Searching answers on Google for this type of stuff has become futile - pretty much written it off at this point. Thank you for this. Wish it'd been around when I was at my first startup
My advice is, hire a lawyer and have him/her review and correct your option contract before you sign it. You will pay a few hundred dollars. It’s worth it.
I was employee #1 with a substantial equity stake, and my lawyer has found half a dozen ways I could be screwed. By default these contracts are incredibly one sided, but they don’t have to be. And as a rule in a startup if you can be legally screwed out of your money, you will be.
EDIT: The linked site does have great advice and is vastly better than just about anything else on the topic you can find on the internet. Just remember that there will be a _lawyer_ on the other end, and they know this stuff much better than you do. It's better to retain a lawyer on your end as well, especially if the amount of equity is non-trivial.
If your employee stock agreement has market terms, this is a bad way to look at things. The reality is that there is no set of terms you'll obtain from any competently run company that will give you the legal upper hand in extracting the maximum possible value from your work, or eliminating the possibility that you'll be treated ruthlessly. For instance: no matter how things shake out, you're going to get a cliff and a vesting period, and you're probably going to get transfer restrictions.
The questions, I think, have to come down to:
* Do you trust the team? Did you check references? That includes that of their investors.
* How tolerant are you of risk? The biggest risk with startups is, of course, that equity will be worth zero. The contract risk you're talking about is comparatively marginal. People get screwed by contracts, yes, of course. It's worth being wary. But for every startup engineer screwed by contracts, 20 have been screwed by investing years of their lives into companies that fell over and died. Keep perspective.
I am very sympathetic to employees minding their rights in these equity transactions. I don't think equity is a particularly good deal for employees most of the time. But I've noticed a pathology with some people who are super microscope-and-tweezers about these kinds of contract terms. It's not always a great look. Better instead to be someone who can look at the total package (maybe with input from your lawyer) and make a snap decision: do I believe in this opportunity, for me, or not? Obviously, the bigger problem in our field is that people want to believe way too much.
Yes, that’s another excuse that will inevitably be fielded: that those are “market” terms. It was tried in my case. Miraculously I ended up getting everything I wanted the moment I told them I was going to leave. Now, my negotiating position was unusually strong, and normally I wouldn’t get everything I wanted, but “market” is such a bullshit excuse in the case of early, core employees that it should be dismissed out of hand. Truly “market” terms are what you manage to negotiate. That having been said I didn’t actually request anything extraordinary.
Who are you talking to? I'm not the one telling you to accept contracts you don't want to accept. By all means, ask for stuff. But: my experience is, the fine-toothed-comb people end up asking for things that the company can't give, and then take to Twitter about the "red flags" they've identified, and all I'm saying is that it's a bad look.
The legal wrangling, for most engineers, isn't going to do anything to improve the bottom line. Leaving and picking better companies, on the other hand, might.
Also the math almost never works out in favor of working at a startup vs working hard at bigco.
Make a spreadsheet, add probabilities of how things will work with current IPO timelines (+10yrs), chances of exit at each startup stage, the loss your getting from investing the same amount of cash working at bigco in ETFs, projected career growth, cost of living, etc.
That's true. Don't neglect the cash base salary either, and don't overvalue the upside potential, because probabilistically speaking even under the best of circumstances it is likely worth much less than you think. Certain amount of faith is required, you should just moderate the amount of faith in anything startup-related unless it's late stage and things are going well, or unless you're a founder (and therefore you're mostly in control and are likely to benefit disproportionally in case of an exit). Even single-digit number first employees should be running these calculations in their head, with a healthy dose of pessimism.
There are other benefits to working at a startup though. For one thing you might end up on a great team. For another there's far less bureaucracy and process that gets in the way of doing things. For yet another, most of the truly "cool" things are done by startups, and your chance of getting a job doing something intellectually rewarding is far greater there (in my estimation at least). Simple fact is, FANGs of the world have some pretty cool teams, but those teams as a rule have no open positions, so pro tip: don't go to Google thinking you'll work on Brain or autonomous cars at any point in your future, unless you're joining those teams directly. Startups do have open positions every imaginable type of work, tech stack, or field.
But yeah, do consider whether money to fun balance is there, and if it's worth it for you.
> the loss your getting from investing the same amount of cash working at bigco in ETFs
Only if that's actually what you'd do with the money. If working for a startup means working from home in rural/suburban Oregon and working for bigco means you're living in SF proper the rent and ancillary costs may make dumping the excess cash into the market unlikely or not particularly lucrative.
Not just in startups. This is true for any transaction or business agreement (including plain vanilla employment) where your counterpart enjoys a massive information and power advantage over you.
I don't think any information or power disparity is required for this. If someone (person, or company, or government) can legally get money out of you, or pay you less, they will. Just like if you had an opportunity to leave your company and take $10,000 or $100,000 with you, it's hard to imagine two identical scenarios where you take the smaller amount.
What kind of lawyer would you want for this? Is it simply lawyers with contract experience or with startups is there a particular type of lawyer best suited for this conversation?
