This -- "One of those former employees paid about $100,000 to exercise more than 20,000 incentive stock options (ISOs), plus a tax bill of over $200,000. The other paid about $70,000 to exercise about 5,000 ISOs, and then about $160,000 in taxes. Both former employees took out loans from family members to make the payments, and requested anonymity to discuss their personal financial situations."
Is how many many Silicon Valley horror stories begin. In the dot.com days it was "How working for a startup bankrupted me, and ruined my relationships." All because some situation forced a person to make the bet of whether or not their illiquid asset (stock in a private company) would ever become liquid. And that when it did, selling it would be more valuable than what you paid for it.
Clearly not everyone is as out there as the person mentioned in the article is, although I knew many people who had anywhere from $5K - $50K at risk because they had exercised and were holding. I had stock losses from the dot com implosion that I wrote off for over 10 years (at $3,000 a year) and it would have gone on for the rest of my life if we hadn't had a bit of long term gains to offset it later.
Yeah, this always existed but the magnitude is so much greater for so many more people now because companies are staying private longer.
I think it's healthy to just let vesting mean you get to take it with you, period, no catch. But it's worth noting this means there will be fewer options returned to companies in comparison to the last boom. Scott Kupor made this point although he framed it in a poor way.[1] He notes that it will in theory result in more dilution for employees that stay.
> I think it's healthy to just let vesting mean you get to take it with you, period, no catch.
This sounds great in concept but in practice acquiring the shares is the taxable event. So if a company just gives you shares, that's the taxable event. And since you get taxed on the delta between your strike price and the "fair market value" (even though there isn't one), it would happen on the company's schedule, not your own.
If you extended the exercise window for N years, that would mitigate most of it because you could wait to execute until it's liquid. Or not execute at all if it goes under.
* I've been through two IPOs in the last couple years.. good planning shielded me from having major tax liabilities.
I've never heard of it either but have some reading ahead of me.
Though I've been at both companies pre-IPO so that is probably the first distinction. Post-IPO, the rules are quite a bit different so maybe it's an option now..
Isn't there a 401k limit per year on how much you can do this? Like 18k or something. I can see people abusing this and putting million into the 401k tax free
Yes, for 2017 the limit is 18k . But it’s worth noting for those that may not know how a 401k works (I’m not suggesting that’s you) - it’s not “tax free”, it’s just deferred until withdrawn (for a traditional 401k, there is also a Roth variant like IRAs).
True, as of current only distributions from the account are taxed (and are taxed at current income rates, what happened to make the account grow doesn't come into play). Good clarification!
$18k is the limit for individual contribution. Employers have a separate contribution limit, I think around $55k. So they can freely give each employee $55k worth of cash or stock and that employee can freely contribute an additional $18k of their own money.
But, yes, as pointed out, you do pay taxes, but ONLY when withdraw from it, which you can do without a penalty when you reach a certain age. The capital gains are tax free. But I was saying distributing stock into a 401k is not a taxable event, not that you'd never pay taxes.
It's not abusive to fill up your 401k, that's what it is there for.
> If you extended the exercise window for N years...
We agree. That's all I meant by "you get to take it [your vested options] with you," as opposed to turning them in on the way out the door if you can't pay the strike price + AMT.
"Both former employees took out loans from family members to make the payments"
This isn't the point of the story, but it may be a good bubble-check for some to hear that the idea of having family members in a position to lend this kind of money is mind-boggling to this reader of working-class roots.
Yeah this just looks like poor/risky financial calculus on the part of the former employees.
Also I always incorrectly think that these sorts of option traps are public knowledge, but then every now and then I'm prove wrong by even very smart people I personally know, not being aware of these traps.
Not sure how we fix this situation tbh. For starters "don't join a company without an extended option exercise period" is a decent first order heuristic, but not everyone has that luxury.
I'd say "risky" rather than "poor". They probably knew it was "risky" in the sense that they were extending themselves but perhaps underestimated the tax consequences or risk of the company's fortunes turning.
Many people just stick it out with their employer hoping that their options become liquid; in some ways that can also be risky/poor decision making. Maybe it's an unhealthy work environment or you've stopped learning/advancing in your career, or there's a real opportunity cost where you're foregoing a higher salary.
Maybe these people left because it was the better life decision (or maybe they were terminated), but regardless, most of us would think long and hard about giving up, say, millions of dollars in potential value. Hell, even at $300k in debt it might be a good or worthwhile gamble.
It's easy to dismiss this all as poor decision making, but there are real risk/reward calculations to be done here, and "walk away from millions of dollars" is not always the smart answer, even if it kills in the comment threads.
if you are optimizing for regret minimization I'd probably argue that it's way less regrettable to end up in $200-300k in debt due to a crazy, unexpected snafu occurring (like an economic crash or company crash) than have to know for the rest of your life you could have been a millionaire if you just had bet on the (at the time) reasonably high probability event of eventual liquidity, by exercising options that you worked hard to earn. especially because in the crash scenario, you are surrounded by commiserating peers who also got burned, but in the upside scenario you missed out on, all of your peers except you are living the high life shaking their heads at your "foolish" (in hindsight) risk aversion.
edit: not sure why the downvotes. if you are interested in a treatment of peer-based utility functions that affect risk premia, see https://www.amazon.com/Missing-Risk-Premium-Volatility-Inves... -- in other words, risk may not be best measured as volatility but instead as the expected relative wealth gain/loss to your market peers. for private employee equity, those peers are other optionholders.
Well, a "company crash" is not a wild, unexpected snafu for a startup. It depends on the "facts," such as you know them, of course. But a $200-$300K debt is, bankruptcy option notwithstanding, a major life-altering event if you don't hit your payday. If it's a legitimately high probability payout, it may be a justified risk. But, for most people in that scenario, my guess is that they're wildly overestimating the upside potential.
I was following you for a while...but can you explain how this is different than taking out a home equity loan, going $200-300k in debt, and buying lotto tickets for a chance to become a millionare? Aside from the fact that you wouldn't know whether you would or would not have won that lotto.
The chance of winning the lotto is much much smaller than the chance of Uber surviving to an IPO with value at/above the fair market value that triggered $300k in AMT.
Yep I was referring specifically to the idea of Uber options converting to stock worth some reasonable price. The idea of Uber completely imploding to $0 seems rather far fetched, but it depends on strike price, etc.
There have been cases of lotteries where the expected value of a ticket, though low, was still sometimes positive. And there have absolutely been cases of people who figured that out and organized investors to buy large quantities of tickets for the return.
In this case, the bank that gives you a loan is the one taking the risk. Theoretically. The trouble is that the government doesn't like to let banks fail.
Trump is special. The fact that Deutsche Bank was still willing to lend so much, despite his repeated bankruptcies is very interesting. If I recall correctly, he was involved in a lawsuit with one department at Deutsche over missed payments while a different department was signing over $700 million.
> They probably knew it was "risky" in the sense that they were extending themselves but perhaps underestimated the tax consequences or risk of the company's fortunes turning
"[over-]extending themselves" - risky
"underestimated the tax consequences" - poor; this is a straightforward computation assuming you exercise your rights to get the latest 409a valuation after exercising a single share
It seems like this is a kind of a loophole in the SEC's accredited investor rules. These people aren't accredited investors, yet a private company like Uber is able to take an investment from them by giving them options beforehand.
Perhaps private companies should be forbidden from allowing the exercise of options for non-liquid stock by non-accredited investors, and then also forbidden from requiring un-exercised options that they have granted to non-accredited investors to be forfeited at the end of an exercise window so as to not be ludicrously unfair to the people holding unexercisable options.
This reflects one of the more notable changes of late in the basic SV startup template. More companies are going with so-called "extended" exercise windows, converting from 90-day-window ISOs to multi-year-window NSOs upon exit. Zach Holman (ex-Github) wrote a short, fun post on this a couple years ago.[1] Y Combinator has made it their standard around when Pinterest did it as well.[2]
It was fun to watch Andreessen Horowitz criticize[3] ten year windows and then backtrack[4] after a public flogging. That was when the power balance shifted towards more employee-friendly terms.
The part of this I'm still trying to figure out is when does it makes sense to offer RSUs over ISO/NSOs. My general sense is it works better for bigger companies than tiny startups, but I forget the details.
> A 10-year exercise window is really a direct wealth transfer from the employees who choose to remain at the company and build future shareholder value, to former employees who are no longer contributing to building the business/ its ultimate value.
This is an investor bias toward recency that is ugly to see laid out so clearly. Work, foundational work even, only has intrinsic value if it happens between board meetings. On top of that, it's presented as a kind of wage-earner on wage-earner theft. Incredible.
RSUs vs ISOs > before a priced round (83b is cheap at this point), and after you're a massive company, say $2-5B range (option upside is too small so you put a double trigger vest clause in to protect employees from taxes on illiquid shares)
Early stage would be plain Restricted Stock, as opposed to Restricted Stock Units, which are what is typically granted later on once the company gets large. RSUs are "units" not actual shares of stock with associated ownership rights. The recipient gets an award calculated based on the value of the stock, without actually owning stock.
