.
Você deve absolutamente perguntar quantas ações estão pendentes & # 8220; totalmente diluídas & # 8221;. Seu empregador deve estar disposto a responder a essa pergunta. Eu não colocaria nenhum valor nas opções de ações de um empregador que não responderia de forma clara e inequívoca. & # 8220; Totalmente diluído & # 8221; significa não apenas quantas ações são emitidas hoje, mas quantas ações estariam em circulação se todas as ações que foram autorizadas forem emitidas. Isso inclui opções de ações para funcionários que receberam também ações que foram reservadas para emissão para novos funcionários (um pool de ações é normal reservar um pool com captação de recursos para que os investidores possam saber quantos ações adicionais que eles deveriam esperar ter emitido), e outras coisas como garantias que poderiam ter sido emitidas em conexão com empréstimos.
Você deve perguntar quanto dinheiro a empresa tem no banco, a rapidez com que está queimando dinheiro e a próxima vez que espera arrecadar fundos. This will influence both how much dilution you should expect and your assessment of the risk of joining the company. Don’t expect to get as precise an answer to this question as the previous one, but in most cases it is reasonable for employees to have a general indication of the company’s cash situation.
You should ask what the strike price has been for recent grants. Nobody will be able to tell you the strike price for a future grant because that is based on the fair market value at the time of the grant (after you start and when the board approves it); I had a friend join a hot gaming company and the strike price increased 3x from the time he accepted the offer to the time he started. Changes are common, though 3x is somewhat unusual.
You should ask if they have a notion of how the company would be valued today, but you might not get an answer. There are three reasons you might not get an answer: one, the company may know a valuation from a very recent round but not be willing to disclose it; two the company may honestly not know what a fair valuation would be; three, they may have some idea but be uncomfortable sharing it for a variety of legitimate reasons. Unless you are joining in a senior executive role where you’ll be involved in fundraising discussions, there’s a good chance you won’t get this question answered, but it can’t hurt to ask.
If you can get a sense of valuation for the company, you can use that to assess the value of your stock options as I described above. If you can’t, I’d use twice the most recent “fair market value” as a reasonable estimate of a current market price when applying my metrics above.
One feature some stock plans offer is early exercise. With early exercise, you can exercise options before they are vested. The downside of this is that it costs money to exercise them, and there may be tax due upon exercise. The upside is that if the company does well, you may pay far less taxes. Further, you can avoid a situation where you can’t leave your job because you can’t afford the tax bill associated with exercising your stock options (see below where I talk about being trapped by your stock options).
If you do early exercise, you should carefully evaluate the tax consequences. By default, the IRS will consider you to have earned taxable income on the difference between the fair market value and the strike price as the stock vests. This can be disastrous if the stock does very well. However, there is an option (an “83b election” in IRS parlance) where you can choose to pre-pay all taxes based on the exercise up front. In this case the taxes are calculated immediately, and they are based on the difference between the fair market value and the strike price at the time of exercise. If, for example, you exercise immediately after the stock is granted, that difference is probably zero and, provided you file the paperwork properly, no tax is due until you sell some of the shares. Be warned that the IRS is unforgiving about this paperwork. You have 30 days from when you exercise your options to file the paperwork, and the IRS is very clear that no exceptions are granted under any circumstances.
I am a fan of early exercise programs, but be warned: doing early exercise and not making an 83b election can create a financial train wreck. If you do this and you are in tax debt for the rest of your life because of your company’s transient success, don’t come crying to me.
What if you leave? The company has the right, but not the obligation, to buy back unvested shares at the price you paid for them. This is fair; the unvested shares weren’t really “yours” until you completed enough service for them to vest, and you should be thankful for having the opportunity to exercise early and potentially pay less taxes.
Taxes on stock options are complex. There are two different types of stock options, Incentive Stock Options (ISOs) and Non-Qualified Stock Options which are treated differently for stock purposes. There are three times taxes may be due (at vesting, at exercise, and at sale). This is compounded by early exercise and potential 83b election as I discussed above.
This section needs a disclaimer: I am not an attorney or a tax advisor. I will try to summarize the main points here but this is really an area where it pays to get professional advice that takes your specific situation into account. I will not be liable for more than what you paid for this advice, which is zero.
For the purposes of this discussion, I will assume that the options are granted at a strike price no lower than the fair market value and, per my discussion on early exercise, I’ll also assume that if you early exercise you made an 83b election so no taxes are due upon vesting and I can focus on taxes due on exercise and on sale. I’ll begin with NSOs.
NSO gains on exercise are taxed as ordinary income. For example, if you exercise options at a strike price of $10 per share and the stock is worth $50 per share at the time of exercise, you owe income taxes on $40 per share. When you sell the shares, you owe capital gains (short or long term depending on your holding period) on the difference between the value of the shares at exercise and when you sell them. Some people see a great benefit in exercising and holding to pay long term capital gains on a large portion of the appreciation. Be warned, many fortunes were lost doing this.
O que pode dar errado? Say you have 20,000 stock options at $5 per share in a stock which is now worth $100 per share. Parabéns! But, in an attempt to minimize taxes, you exercise and hold. You wipe out your savings to write a check for $100,000 to exercise your options. Next April, you will have a tax bill for an extra $1.9 million in income; at today’s tax rates that will be $665,000 for the IRS, plus something for your state. Not to worry though; it’s February and the taxes aren’t due until next April; you can hold the stock for 14 months, sell in April in time to pay your taxes, and make capital gains on any additional appreciation. If the stock goes from $100 to $200 per share, you will make another $2 million and you’ll only owe $300,ooo in long term capital gains, versus $700,000 in income taxes. You’ve just saved $400,000 in taxes using your buy-and-hold approach.
But what if the stock goes to $20 per share? Well, in the next year you have a $1.6 million capital loss. You can offset $3,000 of that against your next years income tax and carry forward enough to keep doing that for quite a while – unless you plan to live more than 533 years, for the rest of your life. But how do you pay your tax bill? You owe $665,000 to the IRS and your stock is only worth $400,000. You’ve already drained your savings just to exercise the shares whose value is now less than the taxes you owe. Congratulations, your stock has now lost you $365,000 out of pocket which you don’t have, despite having appreciated 4x from your strike price.
How about ISOs? The situation is a little different, but danger still lurks. Unfortunately, ISOs can tempt you in to these types of situations if you’re not careful. In the best case, ISOs are tax free on exercise and taxed as capital gains on sale. However, that best case is very difficult to actually achieve. Por quê? Because while ISO exercise is free of ordinary income tax, the difference between the ISO strike price and value at exercise is treated as a “tax preference” and taxable under AMT. In real life, you will likely owe 28% on the difference between strike price and the value when you exercise. Further, any shares which you sell before you have reached 2 years from grant and 1 year from exercise are “disqualified” and treated as NSOs retroactively. The situation becomes more complex with limits option value for ISO treatment, AMT credits, and having one tax basis in the shares for AMT purposes and one for other purposes. This is definitely one on which to consult a tax advisor.
If you’d like to know if you have an ISO or NSO (sometimes also called NQSO), check your options grant paperwork, it should clearly state the type of option.
Illiquidity and being trapped by stock options.
I’ll discuss one more situation: being trapped by illiquid stock options. Sometimes stock options can be “golden handcuffs”. In the case of liquid stock options (say, in a public company), in my opinion this is exactly as they are intended and a healthy dynamic: if you have a bunch of “in-the-money” options (where the strike price is lower than the current market price), you have strong incentive to stay. If you leave, you give up the opportunity to vest additional shares and make additional gains. But you get to keep your vested shares when you leave.
In the case of illiquid options (in successful private companies without a secondary market), you can be trapped in a more insidious way: the better the stock does, the bigger the tax bill associated with exercising your vested options. If you go back to the situation of the $5 per share options in the stock worth $100 per share, they cost $5 to exercise and another $33.25 per share in taxes. The hardest part is the more they’re worth and the more you’ve vested, the more trapped you are.
This is a relatively new effect which I believe is an unintended consequence of a combination of factors: the applicability of AMT to many “ordinary” taxpayers; the resulting difficulties associated with ISOs, leading more companies to grant NSOs (which are better for the company tax-wise); the combination of Sarbanes-Oxley and market volatility making the journey to IPO longer and creating a proliferation of illiquid high-value stock. While I am a believer in the wealthy paying their share, I don’t think tax laws should have perverse effects of effectively confiscating stock option gains by making them taxable before they’re liquid and I hope this gets fixed. Until then to adapt a phrase caveat faber .
Can the company take my vested shares if I quit.
In general in VC funded companies the answer is “no”. Private equity funded companies often have very different option agreements; recently there was quite a bit of publicity about a Skype employee who quit and lost his vested shares. I am personally not a fan of that system, but you should be aware that it exists and make sure you understand which system you’re in. The theory behind reclaiming vested shares is that you are signing up for the mission of helping sell the company and make the owners a profit; if you leave before completing that mission, you are not entitled to stock gains. I think that may be sensible for a CEO or CFO, but I think a software engineer’s mission is to build great software, not to sell a company. I think confusing that is a very bad thing, and I don’t want software engineers to be trapped for that reason, so I greatly prefer the VC system.
I also think it is bad for innovation and Silicon Valley for there to be two systems in parallel with very different definitions of vesting, but that’s above my pay grade to fix.
What happens to my options if the company is bought or goes public?
In general, your vested options will be treated a lot like shares and you should expect them to carry forward in some useful way. Exactly how they carry forward will depend on the transaction. In the case of an acquisition, your entire employment (not just your unvested options) are a bit up in the are and where they land will depend on the terms of the transaction and whether the acquiring company wants to retain you.
In an IPO, nothing happens to your options (vested or unvested) per se, but the shares you can buy with them are now easier to sell. However there may be restrictions around the time of the IPO; one common restriction is a “lockup” period which requires you to wait 6-12 months after the IPO to sell. Details will vary.
In a cash acquisition, your vested shares are generally converted into cash at the acquisition price. Some of this cash may be escrowed in case of future liabilities and some may be in the form of an “earn-out” based on performance of the acquired unit, so you may not get all the cash up front. In the case of a stock acquisition, your shares will likely be converted into stock in the acquiring company at a conversion ratio agreed as part of the transaction but you should expect your options to be treated similarly to common shares.
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It’s hard to sell a company if there is a log of acceleration. That could actually be counterproductive for option holders.
Agree, that’s one of the reasons I think it is warranted only in a few specific cases.
What happens to unvested stock in the case of a cash/stock acquisition? (for a generic Silicon Valley VC funded startup)
Lot of it depends (including whether they keep the employees at all). But often they are converted to options in the new company.
What happens if the company is bought before I was granted my options?
In my employment agreement the granting is subject to board approval and that never happened.
I got new options of the acquiring company (at a SHITTY strike price ) , anything to do about that?
Probably nothing to do about it besides quit (though I am not a lawyer and you might ask one if there is a lot of money involved). How long did you work there without the options being granted? Up to a few months is normal, past that is unusual.
I worked there for 6months part time and another 6months full-time.
Basically the board of directors probably didn’t meet to approve the options of the new employees and when it did it discussed the buyout.
I assume that they said to themselves, let’s not grant these options and grant options of the buying company instead.
Ai Can you ask/have you asked asked a few questions: 1. Did the board meet during the time after you accepted the offer and started and prior to the acquisition and how many times? Did it review your proposed grant at the meetimg and if not why not? If it reviewed your proposed grant why did it not approve it? 2. On what basis was your new grant determined? Did they convert the grant in your offer letter based on the terms of the purchase or did they just give you stock in the acquiring company as a new employee of that company?
I am assuming your options dated from joining full time, so it was a 6 month delay, not a year?
While I might be popular online for saying they hosed you and they’re evil, situations like this can be complex. It is possible/likely that the board was in serious discussions about an aquisition for a number of months before it occured. This could have been ongoing from the time you joined, or started shortly afterwards but have been in progress at the first board meeting after you joined.
If this was the case, the board may have been in a very hard situation with respect to valuing the stock options. If the acquisition discussion was credible enough, it would be material information that could force a re-evaluation of the fair market value of the shares. To avoid the risk of grantees (you) being liable for huge tax penalties, they would likely have wanted to retain a third party to do the valuation. Hiring the firm takes time, the valuation takes time, and board approval of the valuation takes time. During that time, the discussions might gave progressed – maybe they got a second higher offer. That could restart the clock.
In any case, even if they were able to complete the valuation and grant the options, the valuation may well have been quite similar to the price offered by the acquirer and those options might have been converted to options in the acquiring company at a similar strike price to the price of your grant. So quite possibly what is at issue is whether your grant could have been granted at a somewhat (say 20 or 30%) lower strike price.
If the value of the stock underlying your new grant (number of shares times strike price) is well in to the six figures or beyond, it may be worth consulting an attorney just in case, but my guess (and I am not a lawyer) is they are going to say that you just had bad timing. If it’s five figures or less, I don’t think its worth spending the legal fees for a small chance at a medium settlement.
What I described is the way this happened in completely good faith with everyone involved trying to do what’s fair and legal for you in a complex situation. That’s not always the case, but I’d start by asking.
You’re thinking the same as I do.
Since the company have been planning an IPO and this buyout came in I’m sure the board have met several times since I joined.
I too think that I should have gotten either an approval or decline of my options , neither was delivered to me, hence I believe this is a direct violation of my employment agreement.
My options never materialized, I basically got the buying company options at a strike price which is the share price in the day of the buyout which means zero profit!
I’m getting really pissed here and I think that this might even have legal implications.
This is 5 figures but I think that the determining factor is that I think this isn’t completely legal , I don’t think they can just ignore this term of the contract just because they’re busy or not sure about the price.
My guess is that you make some enemies with this post. It is clearly to the advantage of the company that the terms of stock options and vesting periods remain opaque.
What if there were liquidity in options? That would be interesting, and wildly dangerous, I imagine, because such liquidity would be so predominantly speculative in the absence of knowledge of company fundamentals.
Possible I suppose, but.
Possible I suppose, but only ill advised companies and VC’s that I’m happy to stay away from.
A successful growing company grants millions of dollars worth of options each year, and I think it works to their advantage to have people understand their value and thus make rational decisions about them.
