Stock Option Counsel for individual employees and founders in all matters relating to startup stock options or other employee stock. This video describes stock options in a simple, accessible way. Call us when you want to evaluate, maximize or monetize your stock options or other startup stock. (650) 326-3412. www.stockoptioncounsel.com. info@stockoptioncounsel.com.
Negotiating Equity @ a Startup – Stock Option Counsel Tips
Negotiating an offer from a startup? Here's some tips. For more information on how Stock Option Counsel serves employees who are negotiating their offers, contact us or see our intro video here> .
1. Know How Much Equity You Want
For employees early in their careers, the only negotiable terms for equity are the number of shares of stock and, possibly, the vesting schedule. The company will already have defined the form in which you will earn those shares, such as stock options, restricted stock units or restricted stock.
Your task in negotiating equity is to know how many shares would make the offer appealing to you or better than your other offers. If you don’t know what you want for equity, the company will be happy to tell you that you don’t want much.
Your desired number of shares should be the result of thoughtful consideration of the equity offer. There is no simple way to evaluate equity, but understanding the concepts and playing with the numbers should give you the power to decide how many shares you want.
One way to compare offers and evaluate equity is to find the current VC valuation of the preferred shares in the company. If a VC has recently paid $10 per share for the company’s stock, and you have been offered 10,000 shares, you can use $100,000 to compare to other offers. If another company has offered you 20,000 shares, and a VC has recently paid $5 for their shares, you could use those numbers to compare the offers. For more info on finding VC valuations, see: Startup Valuation Basics or contact Stock Option Counsel. For more on early stage startups that do not have VC valuations, see this post.
Remember that the purpose of this exercise is not to have a precise dollar value for the offer, but to answer these questions: How does this offer compare to other offers or my current position? What salary and number of shares at this company would make this a stable, sustainable relationship for me? In other words, will this keep me happy here for some time? If not, it is in nobody’s best interest to come to a deal on that package.
For more information on negotiating equity, see our video: Negotiate the Right Stock Option Offer or our blog with Boris Epstein of BINC Search: Negotiate the Right Job Offer.
2. Look for Tricky Legal Terms That Limit Your Shares' Value
There are some key legal terms that can diminish the value of your equity grant. Pay careful attention to these, as some are harsh enough that it makes sense to walk away from an equity offer.
If you receive your specific equity grant documents before you are hired, such as the Equity Incentive Plan or Stock Option Plan, you can ask an attorney to read them.
If you don’t have the documents, you will have to wait until after you are hired to study the terms. But you can ask some general questions during the negotiation to flush out the tricky terms. For example, will the company have any repurchase rights or forfeiture rights for vested shares? Does the equity plan limit the kinds of exit events in which I can participate? What happens to my equity if I leave the company?
3. Evaluate the Equity’s Potential
Evaluate the company to know how many shares would make the equity offer worth your time. You can start by asking the company some basic questions on their expectations for future growth and the exit timeline.
The higher your rank in the company and the stronger your emphasis on these matters, the more likely you are to speak to the CEO, CFO or someone else at the company who can answer these questions. If you want more resources to help you think like a startup investor, there are great online resources on valuation, dilution and exits for startups.
But don’t place too much weight on the company’s predictions of the equity’s potential value, especially if those values are based on an early-stage company’s Discounted Cash Flows (DCF). Even the experts know that the only thing early stage startups know about financial projections is that they are wrong.
Stock Option Counsel
Stock Option Counsel provides legal services for individual employees and founders in negotiating, evaluating and monetizing employee stock.
Employees rely on Stock Option Counsel in: (a) evaluation and negotiation of employee equity offers; (b) identifying unusual terms in equity documents; (c) legal matters for sales of shares to third parties; (d) negotiation of employment offers after acquisitions and (e) disputes regarding equity and payouts at exits.
