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A growing number of startups and Large Tech companies offer equity – stocks, options, and others – as part of software applied science bounty. Nonetheless, I’ve noticed few engineers understand what these mean.

When I was a hiring manager at Uber in Amsterdam, engineers commonly focused far more than on the base bacon, taking footling interest in equity. Several people merely realized much afterward – sometimes at the IPO – how big of a bargain a practiced disinterestedness packet means.

“Why should I care near disinterestedness?”
is a question I frequently become, especially from engineers who have yet to exist issued equity. Here’due south why: for almost all total compensation packages over $250K in the US and €150K in Europe, an increasing chunk of information technology is equity. Both publicly traded companies in Big Tech and startups frequently issue meaningful stock to software engineers.

This post attempts to summarize the most common equity compensation setups
yous might come beyond, help you understand their value, and point to additional resources. This is the data I wish I knew before to understand how disinterestedness works at the high-level, and help me do more detailed inquiry when I got offers that contained disinterestedness components.

Disclaimer: this article is not tax or legal advice or advice of any class.
Though I accept received options, RSUs and been function of ESPP schemes: I’g no financial advisor or expert on the topic. Do your homework beyond this article: read the fine impress in offers, talk with people who have more context, or find an expert.

Books that go deeper in the topic – peculiarly for equity with United states-based companies – are:

  • Equity Compensation for Tech Employees
    – a book I reviewed, written past Matt Dickenson, software engineer at Foursquare.
  • The Holloway Guide to Equity Bounty – a pop book for tech employees.

We’ll embrace the following topics:

  1. Why Disinterestedness is Important: Success Stories
  2. Vesting, Cliffs, and Clawbacks
  3. Stock Options, ESOPs and NSOs
  4. RSUs (Restricted Stock Units)
  5. Double-trigger RSUs
  6. ESPP (Employee Stock Purchase Plans)
  7. Phantom Shares
  8. SARs (Stock Appreciation Rights)
  9. Virtual Shares, Virtual Options
  10. Growth Shares
  11. Dilution
  12. Taxes
  13. Why Equity is Illusive: Cautionary Examples

1. Why Equity is Important: Success Stories

Equity is an important compensation component for software engineers at Big Tech and the “top” tech startups. At places like this, staff and above levels in the US oft receive
more
in stock per twelvemonth than their base salary:

Compensation data for Facebook, Uber, Stripe and Twitter based on salaries shared on Levels.fyi. At these companies, equity becomes more prominent from the senior and staff applied science levels.

For the bulk of software engineers I know – including myself, based in Europe – equity has been hugely beneficial. Still, few people have heard of these stories from friends and assume equity upsides are limited to either those in Silicon Valley, or to executives.

Here are a few outsized success stories to illustrate the type of gains software engineers have seen in the past:

  • $12M in options and stocks gain for a software engineer
    who joined Doordash in 2018 as a software engineer two (source). They were allowed to sell their stock starting May 2021, afterwards the half-dozen-calendar month lockup expired.
  • $10M in equity gains
    for four years’ of equity vested for the beginning 10 engineers at Amplitude, an analytics startup (source: the founder). The startup was the kickoff to put extremely employee-friendly equity policies in-identify, like a x-year postal service-termination exercise window. This meant that even if any of these outset 10 employees left later 4 years, they nonetheless fabricated $10M or more without having to exercise their options, and could do and then, years after, on the IPO.
  • $6M in options gains for a software engineer
    at Databricks who accepted an offering late 2018 that included fifty,000 options spread over 4 years (source). Databricks was valued at around $1B at this time – equally of February 2021, it is valued at $28B. This engineer has not nevertheless vested all options, and they are non yet liquid – but there’southward a high chance they will be, following an IPO.
  • $ii.2M in gains in ane.5 years for a software engineer
    who joined Snowflake in 2019, 1.5 years earlier its IPO. Taxes were a big source of this engineer, with the exercise cost and taxes bookkeeping for $508K (the gains were on top of this). Source: Secfi land of tax options 2020.
  • $600K/twelvemonth for a staff software engineer at Google
    in Washington with the post-obit setup: $240K in base salary, $300K/year in Google stock, and $60K in cash bonus. Staff and higher up levels making more in RSUs than base salary is not uncommon at publicly traded Big Tech companies in the US.
  • €500K/yr at Snap, in Europe for a senior engineer, cheers to stock rises. A person I know received an offer at Snap with €100K/year in base of operations salary and $100K/twelvemonth in RSUs. They received RSUs around $10 each in early 2019 – a total of around 30,000 RSUs. The stock has grown by more than than 6x, and this person is currently vesting around €400K/year just in stock. Had they not received such a strong disinterestedness package, they would non have benefitted from the rise in disinterestedness.
  • Not-senior software engineer making €250K/twelvemonth in Germany
    thanks to disinterestedness. A software engineer received 4,000 RSUs vesting over 4 years when joining Airbnb. At the time, the internal stock price was at $60, valuing this package at  $60K/year (1,000RSUs/year), on top of their €90K/year salary. Following the IPO and the increase in share toll, the equity is worth around $180K/year (at a share price of $180/share and 1,000 shares/year – €150K/year), bringing their full liquid bounty to around €250K (including an annual €10K bonus).