Re: liquidity, the illiquidity of the _options_ stems from the fact that they are subject to cancellation if you quit as well as some specific contractual terms. Your _shares_ should you exercise your stock can sometimes be liquid even before the company is public. That is certainly the case for well known private companies (eg, Facebook), and sometimes is the case for smaller companies as well; question is can you find an investor who wants to buy the shares.
The biggest issue in liquidity of pre-IPO shares is the company’s cooperation in allowing a potential buyer to see the books. Often this will be restricted for current employees but more open for ex-employees. This can be very complex and the SEC has rules about shareholder counts, how the shares can be offered etc.
Hello, I just received an employee stock option that would allow me to buy shares within five years. Do I have to buy the shares right away? or wait until my company goes public or another company (that is currently in stock trading) will aquire us? If I buy the shares now and after 2 years I left the company or they fired me, do I still have the right for my shares? If still have the right for my shares then I’m willing to expend few thousand dollars for it. I really appreciate your advice.
Really sorry for the delayed reply. Usually you have all 5 years. Usually you can buy some now and some later. Tax issues vary, research them carefully.
well written, and easy to understand…thanks very much.
Well written for sure. An scenario I’d appreciate your feedback on. A small company was bought by a larger one and the employee was given her recalculated options. There are 2 years left on this employees vesting schedule. Without any prior negotiation at time of hire regarding acceleration of vesting, is there any way receive acceleration in case of termination?
Unfortunately for the subject of your story, probably not.
Most folks in small companies are employed “at will”. That means that their employer is under no obligation to keep them employed until the end of their vesting period or for any other reason. They can be fired because of a lack of work for them to do, a desire to hire someone less expensive to do the same job, a desire to restructure and eliminate their job, or because the company is unsatisfied with their work. The same holds true once they’ve joined the big company.
Sometimes companies will offer “packages” to employees that they lay off. This is not done out of obligation but rather to help retain the employees who aren’t being laid off – who might otherwise fear being laid off with nothing and instead take another job. By treating the terminated employees nicely, the remaining employees are less likely to panic.
Normally one should expect to vest only as long as their employment continues. The most common exceptions where acceleration can make sense but usually needs to be negotiated up front are positions where the individual is directly involved in selling the company (CEO, CFO etc) and/or is very likely not to be retained after the acquisition.
How do unvested options work post-IPO? Is an IPO an event that can trigger acceleration, or is this reserved for acquisition typically? Can unvested shares be canceled post-IPO?
Usually they continue vesting through the IPO as normal, with restrictions on selling them for some period of time (
6 months is normal) post-IPO.
It is very unusual for an IPO to trigger acceleration. While it is easy to see an IPO as a destination for a startup, it is really the beginning of a much longer journey. An IPO means that a company is ready to have a broader base of shareholders – but it needs to continue to deliver to those shareholders, thus it needs to continue to retain its employees.
Most options are not cancelable other than by terminating the optionee’s employment or with the optionee’s consent. Details vary and there are some corner cases, but the typical situation is if the company doesn’t want you to collect any further options they’ll fire you. Occasionally companies will give people the option to stay for reduced option grants but that is unusual.
By the way when I say “most” or “usually” I am referring to the typical arrangements in startups funded by reputable silicon-valley-type VCs. Family businesses and business that exist outside that ecosystem of startup investors, lawyers, etc may have different arrangements. If you read some of my posts on private equity owned companies and options, you’ll see that they have a somewhat different system for example.
What happens if you exercise pre-IPO stock options (within 90 days of quitting) and the company never goes public?
Then you own shares that may be hard to sell. The company may be acquired and you might grt something for your shares, or in some circumsances you can sell shares of private companies. But the money you pay to exercise the shares is at risk.
Thank you Max! This entire article and your answer to my question has been the best write up on this topic that I could find on the Internet. Obrigado novamente!
Great summary Max, i found it very useful.
wow i personally know someone (well i guess many people do) who lost everything in the bubble and still owed $$$ in tax due to the exercise and hold you described here. he went bankrupt and had to flee out of state but still writes a hefty check to the IRS each and every month.
Excellent…very well explained. Thanks Max.
Ótimo artigo! I’m trying to learn more about employee stock options. I was granted options 4 years ago and now I’m being laid off so I wanted to make sure I’m taking advantage of the benefits (if there are any.) I received the agreement, signed it, and got a copy of it back signed by the corporate secretary. I never received any other documentation since. The company isn’t doing well, but the options were priced at a penny in the agreement. Should I contact HR or a financial advisor? Just slightly concerned since the company seems a little secretive to me. I have been with them for over 6 years. Thoughts are appreciated 🙂
Sorry for the delay in getting back to you.
Usually after you sign your options agreement, there’s no further paperwork until you exercise.
Usually you have 90 days after leaving until you have to exercise the options, but this varies from plan to plan and the details should be in the paperwork you signed. HR or Finance should be able to help you exercise your options if you want to; If you exercise you’ll pay a penny per share and the shares turn out to be worthless or may turn out to be valuable.
If your instinct is that the company isn’t doing well and the shares will likely not be worth much, the question is whether its worth a gamble. If for example you have 20,000 options at $.01 each, its only $200 to exercise them so it may be worth it even if the odds are against you.
One data point that you will need to finalize your decision is the FMV (fair market value) of the shares for tax purposes. The company should be willing to tell you this; if it is quite a bit more than a penny some taxes will be due on exercise but the shares are more likely to be worth something.
If you can get more specifics about number of shares outstanding, debt, preferences, revenue, cash etc a financial advisor may be able to help; without that they’d would probably be shooting in the dark.
Eu espero que isso ajude,
Thanks Max, I really appreciate it. After reading your article and doing some research I found out I was looking at the par value, not the exercise price. So in my case, I would be severely underwater. Agora eu entendo! Thanks again for sharing your knowledge!
Max, thanks for the great info. I am considering joining a tech startup and wonder if there are enough benefits for both the company and myself for me to be brought on as an independent contractor vs. an employee? Any info you have or can refer me to would be helpful. Obrigado!
Desculpe o atraso. There are quite a few qualifications that you must meet to work as an independent contractor; I don’t have them handy but a quick google search might turn them up. If you plan to work there full time for the long term, usually employment makes the most sense – though sometimes companies have more leeway to pay much more money to contractors; if that’s the case and they’re willing to do it and you qualify, it might make sense. But even then, you will probably not get benefits or stock options. Boa sorte com sua decisão.
Why shareholder needs to pay again 50% the difference between of subscription price Convertible Prefered Stock (pre-IPO) and common stock IPO price?
The terms of preferred stock vary, not only from company to company but also across different series of preferred stock in a company. I am not quite sure what you’re referring too but it may well be specific to the structure of those securities at your company. A bit of context could help, but the answer is probably going to be some form of “because that’s the rule defined for this form of stock in this situation”.
Very informative post, thank you for sharing! May I contact you off-post for questions?
Desculpe o atraso. I may not have time to answer but feel free to try me first initial last name at gmail.
Hi Max – thanks for the insightful article. I work for a private company (PE owned) that’s expecting an IPO in about 12 months. Half of my stock options have vested. I got them at a price of 3 and the current valuation is now at 4.5 or so. What happens if I leave AFTER the IPO but BEFORE the employee lock-up ends. Do I get to leave with my vested (as of departure date) options or do I need to pay the company to buy them at the granted strike PLUS pay the tax on the gains etc. Thanks.
Putting aside any idiosyncrasies of your specific options agreement, typically you have 90 days after departure to exercise. So within that 90 days you need to pay the strike price and you incur a tax liability. Keep in mind the stock could decline before you can sell, so its not just acash flow exposure, you may wind up selling for less than you paid to exercise. Waiting until you are less than 90 days from the lockup ending reduces risk a lot, but I don’t know the opportunity cost to you.
Obrigado pela ajuda! Pergunta & # 8211; I purchased stock and then my company got purchased. by another private company. My understanding is that the main investors lost money on their sale (they sold below what they put into the company). I had common shares, is that why I haven’t seen any payout?
Also, the purchaser then got purchased by a public company…how crappy.
Sorry to hear you didn’t get anything for your shares. Without knowing all the details, it sounds like you’re correct; typically if there isn’t enough to repay the investors, the common shareholders won’t get anything.
Max thank you for the terrific article.
Do you have any experience with seeing employees receive additional option grants with promotions? Is this common or only at key-level positions? I joined the sales team of a 50-person startup at an entry level position about 2 years ago. We’re now at about 100 employees and I’ve been promoted about 1.5 times (first from a lead-gen position to an Account Executive, then after good performance had my quota raised and salary increased, though no title change). I haven’t received any additional option grants but also haven’t asked. Is it reasonable to ask?
Also, say they’ll agree to give me more, what are typical steps that have to happen until they’re officially granted? Is this something that needs to be discussed at the next board meeting, or does the CEO/Exec team have discretion to do this on an ad-hoc basis?
Ótima pergunta. It is common but not universal to receive additional grants with significant promotions, but there is wide variety in how these are handled:
& # 8211; Some companies give them shortly after the promotion (approvals take some time)
& # 8211; Some companies review follow-on grants on a semi-annual or annual basis; people who are promoted are typically good candidates to get them.
& # 8211; Some companies (unfortunately, in my view) operate on a squeaky wheel basis where they are only given when people complain.
I would ask your employer what the process is to ensure that your stock is commensurate with your current contribution to the company. Without knowing all the details, it sounds like it may not be given the progress you’ve made.
One situation to consider is that if the value of the company has increased dramatically, it is possible that the grant you got earlier in the company’s history for a more junior position is larger than the grant someone in your current position would get today. For example, if when you joined an entry level employee received 1000 shares and an account exec received 2500, but today an entry level employee receives 250 shares and an account exec receives 600. If this is the case, many companies would not give you additional shares to go with the promotion (but would increase your salary). While this example may sound exaggerated, if the company has twice as many employees, grants may be half the size per employee – often the board will think about how much stock should go to all employees as a whole per year, and now there are twice as many to share the same number of shares. Also often the grants for different roles aren’t nearly as precise as I described, but the principle remains valid even if the grants per level are ranges.
Options grants almost always have to be approved by the board.
Good luck; it sounds like you’re doing well at a growing company so congratulations.
Thanks again Max, very helpful.
i got an offer to work for a startup on a part-time basis keeping my full time job at my current employer. i will be paid only in the form of stock options (0.1%). not sure if this is a good deal.
I’d look at it 2 ways:
1. What is the startup ‘worth’? If its an unfunded early stage idea it may be something like $1-2 million, in which case .1% is $1-2k for example. Of course if the ‘startup’ is Twitter its worth a lot more. In any case whatever that value is, is it fair compensation for your time? How long do you have to stay to vest the options? 1 month? 1 year? 4 years? And how much work are you expected to do?
2. How does your stake compare to other participants and their contribution? Did your two roommates found it in their garage two weeks ago and they’ll each own 49.95 to your 0.1? Or are there 100 full time employees sharing 50% and investors share the rest?
the startup is in a very early stage with about 13 employees. the options vest at 1/48th of the total shares every month for 4 years. i think i need ask more details before i start the work.
this is my first time working for a startup so i am not very clear..
I am new to this whole equity & stock options.. your article is the only basis for my reasoning.. I need your help! My company is a Green Sustainable clothes recycling company.. relatively new Green field.. not sure what are the general vesting schedules like.. any advice?
we negotiated $1k / week + 5% vested equity.. initially when i started back in Oct/ Nov.. now that its time to draft the actual contract, they are saying how 1%/ year vesting is standard, while for whatever reason i thought the 5% would vest over 1-2 years.. how do i approach this? as of now company is worth $1 million. we are constantly loosing $, it will take at least 6 months - 1 year until we start being profitable..
does the evaluation of what i think im worth from what the company is worth today, or based on projections of what we will make in the future?
we only have 1 kind of stock.. any provisions you are recommending to include?
can i ask for a provision to protect myself from taxes and have it be deducted from my equity instead of paying for it our of my pocket?
Thank you soo much.
Desculpe o atraso. I think 4 years is most common, maybe 5 next most, 1-2 years is unusual. I am not sure what else you are asking. If you are asking about taxes on the equity, if it is options there is typically no tax on vesting if the plan is set up properly (which will almost certainly require an attorney).
The IRS will require cash for your tax payments, they don’t accept stock 🙂
How often should a company revalue their privatly held stock options? Any guidelines around that in the accounting standards?
I am not a tax lawyer but I think for tax purposes the valuations are good for a year. If things change (eg, financing, offer to buy the company, or other significant events) you may want to do it more frequently, and for rapidly growing companies that might go public soon you may want to do it more frequently.
Terrific article thank you !
With startups becoming a global tendency, it becomes complicated to create one model that fits all.
Any thoughts on adjusting vesting schedules, cliff periods and accelerations to ventures occurring in high-risk geographical areas? i. e High-risk understood as high volatility & political unrest.
One thing that I do see adjusted globally is some of the details to fit local tax laws – even US-based companies have to administer their plans differently in different jurisdictions.
I am not expert at all but it may make sense to adjust some other parameters; I don’t know how much they vary from the US. Maybe a reader knows??
Great article, now for my question. Been working for a company 3 years, been vested, for example, 100,000 shares, at 5 cents a share. Leaving company, It looks like the period to exerci se, buying the shares will have about 7 more years. When I leave, how long does one usually, have to buy the shares, if they choose. I am a little confused about the 90days mentioned ealier in the article.
Usually the option period is 10 years but only while you are employed. When you leave, the unvestef options go away and you have 90 days to exercise the vested options. Of course it depends on your specific option plan which may be completely different.
I have some vested preferred shares. I’m not sure if or when the company will be acquired or go IPO. What are my options to liquidate them before any event ?
Your option may be to find someone who wants to buy the stock in a private transaction with limited data. Or it may be that the company has to give permission even if you find a buyer. Trading private stock is difficult. Also if you have options, typically you will have to exercise them before you can sell them.
How would you explain this scenario?
Employee shall be entitled to 25,000 Company common share stock options at an exercise price of $6.25 per common share. These stock options shall be deemed to have been granted January 31, 2012 and shall have a term of 3 years from the effective date granted. These stock options shall remain vested for a period of 24 months in which Employee remains in his current position with the Company.
It sounds like you have between 2 and 3 years in which to exercise them. The vesting language is a bit unclear to me. You may want to get some legal advice, I cannot interpret that clearly.