Founders rely on Stock Option Counsel in: (a) protecting their personal interests at incorporation, financings and exits; (b) coaching for their VC negotiations by bringing them to mastery of financing and exit deal terms; (c) managing friction between co-founders; (d) negotiating employment offers after acquisitions and (e) disputes regarding equity and payouts at exits.
For more information on Stock Option Counsel, contact us or see our intro video here>
Stock Option Counsel Tip #1
Use @angellist to research "market" equity for your company size. https://angel.co/jobs #equity #negotiation #startup
Exercising an Incentive Stock Option (ISO)? Should You Hold the Stock?
This is a guest post from Michael Gray CPA. He counsels individuals on their employee stock option tax questions. For more employee stock option tax resources, see Michael Gray, CPA's Option Alert at StockOptionAdvisors.com.
When you have decided to exercise an incentive stock option (ISO) and consider the federal alternative minimum tax (AMT) and the net investment income tax, the benefits of holding stock after exercising an incentive stock option are reduced. The "brass ring" of having the gain from the sale of the stock eligible for long-term capital gains rates (15% or 20%) seems attractive, but the 28% alternative minimum tax rate applies
for the excess of the fair market value of the stock at exercise over the option price ("spread") when the option is exercised. (California also has a 7% alternative minimum tax. Find out the rules for your state.) The minimum tax credit for this tax "prepayment" is hard for many taxpayers to recover, because they are already subject to the AMT, due to deductions disallowed for the AMT computation, including state income taxes, real estate taxes and miscellaneous itemized deductions. That means the "spread" at exercise is probably
going to be taxed at a 28% federal tax rate when the dust settles.
In addition, long-term capital gains are subject to the 3.8% net investment income tax when the taxpayer has high adjusted gross income. That means the total federal tax rate for the initial spread would be 31.8%, versus a maximum federal tax rate of 39.6%. Is an 8% tax benefit worth the risk of exposure to market volatility of the stock? It could fall much more than that.
The main time it makes sense to hold the stock is when the "spread" is low and the option price is low. Then you can probably afford to pay for the stock and AMT (if any) and to take the risk that the value of the stock could fall. When you do this, you forgo the "time value premium" for the option. If you have the alternative of just buying the stock for about the same price without exercising the option, you will probably be in a better position by doing that, because you will still have the options to exercise if the value of the stock increases with no downside risk for the options.
An alternative is to exercise the option and immediately sell the stock, provided the stock is publicly traded or there is a "liquidity event" such as a sale of the employer company. In that case, the gain will be taxed as additional wages, subject to federal tax rates up to 39.6%, but exempt from employment
taxes such as social security and medicare taxes.
These are general comments. You really should meet with a tax professional familiar with incentive stock options (that's our business!) to discuss your individual situation and have tax planning computations done. To make an appointment with Michael Gray, call Dawn Siemer at (408)918-3162 on Mondays,
Wednesdays, Thursdays or Fridays.
This article was published in the September 24, 2014 Option Advisor Alert. Republished with permission.
Founders: Kurt Vonnegut's Caution on Corporate Attorneys
Kurt Vonnegut, Author
If you are a founder with some suspicions about the motivations and allegiances of your company's law firm, you may appreciate the wisdom of Kurt Vonnegut.
Vonnegut has a great bit in God Bless You, Mr. Rosewater about the worst motivations of corporate lawyers.
The book is about money, sort of. Here's the opening line:
“A sum of money is a leading character in this tale about people, just as a sum of honey might properly be a leading character in a tale about bees.”
The Rosewater family had a great fortune. It was held by The Rosewater Foundation, for the benefit of the family's heirs, and managed by a law firm called McAllister, Robjent, Reed and McGee. An associate of the firm, Norman Mushari, was Vonnegut's embodiment of the worst motivations of corporate lawyers.