Uber is specifically and wilfully shitty when it comes to employees’ stock. Large investors have always been able to sell, in part because they hold their shares in LLCs. Smaller investors, however, get blocked.
When the price started crashing, the big guys got out. The little guys remain locked inside. Something similar happened at Palantir. When a big little guy sued, things changed [1].
Uber isn't publicly traded, so its stock price couldn't have "started crashing."
Large investors aren't able to sell because they hold their shares in LLCs. They're able to sell because selling rights are part of the terms they negotiated as part of their agreement to invest. The form of ownership has nothing to do with it, and indeed the use of an LLC as a holding company for corporate stock usually complicates the legal and tax considerations for the sale of stock held by the LLC.
Also not sure why you're including a disclaimer? You're not offering any sort of advice so you don't need to disclaim anything.
With all due respect, this is wrong. Selling SPVs (or stakes therein) containing the shares of a single company is a common institutional tactic.
It sure is. But that's not why the large investors get to sell their stock of Uber. They get to sell because they negotiated the right to sell, which may have included the right to use an SPV to hold their Uver stock. The SPV could have been a corporation, partnership, or LLC; the choice of the LLC form is not what gives the large investors the right to sell. Though based on your response, you probably meant in your original comment to refer to SPVs rather than LLCs.
Disclaimer: I am a lawyer. This is not legal advice, it's legal commentary. The difference: advice applies to a client's specific legal circumstances; commentary applies to third parties.
> But that's not why the large investors get to sell their stock of Uber. They get to sell because they negotiated the right to sell, which may have included the right to use an SPV to hold their Uver stock.
Lots of preferred stock does not carry the right to be transferred (or to be transferred free of other restrictions, e.g. a right of first refusal). SPV transfers are a convenient, if mutually-overlooked, workaround. Their existence is rarely explicitly negotiated.
Another case, more directly tying power and economics: Some companies require Board approval for transfers. Guess who tends to get Board approval.
> you probably meant in your original comment to refer to SPVs rather than LLCs
LLCs are a common way to structure special-purpose vehicles (SPVs). This is Hacker News. Most here are familiar with LLCs; fewer with SPVs.
Disclaimer: I am not a lawyer. This is not legal nor any other kind of advice.
Lots of preferred stock does not carry the right to be transferred (or to be transferred free of other restrictions, e.g. a right of first refusal). SPV transfers are a convenient, if mutually-overlooked, workaround. Their existence is rarely explicitly negotiated.
Are you assuming that most corporate M&A lawyers don't know a basic holding structure taught the first week of the M&A class in law school? SPVs are not mutually overlooked workarounds, they're usually not worth the hassle in most situations. When they exist, they do so because the use of an SPV to hold the stock of the issuing company was explicitly negotiated as part of the investment because the securities law, tax, financing, and other considerations for stock held through an SPV, especially through a pass-through SPV like an LLC, can be very different from stock held directly. This is especially true for startups or other privately held companies with relatively complex ownership structures. (The use of SPVs is not negotiated for publicly traded companies, because the company's permission isn't required to acquire their stock.)
Large investors bought stock. Small investors (employees) bought stock. Price went up. Price went down. The former could get cash for their shares, the latter could not. Price kept going down.
You don’t need to be an M&A lawyer to see why that’s problematic.
I agree with you that it's not fair that the employees got screwed, but they got screwed because Softbank and Uber decided not to make the offer open to the employees that didn't have at least 10,000 shares.
It has absolutely nothing to do with US securities law (or any other US laws), as the current laws don't prevent acquirers from buying stock from unaccredited investors.
Sorry, you're right about that but you're still misplacing the blame.
Softbank made the offer, not Uber. Under US law, the board didn't have much justification for rejecting the offer due to Uber's capitalization needs--the boardmembers could have been sued if they rejected it. Note that the board didn't approve the deal itself, they merely approved Softbank making the offer to the shareholders. The deal is contingent upon enough shareholders participating in the offer.
(Uber's capitalization needs matter here because it goes to whether the board is acting in the best interests of minority shareholders. In this case, the Board can say that w/o investment, those interests become worthless. This is different from a normal, revenue-generating company, like say Qualcomm, where the board can reject this sort of offer if they feel it undervalues the stock of the company, because in such case the lack of a deal doesn't impact the company's ability to operate as a going concern.)
Huh.. the LLC thing is a smart idea.. Seems rational for employees to start their own LLCs for the purpose of buying their options. Maybe the could group together.
An employee can’t sell their options to an SPV any more than they can sell it to any other investor if their agreement places restrictions on selling (most do now days). While otherwise stating several facts, OP is wrong in his overarching premise that the SPV had basically anything to do with large investors being able to sell their ownership or not.
I think you can exercise the options and sell the stock subject to whatever rules you’ve agreed to, like right of first refusal etc... at any rate employees should refuse to work at startups with crappy schemes.. even uber.
He/she's offering a disclaimer bc he/she's a IBD person so his/her words are likely a bit more tied wrt professional obligations than your average engineer on these boards.
Is there some obligation for a licensed engineer to disclaim non-engineering commentary?
It's been my experience that most non-lawyers on HN/Slashdot posting these disclaimers do so because someone once told them they'd be risking unauthorized practice of law charges if they didn't. That was the case once...before the first dotcom boom...Since then, NOLO and others have successfully challenged these restrictions on offering generalized legal advice in most states (including the ones that matter). Nowadays, you're only at risk of unauthorized practice of law if you're applying the law to a specific person's set of circumstances in a manner which clearly indicates that you are specifically providing advice (or other legal services) to them based on those circumstances. This is why NOLO and other guidebooks don't run afoul of these laws--they only provide general advice, it's not tailored to any particular person's legal situation. On a similar note, applying the law to a third-party's circumstances as part of a discussion is not the practice of law, it's commentary.
It's different for a lawyer. Lawyers are held to higher standards when it comes to online advice, but the risk there is whether the advisee believes that a client relationship has been created opening the lawyer up to malpractice liability. I could say that "Uber should do [X] to deal with legal problem [Y]" because it's obvious that Uber, as a well-funded company, has its own lawyers and would not treat my commentary as actionable legal advice or as resulting in a lawyer-client relationship. But I couldn't say "somethirdpartyperson should do [X] to deal with legal problem [Y]" because that person could reasonably treat commentary by a lawyer suggesting a specific action to address a legal issue as legal advice they can act on, and this belief is legally treated in most jurisdictions as creating a de facto lawyer-client relationship.
> but the risk there is whether the advisee believes that a client relationship has been created opening the lawyer up to malpractice liability
Getting a bit meta here, but I read "IANAL" caveats not as limiting personal liability but as a "reader beware". Almost as a courtesy to the reader by saying "I may not know what I'm talking about" without saying it. I doubt people discussing things on these boards are really concerned about the liability attached with actions someone takes after reading their comment.
There is a diversity of approaches. Some companies let anything through. Some want to speak to the newcomer first. Some aggressively exercise their rights of first refusal, or outright block sales, while providing internal tenders for employees. Uber stands somewhat alone in doing none of those things.
Why is this even news? This is the case for pretty much every privately-held company in the valley, because the tax law dictates that [1]. When Pinterest changed their exercise window from 90 days to 7 years, it was big news [2]. When you leave a privately-held company, you have to convert your stock options to stocks to hold onto them, and then AMT kicks in and taxes you on the spread and that often hurt a lot. But in the case of these employees mentioned in the article, they are guaranteed to make a huge profit in the tender offer.
Next up: evil companies in Silicon Valley invalidate employees' RSU when they leave the company.
> Being able to sell shares would imply it's a public company, not a private one, right?
"Public" means your shares are registered [1]. "Private" usually means shares offered under Rule 506 of Reg D [2]. Public and private shares can be bought and sold. The processes, and their respective ease and restrictions, vary.
Palantir [3] and Airbnb [4], for example, recently bought back their employees' shares.
I believe the parent is referring to buy back event. In India, Flipkart has done that a few times delivering a handsome cash windfall to it's employees.
It's actually worse than that--you can have an option that's an ISO if exercised within 90 days of termination, and otherwise an NSO if exercised outside that period (say up to a year, or even 10 years). The only reason to not do it that way is because you hope some leaving employees will just let the options lapse.
There are better ways to manage employee equity, and lots of even the smallest startups do so. E.g. switch to RSUs as early as possible, and have "double-trigger" vesting so taxes are only owed when the shares have a real dollar value.
> To qualify for the tender offer, participants must have at least 10,000 Uber shares and be “accredited investors,” an SEC designation (pdf) for wealthy individuals.
From the SEC link:
> An accredited investor, in the context of a natural person, includes anyone who:
> earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
> has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence)
Wow. There are actually laws in place that say the rich are able to do things that poor people can't.
If you're a former Uber employee who moved somewhere with lower incomes and cost of living, you probably no longer meet the criteria needed to sell these stocks.
Wow. There are actually laws in place that say the rich are able to do things that poor people can't.
This has been discussed many times on HN. The purpose of the law isn't to prevent "poor people" from doing anything. The purpose of the law is to prevent companies from making unregistered sales of stock to people who aren't (1) saavy enough to evaluate the risks of their investment or (2) wealthy enough to survive a financial loss if the investment does not bear fruit.