Let me elaborate on this as I am in the middle of an asset acquisition (a division of the company is being bought) that will close on Jan 31, 2015. I am still trying to understand the language above and below and what my options will be once the transaction is complete. The strike price above given seems a bit high. The division is $5mil and was sold for 7x $35mil. How does this work in terms of an asset being acquired as opposed to the entire company?
“In the event that the Company is acquired or successfully undertakes an initial public offering or reverse takeover, the vesting period relating to the stock options shall be removed and Employee shall have the full and unrestricted ability to exercise the stock options.”
As Twitter is going public soon and I am in the last round of interview. If they offer me a job, will there be any impact to my equity offering if I join before they go IPO or will it be the same after they go IPO? Which will be most beneficiary to me?
Typically people expect the price to increase on I and thus try to get in prior. Predicting what actually happens is hard, for example Facebook went down. But generally joining before IPO is viewed as a better bet.
On the day of my 7hrs in person interview conclusion, HR mentioned that they are not the highest paid company around, they come in like 60th percentile… But their RSU are at great offer. So I am guessing RSU is equal to Stock option they are referring to?
Also, if they offer me RSU/Options, is that something I have to pay for at the evaluation of the company even prior to they going IPO?
Great article, I didn’t know anything about stocks, vesting, options, shares until reading this so it’s helped me understand a bit better! I have been working for a start-up for 5 months and am on the typical vesting schedule of 25% after 1 year and another 6% each month after that. I have been offered just over 5000 shares for .0001.
Our company is expecting to be acquired in the next 90 days so I could end up with no vested options… What happens if we get acquired before I am vested? I am sure there a few different scenarios that could play out depending on who buys us but I’d like to know what COULD happen so I can approach HR about it and see what their plan is. I have read on other ‘stock options explained’ websites that my shares could be wiped out, I’ve read they could be accelerated and I have read they could be absorbed into the new company that acquires us… is that correct? The other thing that complicates it is that our company has a few different products we offer and the one that is getting acquired is the one I work on.. so I’ve heard that when that product/company is acquired in 90 days, our team is going to ‘break off’ and move to a different product (within the same company) and continue on as normal. Isso faz sentido?
Depende. Typically if the acquiring company does not want to keep you they can terminate you and your unvested options will not vest. If they want to keep you they would typically exchange your options for options in the new company. They will have some discretion in how to do this. Hopefully they will want to keep you and will treat you well.
Hi Max.. great article.. a quick question.. after 4 years in a startup i changed the jobs and bought all my vested incentive stock options. Now after 6 months the company is acquired by another company for cash buyout. Since I exercised my stock options just 4 months ago, will I be not considered for Long term Capital gain taxes? Or can I hold on to my share certificates for 9 more months and then will I eligible for Long term capital gain tax rate?
My strong suspicion is that you can’t wait 9 months. Check with an attorney to be sure, it could depend on the details of that specific transaction but usually they close faster than that.
Interesting article! Question for you: I was part of a startup that was acquired and had ISO’s. We received an initial payout and had a subsequent release of the escrow amount withheld. This escrow payout was received over 1 year after the sale of the company. What is this payout considered? Is it a long term capital gains? We were paid out through the employer via the regular salary system (taxes taken) and it was labeled as “Other bonus” but it was clearly part of the escrow. Also, what about a milestone payout that falls under similar circumstance? Obrigado!
I am not a tax attorney so I am not sure. If it came through regular payroll as a bonus my guess is that it is not long term capital gains. If it is a lot of money I would talk to a CPA and / or a tax attorney.
Hi Max – Ótimo artigo! Obrigado. Eu tenho uma pergunta. I joined a company as one of the first 3 sales directors hired and was told in my offer letter I have 150,000 stock options pending board approval. I have now been working for the company for 18 months and have not received any documentation regarding my options. I am continually told that they will be approved at the next board meeting but that has not happened and I was recently told they would be approved after the next round of funding but that did not happen either. What is happening here and what is your recommendation? Thank you in advance for your assistance.
Something is not right. Sometimes the approval will be left out of a board meeting. With really bad luck you could be skipped twice. There is no good explanation for 18 months. The ‘best’ situation from a they-are-not-screwing-you perspective that I can think of is that the next round of funding will be a ‘down’ round and they are waiting to give you a lower price. But something is wrong with your company and I would be looking hard for something new. Sorry to be the bearer of bad news. If the CEO has an explanation that really makes sense feel free to share it and I will let you know what I think, maybe I have missed an innocent explanation but this does not sound right.
Thanks so much for confirming what I was thinking, Max. To my knowledge the board has met several times and our CEO repeatedly states the valuation of our company is going up so I have not heard about a down round. We have had the same original investors for a few years and have recently had a new influx of cash in the form of loan but are still seeking that outside VC investment. I may have another start up offer coming soon and this information will help when I make the decision whether to accept the new position. Thank you again for your help!!
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09 August 2017.
Legislative Update: Empowering Employees Through Stock Ownership Act Resurfaces In The Senate.
Alert: A version of this bill was enacted as part of the Tax Cuts & Job Act, though with a five-year deferral period. See our blog commentary on the adopted legislation.
While stock options continue to be popular at startups and other pre-IPO companies, employees cannot sell stock at exercise to pay the exercise price and the taxes on the income. Moreover, under current law those taxes cannot be delayed. Last year, an encouraging legislative proposal was introduced in the House of Representatives to address this issue. Approved by a House vote in September 2016, the Empowering Employees Through Stock Ownership Act (HR 5719) sought to give employees in pre-IPO companies extra time to pay federal income taxes on the spread at exercise with nonqualified stock options and on the income at vesting with restricted stock units. (See the myStockOptions blog commentaries in July 2016 and October 2016.)
Under the proposal, the permitted deferral of taxation would be considerable. The legislation would allow an employee to defer taxes for up to seven years as long as the company's equity awards met certain conditions (for example, "Qualified Equity Grants" would need to be made to at least 80% of employees). In the feedback we at myStockOptions receive from stock plan participants and financial advisors, we understand that the current tax treatment does deter employees from exercising options and becoming true company owners. Although the proposal appears to be good news for employees at private companies who have equity comp, some provisions in the law could hinder its effectiveness, as we explained in our commentary on HR 5719 last October.
After its House approval last year, the Empowering Employees Through Stock Ownership Act went to the Senate, which did not take it up. However, in late June 2017, it was reintroduced as a separate bill with the same title in the Senate (S.1444). The Senate legislation is very similar to the House bill of last year and has bipartisan support: Its sponsors are two members of the Senate Finance Committee, Mark Warner (D–VA) and Dean Heller (R–NV), and two members of the House Ways and Means Committee, Eric Paulsen (R–MN) and Joseph Crowley (D–NY). Details of the proposals are available in the press release on it that was issued by Senator Warner's staff.
Although more than 70 companies have expressed support for the legislation, the prospects for its enactment remain somewhat uncertain in the current Congress, which seems to be preparing for a major effort at comprehensive tax reform (see the myStockOptions FAQ on how that could affect stock compensation). One obstacle could be finding a way to offset the cost of the proposed tax provisions. Although the legislation would allow only the deferral of taxes, not their elimination, the delay in tax payment would impose a revenue cost on the federal government.
20 October 2016.
Legislative Update: Senate Considering Tax Change For Options And RSUs In Pre-IPO Companies.
We wrote a blog commentary in July about the Empowering Employees Through Stock Ownership Act (HR 5719), which was subsequently approved by the House of Representatives, through a vote of 287 to 124. The bill is now in the Senate for consideration. In short, HR 5719 seeks to give employees in privately held companies extra time to pay taxes on the income they recognize at option exercise or RSU vesting. Instead of paying taxes at the exercise of nonqualified options or at the vesting of stock-settled RSUs, employees would be allowed to elect to defer the resulting income, and thus the taxes on that income, for up to seven years.
A staff member for Congressman Erik Paulsen (R–MN), the bill's leading sponsor in the House, told myStockOptions that "Rep. Paulsen is hopeful that the Senate will pass the legislation soon and that it will make its way to the President's desk sometime in the lame-duck session, either as a standalone bill or as part of a larger package." He added that Rep. Paulsen is not aware of any timetable for Senate consideration. When we checked with the office of Senator Mark Warner (D–VA), a leading sponsor of the bill in the Senate, his staff confirmed that the legislation had just been introduced. With Congress now in recess ahead of the general election on Nov. 8, it is very unlikely that anything will happen with the legislation until after the election. There is a chance that the bill will be adopted during the lame-duck session, a busy time when many laws with populist intentions tend to be hastily enacted while the outgoing president is still in office. At Congress. gov, you can follow the progress of the legislation in the House and the Senate.
Details Of The Proposed Law Could Unintentionally Discourage Its Effectiveness.
In general, we support a beneficial tax-law change for equity awards at pre-IPO companies and favor broad-based stock plans. However, in the report on the bill from the House Ways & Means Committee (see pages 10–14, "Explanation of Provision"), we do see some aspects of the legislation that might somewhat dampen enthusiasm for the proposed tax-qualified grants. The tax deferral would not apply to Medicare, Social Security, or state taxes. It would not apply to early-exercise options. As we interpret it, the deferral election apparently would turn ISOs into NQSOs. Furthermore, clarifications are needed on various aspects of the proposed law. For example, the House report states that an "inclusion deferral election" would be required within 30 days of vesting but does not mention that for options the election would need to be 30 days from exercise (not vesting). Also, the numerous rules that companies would have to follow to grant what the bill calls "qualified stock" might make these awards appealing only to large pre-IPO companies and not to true early-stage startups.
Moreover, companies currently already have a way to structure pre-IPO RSU grants so they do not trigger taxes until there is a liquidity event. Without liquidity and the ability to trade their stock, employees who exercise options in pre-IPO companies face the risk of tying up their money in stock that could be worthless. The proposed tax-deferral feature includes a seven-year period before taxes are owed, but for some employees this may not be long enough to encourage them to exercise options and create the widespread employee ownership that the bill wants to promote.
For additional analysis on the bill and the issues it raises, see a commentary from the consulting firm Compensia and an article by columnist Kathleen Pender in the San Francisco Chronicle .
18 July 2016.
Stock Options In Startup Companies Could Become More Popular Than Ever Under Proposed Tax Change.
Stock options continue to be very popular at startups and other pre-IPO companies, where they are often broadly granted to most or all employees. While these options can have wealth-creating potential, one big challenge is lack of liquidity: employees cannot sell the stock at exercise to pay the exercise price and any taxes owed. As the IRS confirmed in regulations issued during 2014, the tax measurement date (at exercise for options and at vesting for restricted stock) is not delayed by any lack of liquidity or securities law restrictions on resales of stock.
The fact that the tax treatment for stock grants at pre-IPO and large publicly traded companies is identical seems oddly unfair when you consider the vastly differing liquidity situations of private and public companies. Seeking to address this imbalance, recently proposed bipartisan legislation could provide a new optional tax treatment (pun intended) and make stock options more appealing than ever at startups and other pre-IPO companies. Introduced in the House of Representatives and the Senate on July 12, as explained by an article at The Hill , the Empowering Employees Through Stock Ownership Act seeks to give employees in privately held companies extra time to pay taxes on the income they recognize at exercise. The proposed extra time is considerable. Instead of paying taxes at exercise with nonqualified options (or at RSU vesting when settled in stock), this legislation would allow tax deferral for up to seven years.
Senators Mark Warner (D–VA) and Dean Heller (R–NV), members of the Senate Finance Committee, sponsored the bill in the Senate, while Representative Erik Paulsen (R–MN) is the sponsor in the House. In the press release supporting the bill, Sen. Warner states that "extending employee stock programs to a broader universe of workers will strengthen business growth and create new economic opportunities, especially for rank-and-file workers." For his part, Sen. Heller asserts that "it's important to give employees the flexibility to pay their taxes on stock options."
Company And Employee Requirements.
To make the new deferral election available (under Section 83 of the Internal Revenue Code), a company would have to issue what the bill calls "Qualified Equity Grants." These grants would need to be made to at least 80% of the company's employees annually. The company would have to provide information or a warning about the tax impact, especially if the share price should decline, and it would be required to report future tax liability on each employee's Form W-2. Qualified grants would be unavailable to major owners, corporate officers, and the highest-paid executives.
Sounding in some ways similar to the procedure for the Section 83(b) election, the deferral election for qualified equity grants would need to be made by employees within 30 days of either when the shares became transferable or when they were no longer subject to a substantial risk of forfeiture, whichever occurred earlier. If the company were to go public or the employee were to sell the shares for cash during the seven-year period, taxes would have to be paid at the time of the liquidity event. The deferral election could also be revoked by the employee at any time, triggering taxes at that point.
Details Still Need To Be Worked Out.
Open issues remain. A few questions that occurred to us:
How, exactly, would these grants be structured? Why is the deferral for seven years? What information would be required in the election, and how would it be filed? How would this deferral election apply to early-exercise stock options that result in restricted stock which must then vest? Would Social Security and Medicare taxes be deferrable as well as income tax?
Nevertheless, this bill is a good way to start a discussion about changing the tax treatment of stock options and restricted stock units in startups and other pre-IPO companies. The approach of this legislation is more understandable than that of the Expanding Employee Ownership Act of 2016, which recently proposed another new type of stock option (covered at the end of a recent commentary elsewhere on this blog).
08 de setembro de 2014.
Test Your Equity Comp Knowledge: New Quizzes Expand The Fun Interactive Content Of myStockOptions.
Put your books away, class. Time for a pop quiz:
Can you define a corporate change of control? In what ways can equity awards be handled in a corporate merger, acquisition, divestiture, or spinoff? How can a pre-IPO company create liquidity for its stock other than being acquired? Why do some privately held companies grant early-exercise stock options? How soon after an IPO can you sell company shares? What is a lockup, and how do the lockup requirements differ from those under Rule 144?
The current back-to-school climate makes this an appropriate time to announce two new quizzes at myStockOptions. Bringing our total number of quizzes to a dozen, the recent additions test your knowledge of equity compensation issues in M&A transactions and pre-IPO companies.
Our quizzes are free to all users of our website (companies can license and customize them for their stock plan participants). All 12 are available by links from our home page, and each quiz also appears on the landing page the relevant content section. The answer key of each quiz has links to relevant articles and/or FAQs, making the quizzes not just gateways to our award-winning content but also helpful learning tools in themselves—and much more fun than homework.
