And, if you exit the company -- either voluntarily or involuntarily -- you often only have 90 days to exercise your options. If you've gotten laid off, eating into your savings while searching for a job is a pretty risky proposition. If you have an appreciable amount of equity, that bill can be rather high. Then there's AMT. Many end up letting the options expire. So, taking that pay cut for equity really didn't work out -- you had less money to exercise the options and because you couldn't, the option portion of your compensation was effectively clawed back.
I very much appreciate the startups pushing to extend the exercise window out to 5 - 10 years, but that's far from the norm. I've debated this with a couple of investors and their stance is if you leave the company then you're not committed enough and shouldn't receive anything. I think that's quite debatable, but that's certainly not the case when folks are laid off. And we commonly discuss people thriving in one particular phase of a company. If you're not in that phase, it's no good for either the company or the employee to continue the relationship just to defer having to exercise options.
> I've debated this with a couple of investors and their stance is if you leave the company then you're not committed enough and shouldn't receive anything. I think that's quite debatable
I don't think that's debatable at all; I think it's bullshit. Once your options vest, they are yours. They are compensation for the work you have already done, not the work you will do in the future.
Once/if your company switches to RSU grants from option grants, then at vest day your stock is yours, and can't be taken away when you leave the company (well, I imagine they could write up a contract that says that, but that would be quite non-standard, and I would never work for a company that did something like that). The vested RSUs are, again, compensation for the work you have already done, not the work you will do in the future. I don't see why options and RSUs should be considered differently here.
(I might even stretch that into the idea that it's bullshit that startup options expire at all, even if you stay with the company forever, but I do think that's debatable.)
If equity is going to be a material component of compensation, then the argument "you're not committed enough, you deserve nothing if you leave..." is utter nonsense.
Imho, many/most of these draconian equity / option terms are nothing more than attempts at 'golden handcuffs' to make it more challenging for employees to leave these startups.
Sadly, they work: I know many who couldn't leave roles til they'd saved up for years, or could finally ink second mortgage on their home, etc in order to purchase all their equity in their 90 day post-exit windows....
> And, if you exit the company -- either voluntarily or involuntarily -- you often only have 90 days to exercise your options.
This is why I advise everyone that you must early exercise (exercise your option as soon as you start with the company) if you're going to join a startup.
Some startups don't let you early excercise. Run far, far away. Find a different startup. Never join a startup that does not let you early exercise.
> This is why I advise everyone that you must early exercise (exercise your option as soon as you start with the company) if you're going to join a startup.
That's terrible advice, if you present it in an absolutist, blanket way like that. I do wish I early-exercised at my last startup, since I had a nasty AMT bill when I finally did exercise, and I could have had better tax treatment under the small business qualified stock rules when I finally sold. But: a) early exercising my initial grants would have cost me $40k, which would have eaten into my savings to a degree I wasn't comfortable with at the time, and b) I early exercised at two previous startups, which failed, and that ended up being money flushed down the drain to the tune of around $9k.
Sometimes people want to wait a bit to get a better idea of the company's prospects before investing their own money into it. Maybe they want to hold off until the company has revenue, or hits/maintains a particular revenue or growth metric. Sure, if you're a super early employee and have 5-cent options, maybe you'll feel comfortable gambling that money away (but maybe you won't be!). Yes, there will likely be a tax penalty for waiting, but that can be a reasonable and sound financial decision.
I was (fortunately) a few years too young to get mired in the original '00s dot-com bust, but I know several people who were encouraged/pressured to take out loans in order to (early) exercise their startup stock options, and ended up with worthless or underwater stock, but still had to repay those loans. It would have to be a pretty exceptional situation for me to recommend anyone take that route.
(I do agree that a startup not allowing you to early exercise is a red flag, though.)
> Maybe they want to hold off until the company has revenue, or hits/maintains a particular revenue or growth metric.
It is far too late then.
One of the many benefits of doing early exercise is that you exercise the option when the grant price is the same as the current valuation so there is zero profit (and you file an 83(b)).
If you wait too long, your grant might've been at $0.01 but now the valuation is $5.00 (making up numbers but both of these are in the ballpark of my past startup experiences). It is way too late to exercise those options, you'll be paying tax on $4.99 of profit on a stock that you can't sell and might go down! If you waited that long, now you need to keep waiting until there is liquidity so you can do a same day sale.
> take out loans
That would be a terrible idea. Like I said in parallel comments, if the price is too high for your comfort level, don't join that startup.
I very much appreciate the startups pushing to extend the exercise window out to 5 - 10 years, but that's far from the norm. I've debated this with a couple of investors and their stance is if you leave the company then you're not committed enough and shouldn't receive anything. I think that's quite debatable, but that's certainly not the case when folks are laid off. And we commonly discuss people thriving in one particular phase of a company. If you're not in that phase, it's no good for either the company or the employee to continue the relationship just to defer having to exercise options.