In a nutshell, the law requires companies wishing to sell to the general public to register with the SEC and meet certain financial disclosure requirements, such as disclosing financials using standardized accounting practices, so that the people buying their stock can judge the financial condition of the company they're investing in.
Startups choose not to register or adhere to these disclosure requirements so they can peddle their BS financial "metrics" to investors using magical unicorn fairy dust bookkeeping.
But to address the direct issue: there are few, if any, Uber stockholders who hold 10,000 shares of the company but would somehow not qualify as an accredited investor. The tender offer isn't intended for small stockholders with de minimis ownership, it's intended for stockholders with enough stock to represent significant fractions of the ownership of Uber.
> This has been discussed many times on HN. The purpose of the law isn't to prevent "poor people" from doing anything. The purpose of the law is to prevent companies from making unregistered sales of stock to people who aren't (1) saavy enough to evaluate the risks of their investment or (2) wealthy enough to survive a financial loss if the investment does not bear fruit.
This is all true, however laws should be judged by their effect, not by their purpose. This law effectively allows rich people to do things that poor people can't. It also may protect un-saavy investors, although I would argue that an un-saavy investor will inevitably find some other way to lose their money regardless of the accredited investor law. They're probably buying bitcoins right now or something.
This law effectively allows rich people to do things that poor people can't.
You're still not getting it. The law does not stop poor people from investing in a private company. It simply prevents the company from advertising its stock to "poor people" unless the company registers with the SEC and demonstrates at least a minimal level of financial controls. A company can sell its stock to poor people as long as it does not solicit them. This is why employees and friends/family can buy stock of private companies.
I will repeat again for emphasis: there is no law that prevents "poor people" from buying private company stock.
The only entity buying stock here is Softbank (AFAIK), who is definitely not a "poor person".
Outside of the handful of companies who have previously invested in the company (who are surely accredited), most entities who would qualify for this tender would be individual early employees. The accreditation requirement is also being held to those individual stock holders and option holders at the company who want to tender a sale of them to Softbank. Many are random engineers on this forum and other early-ish employees. Many may not meet the requirements for SEC accreditation, rules which specifically delineate around the wealth of the entity.
"But to address the direct issue: there are few, if any, Uber stockholders who hold 10,000 shares of the company but would somehow not qualify as an accredited investor."
The article suggests there are folks who exercised 20,000 options (presumably representing one share each), but who had to borrow the money to exercise and to pay tax. Are you suggesting these people probably qualify as an accredited investor, or that their situation is unusual?
I would say their situation is unusual, but based on Uber's valuation in 2016, they would have been accredited investors under the asset test if they held more than 20,000 shares.
It's unusual because the offer values the stock at significantly less than last year's valuations, so they might not be accredited investors anymore...if the Softbank deal goes through and sets a new FMV for Uber stock. (If the deal falls through, then the $33 offer isn't a useful gauge of current Uber stock value.)
The issue becomes when do you assess whether they are accredited investors: before the deal, using 2016 valuations, in which case they should qualify; or after the deal, using the deal's offer price, in which case they do not?
I've never actually dealt with this situation before, where the deal itself could change a potential investor's accredited investor status, so I couldn't say what the outcome would be.
While it's obviously true what the effect of the law is, I find it a more good than bad law. It's intended to protect non-accredited investors from flim-flam investment schemes, by making it a federal crime to solicit money from them. Soliciting money from accredited investors has a certain supposition that they are at least one (if not both) of better able to withstand a loss of principal in an investment and better able to protect themselves from investment scams.
Though the article says otherwise, I don't believe one has to be an accredited investor to liquidate any position, only to initiate one. (I suppose there's an argument that you could swindled on the sale as well, but I find that a lot less compelling than on the buy.)
Have seen this far too often. I was at a successful UK based startup very early on, so my strike price was pennies. Those who joined a year or two later were looking at strike prices in excess of £30 with hundreds shares. Recent investment rounds put the share price at around £120, but as always current employees can't sell until a full sale or IPO.
The result? A swell of employees who want to leave/move on but can't afford to buy their shares and leave. It's lead to a number of people just hanging around, even when their enthusiasm and passion is waining.
Point being, lots of companies offer options on the 4 year vest, 1 year cliff in order to keep great employees. If the end result is that mediocre employees end up hanging around, not motivated, then it works for neither the employee, nor the business.
>> One of those former employees paid about $100,000 to exercise more than 20,000 incentive stock options (ISOs), plus a tax bill of over $200,000. The other paid about $70,000 to exercise about 5,000 ISOs, and then about $160,000 in taxes.
Maybe it's a common knowledge amongst the Silicon Valley engineers, but for those of us who are not in startup, could someone please explain how this is possible? Specifically, in what logic would you owe more tax to exercise the option(which amounts to purchasing at this point) for half the amount of tax you'll pay? How does purchasing something of $X force you to pay $2X in taxes? I've combed through this thread for answers and it seems like a commonly understood problem.
So you join a shiny new "start up" and they offer you some stock options as part of their compensation package. This is typically done to improve compensation without requiring additional liquidity which is typically a limited resource for a start up.
These "ISOs" (Incentive Stock Options) are usually option agreements where the company agrees to let you "purchase" shares of the company in the future at a strike price equal to current valuation. So even if you "exercise" (purchase) the stock 2+ years later you pay the same price you would have if you had purchased the stock on your first day at the company.
The problem with tax here is that in those 2+ years before exercising your "options" your company may have grown/raised more money with greater valuations...so the value of the stock may have doubled, tripled, or increased in even greater value. Well lucky you! According to your ISO you can purchase the stock for the value it was worth 2+ years ago!
"Hold on just a minute," the IRS says, if you purchase a share for $5 that is "valued" at $25 now...what you actually have is an immediate realized gain of $20. Since you spent $5 and acquired an asset worth $25...you should be taxed AMT on the realized gain of $20. Makes sense.
The issue is with "valued" here. In the case of pre-IPO startups the stock you purchased cannot really be sold. Value of a pre-IPO company's stock is more or less correlated to what investors agreed to in your last round of funding (e.g. I <insert_investor_here> agree to give your company $XXXXXXXX for YY% of your company). But at the end of the day, you pay $5 for a piece of paper that says you have stock in a company that is estimated to have the value of $25...but isn't actually worth anything since you can't actually turn it into money. You can't sell that piece of paper for $25 (in fact, you can't sell that paper at all).
Which means you end up owing taxes on a $20 realized gain on an asset you can't sell. That is, you can't turn around and sell some of that newly acquired stock to pay your tax...again it's not really worth anything...it's estimated value is just higher than what you paid for it.
So the question is...where do you come up with the money to pay this tax? Well, in the case of these individuals, you go into debt.
One small detail, an ISO can be priced at literally any value the company wants (within fiduciary responsible limits of course). They don’t have to be (albeit commonly are) set with a strike price of the value of the company at time of grant. This is partly why ISOs are so heavily regulated.
You're right to think it's strange, because it is. It's a tax that was created long ago to try and close a loophole used by executives, but in today's world, it functions as a barrier to participation in the wealth created by young companies.
One could view the AMT as explicitly serving as a way to prevent poor/middle class people from becoming wealthy by way of stock options.
You get taxed on sale as well (as I understand it). I think the issue is that you are purchasing something at a price considered below market value so your estimated net worth changes.
Edit: FTR I think just taxing on sale for the entire realized gain would make sense to me as well...but I imagine this policy is to try and prevent high income individuals from dodging income tax by taking all their compensation in stock.
At the time you exercise the option, the IRS asks for the difference between the price you paid to exercise, and the estimated value of a share of the stock (based on the company's latest 409a valuation). If those numbers are different, you owe tax on the amount of the difference. The IRS doesn't care whether you actually have the ability to realize the gain by selling stock; they just care that you paid $X and now own something worth $(X + N) where N is positive.
This is a massive issue in this era of companies which never allow their stock to freely circulate, and mostly is based on the previous eras in which a startup that granted options would actually go public at some point and allow the holders of the options to sell their stock for money.
I'm pretty sure it's because his strike price was far lower than the value of those shares. For example, if he pays $100 to get 20 shares at $5/share, but the shares are worth $100 each, he just got $2,000 and will need to pay taxes on that larger amount.
There’s regulations around the 409a valuation of the company, it’s not completely based on the unicorn fairy dust that VCs use to value a company. Admittedly 409a valuations are far from perfect for many reasons, but they aren’t the same as the valuations you commonly hear when a company closes a round.
It adjusts to the price on that day far in the future when employees get out of lockup, but if it spans tax years you're still screwed. Basically, when you have gains, you only ensure realistic taxes when you exercise and sell within the same tax year; otherwise you take a huge risk.
https://www.nceo.org/articles/stock-options-alternative-mini... does a decent job explaining it. Essentially, you exercise at the price you were granted the options, but if the value has gone up since then, you're taxed (AMT) on the delta between the exercise price and the current value.
> Under current tax law, the income from exercising ISOs, a special type of option typically reserved for executives and senior employees, falls under an alternative tax calculation designed to prevent high-earners from using deductions to avoid paying tax. Non-qualified stock options, more commonly awarded to regular employees, are taxed the year they’re exercised on the gain in the stock.
