Eliminate Negotiation in Startup Compensation???

“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

Repurchase Rights are "Horrible" for Employees

“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.

Attorney Mary Russell counsels individual employees and founders to negotiate, maximize and monetize their stock options and other startup stock. You are invited to contact Stock Option Counsel for help in negotiating and evaluating your job offers and post-acquisition employment agreements, making stock option exercise and tax decisions and identifying your rights and opportunities to sell startup stock. 

RSUs - Startup Restricted Stock Units - What You Need to Know

Attorney Mary Russell, Stock Option Counsel, counsels individual employees and founders to negotiate, maximize and monetize their stock options and other startup stock. You are invited to contact Stock Option Counsel for help in negotiating and evaluating your job offers and post-acquisition employment agreements, making stock option exercise and tax decisions and identifying your rights and opportunities to sell startup stock. 

Restricted Stock Units ("RSUs") are not stock. They are not restricted stock. They are not stock options. RSUs are a company's promise to give you shares of the company's stock or the cash value of the company's stock. Every company designs RSUs differently, so be sure to find out the following to understand what you're getting and when you will pay taxes. There are a lot of variables with startups and RSUs, so don't take this blog post as fact or advice for your situation. Read your own fine print or contact Stock Option Counsel for guidance on the details for your negotiation or evaluation of startup stock.

1. How many RSUs are in my grant? Will I be granted more RSUs yearly or after upcoming financings?

One RSU = the right to receive one share of the company's common stock at a later time, or the right to receive the cash value of one share of the company's common stock at a later time. The number of RSUs you are granted tells you how many shares of stock (or the number of shares of stock used to determine your cash payment) you will receive when they are "settled" (see #5 below).

You should also find out when and if you will receive more RSU grants. If you are evaluating a job offer, there is a big difference in the value of your offer between a company that grants you RSUs only at hire and a company that plans to make additional grants each year ("Annual Grants") or after more shares are issued in financings to make up in part for dilution ("Refresh Grants"). 

2. Of course there is no precise "value" for startup RSUs, but it makes sense to gather some relevant details to evaluate the offer. For example: What is the most recent VC price per share of preferred stock? What is the current number of fully diluted shares in the company or my percentage ownership in the company? Can you give me some guidance on the company's expected dilution, exit scenarios, exit timing and future valuation?

When evaluating the number of RSUs in your grant, consider using one of the following methods to value the grant:

A. Current Valuation Method (Fact-Based): For startup stock, you don't have access to a public market for the stock. Therefore, there is no precise method for finding today's value of your RSUs. Instead, use the price per share paid by venture capitalists for one share of preferred stock in the most recent financing. This is the closest number you can find for today's value. It tells you that X Venture Capitalist paid $Y for one share of the company's stock on Z date.

You can find this in one of three ways: (1) Ask your attorney (Stock Option Counsel = legal services available to individual employees to guide them on their negotiation and sale of startup stock) to order the certificate of incorporation from the State of Delaware and interpret it to tell you the most recent price per share paid for the company's preferred stock. (2) Ask the company the price per share paid by VCs in the most recent round of financing. (3) Ask the company for the most recent VC post-money valuation of the company and the number of shares of fully diluted capital at that round; VC post money valuation / fully diluted capital = price per share paid by VCs in the last financing. For more on this approach, see Venture Hacks' post on startup job offers.

B. Future Valuation Method (Guesstimate Based): To look forward and define a future payout for your RSUs, you have to do some guesswork. If you could guess the startup's value at exit and dilution prior to exit, you would know how much the stock will be worth when you receive it. You can make these guesses in one of three ways: (1) Ask the company to estimate different exit scenarios for you. (2) Make these guesses yourself (see John Greathouse's What the Heck Are My Startup Stock Options Worth for his guidance on how to estimate wisely). (3) Find online commentary on future value of your company, if it is close to IPO and discussed in the news. 