All of the success stories can be attributed to meaningful equity offers and the equity value of the companies skyrocketing. Both Doordash and Databricks have increased their company valuation past more 30x in the past 2.five years – and even with dilution, equity holders saw probably 20x or more than in gains. Valuations for Snap and Airbnb have risen past 4-6x in the past two years.

Equity, nevertheless, is risky. There is no guarantee of an IPO, and even less of the stock jumping every bit much as information technology did with Doordash or Airbnb.

This article volition close with cautionary stories where people were left with nothing – or – even worse – lost lots of money through options. In that location is no free lunch, and you will not see outsized gains without taking on some level of risk.

2. Vesting, Cliffs, Refreshers and Clawbacks

Whatever time y’all’ll be awarded disinterestedness, you’ll see a few common terms.

Vesting
refers to in what installments you’ll “get” the disinterestedness. Say you are awarded 48 shares – or options – over 4 years, and they belong quarterly. You would go iii shares – or options – each quarter. If you stay for the total 48 months, all 48 of your shares/options vest.

Cliffs
are a clause that requires you to stay at a company for a minimum corporeality of time earlier you lot get
any
disinterestedness. In the previous example, without a cliff, yous could make up one’s mind to quit afterwards 3 months and withal walk away with 3 shares/options. This might be in your interest, but the point of equity is to incentivize staying long-term.

A one-year cliff is typical with privately traded companies and is usually non negotiable. Going dorsum to the previous example: 48 shares over iv years, vesting quarterly, with a 1-year cliff would mean this vesting:

  • 3 months, 6 months, 9 months: no shares.
  • 12 months: 12 shares
  • xv months: another three shares… and the same, every 3 months.

For publicly traded companies, no cliff on vesting is condign more of the norm in big tech. Google, Facebook, Spotify, Pinterest, Uber and Doordash all issue stock with vesting starting immediately: so you tin can share stock after the first month or quarter (depending on the vesting schedule).

Conversion from budgetary value to shares
or options could happen at two timeframes:

  • Converting when awarding the grant. This is the near common scenario. For example, if y’all bring together Microsoft and your contract states you are awarded $244,000 in stock over four years, and Microsoft’s stock price is $244 at this time, then you’d get awarded i,000 units of stock to vest over time. This approach ensures upside if the stock goes up – but also downside if it goes down.
  • Converting on vesting of each stock unit of measurement. This is an approach Stripe, Lyft, Walmart and a few other companies are taking equally of recently. Say you are awarded $480,000 of Lyft stock to belong over 4 years, at a monthly cadency. After the cliff, you’d be allocated $x,000 worth of shares every month, converted on the spot. This approach ensures you get $x,000 worth of stock every calendar month: but you lot get no upside from the stock going up or see a downside if it goes lower.

Equity refreshers
are something that many Big Tech companies laurels to either a wide population or to people perceived equally top performers. They are typically awarded annually and tin can have a different vesting schedule from your original equity awards.

While I was at Uber, both myself and well-nigh people I knew received equity top-ups every year. This is not the norm for all companies, though: I know several places that either do non accept this in identify or only the top xx% might receive any form of additional equity.

Office of my equity refresh in 2019, at Uber. I received annual disinterestedness refreshers on top of the annual cash bonuses – as did most engineers working hither. As I left Uber late 2020, I forfeited well-nigh of this disinterestedness, also as other unvested disinterestedness.

