Stock Option Counsel's Mary Russell in New York Times on Liquidity for Private Stock

Stock Option Counsel - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock.  Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

For start-up employees, the more explicit language around stock prohibitions can create downsides, said Mary Russell, a lawyer based in Palo Alto, Calif., who works with start-up workers to evaluate their equity compensation. When employees leave start-ups, they often have the opportunity to buy stock that has been set aside for them at a low price. But if their start-ups have been successful, they also need money to pay taxes that will be levied on the increased value of the stock.

Ms. Russell said it is not unusual for a client to say their private company stock is worth $3 million, but that they need to come up with $1 million to pay for the shares and cover the tax bill. “In the past, the solution has been to find a third-party buyer and sell enough of the stock to cover all of those costs,” Ms. Russell said.

The use of more explicit language to cover what is and is not allowed could eliminate the option of raising cash from a third party, Ms. Russell said.

She added that employees rarely read their paperwork carefully. “In some cases a company is simply clarifying its terms, but some are making a black-and-white shift to more restrictive terms,” she said.
— Katie Benner, Airbnb and Others Set Terms for Employees to Cash Out, New York Times
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Advice for startup employees in bill gurley's "on the road to recap"

Startup employees have been curious lately about how economics at their companies and in the broader VC world are affecting the value of their shares.  Benchmark partner Bill Gurley has published a popular post on the wider topic, and he includes some advice specific to employees at unicorn startups. I won't bother with a summary here, as a read of the full article is necessary for a comprehensive view of his advice. So I'll simply suggest Bill Gurley's On the Road to Recap: Why the Unicorn Financing Market Just Became Dangerous...For All Involved.

Stock Option Counsel - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock.  Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

 

Quora: Formula for Option Grant Size at a Startup?

Stock Option Counsel - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock.  Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

QUORA QUESTION: Is there a generic formula I can apply to determine fair pre-IPO stock option grants based on the company's size and # of fully diluted shares?

I am a tech worker who has spent all of my career with post-IPO companies and am negotiating an offer with a well-established startup of approximately 250 employees. I am not taking on a senior role.

This is a simplified version of part of the process I follow with my Stock Option Counsel clients who are evaluating private company equity offers. It works best with a mid-stage startup which has had a recent funding round from a well-known VC (a.k.a. someone whose investment decision you would trust).

Recent VC Company Valuation / Fully Diluted Shares = Current "Value" per Share

Current Value per Share - Exercise Price per Option = Intrinsic Value per Option

Intrinsic Value per Option * Number of Options = Intrinsic Value of Equity Offer

Intrinsic Value of Equity Offer / Number of Years of Vesting = Annual Value of Equity Offer

Annual Value of Equity Offer + Value of Benefits + Salary + Bonus/Commission = Total Annual Compensation

Use Total Annual Compensation to evaluate the offer or compare to market opportunities.

Certain legal terms may change the risk and, therefore, the appropriate number of shares. For more on ownership limitations, see Ownership - Can the Company Take Back My Vested Shares? For more on how companies decide the right offer for startup employees, see Bull’s Eye: Negotiating the Right Job Offer.

Stock Option Counsel - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock.  Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

Quora Question: Why do companies use equity compensation?

Stock Option Counsel - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock.  Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

Quora Question: Why are companies more willing to pay you with stock options and other benefits rather than straight up cash/salary increase?

Mary Russell: Thanks for asking me to answer this. Public companies emphasize equity because it matches pay with overall company performance. If the stockholders are doing well, employee stockholders do well. 

Silicon Valley-type private companies emphasize equity because -- historically, anyway -- they were strapped for cash. They can offer employees options to purchase common stock at a discount from the price investors are paying for preferred stock. So employees receive a discount on an unusual investment in exchange for lower salaries. 