3. What is my vesting schedule? Will any portion of my RSUs be accelerated upon change of control?

You will most likely not earn the full number of RSUs simply by joining the company. They will "vest" over time, meaning that you will earn them over a set period of time (called the "Vesting Period"). If you leave the company before the end of the Vesting Period, you will not earn the full number of RSUs.

The most common vesting period = "Four Year Vesting With a One Year Cliff": (1) After one full year, 1/4 of the RSUs will vest. This is called a "One Year Cliff." (2) After one full year, 1/48 of the total grant of RSUs will vest each month. 

Some startups require more than simply time to fully vest your RSUs. After you have "earned" them by meeting the cliff and monthly vesting during the Vesting Period, you may also have to wait until the company has an exit before they officially "vest." 

"Acceleration Upon Change of Control" is an employee-favorable modification of standard vesting. A portion of your unvested RSUs would vest before the end of the Vesting Period if certain conditions are met. The most common acceleration language is "Double Trigger Acceleration," which provides that you vest a portion of your unvested shares if two conditions are met: (1) the company is acquired and (2) you lose your position within one year of the acquisition. If you have acceleration language, contact an attorney to help you negotiate the most favorable language. The devil is in the details. (Stock Option Counsel = legal services available to individual employees to guide them on their negotiation and sale of startup stock.)

4. Will I forfeit or otherwise lose my vested RSUs if I leave the company?

For stock and stock issued upon exercise of stock options, some companies keep the right to repurchase your stock when you leave the company even if it is already vested ("Repurchase Rights"). Some companies have similar restrictions on RSUs, so watch out. This greatly reduces the value of your grant because it is not really "yours" even after the vesting period if, for example, you are no longer at the company when it is acquired or goes public. For RSUs it may be called "Double Trigger Vesting," which should not be confused with the employee-friendly Double Trigger Acceleration (see #3 above).

5. When will the RSUs be settled? Will the RSUs be settled in cash or stock?

A company "settles" its RSUs when it gives you either cash or stock. Unlike stock options, you may not receive anything for the RSUs at the time they vest. In other words, the company may delay "settling" the RSUs. The company's Stock Plan will tell you whether you will receive the RSUs at vesting, at an IPO  or sale of the company, or some other deferred time. The deferral is usually in your best interests, as it prevents you from paying tax before a liquidity event. However, it can prevent you from selling your startup stock before your company goes public or is acquired.

The company's Stock Plan will also tell you whether the company plans to "settle" the RSUs with (aka "give you") company stock or the cash value of the company's stock.

Knowing when and how the company settles your RSUs will help you with your tax planning.

6. When the company settles the RSUs and income tax is due, how will that be handled? Will I pay payroll ("FICA Taxes") taxes when the shares vest or when they are settled?

Fortunately, you will not pay taxes on RSUs at the time they are granted to you. Taxes are deferred until actual or constructive receipt of the stock or cash settlement.

Unfortunately, RSUs do not have the capital gains tax advantages of restricted stock or stock options. They are simply compensation income to you when you receive them (either at vesting or settlement). That means you owe ordinary income taxes and FICA taxes for their value as if you had received cash. Ugh.

In most cases, you will not pay income tax or FICA Taxes on RSUs until they are "settled." The company can make arrangements so that you do not have to pay these in cash out of pocket, but you will be responsible for the tax in some way. For example, the company may sell a portion of your stock for you to cover the income taxes. It's best to know the company's plan on this so that you are not caught by surprise in your tax planning. 

7. Questions? Contact Stock Option Counsel

Stock Option Counsel legal services are available to guide individual employees and founders on their startup stock. We specialize in helping employees who are evaluating and negotiating job offers with startup stock. Contact us with any questions at (650) 326-3412 or at http://stockoptioncounsel.com/contact/. 

VIDEO Startup Stock Options: Negotiate the Right Startup Stock Option Offer

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.

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.

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.

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.