Our short quizzes are separate from our Learning Center, which has in-depth courses and exams offering continuing education credits for Certified Equity Professionals (CEPs) and Certified Financial Planners (CFP). Our quizzes are also part of our growing body of interactive and multimedia content, which includes podcasts and videos.
03 June 2014.
Here We Grow Again: myStockOptions Expertise Expands With New Articles On Diversification, IPOs, And Foreign-Asset Reporting For Employees With Equity Compensation.
At myStockOptions, our array of award-winning articles on all aspects of equity compensation has grown. In recent weeks, we have welcomed new contributions from expert authors on three crucial topics.
Importance Of Diversification For Employees With Equity Awards And Company Stock.
Through its author's personal example, a new article at myStockOptions presents the dangers of a concentrated stock position, discusses why diversification may be hard for employees with shares from equity compensation, and explores strategies for preserving your net worth. In Your Company Stock: The Importance Of Diversification , CFP Laura Tanner recounts her experience with stock compensation at a company where she used to work as a research scientist, and she explains the lessons she learned.
To read the article and find more insights into investment diversification for employees with stock options, restricted stock/RSUs, or ESPPs, see our section Financial Planning: Diversification.
Careful Planning For Pre-IPO Equity Comp When The Company Goes Public.
Initial public offerings (IPOs) are on the rise. The high-profile IPOs of Facebook and Twitter are just two of many IPOs that have been launched over the past couple of years, including several in Silicon Valley. In the newest installment of our Stockbrokers' Secrets series, our pseudonymous financial advisor W. E.B. Bantling provides a pep talk about smart planning for pre-IPO stock options, restricted stock, or RSUs when the company goes public. At the time of the IPO, when the company finally pours long-awaited liquidity into those grants, planning considerations must be carefully weighed.
In the author's experience, clients at companies preparing for an IPO are often giddy with thoughts of the wealth and opportunities it will provide. Many of them have worked at these companies since the startup stage, and the IPO represents a long-awaited event that may be life-altering for both their company and them. However, the author always emphasizes five planning points that may help to manage employee expectations in an IPO situation. He shares some of this wisdom in the new article, Stockbrokers' Secrets: Financial Planning For Equity Compensation At IPO Companies , available in our section Pre-IPO: Going Public.
International Equity Awards And Company Stock: Tricky Rules Of IRS Reporting For Assets And Income In Foreign Financial Accounts.
United States citizens and resident aliens are taxable on their worldwide income. The related IRS reporting rules are complicated, and mistakes can lead to costly penalties. In fact, the IRS has launched an aggressive initiative to identify taxpayers with unreported foreign income and/or assets in foreign financial institutions. Charges of tax evasion stemming from unreported foreign income have been brought against dozens of individual taxpayers, including bankers, lawyers, and advisors.
In a new article at myStockOptions, compensation and tax expert Richard Friedman presents the rules and related issues of IRS reporting for assets and income that an international US taxpayer may hold in a foreign financial account—including those acquired through stock options, restricted stock, RSUs, or other equity awards. The article, International Equity Awards And Company Stock: The Confusing World Of IRS Reporting For Overseas Assets And Income , is available in our section Financial Planning: High Net Worth.
License Our Expertise For Your Employees.
For companies, education is vital for ensuring that stock compensation motivates and retains highly valued employees and executives. All of our expert yet reader-friendly articles, FAQs, and other content are available for licensing by companies that want to improve their stock plan education and communications for participants. Content licensing is just part of the suite of corporate services that we offer.
22 October 2013.
Stock Compensation At Twitter: IPO Registration Statement Reveals Twitter's Extensive Use Of Restricted Stock Units.
When a high-profile company prepares for an initial public offering (IPO), its SEC filings provide an opportunity to analyze the company's stock compensation practices. The IPO of Twitter—about as high-profile as you can get—is expected to occur by mid-November. Twitter's Form S-1 (Amendment No. 1, filed on Oct. 15, 2013) discloses its extensive use of restricted stock units over stock options (see the table on page 88). Apart from awarding stock options to its senior executives (see page 128) and using options in relation to acquisitions (see pages 136–138), Twitter seems to exclusively grant RSUs.
Under Twitter's 2007 equity incentive plan, RSUs granted to domestic employees before Feb. 2013, and all RSUs granted to international employees (the pre-2013 RSUs), vest upon the satisfaction of both a time-based service condition (mainly four years) and what Twitter considers a "performance condition," which is actually more like a vesting condition based on a liquidity event for the company. The performance condition is satisfied on the earlier of either (1) the date that is ( a ) six months after the effective date of this offering or ( b ) Mar. 8 of the calendar year after the effective date of the offering (which the company may elect to accelerate to Feb. 15), whichever comes first; and (2) the date of a change in control. (Details about the company's prior RSU grants appear in a letter Twitter submitted to the SEC in September 2011 to request a Section 12(g) exemption from registering its RSU plan under the Securities Act of 1934.)
While the vesting of these RSUs will cause dilution (see page 47), the amount of dilution will be is much less than it would have been with stock options. (Grants of options have to be much larger to deliver the same compensation grant-date value as RSUs.) The vesting of the post-2013 RSUs is not subject to a performance condition. Instead, the grants have just the standard time-based vesting over a period of four years (see page 86). For future grants after the IPO, Twitter is adopting a stock plan for 2013 that will be effective on the business day immediately before the effective date of the registration statement; it will then no longer make grants under its 2007 plan (see pages 130–132). Twitter is also planning to roll out an ESPP with appealing features (see pages 133–134).
Earnings Charge For Stock Grants.
As of Sept. 30, 2013, no stock-based compensation expense had been recognized for the pre-2013 RSUs because a qualifying event meeting the performance condition was not probable (i. e. the grants had not fully vested). In the quarter during which the offering is completed, Twitter will begin recording a stock-based compensation expense based on the grant-date fair value of the pre-2013 RSUs. If this offering had been completed on September 30, 2013, the company would have recorded $385.2 million of cumulative stock-based compensation expense related to the pre-2013 RSUs on that date; and an additional $199.6 million of unrecognized stock-based compensation expense related to the pre-2013 RSUs would have been recognized over a weighted-average period of about three years. In addition to the stock-based compensation expense associated with the pre-2013 RSUs, as of Sept. 30, 2013, the company had an unrecognized stock-based compensation expense of approximately $698.3 million related to other outstanding equity awards (see pages 24 and 86–87).
See myStockOptions for additional information on restricted stock units, pre-IPO stock grants, and the rules on the timing of employee stock sales after the IPO.
14 August 2012.
Facebook Stock Comp: A Status Update.
Earlier this year, we blogged about the potential stock comp wealth (and related tax issues) that seemed certain to blossom for Facebook employees amid the company's much-hyped initial public offering in May. Time and the market have popped these balloons of expectation. Although investors were predicted to "like" Facebook stock in huge numbers, skepticism about the company's valuation and prospects has prompted significant investor flight over the past few weeks. The surprising plunge in the stock price has created unexpected difficulties for the company's equity compensation.
Angst among Facebook employees about their equity awards has been widely reported (e. g. by Reuters and Business Insider ). While the expiration date of the lockup on most employee shares (almost 50% of total shares outstanding) is still fairly far off (Nov. 14), Reuters notes that some employees are already adjusting their expectations because of the poor post-IPO performance. Many now plan to sell a smaller portion of their stake in the company than they otherwise would have if the stock price had risen or even just stayed flat. "I will definitely take some," said an employee anonymously quoted in the news report. "But my debate is how much." The article in Business Insider wonders whether Facebook may develop problems with employee retention, at least in the short term.
Additionally, Facebook needs to raise cash for the taxes ($2.5–4 billion) incurred by its share withholding at RSU vesting, and it has been planning to sell shares to cover this. Because of the fallen stock price, financing that tax bill will now be more difficult than expected.
Facebook employees who joined the company during the past 18 months (perhaps half its workforce) were granted restricted stock units (RSUs). This is fortunate for them. Unless the underlying stock price drops to zero, RSUs always have some value. Stock options, by contrast, would be well underwater, as the exercise price would reflect the pre-IPO stock valuation—much higher than the current depressed price. Before the IPO, various option-valuation models gave Facebook stock a worth of $24.10 during the first quarter of 2011 and around $31 in the first quarter of 2012. Now that the stock price is below these thresholds, the golden handcuff would have lost its lure for restless employees.
In this blog we have also discussed Zynga's pre-IPO demand for nonproductive employees to give back large unvested stock grants. Bloomberg has revealed that Zynga is now broadly granting stock options to retain staff after a fall in the company's stock price. Like Facebook, Zynga had previously granted mostly RSUs. The reasoning behind the switch seems clear. Stock options have much more upside than restricted stock. In short, you get more options per grant, and the fixed purchase (exercise) price provides investment leverage. As a result, options have the power to generate much greater wealth from stock-price appreciation than restricted stock/RSUs do. This, in turn, may help to keep employees at the company.
If Facebook believes its stock is unreasonably depressed, we wonder whether it too will start proffering the golden carrot of stock options to motivate and retain employees. This move could also signal some much-needed optimism about Facebook stock. If or when the stock price does rise, these options would be much more valuable and attractive than RSU grants.
25 May 2012.
Million-Dollar Question: A Week After The IPO, What's The Latest On Facebook's Stock Comp?
It's been one week since Facebook's initial public offering. Last month, this blog provided various insights into the company's stock grants and the related tax issues for Facebook employees.
As we mentioned then, and as Facebook's registration statement (page 48) explains, the restricted stock units granted by the company before 2011 will not pay out and fully vest until six months after the IPO. They face two vesting hurdles: time worked at company and a liquidity event (i. e. the IPO). We have seen these types of vesting requirements in grants made by some other pre-IPO companies, such as Twitter (see an FAQ at myStockOptions).
Facebook continues to rely on the broad use of RSU grants, though these will vest in the standard time-based way. In the 6th amendment to its S-1 registration statement, the company disclosed that in early May it awarded more than 25 million RSUs in what it termed "employee refresher grants" (see page 78 of the S-1 and an article at the blog TechCrunch ).
Now for the million-dollar question (literally). How much wealth has the IPO created for employees at Facebook? How many are now millionaires? According to Aaron Boyd, Director of Research at the compensation research firm Equilar, at the time of the IPO the average paper value of equity per employee was $4.9 million (excluding CEO Mark Zuckerberg's vast holdings). Equilar used the information in the prospectus for the most recently completed quarter for the number of options and restricted stock outstanding as of March 31, 2012, and calculated the values with the IPO price. In an article on May 21, The Washington Post reported that 600 of Facebook's 3,700 employees and 250 former employees will become millionaires, according to PrivCo, a research firm.
The wealth created for senior executives will be much greater. An insider of a company registering stock for the first time under Section 12 of the Securities Exchange Act must file Form 3 under the SEC's Section 16 rules no later than the effective date of the registration statement. It's worth looking at the data in these fillings by Facebook insiders for the stock grants and outright stock holdings and how they are reported with the SEC on Form 3.
For example, the Form 3 for CFO David Ebersman shows he holds 1.2 million RSUs that vest quarterly between early 2012 and early 2019, along with options to buy 4.5 million shares at $3.23 per share. These began vesting in 2010, starting with a fifth of the grant, followed by monthly tranches that will bring the grant to full vesting by 2015. In a footnote, the Form 3 also discloses that the RSUs he holds in which vesting is based on both continued service and liquidity (additional 6.75 million RSUs) are not considered reportable under SEC rules. The Form 3 for COO Sheryl Sandberg also contains new details on her options and RSU grants, such as the vesting provisions. Mark Zuckerberg's Form 3 discloses his stock options, along with the company stock he owns through various trusts (an estate-planning technique to minimize taxes).
When these executives and other senior executives at Facebook get more stock grants or sell company stock, they will have to make filings on Form 4. In addition, sales will also need to follow the SEC's Rule 144 requirements. These will be worth following, as they may reveal some information about individual financial planning, such as whether sales are made under Rule 10b5-1 trading plans, along with showing any changes in Facebook's stock compensation practices after the IPO.
[For more on Facebook stock compensation, see our blog entry of October 29 about the end of the lockup.]
23 April 2012.
Stock Compensation At Facebook: What Facebook's SEC Registration Statement Reveals.
With Facebook planning to go public next month, its S-1 registration statement is worth perusing for details about its stock plans and some of the tax issues the company and its employees face (other than the obvious fact that they will be very rich and can thus afford the best tax and financial advisors!).
Below are a few of the tidbits that can be gleaned from the SEC filing to go public.
Switch To RSUs; Tax Bill Due.
Facebook initially granted stock options to employees during its early days but switched almost entirely to restricted stock units in 2007. RSUs granted by Facebook before January 1, 2011, vest after two conditions: a specified length of employment at the company plus a liquidity event such as an IPO (see page 48). Grants made after that date do not have this liquidity condition, as they vest over four or five years (see page 60). We have been seeing this two-part vesting grant structure at other large pre-IPO companies.
Vesting will occur six months after Facebook's IPO. At that time, employees will owe taxes on the income from these pre-IPO RSUs at ordinary income rates. (In comparison, employees who had stock options before the move to RSUs will see most of the stock's appreciation taxed at capital gains rates, assuming they exercised them more than one year ago.) The company expects that many of its employees with RSUs will see 45% of the value of their shares withheld for taxes (see page 56).
Facebook intends to net-settle the shares at vesting, instead of leaving employees to sell shares for the taxes they owe. To come up with the cash needed to meet its withholding obligations and remit the funds to the IRS, the company plans to sell stock near the settlement date in an amount that is roughly equivalent to the number of shares of common stock that it withholds for taxes (see page 21).
Stock Option Grant Held By Mark Zuckerberg.
In 2005 Mark Zuckerberg, the CEO and founder of Facebook, received nonqualified stock options to acquire 120 million shares of Facebook class B (voting) stock (see page 113). These have all vested, and the option term is scheduled to expire on November 7, 2015. With the exercise price of 6 cents per share and Facebook's valuation of over $100 billion, he will owe a giant amount of taxes at exercise. Some of the tax issues he faces are covered in The Federal Taxation Developments Blog.
Company's Tax Deduction & Earnings Charge.
