Should I exercise startup stock options early? Is that a bad move?
February 13, 2017 2:02 PM Subscribe
I'm about to join a startup and have been given some choices, re: salary vs. stock options - please help?
Some relevant points:
• This is my first startup experience and I would be employee #1
• For various reasons, I probably won't stay with them longer than 18 months
• I live in SFO so I need the "higher salary / fewer stock options" scenario
• I think the basic startup idea is sound, but I'm not 100% on board it's that innovative or viable
So I'm wondering, since I'm basically being handed the job, is it insulting if I elect for the topmost salary with fewer options? Does that imply I don't trust the viability of the idea? After 1 year, I would be 20% vested and hold about 12,000 options. I am not trying to get rich off this experience per se, but I would like to know how my hard work might pay off at some point.
Also I've been reading this article which says to always "do an early exercise and immediately file an 83(b) Election" — would this be considered insulting to the owners of the startup (who are also people I like and have worked with before)?
Basically I want to 1) come into this company with optimism & work hard, and 2) maximize whatever dividends there might be without making it seem like a top priority.
Thanks for any advice you have for a startup newb.
Some relevant points:
• This is my first startup experience and I would be employee #1
• For various reasons, I probably won't stay with them longer than 18 months
• I live in SFO so I need the "higher salary / fewer stock options" scenario
• I think the basic startup idea is sound, but I'm not 100% on board it's that innovative or viable
So I'm wondering, since I'm basically being handed the job, is it insulting if I elect for the topmost salary with fewer options? Does that imply I don't trust the viability of the idea? After 1 year, I would be 20% vested and hold about 12,000 options. I am not trying to get rich off this experience per se, but I would like to know how my hard work might pay off at some point.
Also I've been reading this article which says to always "do an early exercise and immediately file an 83(b) Election" — would this be considered insulting to the owners of the startup (who are also people I like and have worked with before)?
Basically I want to 1) come into this company with optimism & work hard, and 2) maximize whatever dividends there might be without making it seem like a top priority.
Thanks for any advice you have for a startup newb.
If you aren't planning to stay more than 18 months then, in my opinion, go for the cash.
There's no possible way those options will be worth anything in that timeframe. And since you're not bringing money/equity into the picture, any options you get handed will probably evaporate the moment you quit.
Actually, now that I reflect on my previous experience with startups, ALWAYS go for the cash. Anything else is a lottery ticket.
posted by JoeZydeco at 2:14 PM on February 13, 2017 [10 favorites]
There's no possible way those options will be worth anything in that timeframe. And since you're not bringing money/equity into the picture, any options you get handed will probably evaporate the moment you quit.
Actually, now that I reflect on my previous experience with startups, ALWAYS go for the cash. Anything else is a lottery ticket.
posted by JoeZydeco at 2:14 PM on February 13, 2017 [10 favorites]
Cash in your hand is a certainty. Your stock options being worth anything are not.
posted by Jubey at 2:19 PM on February 13, 2017 [4 favorites]
posted by Jubey at 2:19 PM on February 13, 2017 [4 favorites]
Response by poster: Thanks guys. Any thoughts on the exercise early and immediately file an 83(b) Election" suggestion?
posted by critzer at 2:24 PM on February 13, 2017
posted by critzer at 2:24 PM on February 13, 2017
Live in Silicon Valley for a long time - Startup options really are like buying a lottery ticket - probably worth very little but the potential for a big payout. Probably better odds than a state lottery but still, you are trading off some money now for maybe (but probably not) big money later. If you afford it, risk has the potential to make you rich but if you can't afford the more likely case that it will be worthless, you are better off with cash now.
On the other hand, going for cash now does send a message about your commitment to the company. If you are going in as a senior person, venture capitalist and other investors view stock options as an indicator or greater commitment to doing whatever it takes to make the company successful. Of course, VCs only care about what is best for them, not what is best for you. So you should consider your role in the company in terms of guessing how others might interpret your choices.
posted by metahawk at 2:25 PM on February 13, 2017 [1 favorite]
On the other hand, going for cash now does send a message about your commitment to the company. If you are going in as a senior person, venture capitalist and other investors view stock options as an indicator or greater commitment to doing whatever it takes to make the company successful. Of course, VCs only care about what is best for them, not what is best for you. So you should consider your role in the company in terms of guessing how others might interpret your choices.
posted by metahawk at 2:25 PM on February 13, 2017 [1 favorite]
Stock options as an investment strategy are not a good bet. Depending on what stats you look at, between 75% and 90% of startups fail, so the odds are against you getting a payout. You should treat stock options as icing on the cake, not the cake itself.