But in today's marketplace for talent at these private companies, employees are negotiating for higher cash salaries than in the past. I see two reasons for this. First, private companies are having a much easier time raising cash than in years past because of the wider world of investor economics. When equity is expensive, cash becomes cheap. So these companies can and do offer higher salaries. Second, private companies are having to compete with hugely successful local public companies who are aggressively recruiting and retaining talent with impressive cash and equity offers.

Stock Option Counsel - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock.  Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

 

Is the battle for talent delaying unicorn ipos?

Stock Option Counsel - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock.  Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

Frederic Kerrest, Chief Operating Officer and Co-Founder of Okta lists recruitment as one of a few factors that influenced their choice to delay their IPO. 

There’s a few reasons specifically that we thought about when we went through the calculation [of taking another private financing rather than having an IPO]. Five or ten years ago, companies like us would have gone public at this point instead of doing this financing round, because it’s about the same amount of money you would raise in a typical IPO.

First of all, it’s interesting for potential employees who want to come join the company. The opportunity to join a pre-IPO company is something that’s interesting to them, even if it’s just 6 or 9 months before.
— Frederic Kerrest, Chief Operating Officer & Co-Founder, Okta
Do you think it’s harder to hire certain folks if you were public as opposed to being pre-public?
— Dan Primack, Fortune
I think it’s a slightly different kind of person who wants to join a pre-public versus a ... public company. They have different profiles, they’re looking for different things. They’re looking for different things in terms of the company, in terms of the job, in terms of other things.
— Frederic Kerrest, Chief Operating Officer & Co-Founder, Okta

Stock Option Counsel - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock.  Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

Eliminate Negotiation in Startup Compensation???

Stock Option Counsel - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock.  Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

Ellen Pao, the interim CEO of Reddit, has seen women struggle with salary negotiations. So she’s eliminating money talk from the company’s hiring process.

In her first interview since losing the landmark Silicon Valley trial, Pao told The Wall Street Journal that she has eliminated salary negotiations from the hiring process at Reddit, where she currently serves as interim CEO.
— Mashable http://mashable.com/2015/04/06/ellen-pao-reddit-salary/
Men negotiate harder than women do and sometimes women get penalized when they do negotiate. So as part of our recruiting process, we don’t negotiate with candidates. We come up with an offer that we think is fair. If you want more equity, we’ll let you swap a little bit of your cash salary for equity, but we aren’t going to reward people who are better negotiators with more compensation.
— Ellen Pao, as quoted in the Wall Street Journal
I appreciate ... that it actually puts a substantial burden on Reddit to pay what they think someone is worth, not what they think they can get away with. This is not an easy way out for them - far from it.
— Gayle Laakmann McDowell @gayle via @quora http://qr.ae/LNR0U

Stock Option Counsel - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock.  Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

Reddit to Share Stock with Users

Stock Option Counsel - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock.  Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

What’s new and interesting is that the round was led by an individual — Y Combinator president Sam Altman — and that he, along with the other investors, plans to allocate 10 percent of the equity they are buying to Reddit users.

How exactly that’s going to be managed hasn’t yet been figured out (or, more importantly, approved by bankers and lawyers), but Altman said Reddit may dole out shares using a distributed accounting system, a la the bitcoin block chain.
— @LizGannes, Reddit @ http://on.recode.net/1pndO1M

Stock Option Counsel - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock.  Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

Startup Equity - Ownership - Can the Company Take Back My Vested Shares?

Stock Option Counsel - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock.  Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

This is a companion piece to the Gold Standard of Startup Equity - A Guide for Employees. It describes why startup employees should ask about Standard #1: Ownership: Can the Company Take Back My Vested Shares?

Image republished with permission of Babak Nivi of Venture Hacks, who warns startup employees to "run screaming from" any startup equity offer that gives the company the right to repurchase vested stock: "Some option plans provide the company the right to repurchase your vested stock upon your departure. The purchase price is 'fair market value.' Guess whether the definition of fair market value is favorable to you or the company... Founders and employees should not agree to this provision under any circumstances. Read your option plan carefully."