Signing cash bonuses
are sometimes awarded together with disinterestedness, especially when your equity vesting is back-heavy.

For example, the Amazon vesting schedule follows a 5-15-40-40% pattern. You get 5% of your equity the first year, 15% the side by side, and 40% in years iii and 4. In practise, this means you get less equity before. Amazon balances this out by granting people a greenbacks bonus upfront for years 1 and 2.

Clawbacks
are a term where you need to pay back money or benefits if you lot leave within a certain corporeality of time. They are nigh frequently used for upfront greenbacks bonuses, like the one with Amazon. They might also be used for relocation expenses.

For equity, clawbacks are not needed, as if you lot exit early, y’all won’t get the equity that you lot have not vested. However, for vested equity: this should now belong to y’all, and – in the instance of options – you should exist able to practice them.

Post termination exercise window
refers to what happens to your vested, merely not even so exercised stock when you go out the visitor – either through your own will, or because you accept been let get. If a startup has gone through high growth, exercising the stock options might be very expensive: not because of the price, but because you need to pay tax. This could amount to tens, hundreds, or fifty-fifty millions of dollars.

Many United states startups offer a standard, 90-day do window. When early GitHub engineer Zach Holman was fired from the company, he had millions of paper gains, merely not the money to pay off taxes when exercising. He wrote the Fuck Your 90 Day Practice Window article that explains why such short windows are a bad deal for employees.

Look for companies that offer ten-twelvemonth exercise windows: something that is condign more than mutual in the industry, many Y Combinator startups offering this from the get become. See a list of such companies here.

IPO lockup periods
are a time frame when y’all cannot sell shares that you have vested, post-obit an IPO. The standard term is 6 months for most companies. For example, when Uber went IPO in April 2019, employees could not sell the stock until Dec 2019. Note that the employer might sell RSUs during this fourth dimension period to comprehend taxes for employees.

Typical terms
in Large Tech and sensible startup equity are these:

  • One-year cliff
    for vesting for private companies. No cliff for publicly traded companies.
  • 4-twelvemonth vesting
    of grants with monthly or quarterly vesting. Whatsoever longer vesting goes against the usual “up to 4 years tour of duty” that virtually innovative companies and organizations use – and which “tour of duty” tin be extended a few years in, with another, sizable disinterestedness grant.
  • Clawback
    on upfront cash bonuses or relocation expenses for up to ii years.
  • Equity refreshers
    are variable. Better companies award them to most employees equally role of the bonus process. Places like Amazon award them to a small population. Refreshers oftentimes accept 3-year vesting.

Scarlet flags
for equity are – unfortunately – not uncommon. If you spot any of these, proceed with caution.

  • Predatory vesting or clawback terms. A few people mentioned seeing clawback clauses on equity where you would need to repay all equity if you left earlier iv years.
  • Longer vesting period than iv years: this is outside what is “normal” in tech or a productive “tour of duty”. A 4-yr vesting is the standard for most tech companies. In Europe, v-year terms used to be the “norm” upward to a few years ago, but this is changing to 4 years for all “reasonable” companies. Anything longer is a scarlet flag – I know of some EU startups offering 6-year vesting periods who get turned downwardly by candidates knowing what reasonable vesting windows are.
  • Short windows to exercise options
    later leaving the company (postal service termination exercise windows). Many companies have 90-day windows for exercising options. This tin be problematic for many people. Expect for companies that accept 10-year practice windows – here’due south a list of such companies. Amplitude was one of the first companies to introduce this setup, and they take open-sourced their approach.
  • Stock granted as dollars in a high-growth pre-IPO company can be a xanthous flag.
    In October 2020, Stripe has changed from giving four-twelvemonth RSU grant to giving out a stock-still dollar amount of stock at the terminate of every year, at the same value. Considering most people expect Stripe’s stock cost to keep going up, this do ways employees will lose out on all stock gains for 4 years. From an employee perspective, they are not getting equity, but a large cash bonus that has no upside – or downside.

In general, seek expert advice to review the equity terms to avert surprises afterwards down the road. If you could gain plenty money to pay for a business firm from an disinterestedness package – you lot should probably spend comparable time and money on due diligence than yous would with ownership a business firm.

3. Stock Options, NSOs and ESOPs

Employee Stock Options (ESOPs)  or Non-Qualifies Stock Options (NSOs)
are often just chosen stock options. Options are a common type of disinterestedness to be granted by startups and high-growth companies to employees. It’s the virtually common form of equity compensation for companies that are not yet shut to an IPO – and, usually, the least understood past engineers.