The company's tax deduction for the income realized by employees, from both RSU vesting and NQSO exercise, could generate a tax refund of up to $500 million in the first six months of 2013 (see page 63). This attracted attention when Senator Carl Levin again proposed his bill to limit the corporate tax deduction for stock compensation. According to an article on this in The Washington Post , some analysts calculate that the tax savings from stock compensation at Facebook could be much higher than the figures mentioned in the company's registration statement. (Estimates run up to $7.5 billion in deductions, translating into $3 billion in federal and state tax savings.)
According to Amendment 4 of Facebook's S-1 registration statement, as of March 31, 2012, Facebook had $2.381 billion in unrecognized stock compensation expenses on its income statement, with $2.319 billion for RSUs and $62 million for restricted stock and options (see page 53 of Amendment 4). For pre-2011 RSUs that met the first vesting trigger of a service condition on or before March 31, 2012, Facebook will recognize a $965 million expense when it goes public at the start of the IPO (see page 53), though net of income taxes this amount will be $640 million (see page 37 in Amendment 4).
Would Stock Options Have Been Better?
The move to granting restricted stock units instead of stock options may have been better for the company for many reasons, including the prospect of minimizing share dilution, along with the relief of having fewer post-IPO multi-millionaire employees to retain and motivate (well, fewer with gains of $10–$100 million, anyway). Depending on the size of the RSU grants relative to previously made stock options grants at Facebook, a basic calculation shows that, given the stock-price appreciation, employees with RSUs would be sitting on much larger gains if they had received stock options.
Example: Regardless of whether employees exercise options earlier or later after the IPO, the following example shows the potential magnitude of their gains from receiving stock options instead of restricted stock (pre - and post-tax calculations are easy to do with the tools on myStockOptions). For this example, let's use the exercise price of 6 cents for the options Mr. Zuckerberg received in 2005 (other employees would have received grants at same price at that time, assuming these were not discounted stock options). Let's assume Facebook granted four times as many stock options as RSUs (the actual ratio may have been much greater). With the current value of Facebook stock at $30.89 (see page 77 of Amendment 4), the following shows the pre-tax gains: Current gains/spread for grant of 400,000 stock options made in 2005 ($0.06 exercise price): $12.332 million (400,000 x [$30.89 – $0.06]) Grant of 100,000 RSUs: $3.089 million.
The blog Inside Facebook also wonders whether Facebook employees would have been better off with options, at least from a tax perspective. While employees would have had the opportunity to exercise shares earlier, when the spread was small, and to start the capital gains holding period sooner, they would also have had to come up with cash to hold the stock while risking the possibility that a liquidity event did not occur.
Given the big tax bills that employees at Facebook will incur, along with the much larger upside they would have realized if they had received stock options instead of RSUs, we wonder whether other pre-IPO companies will rethink whether to grant stock options again. Some private companies use a special type of stock option grant that allows immediate exercise, after which the stock received is subject to vesting. One reason for granting this type of option is to let employees start the capital gains holding period earlier and to allow them to decide when they want to pay the taxes (i. e. early if the options are granted with little or no spread, or later if employees are certain the stock will eventually have real value).
[For more on Facebook stock compensation, see our blog entry of October 29 about the end of the lockup.]
28 December 2011.
Looking For Data On Stock Grants At Privately Held Companies?
We all are. However, in-depth information about specific stock comp practices at private companies seldom comes to light. This is why we like the 2011 Private Company Equity Compensation Survey, recently published by the National Center for Employee Ownership. It amasses data from 201 privately held companies with equity plans, broken down by industry, company age, and number of employees (57% had over 100 employees, while 53% had fewer). Assessing grant practices at all levels, from senior executives to hourly employees, the report gives a detailed narrative description of its key findings. It even comes with an Excel spreadsheet containing all the raw data, so you can sort and analyze the data according to your own research criteria.
Among the findings of interest:
93% of companies give at least some of their C-level employees equity; 81% of companies give all of these employees equity. 82% of companies give at least some managers equity grants, while 50% give equity to all managers. 48% of the companies provide equity to at least some hourly/nonsupervisory employees, and 65% give equity to at least some supervisory/technical employees. C-level executives receive an average of 56% of the awards, other management 19%, supervisory and technical 11%, and hourly/nonsupervisory 4%. 74% of companies grant equity to C-level personnel upon hiring, and 61% do so for other managers, but only 44% grant equity upon hiring supervisory employees and only 29% upon hiring hourly/nonsupervisory employees. About half of the companies make occasional or periodic grants to eligible groups. Two thirds of the companies use stock options. Restricted stock was far less common, at just 29%. Phantom stock, stock appreciation rights, and restricted stock units are all used by under 10% of the companies. The mean percentage of equity held by nonfounders through awards was 15%.
For summaries of other surveys on stock grants at privately held companies, including grant practices at pre-IPO companies before and after they go public, see the FAQs in the section Pre-IPO: Basics at myStockOptions.
06 December 2011.
Griping About IPOs: Too Much Upside?
After a formerly private company has gone public, new riches among employees can cause problems, as noted by a recent piece in the San Jose Mercury News (IPOs Give Companies Instant Wealth But Lots Of Headaches, Nov. 13). The article chronicles some of the distractions: excessive scrutiny of the stock price, envy among employees, or disengagement at work by the newly wealthy. Things can be even worse at companies with broadly granted stock options and restless investors (angels and/or venture capital) who do not see an opportunity to realize any liquidity from their equity grants or investment.
Not surprisingly, the article considers the need for a pre-IPO company to educate employees on the various financial-planning issues they face when the company goes public, along with quickly teaching them the rules against insider trading. At myStockOptions, employees and their financial advisors can find educational material on both financial planning with equity awards and the securities laws that apply to people with stock compensation.
21 November 2011.
Zynga's Zinger: Reducing The Size Of Grants Already Made To Employees.
As the online-games company Zynga approaches its initial public offering, it has garnered attention for reasons far removed from the innocent fun of FarmVille and Mafia Wars 2. When the headline Zynga Leans On Some Workers To Surrender Pre-IPO Shares appeared in The Wall Street Journal on Nov. 10, observers across the worlds of compensation and pre-IPO business sat up and took notice. Allegedly, Zynga is demanding that certain unproductive employees with large early-stage stock grants give back some of their unvested grants. If they don't return these grants, they will be fired.
The WSJ article does not make it clear why the company is taking this hard-line approach. Its share pool for grants may need replenishment to make new grants to more skilled employees. However, the article seems to imply another reason: the company may find it unfair that certain employees should greatly profit from the upcoming IPO merely because they started working there before better-performing employees were hired.
Avoiding the temptation to criticize Zynga's move, some observers have proposed the consoling idea that through the giveback Zynga is actually making an effort to keep some employees it otherwise might have fired. This was the view put forth by Dan Primack of CNN Money on Nov. 10. He finds it reasonable that Zynga is willing to give these employees another chance, perhaps in another position, as long as they give back some of their unvested stock.
However, much of the reaction to Zynga's move has been grumpy. The reasons become clear when you read some of the internet comment forums frequented by tech employees with experience in the startup arena. See, for example, the remarks at HackerNews in response to the WSJ report. As one commenter points out, "getting a chance of a huge upside is one of the reasons employees take lower salaries and work longer hours at startups in the first place. A company that abused its bargaining position like this should not expect to be able to hire good employees in the future."
Zynga's move underscores the risks that many employees joining startup companies may not consider or fully understand, whether they receive stock options, restricted stock, or outright grants of pre-IPO shares. The risk of company failure at a startup is obvious enough. Less well understood, however, may be the problems of share dilution and the demands of cash investors (preferred shareholders) who want most of the sale proceeds in an acquisition. A recent informal employee survey that we found at another blog indicates some of these issues in pre-IPO companies, and shows that employees often don't know enough about them.
In the Pre-IPO section of myStockOptions, articles and FAQs cover some of the risks with suggestions on how to handle them. The steps employees can take with their equity grants depend on their leverage and what the company is willing to negotiate. Whatever the case, they should set foot in the pre-IPO employment world with a realistic understanding of the risks as well as the potential upside.
23 August 2011.
With IPOs On The Way, Questions Arise On Post-IPO Stock Sales.
As fast-growing young companies such as Facebook, Groupon, and Zynga prepare to follow their peer LinkedIn down the road of an initial public offering (IPO), we at myStockOptions expect lots of questions in the coming months about post-IPO stock sales. In particular, shareholding employees often want to know how soon after the IPO they can sell their company stock, given SEC rules and contractual restrictions.
The answer depends on:
the registration exemption the company used to issue the pre-IPO company options or restricted stock whether a form S-8 registration statement is now filed with the SEC for the stock-plan shares the terms of the lockup period.
If the company went public without filing an S-8 registration form for the shares under the stock plan, employees will have to adhere to the waiting period and other requirements for resales under Rule 701. This federal securities-law registration exemption, used for stock plans in privately held companies, allows post-IPO resales without the need to follow certain requirements of Rule 144, such as the holding period.
Therefore, 90 days after the date when the company becomes subject to the ongoing SEC reporting requirements, usually the public offering date, employees can sell their shares. Almost all companies try to fit their pre-IPO option and stock grants into Rule 701. Otherwise, the company would need to make a rescission offer, as Google did before its IPO. (See its SEC filing amendment and later SEC settlement, which explain what happened.) If there is no lockup or if the shareholder is no longer an employee, the holding period rules can be different under Rule 144.
In addition, even when the company registers the stock-plan shares on Form S-8, employees must hold shares for the duration of any contractual lockup agreement with the underwriters. Regardless of when the company went public, your sales will also be limited by company policy for preventing insider trading.
Finally, people considered affiliates of the company for the purposes of securities laws will be generally required to sell shares in accordance with the volume restrictions and notice requirements of SEC Rule 144.
As even this brief explanation showed, stock compensation issues surrounding an IPO can be complex. A full suite of clearly written articles and FAQs on these topics, see the section Pre-IPO at myStockOptions.
08 September 2010.
From The Files Of Frequently Asked Questions.
However, some questions really do come up repeatedly. One of these recurring inquiries prompted an FAQ we published just today: Do I need to sell my shares at the vesting of restricted stock, RSUs, or performance shares?
In short, no. The vesting of restricted stock, RSUs, or performance shares is separate from the sale of the shares. Whether you sell the shares at vesting depends on various factors, some of which you can control:
Methods of tax withholding available to you through your company's stock plan, or any mandatory share surrender. The shares can be a source of the proceeds needed to pay the taxes. Tax planning. Whether you hold the shares and for how long will affect your capital gains tax at sale. Any holding period after vesting does not affect the amount of income tax due for the value of the shares at vesting. Your needs for the cash proceeds and other financial-planning goals, such as diversification, dividends paid on your stock, and alternative investments. Whether your company is publicly traded or privately held. In a privately held company, you will not be able to sell the shares immediately at vesting because of restrictions that are likely to exist in your grant and/or because of the SEC rules on resales.
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Thoughts on technology and the tech business.
Startup stock options explained.
Stock options are a big part of the startup dream but they are often not well understood, even by senior execs who derive much of their income from stock options. Here’s my attempt to explain the main issues employees should be aware of.
“Stock options” as typically granted give you the right to buy shares of stock in the future for a price which is determined today. O preço de exercício & # 8220; & # 8221; is the price at which you can buy the shares in the future. If in the future the stock is worth more than the strike price, you can make money by “exercising” the options and buying a share of stock for the strike price. For example, your are granted 5,000 shares of stock at $4 per share in a startup. 5 years later, the stock goes public and three years after that it’s run up to $200 per share. You can exercise the option, paying $20,000 to buy 5,000 shares of stock which are worth $1,000,000. Congrats, you’ve made a $980,000 pretax profit, assuming you sell the shares immediately.
There is a small but necessary catch: when you are granted your options, they are not “vested”. This means that if you leave the company the week after you join, you lose your stock options. This makes sense; otherwise rather than being an incentive to stay, they’d be an incentive to job-hop as much as possible, collecting options from as many employers as you can. So, how long do you have to stay to keep your options? In most companies, they vest over four years. The most common structure is a “cliff” after one year when 25% of your shares vest, with the remaining shares vesting pro-rata on a monthly basis until you reach four years. Details vary from company to company; some companies vest options over 5 years and some over other periods of time, and not all employers have the cliff.
The cliff is there to protect the company – and all the shareholders, including other employees – from having to give shares to individuals who haven’t made meaningful contributions to the company.
Why should you care about whether that guy who got fired after six months walked away with any options or not? Because those options “dilute” your ownership of the company. Remember each share represents a piece of ownership of the company. The more shares there are, the less value each one represents. Lets say when you join the startup and get 5,000 shares, there are 25,000,000 total shares outstanding. You own .02% – two basis points – da empresa. If the company issues another 25,000,000 options or shares over the intervening five years so there are 50,000,000 shares at the IPO (typically either as part of fundraising including an IPO or to hire employees), you’re left with .01% – one basis point or half of your original percentage. You have had 50% dilution. You now make half as much for the same company value.
That said, dilution is not necessarily bad. The reason the board approves any dilutive transaction (raising money, buying a company, giving out stock options) is that they believe it will make the shares worth more. If your company raises a lot of money, you may own a smaller percentage, but the hope is that the presence of that cash allows the company to execute a strategy which enhances the value of the enterprise enough to more than compensate for the dilution and the price per share goes up. For a given transaction (raising $10 million) the less dilutive it is the better, but raising $15 million may be more dilutive than raising $10 million while increasing the value of each existing share.
This brings us to the number which is much more important (though it is less impressive sounding) than the number of shares – what portion of the company do you own. This is often measured in percentage terms, which I think is unfortunate because very few employees other than founders wind up with one percent or even half a percent, so you’re often talking about tiny fractions, which is irritating. I think it is more useful to measure it in “basis points” & # 8211; hundredths of a percent. Regardless of units, this is the number that matters. Por quê?
Lets say company A and company B are both, after lots of hard work, worth $10 billion (similar to Red Hat, for example). Long ago Albert went to work at company A and Bob went to work at company B. Albert was disappointed that he only got 5,000 options, and they were granted at a price of $4 each. Bob was very happy – he was granted 50,000 options at only 20 cents each. Who got the better deal? Depende. Lets say company A had 25,000,000 shares outstanding, and company B had 500,000,000 shares outstanding. After many years and 50% dilution in each case, company A has 50,000,000 shares outstanding so they are worth $200 each and Albert has made a profit of $980,000 on his options ($1 million value minus $20,000 exercise cost). Company B has 1 billion shares outstanding, so they are worth $10 each. Bob’s options net him a profit of $9.80 each, for a total profit of $490,000. So while Bob had more options at a lower strike price, he made less money when his company achieved the same outcome.