Isn't the $100,00K in this case the premium on the option? Taking the price SoftBank is offering, $33, those 20,000 shares are worth 660,000 so a net profit of 560,000 and a tax of about 35%. This seems a little high still so there might be something I'm missing.
The day Uber goes public there will be a mass exodus of employees waiting for years to leave the company. I wonder if Uber will stay private permanently to prevent this?
They hired too many, too fast. When I was there, the whole thing was chaos. Instead of using a cloud provider, they are building basic infrastructure because engineers have to do something.
Beyond the obvious HR issues that Susan Fowler exposed, it was a bad place to work for almost any engineer. I would stay far away if you get an offer there.
As I understand, we tried using AWS to power key infrastructure but ran into scalability/cost issues. We still use 3rd providers for various things but my understanding is that a lot of this eng work is to reduce the costs incurred from these services.
I do agree though, as a new hire, that the culture here is quite a bit on the NIH side, compared to a more traditional software shop.
I probably can't say a lot due to NDA, but does it make sense to you that AWS or Google Cloud can't scale to the level of Uber, such that Uber has to build their own datacenters and write their own Lambda equivalent?
Further, does it make sense that you'd rather buy hardware up front to scale for Halloween and New Years instead of being able to dynamically surge your infrastructure?
Does it make sense that managing your own hardware and data center is extraordinarily expensive? Why do you think public cloud providers are so popular? I don’t buy your scalability argument either. Netflix has about 100m users and moved from having their own data centers to AWS and is extremely profitable. Uber has 40m. Given they might have different requirements for a system it might make sense but if scalability is the main reason, that is a bad excuse to undertake a huge infra investment.
Oh, that was what I was told during new employee training. I'm not in the infra org and tbh, I don't really buy the do-it-in-house-for-scalability argument either. I've also seen other employees express sentiments similar to influx's wrt infra.
I had a technical phone screen there. The idea was to build some web frontend against a RESTFul service. I finished it in about 15 minutes, out of the 60 minutes that had been set aside. The fact that the entry test was that easy was a turn off, especially considering the interviewer seemed surprised at how fast I finished.
But then my (white male) interviewer wanted to spend the left over 45 minutes talking about how diverse Uber was blah blah blah and that they were just unfairly represented in the press. I decided not to follow up after that.
Hopefully their culture improves, but it's not somewhere I'd consider working currently.
I don't know details on stock options, but for RSUs, my understanding is that it works like this: your signing bonus and part of yearly perf bonus is in equity. Signing bonus matures in four years, incrementally. 25% vests at the end of 1st year, the rest vests incrementally by month. Perf bonus vests in 1 yr. Once a RSU vests, it's yours. If you leave the company before a RSU vests, you lose it.
At IPO, RSUs get converted into stocks, however, there's a restriction that you can't sell them for 1 year from the IPO date. Tax obligation is handled by subtracting a portion of the units, rather than by paying out-of-pocket.
Ireland. Every options scheme I'm aware of allows years after options mature to exercise them. Quite surprised that it isn't the same in the US; I don't know why anyone would take the risk of exercising options in a private company while it's private.
Can someone tell me what the rules are from companies who are already listed on NASDAQ and trading publicly?
For example say if I join company X today (where X could be Intel or Cisco or a similar company) and I have 40 RSUs vesting over 4 years. After 2 years I decide to leave X. 20 RSUs would have been vested.
I clearly understand that I am going to lose the 20 unvested RSUs completely. My question is about the 20 vested RSUs. Is there a maximum time limit before which I must sell these 20 vested RSUs? Or can I keep these vested RSUs with me for life and choose to sell them whenever I wish?
If it is indeed true that I can keep these vested RSUs with me for life, how exactly would I be selling these RSUs, say after 20 years? I mean, the company does not give me these RSUs directly on printed paper. The RSUs are held in an account in a website of a finance company such as UBS. I log into my UBS account to access my RSU details and sell them. What if UBS goes out of business in 20 years?
All your granted shares go to your brokerage account. Those are insured by SIPC insured up to a limit. You can sell your shares whenever you want except for certain blackout dates around earnings if you are still employed by that company.
UBS is only holding those shares for you under your own name (a key distinction from having a structure where the shares are actually owned by UBS and you legally own a part of UBS' contract with you).
In the worst case you can ACATS transfer your position to another brokerage (I did this with stock resulting from exercised options). I imagine there are federal laws regarding protecting your equity holdings (cash is more at risk than equity in this regard since they lend it away I think?)
US banks are protected via FDIC insurance. In a similar manner your stocks are protected by SIPC insurance. They don't insure you against loss in value to the stocks. But if the firm winds up going bankrupt and somehow looses your stock, the CEO absconds with the money, they get hacked, etc, then you'll be protected up to $500,000.
They're your shares. They are held in an account sponsored by the employer, but they are yours just like if you bought them from schwab.com.
I don't know what happens if a brokerage goes out of business, but I imagine you're in the same boat as all the people who bought those shares with cash on the open market. Once the stock vests, it's yours.
Typically, when RSUs vest, shares (which you can sell just like any other shares) go into a brokerage account with some percentage of shares automatically sold to cover your estimated tax liability.
How many employees are allowed to participate? Seems like they need to be accredited investors. Many will be left out of this.
under Wikipedia:
In the United States, to be considered an accredited investor, one must have a net worth of at least $1,000,000, excluding the value of one's primary residence, or have income at least $200,000 each year for the last two years (or $300,000 combined income if married) and have the expectation to make the same amount this year. [1]
If it were a public company sure but it's difficult to find a counterparty (at some point of the hedging process, somebody is gonna need to settle the trade with a share of Uber stock, and Uber stock is notoriously illiquid, and we're back to step 1).
Yet another reason why taking startup stock sucks.
Oh? You managed to actually get stock in a startup that seems to be worth something? And you didn't get diluted to a pittance? And the board / founders didn't try to fire you or ask you to give stock back to the pool? Lucky you, you're one of the 1% of the 1%.
Now stay there until the company sells or goes public.
Wait -- they got bought? Congratulations, you just won 2+ years of golden handcuffs at Parent Corporation! Enjoy your new corporate job!
Alternative storyline: You leave startup early, exercise options and go into debt, startup dies, you lost money.
I'd argue that working at crappy companies is the problem and stock comp pain is just one symptom -- I find various forms of crappiness tend to correlate. At places with solid cultural values (Pinterest, Dropbox, Asana, Coinbase to name drop a few), employees are treating reasonably fairly on all dimensions.
2. Is the company giving RSUs? Great; just realize you'll be paying nearly 50% taxes when they convert to shares. (and make sure that the company will actually pay your taxes by buying back shares when they do convert!)
3. Is the company super early stage? Your options are probably worth nothing and probably will amount to nothing. But if it costs almost nothing to exercise (strike + taxes), you might as exercise them now.
That's true. I find that founders of companies that try to screw over their employees with crappy equity schemes are usually in it for the short-term gain; that means that the company is more likely to crash at some point in the future once the founders are all cashed up.
Why do you say 50% taxes on RSUs? You pay tax on them as normal income for their equivalent cash value at vesting. If you want to immediately sell you can. RSUs suck only when the company has one year vesting schedules. Quarterly or monthly vesting schedules work fine by me.
I was unclear in my post and sadly the edit timeout has passed.
You pay taxes on RSUs not at vesting, but when they settle into shares. This might be shortly after vesting; it might be delayed until an acquisition/IPO. (generally it is delayed for companies far away from IPO).
The delay causes multi-year income to be batched into a single year. With a progressive tax system, that results in your money being taxed at a rather high marginal tax rate: If you have a substantial amount you vest a year, it's easiest to use the highest marginal bracket as a conservative guess of what you'll be taking home. In California, that's somewhere on the order of 48% combined state + federal.
Another detail that's not well-known unless you know someone who's gone through it: buying your shares comes with a huge tax bill.
As I understand it, you have to pay tax on the difference between the option price and the value at the time you buy them. So if you have a bunch of options to buy at $10 per share, and the company grows to $90 per share by the time you quit/have to buy your shares, you're taxed on $80 a share. Remember, stock in a private company is worthless until you find a buyer, which is one of the reasons the people referenced in the article had to go into debt to exercise their options.
30% of a large amount of imaginary money ends up causing a gigantic tax bill, paid in actual money.
Canada has a good rule for this: There's a special class of company called Canadian-Controlled Private Corporation (CCPC). When exercising options issued by a CCPC, the tax burden is deferred until disposition.
And the company going belly up (or an acquisition scenario where common shares are worth zip) is a disposition that will make the tax due.
You can however use the Allowable Business Investment Loss deduction to deduct half, and if you hold the CCPC shares for two years, you can deduct the other half. So the danger zone is the two year window after exercising.
Honestly, I think the best answer is just "Because the tax code says so". It really doesn't make sense, you should be taxed on the sale of stocks, not the purchase, but the tax code as it currently stands doesn't work that way.
