This is why I choose to not work for companies that do not have extended exercise windows -- and IMO neither should you.
[1]: https://blog.samaltman.com/employee-equity#:~:text=2)%20Most....
Meanwhile growth had stalled, and competition was getting stronger. I left all my options un-purchased. 6 years later when they had a Private Equity buyout I probably would have made somewhere between a -50% and 2x return (depending on liquidation preferences, subsequent issuance, and debt). At best.. I would have had an non-liquid 12% rate of return, losing out to the S&P500 over the last 6 years.
I know the conventional wisdom here is that options never matter, but the reality is that they sometimes do, especially for companies that are experiencing solid growth. I recently made several hundred thousand dollars off my options from a liquidity event, and I hadn't been at the company for a few years.
It's a great perk, even if it doesn't end up amounting to anything.
Options is how you actually make money at startups. The salary is only enough to make sure you can afford to exercise your options regularly and not starve to death in an extremely HCOL area.
If you value options at $0 - just join FAANG and never join a startup.
That’s a lot of conditions, so IMO they don’t make all that much sense and I much prefer RSUs (maybe I’d think differently as a founder). Plus there are sharp edges like AMT. I’ve been an early employee multiple times at companies that had successful exits and never successfully had all conditions satisfied, and have ended up paying regular income tax rates but had more complicated taxes to file.
If joining a company as a non-founder I’d just take straight RSUs.
RSUs are just shares you don't own yet. When you hit your vesting dates, you don't have to DO anything, they just become yours. You don't have to pay anything to execute and often the company will sell some for you to pay the taxes on them.
I wouldn't say one is definitively better.. there are tradeoffs:
RSUs can be better because you don't have to spend money to get them and they're liquid immediately (or at least soon).
Stock options can be better because your pre-IPO price may be better than the public price but you have no guarantee they'll ever be liquid.
- Stock options are "cheaper" for a startup to give out than RSUs, so you get more shares, ie your equity is higher-leverage. So if things go well, you end up with much much more money than had you gotten RSUs (and yes obviously if things go terribly, you get nothing).
Options = salary
In other words: exercise them as SOON as they vest. I had two financial planners tell me that over 15 years (I fired the first one), and both were 100% correct in hindsight.
Over 8 years this paid off my house in a HCOL area. Sure am glad I turned them into a real asset!
What you can control though are:
1. Knowing your exercise cost in advance - sometimes you can negotiate for a bonus that can subsidize the cost
2. Getting a fair salary and equity cut based on the funding stage; even if you don't exercise all your equity, your package can at least be used in future negotiations: https://topstartups.io/startup-salary-equity-database/
3. Asking for the option to extend exercise windows if you choose, turning ISOs into NSOs
I don’t have the details to be able to say anything useful. But there might be a narrow window of tax circumstances in which 70% of the equity without AMT but with loan costs is better than 100% with AMT + marginal long-term taxes and no loan costs. (Such schemes make sense if you’re concerned about not being able to exercise your options on short notice after getting laid off. If you have the liquidity, however, set it aside, take the yield and hold form after talking to a CPA.)
I'm not 100% sure about this, but IIRC these programs are typically structured as a tax-free loan to you. If the shares end up worthless, the loan is then forgiven.
So while you may not be out the principle of the loan, or the AMT, the forgiven loan may be taxed as income at some point in the future.
We were in an ipo just recently with same-but-different setup:
- sold some immediately at the pop to recuperate the principal
- ... Note this may count as a short-term capital gain (< 1yr, ...) with higher taxes, so factor in. That makes a floor.
- In retrospect, I should have examined the P/E ratio and sanity checked revenue growth against growing into a reasonable P/E multiple, and raised the floor based on that difficult road, but was lazy :) There are other ways to quickly handle risk for the private/public transition: something is better than nothing.
- we kept the rest bc we liked the company long-term, incl.desired risk, vs wanting to pay taxes to diversify it. It of course went way down below the pop, and markets now stink, but everything at this point is 'free money' that we are ok with. We view it as a long-term holding so are ok with that
- If it fails to go an upswing over the next couple of years, we'll sell at a more forgiving long-term capital gains tax rate. Likewise forced to bail sooner if tanks below market.
Everything happening now is basically profit, and we are ok with most outcomes. The real risk was pre-IPO, and the rest is about profit handling. If we had held even earlier-stage shares, as in the early employee or VC case, we would have sold more.
The question is to sell them and invest the cash somewhere better(??) or HODL.
Maybe it will work out better for some of you though. I feel like if you are not extremely passionate about a startup and you are not one of the original founders… great place to learn and build your career but don’t think it will make you rich
Or, much easier is to use a calculator like the one they link[3], and calculate your total taxes on your current earnings, calculate total taxes on the earnings if you were to exercise, and then subtract.