Options aren't worth anything unless the company successfully executes an exit strategy (IPO, merger, acquisition, whatever) at a valuation higher than your options' strike price. It's unlikely the company will have exited in 18 months, so if you leave then, you'll either be paying for exercising those options out of your pocket or perhaps -- if the valuation has increased enough -- doing a cashless exercise (buying on margin typically via the broker managing the options program) based on the then-current valuation.
Statistically, you are probably better off taking that additional salary and investing it in something that provides a more predictable high growth return.
That said, I'm currently taking months off between jobs and just pursuing personal interests, a luxury that I can only afford because of money I earned off options granted by my former company. So when it works, it works. :-) But it took more than a decade for me to get that payout, and I never gave up salary in exchange for more options. I wouldn't bet on options as a short-term investment strategy.
posted by gritter at 2:30 PM on February 13, 2017 [1 favorite]
Options aren't worth anything unless the company successfully executes an exit strategy (IPO, merger, acquisition, whatever) at a valuation higher than your options' strike price. It's unlikely the company will have exited in 18 months, so if you leave then, you'll either be paying for exercising those options out of your pocket or perhaps -- if the valuation has increased enough -- doing a cashless exercise (buying on margin typically via the broker managing the options program) based on the then-current valuation.
Statistically, you are probably better off taking that additional salary and investing it in something that provides a more predictable high growth return.
That said, I'm currently taking months off between jobs and just pursuing personal interests, a luxury that I can only afford because of money I earned off options granted by my former company. So when it works, it works. :-) But it took more than a decade for me to get that payout, and I never gave up salary in exchange for more options. I wouldn't bet on options as a short-term investment strategy.
posted by gritter at 2:30 PM on February 13, 2017 [1 favorite]
Get as much stock/options as possible. Consider it worth 0$ when you think about actual cash-money salary. Always file an 83b at grant time (like seriously, get it in the mail the day after). No one thinks anything of early exercise, if anything it's a vote of confidence in the company since you are actually trading your money for their shares.
Speak to an accountant: this shit is complicated (intentionally, I cynically feel) and you need a professional.
posted by so fucking future at 2:37 PM on February 13, 2017 [3 favorites]
Speak to an accountant: this shit is complicated (intentionally, I cynically feel) and you need a professional.
posted by so fucking future at 2:37 PM on February 13, 2017 [3 favorites]
The big thing that no one has asked: Is the company public yet?
If not, "options" are a great way to avoid paying people real money. Often, by the time a company goes public, common stock (most frequently granted) are devalued, someimes to pennies a share.
I worked for a company that even devalued founders' stock options - these were the people who worked without pay for up to three months in the early days, and gave their blood, sweat, and tears to make the company a success. Not that I'm bitter.
posted by dbmcd at 2:55 PM on February 13, 2017 [2 favorites]
If not, "options" are a great way to avoid paying people real money. Often, by the time a company goes public, common stock (most frequently granted) are devalued, someimes to pennies a share.
I worked for a company that even devalued founders' stock options - these were the people who worked without pay for up to three months in the early days, and gave their blood, sweat, and tears to make the company a success. Not that I'm bitter.
posted by dbmcd at 2:55 PM on February 13, 2017 [2 favorites]
Just as a counter example, my bf worked for a startup that was purchased in an all cash transaction by a Big Company, which meant that his stock was purchased for a reasonably large chunk o' cash.
However, you never know when you get the shares whether they will eventually be worth anything, and if depends a lot on the way the company funds its growth and how early the purchase or IPO comes. Typically, founders who get shares on day one will necessarily be diluted, sometimes very deeply. Also, if the company funds with debt, if the total value of the company is not markedly greater than the principal amount of the debt, shares can be worth very little.
posted by janey47 at 3:17 PM on February 13, 2017
However, you never know when you get the shares whether they will eventually be worth anything, and if depends a lot on the way the company funds its growth and how early the purchase or IPO comes. Typically, founders who get shares on day one will necessarily be diluted, sometimes very deeply. Also, if the company funds with debt, if the total value of the company is not markedly greater than the principal amount of the debt, shares can be worth very little.
posted by janey47 at 3:17 PM on February 13, 2017
I worked for a couple start-ups that handed out options... my opinion is 99.9 percent of the time you want the money. Because the company doesn't just have to go public/get acquired for you to cash out, they have to do it really bigly. Oftentimes the options handed out to employees represent such a small portion of the company that they're not really worth much anyways, even if the company somehow someway strikes it rich. The far more common story is those options will be pretty much worthless. Unless you really truly believe they are onto something very special, take the money.