At an early startup (definitely anything pre-Series A, but arguably including many Series A startups), any pushback on changing these kinds of terms would be a major red flag to me regarding the founders. If you're early on the team and not asking for anything outrageous or subject to terms they've already agreed to with their investors, I'd see it as a sign that the founder would choose to put their own interests at odds with their employees when given the chance to choose to align them.
Changing the employee stock agreement after the A round for an individual hire probably requires a board meeting about that hire.
Don't take a job whose comp terms are incompatible with your goals; of course not. But again: be careful imputing intentionality. It's not a "red flag".
Once again I agree with the first part of what you said and disagree with the rest. Yes, changes in some of the clauses do require board approval, and no, I absolutely do impute intentionality to abusive contracts. It’s not like the company lawyers (and therefore founders) don’t know the details of the contracts: founders themselves sign some corrected variant of it. Therefore they do not get to use malice/incompetence platitudes in their own defense. I do now consider the presence of certain clauses in an option contract a _major_, deal breaking red flag.
Depends on how much they want you, they might accommodate. Obviously this is unlikely to work if you're fresh out of school and have no track record to speak of.
You are not asking for anything extra here, you're just asking, de facto, for conditions that would let you value the options part of your compensation at anything greater than zero. You got dinged for it on the base salary after all, and it costs the company very close to zero to give you this paper wealth. If the contract is abusive, you can be sure you'll be treated 100% in line with the letter of the contract and your options are very likely to be worth nothing.
Don't be afraid to offend, this is just business. Don't speak in confrontational tone either though, and be prepared to walk away, just like in any other negotiation. The worst outcome is nothing changes, but you had that to begin with. If you're aggressive, the second move will be an email from the company lawyer telling you the changes you've suggested are out of the question. After that, if you're prepared to walk away, they will agree to a part or all of it.
The net benefit of this is you could introduce numerous improvements into your option contract if you succeed, i.e. eliminate or weaken the clawback clauses, negotiate early exercise, take care of accelerated vesting or option replacement in case of an acquisition (otherwise you could be left with literally nothing after the exit), vastly extend the exercise window (from the default 0-90 days after you leave to many years), negotiate that you get to keep shares if you're _fired_, etc, etc. A good lawyer could write a thick tome on this, and you're NOT going to be able to learn it in your spare time.
If equity is substantial, and you think it might eventually be worth anything, I also advise hiring a tax accountant with experience in such matters. There are different types of stock options, with different levels of taxation (conditioned on your exercise strategy). Under some strategies you could end up on the hook for six-seven figure amounts of tax even though you can't sell your shares, and might never be able to do so.
But for most startups, given the low probability of success and the many ways you can be screwed (dilution, clawback, liquidation preferences, etc) you'd need to have A LOT of faith in your startup (and in the soundness of your options contract) to exercise early.
If you do nothing else, try to negotiate that: a). You're not required to sell _vested_ stock back to the company if you leave / or even get fired, b). You get _something_, preferably full, immediate vesting, in the event of an acquisition, c). Your exercise window spans many years after you leave, so that if the startup does exit you can get something for the vested portion of your option without exercising it before you leave (and potentially exposing yourself to massive reaming by the IRS).
None of the above is a replacement for proper legal / tax advice though, it's merely a distillation of the advice I received that was applicable to my particular circumstances at the time.
A philosophy I have for founders is if it is too much money to early exercise all of it, covering the cost with a sign on bonus, you should be giving RSUs at that point.
82b sign on bonuses are cheaper than the actual cost, since the money is really the employee's marginal tax rate, since early exercise money comes back to the corp.
That is typically around series A or B, which is a lot earlier than the typical switch to RSUs.
A really nice idea, although my sense is that companies in the $5-20mm paper valuation range fall into a sort of "valley of death" where the options are too expensive to exercise, RSUs would be laughably premature, and the odds of success are still very, very thin.
Are they really laughably premature? Is it really that much more work to start issuing RSUs vs options for new hires? From what I know, it's a board meeting and other kind of equity contract that is presented.
The paperwork shouldn't be crushing, but RSUs are not too appealing when the company stock is far from liquid. Grant 0.5% of a $10mm company--assuming no aggressive discount on common stock--pay something like $15K in tax with 83b election? Or, no early exercise and pay perhaps much more tax on vest with no market to sell.
$15k in tax isn't that big of a sign on bonus then, since I'm assuming it's a $37.5k grant? When paying $XXXk in tax starts sounding crazy for a company to do as a sign on bonus, that is the time to go RSU, because it's triple crazy for your employee to pay the exercise cost themselves.
In practice, unless the cost is so cheap that doing an 83b is not hard, then an RSU is no different than an option to an employee. The employees will only exercise when there is some sort of liquidity.
No employee is going to have the capital to exercise any other time either, because it's only to get more expensive with AMT as time goes on.
By RSU I mean stock that is granted only when you have met the time requirement as in normal stock options, and when the company is liquid (acquisition or IPO). Cheap stock options that don't expire when you leave also work too.
Yeah you really cannot find any good information about it without spending hours, google just surfaces terrible generic articles on equity. Real information is surprisingly hard to come by, some kind of SEO has pushed it elsewhere.
