Do early employees ever receive actual equity as opposed to mere options? | Hacker News Reader

Do early employees ever receive actual equity as opposed to mere options?

3 pointspain_perdu8 comments

I understand that any equity would almost-certainly be 'vested' equity but someone told me today that it is unheard of for employees to received anything other than stock-options. Is this really the case? When you look on AngelList at companies offering 0.5-2% equity for certain key positions, are they referring to options or actual equity? Finally, for extra credit, if anyone cares to explain how either employee equity or options might be affected by dilution that would also be most interested to read.<p>muchas gracias!

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There's no such thing as 'mere options'. Options are the right to purchase shares as a certain price. The price is typically set at the current FMV of the shares to avoid any tax implications. Vesting schedules may apply. Make an 83(b) election.

Stock grants are possible, but you would owe regular income tax on the FMV regardless of whether the shares are actually liquid, or will most likely end up worthless.

Your shares (or options) dilute exactly as you would expect. The company can issue as many new shares as their Bylaws allow and their stockholders vote for, and your percentage goes down. More importantly, inquire about participation preferences of preferred shares, which will have a liquidation preference; you do not want participating preferred, only participation on a as-converted basis (these are the investors shares, not yours). That means in a sale investors either get their share of a liquidation preference, or the share price, but not both.

How did the laws get so complicated? Common sense would dictate that the best way to handle equity is to have people given equity retain the percentage in the company (that they were promised) and just multiply their shares to reflect any new shares that are issued. To a layman like myself it just seems like all of these additional ways to manipulate the stocks were created for the sole purpose of fucking people out of money. Am I right, or is there actually a reason for doing things like this?

No offense, but that's not common sense, it's naivete. Strong anti-dilution rights causes many problems. Most commonly, it makes it very difficult to attract new investors.

Also, your math ("just multiply their shares to reflect any new shares that are issued") doesn't work. Try it on paper and you'll see why :-)

I didn't really explain myself very well, because as I said, I'm just a layman when it come to the subject of stock options and equity. My post was mostly a question. I wasn't trying to say that the new shares shouldn't detract from the overall value of each share, clearly no matter how many there are the company will still only have 100% of it's value to distribute amongst shareholders. Unfortunately, that's the way I sounded.

What I'm really trying to understand, is how a person can go from owning a significant percentage of a company, to having his shares become worthless, even if the company is worth quite a bit. It seems like any system of regulations or laws that allows something like that to occur must be fundamentally flawed.

I've taken some economics classes, but they don't really delve into issues like this. Can anyone recommend a good resource for learning how this works?

Taxes and corporate governance is certainly complicated, but the basic concept of a share is not.

If you work through some common scenarios, you'll see how the concept of owning a 'percentage' breaks down really quickly, and the concept of owning a 'share' actually keeps things very simple.

There's nothing about it that's for the purpose of fucking people out of money, but like many things in life, it's perfectly possible to achieve that effect.

Yes, in the form of http://en.wikipedia.org/wiki/Restricted_Stock_Unit

Signing up for a straight RSU/stock deal is rarely advantageous for a private company employee - stock grants are issued (and taxed) at vesting time, while ISOs are taxed at exercise time.

You control the latter, but not the former, and the risks of getting stuck with not very liquid private stock and pending tax bill with stock grants outweigh the benefits of not having to pay income taxes on their appreciated value. Generally the only companies even offering stock/RSU grants are those with either high liquidity in private markets or with public offering in pending mode.

Employee equity is diluted with each new financing event, as typically new stock is issued to support the round. Sometimes investors would insist on preferred stock with liquidation preferences, which doesn't necessarily dilute the employees, but creates interesting situations if the company is to be sold.

I haven't worked for a start-up, but from hanging out on HN for a few years I can tell you that equity not necessarily common, but not really rare either.

One thing to keep in mind, is that most start-ups fail, and most successful start-ups don't turn the early employees into millionaires. I've often heard the advice that you should just look at any equity/options offered as a bonus, and negotiate for a fair wage. At the very least you should go in understanding that you are potentially giving up income for equity that may or may not ever be worth a lot of money.

For dilution information, smartasset has a decent calculator that lets you play with it. https://www.smartasset.com/infographic/startup

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