The option is an opportunity to buy a share of the company (“exercise”) at a given price (“strike toll”) after the choice vests.

How much is my options package worth
– both now and in the future, assuming the company goes public/is caused at $X valuation” is the question y’all’ll want to answer whenever you lot go an offering with equities. Unfortunately, not all companies make this easy. To do then, y’all’ll demand to figure out:

  • What buying %
    the options would mean if you exercised them. This is relevant typically for seed stage companies, or at of before the Serial-A rounds.
  • The selection strike cost and the fair share valuation
    that investors paid for in the final circular of funding. This is typically information based on the 409a valuation. For example, say yous are issued 10,000 options at a $10 strike price, and the 409a valuation is $50 per share. In this example, your packet is worth $400,000 on paper 10,000 x ($50-10).
  • Expected visitor growth
    that is realistic/conservative / optimistic from your perspective. Future growth is both the biggest opportunity for your equity package to abound in value: but it’s every bit the biggest take chances.
  • Expected dilution
    equally the visitor grows. The visitor raising money at double the valuation will almost likely mean your options/shares will be worth less than twice their current value due to dilution. Dilution tin be hard to predict
  • Exit scenarios. Options are only worth anything if there will be a financial event – IPO or acquisition – where the shares volition become liquid. IPOs are typically a lot cleaner from a financial perspective than acquisitions, where ratchet clauses volition protect early investors’ interests. See cautionary examples for examples where employees were left with petty to nix afterwards company acquisitions.
  • Postal service-termination exercise period: if yous leave the company, how long do you take to exercise options that you lot’ve vested? Wait for places where this is years, non 90 days. See a list of startups with extended practice windows here.

Disinterestedness issued in different stages of venture funding is hard to compare: it’s like comparing apples to oranges. This is considering of the expected growth of the company is higher, the earlier the stage. Nonetheless, the time for any get out is also
much
longer and more uncertain if it will ever happen, the earlier the stage. For example, almost seed-phase, venture funded companies optimistically hope to grow 100x or more, over the adjacent many years. At Series D, E, or F, this optimistic growth is more than expected to exist ii-5x before a potential go out.

However, the earlier stage the company, the higher adventure that they will never exit. Do your enquiry on the industry, the founding team, the investors so you can “toll” the value of equity, and the value of a potential issue. TLDR Options is a site that helps you visualize various outcomes with crude estimations.

TLDR Options is a rough visualization to help you sympathise the risk – and upside – of stock options at dissimilar stages of venture funding

Most companies will stand for options to be worth more than they probably are, and at that place’due south not much you tin can do nigh this. As software engineer Dan Luu puts it in this article,
“startups prefer options because their lack of value is less obvious than it would be with cash”.

Using your ain savings to practise options
is the biggest downside of options from an employee’southward perspective. Let’south imagine you joined Uber early on, and you’ve received 50,000 options at a $iv strike price each. Allow’s assume that these shares would be valued internally at $44 each in 2017. However, Uber is non public, and you lot want to exit the company, and allow’s assume you take a 90-day post-termination exercise period.

On newspaper, you lot accept made $40 turn a profit on each pick and gained $ii,000,000 in value. However, you would need to pay $200,000 from your ain savings just to exercise these options – and nosotros’ve not fifty-fifty talked about taxes.

It might be tempting to borrow the money: but what happens if Uber never goes public? Y’all will accept lost all that money. What happens if they exercise get public and you have left and lost the correct to practise those options? You could have left millions on the tabular array. This is yet another reason to look for places that have multi-year post-termination practice periods.

Exercising options early
is the number one concept most people in tech mentioned as something they wished they knew about. Exercising options before they vest, can qualify for favorable revenue enhancement handling. Here’s a case studyof what information technology would have meant for an early Snowflake employee, instead of waiting for the IPO:

Exercising options early vs waiting for the IPO for a Snowflake employee. A xx% difference in the outcome.

Not having the funds
to encompass exercising options and the tax is the main reason many engineers shy abroad from this choice. This is where financing solutions providers might help: they can offer no-downside funds to practice, and and so take a fair cut at the IPO, often resulting in more profit than if you would take exercised options later.