Then again, I've gotten very cynical about the tech industry in general and think everything they ostensibly do for *your* benefit (free beer and free food! open floor plan! stock options!) are really for *their* benefit (stay through lunch and don't go home! work where we can watch you! take promises of fantastic wealth instead of cold hard cash!)
posted by joechip at 3:18 PM on February 13, 2017
Then again, I've gotten very cynical about the tech industry in general and think everything they ostensibly do for *your* benefit (free beer and free food! open floor plan! stock options!) are really for *their* benefit (stay through lunch and don't go home! work where we can watch you! take promises of fantastic wealth instead of cold hard cash!)
posted by joechip at 3:18 PM on February 13, 2017
Oh, also just to note -- the shares are yours (once they vest) no matter whether or not you leave the company, so the question as to whether you plan to stay for any length of time is only relevant to the extent there's a vesting period (very common and something you should consider in your overall analysis).
posted by janey47 at 3:19 PM on February 13, 2017
posted by janey47 at 3:19 PM on February 13, 2017
Did they actually offer you a menu of comp choices? If they did, then I don't think you'd insult them by picking one from the menu. That said, if you don't really want the equity very much or believe in the business, I would wonder a bit why you're going to work for a startup as employee #1 rather than going to a more established company that can easily pay you a lot of cash.
83(b) elections with early exercise are, as said above, a vote of confidence in the company and would not insult anybody.
posted by phoenixy at 3:19 PM on February 13, 2017 [1 favorite]
83(b) elections with early exercise are, as said above, a vote of confidence in the company and would not insult anybody.
posted by phoenixy at 3:19 PM on February 13, 2017 [1 favorite]
Here are some links with useful background on stock options:
It is not insulting to ask for more salary vs. more options, you explain this as "I need to make rent". It's a hard call to make. The options are way higher risk. OTOH while it's relatively simple for a company to give you a cash raise in future years, they will never be able to give you options again like they can when they hire you. Note that the "you can choose more salary or more equity" is a common negotiating tactic, but it's just a tactic. You can say "nah, I want more of both" and then negotiate from there.
It is definitely not insulting to early exercise; the opposite in fact. The early exercise is a good thing for several reasons. Mostly it helps you avoid tax liability, particularly if the strike price on your option is the same as the FMV of the stock, as is common at a new startup. Also it means you own the stock. A lot of tech company stock options expire 90 days after you leave the company. If you quit the company in 18 months you're suddenly having to either exercise the options (which can be an enormous risk and tax liability) or kiss all your equity goodbye. That's a big problem right now as companies are taking longer and longer to go public. If you already bought the stock, it's easy.
The main downside to early exercise, assuming no tax burden up front, is the risk of the money you are spending to buy the stock. For a brand new startup that cost should be pretty low, since the company is relatively valueless. Also it's not uncommon for a company to loan or give employees the money to buy out their option grants.
(I'll be honest and say your stated intent to leave in 18 months sounds weird to me. Do the founders know? If so, I'd want to know why they would be willing to accept that for an employee #1. If not, you need to decide your own ethics on what you should disclose.)
posted by Nelson at 4:01 PM on February 13, 2017 [5 favorites]
- The Open Guide to Equity Compensation
- How We Explain Stock Options to Team Members & How Much Money They Would Make
- Things you should know about stock options before negotiating an offer
It is not insulting to ask for more salary vs. more options, you explain this as "I need to make rent". It's a hard call to make. The options are way higher risk. OTOH while it's relatively simple for a company to give you a cash raise in future years, they will never be able to give you options again like they can when they hire you. Note that the "you can choose more salary or more equity" is a common negotiating tactic, but it's just a tactic. You can say "nah, I want more of both" and then negotiate from there.
It is definitely not insulting to early exercise; the opposite in fact. The early exercise is a good thing for several reasons. Mostly it helps you avoid tax liability, particularly if the strike price on your option is the same as the FMV of the stock, as is common at a new startup. Also it means you own the stock. A lot of tech company stock options expire 90 days after you leave the company. If you quit the company in 18 months you're suddenly having to either exercise the options (which can be an enormous risk and tax liability) or kiss all your equity goodbye. That's a big problem right now as companies are taking longer and longer to go public. If you already bought the stock, it's easy.
The main downside to early exercise, assuming no tax burden up front, is the risk of the money you are spending to buy the stock. For a brand new startup that cost should be pretty low, since the company is relatively valueless. Also it's not uncommon for a company to loan or give employees the money to buy out their option grants.