This is maybe rare, but there's at least 1 late-stage startup that gives RSUs and allows you to do this in practice. Where my friend works, they give you the option to either pay your own taxes when your RSUs vest, or they will purchase an amount of RSUs from you to cover your tax bill. Seems like a really good deal for the employees. I don't know if this can translate to options in any way, I'm only familiar with RSUs.
Right, and they also want to tax income, not accumulation of untradeable shares. They seem to want to treat it as income for purposes of determining tax liability, but not income for purposes of satisfying the very same tax liability. That's like trying to have your cake and eat it too.
Reminds me of California's debt crisis and "Hey! How dare you turn down state IOUs as payment? These are every bit as good as cash. ... Wait, you want to pay your state tax bill with state IOUs? Get that crap away from us!"
Yeah, it would be great also if supermarkets would accept a fraction of the stock, in return for baby food. But I'm not sure why they would be willing to do that.
Also wasn't there a further amendment to that after lobbying to exempt private company shares from this? I recall fred Wilson writing something to that effect.
The moment for me when I realized that options were bullshit was when I got a story about how “we wanted to give you a bigger raise but it’s not in the budget, so here’s $3k less and $3k worth of options”
If you have the dollar amount and the # of shares, then you can backtrack it to a rough percentage.
Also options are a % increase in share price play, so $100,000 strike price can at least give you some information wrt how much $ you can make if the per share price of the company triples, etc.
It's not always better to know % and % only. Let's say you get 1% options of a company valued at $10B. Options are priced at the preferred price, no discount. The company IPOs at $10B. Did you make $100M? Nope you made $0 so far!
"If you have the dollar amount and the # of shares, then you can backtrack it to a rough percentage."
Perhaps. But if a company will not give you a percentage of ownership and expects you to accept this as compensation, you should quit. Full stop.
If the company won't tell you how to fairly evaluate your options, they're operating in bad faith, and should not be rewarded for their sleazy behavior.
I agree with you on that regard fwiw. I've wondered whether a company will tell me what the liquidation preferences and antidilution clauses for its preferred shares are, since that also comes into play pretty significantly wrt evaluating the value of ones equity offer.
This gets into a fuzzy area, since it's a multidimensional equation, and often, even the founders can't tell you what your share is "worth" without lots of caveats and time spent on spreadsheets. There's usually not a single answer.
The important principle, though, is that they shouldn't be hiding anything from you. If the company won't even tell you the percentage your shares represent, you can't trust them to do anything else.
Options have value, but the value comes with a large variance and serious risk.
From a financial perspective, what you want isn't $1,000 worth of options, but a _risk-adjusted_ $1,000 worth of options. Which means in all likelyhood, more like $100,000 worth of options.
Oh, the company doesn't want to give you that much? Well then, "Show me the non-risky money."
But I don't think managers understand that while options might make people stay while things are going well, they make them flee (or worse, stay and become resentful) when things are clearly not going well.
If you reward someone for their service you have to do it right or don't bother at all. A reward that loses its value, is delivered late, or requires the recipient to nag you constantly to deliver at all, has negative value for the person. 'Thanks for nothing' is not something you want to hear from an employee. It crushes motivation.
Options should be seen as worthless; they're mostly an instrument to deceive and screw over employees. It's like a lottery ticket.
I would never accept options from any startup. I will only accept shares if I know and trust the founder(s) or if there is a way to cash out early.
The last startup I worked for full time for 2 years added a clause to my contract which allows me to sell my shares as part of each capital raise that they do.
Over the past few years since I left, I've had two opportunities to cash out. The last one looked pretty decent but I trust the founders so I decided to hold. It's nice to have the choice.
libertarians will tell you that that's on you for not understanding the risks involved, but that's a heartlessness and antisocial position to take.
instead, potential startup employees can educate themselves a bit on how options are a risky derivative investment in the startup you work for. there's really no need for the bitterness in your post once you can properly account for them (they're like lottery tickets that are only mostly, but not completely, up to chance).
if you know some quantitative finance, you can (approximately) value the options (binomial and black-scholes are commonly taught in b-school), but it's really easy to miss important valuation factors that will throw your valuation way off.
for example, preferred shares bought by investors could have (very unfriendly) participating preferred clauses that discount the value of your common shares. you can value that, but you'd need to be pretty good about forecasting the future value of the company to get it right.
a simpler approach is to do a rough back-of-the-envelope calculation like this: i've noticed (completely anecdotally) that startups will give you options at the current valuation that if the company has a good outcome, will net you about 1-5 years worth of salary in the end. if my salary is $100K and i believe the chances of this startup succeeding is 20% (this is the hand-wavy part), my options are worth $20-100K in 5-7 years when the startup exits.
or if you're risk averse, you'll completely discount the value of the options in comp negotiations. that's different by the way from scornful statements like "options have no value" where you're completely surrendering your agency in the matter. in this case, you acknowledge your risk tolerance and account for it.
libertarians will tell you that that's on you for not understanding the risks involved, but that's a heartlessness and antisocial position to take
You're missing the constant drumbeat of "options will make you rich! Work 80 hour weeks, sacrifice your health and relationships, get paid well below market rate, join our startup!"
The entire VC industry is focussed on misleading people like this. One of the reasons for ageism in Silly Valley is that experienced engineers can't be suckered like this.
> they're like lottery tickets that are only mostly, but not completely, up to chance
> if you know some quantitative finance [...]
> a simpler approach is to do a rough back-of-the-envelope calculation [...]
You're looking at this as if you're calculating the odds of winning the lottery and doing backwards math to figure out the viability. That's only half of the picture.
There are a lot of circumstances that do happen and can't be put into a math equation.
1) If a company is striking gold and you have significant options they can fire you before the rest of your options vest to get more stock back into the pool. See: Zynga
2) If the company needs to grow fast but doesn't have enough stock to offer new employees they can ask you to relinquish stock back into the pool to help hire more employees. If you refuse, go back to #1. There was a good post on HN where someone was being strong armed like this.
3) Dilution will happen. You can't account for how founders and investors will dilute things because there's a lot of tricks that can happen here.
4) At the end of the day, you're counting on the company to go public or be sold. The problem is that founders turn down huge acquisitions all the time, only to have the company -- and your stock -- become worthless. See: Digg and the would-be-millionaire employees that ended up with fat debt from exercising.
There's plenty of ways that your stock can go bottom-up that have nothing to do with the success of a company.
Is how many many Silicon Valley horror stories begin. In the dot.com days it was "How working for a startup bankrupted me, and ruined my relationships." All because some situation forced a person to make the bet of whether or not their illiquid asset (stock in a private company) would ever become liquid. And that when it did, selling it would be more valuable than what you paid for it.
Clearly not everyone is as out there as the person mentioned in the article is, although I knew many people who had anywhere from $5K - $50K at risk because they had exercised and were holding. I had stock losses from the dot com implosion that I wrote off for over 10 years (at $3,000 a year) and it would have gone on for the rest of my life if we hadn't had a bit of long term gains to offset it later.
I think it's healthy to just let vesting mean you get to take it with you, period, no catch. But it's worth noting this means there will be fewer options returned to companies in comparison to the last boom. Scott Kupor made this point although he framed it in a poor way.[1] He notes that it will in theory result in more dilution for employees that stay.
[1] https://a16z.com/2016/06/23/options-timing/
This sounds great in concept but in practice acquiring the shares is the taxable event. So if a company just gives you shares, that's the taxable event. And since you get taxed on the delta between your strike price and the "fair market value" (even though there isn't one), it would happen on the company's schedule, not your own.
If you extended the exercise window for N years, that would mitigate most of it because you could wait to execute until it's liquid. Or not execute at all if it goes under.
* I've been through two IPOs in the last couple years.. good planning shielded me from having major tax liabilities.
Unless they put them in your 401k, which is exactly what many (most?) companies do.
I have company stock given to me in my 401k.
https://www.fidelity.com/viewpoints/personal-finance/company...
>More than 15 million people own about $400 billion of company stock in Fidelity-administered workplace retirement plans alone
Though I've been at both companies pre-IPO so that is probably the first distinction. Post-IPO, the rules are quite a bit different so maybe it's an option now..
But, yes, as pointed out, you do pay taxes, but ONLY when withdraw from it, which you can do without a penalty when you reach a certain age. The capital gains are tax free. But I was saying distributing stock into a 401k is not a taxable event, not that you'd never pay taxes.
It's not abusive to fill up your 401k, that's what it is there for.
We agree. That's all I meant by "you get to take it [your vested options] with you," as opposed to turning them in on the way out the door if you can't pay the strike price + AMT.
This isn't the point of the story, but it may be a good bubble-check for some to hear that the idea of having family members in a position to lend this kind of money is mind-boggling to this reader of working-class roots.
(I still wouldn't do it but it's possible.)
Also I always incorrectly think that these sorts of option traps are public knowledge, but then every now and then I'm prove wrong by even very smart people I personally know, not being aware of these traps.
Not sure how we fix this situation tbh. For starters "don't join a company without an extended option exercise period" is a decent first order heuristic, but not everyone has that luxury.
Many people just stick it out with their employer hoping that their options become liquid; in some ways that can also be risky/poor decision making. Maybe it's an unhealthy work environment or you've stopped learning/advancing in your career, or there's a real opportunity cost where you're foregoing a higher salary.
