VIDEO Startup Stock Options: Negotiate the Right Startup Stock Option Offer
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Proposed in the U.S. Senate - Changes to Startup Employee Equity Taxation - CEO and Worker Pension Fairness Act
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
If national politics take a strange turn and an unlikely new tax bill proposed in the U.S. Senate last month becomes law, individuals can expect a huge tax hit on NQSOs and startup RSUs. NQSOs would become taxable at vesting on the spread between the exercise price and the FMV. Currently, the exercise - rather than the vesting - of a NQSO is the taxable event. RSUs would become taxable at their FMV when time-based service milestones are achieved. Currently, taxation on RSUs in specially-designed private company plans (such as Airbnb and Pinterest) is deferred until an IPO or company acquisition.
There is an exception in the bill for those grants that qualify for Section 83(i) - which was intended to allow for deferral of taxation on private company stock until it becomes tradeable. But Section 83(i) as enacted is very limited and not workable in practice. Therefore, startup employees can expect that their NQSOs and RSUs - as they are currently designed - would be taxable even if they are not able to sell the shares to cover the tax bill.
So what will happen in practice? Startup employees with valuable equity grants would either pay high taxes out of their own savings (if they have them) before their shares are tradable or walk away from valuable equity opportunities to avoid this tax expense.
This would also change the world of equity compensation design, as tax is the underlying rhythm of all employee equity. The best practices as of today would become obsolete. In practice, I predict that this bill would result in an unexpected and very anti-employee consequence in future equity compensation design: more company clawbacks on time-vested shares.
More clawbacks? The same clawbacks that experts have called “horrible for employees” and encouraged people to “run screaming from” in a job offer? Yes. A clawback is the right of a company to take back time-vested shares if an employee leaves the company prior to an acquisition or IPO. This term dramatically reduces the value of startup equity, as most individuals who work at startups in the early stages do not stay at those startups all the way until the acquisition or IPO.
Why would more clawbacks be the result of this proposed bill? If companies design their NQSOs and RSUs so that employees are required to remain in service until the later of the date of an acquisition/IPO or their time-based vesting schedule, those employees would not be taxed under this new bill when they meet their time-based vesting requirements. In that workaround, though, employees would forfeit their time-vested shares if they leave the company prior to the acquisition or IPO. That means that employees would have to stay in service until that exit event to have a payout and, therefore, that far fewer early stage employees would have paydays in startup acquisitions and IPOs.
It would be hard to believe that these are the results intended by the bill, but from my perspective this is the most likely outcome for employee equity grants. Thoughts?
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
VIDEO Startup Stock Options: Exercise Price Basics
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Negotiating Equity @ a Startup – Stock Option Counsel Tips
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Negotiating an offer from a startup? Here's some tips.
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.
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.
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.