This becomes clear when you look at ownership percentage. Albert had 2 basis points, Bob had one. Even though it was less shares, Albert had more stock in the only way that matters.
How many shares outstanding is “normal”? At some level the number is totally arbitrary, but many VC funded companies tend to stay in a similar range which varies based on stage. As a company goes through more rounds of funding and hires more employees, it will tend to issue more shares. A “normal” early stage startup might have 25-50 million shares outstanding. A normal mid-stage (significant revenue and multiple funding rounds, lots of employees with a full exec team in place) might have 50-100 million shares outstanding. Late stage companies that are ready to IPO often have over 100 million shares outstanding. In the end the actual number doesn’t matter, what matters is the total number relative to your grant size.
I talked briefly about exercising options above. One important thing to keep in mind is that exercising your options costs money. Depending on the strike price and the number of options you have, it might cost quite a bit of money. In many public companies, you can do a “cashless exercise” or “same-day-sale” where you exercise and sell in one transaction and they send you the difference. In most private companies, there is no simple way to do the equivalent. Some private companies allow you to surrender some of the shares you’ve just exercised back to the company at their “fair market value”; read your options agreement to see if this is offered. I’ll talk more about “fair market value” below, but for now I’ll just say that while its great to have this option, it isn’t always the best deal if you have any alternative.
The other really important thing to consider in exercising stock options are taxes, which I will discuss later.
In my opinion, the process by which the “fair market value” of startup stock is determined often produces valuations at which it would be very difficult to find a seller and very easy to find buyers – in other words a value which is often quite a bit lower than most people’s intuitive definition of market value. The term “fair market value” in this context has a very specific meaning to the IRS, and you should recognize that this technical meaning might not correspond to a price at which it would be a good idea to sell your shares.
Why is the IRS involved and what is going on? Stock option issuance is governed in part by section 409a of the internal revenue code which covers “non-qualified deferred compensation” & # 8211; compensation workers earn in one year that is paid in a future year, other than contributions to “qualified plans” like 401(k) plans. Stock options present a challenge in determining when the “compensation” is “paid”. Is it “paid” when the option is granted, when it vests, when you exercise the option, or when you sell the shares? One of the factors that the IRS uses to determine this is how the strike price compares to the fair market value. Options granted at below the fair market value cause taxable income, with a penalty, on vesting. This is very bad; you don’t want a tax bill due when your options vest even if you haven’t yet exercised them.
Companies often prefer lower strike prices for the options – this makes the options more attractive to potential employees. The result of this was a de-facto standard to set the “fair market value” for early stage startup options issuance purposes to be equal to 10% of the price investors actually paid for shares (see discussion on classes of stock below).
In the case of startup stock options, they specify that a reasonable valuation method must be used which takes into account all available material information. The types of information they look at are asset values, cash flows, the readily determinable value of comparable entities, and discounts for lack of marketability of the shares. Getting the valuation wrong carries a stiff tax penalty, but if the valuation is done by an independent appraisal, there is a presumption of reasonableness which is rebuttable only upon the IRS showing that the method or its application was “grossly unreasonable”.
Most startups have both common and preferred shares. The common shares are generally the shares that are owned by the founders and employees and the preferred shares are the shares that are owned by the investors. So what’s the difference? There are often three major differences: liquidation preferences, dividends, and minority shareholder rights plus a variety of other smaller differences. What do these mean and why are they commonly included?
The biggest difference in practice is the liquidation preference, which usually means that the first thing that happens with any proceeds from a sale of the company is that the investors get their money back. The founders/employees only make money when the investors make money. In some financing deals the investors get a 2x or 3x return before anyone else gets paid. Personally I try to avoid those, but they can make the investors willing to do the deal for less shares, so in some situations they can make sense. Investors often ask for a dividend (similar to interest) on their investment, and there are usually some provisions requiring investor consent to sell the company in certain situations.
Employees typically get options on common stock without the dividends or liquidation preference. The shares are therefore not worth quite as much as the preferred shares the investors are buying.
That is, of course, the big question. If the “fair market value” doesn’t match the price at which you reasonably believe you could find a buyer, how do you about estimating the real world value of your options?
If your company has raised money recently, the price that the investors paid for the preferred shares can be an interesting reference point. My experience has been that a market price (not the official “fair market value”, but what VCs will pay) for common shares is often between 50% and 80% of the price the investors pay for preferred shares. The more likely that the company will be sold at a price low enough that the investors benefit from their preference the greater the difference between the value of the preferred shares and the common shares.
The other thing to keep in mind is that most people don’t have the opportunity to buy preferred shares for the price the VCs are paying. Lots of very sophisticated investors are happy to have the opportunity to invest in top-tier VC funds where the VC’s take 1-2% per year in management fees and 25-30% of the profits. All told, they’re netting around 60% of what they’d net buying the shares directly. So when a VC buys common shares at say 70% of the price of preferred shares, that money is coming from a pension fund or university endowment who is getting 60% or so of the value of that common share. So in effect, a smart investor is indirectly buying your common shares for around the price the VCs pay for preferred.
If there hasn’t been a round recently, valuing your shares is harder. The fair market value might be the closest reference point available, but I have seen cases where it is 30-60% (and occasionally further) below what a rational investor might pay for your shares. If its the only thing you have, you might guess that a market value would be closer to 2x the “fair market value”, though this gap tends to shrink as you get close to an IPO.
Expiration and termination.
Options typically expire after 10 years, which means that at that time they need to be exercised or they become worthless. Options also typically terminate 90 days after you leave your job. Even if they are vested, you need to exercise them or lose them at that point. Occasionally this is negotiable, but that is very rare – don’t count on being able to negotiate this, especially after the fact.
The requirement to exercise within 90 days of termination is a very important point to consider in making financial and career plans. If you’re not careful, you can wind up trapped by your stock options; I’ll discuss this below.
Occasionally stock options will have “acceleration” language where they vest early upon certain events, most frequently a change of control. This is an area of asymmetry where senior executives have these provisions much more frequently than rank-and-file employees. There are three main types of acceleration: acceleration on change of control, acceleration on termination, and “double trigger” acceleration which requires both a change of control and your termination to accelerate your vesting. Acceleration can be full (all unvested options) or partial (say, 1 additional year’s vesting or 50% of unvested shares).
In general, I think acceleration language makes sense in two specific cases but doesn’t make sense in most other cases: first, when an executive is hired in large part to sell a company, it provides an appropriate incentive to do so; second when an executive is in a role which is a) likely to be made redundant when the company is sold and b) would be very involved in the sale should it occur it can eliminate some of the personal financial penalty that executive will pay and make it easier for them to focus on doing their job. In this second case, I think a partial acceleration, double trigger is fair. In the first case, full acceleration may be called for, single trigger.
In most other cases, I think executives should get paid when and how everyone else gets paid. Some executives think it is important to get some acceleration on termination. Personally I don’t – I’d rather focus my negotiation on obtaining a favorable deal in the case where I’m successful and stick around for a while.
How many stock options you should get is largely determined by the market and varies quite a bit from position to position. This is a difficult area about which to get information and I’m sure that whatever I say will be controversial, but I’ll do my best to describe the market as I believe it exists today. This is based on my experience at two startups and one large company reviewing around a thousand options grants total, as well as talking to VCs and other executives and reviewing compensation surveys.
First, I’ll talk about how I think about grant sizes, then give some specific guidelines for different positions.
I strongly believe that the most sensible way to think about grant sizes is by dollar value. As discussed above, number of shares doesn’t make sense. While percent of company is better it varies enormously based on stage so it is hard to give broadly applicable advice: 1 basis point (.01 percent) of Google or Oracle is a huge grant for a senior exec but at the same time 1 basis point is a tiny grant for an entry level employee at a raw series-A startup; it might be a fair grant for a mid-level employee at a pre-IPO startup. Dollar value helps account for all of this.
In general for these purposes I would not use the 409a “fair market value”. I would use either a) the value at the most recent round if there was one or b) the price at which you think the company could raise money today if there hasn’t been a round recently.
What I would then look at is the value of the shares you are vesting each year, and how much they are worth if the stock does what the investors would like it to do – increases in value 5-10 times. This is not a guaranteed outcome, nor is it a wild fantasy. What should these amounts be? This varies by job level:
Entry level: expect the annual vesting amount to be comparable to a small annual bonus, likely $500-$2500. Expect the total value if the company does well to be be enough to buy a car, likely $25-50k.
Experienced: most experienced employees will fall in to this range. Expect the annual vesting amount to be comparable to a moderate annual bonus, likely $2500-$10k, and the total value if the company does well to be enough for a down-payment on a silicon valley house or to put a kid through college, likely around $100-200k.
Key management: director-level hires and a handful of very senior individual contributors typically fall into this range. Key early employees often wind up in this range as the company grows. Expect the annual vesting amount to be like a large bonus, likely $10k-40k and the total value if the company does well to be enough to pay off your silicon valley mortgage, likely $500k-$1 million.
Executive: VP, SVP, and CxO (excluding CEO). Expect the annual vesting amount to be a significant fraction of your pay, likely $40-100k+, and the value if the company does well to be $1 million or more.
For those reading this from afar and dreaming of silicon valley riches, this may sound disappointing. Remember, however, that most people will have roughly 10 jobs in a 40 year career in technology. Over the course of that career, 4 successes (less than half) at increasing levels of seniority will pay off your student loans, provide your downpayment, put a kid through college, and eventually pay off your mortgage. Not bad when you consider that you’ll make a salary as well.
You should absolutely ask how many shares are outstanding “fully diluted”. Your employer should be willing to answer this question. I would place no value on the stock options of an employer who would not answer this clearly and unambiguously. & # 8220; Totalmente diluído & # 8221; means not just how many shares are issued today, but how many shares would be outstanding if all shares that have been authorized are issued. This includes employee stock options that have been granted as well shares that have been reserved for issuance to new employees (a stock “pool”; it is normal to set aside a pool with fundraising so that investors can know how many additional shares they should expect to have issued), and other things like warrants that might have been issued in connection with loans.
You should ask how much money the company has in the bank, how fast it is burning cash, and the next time they expect to fundraise. This will influence both how much dilution you should expect and your assessment of the risk of joining the company. Don’t expect to get as precise an answer to this question as the previous one, but in most cases it is reasonable for employees to have a general indication of the company’s cash situation.
You should ask what the strike price has been for recent grants. Nobody will be able to tell you the strike price for a future grant because that is based on the fair market value at the time of the grant (after you start and when the board approves it); I had a friend join a hot gaming company and the strike price increased 3x from the time he accepted the offer to the time he started. Changes are common, though 3x is somewhat unusual.
You should ask if they have a notion of how the company would be valued today, but you might not get an answer. There are three reasons you might not get an answer: one, the company may know a valuation from a very recent round but not be willing to disclose it; two the company may honestly not know what a fair valuation would be; three, they may have some idea but be uncomfortable sharing it for a variety of legitimate reasons. Unless you are joining in a senior executive role where you’ll be involved in fundraising discussions, there’s a good chance you won’t get this question answered, but it can’t hurt to ask.
If you can get a sense of valuation for the company, you can use that to assess the value of your stock options as I described above. If you can’t, I’d use twice the most recent “fair market value” as a reasonable estimate of a current market price when applying my metrics above.
One feature some stock plans offer is early exercise. With early exercise, you can exercise options before they are vested. The downside of this is that it costs money to exercise them, and there may be tax due upon exercise. The upside is that if the company does well, you may pay far less taxes. Further, you can avoid a situation where you can’t leave your job because you can’t afford the tax bill associated with exercising your stock options (see below where I talk about being trapped by your stock options).
If you do early exercise, you should carefully evaluate the tax consequences. By default, the IRS will consider you to have earned taxable income on the difference between the fair market value and the strike price as the stock vests. This can be disastrous if the stock does very well. However, there is an option (an “83b election” in IRS parlance) where you can choose to pre-pay all taxes based on the exercise up front. In this case the taxes are calculated immediately, and they are based on the difference between the fair market value and the strike price at the time of exercise. If, for example, you exercise immediately after the stock is granted, that difference is probably zero and, provided you file the paperwork properly, no tax is due until you sell some of the shares. Be warned that the IRS is unforgiving about this paperwork. You have 30 days from when you exercise your options to file the paperwork, and the IRS is very clear that no exceptions are granted under any circumstances.
I am a fan of early exercise programs, but be warned: doing early exercise and not making an 83b election can create a financial train wreck. If you do this and you are in tax debt for the rest of your life because of your company’s transient success, don’t come crying to me.
What if you leave? The company has the right, but not the obligation, to buy back unvested shares at the price you paid for them. This is fair; the unvested shares weren’t really “yours” until you completed enough service for them to vest, and you should be thankful for having the opportunity to exercise early and potentially pay less taxes.
Taxes on stock options are complex. There are two different types of stock options, Incentive Stock Options (ISOs) and Non-Qualified Stock Options which are treated differently for stock purposes. There are three times taxes may be due (at vesting, at exercise, and at sale). This is compounded by early exercise and potential 83b election as I discussed above.
This section needs a disclaimer: I am not an attorney or a tax advisor. I will try to summarize the main points here but this is really an area where it pays to get professional advice that takes your specific situation into account. I will not be liable for more than what you paid for this advice, which is zero.
For the purposes of this discussion, I will assume that the options are granted at a strike price no lower than the fair market value and, per my discussion on early exercise, I’ll also assume that if you early exercise you made an 83b election so no taxes are due upon vesting and I can focus on taxes due on exercise and on sale. I’ll begin with NSOs.
NSO gains on exercise are taxed as ordinary income. For example, if you exercise options at a strike price of $10 per share and the stock is worth $50 per share at the time of exercise, you owe income taxes on $40 per share. When you sell the shares, you owe capital gains (short or long term depending on your holding period) on the difference between the value of the shares at exercise and when you sell them. Some people see a great benefit in exercising and holding to pay long term capital gains on a large portion of the appreciation. Be warned, many fortunes were lost doing this.