I calculate $81,599-$38,038 = $43,561 in additional taxes, rather than the $41,893 they said.
I agree with the author's take on ISOs:
> It’s a bit complicated – and dry – so if you have ISOs you should probably talk to your tax person
My opinion on ISOs is essentially that for some middle ground between "few enough ISOs that you don't trigger AMT" and "so many ISOs that the potential tax savings are more than big enough to pay for a financial professional", it's not worth it to try and exercise ISOs early.
AMT on ISOs will complicate your taxes for years to come: in some circumstances, you can recover some of the money you paid as AMT on the ISOs in future years -- essentially, ISO bargain element is a specific category of AMT-taxable income which gives you an AMT credit for future years, which you can recover with form 8801 [4]. For several years after my ISO exercise, I was able to eat away that credit by paying the AMT tax amount when it was _lower_ than my standard income tax.
1. https://taxfoundation.org/2022-tax-brackets/
2. https://www.nerdwallet.com/article/taxes/california-state-tax
3. https://smartasset.com/taxes/income-taxes#H3aXczXUcM
4. https://www.irs.gov/forms-pubs/about-form-8801I actually tried to enumerate the scenarios. When I hit five variables I realized the advice would be mostly worthless. That's 32 separate outcomes, some of which are pretty subjective, e.g. do I think this is a viable company?
Nevertheless, I've been down this road a few times. I have some wins and losses. I think this article misses an important point: Exercising is not an all or nothing proposition.
For example: If I join a startup and leave after a year, the difference between my strike price and the 409a price might be non-zero. I can still exercise a percentage of my options to avoid AMT. Maybe I can't exercise all of them without triggering AMT, but chances are I can exercise a fair amount.
If I'm offered an early exercise, I don't have to do 100%. I can do a number that fits my budget. I just have to make sure I file my 83b election form.
edit for a bit of context: Western Europe, renting, unlikely to be able to buy/invest into a house/flat, looking at gold ingots, not the nerve for crypto.
As counterintuitive as it seems, the book actually recommends buying stocks in a bear market since they are priced reasonably. Warren Buffet's famous quote comes to mind: “Be fearful when others are greedy, and greedy when others are fearful.” The book also talks about the importance of long-term investing and discipline.
Look at how far behind the Fed has gotten: https://www.longtermtrends.net/real-interest-rate/
It implies increasing demand for alternative assets like art and collectables, and maybe small land purchases. If there's something you know about or enjoy, it may be worth just getting into buying something, like antique motorcycles, painting and sculpture, photography, classical instruments of the non-piano variety, fancy watches, wine auctions, and other niche high end collectables. Even the top level hi-fi systems from niche makers (McIntosh, Luxman, Audio Research) with limited supply look like they could still be in demand in a decade, just like a good 1970s amp or speakers still costs more than an iPod.
If these sound extravagent, the alternative at that level of investment is to buy a small crypto mining rig. Personally I would rather just take the hi-fi system or the instruments. :)
During the dot com crash in 2000-2001, investors sold all the way down to the bottom (and lots of them sold at the very bottom), and then they eventually sold all the way up to the peak, when instead they could have just held onto their shares.
Rebalancing doesn't really work. That's another thing Bogle showed us.
Of course, if you need the cash, that's another matter. But then you arguably shouldn't have invested it in the stock market to begin with. If you have a time horizon less than 5 years, the market is just too volatile.
holding stocks as they go down in price does not necessarily matter. It only matters at time of sale. Selling an index (or a particular stock or set of stocks) as they go down only to buy them again later is not the right strategy... you're incurring transaction costs at the very least and the fact that you cannot time the market means you'll probably lose out even further.
Hold the index, unless you need the cash flow or forecast that you need more buffer for flexibility and don't want, in the short term, to be penalized for volatile stock prices (e.g. in case you need to sell to service some cash needs).
And if you have the cash, continue to buy the index on the way down. If your view is that the market, over the long term, is the best generator of wealth, then continuing to buy into it is the more rational strategy.
Inaction is sometimes the best action. There are more ways to be dead than being alive.
as consumer prices are surging this no longer may be true
my bet is on physical assets: guitars, gold, watches
Otherwise, Either a targetdate fund, I use VFIFX which should give most benefits of a bull market while giving some cushion due to its diversification.
Or, just a nice total market index fund should be a good option. It may drop a bit but it's as diversified as it gets. I use FZROX, but there are many others.
Some good FTSE options paying nice dividends:
https://uk.finance.yahoo.com/quote/EGL.L https://uk.finance.yahoo.com/quote/TRIG.L https://uk.finance.yahoo.com/quote/UKW.L
Uranium spot price should also be stable/grow depending on many factors:
https://uk.finance.yahoo.com/quote/YCA.L
Disclaimer: far from an expert.
That said; during times of uncertainty cash is king so my advise is to keep it in a time deposit for 6-8 months and wait for the markets to stabilise.
