[philip1209]

For late-stage startups like this, RSUs are common instead of options. Because stock is issued rather than purchased (like an option), I don't think this is dishonest. (If a company valuation stays flat, stock options are worthless - but RSUs have value).

Either way: A thing to keep an eye out for is startups that describe the compensation value of stock using the preferred stock price, but then issue you common stock. I've personally seen one late-stage YC company doing this - you sign the offer letter with $Xk in stock, then the paperwork shows up later with $(X/4)k in the grant.

If a late-stage startup is including stock-based compensation in this number, I think it's likely they are pricing the stock inconsistent with its class in the 409a valuation. Keep an eye out for this - I think it's a common and dishonest way to boost perceived compensation.

[zachthewf]

You are right, but using the 409a pricing would not really be honest either. (In the sense that the 409a is basically "as low as we could reasonably value this stock" in order to keep the strike prices low.)

[philip1209]

I understand the founder argument. "Our investors said our valuation was $XM, so we give you your stock grant based on that price." But, the investors don't take normal stock. They demand special ("preferred") stock with more voting power that can get paid first - before employees. So, the $XM valuation isn't fair between the different stock levels, and the employees are at the bottom of the food chain - most likely to walk away with nothing.

Startups typically give their employees stock or options, and how you price the stock has tax implications. So, the IRS strongly suggests that you do something called a 409a valuation, where a neutral 3rd-party professional accounting firm determines the value of each stock type in your company. So, if your startup valuation is Schrodinger's Cat, then the 409a process is intended to have some trusted third party open the box and see what's happening.

The problem arises when you report one valuation to the IRS, and another to employees. You can't keep two different sets of accounting books, and you can't represent two different sets of valuations at the same time. By having the third-party accounting firm issue a valuation and by issuing stock at that valuation, you're supposed to have eliminated uncertainty in your stock price - and if you haven't, then the tax treatment of your grant is at risk.

That duality is made clear when your offer letter says "$X" and the stock grant says "$<X". That's dishonest and potentially fraud.

You can say "Your stock is valued at $X based on a $Y liquidity event, and $Y is the post-money valuation of our last round of funding." But, that's not the same as "We advertise your stock as worth $X (but, shhh, that's not what we tell the government so keep it a secret)."

[malfist]

But that is what the market will pay. No one goes onto the stock market and purchases orders above their ask

[singron]

The 409a isn't based on what the market will pay since private shares aren't on the stock market. It's a guess about what the market might pay, but since the shares aren't liquid, the guess can't be tested, so there is huge leeway to pick a favorable number.

[juancampa]

409a value is determined by an independent appraiser though, not the market. And in my (very limited) experience the actual difference can vary wildly, especially since the appraisal happens only once a year.

[temp_praneshp]

>(If a company valuation stays flat, stock options are worthless - but RSUs have value)

Can you help me understand why? I'd expect if you're granted options at a strike price of $Y, you will still make money as long as the valuation at liquidation time is more than $Y.

[yen223]

If the company value stays flat, that means its valuation at liquidation time is equal to $Y

[temp_praneshp]

But in any offer I have received, I've seen two numbers: Preferred value(?): X, and strike price: Y, with Y well below X.

In any case, you don't have to teach me all about options here, I was just curious :)

[MrDarcy]

Put another way, your capital gains are zero.

[bfung]

The kicker is “at liquidation time”, which is unpredictable and unknowable. Most of the time, options go to zero due to company shutdown.

[milkshakes]

If anything, RSU compensation is worse than options because of the tax implications. With options you have the option of paying the tax before the appreciation of the equity. With RSUs, you pay at liquidity.

[kokanee]

As a W2 software developer, I've held options at three companies and RSUs at two. I've netted around $30K from RSUs, and netted a loss of $20K from options. Only once did my options "liquify," when a startup I had worked at was acquired. The proceeds were distributed entirely to preferred shareholders and employees were left with nothing, several of us having spent thousands to exercise.