O que pode dar errado? Say you have 20,000 stock options at $5 per share in a stock which is now worth $100 per share. Parabéns! But, in an attempt to minimize taxes, you exercise and hold. You wipe out your savings to write a check for $100,000 to exercise your options. Next April, you will have a tax bill for an extra $1.9 million in income; at today’s tax rates that will be $665,000 for the IRS, plus something for your state. Not to worry though; it’s February and the taxes aren’t due until next April; you can hold the stock for 14 months, sell in April in time to pay your taxes, and make capital gains on any additional appreciation. If the stock goes from $100 to $200 per share, you will make another $2 million and you’ll only owe $300,ooo in long term capital gains, versus $700,000 in income taxes. You’ve just saved $400,000 in taxes using your buy-and-hold approach.
But what if the stock goes to $20 per share? Well, in the next year you have a $1.6 million capital loss. You can offset $3,000 of that against your next years income tax and carry forward enough to keep doing that for quite a while – unless you plan to live more than 533 years, for the rest of your life. But how do you pay your tax bill? You owe $665,000 to the IRS and your stock is only worth $400,000. You’ve already drained your savings just to exercise the shares whose value is now less than the taxes you owe. Congratulations, your stock has now lost you $365,000 out of pocket which you don’t have, despite having appreciated 4x from your strike price.
How about ISOs? The situation is a little different, but danger still lurks. Unfortunately, ISOs can tempt you in to these types of situations if you’re not careful. In the best case, ISOs are tax free on exercise and taxed as capital gains on sale. However, that best case is very difficult to actually achieve. Por quê? Because while ISO exercise is free of ordinary income tax, the difference between the ISO strike price and value at exercise is treated as a “tax preference” and taxable under AMT. In real life, you will likely owe 28% on the difference between strike price and the value when you exercise. Further, any shares which you sell before you have reached 2 years from grant and 1 year from exercise are “disqualified” and treated as NSOs retroactively. The situation becomes more complex with limits option value for ISO treatment, AMT credits, and having one tax basis in the shares for AMT purposes and one for other purposes. This is definitely one on which to consult a tax advisor.
If you’d like to know if you have an ISO or NSO (sometimes also called NQSO), check your options grant paperwork, it should clearly state the type of option.
Illiquidity and being trapped by stock options.
I’ll discuss one more situation: being trapped by illiquid stock options. Sometimes stock options can be “golden handcuffs”. In the case of liquid stock options (say, in a public company), in my opinion this is exactly as they are intended and a healthy dynamic: if you have a bunch of “in-the-money” options (where the strike price is lower than the current market price), you have strong incentive to stay. If you leave, you give up the opportunity to vest additional shares and make additional gains. But you get to keep your vested shares when you leave.
In the case of illiquid options (in successful private companies without a secondary market), you can be trapped in a more insidious way: the better the stock does, the bigger the tax bill associated with exercising your vested options. If you go back to the situation of the $5 per share options in the stock worth $100 per share, they cost $5 to exercise and another $33.25 per share in taxes. The hardest part is the more they’re worth and the more you’ve vested, the more trapped you are.
This is a relatively new effect which I believe is an unintended consequence of a combination of factors: the applicability of AMT to many “ordinary” taxpayers; the resulting difficulties associated with ISOs, leading more companies to grant NSOs (which are better for the company tax-wise); the combination of Sarbanes-Oxley and market volatility making the journey to IPO longer and creating a proliferation of illiquid high-value stock. While I am a believer in the wealthy paying their share, I don’t think tax laws should have perverse effects of effectively confiscating stock option gains by making them taxable before they’re liquid and I hope this gets fixed. Until then to adapt a phrase caveat faber .
Can the company take my vested shares if I quit.
In general in VC funded companies the answer is “no”. Private equity funded companies often have very different option agreements; recently there was quite a bit of publicity about a Skype employee who quit and lost his vested shares. I am personally not a fan of that system, but you should be aware that it exists and make sure you understand which system you’re in. The theory behind reclaiming vested shares is that you are signing up for the mission of helping sell the company and make the owners a profit; if you leave before completing that mission, you are not entitled to stock gains. I think that may be sensible for a CEO or CFO, but I think a software engineer’s mission is to build great software, not to sell a company. I think confusing that is a very bad thing, and I don’t want software engineers to be trapped for that reason, so I greatly prefer the VC system.
I also think it is bad for innovation and Silicon Valley for there to be two systems in parallel with very different definitions of vesting, but that’s above my pay grade to fix.
What happens to my options if the company is bought or goes public?
In general, your vested options will be treated a lot like shares and you should expect them to carry forward in some useful way. Exactly how they carry forward will depend on the transaction. In the case of an acquisition, your entire employment (not just your unvested options) are a bit up in the are and where they land will depend on the terms of the transaction and whether the acquiring company wants to retain you.
In an IPO, nothing happens to your options (vested or unvested) per se, but the shares you can buy with them are now easier to sell. However there may be restrictions around the time of the IPO; one common restriction is a “lockup” period which requires you to wait 6-12 months after the IPO to sell. Details will vary.
In a cash acquisition, your vested shares are generally converted into cash at the acquisition price. Some of this cash may be escrowed in case of future liabilities and some may be in the form of an “earn-out” based on performance of the acquired unit, so you may not get all the cash up front. In the case of a stock acquisition, your shares will likely be converted into stock in the acquiring company at a conversion ratio agreed as part of the transaction but you should expect your options to be treated similarly to common shares.
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It’s hard to sell a company if there is a log of acceleration. That could actually be counterproductive for option holders.
Agree, that’s one of the reasons I think it is warranted only in a few specific cases.
What happens to unvested stock in the case of a cash/stock acquisition? (for a generic Silicon Valley VC funded startup)
Lot of it depends (including whether they keep the employees at all). But often they are converted to options in the new company.
What happens if the company is bought before I was granted my options?
In my employment agreement the granting is subject to board approval and that never happened.
I got new options of the acquiring company (at a SHITTY strike price ) , anything to do about that?
Probably nothing to do about it besides quit (though I am not a lawyer and you might ask one if there is a lot of money involved). How long did you work there without the options being granted? Up to a few months is normal, past that is unusual.
I worked there for 6months part time and another 6months full-time.
Basically the board of directors probably didn’t meet to approve the options of the new employees and when it did it discussed the buyout.
I assume that they said to themselves, let’s not grant these options and grant options of the buying company instead.
Ai Can you ask/have you asked asked a few questions: 1. Did the board meet during the time after you accepted the offer and started and prior to the acquisition and how many times? Did it review your proposed grant at the meetimg and if not why not? If it reviewed your proposed grant why did it not approve it? 2. On what basis was your new grant determined? Did they convert the grant in your offer letter based on the terms of the purchase or did they just give you stock in the acquiring company as a new employee of that company?
I am assuming your options dated from joining full time, so it was a 6 month delay, not a year?
While I might be popular online for saying they hosed you and they’re evil, situations like this can be complex. It is possible/likely that the board was in serious discussions about an aquisition for a number of months before it occured. This could have been ongoing from the time you joined, or started shortly afterwards but have been in progress at the first board meeting after you joined.
If this was the case, the board may have been in a very hard situation with respect to valuing the stock options. If the acquisition discussion was credible enough, it would be material information that could force a re-evaluation of the fair market value of the shares. To avoid the risk of grantees (you) being liable for huge tax penalties, they would likely have wanted to retain a third party to do the valuation. Hiring the firm takes time, the valuation takes time, and board approval of the valuation takes time. During that time, the discussions might gave progressed – maybe they got a second higher offer. That could restart the clock.
In any case, even if they were able to complete the valuation and grant the options, the valuation may well have been quite similar to the price offered by the acquirer and those options might have been converted to options in the acquiring company at a similar strike price to the price of your grant. So quite possibly what is at issue is whether your grant could have been granted at a somewhat (say 20 or 30%) lower strike price.
If the value of the stock underlying your new grant (number of shares times strike price) is well in to the six figures or beyond, it may be worth consulting an attorney just in case, but my guess (and I am not a lawyer) is they are going to say that you just had bad timing. If it’s five figures or less, I don’t think its worth spending the legal fees for a small chance at a medium settlement.
What I described is the way this happened in completely good faith with everyone involved trying to do what’s fair and legal for you in a complex situation. That’s not always the case, but I’d start by asking.
You’re thinking the same as I do.
Since the company have been planning an IPO and this buyout came in I’m sure the board have met several times since I joined.
I too think that I should have gotten either an approval or decline of my options , neither was delivered to me, hence I believe this is a direct violation of my employment agreement.
My options never materialized, I basically got the buying company options at a strike price which is the share price in the day of the buyout which means zero profit!
I’m getting really pissed here and I think that this might even have legal implications.
This is 5 figures but I think that the determining factor is that I think this isn’t completely legal , I don’t think they can just ignore this term of the contract just because they’re busy or not sure about the price.
My guess is that you make some enemies with this post. It is clearly to the advantage of the company that the terms of stock options and vesting periods remain opaque.
What if there were liquidity in options? That would be interesting, and wildly dangerous, I imagine, because such liquidity would be so predominantly speculative in the absence of knowledge of company fundamentals.
Possible I suppose, but.
Possible I suppose, but only ill advised companies and VC’s that I’m happy to stay away from.
A successful growing company grants millions of dollars worth of options each year, and I think it works to their advantage to have people understand their value and thus make rational decisions about them.
Re: liquidity, the illiquidity of the _options_ stems from the fact that they are subject to cancellation if you quit as well as some specific contractual terms. Your _shares_ should you exercise your stock can sometimes be liquid even before the company is public. That is certainly the case for well known private companies (eg, Facebook), and sometimes is the case for smaller companies as well; question is can you find an investor who wants to buy the shares.
The biggest issue in liquidity of pre-IPO shares is the company’s cooperation in allowing a potential buyer to see the books. Often this will be restricted for current employees but more open for ex-employees. This can be very complex and the SEC has rules about shareholder counts, how the shares can be offered etc.
Hello, I just received an employee stock option that would allow me to buy shares within five years. Do I have to buy the shares right away? or wait until my company goes public or another company (that is currently in stock trading) will aquire us? If I buy the shares now and after 2 years I left the company or they fired me, do I still have the right for my shares? If still have the right for my shares then I’m willing to expend few thousand dollars for it. I really appreciate your advice.
Really sorry for the delayed reply. Usually you have all 5 years. Usually you can buy some now and some later. Tax issues vary, research them carefully.
well written, and easy to understand…thanks very much.
Well written for sure. An scenario I’d appreciate your feedback on. A small company was bought by a larger one and the employee was given her recalculated options. There are 2 years left on this employees vesting schedule. Without any prior negotiation at time of hire regarding acceleration of vesting, is there any way receive acceleration in case of termination?
Unfortunately for the subject of your story, probably not.
Most folks in small companies are employed “at will”. That means that their employer is under no obligation to keep them employed until the end of their vesting period or for any other reason. They can be fired because of a lack of work for them to do, a desire to hire someone less expensive to do the same job, a desire to restructure and eliminate their job, or because the company is unsatisfied with their work. The same holds true once they’ve joined the big company.
Sometimes companies will offer “packages” to employees that they lay off. This is not done out of obligation but rather to help retain the employees who aren’t being laid off – who might otherwise fear being laid off with nothing and instead take another job. By treating the terminated employees nicely, the remaining employees are less likely to panic.
Normally one should expect to vest only as long as their employment continues. The most common exceptions where acceleration can make sense but usually needs to be negotiated up front are positions where the individual is directly involved in selling the company (CEO, CFO etc) and/or is very likely not to be retained after the acquisition.
How do unvested options work post-IPO? Is an IPO an event that can trigger acceleration, or is this reserved for acquisition typically? Can unvested shares be canceled post-IPO?
Usually they continue vesting through the IPO as normal, with restrictions on selling them for some period of time (
6 months is normal) post-IPO.
It is very unusual for an IPO to trigger acceleration. While it is easy to see an IPO as a destination for a startup, it is really the beginning of a much longer journey. An IPO means that a company is ready to have a broader base of shareholders – but it needs to continue to deliver to those shareholders, thus it needs to continue to retain its employees.
Most options are not cancelable other than by terminating the optionee’s employment or with the optionee’s consent. Details vary and there are some corner cases, but the typical situation is if the company doesn’t want you to collect any further options they’ll fire you. Occasionally companies will give people the option to stay for reduced option grants but that is unusual.
By the way when I say “most” or “usually” I am referring to the typical arrangements in startups funded by reputable silicon-valley-type VCs. Family businesses and business that exist outside that ecosystem of startup investors, lawyers, etc may have different arrangements. If you read some of my posts on private equity owned companies and options, you’ll see that they have a somewhat different system for example.
What happens if you exercise pre-IPO stock options (within 90 days of quitting) and the company never goes public?
Then you own shares that may be hard to sell. The company may be acquired and you might grt something for your shares, or in some circumsances you can sell shares of private companies. But the money you pay to exercise the shares is at risk.
Thank you Max! This entire article and your answer to my question has been the best write up on this topic that I could find on the Internet. Obrigado novamente!
Great summary Max, i found it very useful.
wow i personally know someone (well i guess many people do) who lost everything in the bubble and still owed $$$ in tax due to the exercise and hold you described here. he went bankrupt and had to flee out of state but still writes a hefty check to the IRS each and every month.
Excellent…very well explained. Thanks Max.
Ótimo artigo! I’m trying to learn more about employee stock options. I was granted options 4 years ago and now I’m being laid off so I wanted to make sure I’m taking advantage of the benefits (if there are any.) I received the agreement, signed it, and got a copy of it back signed by the corporate secretary. I never received any other documentation since. The company isn’t doing well, but the options were priced at a penny in the agreement. Should I contact HR or a financial advisor? Just slightly concerned since the company seems a little secretive to me. I have been with them for over 6 years. Thoughts are appreciated 🙂
Sorry for the delay in getting back to you.
Usually after you sign your options agreement, there’s no further paperwork until you exercise.
Usually you have 90 days after leaving until you have to exercise the options, but this varies from plan to plan and the details should be in the paperwork you signed. HR or Finance should be able to help you exercise your options if you want to; If you exercise you’ll pay a penny per share and the shares turn out to be worthless or may turn out to be valuable.
