<story><title>Guide to Equity Compensation</title><url>https://www.holloway.com/g/equity-compensation</url></story><parent_chain><item><author>alecbenzer</author><text>&amp;gt; don&amp;#x27;t deserve to be &amp;quot;preferred&amp;quot; instead of &amp;quot;common&amp;quot; because the VCs put in actual money&lt;p&gt;I agree with most of what you said, but a nit: one perspective I&amp;#x27;ve heard on the motivation for preferred stock is this:&lt;p&gt;Suppose I give you $10M to start a company in exchange for 10% of it. You then easily sell the company for $9M, keeping 90% * $9M = $8.1M for yourself and returning $900k to me. Preferred (non-participating, 1x) shares prevent this problem by making sure you can&amp;#x27;t just run away with the money: you have to actually use it to build the business.&lt;p&gt;People investing in the company in non-liquid ways (e.g., the founders or engineers, via opportunity costs) aren&amp;#x27;t in the same boat, because their opportunity cost can&amp;#x27;t be immediately liquidated.</text></item><item><author>ditonal</author><text>Startup ISOs are totally broken, and VCs and founders would rather write 30 page treatises on all their complexities (of course, glossing over the 99 ways to screw employees), than actually try to improve them.&lt;p&gt;A small percentage of people got rich off options a handful of times a long times ago, and since then countless people have been screwed.&lt;p&gt;Public RSUs for stock you can sell immediately on the open market are fantastic.&lt;p&gt;Common ISOs are toilet paper. At a _minimum_ you should get a 10 year exercise window, and if the CEO tries to say that would make it so early employees can hurt cap tables for future rounds, he&amp;#x27;s basically saying he doesn&amp;#x27;t consider your equity grant to be real equity as it deserves to be clawed back for the sin of not wanting to stick around for the 15 years it takes startups to IPO these days.&lt;p&gt;These exact same people will try to convince you that their ISOs are a valid subsitute to liquid RSUs, THEN say that they don&amp;#x27;t deserve to be &amp;quot;preferred&amp;quot; instead of &amp;quot;common&amp;quot; because the VCs put in actual money (hint: so did you if you turned down a public company to work at the startup. Biggest difference is only that you&amp;#x27;re way less diversified).&lt;p&gt;Am I ranting? Of course, but if VCs and founders are going to continually &amp;quot;educate&amp;quot; engineers on their equity offers, engineers need to stand up and inform each other of the pitfalls. I know countless people, myself included, who have been screwed by ISOs. You can actually lose money because the 30 day window forces you to pay strike price + taxes on gains, then you find out that the CEO sold the company at a bargain so liquidation preference kicked in and he just took a huge retention bonus instead.&lt;p&gt;The way out of this mess is not Github treatises on how to evaluate your equities. The way out is for engineers to continually tell founders&amp;#x2F;VCs that they will pick public companies instead of startups until ISOs get fixed. If ISOs screwed over VCs instead of engineers, they would have gone to DC and gotten this fixed 10 years ago. At an absolute minimum you shouldn&amp;#x27;t have to pay a dime in taxes until you&amp;#x27;ve actually realized some money in your checkings account. VCs&amp;#x2F;founders don&amp;#x27;t care because they don&amp;#x27;t have to care because engineers are still too gullible and accept these bogus deals.</text></item></parent_chain><comment><author>zapita</author><text>Except employees do invest money in the business by exercising their options. And that money, dollar for dollar, buys them an inferior product: lower priority in the liquidation stack; less liquidity because of abusive bylaws restricting secondary transactions; less tax benefits since your “gains” are taxed upfront.&lt;p&gt;The lower the pay, and the higher the relative cost of exercising, the worse it gets. So higher-paid executives are less penalized than entry-level employees who might spend their savings exercising options that will end up worthless.</text></comment>
<story><title>Guide to Equity Compensation</title><url>https://www.holloway.com/g/equity-compensation</url></story><parent_chain><item><author>alecbenzer</author><text>&amp;gt; don&amp;#x27;t deserve to be &amp;quot;preferred&amp;quot; instead of &amp;quot;common&amp;quot; because the VCs put in actual money&lt;p&gt;I agree with most of what you said, but a nit: one perspective I&amp;#x27;ve heard on the motivation for preferred stock is this:&lt;p&gt;Suppose I give you $10M to start a company in exchange for 10% of it. You then easily sell the company for $9M, keeping 90% * $9M = $8.1M for yourself and returning $900k to me. Preferred (non-participating, 1x) shares prevent this problem by making sure you can&amp;#x27;t just run away with the money: you have to actually use it to build the business.&lt;p&gt;People investing in the company in non-liquid ways (e.g., the founders or engineers, via opportunity costs) aren&amp;#x27;t in the same boat, because their opportunity cost can&amp;#x27;t be immediately liquidated.</text></item><item><author>ditonal</author><text>Startup ISOs are totally broken, and VCs and founders would rather write 30 page treatises on all their complexities (of course, glossing over the 99 ways to screw employees), than actually try to improve them.&lt;p&gt;A small percentage of people got rich off options a handful of times a long times ago, and since then countless people have been screwed.&lt;p&gt;Public RSUs for stock you can sell immediately on the open market are fantastic.&lt;p&gt;Common ISOs are toilet paper. At a _minimum_ you should get a 10 year exercise window, and if the CEO tries to say that would make it so early employees can hurt cap tables for future rounds, he&amp;#x27;s basically saying he doesn&amp;#x27;t consider your equity grant to be real equity as it deserves to be clawed back for the sin of not wanting to stick around for the 15 years it takes startups to IPO these days.&lt;p&gt;These exact same people will try to convince you that their ISOs are a valid subsitute to liquid RSUs, THEN say that they don&amp;#x27;t deserve to be &amp;quot;preferred&amp;quot; instead of &amp;quot;common&amp;quot; because the VCs put in actual money (hint: so did you if you turned down a public company to work at the startup. Biggest difference is only that you&amp;#x27;re way less diversified).&lt;p&gt;Am I ranting? Of course, but if VCs and founders are going to continually &amp;quot;educate&amp;quot; engineers on their equity offers, engineers need to stand up and inform each other of the pitfalls. I know countless people, myself included, who have been screwed by ISOs. You can actually lose money because the 30 day window forces you to pay strike price + taxes on gains, then you find out that the CEO sold the company at a bargain so liquidation preference kicked in and he just took a huge retention bonus instead.&lt;p&gt;The way out of this mess is not Github treatises on how to evaluate your equities. The way out is for engineers to continually tell founders&amp;#x2F;VCs that they will pick public companies instead of startups until ISOs get fixed. If ISOs screwed over VCs instead of engineers, they would have gone to DC and gotten this fixed 10 years ago. At an absolute minimum you shouldn&amp;#x27;t have to pay a dime in taxes until you&amp;#x27;ve actually realized some money in your checkings account. VCs&amp;#x2F;founders don&amp;#x27;t care because they don&amp;#x27;t have to care because engineers are still too gullible and accept these bogus deals.</text></item></parent_chain><comment><author>TrueDuality</author><text>This is one of the better explanations I&amp;#x27;ve heard about preferred stock. I&amp;#x27;d say the counter point for the engineers at least is that frequently the opportunity cost for them is vesting stock.&lt;p&gt;That lost revenue over the vesting period is IMHO the same as directly investing cash in the company that the company itself can liquidate. I would say that when shares are used for compensation with a vesting period they should be treated equivalently to investors that are directly putting cash in.</text></comment>