“Treat Your Share In The Company As A Lottery Ticket”

This is a short text about the things that I would love to know it myself before I took a job in a private company (or a startup, or in some cases “the unicorn”). Im not trying to create you have the impression that in any case it is not necessary to work in a startup, but here the imbalance of power between founder and employee, the maximum, potential applicants would do well to provide for other employment opportunities. After leaving the company, you are given 90 days to option exercise. It seems that this tradition appeared thanks to the historical rule tax service in relation to the right to purchase shares of the company at a specified price without taxes, but that doesnt matter.

More importantly, if you decide to quit, then the percentage you earned for years of service, will burn if you dont have sufficient monetary reserves to redeem her. Whats worse, realizing the options, you must pay tax on income that you never had. Each option has an initial strike price.

The current market value of the company (the value of all shares) is fixed on the basis of shape 409A. Buying option, you have to pay tax for the difference between its initial and current value, and the amount of tax depends on the number of options. In this case, you have not earned on these securities is a penny and are unlikely to do so in the future. But even if you have free money to buy back stock options and to pay taxes, now they are closed, and you will not be able to invest for an indefinite period of time.

Is a loss of profit. Imagine how much you could earn if invested in other assets. In accordance with the tax legislation, the possibility of the exercise of options at a fixed price without paying taxes, is limited to ten years, counted from the receipt of options.

If you dont sell, then they will either burn out, or you have to pay taxes. You think that 10 years is a long time. Some companies began to start the countdown of the period of performance since the dismissal of employees. And for workers 10 years look much better than 90 days.

But as I said above, sometimes 10 years is not enough. Golden handcuffs snap into place very quickly.The longer you are in the company, the greater your share, and to decide on the dismissal becomes harder and harder. Sooner or later there comes such moment when employees first become “paper millionaires”, although they dont have much money.

And they find themselves facing a difficult choice — either to resign, but to let it all burn, or stay in and wait for co-founders will allow them to get at least some profit. No one knows exactly when this or that company will go to IPO or get the offer of purchase. By the way, the more successful the company is, the longer employees have to wait for the liquidity event. It can happen in a year, five, 10 years, or not happen ever.

Neither Uber nor Airbnb, nor Dropbox has yet to become public companies. The employee of the company and its founder are diametrically opposed relation to the IPO. Employees want to get my hands on the money, as a reward for what they helped to create a business. For the founder it could mean the risk of losing their best people.

Having money on hand they can do other projects, or open your own. There is also another reason why the founders postpone the IPO for as long as possible. They believe that their companies still have opportunities for growth, and if theyre too early will make your company public, this potential will be lost.

For any normal entrepreneurs company is his lifes work. So often they want to wait a few more years to assess whether they have achieved their goals or not. This is a more noble reason to postpone IPO. But from the point of view of the worker is still a problem.

The founders (and their elected leaders) can agree to make their share of money while attracting investment. So they can get rich even before you get a real jackpot during the big event of liquidity. Employees have no such possibility. The situation is completely asymmetrical, and unfortunately, we are on the wrong side. While no one is immune from the force majeure, even if you come to the company with full understanding of its tables of capitalization.

At any time the founder may decide to increase the number of shares, and then your own share. By the way, “blur” shares employees during the investment rounds are not uncommon. For trading shares in private companies there are special markets. Sometimes they help to legally avoid paying taxes.

But you should understand that their assistance will cost dearly, and you are likely to lose a significant portion of the profits. Additionally, some companies set a limit for operations with shares of employees without the approval of the leadership. Share in the company, especially if the company is young, offered in exchange for the expectations of high assessment in the future. The President of the startup accelerator Sam Altman recommends to offer the first 10 employees at 1% of the company.

If the user subsequently sell business $10 billion, you get a very large reward. But just think, how many companies are able to rise to such a level. If the company sold for a more modest sum of $250 million, excluding taxes and the result of the inevitable blurring of shares you hold will remain not so much as you had hoped.

You could achieve the same rewards if you worked in a major large public company and sold her shares with restriction of circulation. Only in this case the risk would be less. But do not blindly listen to my words — take a calculator and calculate yourself how much you can bring to share in the company, taking into account market prices and possible blur. Its not that hard.

The leaders of some companies understand that if you delay the IPO or sale of the company, it might cause dissatisfaction employees. So sometimes they propose to redeem their shares for a fee. Of course, its better than nothing. But this can reduce the amount of profit that you could get in the future.

These events are held infrequently, so read the fine print of footnotes, and count what is your annual income (including the time that you spent in the company, not for the year redemption of shares). Maybe you get less than you could earn on the shares of restricted cases if you worked in a large public company. So, if you still want to work in a private company, I have compiled for you a list of questions to ask during the interview. (And you wont believe how rarely someone puts these lists free of charge).

Until what time after retirement I will be able to exercise the option?. How many shares in circulation. (This will allow you to calculate what shares of the company you will own).

Do you plan executives to sell the company or take it to IPO. And if so, within what time. (“We dont know” is not an answer). Is there in the company secondary sale of shares.

(Try to figure out change if the founders share in the company at the money at the time of investment, and whether the company repurchase the shares of employees). If the liquidity event is not expected — can I sell my share in the private market. Does the company have any debts or agreements with investors on a multiple liquidation privileges.

(If the investor has a two-time liquidation privilege, as long as he doesnt get 200% of their contribution back, none of their money will see). If you can increase me exercise period of the option. (After I first got a job in a private company, I learned that not all employees had a three month limit, but by the time the Treaty was already signed, and I could not knock the same conditions).

To work in a startup can be fun, interesting, promising — and may even be profitable. Working conditions in companies from Silicon valley are among the best in the world. You may decide to stay in one of them, even if you did not offer to share. But do not forget that if the share is still advertised, then it will play against you. The present value of your share — $0.

Treat her like a lottery ticket. Managed to win — well. No, nothing to worry about. Better get an environment that you feel comfortable even in that case, even if the share is not provided for by the terms of the contract. I say this not because there is a likelihood of the death of your startup, but because in case of success, there are plenty of scenarios in which to achieve their rewards it will be difficult.

Suddenly after five years you will want to do something new, or you decide to start a family or find a better paying job to buy a first home in Silicon valley in the Bay area. In this case, you will find yourself in a risky position, because your share in a startup is like money in Monopoly.

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