I know this article focuses on founders, but I'd love to see something done in the industry for employees (especially early employees!) as well.
One of the former companies I worked at never allowed early exercise and issued standard ISO with 90 day expiration upon leaving, which is unfortunately essentially the analogue of "standard and clean" when it comes to employee compensation. By the time I was ready to leave (4+ years, I was very early) all my equity was vested, and buying it required spending ~250k (USD!) between cost of exercising and AMT taxes, all while the company shares were illiquid as ever. The company had no interest in helping me, despite me asking for an extension to the option expiration, they were too bitter that I was leaving and creating significant "damage" to the business.
It was incredibly painful and I felt very cheated and stupid for agreeing to those terms in the first place (actually faced some deep depression and anger against the world for a few months because of this, and thought about going to therapy), but what did I do in the end? I paid out the money. Yes, I wrote a check to my employer for 60k, and another check to the IRS for 190k, depleting my non-emergency savings (and this is from a very frugal person, who never even spent more than 8k on a car, car being my biggest expense ever). There were funds who would lend me the money, but wanted 50%+ of the proceeds, and if the company goes under you're still on the hook for a taxable event when the loan is forgiven.
Luckily AMT for ISO exercise can be slowly (very slowly) recouped in future tax years (and the new tax law made it a bit easier by increasing the deduction and the phaseout limits), but I still had to waste so much of my after tax money just to leave with what I matured over the years. And that money is now sitting in the government pockets for years, producing me no interest and losing value with inflation until I recoup all of it.
Fortunately, a year after I bought those shares one of the investors contacted me and bought some of my equity, so I was able to recoup all what I originally put in (and then some). But it's simply insane, and I am still in the hole for all that AMT that I will recoup in ~10 years, no less.
Other coworkers who left and didn't have the money to come up with the exercise and tax liability, simply lost them, justifying to themselves "well, they're probably not going to be worth anything anyway" (which could be totally true even after paying thousands to exercise them!).
It's a plain insult to startup employees. I wish all startup employees would rebel against this and refused to accept any startup offer unless there was early exercise paid by the company upon joining, or option expiration window of 10+ years.
I, for one, know that will never __ever__ join another startup again for this reason.
We hope that 10 year exercise windows will become the industry standard so that no one needs to worry about this anymore. Unfortunately, that hasn't happened yet. In the meantime, you can see a list of companies that have committed to them here: https://github.com/holman/extended-exercise-windows.
This sucks. Sorry to hear they did that to you and I’m glad you made out ahead of the game.
A company I worked with had the opposite approach — they not only allowed for early exercise, they allowed for immediate exercise of all unvested shares with an 83(b) election (and converted the vesting schedule into a clawback schedule). AND they offered a bonus for the amount of the exercise price.
So in effect, if you had $100k in stock vesting over 4 years, the company would bonus you $100k, you’d then exercise, file an 83(b) election, and you owned Common with a clawback provision.
You of course were liable for the income tax on the $100k, the company was liable for the employer portion of same, and when/if the shares were sold you’d be liable for capital gains accordingly, but overall this seemed like an eminently fair offer to employees and cost the company only the employer portion of the income tax on the bonus.
Everyone loved it and employees felt respected and treated fairly. Why don’t more companies do this?
The $40k+ you could owe in taxes is still a problem. Perhaps the company could give you an open-ended loan of the $100k (that you paid back if you returned the stock, or after a good exit).
Agreed, but: I think that might cross the line into what a loan actually is vs. what income actually is (or at least the IRS might have something to say about it).
I know the $40k in taxes sucks, but if you step back and think about it, it's actually quite "fair" (ignoring fundamental arguments about whether taxes are fair heh ;).
You are receiving $100k in stock options/stock. That will grow over time. I think it's fair to be taxed on that stock as income (since it is income! you're being given an asset) and then, later, be taxed on the gain of of that asset (if there is a gain). If you leave the company, they'll have the option to buy back any clawed-back stock, so you could even end up ahead (let's say you vest 50% then leave, so company pays you $50k for the unvested/clawed-back stock -- then you're actually ahead of the game by $10k net of taxes).
it is, of course, complete BS that this is the norm.
however, be aware that you can negotiate for early exercise or 10 year expiration prior to joining. even if the startup has never done anything like that prior, they will make it happen if they really want to hire you.