“No one ever went out to lunch with Mushari. He took nourishment alone in cheap cafeterias, and plotted the violent overthrow of the Rosewater Foundation. He knew no Rosewaters. What engaged his emotions was the fact that the Rosewater fortune was the largest single money package represented by McAllister, Robjent, Reed and McGee. He recalled what his favorite professor, Leonard Leech, once told him about getting ahead in law. Leech said that, just as a good airplane pilot should always be looking for places to land, so should a lawyer be looking for situations where large amounts of money were about to change hands.
”In every big transaction,” said Leech, “there is a magic moment during which a man has surrendered a treasure, and during which the man who is due to receive it has not yet done so. An alert lawyer will make that moment his own, possessing the treasure for a magic microsecond, taking a little of it, passing it on. If the man who is to receive the treasure is unused to wealth, has an inferiority complex and shapeless feelings of guilt, as most people do, the lawyer can often take as much as half the bundle, and still receive the recipient’s blubbering thanks.”
Vonnegut's wisdom is a good reminder to founders that their company's attorneys may be representing the company's money rather than its founders.
Stock Option Counsel provides personal counsel to founders to protect their individual interests. At incorporation, we review the company counsel's documents and provide founder-friendly terms. At financings and mergers, we train founders to help them master the deal terms so they can identify and negotiate for the terms most favorable to them as individuals. For more information, see the Stock Option Counsel website or call us at (650) 326-3412.
From The Daily Muse
Attorney Mary Russell, Founder of Stock Option Counsel based in San Francisco, advises that anyone receiving equity compensation should evaluate the company and offer based on his or her own independent analysis. This means thoughtfully looking at the company’scapitalization and valuation.
Read MoreNegotiation Rhythms #3: Sales & Threats
Mary Russell counsels individual employees and founders to negotiate, maximize and monetize their stock options and other startup stock. She is an attorney and the founder of Stock Option Counsel. You are welcome to contact Stock Option Counsel at info@stockoptioncounsel or (650) 326-3412.
There are two ways to increase or decrease another party’s limit in a negotiation – sales and threats.[1] The picture above takes some of the mystery out of the salesman and the thug -- they're both just working as negotiators to change the perception of the current offer in comparison to the other party's BATNA – Best Alternative to Negotiated Agreement.
Selling improves the perception of the quality of the present offer so that the outside alternatives are unattractive by comparison. Threats decrease the attractiveness of outside offers or the possibility of making no deal and sticking with the status quo.
Threats
An ongoing employment lawsuit over no-hire agreements among Silicon Valley companies featuring Steve Jobs provides a strangely relevant example of the power of threats.
Edward Colligan, former CEO of Palm, has said in a statement that Jobs was concerned about Palm’s hiring of Apple employees and that Jobs “proposed an arrangement between Palm and Apple“ [2] to prohibit either party from recruiting the others' employees.
That would have been a simple offer of an agreement (however illegal that arrangement might have been) if Colligan had access to the undisturbed alternative of not participating and keeping the status quo.
But Colligan has said that Jobs’ next negotiation move was to make the alternative of nonparticipation very unappealing with the threat of patent lawsuits that would cost Palm and Apple a great deal of money. Jobs followed this threat with a reminder of just how unpleasant such litigation would be for Palm, considering the fact that Apple had vast resources to endlessly pursue the lawsuits: "I’m sure you realize the asymmetry in the financial resources of our respective companies …."[2]
Even though most of us don’t use threats in a negotiation, it’s part of the logic of negotiation rhythms.
Selling
Selling is the more common (and generally legal) way to address the fact that the other party has choices outside the present negotiation. As we discussed in the prior posts, a party's price or terms limits are defined by his or her best alternative outside of making an agreement in the present negotiation. Selling moves the limit when it can make the present offer more appealing than what had been perceived as an outside alternative.
Many people resist “selling themselves” in a salary negotiation because they are embarrassed to discuss their “value.” The logic of BATNA and negotiations provides some relief from this embarrassment, for it reframes “selling” from bluffing and puffing to describing and distinguishing one’s past experience and intended role in the organization.
