Fall 2018 Newsletter - Stock Option Counsel®

Hello Startup Community!

Here's the big news in the world of startup equity.

Leaked Compensation Data for Startup Executives from Andreessen Horowitz.Business Insider has published a database of startup executive compensation data leaked from Andreessen Horowitz. It was sourced from executive search firms and is searchable by fundraising stage. This data may be valuable to startup executives negotiating their compensation and interesting to anyone curious to know how much executives in the startup world earn in cash and equity.

How to Use the Data. The data reveals that the level defined for a role can dramatically affect the compensation offer. For example, the difference between the compensation for a CMO and a VP of Marketing at a Series A company would be significant in both cash and equity. In counseling individuals on their compensation negotiations, I see the most significant increases in cash and equity from successful re-leveling arguments.  Read more on my blog about how to use leveling to negotiate the right startup offer or contact me for information on my services.

Pay Gap for Startup Equity. I was recently interviewed by Bloomberg for an article on the gender pay gap for startup equity. They featured a study by Carta which found that women "make up 35 percent of equity-holding employees, but hold only 20 percent of the employee equity," and, further, that women make up "13 percent of founders but hold 6 percent of founder equity." I noted that one reason for the gap may be a lack of willingness to push for information necessary to evaluate a startup equity offer: "Equity is information asymmetry squared. You have to have the confidence to put the responsibility on the company to give you enough information."

Closing the Information Gap. It's up to individuals to educate themselves on equity and negotiate for the right number of shares to balance the risk of joining a startup. The purpose of my practice is to be available to those who need guidance in this process. See my website for more information.

Stock Option Counsel, P.C. - Legal Services for Individuals. Thank you for your enthusiasm for my practice and for the Stock Option Counsel Blog! I will continue to send quarterly updates on important topics in the market for startup equity for individual founders, executives and employees. Please keep in touch. 

Best,

Mary

Mary Russell | Attorney and Founder
Stock Option Counsel, P.C. | Legal Services for Individuals
(650) 326-3412 | mary@stockoptioncounsel.com

Early Expiration of Startup Stock Options - Part 2 - The Full 10-Year Term Solution

Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsels founders on their personal interests  at incorporation, financings and exit events. Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

The startup scene is debating this question: Should employees have a full 10 years from the date of grant to exercise vested options or should their rights to exercise expire early if they leave the company before an IPO or acquisition?

This is Part 2 of a 3-part series. See Early Expiration of Startup Stock Options - Part 1 - The $1 Million Problem for more information on the issue and Early Expiration of Startup Stock Options - Part 3 - Examples of Good Startup Equity Design by Company Stage

FULL 10-YEAR TERM SOLUTION

Some companies are saving their optionees from the $1 million problem of early expiration stock options by granting stock options that have a full 10 year term and do not expire early at termination. The law does not require an early expiration period for stock options. Ten years from date of grant is usually the maximum exercise period, as the legal landscape for stock options makes anything beyond a 10 year exercise period impractical in most cases. The 10 year exercise window (without an early exercise period) enables employees to wait for a liquidity event (IPO or acquisition) to pay their exercise price and the associated taxes. This extended structure is designed to compensate employees in a way that makes sense for them. 

Startups who choose a full 10-year term in place of early expiration may do so because their recruits or founders have faced the problem of early expiration at prior companies and become disillusioned with stock options as a benefit. Or their recruits may have read about the issue and asked for it as part of their negotiation. Or their founders may have designed their equity plan to be as favorable to employees as possible as a matter of principle or as a recruiting tool.

Other companies are extending their early expiration period for existing stock options.  One example of this is Pinterest, which extended the term in some cases to 7 years from the date of grant.  This move was in response to their valuation and extreme transfer restrictions that made the early expiration period burdensome for option holders.

An exercise more than 90 days after the last date of employment changes tax treatment for options originally granted as Incentive Stock Options (ISOs).  Such an exercise will be treated as the exercise of a Non-Qualified Stock Option (NQSO) instead. Most employees would prefer to have the choice that an extended exercise period allows, the choice between exercising within 90 days of termination of employment for ISO treatment or waiting to exercise and being subject to NQSO treatment.

You can see a list of companies that have adopted an extended option exercise period or changed from the short early expiration period to longer periods.

CREATIVE MODIFICATIONS TO THE FULL 10-YEAR TERM SOLUTION

Companies may prefer early expiration of stock options because terminated stock options reduce dilution for other stockholders. Or they may prefer that their employees are bound to the company by the “golden handcuffs” of early expiration stock options as a retention tool.