Maybe these people left because it was the better life decision (or maybe they were terminated), but regardless, most of us would think long and hard about giving up, say, millions of dollars in potential value. Hell, even at $300k in debt it might be a good or worthwhile gamble.
It's easy to dismiss this all as poor decision making, but there are real risk/reward calculations to be done here, and "walk away from millions of dollars" is not always the smart answer, even if it kills in the comment threads.
edit: not sure why the downvotes. if you are interested in a treatment of peer-based utility functions that affect risk premia, see https://www.amazon.com/Missing-Risk-Premium-Volatility-Inves... -- in other words, risk may not be best measured as volatility but instead as the expected relative wealth gain/loss to your market peers. for private employee equity, those peers are other optionholders.
Trump is special. The fact that Deutsche Bank was still willing to lend so much, despite his repeated bankruptcies is very interesting. If I recall correctly, he was involved in a lawsuit with one department at Deutsche over missed payments while a different department was signing over $700 million.
"[over-]extending themselves" - risky
"underestimated the tax consequences" - poor; this is a straightforward computation assuming you exercise your rights to get the latest 409a valuation after exercising a single share
Poor? That's yet to be seen.
Perhaps private companies should be forbidden from allowing the exercise of options for non-liquid stock by non-accredited investors, and then also forbidden from requiring un-exercised options that they have granted to non-accredited investors to be forfeited at the end of an exercise window so as to not be ludicrously unfair to the people holding unexercisable options.
It was fun to watch Andreessen Horowitz criticize[3] ten year windows and then backtrack[4] after a public flogging. That was when the power balance shifted towards more employee-friendly terms.
The part of this I'm still trying to figure out is when does it makes sense to offer RSUs over ISO/NSOs. My general sense is it works better for bigger companies than tiny startups, but I forget the details.
[1] https://zachholman.com/posts/fuck-your-90-day-exercise-windo...
[2] https://news.ycombinator.com/item?id=11198991
[3] "A 10-year exercise window is really a direct wealth transfer from the employees who choose to remain at the company" https://a16z.com/2016/06/23/options-timing/
[4] "the 90-day exercise essentially pits cash-rich employees against cash-poor ones. And that isn’t right." https://a16z.com/2016/07/26/options-plan/
This is an investor bias toward recency that is ugly to see laid out so clearly. Work, foundational work even, only has intrinsic value if it happens between board meetings. On top of that, it's presented as a kind of wage-earner on wage-earner theft. Incredible.
When the price started crashing, the big guys got out. The little guys remain locked inside. Something similar happened at Palantir. When a big little guy sued, things changed [1].
[1] https://www.bloomberg.com/news/articles/2017-03-18/at-peter-...
Disclaimer: I am not a lawyer. This is neither legal nor securities advice.
Large investors aren't able to sell because they hold their shares in LLCs. They're able to sell because selling rights are part of the terms they negotiated as part of their agreement to invest. The form of ownership has nothing to do with it, and indeed the use of an LLC as a holding company for corporate stock usually complicates the legal and tax considerations for the sale of stock held by the LLC.
Also not sure why you're including a disclaimer? You're not offering any sort of advice so you don't need to disclaim anything.
"Crashing" is a function of value, not registration status. For example, CDOs "crashed" in the crisis [1].
> Large investors aren't able to sell because they hold their shares in LLCs
With all due respect, this is wrong. Selling SPVs (or stakes therein) containing the shares of a single company is a common institutional tactic.
[1] https://www.bloomberg.com/news/articles/2016-06-14/goldman-s...
Disclaimer: I am not a lawyer. This is not legal nor tax advice.
It sure is. But that's not why the large investors get to sell their stock of Uber. They get to sell because they negotiated the right to sell, which may have included the right to use an SPV to hold their Uver stock. The SPV could have been a corporation, partnership, or LLC; the choice of the LLC form is not what gives the large investors the right to sell. Though based on your response, you probably meant in your original comment to refer to SPVs rather than LLCs.
Disclaimer: I am a lawyer. This is not legal advice, it's legal commentary. The difference: advice applies to a client's specific legal circumstances; commentary applies to third parties.
Lots of preferred stock does not carry the right to be transferred (or to be transferred free of other restrictions, e.g. a right of first refusal). SPV transfers are a convenient, if mutually-overlooked, workaround. Their existence is rarely explicitly negotiated.
Another case, more directly tying power and economics: Some companies require Board approval for transfers. Guess who tends to get Board approval.
> you probably meant in your original comment to refer to SPVs rather than LLCs
LLCs are a common way to structure special-purpose vehicles (SPVs). This is Hacker News. Most here are familiar with LLCs; fewer with SPVs.
Disclaimer: I am not a lawyer. This is not legal nor any other kind of advice.
Are you assuming that most corporate M&A lawyers don't know a basic holding structure taught the first week of the M&A class in law school? SPVs are not mutually overlooked workarounds, they're usually not worth the hassle in most situations. When they exist, they do so because the use of an SPV to hold the stock of the issuing company was explicitly negotiated as part of the investment because the securities law, tax, financing, and other considerations for stock held through an SPV, especially through a pass-through SPV like an LLC, can be very different from stock held directly. This is especially true for startups or other privately held companies with relatively complex ownership structures. (The use of SPVs is not negotiated for publicly traded companies, because the company's permission isn't required to acquire their stock.)
You don’t need to be an M&A lawyer to see why that’s problematic.
It has absolutely nothing to do with US securities law (or any other US laws), as the current laws don't prevent acquirers from buying stock from unaccredited investors.
Nobody said it did. The top of the thread specifically calls out Uber, not securities laws, for being shitty.
Softbank made the offer, not Uber. Under US law, the board didn't have much justification for rejecting the offer due to Uber's capitalization needs--the boardmembers could have been sued if they rejected it. Note that the board didn't approve the deal itself, they merely approved Softbank making the offer to the shareholders. The deal is contingent upon enough shareholders participating in the offer.
(Uber's capitalization needs matter here because it goes to whether the board is acting in the best interests of minority shareholders. In this case, the Board can say that w/o investment, those interests become worthless. This is different from a normal, revenue-generating company, like say Qualcomm, where the board can reject this sort of offer if they feel it undervalues the stock of the company, because in such case the lack of a deal doesn't impact the company's ability to operate as a going concern.)
I agree, but not everyone is in a position to do that.
It's been my experience that most non-lawyers on HN/Slashdot posting these disclaimers do so because someone once told them they'd be risking unauthorized practice of law charges if they didn't. That was the case once...before the first dotcom boom...Since then, NOLO and others have successfully challenged these restrictions on offering generalized legal advice in most states (including the ones that matter). Nowadays, you're only at risk of unauthorized practice of law if you're applying the law to a specific person's set of circumstances in a manner which clearly indicates that you are specifically providing advice (or other legal services) to them based on those circumstances. This is why NOLO and other guidebooks don't run afoul of these laws--they only provide general advice, it's not tailored to any particular person's legal situation. On a similar note, applying the law to a third-party's circumstances as part of a discussion is not the practice of law, it's commentary.
It's different for a lawyer. Lawyers are held to higher standards when it comes to online advice, but the risk there is whether the advisee believes that a client relationship has been created opening the lawyer up to malpractice liability. I could say that "Uber should do [X] to deal with legal problem [Y]" because it's obvious that Uber, as a well-funded company, has its own lawyers and would not treat my commentary as actionable legal advice or as resulting in a lawyer-client relationship. But I couldn't say "somethirdpartyperson should do [X] to deal with legal problem [Y]" because that person could reasonably treat commentary by a lawyer suggesting a specific action to address a legal issue as legal advice they can act on, and this belief is legally treated in most jurisdictions as creating a de facto lawyer-client relationship.
Getting a bit meta here, but I read "IANAL" caveats not as limiting personal liability but as a "reader beware". Almost as a courtesy to the reader by saying "I may not know what I'm talking about" without saying it. I doubt people discussing things on these boards are really concerned about the liability attached with actions someone takes after reading their comment.
They're smart though. This reduces their employee comp cost significantly through cheap internal buybacks.
"200k in equity in option strike value for a very late stage startup is very unlikely to be ever be worth $200k even if an exit event happens.
I suppose that there are many different ways to be evil in this game, and we're just arguing which tactic is worse.
Next up: evil companies in Silicon Valley invalidate employees' RSU when they leave the company.
[1] https://news.ycombinator.com/item?id=9254299 [2] https://news.ycombinator.com/item?id=9253497
Many companies allow employees and ex-employees to sell shares.
"Public" means your shares are registered [1]. "Private" usually means shares offered under Rule 506 of Reg D [2]. Public and private shares can be bought and sold. The processes, and their respective ease and restrictions, vary.
Palantir [3] and Airbnb [4], for example, recently bought back their employees' shares.
[1] https://www.sec.gov/fast-answers/answersregis33htm.html
[2] https://www.sec.gov/fast-answers/answers-rule506htm.html
[3] https://www.nytimes.com/2016/06/29/business/dealbook/palanti...
[4] https://www.nytimes.com/2016/08/12/technology/airbnb-and-oth...