Since the employer’s limit is not defined by an individual’s value, but by the employee’s differentiation from the field of candidates, the task of negotiating becomes more fact-based and less fear-driven. This logic encourages progress from the attitude of “Oh, they see who I am and hate me,” toward the sales approach of “Oh, it seems they need more information about what I offer in terms of my past experience and my role going forward.”
As an employee’s offer of services becomes distinguishable from the employer’s alternatives, the employer’s perception of the BATNA will change.
Consider an employer who believes there’s an equal candidate available for $120,000 and is entertaining another’s proposal to perform the role for $140,000. Without “selling” the offer of one’s services, the employer has no information with which to make a distinction between the two alternatives. The process of selling oneself to the employer is not to prove one’s inner worthiness at $140,000, but to show and tell that the employer is choosing between two distinguishable candidates.
(For those still interested in threats, distinguishing one’s skills is a form of a threat when it comes to negotiating with a current employer. Every element of the description one’s current performance and ongoing role is a threat of what the employer would have to work without or try to replace.)
What an employer would have once considered a better alternative – such as another equal offer for $120,000 – loses its appeal in light of the truth (sales pitch) of the $140,000 offer. If they are no longer equal in the mind of the employer, he or she must consciously decide if the other candidate at the lower price is still a better alternative. While there is no guarantee that the employer will prefer to pay more, the process of selling pushes the employer to the choice based on the true distinctions in the qualities of the candidates.
Mary Russell counsels individual employees and founders to negotiate, maximize and monetize their salary, stock options and other startup stock. She is an attorney and the founder of Stock Option Counsel. You are welcome to contact Stock Option Counsel at info@stockoptioncounsel or (650) 326-3412.
[1] Roger Fisher, William Ury and Bruce Patton, Getting to Yes: Negotiating Agreement Without Giving In. Gerald B. Wetlaufer, The Rhetorics of Negotiation (posted to SSRI).
Negotiation Rhythms
We’ve all heard plenty of advice about negotiating.
The business world directs us to stay rationally focused, rely on exhaustive preparation, think through alternatives, spend less time talking and more time listening and asking questions, and let the other side make the first offer.[1]
The psych world counsels us to listen first, sit down, find common ground, move in, keep cool, be brief, forget neutrality, avoid empty threats, and don’t yield.[2]
These tips don’t have much meaning without knowing the underlying principles of negotiations, and studying tips alone is about as meaningful as learning dance steps without ever hearing the music.
The following three-part series presents the rhythm of negotiations as described in the Harvard Negotiation Project’s Getting to Yes: Negotiating Agreement Without Giving In.[3] It should be useful for those first learning to hear this rhythm and for those who have been dancing since the bazaars of their youth who may need to go back to basics to learn some tricky new steps.
Mary Russell counsels individual employees and founders to negotiate, maximize and monetize their stock options and other startup stock. She is an attorney and the founder of Stock Option Counsel. You are welcome to contact Stock Option Counsel at info@stockoptioncounsel or (650) 326-3412.
Read on!
#1: Zone of Possible Agreement
#2: Best Alternatives to Negotiated Agreement
#3: Sales & Threats
[1] Take It Or Leave It: The Only Guide to Negotiating You Will Ever Need http://www.inc.com/magazine/20030801/negotiation.html via @Inc
[2] The Art of Negotiation | Psychology Today http://www.psychologytoday.com/articles/200701/the-art-negotiation
[3] Roger Fisher, William Ury and Bruce Patton, Getting to Yes: Negotiating Agreement Without Giving In.
Funding Options for Exercising Options
Quora is awesome. Today it provided me a real softball question for a blog post:
"How am I supposed to afford my stock options?"
Here's my answer:
When your options "vest," they "become exercisable." At that time you have the choice to exercise them or wait to exercise them later (or never).