For companies that are concerned about excessive dilution, it might make sense to eliminate early expiration only if the company’s value has increased since grant. In other words, employees have a full 10-year term only if the FMV of the common stock on the date of their departure is greater than the exercise price of the stock option. This targets the solution (tax deferral) to the problem (owing tax at exercise before liquidity). If the FMV at exercise is equal to the exercise price, then there is no taxable income to report at exercise. Therefore, an extended exercise period is not necessary to defer taxes until liquidity. This solution does not address the problem of high exercise prices; companies with high exercise prices due to high valuations may want to use RSUs instead of stock options to solve the exercise price problem.

Attorney Augie Rakow, a partner at Orrick who advises startups and investors, has another creative modification to the full 10-year term solution. He has advised clients to find a middle ground by extending exercise periods only for longer-term contributors. This addresses the company concern about retention while solving the early expiration problem for longer-term employees. For example, option agreements might allow three years to exercise after departure only if an employee has been with the company for three years. He notes that "it's a good solution for companies that want to let long-term contributors participate in the value they help create, without incentivizing employees to leave prematurely."

CAN I REALISTICALLY EXERCISE THE STOCK OPTIONS IF THE COMPANY IS A SUCCESS?

Due to the prevalence of early expiration stock options at startups, this becomes an essential question in evaluating an equity offer: “Can I realistically earn the value of vested equity if the company is a success?” If the option grant has a very high exercise price or could potentially lead to a huge tax bill at exercise, it may not be feasible to exercise during an early expiration period at the end of employment, making the value of vested equity impossible to capture. Clients have negotiated the removal of early expiration or other creative structures to solve this problem if it arises in the employment offer.

I hope this post has illuminated the usefulness of a full 10-year term as a solution to the problem of early expiration of startup stock options. For other alternatives to structuring startup equity, see Early Expiration of Startup Stock Options - Part 3 - Examples of Good Startup Equity Design by Company Stage.  See also Early Expiration of Startup Stock Options - Part 1 - A $1 Million Problem for more information on the issue.

Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsels founders on their personal interests  at incorporation, financings and exit events. Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

THANK YOU

Thank you to JD McCullough for editing this post. He is a health tech entrepreneur, interested in connecting and improving businesses, products, and people.

Thank you to attorney Augie Rakow, a partner at Orrick who advises startups and investors, for sharing his creative solution to this problem

The Not So Old Girls' Club: Who You Need to Succeed

Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsels founders on their personal interests  at incorporation, financings and exit events. Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

Working with a great network can make career success much easier (and perhaps simply possible) to achieve.

When women talk about advancing their careers, they often talk about their lack of an “old boys’ club” to move them forward. In particular, women in the tech industry are uniquely aware of their need for a network because of their minority status. Without a built-in network, smart women in tech are thoughtfully constructing their own.

Mentors Far and Wide

The first step in building a network is recognizing that it takes a community to build a career and then committing to not go it alone. After they make this commitment, networkers find that informal mentors start to appear from far and wide to guide their paths.

According to Patricia K. Gillette, Esq., a partner in the employment law group at Orrick in San Francisco, “A mentor is someone, and I think it’s a variety of people in your life, who are going to help you navigate certain aspects of your life, whether it's your personal life, whether it's your work life, whether it's how you exercise, whether it's what you do for fun.”

Mentors are people you feel comfortable with. As Pat notes, “They're people who know you and are going to respond to you in a caring way and thoughtful way.

Diversity is important to get great perspectives. “They do not have to look like you,” Pat says. “They do not have to be the same gender or race. They don't have to be you.”

There will be many mentors in a well-connected life, but mentors are only one piece of the network necessary for advancing a career.

Sponsors within Your Organization

A sponsor is necessary in order to advance in an organization. A sponsor is someone in a very high position of leadership who advocates on one’s behalf within the organization.

A sponsor is going to “advocate for ways for you to increase your power within the organization either on the work side or on the leadership side on the economic side on the business building side,” Pat says. “You have to find a sponsor and you have to make sure you click with that sponsor and that that sponsor is willing to advocate for you. That's the way you advance within firms.”

A sponsor is completely different from a mentor. According to Pat, a sponsor is not someone to ask, “‘Where shall I stand in court? Shall I file this brief early?’ That's not what this person is.” In fact, Pat says, “a sponsor is someone who you may not like so much. A sponsor is somebody who is going to take you and say, 'The next thing you should do within the organization if you want to assume a position of power is X. And I'm going to talk to my friends within the organization to say that they ought to consider you.' That's very different from a mentor.”

What a sponsor offers is not based on altruism. To have this relationship, “you not only have to be ready, willing and able to ask, but you also have to be willing to offer something in return,” Pat says. “Usually what you offer in return is support for that person, either by being exactly as you said you were going to be - meaning you're really highly qualified and anxious and willing to accept positions of power within the organization. And also by making sure that you support that person in whatever causes he or she may have.”

See Pat’s presentation, Elimination of Bias - Women in the Law: Flying the Coop on the Wings of Economic & Institution Power, available from Lexvid: Continuing Professional Education.

Professionals

Finally, professionals provide services to help guide a career and financial path.