Image republished with permission of Babak Nivi of Venture Hacks, who warns startup employees to "run screaming from" any startup equity offer that gives the company the right to repurchase vested stock: "Some option plans provide the company the right to repurchase your vested stock upon your departure. The purchase price is 'fair market value.' Guess whether the definition of fair market value is favorable to you or the company... Founders and employees should not agree to this provision under any circumstances. Read your option plan carefully."

The news loves a gold rush story about a Google chef or a Facebook muralist who made millions on startup employee equity. But not all startup equity is created equal. If a startup adds "repurchase rights for vested shares" to its employee stock agreements, its employees have to keep their jobs all the way until an IPO or acquisition in order to get the full value of their shares.  If you're working at a tech startup with a gold rush dream, make sure you avoid the dreaded:

Repurchase rights for vested shares are "horrible for employees" - YC's Sam Altman

In a true startup equity plan, employees earn shares of common stock which they continue to own when they leave the company. Just as they would own shares of public company stock they bought through a broker, they own their startup stock until they are paid for the shares when they company is acquired or they are able to sell them on the public markets after an IPO. There are special rules about vesting and requirements for exercising options, but once the shares are vested and purchased, the employees of true startups have true ownership rights.

But some startups design their equity plans so that employees earn shares that they don't really own. If the company includes repurchase rights for vested shares, the company can purchase the employees' shares upon certain events, most commonly after an employee leaves the company or is terminated by the company. Most repurchase rights expire after an IPO or acquisition so that if the employee is still there at the IPO or acquisition they get the full value of the shares. If not, the company can buy back the shares at a discounted price, called the "fair market value" of the common stock on the date of the buyback ("FMV").

These repurchase rights are included in stock option plans, stock option agreements or company bylaws, but most employees do not know about these value-limiting terms when they join a company or even when they choose to exercise their stock options. That's why the Gold Standard of Startup Equity - A Guide for Employees - suggests that employees ask before they accept startup equity: Can the Company take back my vested shares?

How Repurchase Rights Take away Employee Equity Value

One might think that an employee might be happy to sell their shares to the company. But repurchase rights are not designed with the employee's interests in mind. They allow the company to buy the shares back against the employees will and at a discounted price per share. As Y Combinator head Sam Altman wrote, "Some companies now write in a repurchase right on vested shares at the current common price when an employee leaves.  It’s fine if the company wants to offer to repurchase the shares, but it’s horrible for the company to be able to demand this."

The  common price at the date of repurchase is not the true value for two reasons. First, the true value of common stock is close to the preferred stock price per share (the price that is paid by investors for stock and which is used to define the value of the startup). Second, the real value of owning startup stock comes at the exit event - IPO or acquisition. This early buyback prevents the employee realizing that value.

Example - Company Does NOT Have Repurchase Rights for Vested Shares - Employee Value: $1.7 Million

Here's an example of how an employee in a true startup earns the value of startup stock. The company cannot buy his or her shares at departure, so he or she holds them until IPO. In the case of an early employee of Ruckus Wireless, Inc., the value would have grown as shown below.

This is an example of a hypothetical early employee of Ruckus Wireless, which went public in 2012. It assumes that the company did not offer equity with the "horrible" repurchase rights for vested shares. Therefore, the employee was able to hold his or her shares until IPO and earn $1.7 million. These calculations were estimated from company public filings with the State of California, the State of Delaware, and the Securities and Exchange Commission. For more on these calculations, see The One Percent: How 1% of Ruckus Wireless at Series A Became $1.7 million at IPO. 

This is an example of a hypothetical early employee of Ruckus Wireless, which went public in 2012. It assumes that the company did not offer equity with the "horrible" repurchase rights for vested shares. Therefore, the employee was able to hold his or her shares until IPO and earn $1.7 million. These calculations were estimated from company public filings with the State of California, the State of Delaware, and the Securities and Exchange Commission. For more on these calculations, see The One Percent: How 1% of Ruckus Wireless at Series A Became $1.7 million at IPO. 