(I'll be honest and say your stated intent to leave in 18 months sounds weird to me. Do the founders know? If so, I'd want to know why they would be willing to accept that for an employee #1. If not, you need to decide your own ethics on what you should disclose.)
posted by Nelson at 4:01 PM on February 13, 2017 [5 favorites]
Response by poster: (I'll be honest and say your stated intent to leave in 18 months sounds weird to me. Do the founders know?
Fair. Basically my wife and I are both feeling mixed about San Francisco these days and have kicked around buying a house back in her home state. 18-24mos from now was just a timeline we'd considered. Do I owe it to the employer to mention it if it's not really 100% planned?
posted by critzer at 4:19 PM on February 13, 2017 [1 favorite]
Fair. Basically my wife and I are both feeling mixed about San Francisco these days and have kicked around buying a house back in her home state. 18-24mos from now was just a timeline we'd considered. Do I owe it to the employer to mention it if it's not really 100% planned?
posted by critzer at 4:19 PM on February 13, 2017 [1 favorite]
Take the money up front. Don't mistake the garnish for the meal.
posted by mosk at 4:19 PM on February 13, 2017
posted by mosk at 4:19 PM on February 13, 2017
Do I owe it to the employer to mention it if it's not really 100% planned?
Well, it's more up to founders to suss this out, but employee #1 should be in for the extremely long haul. 5+ years at least. In fact, VCs are literally going to ask the founders how the plan on making sure their early people don't leave.
Originally, Brian Chesky of AirBnB would only hire people if they'd still take the job even if they had only one year left to live. If a potential hire want to spend their last 12 months with their family/traveling/etc., they would not be offered a job. As they gotten bigger, the limit has risen to 10 years.
Another thing to keep in mind: companies are not going public anymore. If you happened to be employee #1 at Uber and had quit after 18 months, after immediately coming up with the money to exercise, you'd be 7 years into waiting for that liquidity event.
posted by sideshow at 4:34 PM on February 13, 2017 [2 favorites]
Well, it's more up to founders to suss this out, but employee #1 should be in for the extremely long haul. 5+ years at least. In fact, VCs are literally going to ask the founders how the plan on making sure their early people don't leave.
Originally, Brian Chesky of AirBnB would only hire people if they'd still take the job even if they had only one year left to live. If a potential hire want to spend their last 12 months with their family/traveling/etc., they would not be offered a job. As they gotten bigger, the limit has risen to 10 years.
Another thing to keep in mind: companies are not going public anymore. If you happened to be employee #1 at Uber and had quit after 18 months, after immediately coming up with the money to exercise, you'd be 7 years into waiting for that liquidity event.
posted by sideshow at 4:34 PM on February 13, 2017 [2 favorites]
Originally, Brian Chesky of AirBnB would only hire people if they'd still take the job even if they had only one year left to live. If a potential hire want to spend their last 12 months with their family/traveling/etc., they would not be offered a job. As they gotten bigger, the limit has risen to 10 years.
What?
posted by STFUDonnie at 5:43 PM on February 13, 2017 [2 favorites]
What?
posted by STFUDonnie at 5:43 PM on February 13, 2017 [2 favorites]
Do I owe it to the employer to mention it if it's not really 100% planned?
Your description of your plan is vague enough I wouldn't feel obligated to volunteer it. I mean you're an employee, not a founder, and certainly not an indentured servant. If you think there's a reasonable chance you'd stay because the job is going well, that's enough for my personal ethical compass. You get to make your own choice.
The idea you might possibly leave is a good reason to early exercise though. If you don't and then you leave in 18 months, you will probably either have to exercise the options at the time you leave (with a larger tax consequence) or lose them.
posted by Nelson at 5:46 PM on February 13, 2017 [4 favorites]
Your description of your plan is vague enough I wouldn't feel obligated to volunteer it. I mean you're an employee, not a founder, and certainly not an indentured servant. If you think there's a reasonable chance you'd stay because the job is going well, that's enough for my personal ethical compass. You get to make your own choice.
The idea you might possibly leave is a good reason to early exercise though. If you don't and then you leave in 18 months, you will probably either have to exercise the options at the time you leave (with a larger tax consequence) or lose them.
posted by Nelson at 5:46 PM on February 13, 2017 [4 favorites]
You can't throw a rock in SF without hitting at least 3 people who own totally worthless stock options.