Examples of providers who can offering financing solutions include Secfi, Quid, EquityBee, Forge Global. Find others by searching for “stock pick financing”.

Getting issued options at late-stage companies can be risky, as they might turn out worthless after an IPO, if the company’s valuation does not abound fast enough. This is called the options being nether water. This is why companies in a higher place the $1B valuation typically event RSUs or double-trigger RSUs.

At Uber, some of the options ended up under water. Some people who joined in 2015 received options at the strike price of effectually $31 per share. Uber subsequently went public at a $45 value. Yet, later on the lockup expired, the share was at $30. This meant that those options were nether h2o and worthless.

Compare this with employees who joined in 2016, and received double-trigger RSUs. Even though the issue price of the RSU was $48, at a $30 stock price they were nevertheless worth 62% of the issue price.

Get professional assistance
in understanding how to maximize your equity value: both from experts like Secfi, and startup disinterestedness and revenue enhancement advisors.

Further reading:

  • Options vs cash from software engineer Dan Luu – a must-read for software engineers
  • Understanding startup options from YCombinator
  • The State of Stock Options in 2020 from Secfi
  • Stock Options chapter in the Holloway Guide to Disinterestedness Compensation
  • Employee Stock Ownership Program (ESOP) on Investopedia
  • Exercising stock options from Carta
  • Fuck your 90 solar day exercise window from an Zach Holman, an early GitHub engineer
  • List of startups with extended exercise windows that are longer than 90 days
  • Secfi: a visitor to help make the most of your stock options

4. RSUs (Restricted Stock Units)

Publicly traded companies
are on the stock market place – like Microsoft, Google, Amazon. Anyone can buy and sell their stock after opening a stock account.

RSUs
– Restricted Stock Units – are a form of stock bounty that publicly traded companies often offer to software engineers. You’d typically get awarded a specific
amount

of stock that
vests
over a
given time flow.

Depending on the terms of the stock, it could be awarded in various ways:

  • Y’all get awarded a number of shares: converted from the dollar amount from when your award is approved. Say y’all get awarded
    $120,500
    in Microsoft stock that vests over 4 years. Let’s assume your stocks get awarded when the Microsoft stock price is $241. Y’all would go awarded 500 units that belong over these 4 years: or
    125 units per year. If the price of Microsoft stock goes up or down, so does the value of this bundle. Once the stocks vests, you lot tin can make up one’s mind to sell them or keep belongings them.
  • Y’all become awarded a dollar value of shares
    that get converted to shares on vesting. Say you go awarded the aforementioned
    $120,500
    in stocks to belong over 4 years. Regardless of the stock performance, you’d receive
    $thirty,125 per year
    in stocks. Once yous go these stocks, yous can sell or keep property them.

Companies have an RSU policy. However, almost places would honour a number of shares at the start of your vesting period, making you more of an “owner” and someone who can do good more from the stock price going upwardly.

Further reading:

  • Restricted stock on Wikipedia
  • What is Restricted stock? on Investopedia
  • Restricted Stock Unit section in the Holloway Guide to Disinterestedness Compensation

5. Double-Trigger RSUs

Pre-IPO companies
are private companies that are not listed on any stock exchange. Merely private investors investing in the company can purchase shares, unremarkably as a grade of an investment rounds.

Double-trigger RSUs
is a concept more common for unicorn companies that plan to go public in the coming years. These companies allocate stock to employees that vests similar to how RSUs do with public companies.

The problem with application RSUs for private companies is taxes. You’d need to pay revenue enhancement the income from the stock value that you lot’ve vested: however, in that location is no marketplace to liquidate this stock. You’d have to pay out of pocket for the revenue enhancement, with no style to sell office of your equity cover those taxes.

Double trigger RSUs is a setup Facebook utilized before its IPO, and several other companies take followed since. The idea is that the stock does non vest until a 2nd trigger – an IPO or another financial effect happens. This way, taxes are due on the IPO or visitor sale, but not earlier.

Further reading:

  • Pre-IPO tech giants utilize Double-Trigger RSU vesting to attract talent
  • Private company stock grants programme design trends

6. ESPP (Employee Stock Purchase Plans)

Employee Stock Purchase Plans (ESPP) is a benefit offered mostly by publicly traded companies. It allows employees to buy stock v-fifteen% below the fair market place value.

Details of ESPP can seem complex, simply information technology’s worth understanding, as you can do good from participating.

