class: center, middle # Equity Compensation in Startups: intro / braindump Paul Winkler @ recurse center June 2024 (revised Jan 2026) VERY MUCH not comprehensive, I am skipping huge topics entirely **Highly recommended reading:** ​​[https://github.com/jlevy/og-equity-compensation](https://github.com/jlevy/og-equity-compensation) --- # Pre-exit Equity: Stock Options * Usually "Incentive Stock Options" (ISOs) * "Exercise" == buying * "Options" == optional! * If you never exercise, you have no equity * “Strike price” is guaranteed purchase price * In your paperwork when you are hired * You can buy at that price as long as you're employed * And (often) for ~months after leaving --- # Why buy stock options? You permanently have the right to _buy_ shares at a fixed “strike price” … as long as you’re employed **If company succeeds**, value will often be _much_ higher than strike price == Profit! --- # Why not buy stock options? You have to spend your own money Almost all startups fail - Go out of business - Acquired at a loss You lose your money --- # What’s an exit? - Acquisition - IPO Not all acquisitions are profitable --- # What’s the value of stock options before exit? ## $0 --- # What happens if you exercise options before exit? You pay $$ to buy your shares. You now own them, on paper You cannot turn that into actual $$ You **_may_** already owe taxes on “profit”! --- # Taxes on theoretical profits? WTF Yep. It’s complicated --- # What happens to options in an Acquisition? ISOs are usually “Non preferred”. This means: * VC gets paid first * Employees who bought options only get $$ if _all_ the VC is paid! * Example: VCs invested $100M * Company acquired for $75M * VCs take a loss of $25M and move on to the next thing. * You get $0. You don't get your money back. That's why options are risky! * **This happens all the time**. --- # What happens to options in an IPO? Your options become shares (if you’ve already exercised) or you can buy actual shares at your strike price (if you haven’t yet, AND if you haven't missed your exercise window - more on that later) Legally you probably have to wait months after IPO before you can actually sell shares ("lock-up period") But then you probably come out ahead --- # Q: How do I know if I should buy my stock options? A: Before exit, there is no quantifiable answer. Ask yourself: - Will you be OK if you lose it all? **assume you will.** - How long _could_ it take for an exit? (forever?) - Can you afford to wait that long? Ask employer: - If you leave the company, how long are you able to exercise before the options expire? --- # Q: What's a Post-Separation Exercise Window for Options? * Standard: Only ~ 3 months to exercise ISOs after leaving. * If you don't buy within that time, you lose them! * But you can negotiate! * Some (10-20%?) companies offer extended windows * Even up to 10 years (rare) --- # Q: Why would I want a long exercise window? * Imagine: Good exit happens 4 years after you leave. * With short window: Must decide whether to gamble $$ years before knowing outcome. * With long window: Can wait and see what happens! * = Less risk! Ask during offer negotiation to extend your exercise window! --- # My acquisition story #1: Percolate -> Seismic * 2017: I bought $20k in options when I left * Only had 90 day exit window * Knew it was a risk * Thought there was a good chance they’d be huge * Had to pay $20k in tax! * 2019: Percolate acquired at a loss, by Seismic. * Rumors said it was a “fire sale” * I lost my $40k. (Got some tax credit; it's complicated) * Venture capitalists lost hundreds of millions * The CEO who negotiated the sale probably got $$$$$ because contract guarantees --- # My acquisition story #2: Handshake -> Shopify * I did not buy any Handshake options * I was thinking about it… * Good thing I didn't! Company sold at a loss! * **we employees had no idea this was coming** * VC lost X millions * People who had bought options got screwed :-( * Especially those who weren't retained / lost their jobs :-( :-( :-( * BUT employees who were retained got Shopify equity (RSUs, actual shares in public company, real $$$). Luckiest thing that ever happened in my career. --- # Q & A?