I made my bed and slept in it, so I have no axe to grind, but going forward I will never accept options over any other form of compensation, given a choice.

[verbify]

Thanks for your contribution to this discussion, it's helpful to have actual numbers.

There was a mixed metaphor that popped out to me in your comment (and I hope pointing it out doesn't break HN guidelines around tangential annoyances):

> I made my bed and slept in it, so I have no axe to grind

It reminded me of something George Orwell wrote in 'Politics and the English Language':

> A newly invented metaphor assists thought by evoking a visual image, while on the other hand a metaphor which is technically ‘dead’ (e. g. iron resolution) has in effect reverted to being an ordinary word and can generally be used without loss of vividness. But in between these two classes there is a huge dump of worn-out metaphors which have lost all evocative power and are merely used because they save people the trouble of inventing phrases for themselves. Examples are: Ring the changes on, take up the cudgels for, toe the line, ride roughshod over, stand shoulder to shoulder with, play into the hands of, no axe to grind, grist to the mill, fishing in troubled waters, on the order of the day, Achilles’ heel, swan song, hotbed. Many of these are used without knowledge of their meaning (what is a ‘rift’, for instance?), and incompatible metaphors are frequently mixed, a sure sign that the writer is not interested in what he is saying...

> By using stale metaphors, similes and idioms, you save much mental effort, at the cost of leaving your meaning vague, not only for your reader but for yourself. This is the significance of mixed metaphors. The sole aim of a metaphor is to call up a visual image. When these images clash – as in The Fascist octopus has sung its swan song, the jackboot is thrown into the melting pot – it can be taken as certain that the writer is not seeing a mental image of the objects he is naming

https://www.orwellfoundation.com/the-orwell-foundation/orwel...

[kokanee]

Well, that was not at all an expected reply, but it's well-received. Thank you for the thoughtful linguistic advice; I'll keep it in mind.

[singron]

I've had options at 2 companies and RSUs at 1, and I have a similar story (bigger earnings on RSUs, bigger "losses" on options (I technically still hold exercised stock, although I don't anticipate ever being able to sell it)).

A huge part of this is that a company won't issue RSUs unless it's already reasonably successful and the shares are liquid or nearly liquid, whereas options are issued by early stage companies that are mostly likely going to fail and are far from a liquidity event.

As an employee, options just aren't good compensation since they have too high risk and you can't work at enough companies to form a portfolio. The VCs that invest in these companies expect to win on less than 1/20th of the companies with preferred shares, so it's quite likely you will never make money on options in your entire career.

People talk about taxes a lot, but the most important factor is whether you are going to make money at all. There is no point in optimizing taxes on your gains if you are making losses instead.

[sokoloff]

You are permitted by the tax code to make an 83(b) election on RSUs.

Very few non-founders do it, because it means you could end up paying tax (with the election) on shares that will never vest for you, but you do have the option to do so.

[milkshakes]

fascinating! i have never heard of this. thanks for explaining.

[santoshalper]

If you're reasonably confident they'll go up, options are better. The vast majority of startups are heading to zero.

[toomuchtodo]

If issued ISOs that are QSBS qualified, no federal tax on the first $10M or 10x your cost basis, whichever is more. 83(b) election is sometimes an option too. RSUs are, as you mentioned, mostly cash comp due to valuation and tax treatment.

(not tax advice, we're just talking lottery ticket mechanics)

[beambot]

IIRC, you only get QSBS if you (a) exercise to purchase actual shares while the company is QSBS eligible; and (b) hold the resulting stock for 5 full years.

[toomuchtodo]

Correct. You’ll also want a QSBS attestation letter from the finance team or whomever handles equity admin if the IRS comes knocking. Save it with your options grant documentation.

[philip1209]

I've seen RSUs issued with single-trigger acceleration on acquisition or IPO.

[milkshakes]

typically, the liquidity event is the trigger that takes longer, not the vesting schedule. with options, you can exercise before the liquidity event, and pay taxes on a much smaller income (or none at all in the case of QSBS as a sibling comment noted)