Always absent in these kinds of essays/posts is the reason why startups are able to get away with this. If it didn't work, obviously the options games would have stopped a long time ago. A lot of people don't want to admit that there's a small army of young, naive employees who are enamored with startups and are perfectly willing to sign up for below-market salary and extremely unfavorable options terms in exchange for "the startup experience". And importantly, this small army is constantly renewing itself. Repeatedly bringing up how much the game is rigged doesn't really do much to change anything.
> Repeatedly bringing up how much the game is rigged doesn't really do much to change anything.
Au contraire! I stumbled across one of these semi-monthly kludgeposts with a comment section full of angry people early in my career, and it helped me avoid getting mired in any bad startup situations.
I think that getting the word out about this stuff is one of the best things we can do, since it'd be really hard to try and legislate this problem away
Options aren't a game. They're preferable to employees, for tax reasons. If startups gave employees shares, then employees would have to pay taxes on those shares, even though they're illiquid - so you're paying taxes on something you can't even sell!
Options solve this problem well, by delaying the tax burden until the equity is actually worth something. If it ends up worth nothing, you don't exercise your options and you don't pay any taxes.
> If startups gave employees shares, then employees would have to pay taxes on those shares, even though they're illiquid - so you're paying taxes on something you can't even sell!
Executives get gross-ups, so the tax thing is basically a smokescreen.
I doubt that's the reason. Like some FAANGs do with stocks, can't you always deduct a part of RSUs as tax liability and add the remaining into the employee's account?
You're probably getting downvoted because you're making confident-sounding but wrong claims. I posted a top level comment that should resolve all your confusion: https://news.ycombinator.com/item?id=24202814
You can do this at a public company because the RSUs are liquid. They can be sold at market rate on the stock market, for cash, which is what's given to the government. The government doesn't want your illiquid startup shares.
That's the exact purpose of stock options. From the IRS's perspective, when you receive shares in a private company, that's still income, because those shares have a specific value (determined by 409a valuation), despite them being illiquid.
Why the need for an exercise price(you can always keep it at a nominal amount like 1 cent) and short windows of redemption once you leave then? From most terms of options I have seen or heard of they have been quite restrictive compared to how flexible RSUs are.
Every year startups get a 409a valuation from an audit firm that determines what their company and shares are worth. The IRS requires that stock options have an exercise price that is equal to or greater than the share price that comes out of the 409a valuation. These are laws, not decisions made by founders/investors.
If you grant stock options with an exercise price that is less than the fair market value (share price from 409a), then that's considered income by the IRS and employees owe tax immediately.
With ISOs, the 90 day exercise window is required by the IRS. With NSOs, it can be longer, like 7-10 years. 7-10 years is obviously way more employee friendly.
Yes, kind of - what you're thinking of is known as an 83b election. But you still owe tax in the year you are granted the stock, at the current fair market value. If your startup is pre-funding, that's fine, it will be 10s of dollars. If your startup is funded, it will be 10s of thousands to hundreds of thousands of dollars.