Disclaimer: I am not a lawyer. This is neither legal nor investment advice.
From the SEC link:
> An accredited investor, in the context of a natural person, includes anyone who:
> earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
> has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence)
Wow. There are actually laws in place that say the rich are able to do things that poor people can't.
If you're a former Uber employee who moved somewhere with lower incomes and cost of living, you probably no longer meet the criteria needed to sell these stocks.
This has been discussed many times on HN. The purpose of the law isn't to prevent "poor people" from doing anything. The purpose of the law is to prevent companies from making unregistered sales of stock to people who aren't (1) saavy enough to evaluate the risks of their investment or (2) wealthy enough to survive a financial loss if the investment does not bear fruit.
In a nutshell, the law requires companies wishing to sell to the general public to register with the SEC and meet certain financial disclosure requirements, such as disclosing financials using standardized accounting practices, so that the people buying their stock can judge the financial condition of the company they're investing in.
Startups choose not to register or adhere to these disclosure requirements so they can peddle their BS financial "metrics" to investors using magical unicorn fairy dust bookkeeping.
But to address the direct issue: there are few, if any, Uber stockholders who hold 10,000 shares of the company but would somehow not qualify as an accredited investor. The tender offer isn't intended for small stockholders with de minimis ownership, it's intended for stockholders with enough stock to represent significant fractions of the ownership of Uber.
This is all true, however laws should be judged by their effect, not by their purpose. This law effectively allows rich people to do things that poor people can't. It also may protect un-saavy investors, although I would argue that an un-saavy investor will inevitably find some other way to lose their money regardless of the accredited investor law. They're probably buying bitcoins right now or something.
You're still not getting it. The law does not stop poor people from investing in a private company. It simply prevents the company from advertising its stock to "poor people" unless the company registers with the SEC and demonstrates at least a minimal level of financial controls. A company can sell its stock to poor people as long as it does not solicit them. This is why employees and friends/family can buy stock of private companies.
I will repeat again for emphasis: there is no law that prevents "poor people" from buying private company stock.
Outside of the handful of companies who have previously invested in the company (who are surely accredited), most entities who would qualify for this tender would be individual early employees. The accreditation requirement is also being held to those individual stock holders and option holders at the company who want to tender a sale of them to Softbank. Many are random engineers on this forum and other early-ish employees. Many may not meet the requirements for SEC accreditation, rules which specifically delineate around the wealth of the entity.
The article suggests there are folks who exercised 20,000 options (presumably representing one share each), but who had to borrow the money to exercise and to pay tax. Are you suggesting these people probably qualify as an accredited investor, or that their situation is unusual?
It's unusual because the offer values the stock at significantly less than last year's valuations, so they might not be accredited investors anymore...if the Softbank deal goes through and sets a new FMV for Uber stock. (If the deal falls through, then the $33 offer isn't a useful gauge of current Uber stock value.)
The issue becomes when do you assess whether they are accredited investors: before the deal, using 2016 valuations, in which case they should qualify; or after the deal, using the deal's offer price, in which case they do not?
I've never actually dealt with this situation before, where the deal itself could change a potential investor's accredited investor status, so I couldn't say what the outcome would be.
I don't know how much duty the counterparty has to investigate the validity of the declaration.
Though the article says otherwise, I don't believe one has to be an accredited investor to liquidate any position, only to initiate one. (I suppose there's an argument that you could swindled on the sale as well, but I find that a lot less compelling than on the buy.)
The result? A swell of employees who want to leave/move on but can't afford to buy their shares and leave. It's lead to a number of people just hanging around, even when their enthusiasm and passion is waining.
Not what options are designed for!
Not "deferred compensation"?
Maybe it's a common knowledge amongst the Silicon Valley engineers, but for those of us who are not in startup, could someone please explain how this is possible? Specifically, in what logic would you owe more tax to exercise the option(which amounts to purchasing at this point) for half the amount of tax you'll pay? How does purchasing something of $X force you to pay $2X in taxes? I've combed through this thread for answers and it seems like a commonly understood problem.
So you join a shiny new "start up" and they offer you some stock options as part of their compensation package. This is typically done to improve compensation without requiring additional liquidity which is typically a limited resource for a start up.
These "ISOs" (Incentive Stock Options) are usually option agreements where the company agrees to let you "purchase" shares of the company in the future at a strike price equal to current valuation. So even if you "exercise" (purchase) the stock 2+ years later you pay the same price you would have if you had purchased the stock on your first day at the company.
The problem with tax here is that in those 2+ years before exercising your "options" your company may have grown/raised more money with greater valuations...so the value of the stock may have doubled, tripled, or increased in even greater value. Well lucky you! According to your ISO you can purchase the stock for the value it was worth 2+ years ago!
"Hold on just a minute," the IRS says, if you purchase a share for $5 that is "valued" at $25 now...what you actually have is an immediate realized gain of $20. Since you spent $5 and acquired an asset worth $25...you should be taxed AMT on the realized gain of $20. Makes sense.
The issue is with "valued" here. In the case of pre-IPO startups the stock you purchased cannot really be sold. Value of a pre-IPO company's stock is more or less correlated to what investors agreed to in your last round of funding (e.g. I <insert_investor_here> agree to give your company $XXXXXXXX for YY% of your company). But at the end of the day, you pay $5 for a piece of paper that says you have stock in a company that is estimated to have the value of $25...but isn't actually worth anything since you can't actually turn it into money. You can't sell that piece of paper for $25 (in fact, you can't sell that paper at all).
Which means you end up owing taxes on a $20 realized gain on an asset you can't sell. That is, you can't turn around and sell some of that newly acquired stock to pay your tax...again it's not really worth anything...it's estimated value is just higher than what you paid for it.
So the question is...where do you come up with the money to pay this tax? Well, in the case of these individuals, you go into debt.
One could view the AMT as explicitly serving as a way to prevent poor/middle class people from becoming wealthy by way of stock options.
Edit: FTR I think just taxing on sale for the entire realized gain would make sense to me as well...but I imagine this policy is to try and prevent high income individuals from dodging income tax by taking all their compensation in stock.
This is a massive issue in this era of companies which never allow their stock to freely circulate, and mostly is based on the previous eras in which a startup that granted options would actually go public at some point and allow the holders of the options to sell their stock for money.
why can't the tax be levied when the same stock is liquidated into cash? then you'd get a real price, rather than an estimate.
> Under current tax law, the income from exercising ISOs, a special type of option typically reserved for executives and senior employees, falls under an alternative tax calculation designed to prevent high-earners from using deductions to avoid paying tax. Non-qualified stock options, more commonly awarded to regular employees, are taxed the year they’re exercised on the gain in the stock.
As the article mentioned, Dara has expressed that he would like to take the company public in a couple of years.
Not sure what his pay structure looks like, but assuming it includes equity, I would imagine it would be in his interest to go public
As far as the culture goes, from what I understand it's very backstabby and culty. Basically, Travis set the culture, and it permeates the company.
Beyond the obvious HR issues that Susan Fowler exposed, it was a bad place to work for almost any engineer. I would stay far away if you get an offer there.
As I understand, we tried using AWS to power key infrastructure but ran into scalability/cost issues. We still use 3rd providers for various things but my understanding is that a lot of this eng work is to reduce the costs incurred from these services.
I do agree though, as a new hire, that the culture here is quite a bit on the NIH side, compared to a more traditional software shop.
Further, does it make sense that you'd rather buy hardware up front to scale for Halloween and New Years instead of being able to dynamically surge your infrastructure?
Oh, that was what I was told during new employee training. I'm not in the infra org and tbh, I don't really buy the do-it-in-house-for-scalability argument either. I've also seen other employees express sentiments similar to influx's wrt infra.
But then my (white male) interviewer wanted to spend the left over 45 minutes talking about how diverse Uber was blah blah blah and that they were just unfairly represented in the press. I decided not to follow up after that.
Hopefully their culture improves, but it's not somewhere I'd consider working currently.
At IPO, RSUs get converted into stocks, however, there's a restriction that you can't sell them for 1 year from the IPO date. Tax obligation is handled by subtracting a portion of the units, rather than by paying out-of-pocket.
* "Microsoft Employees Face Tax Nightmare", AccountingWEB, Apr 19, 2001. https://www.accountingweb.com/tax/irs/microsoft-employees-fa...
* "Why Microsoft's Stock Options Scare Me", The Motley Fool, Feb 17, 2000. https://www.fool.com/archive/portfolios/rulemaker/2000/02/17...
* "Gates Regrets Ever Using Stock Options", Martin Wolk, NBC News, May 5, 2005. http://www.nbcnews.com/id/7713133/ns/business-eye_on_the_eco...
Is this the standard time window for exercise?
https://medium.com/@michaeldeangelo/unlocking-the-golden-han...
They give you 7 years to buy, so you don't get stuck with a huge tax bill between exercising the options and being able to sell shares.
For example say if I join company X today (where X could be Intel or Cisco or a similar company) and I have 40 RSUs vesting over 4 years. After 2 years I decide to leave X. 20 RSUs would have been vested.