  • Enrolment period
    is the time y’all need to decide upfront how much of your salary yous contribute.
  • ESPP lookback provision
    is a key part of ESPPs. You lot will purchase stock at the lower or either the offering date or the purchase date share cost. Basically, if the stock rises significantly during the period, you lot might be able to buy the stock with far more a fifteen% discount. Run into an example here.
  • Contribution limits
    curb how much of your bacon you lot can contribute. ESPP is typically a solid deal, and the limits ensure you lot tin’t benefit too much from enrolling.

I benefitted quite a bit from ESPPs both at Microsoft and at Uber. Both companies had a generous program with offers to buy stock 15% beneath the fair market value and contribution limits of about $twenty,000 per year.

Further reading:

  • The untold advantages of your employee stock purchase program
  • ESPP on Investopedia
  • A good ESPP is a no-brainer
  • Have an ESPP? Beware of the risks.
  • Is ESPP a gamble free investment? from the Coin Stackexchange forum

Phantom shares
or
shadow stocks
are similar to application RSUs – but without actually giving out any company stock. Employees receive “mock stock”. The stock follows the company’s stock price changes, and pays out profits after vesting. Profits might mean the departure in share price since issuing, or the price of shares on vesting.

  • Appreciation only plans
    would only pay the “profits” of the stock increase, since the phantom stock was issued. Say you got awarded one phantom stock when the company’southward share price is $100. By the time the share vests, the company share price is $150. You would exist paid out $50 in cash.
  • Full-value plans
    would pay out the full stock value on vesting. Taking the previous example, you’d be paid out $150 in cash when the vesting period ends.

Phantom stocks are uncommon for Large Tech, simply a few tech companies in the EU result them. Adyen – a competitor to Stripe – is an example of a company who grants phantom shares to its employees.

Further reading:

  • Phantom stock plan on Investopedia
  • 9 oft asked questions about phantom stock plans
  • Phantom stock: what is it?
  • Why phantom stock tin can be improve than real stock
  • Less common types of equity: phantom stock from the Holloway Guide to Equity Compensation

8. SARs (Stock Appreciation Rights)

Stock Appreciation Rights (SAR) are an interesting middle-basis betwixt stock options and RSUs and are probably the most like to phantom stocks.

Employees would gain the increment in the stock toll of the company, during a pre-divers menses. They are well-nigh always paid out in cash. They are sometimes issued parallel with options as tandem SARs, so the proceeds in SARs will assistance with buying the stock options.

SARs are non a type of equity you’ll run across with US tech startups. Yous might come up across them with some startups preferring this setup in the European union. There are both advantages and disadvantages of SARs both from an employee, and a company perspective.

Every bit an employee, SARs could be seen as more benign than options, the biggest do good being how you lot don’t have to pay upfront to exercise them. Y’all basically get greenbacks for the value increment – the payout usually tied to a company liquidity event that happens
while
you work at that place.

The primary drawbacks are how, as an employee yous have little flexiblity to choose when to exercise after vesting occurs. Also, dissimilar stock options you exercise, with SARs you typically won’t accept ownership in the company after you go out – and you might be left with less if, say, an IPO occurs a year later on you left.

Further reading:

  • Stock appreciation rights on Investopedia
  • Deviation between ESOPs & SARs on MyStartupEquity weblog
  • Pros and cons of SARs and stock options
  • Incentivising employees in get-go-ups through SARs
  • Less common types of equity: stock appreciation rights from the Holloway Guide to Disinterestedness Compensation

Virtual shares
are a synonym to phantom shares, and are increasingly adopted by European startups. They are similar to RSUs, except they only trigger a financial event – and thus “belong” – when the company experiences a financial result (eastward.one thousand. is acquired or goes public).

Virtual share plans are becoming popular in countries like Hungary where setting up options or regular share plans would acquit much more than administration, and tax burdens for employees.

Virtual options
are designed similarly to avoid revenue enhancement until a financial outcome happens. This setup removes risks of employees losing their capital if the company either does not take a fiscal get out, or the leave would be below the option’s strike price.

Both virtual shares and virtual options are contracts you demand to carefully design. When done well, they can greatly benefit employees, and help companies concenter more talent, without the downside of employees having to risk their upper-case letter for an uncertain exit.