When you decide to exercise, you may have more choices than simply paying cash. These will depend on the terms of your options (as described in your option agreement and the company's option plan), your company's policies, your ability to negotiate for favorable terms, and the existence of a public or private market for your company's stock.
Here are the basics of each alternative:
1. Pay with a Promissory Note.
If the company allows you to pay the exercise price with a promissory note, you'll make an official promise to pay the company the exercise price and they will issue you the stock. This is not common, as it requires some thoughtful planning by the company to comply with the law. But I have seen it used for executives of private companies to exercise or even early exercise very valuable option grants.
2. Take Out a Loan.
If the company is promising enough to inspire you to exercise your options, it may also inspire a friend, a bank, or a special fund to loan you the money to make the exercise. The terms of such a loan would vary from a standard signature loan from a bank (much like borrowing on a credit card) to the non-recourse loans offered by specialized Silicon Valley funds. These special funds, such as The Employee Stock Option Fund (esofund.com), loan you the cash to exercise your options (and even to cover any tax liabilities at exercise). At a liquidity event, the funds are repaid and also participate in the upside of the stock. However, they do not require repayment if the stock later becomes valueless.
3. Cashless Exercise.
There are three steps in an exercise and sale -- pay cash for exercise, receive stock, sell stock. You may be able to cut out the "pay cash" portion by using a twist on the "Take Out a Loan" option above. Using a brokerage, you would borrow the money to exercise the options and immediately sell at least enough of the stock issued on exercise to repay the loan from the brokerage. This depends, of course, on having a buyer / market for the company stock.
4. Pay the Exercise Price in Stock.
If you already hold stock in the company, you may be able to use that stock to "pay" the exercise price. You would transfer your stock back to the company, and the current FMV of the transferred stock would be applied toward the exercise price of the options as if you were paying the exercise price in cash.
Startup Negotiation: Know the Game
Mary Russell counsels individual employees and founders to negotiate, maximize and monetize their stock options and other startup stock. She is an attorney and the founder of Stock Option Counsel.
Craps is the best game in a casino. The house odds are very low at around 0.6%. When you’re rolling and you’re hot you can make big money for everyone at the table. And when you’re cold it doesn’t take long for your turn to end and the dice to move to someone who might get hot!
The same is true for Silicon Valley. It is arguably the only place where employees can strike it rich. Employees become rollers here, making the enterprise happen and enjoying some of the upside of the business through employee equity.
But the odds in craps can be even worse than double zero roulette if you don’t choose the right bets. There are about 120 to choose from, and the people who win know the game and know the risks they’re taking with each bet.
This is a list of casino-style descriptions of a bet on stock options, RSUs or ESPPs. We’ll give each a more thorough look (and pay attention to the great casino king Uncle Sam’s take) in later posts. To keep it simple, these presume that the vesting time/terms have been met by the player.
Stock Options: Player wins cash if (1) player pays cash exercise price to company before/when leaving the company and before the expiration date of the option; (2) company gives permission for or requires player to sell shares (on secondary market, at IPO, at sale of company, etc.); and (3) player sells shares at a price greater than the exercise price. Player loses the exercise price cash if (2) and (3) are not met.
RSUs (“Restricted Stock Units”): Player wins cash when (1) company settles the RSUs in shares of common stock (aka company gives player common stock) and (2) player sells the shares.
ESPPs (“Employee Stock Purchase Plans”): Player wins cash if (1) player makes cash payroll contribution; (2) company converts player’s cash to shares on purchase date (# of shares = cash/conversion price); (3) player sells shares at a price greater than the conversion price. Player loses cash if player sells shares below the conversion price.
Of course, this post does not include the 1000 disclaimers that would be necessary to cover every possible Stock Option/RSU/ESPP plan or equity compensation bet. But it should be a good place to start for employees trying to know the game.
Startup Stock: Particles and Waves. Casinos and Creativity.
