Uber IPO - Lessons for Negotiating Startup Equity Offers - Spring 2019 Newsletter - Stock Option Counsel, P.C. - Legal Services for Individuals
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Hello Startup Community!
Uber's IPO is a great lesson for startup employees on negotiating their startup equity. Unicorn startup recruiters have been telling hires for the past few years to value the offered RSUs at many multiples, even 10X, of the most recent investor valuation in negotiating their compensation offers. Since Uber's value has not risen even 2X in that time, any hires who accepted offers based on this calculus have lost significant value compared to their opportunity cost.
Individuals need negotiate for enough shares in a startup to balance their risk. The calculation for the right number of RSUs at a late-stage startup with a public-company-size valuation is the current investor value per share, not the potentialfuture value.
Shira Ovide explored this issue in Bloomberg Opinion last week with input from Stock Option Counsel:
Uber's example shows that employees at startups – particularly those who come aboard when the company is more mature – often don't get rich, even when the companies are successful. Many workers are at the bottom rung of stock holders and tend to have less information about their company's value and prospects than just about anyone else who holds shares. ... Mary Russell of Stock Option Counsel, which advises employees on compensation at startups, said people evaluating job offers at more mature startups should analyze only what the proposed equity is worth at the time of negotiation, not what it could possibly be worth in a dreamy future. That’s not always easy, because Russell said startup recruiters sometimes suggest that a 10-fold increase in valuation in the past is an indication of what prospective employees can expect from their wealth.
For more on using current value to evaluate startup equity offers, see this video from the Stock Option Counsel blog.
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
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Tax Changes for Startup Executives and Employees - Tax Cuts and Jobs Act of 2017 - Q1 2018 Newsletter - Stock Option Counsel, P.C.
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Here's our Q1 2018 Newsletter. Sign up for our mailing list to receive these quarterly updates!
Hello Startup Community!
The final Tax Cuts and Jobs Act of 2017 is already affecting startup equity holders. Check out my recent blog posts on Tax-Deferred Option Exercises Under the New Section 83(i) and Incentive Stock Options & Changes to the Alternative Minimum Tax. Here's the short version.
Tax Deferral for Option Exercise - New Section 83(i) Election. The new Section 83(i) was designed to defer taxation from a stock option exercise until the shares become liquid. Unfortunately, the details of the new Section 83(i) make it unlikely to work for most startup option holders. But where it does apply it will defer taxation for up to five years from the date of option exercise with the use of the new Section 83(i) Election. These are the key details of the new Section 83(i).
Tax Relief for ISO Exercise - New AMT Limits. Dramatic increases to the exemption amounts and phase out thresholds of the Alternative Minimum Tax (AMT) will allow many more startup employees to exercise Incentive Stock Options (ISOs) tax-free. This allows for more planning opportunities to take advantage of the potential ISO tax benefits of capital gains tax rates on all gains. These are the key details of the AMT changes as they relate to ISO exercise.
Startup Offer Negotiation Tips. What does this mean for our clients negotiating new stock option offers? First, the new Section 83(i) will not provide wide relief from pre-liquidity tax burdens for stock option exercise. So it still makes sense to negotiate for a tax-deferred structure such as early exercise or an extended post-termination exercise period. Second, since the revised AMT limits make the ISO benefits even more appealing than ever, ISOs are far more appealing than NSOs for most people (unless the options will be early exercised.)
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
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.
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.
Negotiation Rhythms
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Salary Negotiation Method: Identify your BATNA, or best alternative to negotiated agreement.
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.
Read on!
#1: Zone of Possible Agreement
#2: Best Alternatives to Negotiated Agreement
#3: Sales & Threats
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
[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.