Further reading:

  • Virtual share plans: the right tool for Hungarian startups to concenter and go on talent on Financier Worldwide
  • Startups and virtual options from a corporate law business firm Raue

Growth shares
are a setup where you tin get shares just afterward the company has grown in some way. You are issued the shares only after a “hurdle rate” has been met: which typically correlates to business concern results improving for the company.

Growth shares are usually far less advantageous for employees
than other types of shares. When I joined Skyscanner, I was offered growth shares that would have been worth naught until the business concern grew past twenty%: then it was similar an “underwater option”.

Similary, following massive growth, Revolut changed to issung growth shares. An employee shared to Sifted:

“Revolut used to be astonishing for equity, simply now they offer growth shares, which are useless”.

Growth shares are advantageous for the business equally they only have to pay if the business grows. They are shares offered more often than not by EU startups, Skyscanner and Revolut being expert examples on this.

Further reading:

  • Growth shares overview
  • Revolut issuing growth shares with a pricey hurdle rate
  • Growth shares share schemes
  • What are growth shares?

xi. Dilution

Y’all joined a startup when it was valued at $100M and received options that you calculated to be worth $100,000 over four years. Four years later, the company is worth 20x that, at $2B. Is your equity as well worth 20x that, or about $2M?

Hundred-to-one.

It’s probably worth less than that. It could be worth 5x, 10x, or even 15x: all depending on dilution.

Dilution occurs when a company raises new investment, and the new investors receive freshly issued stock
at the expense of existing stock holders – founders, earlier investors, and employee stock holders. For high-growth companies who raise several funding rounds, some level of dilution will be an ongoing characteristic.

Startups growing at a healthy pace will run into stock holders own a smaller piece of a larger pie – but the pie growing typically offsets the shrinking in buying.

At the aforementioned time, dilution is rarely the cause for employee stock options not beingness worth much. Not getting to a liquidity event or just stopping to grow are far more common cases. And remember: in that location is cypher you’ll be able to exercise near dilution as an employee. Nonetheless, you lot might be able to impact growth: and very high growth with high dilution about always has better outcomes than wearisome growth with little dilution.

Further reading:

  • Dilution: the good, the bad and the ugly from TechCrunch
  • The dangers of share dilution from Investopedia
  • Disinterestedness dilution for early phase startups from Silicon Valley Bank

12. Taxes

Regardless of what blazon of equity you’ll exist issued, taxes will be a key question. When are they due? What is a sensible strategy to optimize them? What options do you lot have to alter how your gains – or losses – are taxed?

Taxes on top of exercising options are oft a huge surprise factor,
peculiarly for belatedly-stage unicorn employees. Secfi collected information from individuals in more than than 700 late-stage unicorn companies in the US and establish taxes to business relationship for more than than 6x the exercise cost in this study:

Employees are often surprised at JUST how much tax they might need to pay when exercising options. Secfi helps plan for financing in these cases. Read more here.

Taxes are outside the scope of this commodity
beyond the fact that they
will
exist due. Peculiarly with options and not-liquid stock, they might be due before you can realize the value of your equity.

Practice your homework and talk to accountants to understand the revenue enhancement implications. Decide if you want to exercise early on – and if you don’t have the funds to exercise and pay taxes, expect into financing options similar Secfi who might help out. Here’s a case report of how early on exercising Snowflake options over waiting for the IPO would have saved $130K for an engineer – or 20% of their stocks.

The greater your gains, the greater your tax bill could be: be prepared.

thirteen. Why Equity is Illusive: Cautionary Examples

While employee stock is generally something positive, in that location are plenty of ways you tin can see no money from them: and even lose money on the stock.

Equity beingness worth less than what you banked on
is a very common case with publicly traded companies and Big Tech. The simplest instance is joining a publicly-traded company at a time when its equity value is slowly going down. For case, if y’all would have joined Snap in 2017, issued an equity grant of $200K/year at the $twenty/share part, by 2019 the stock would have been downward at $5/share, taking this grant to $50K/year.

At larger companies, equity “top-ups” might have made the “decrease” less painful. And merely every bit stock tin go down, information technology tin can get up: Snap is trading at $61 – 3x of the $twenty price range – as of February 2021.

If you lot would have joined Snap in early 2017 at a $20 stock cost, by late 2018 the stock grant would have been worth a quarter of the initial grant.‌ Looking alee: volition it go upwardly, or down again?

