VIDEO Startup Stock Options: Startup Valuation

Stock Option Counsel for individual employees and founders in all matters relating to startup stock options or other employee stock. This video describes startup valuation for employees in a thoughtful, 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.

VIDEO Startup Stock Options: Exercise Price Basics

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>

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. 

Source: http://www.stockoptionadvisors.com/optiona...

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 More

Skype Repurchase Rights = Vampire Capitalism

I agree that it is unethical as it goes against the expectation of employees as to how their contributions are valued. If they don't know about it before they choose the company, they are making a choice without an essential term of the deal.

And it goes against the most idealistic ethic of Silicon Valley – that capitalism should be used by groups to organize and cultivate their own creative efforts rather than as a tool of vampires.

But it is not illegal. And I've seen worse in my Stock Option Counsel practice (twice this month alone). Congratulations on paying attention.

Read More

Am I an Employee or Founder???

"The difference between a founder and an early employee is gray, not black and white."
 

Read More

Best of Blogs: How to Value and Negotiate Startup Stock Options

We have suggested the following free resources to Stock Option Counsel clients to help them master this area and gain confidence in negotiating their stock options and other employee stock. We hope you find this list helpful and invite you to contact us to find out how Stock Option Counsel can help you evaluate and maximize your startup stock compensation. Contact>

1. David Weekly's  An Introduction to Stock & Options for the Tech Entrepreneur or Startup Employee

2. Venture Hacks' I have a job offer at a startup, am I getting a good deal?

3. Andy Payne's Startup Equity for Employees 

4. John Greathouse's What The Heck Are My Startup Stock Options Worth?! Seven Questions You Should Ask Before Joining A Startup

5. Wealthfront's Startup Salary and Equity Compensation Calculator (This is very general but people find it helpful.) And Wealthfront's The Right Way to Grant Equity to Your Employees.

6. Patrick McKenzie of Kalzumeus Software's Salary Negotiation: Make More Money, Be More Valued

7. Piaw Na's Negotiating Compensation, from An Engineer's Guide to Silicon Valley Startups

8. mystockoptions.com's How does a private company decide on the size of a stock grant? (You may have to create a login)  

9. Michelle Wetzler's How I Negotiated My Startup Compensation

10. Mary Russell's Video Negotiate the Right Startup Stock Option Offer, based on Mary Russell and Boris Epstein's Bull's Eye: Negotiate the Right Job Offer

11. Robby Grossman's Negotiating Your Startup Job Offer

12. Mary Russell's Joining An Early Stage Startup? Negotiate Your Salary and Equity with Stock Option Counsel Tips

13. Mary Russell's RSUs: Startup Restricted Stock Units: What You Need to Know

Need more help? Stock Option Counsel provides legal services for employees, executives and independent contractors. Employees and executives rely on Stock Option Counsel's expert advice in their startup stock option matters to correct the imbalance of information and expertise in this area that can cause the uninformed to lose out on high value opportunities. We counsel clients during their compensation negotiations, their exercise choices and the sale of their shares. We also work with clients who are in disputes with employers or cofounders regarding their stock options, other equity compensation or intellectual property and help them resolve the issues in their favor.

Contact> us if you are interested in Stock Option Counsel. It works best to set up a 15 minute call so we can hear about your situation and describe how we would help as Stock Option Counsel. Alternatively, you can send us a message with your questions and we will respond and tell you how Stock Option Counsel could be valuable to you. Contact>

Negotiation Rhythms #2: Best Alternative to Negotiated Agreement

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.

We know we want to push beyond our limits to capture as much value as possible in a negotiation. But how do we define those limits? It takes a five-word phrase to bring this concept into focus: Best Alternative to Negotiated Agreement (“BATNA”).

The BATNA for a car buyer might be the same car at a nearby dealership for $20,000. The BATNA for a home seller might be an offer from another party for $1 million. The BATNA for a child trading baseball cards might be to hold onto his favorite cards and enjoy looking at them rather than to trade them away.

 

BATNA Slide.jpg

Any agreement below (or, for a maximum limit, above) a BATNA would leave the negotiator worse off than in the absence of that particular agreement. Said another way, the negotiator would be better off with some other option – their BATNA – than accepting an agreement on those terms.

 

BATNAexamples.jpg

To properly identify a BATNA, we must do a lot of calculating, daydreaming, and going out in the world to test alternatives. But this creative process is necessary. When we believe that the only alternative is the one at hand, our negotiation position is dangerously weak. It is also dangerously ineffective because it leads to an arrangement that does not, in fact, make the negotiator better off than without it. And any deal that is not in both parties’ best interests is unstable and likely to collapse after it is made.

Countless factors go into naming and ranking one’s alternatives to arrive at a BATNA, and even then it is impossible to do so clearly as those factors cannot all be outlined in numerical format. A better offer might be less certain of being completed, so it might be more advantageous to make an agreement on less favorable terms today. For example, the other job offer might not be certain even though it appears it would be more advantageous if it were finalized. This is the old saying that a bird in the hand is better than two in the bush, and this can be dangerous for those who optimistically negotiate as if their imaginary alternatives are already in the hand. In the other extreme, this is very limiting for those who are very fearful of uncertainty, as they will accept disadvantageous terms for the simple purpose of having certain terms when a bit of risk in pursuit of a better alternative could have led to greater results.

Timing is important in other ways as well, as a negotiator with more time to come to an agreement will have more chances to find alternatives to the agreement at hand. "Wait and see" becomes a BATNA in itself. The opposite of this would be a party who must have resolution today, which would, of course, limit the alternatives.

Beyond hard limits on time, some people do not enjoy the back and forth process of negotiating. They might prefer to take this deal, and even to accept much less of the middle than is possible to capture, than to continue to seek alternatives or negotiate deals. For these people, the process itself inhibits the growth of BATNAs.

We’ll see in the next post – Negotiation Rhythms #3: Sales & Threats – how brainstorming or eliminating BATNAs changes the ZOPA and improves or weakens our force in negotiation.

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.

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

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.