Photo: Bobby Mikul
Mary Russell counsels individual employees and founders to negotiate, maximize and monetize their stock options and other startup stock. She is an attorney and the founder of Stock Option Counsel.
What is a corporation? Finance pros and justice types present two very different answers to that question.
On the finance side, a corporation is a casino-style financial arrangement between those who own stock. It divides up the rights to a financial return on capital. It emphasizes balance sheets and stock prices and risk and return to support the view that each corporation is a table in a casino that investors approach to place their investment bets and seek a financial return.
On the human advocacy side, a corporation is a living body made up of creative individuals. The liveliness of the group – defined to include investors, managers, employees, and, perhaps, the community or the earth – is the purpose of the corporation. They make comparisons to slavery, define externalities and articulate their values to support their view that a corporation is a living body that could not be owned.
Like a ray of light, which is at once a wave and a group of particles, the corporation is both a casino game for investors and a living, creative body. Evidence will always appear on both sides of this truth.
In choosing a career path and negotiating compensation, we use both perspectives. We find a place that has some life to it, to which our creative contribution can add life. But we tune into the casino view as well and seek compensation for the risk we take in joining the enterprise. This requires the eye of an investor who would look at the risks of the bet and the size of the possible return from every angle with the help of professionals in law, finance, technology, etc.
It would be distasteful to take this view of our work every day, but it must be done at some time. And it is best done with Stock Option Counsel. This blog will introduce the Stock Option Counsel perspective on the risk / investment that employees take / make in accepting stock options or other equity as compensation. It should be helpful to those evaluating their compensation and also reveal the points in time in which Stock Option Counsel can add value in this process.
Mary Russell counsels individual employees and founders to negotiate, maximize and monetize their stock options and other startup stock. She is an attorney and the founder of Stock Option Counsel. You are welcome to contact her at info@stockoptioncounsel or at (650) 326-3412.
Who is Mark Zuckerberg's Daddy?
Who is Mark Zuckerberg’s daddy? In a traditional public company, the CEO’s daddy is the board of directors who hire him, and the board’s daddy is the stockholder who can vote out the board. But Mr. Zuckerberg has voting control over the board and the power to define his own priorities.
So, who IS Mr. Zuckerberg’s daddy? He answered that question in yesterday’s interview with TechCrunch founder Mike Arrington with a subtle message to employees: The employee equity we grant you today, at today’s low prices/strike price with a four-year vesting schedule, will “pop” at the end of the vesting schedule.
Well, he didn’t say that exactly. But he led with that very clear (and obviously carefully crafted) message to employees by defining a remarkably specific timeline for stock price increase (remember, he always references vague future goals such as “build value over the long term” and “making the world more open and connected”):
“Over the next three to five years, I think the biggest question that is on everyone’s minds that will determine at least our performance over that period, is really going to be how well we do with mobile. … I think it’s easy for a lot of folks, without us being out there talking about the stuff we’re doing, to really underestimate how fundamentally good mobile is for us.”
Did someone ask him about the next three to five years? Not the interviewer. Not the public markets. Who cares about three to five years? Employees care about three to five years because they will receive grants of options or RSUs that will become fully vested in three to five years.
So Mr. Zuckerberg’s message to employees is this:
1. I know you care about the Facebook stock price in three to five years, because its delta over that time is your chance to build a fortune in compensation. If you’re not expecting a delta, you’ll place your bets (work) elsewhere.
2. I am thinking about the stock price in three to five years, because that is what you care about. I care about you. I have a plan, and it is going to benefit you directly.
3. The plan is mobile. Facebook is going to have a higher stock price in three to five years because of mobile.
4. Your employee equity is not worthless. It is going to gain value in the exact time frame in which you want it to gain value. And you will be rich.
So, Mr. Zuckerberg has declared what employees are betting on if they bet their workdays on Facebook employee equity. Will the best and brightest take the bet?