I have a friend who has drunk the koolaid at his startup and is convinced they're the next big thing (spoiler: they're not) and that he's going to be a millionaire soon. Don't be that guy. Take the cash.
posted by bradbane at 6:34 PM on February 13, 2017 [1 favorite]
I have a friend who has drunk the koolaid at his startup and is convinced they're the next big thing (spoiler: they're not) and that he's going to be a millionaire soon. Don't be that guy. Take the cash.
posted by bradbane at 6:34 PM on February 13, 2017 [1 favorite]
I went through a boot camp in SF, and the advice they gave us for valuing stock in offers was this:
Take the number of shares you're being offered, multiply that by the price per share, and then multiply that by zero.
Take the money.
posted by alphanerd at 8:15 PM on February 13, 2017
Take the number of shares you're being offered, multiply that by the price per share, and then multiply that by zero.
Take the money.
posted by alphanerd at 8:15 PM on February 13, 2017
(~15 years of Bay Area start-up experience here): take the money and don't worry about telling them exactly why. There are many personal financial reasons for someone to prefer cash instead of what we fondly referred to as "more toilet paper" in most of my start-ups and those reasons can and should remain private.
posted by girlhacker at 10:21 PM on February 13, 2017
posted by girlhacker at 10:21 PM on February 13, 2017
Cash is cash. If you want to a nicer way to say why you're picking more cash, you can call it "preserving my cash flow" as a rationale. People will get it.
A lot of good advice here. The other thing to consider is that exercising your options will obviously take money! So, make sure you don't pick the "more options" option and find that you can't/won't plunk down the cash to exercise. There may not be a lot of liquidity in the early years, so you may be stuck with them for a while (so I've heard...not the expert here), vs. if you were to join a company pre IPO and then you have the public market as a way to more easily sell stock.
And last but not least, consider YOUR exit strategy. If you were looking for a new job in your intended new location (presumably a place with fewer start ups and a lower cost of living), how would companies there view your salary/bonus/equity package, and how would they construct a comparable one? Cash is very easy for any company to understand. But the story can be a lot harder when you have to say, well my equity for my private start up is worth X, so you need to at least match me salary/bonus + X.
posted by ellerhodes at 6:10 AM on February 14, 2017 [1 favorite]
A lot of good advice here. The other thing to consider is that exercising your options will obviously take money! So, make sure you don't pick the "more options" option and find that you can't/won't plunk down the cash to exercise. There may not be a lot of liquidity in the early years, so you may be stuck with them for a while (so I've heard...not the expert here), vs. if you were to join a company pre IPO and then you have the public market as a way to more easily sell stock.
And last but not least, consider YOUR exit strategy. If you were looking for a new job in your intended new location (presumably a place with fewer start ups and a lower cost of living), how would companies there view your salary/bonus/equity package, and how would they construct a comparable one? Cash is very easy for any company to understand. But the story can be a lot harder when you have to say, well my equity for my private start up is worth X, so you need to at least match me salary/bonus + X.
posted by ellerhodes at 6:10 AM on February 14, 2017 [1 favorite]
Cash is very easy for any company to understand. But the story can be a lot harder when you have to say, well my equity for my private start up is worth X, so you need to at least match me salary/bonus + X.
Good advice. Also important because if you leave before vesting, a potential employer could respond with, "Well, it looks to us like your equity is worth $0, so that's what we'll add to the salary/bonus we're offering."
Where are you then?
posted by John Borrowman at 8:49 AM on February 14, 2017
Good advice. Also important because if you leave before vesting, a potential employer could respond with, "Well, it looks to us like your equity is worth $0, so that's what we'll add to the salary/bonus we're offering."
Where are you then?
posted by John Borrowman at 8:49 AM on February 14, 2017
You're planning to leave within 18 months; your options would only be 20% vested by then; and you don't fully believe the startup is viable. It doesn't sound like you're particularly confident that the options would be valuable.
posted by We had a deal, Kyle at 9:47 AM on February 19, 2017
posted by We had a deal, Kyle at 9:47 AM on February 19, 2017
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I will suggest you do whatever makes the most sense to you and if anyone ever says anything to you about it implying anything about your opinion of the company, you make it clear that you have never dealt with stock options before, you felt overwhelmed and you did what was easiest for you at the time. If necessary, make some remark about how you may kick yourself later.
If you are really paranoid, you can make sure to put this information out before anyone can accuse you of anything, but not in an overly eager fashion and not until after you have made whatever decision you are going to make, it is a done deal and cannot be undone by well-meaning people who desire to educate you and protect you from your foolishness and ignorance.
posted by Michele in California at 2:12 PM on February 13, 2017