If your instinct is that the company isn’t doing well and the shares will likely not be worth much, the question is whether its worth a gamble. If for example you have 20,000 options at $.01 each, its only $200 to exercise them so it may be worth it even if the odds are against you.
One data point that you will need to finalize your decision is the FMV (fair market value) of the shares for tax purposes. The company should be willing to tell you this; if it is quite a bit more than a penny some taxes will be due on exercise but the shares are more likely to be worth something.
If you can get more specifics about number of shares outstanding, debt, preferences, revenue, cash etc a financial advisor may be able to help; without that they’d would probably be shooting in the dark.
Eu espero que isso ajude,
Thanks Max, I really appreciate it. After reading your article and doing some research I found out I was looking at the par value, not the exercise price. So in my case, I would be severely underwater. Agora eu entendo! Thanks again for sharing your knowledge!
Max, thanks for the great info. I am considering joining a tech startup and wonder if there are enough benefits for both the company and myself for me to be brought on as an independent contractor vs. an employee? Any info you have or can refer me to would be helpful. Obrigado!
Desculpe o atraso. There are quite a few qualifications that you must meet to work as an independent contractor; I don’t have them handy but a quick google search might turn them up. If you plan to work there full time for the long term, usually employment makes the most sense – though sometimes companies have more leeway to pay much more money to contractors; if that’s the case and they’re willing to do it and you qualify, it might make sense. But even then, you will probably not get benefits or stock options. Boa sorte com sua decisão.
Why shareholder needs to pay again 50% the difference between of subscription price Convertible Prefered Stock (pre-IPO) and common stock IPO price?
The terms of preferred stock vary, not only from company to company but also across different series of preferred stock in a company. I am not quite sure what you’re referring too but it may well be specific to the structure of those securities at your company. A bit of context could help, but the answer is probably going to be some form of “because that’s the rule defined for this form of stock in this situation”.
Very informative post, thank you for sharing! May I contact you off-post for questions?
Desculpe o atraso. I may not have time to answer but feel free to try me first initial last name at gmail.
Hi Max – thanks for the insightful article. I work for a private company (PE owned) that’s expecting an IPO in about 12 months. Half of my stock options have vested. I got them at a price of 3 and the current valuation is now at 4.5 or so. What happens if I leave AFTER the IPO but BEFORE the employee lock-up ends. Do I get to leave with my vested (as of departure date) options or do I need to pay the company to buy them at the granted strike PLUS pay the tax on the gains etc. Thanks.
Putting aside any idiosyncrasies of your specific options agreement, typically you have 90 days after departure to exercise. So within that 90 days you need to pay the strike price and you incur a tax liability. Keep in mind the stock could decline before you can sell, so its not just acash flow exposure, you may wind up selling for less than you paid to exercise. Waiting until you are less than 90 days from the lockup ending reduces risk a lot, but I don’t know the opportunity cost to you.
Obrigado pela ajuda! Pergunta & # 8211; I purchased stock and then my company got purchased. by another private company. My understanding is that the main investors lost money on their sale (they sold below what they put into the company). I had common shares, is that why I haven’t seen any payout?
Also, the purchaser then got purchased by a public company…how crappy.
Sorry to hear you didn’t get anything for your shares. Without knowing all the details, it sounds like you’re correct; typically if there isn’t enough to repay the investors, the common shareholders won’t get anything.
Max thank you for the terrific article.
Do you have any experience with seeing employees receive additional option grants with promotions? Is this common or only at key-level positions? I joined the sales team of a 50-person startup at an entry level position about 2 years ago. We’re now at about 100 employees and I’ve been promoted about 1.5 times (first from a lead-gen position to an Account Executive, then after good performance had my quota raised and salary increased, though no title change). I haven’t received any additional option grants but also haven’t asked. Is it reasonable to ask?
Also, say they’ll agree to give me more, what are typical steps that have to happen until they’re officially granted? Is this something that needs to be discussed at the next board meeting, or does the CEO/Exec team have discretion to do this on an ad-hoc basis?
Ótima pergunta. It is common but not universal to receive additional grants with significant promotions, but there is wide variety in how these are handled:
& # 8211; Some companies give them shortly after the promotion (approvals take some time)
& # 8211; Some companies review follow-on grants on a semi-annual or annual basis; people who are promoted are typically good candidates to get them.
& # 8211; Some companies (unfortunately, in my view) operate on a squeaky wheel basis where they are only given when people complain.
I would ask your employer what the process is to ensure that your stock is commensurate with your current contribution to the company. Without knowing all the details, it sounds like it may not be given the progress you’ve made.
One situation to consider is that if the value of the company has increased dramatically, it is possible that the grant you got earlier in the company’s history for a more junior position is larger than the grant someone in your current position would get today. For example, if when you joined an entry level employee received 1000 shares and an account exec received 2500, but today an entry level employee receives 250 shares and an account exec receives 600. If this is the case, many companies would not give you additional shares to go with the promotion (but would increase your salary). While this example may sound exaggerated, if the company has twice as many employees, grants may be half the size per employee – often the board will think about how much stock should go to all employees as a whole per year, and now there are twice as many to share the same number of shares. Also often the grants for different roles aren’t nearly as precise as I described, but the principle remains valid even if the grants per level are ranges.
Options grants almost always have to be approved by the board.
Good luck; it sounds like you’re doing well at a growing company so congratulations.
Thanks again Max, very helpful.
i got an offer to work for a startup on a part-time basis keeping my full time job at my current employer. i will be paid only in the form of stock options (0.1%). not sure if this is a good deal.
I’d look at it 2 ways:
1. What is the startup ‘worth’? If its an unfunded early stage idea it may be something like $1-2 million, in which case .1% is $1-2k for example. Of course if the ‘startup’ is Twitter its worth a lot more. In any case whatever that value is, is it fair compensation for your time? How long do you have to stay to vest the options? 1 month? 1 year? 4 years? And how much work are you expected to do?
2. How does your stake compare to other participants and their contribution? Did your two roommates found it in their garage two weeks ago and they’ll each own 49.95 to your 0.1? Or are there 100 full time employees sharing 50% and investors share the rest?
the startup is in a very early stage with about 13 employees. the options vest at 1/48th of the total shares every month for 4 years. i think i need ask more details before i start the work.
this is my first time working for a startup so i am not very clear..
I am new to this whole equity & stock options.. your article is the only basis for my reasoning.. I need your help! My company is a Green Sustainable clothes recycling company.. relatively new Green field.. not sure what are the general vesting schedules like.. any advice?
we negotiated $1k / week + 5% vested equity.. initially when i started back in Oct/ Nov.. now that its time to draft the actual contract, they are saying how 1%/ year vesting is standard, while for whatever reason i thought the 5% would vest over 1-2 years.. how do i approach this? as of now company is worth $1 million. we are constantly loosing $, it will take at least 6 months - 1 year until we start being profitable..
does the evaluation of what i think im worth from what the company is worth today, or based on projections of what we will make in the future?
we only have 1 kind of stock.. any provisions you are recommending to include?
can i ask for a provision to protect myself from taxes and have it be deducted from my equity instead of paying for it our of my pocket?
Thank you soo much.
Desculpe o atraso. I think 4 years is most common, maybe 5 next most, 1-2 years is unusual. I am not sure what else you are asking. If you are asking about taxes on the equity, if it is options there is typically no tax on vesting if the plan is set up properly (which will almost certainly require an attorney).
The IRS will require cash for your tax payments, they don’t accept stock 🙂
How often should a company revalue their privatly held stock options? Any guidelines around that in the accounting standards?
I am not a tax lawyer but I think for tax purposes the valuations are good for a year. If things change (eg, financing, offer to buy the company, or other significant events) you may want to do it more frequently, and for rapidly growing companies that might go public soon you may want to do it more frequently.
Terrific article thank you !
With startups becoming a global tendency, it becomes complicated to create one model that fits all.
Any thoughts on adjusting vesting schedules, cliff periods and accelerations to ventures occurring in high-risk geographical areas? i. e High-risk understood as high volatility & political unrest.
One thing that I do see adjusted globally is some of the details to fit local tax laws – even US-based companies have to administer their plans differently in different jurisdictions.
I am not expert at all but it may make sense to adjust some other parameters; I don’t know how much they vary from the US. Maybe a reader knows??
Great article, now for my question. Been working for a company 3 years, been vested, for example, 100,000 shares, at 5 cents a share. Leaving company, It looks like the period to exerci se, buying the shares will have about 7 more years. When I leave, how long does one usually, have to buy the shares, if they choose. I am a little confused about the 90days mentioned ealier in the article.
Usually the option period is 10 years but only while you are employed. When you leave, the unvestef options go away and you have 90 days to exercise the vested options. Of course it depends on your specific option plan which may be completely different.
I have some vested preferred shares. I’m not sure if or when the company will be acquired or go IPO. What are my options to liquidate them before any event ?
Your option may be to find someone who wants to buy the stock in a private transaction with limited data. Or it may be that the company has to give permission even if you find a buyer. Trading private stock is difficult. Also if you have options, typically you will have to exercise them before you can sell them.
How would you explain this scenario?
Employee shall be entitled to 25,000 Company common share stock options at an exercise price of $6.25 per common share. These stock options shall be deemed to have been granted January 31, 2012 and shall have a term of 3 years from the effective date granted. These stock options shall remain vested for a period of 24 months in which Employee remains in his current position with the Company.
It sounds like you have between 2 and 3 years in which to exercise them. The vesting language is a bit unclear to me. You may want to get some legal advice, I cannot interpret that clearly.
Let me elaborate on this as I am in the middle of an asset acquisition (a division of the company is being bought) that will close on Jan 31, 2015. I am still trying to understand the language above and below and what my options will be once the transaction is complete. The strike price above given seems a bit high. The division is $5mil and was sold for 7x $35mil. How does this work in terms of an asset being acquired as opposed to the entire company?
“In the event that the Company is acquired or successfully undertakes an initial public offering or reverse takeover, the vesting period relating to the stock options shall be removed and Employee shall have the full and unrestricted ability to exercise the stock options.”
As Twitter is going public soon and I am in the last round of interview. If they offer me a job, will there be any impact to my equity offering if I join before they go IPO or will it be the same after they go IPO? Which will be most beneficiary to me?
Typically people expect the price to increase on I and thus try to get in prior. Predicting what actually happens is hard, for example Facebook went down. But generally joining before IPO is viewed as a better bet.
On the day of my 7hrs in person interview conclusion, HR mentioned that they are not the highest paid company around, they come in like 60th percentile… But their RSU are at great offer. So I am guessing RSU is equal to Stock option they are referring to?
Also, if they offer me RSU/Options, is that something I have to pay for at the evaluation of the company even prior to they going IPO?
Great article, I didn’t know anything about stocks, vesting, options, shares until reading this so it’s helped me understand a bit better! I have been working for a start-up for 5 months and am on the typical vesting schedule of 25% after 1 year and another 6% each month after that. I have been offered just over 5000 shares for .0001.
Our company is expecting to be acquired in the next 90 days so I could end up with no vested options… What happens if we get acquired before I am vested? I am sure there a few different scenarios that could play out depending on who buys us but I’d like to know what COULD happen so I can approach HR about it and see what their plan is. I have read on other ‘stock options explained’ websites that my shares could be wiped out, I’ve read they could be accelerated and I have read they could be absorbed into the new company that acquires us… is that correct? The other thing that complicates it is that our company has a few different products we offer and the one that is getting acquired is the one I work on.. so I’ve heard that when that product/company is acquired in 90 days, our team is going to ‘break off’ and move to a different product (within the same company) and continue on as normal. Isso faz sentido?
Depende. Typically if the acquiring company does not want to keep you they can terminate you and your unvested options will not vest. If they want to keep you they would typically exchange your options for options in the new company. They will have some discretion in how to do this. Hopefully they will want to keep you and will treat you well.
Hi Max.. great article.. a quick question.. after 4 years in a startup i changed the jobs and bought all my vested incentive stock options. Now after 6 months the company is acquired by another company for cash buyout. Since I exercised my stock options just 4 months ago, will I be not considered for Long term Capital gain taxes? Or can I hold on to my share certificates for 9 more months and then will I eligible for Long term capital gain tax rate?
My strong suspicion is that you can’t wait 9 months. Check with an attorney to be sure, it could depend on the details of that specific transaction but usually they close faster than that.
Interesting article! Question for you: I was part of a startup that was acquired and had ISO’s. We received an initial payout and had a subsequent release of the escrow amount withheld. This escrow payout was received over 1 year after the sale of the company. What is this payout considered? Is it a long term capital gains? We were paid out through the employer via the regular salary system (taxes taken) and it was labeled as “Other bonus” but it was clearly part of the escrow. Also, what about a milestone payout that falls under similar circumstance? Obrigado!
I am not a tax attorney so I am not sure. If it came through regular payroll as a bonus my guess is that it is not long term capital gains. If it is a lot of money I would talk to a CPA and / or a tax attorney.
Hi Max – Ótimo artigo! Obrigado. Eu tenho uma pergunta. I joined a company as one of the first 3 sales directors hired and was told in my offer letter I have 150,000 stock options pending board approval. I have now been working for the company for 18 months and have not received any documentation regarding my options. I am continually told that they will be approved at the next board meeting but that has not happened and I was recently told they would be approved after the next round of funding but that did not happen either. What is happening here and what is your recommendation? Thank you in advance for your assistance.
Something is not right. Sometimes the approval will be left out of a board meeting. With really bad luck you could be skipped twice. There is no good explanation for 18 months. The ‘best’ situation from a they-are-not-screwing-you perspective that I can think of is that the next round of funding will be a ‘down’ round and they are waiting to give you a lower price. But something is wrong with your company and I would be looking hard for something new. Sorry to be the bearer of bad news. If the CEO has an explanation that really makes sense feel free to share it and I will let you know what I think, maybe I have missed an innocent explanation but this does not sound right.
Thanks so much for confirming what I was thinking, Max. To my knowledge the board has met several times and our CEO repeatedly states the valuation of our company is going up so I have not heard about a down round. We have had the same original investors for a few years and have recently had a new influx of cash in the form of loan but are still seeking that outside VC investment. I may have another start up offer coming soon and this information will help when I make the decision whether to accept the new position. Thank you again for your help!!
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