Based on yesterday's fed FOMC guideline they believe there's still a long way to go before they tame the inflation and they are likely to raise interest rates as high as 4%. I don't know if markets have priced 4% in yet or not. All this is to say next 8-10 months are going to be extremely choppy/volatile.
Once you see signs of stability and recovery you can enter equity markets through DCA.
The problem of course is we often don't know either of these things, and having better cashflow, or a pile of savings, now might help you weather the coming storm.
As a companion to the sibling comment recommending the Intelligent Investor (realize that index funds didn't exist when Graham wrote that), I'd keep in mind the mantra, "price is what you pay, value is what you get".
If the holding-period is decades, there are good arguments in favor of stocks/index funds. Shorter-term than that, it may be difficult to provide guidance with any real certainty.
Alternatively keep cash.
- Several hundred dollars each of tuna, prosciutto, a wheel of Parmesan, jerky, rice, flour.
- If you have an oil/wood heater fill up the tank. If gas buy plenty of wool sweaters.
- If you have to drive to work, get a scooter.
- If you live in Czechia, or Finland, (you're not Swiss I gather) a rifle, shotgun and/or pistol. Otherwise upgrade your locks
- Any left over money (if any) buy an assortment of gold, silver and what not.
This might all seem doom gloom, and it is. But inflation is the least of our concerns. We're headed straight to an early 90s Soviet style collapse of our economies.
Why shouldn’t I spend like an Italian small-town bachelor in 1975, if the world is ending anyway.
If this whole societal house of cards comes tumbling down, though, I think most of the people posting on HackerNews are going to be screwed (relevant: https://ext.penny-arcade.com/comic/2019/03/15/deer-diary )
Same with flour, really
My current employer has (and uses) the right to repurchase any shares I hold at the current "fair market value" if I leave the business. That's also fairly standard for privately-held companies, it seems.
We help tech employees manage their finances and specialize in equity compensation.
Our essay on equity and taxes may also be useful to those looking to better understand stock options: https://manual.withcompound.com/equity-guide-for-employees-a...
That said, the common adage of 'winning the startup lottery' is very true. The likelihood of actually (i) joining early enough, (ii) getting a reasonable grant, (iii) having market conditions work in your favour, (iv) the company growing exponentially for years, (v) you actually being able to stay the 3-4 years to vest enough options, and (vi) a liquidation event happening .... is quite low. Most, if not all, of these factors need to happen together.
Other stats: $60M ARR, 120% NRR last year, almost 100% YoY growth during 2021, raised $110M at 40x revenue last year, high NPS, company still has over $110M in the bank, TAM is in the tens of billions, current market penetration is <5%, planning to go public at $200M ARR. So the potential upside is huge.
Work environment is great, I have a great boss and a decently challenging/significant role. I'm a senior engineer making around $170k/year.
I'm curious what you all think - is it worth the risk of staying until I vest? The alternative would be to join a public software company and increase my salary significantly (which would help so much right now - we need a larger house for our kids).
Vesting 2,875 shares per year
2,875 @ $(14-1.50)= $36k/yr
Assuming IPO @ $200MM ARR, public cloud SaaS benchmark rev multiple was roughly 20x last year before the crash.
That’s a $4B valuation, ignoring dilution from here to there:
$4B/70M shares = $57/share
2,875 @ $(57-1.5) = $160k/yr
That’s assuming the market recovers to a similar level, ignoring further dilution, assuming the company continues executing and doesn’t hit unforeseen difficulties, etc.
Can you make that much with less risk by changing jobs?
- Another consideration might be diversification if your vested options represent a large % of your portfolio.
- Another consideration, “work environment is great” isn’t something that everybody can say and this might be worth more than the raise.
If you truly believe they're valuable, then invest when they ipo.
So the worst outcome is that your strike is $1.28 you exercise at $3.13 (costing you $80k + $40k in taxes or whatever -- it gets worse the better the stock is doing, which is one of many reasons why early exercise of options is risky but good) but you're stuck in a holding period while you go public, then when you exit that period you're at $0.50 or something like that, and you've passed over into a new tax year, and you have no cap gains to offset the losses on the stock.
This happened to a lot of employees at dot com companies in the 2001 collapse.
Pick one man, they're not the same.
Does anyone actually work at a company because they do interesting stuff, rather than option terms?
Not quite really—I do enjoy my work and my time at my job, and I would sacrifice some compensation to work at a more interesting/meaningful/fun company. I don't price the enjoyment of 50% of my waking hours at zero, of course. But my primary purpose in working a job is making money, and I don't think that's anything to be ashamed about. I want to buy a house one day.
Very rarely. 99% it's all implement this API route or implement this react component.
Waste of time, but pays well and will let you retire early.
dvs: please convince me otherwise