If you want to see the working calculations, visit the document on GoogleDocs.

Example - Company DOES Have Repurchase Rights for Vested Shares - Employee Value: $68,916

If the company had the right to repurchase the shares at the fair market value of the common stock at the employee's departure, and the employee left after four years of service when his shares were fully vested, the buyout price would have been $68,916 (estimated). This would have taken away a value of $1,635,054 by the time of the IPO:

Hypothetical - If the company could have repurchased the vested shares at departure, the employee would have lost $1,635,054 in value. When you are evaluating an equity offer, always ask: Can the company take back my vested shares? For more, see Gold Standard of Startup Equity - A Guide for EmployeesIf you want to see the working calculations, visit the document on GoogleDocs.

If you want to see the working calculations, visit the document on GoogleDocs.

Here's the point:

When you are evaluating your startup equity, find out if the company has the right to repurchase your vested shares. If they can do so, you don't really own them. That changes their value significantly. If you have the power to negotiate this term out of your documents, do so. If not, incorporate this value-limiting term into your evaluation of your equity. Not all equity is created equal. 

For more, see Stock Option Counsel's Gold Standard of Startup Equity - A Guide for Employees. If you would like professional guidance in evaluating your startup equity,  contact Stock Option Counsel - Legal Services for Individuals.

Stock Option Counsel - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock.  Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

In the News: Startup Employees in the Dark on Equity

Stock Option Counsel - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock.  Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

Mary Russell, an attorney who founded Stock Option Counsel to help employees evaluate their equity compensation, says the first step is for employees to make sure any equity is theirs to keep. Some companies have repurchase rights in their equity agreements that give them a right to buy back shares and options from any employee who leaves; and some give founders or investors broad latitude to change the terms.

“If the company can take back employee shares it dramatically limits the value of those shares,” says Ms. Russell. “It’s the sort of thing an employee needs to know about when they go into a job.” She says it’s as simple as asking whether the company can take back vested shares.
— Katie Benner, The Information

See Katie Benner's full article, Startup Employees in the Dark on Equity. The Information is a subscription publication for professionals who need the inside scoop on technology news and trends. 

Stock Option Counsel - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock.  Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

Repurchase Rights are "Horrible" for Employees

Stock Option Counsel - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock.  Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

As an aside, some companies now write in a repurchase right on vested shares at the current common price when an employee leaves. It’s fine if the company wants to offer to repurchase the shares, but it’s horrible for the company to be able to demand this.
— Sam Altman, YC

What can you do about it? Ask before you join:

Can the company take back my vested shares?
— Mary Russell, Stock Option Counsel

For more from Sam Altman, see his post, Employee Equity. For more on questions to ask to make sure you have true startup equity, see our post, Startup Equity Standards - A Guide for Employees.

Stock Option Counsel - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock.  Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

The Gold Standard of Startup Equity - A Guide for Employees

Stock Option Counsel - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock.  Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

Learn the three standards that define Startup Equity and three questions to ask to know if you have the real thing. 

1. Ownership - “Can the company take back my vested shares?”

2. Risk/Reward - “What information can you provide to help me evaluate the offer?”

3. Tax Benefits - “Is this equity designed for capital gains tax rates and tax deferral?”

Stock Option Counsel - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock.  Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

Links - Best web content on startup employee stock

Stock Option Counsel - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock.  Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

Here's links to the best web content on startup employee stock:

1.  Risk/Reward

Calculating percentage ownership and understanding fully diluted capital, #1-2 of The 14 Crucial Questions About Stock Options, Andy Rachleff, the Wealthfront Blog

How to value an offer, Right to Value How-To, Stock Option Counsel Blog

How to use the company's VC valuation to evaluate your equity offer, Video, Stock Option Counsel Blog

How to calculate the future value of your equity by estimating dilution and valuation, John Greathouse's Blog

How to ask about valuation, #11-13 of The 14 Crucial Questions About Stock Options, Andy Rachleff, the Wealthfront Blog