For example, financial planner Meg Bartelt, CFP®, MSFP, Founder and President, Flow Financial Planning, LLC, works with women in the tech industry. She knows that good financial planning isn’t enough if a woman’s career is flagging, which it often can in an industry notoriously unwelcoming to women. Part of her role is to help her clients connect to a larger network of professionals who can help them advance their careers, which in turn benefits their finances and helps them build wealth and financial strength. She started the list below based on her experiences of professionals who have helped her clients, and the list is growing as other women are adding ideas based on their own experiences.

A great network of professionals might include:

  • Recruiters and hiring managers for networking and job placement

  • Financial planners for managing wealth, making important financial decisions, and considering career moves from a financial perspective

  • Attorneys for negotiation of employment contracts, stock compensation, and intellectual property matters

  • Accountants for tax planning and estate planning

  • Career and leadership coaches for individual contributors who want to move to the management level or move from there to C-level roles, or to help with participation in and running meetings, finding places to speak and be on panels or interact with senior colleagues and peers

  • Public speaking coach for women wishing to improve their personal brand by speaking at conferences or even presentations in the office

  • Negotiation coach for women wishing to advocate on their own behalf more effectively, be that when negotiating a compensation package for a new job, or for advancement in a current job and

  • Professionals on the person side of life, such as healthcare professionals, who in turn can improve effectiveness at work.  

Opportunities for the Future

The essence of the “old boys’ club” is that their networks are built-in and are established without having to learn to create them. They meet the right contacts in their personal networks and activities. This list of network roles is meant to be a starting point for women to start to think about who is out there that would make up a community for a successful career.

As women learn the necessity of community in building a career, they may start to overcome their aversion to seeking out a network and becoming successful. Since everyone needs this, it's not wrong or overly ambitious to pursue it. As Pat notes, "[W]e see ambition as being a dirty word. There's some of us who say, 'I don't want to be ambitious, I don't want to look like I'm trying to go for everything, I don't want to look like I'm trying to get everything for myself.' That's okay, because it's not for yourself. Ultimately it's for the team, it's for your family, for your personal satisfaction."

Adding to the List

Please contact me with any suggestions of other roles that might be added to the list or descriptions of how these types of people can be helpful. I would be happy to add them to the list!

Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsels founders on their personal interests  at incorporation, financings and exit events. Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

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

Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsels founders on their personal interests  at incorporation, financings and exit events. 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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Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsels founders on their personal interests  at incorporation, financings and exit events. 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, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsels founders on their personal interests  at incorporation, financings and exit events. 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, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsels founders on their personal interests  at incorporation, financings and exit events. 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, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsels founders on their personal interests  at incorporation, financings and exit events. 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, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsels founders on their personal interests  at incorporation, financings and exit events. Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

Tax Deduction Reminder & Stock Option Counsel Updates

 

Stock Option Counsel

Legal Services for Individuals

Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsels founders on their personal interests  at incorporation, financings and exit events. Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

Thanks for a great year with Stock Option Counsel.

Reminder - Tax Deduction for Legal Fees

Your legal fees may be deductible on your tax return. Check with your tax advisor for more information. 

Update - Stock Option Counsel Services for Employees & Founders

Please keep us in mind as a resource for yourself and your friends and colleagues for guidance on:

  • Job offers, equity grants and employment agreements
  • Stock option exercise and tax choices
  • Sales of employee stock on the secondary market
  • Post-acquisition employment agreements
  • Founders' interests at incorporation, financings, and exits
  • Dispute resolution among founders and employees on startup equity

Our Blog - Articles and Videos on Employee Equity

We use the Stock Option Counsel Blog to share information on negotiating job offers and selling startup stock. Please send us any requests for additions to the blog. Here's some links to our most popular posts:

Joining An Early Stage Startup? Equity Tips

Bull's Eye - Negotiating the Right Job Offer

RSUs - Startup Restricted Stock Units

Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsels founders on their personal interests  at incorporation, financings and exit events. Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

MARY RUSSELL • ATTORNEY-AT-LAW 

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INFO@STOCKOPTIONCOUNSEL.COM • (650) 326-3412

©2014 STOCK OPTION COUNSEL • DISCLAIMER

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

Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsels founders on their personal interests  at incorporation, financings and exit events. Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

 

Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsels founders on their personal interests  at incorporation, financings and exit events. Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

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. 

Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsels founders on their personal interests  at incorporation, financings and exit events. Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

Stock Option Counsel Tip #1

Stock Option Counsel, P.C. - Legal Services for Individuals.  Attorney Mary Russell counsels individuals on equity grants, executive compensation design, employment agreements and acquisition terms. She also counsels founders on their personal interests  at incorporation, financings and exit events. Please see this FAQ about her services or contact her at (650) 326-3412 or by email.

Use @angellist to research "market" equity for your company size. https://angel.co/jobs   #equity #negotiation #startup