I clearly understand that I am going to lose the 20 unvested RSUs completely. My question is about the 20 vested RSUs. Is there a maximum time limit before which I must sell these 20 vested RSUs? Or can I keep these vested RSUs with me for life and choose to sell them whenever I wish?
If it is indeed true that I can keep these vested RSUs with me for life, how exactly would I be selling these RSUs, say after 20 years? I mean, the company does not give me these RSUs directly on printed paper. The RSUs are held in an account in a website of a finance company such as UBS. I log into my UBS account to access my RSU details and sell them. What if UBS goes out of business in 20 years?
UBS is only holding those shares for you under your own name (a key distinction from having a structure where the shares are actually owned by UBS and you legally own a part of UBS' contract with you).
In the worst case you can ACATS transfer your position to another brokerage (I did this with stock resulting from exercised options). I imagine there are federal laws regarding protecting your equity holdings (cash is more at risk than equity in this regard since they lend it away I think?)
I don't know what happens if a brokerage goes out of business, but I imagine you're in the same boat as all the people who bought those shares with cash on the open market. Once the stock vests, it's yours.
under Wikipedia:
In the United States, to be considered an accredited investor, one must have a net worth of at least $1,000,000, excluding the value of one's primary residence, or have income at least $200,000 each year for the last two years (or $300,000 combined income if married) and have the expectation to make the same amount this year. [1]
[1] https://en.wikipedia.org/wiki/Accredited_investor
Let's thank the sec for suppressing wages.
Oh? You managed to actually get stock in a startup that seems to be worth something? And you didn't get diluted to a pittance? And the board / founders didn't try to fire you or ask you to give stock back to the pool? Lucky you, you're one of the 1% of the 1%.
Now stay there until the company sells or goes public.
Wait -- they got bought? Congratulations, you just won 2+ years of golden handcuffs at Parent Corporation! Enjoy your new corporate job!
Alternative storyline: You leave startup early, exercise options and go into debt, startup dies, you lost money.
There's just a few ground rules:
1. Is the company giving options? They better have a 7 year exercise window (https://triplebyte.com/blog/fixing-the-inequity-of-startup-e... ); if not, don't work there.
2. Is the company giving RSUs? Great; just realize you'll be paying nearly 50% taxes when they convert to shares. (and make sure that the company will actually pay your taxes by buying back shares when they do convert!)
3. Is the company super early stage? Your options are probably worth nothing and probably will amount to nothing. But if it costs almost nothing to exercise (strike + taxes), you might as exercise them now.
You pay taxes on RSUs not at vesting, but when they settle into shares. This might be shortly after vesting; it might be delayed until an acquisition/IPO. (generally it is delayed for companies far away from IPO).
The delay causes multi-year income to be batched into a single year. With a progressive tax system, that results in your money being taxed at a rather high marginal tax rate: If you have a substantial amount you vest a year, it's easiest to use the highest marginal bracket as a conservative guess of what you'll be taking home. In California, that's somewhere on the order of 48% combined state + federal.
As I understand it, you have to pay tax on the difference between the option price and the value at the time you buy them. So if you have a bunch of options to buy at $10 per share, and the company grows to $90 per share by the time you quit/have to buy your shares, you're taxed on $80 a share. Remember, stock in a private company is worthless until you find a buyer, which is one of the reasons the people referenced in the article had to go into debt to exercise their options.
30% of a large amount of imaginary money ends up causing a gigantic tax bill, paid in actual money.
https://www.collinsbarrow.com/en/cbn/publications/taxation-o...
You can however use the Allowable Business Investment Loss deduction to deduct half, and if you hold the CCPC shares for two years, you can deduct the other half. So the danger zone is the two year window after exercising.
Edit: Can someone point me to IRS docs? or blog explaining?
Reminds me of California's debt crisis and "Hey! How dare you turn down state IOUs as payment? These are every bit as good as cash. ... Wait, you want to pay your state tax bill with state IOUs? Get that crap away from us!"
For regular (Non-qualified) options, current value - strike is considered ordinary income when you exercise.
If you have NQOs, this tax always happens.
This could be fixed in reconciliation, but with the way things are going, I wouldn't be surprised if the house just votes for the senate bill.
https://www.washingtonpost.com/news/wonk/wp/2017/11/30/what-...
Also wasn't there a further amendment to that after lobbying to exempt private company shares from this? I recall fred Wilson writing something to that effect.
Could be worse; in Ireland I’d pay a little over 50% on my options if I exercised them. Which is why I don’t.
I certainly wouldn’t be interested in taking a job in a private company where options were a significant part of compensation.
EDIT: Just noticed from the article, Uber employees had to exercise within 30 days. Wow. 7 years seems to be normal in this country.
https://medium.com/@michaeldeangelo/unlocking-the-golden-han...
As if options had a value.
$100,000 in options sounds great but if it’s .01% of options then you’ll have to be part of a monster IPO or sale to get a windfall.
Always insist on the % amount. Most founders will try not to share it.
Also options are a % increase in share price play, so $100,000 strike price can at least give you some information wrt how much $ you can make if the per share price of the company triples, etc.
It's not always better to know % and % only. Let's say you get 1% options of a company valued at $10B. Options are priced at the preferred price, no discount. The company IPOs at $10B. Did you make $100M? Nope you made $0 so far!
Perhaps. But if a company will not give you a percentage of ownership and expects you to accept this as compensation, you should quit. Full stop.
If the company won't tell you how to fairly evaluate your options, they're operating in bad faith, and should not be rewarded for their sleazy behavior.
The important principle, though, is that they shouldn't be hiding anything from you. If the company won't even tell you the percentage your shares represent, you can't trust them to do anything else.
From a financial perspective, what you want isn't $1,000 worth of options, but a _risk-adjusted_ $1,000 worth of options. Which means in all likelyhood, more like $100,000 worth of options.
Oh, the company doesn't want to give you that much? Well then, "Show me the non-risky money."
But I don't think managers understand that while options might make people stay while things are going well, they make them flee (or worse, stay and become resentful) when things are clearly not going well.
If you reward someone for their service you have to do it right or don't bother at all. A reward that loses its value, is delivered late, or requires the recipient to nag you constantly to deliver at all, has negative value for the person. 'Thanks for nothing' is not something you want to hear from an employee. It crushes motivation.
I would never accept options from any startup. I will only accept shares if I know and trust the founder(s) or if there is a way to cash out early.
The last startup I worked for full time for 2 years added a clause to my contract which allows me to sell my shares as part of each capital raise that they do.
Over the past few years since I left, I've had two opportunities to cash out. The last one looked pretty decent but I trust the founders so I decided to hold. It's nice to have the choice.
If the company wants to "align incentives" with employees, then they should offer some kind of revenue/profit sharing.
instead, potential startup employees can educate themselves a bit on how options are a risky derivative investment in the startup you work for. there's really no need for the bitterness in your post once you can properly account for them (they're like lottery tickets that are only mostly, but not completely, up to chance).
if you know some quantitative finance, you can (approximately) value the options (binomial and black-scholes are commonly taught in b-school), but it's really easy to miss important valuation factors that will throw your valuation way off.
for example, preferred shares bought by investors could have (very unfriendly) participating preferred clauses that discount the value of your common shares. you can value that, but you'd need to be pretty good about forecasting the future value of the company to get it right.
a simpler approach is to do a rough back-of-the-envelope calculation like this: i've noticed (completely anecdotally) that startups will give you options at the current valuation that if the company has a good outcome, will net you about 1-5 years worth of salary in the end. if my salary is $100K and i believe the chances of this startup succeeding is 20% (this is the hand-wavy part), my options are worth $20-100K in 5-7 years when the startup exits.
or if you're risk averse, you'll completely discount the value of the options in comp negotiations. that's different by the way from scornful statements like "options have no value" where you're completely surrendering your agency in the matter. in this case, you acknowledge your risk tolerance and account for it.
You're missing the constant drumbeat of "options will make you rich! Work 80 hour weeks, sacrifice your health and relationships, get paid well below market rate, join our startup!"
The entire VC industry is focussed on misleading people like this. One of the reasons for ageism in Silly Valley is that experienced engineers can't be suckered like this.
> if you know some quantitative finance [...]
> a simpler approach is to do a rough back-of-the-envelope calculation [...]
You're looking at this as if you're calculating the odds of winning the lottery and doing backwards math to figure out the viability. That's only half of the picture.
There are a lot of circumstances that do happen and can't be put into a math equation.
1) If a company is striking gold and you have significant options they can fire you before the rest of your options vest to get more stock back into the pool. See: Zynga
2) If the company needs to grow fast but doesn't have enough stock to offer new employees they can ask you to relinquish stock back into the pool to help hire more employees. If you refuse, go back to #1. There was a good post on HN where someone was being strong armed like this.
3) Dilution will happen. You can't account for how founders and investors will dilute things because there's a lot of tricks that can happen here.
4) At the end of the day, you're counting on the company to go public or be sold. The problem is that founders turn down huge acquisitions all the time, only to have the company -- and your stock -- become worthless. See: Digg and the would-be-millionaire employees that ended up with fat debt from exercising.
There's plenty of ways that your stock can go bottom-up that have nothing to do with the success of a company.
https://equidateinc.com/company/uber