Disinterestedness being worth nothing
is the nearly common outcome with startups. The company might never go public. It might be sold at a price where common stock – and options – are worth null thanks to ratchet causes protecting the early investors. The visitor might never take a financial effect.

If you joined the “side by side and better Uber”, you’d have gotten nothing. Sidecar was the first “true” ridesharing company, connecting riders with drivers who did not have to be black car drivers. Still, despite innovating ahead, the company close down a few years later on. Anyone with equity in the visitor was left with zero.

As another story, ane of my friends worked at five startups, over five years, exercising options in each. Just one of the startups e’er had an get out: it got sold to another visitor. My friend had stock worth around $50,000 on newspaper when he left. He received $215 as proceeds from the auction.

Company valuations collapsing like WeWork did and employees losing big money
is non equally uncommon as it seems.

WeWork was on track for a $47B IPO in 2019, which would have made many employees millionaires. All the same, this all complanate in a matter of 6 weeks. Instead of the IPO, Softbank took command of WeWork. Some employees “only” lost hundreds of thousands of unrealized gains. However, the 500 to i,000 early on employees lost hundreds of thousands that they paid on their tax bills when each share was valued at $l – and which share price was now reduced to $4.

Employees losing big money by exercising options
is not a common story, but one that has happened several times – and not only to WeWork early employees.

Good Technology was valued at $1B in 2014 and planned to go public. Notwithstanding, in 2015 Blackberry announced information technology would acquire Good Technology for $425M in a fire sale. Several employees lost big amounts of savings as they paid greenbacks to exercise options, bought stock in the company, or paid taxes on the mutual stock they received.

The takeaway from this story is that visitor share prices tin become down as much every bit up, and when a visitor is sold, common shareholders might end upward near empty-handed.

Fast-growing companies needing to lay off staff and slash company valuation
– and thus, the value of any disinterestedness also happens often. By nature, high-growth is tied to high risk, and sometimes that risk does non pay off. There’southward a fair chance you could be laid off during this time. Even if you are not, your disinterestedness value is unlikely to be worth as much as information technology did earlier.

Zenefits went from a $4.5B valuation to laying off 45% of people in less than two years in 2017. Bird laid off a 3rd of employees when COVID hit, and demand for scooters dried up overnight.

When companies are acquired by private disinterestedness,
existing shareholders might see little value for their stock, even if the company is later sold or taken public.

FanDuel was a seemingly rocketing unicorn, where founders and several employees were millionaires on paper. However, after a failed merger with competitor DraftKings, bookmaker Paddy Power Betfair acquired FanDuel for $465 meg. As part of the sale, founders and employees got nil. Lawsuits are still in progress, but employees are likely to encounter cypher of the sale.

The case of the convertible note not converting
is a rare and interesting story. Toptal employees were promised stock, just even the visitor’s co-founder was empty-handed. This was considering all stakeholders received a convertible note that granted them disinterestedness if and but if Toptal raised more coin in the time to come, later their seed round.

In nigh all cases, companies raise more money. TopTal never did, and thus the founder still owes 100% of the company stock. Lawsuits are in progress, merely employees volition probable never encounter stock.

Farther reading:

  • WeWork staff planned their life around a stock bargain that collapsed
  • Zenefits went from a $4.5B valuation to massive layoffs in less than 2 years
  • Skillful Technology wasn’t then practiced for its employees
  • Good Technology’south $425M fire sale to Blackberry
  • FanDuel founders spin juicy tale in adjust against investors. The funds have a different story
  • FanDuel founders and employees file lawsuit against investors who cheated them
  • When a unicorn startup stumbles, its employees become hurt

Just How Do You lot Get Into These Companies?

Most engineering positions still don’t offer any equity: Large Tech and high-growth startups who desire to recruit exceptional talent are the ones who typically do.

I don’t take all the answers, but I exercise accept enough of feel both interviewing for these companies, and helping others prepare for interviews.

If you lot’re interested in interview training communication for senior and above engineers and engineering managers, subscribe to these (gratuitous) emails from me here. I won’t publish the contents on this blog – they are my raw thoughts, and I’d ask you to non share them elsewhere.


Featured Pragmatic Engineer Jobs

  1. Engineering Manager at Element.
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  3. Senior Full Stack Engineer at Calliper.
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Source: https://blog.pragmaticengineer.com/equity-for-software-engineers/