I have a deep network of friends in Silicon Valley who jump from startup to startup, and I tried to educate them when it comes to this topic, telling them to absolutely make sure the equity conditions were reasonable. None of them has ever managed to change those on an offer, it always comes back as "It's the standard contract!", and they are in general strong performers.
In my experience, unless you are really an insanely high quality and senior hire, for a standard software engineer they're not going to do anything like that, since they have other candidates at the door who won't mention the equity pieces, you can't fight the system too easily.
I've personally been in an interview feedback loop, back when I was at a startup, where one of the founders (who was an interviewer) said: "This guy is technically really good, but asked too much about the details of the equity compensation, I think he might not be focused enough on our mission, let's pass".
perhaps im extrapolating too much based on my own two data points. im just a normal senior eng, but have been able to get my last two offers modified (once with early exercise, once with 10 year expiration).
The alternative to making sure the equity conditions are reasonable is to value them at $0 when deciding whether the compensation package is good enough to get you to join.
But how does that solve the problem I had, exactly? If you later find out that your equity is on paper worth a lot of money, and you want to pursue other opportunities, do you just leave the potential money behind because of an assumption you made several years before which turned out to be statistically much more unlikely than the current expected outcome?
When your startup is at series E and your options on paper are valued 7 figures and all the investment rounds were raised with clean terms (see linked post), I find it debatable to still hold on to the assumption that they should be valued at $0, like they were at Seed/Series A when you joined, and so be willing to walk away from them rather than dealing with painful vesting/exercising conditions that were initially set in your contact, no?
When you play the lottery, you expect $0 back, but you also expect that in the rare case you win you won't have to pay taxes on your win years before being able to get the prize, otherwise you just wouldn't play at all.
One of the former companies I worked at never allowed early exercise and issued standard ISO with 90 day expiration upon leaving, which is unfortunately essentially the analogue of "standard and clean" when it comes to employee compensation. By the time I was ready to leave (4+ years, I was very early) all my equity was vested, and buying it required spending ~250k (USD!) between cost of exercising and AMT taxes, all while the company shares were illiquid as ever. The company had no interest in helping me, despite me asking for an extension to the option expiration, they were too bitter that I was leaving and creating significant "damage" to the business.
It was incredibly painful and I felt very cheated and stupid for agreeing to those terms in the first place (actually faced some deep depression and anger against the world for a few months because of this, and thought about going to therapy), but what did I do in the end? I paid out the money. Yes, I wrote a check to my employer for 60k, and another check to the IRS for 190k, depleting my non-emergency savings (and this is from a very frugal person, who never even spent more than 8k on a car, car being my biggest expense ever). There were funds who would lend me the money, but wanted 50%+ of the proceeds, and if the company goes under you're still on the hook for a taxable event when the loan is forgiven.
Luckily AMT for ISO exercise can be slowly (very slowly) recouped in future tax years (and the new tax law made it a bit easier by increasing the deduction and the phaseout limits), but I still had to waste so much of my after tax money just to leave with what I matured over the years. And that money is now sitting in the government pockets for years, producing me no interest and losing value with inflation until I recoup all of it.
Fortunately, a year after I bought those shares one of the investors contacted me and bought some of my equity, so I was able to recoup all what I originally put in (and then some). But it's simply insane, and I am still in the hole for all that AMT that I will recoup in ~10 years, no less.
Other coworkers who left and didn't have the money to come up with the exercise and tax liability, simply lost them, justifying to themselves "well, they're probably not going to be worth anything anyway" (which could be totally true even after paying thousands to exercise them!).
It's a plain insult to startup employees. I wish all startup employees would rebel against this and refused to accept any startup offer unless there was early exercise paid by the company upon joining, or option expiration window of 10+ years.
I, for one, know that will never __ever__ join another startup again for this reason.