How preferred stock rights make common stock less valuable, Stock Option Counsel Blog

Knowing your market rate with regards to startup equity, #3-4 of The 14 Crucial Questions About Stock Options, Andy Rachleff, the Wealthfront Blog

How to know how much is enough equity for a pre-Series A startup, Stock Option Counsel Blog

Four factors of how startups decide your salary and equity Mary Russell & Boris Esptein on the Stock Option Counsel Blog

Four factors of how startup decide your equity offer VIDEO Mary Russell & Boris Esptein on the Stock Option Counsel Blog

Negotiating Compensation An Engineer's Guide to Silicon Valley Startups

2. Vesting

Acceleration upon change of control, Gil Silberman on Quora

When acceleration upon change of control does not make sense, Gil Silberman on Quora

What is vesting; what is acceleration upon change of control? #5 & #8 of 14 Crucial Questions about Stock Options, Andy Rachleff, Wealthfront Blog

Does my vesting make sense? Stock Option Counsel Blog

3. Ownership

Can the company take back my vested shares if I leave?, #6 of The 14 Crucial Questions About Stock Options, Andy Rachleff, the Wealthfront Blog

How Skype's repurchase rights gave certain employees $0 of $8.5 billion acquisition payouts, Felix Salmon on Reuters Blog

4. Tax Benefits

Three Ways to Avoid Tax Problems When You Exercise Options, Bob Guenley, Wealthfront Blog

Ensuring company compliance with tax rules - and your tax rights - when negotiating an offer, #9-10 of 14 Crucial Questions About Stock Options, Andy Rachleff on the Wealthfront Blog

Incentive stock options, Michael Gray, CPA

Non-qualified employee stock options Michael Gray, CPA

5. Overview

The 14 Crucial Questions About Stock Options, Andy Rachleff, the Wealthfront Blog

Stock Option Counsel - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock.  Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

Risk/Reward of Startup Employee Stock

Stock Option Counsel - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock.  Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

Startup employee equity should reward the risk you take in joining the company. Here's some ways to understand equity value so you can decide if your equity meets this standard.

 For more information on joining an early stage startup before there is a VC valuation, see Joining An Early Stage Startup? Negotiate Your Salary and Equity with Stock Option Counsel Tips.

Stock Option Counsel - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock.  Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

March 14 Event: Bill of Rights Discussion

Stock Option Counsel - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock.  Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

Thanks to the 300 people who joined Chris Zaharias, @SearchQuant, and Mary Russell, Attorney Counsel to Individuals @StockOptionCnsl, for this event in Palo Alto on March 14, 2014! 

We had a great discussion of how to define and improve startup equity. For Mary Russell's current suggestions on the topic, please see Startup Equity Standards: A Guide for Employees.

Here's what we discussed at the event:

Right to Know. Company information on capitalization and valuation, being necessary to the employee’s negotiation of a fair compensation package, shall be provided to the employee with his or her equity offer and after each dilution and valuation event.

Right to Value. The right of the employee to earn the full value of his or her grant shall not be limited by unreasonable vesting terms.

Right to Hold Earned Equity. The right of the employee to hold vested equity up to an acquisition or public offering shall not be violated, and no forfeiture, repurchase or other provisions shall allow the company to seize vested equity of current or former employees.

Right to Tax Benefits. The employee shall enjoy the right to all tax benefits available from state and federal governments, and shall not be subjected to tax penalties due to company negligence, at grant, at vesting or settlement and at company acquisition or sale of stock.

Right to Ask. The right to evaluate equity shall not be violated by company limits on access to information or legal counsel.

Chris Zaharias, SearchQuant LLC

Chris is a startup veteran and advocate for startup employee equity rights. chris@searchquant.net (415) 832-0089.

Stock Option Counsel - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity offer evaluation and negotiation, stock option exercise and tax choices, and sales of startup stock.  Please see this FAQ about her services or contact her at (650) 326-3412 or by email.