Company-Side Education Programs on Startup Equity - Feedback from Newsletter Subscribers
Here’s a quick primer on how to negotiate stock options or RSUs in a startup. It's up to individuals to educate and empower themselves when company-side education programs are lacking. Photo by Alena Darmel.
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
I asked my newsletter subscribers to share their experiences with startup company employee equity education programs. Thank you for all your responses! I love being in touch and hearing your feedback.
See below under My Takeaways for a quick primer on how employees can empower themselves by taking the initiative to learn about startup equity and ask their companies for the information they need to make informed decisions.
Individuals reported these company programs they found very helpful:
Company all-hands meetings followed by both (1) smaller working groups led by the CEO/CFO using real world tangible scenarios to explain and provide context and (2) one-on-ones with senior management.
Training sessions with the company’s CFO.
Carta, including blog content, presentations, Equity 101 posts, and online calculators. “Very good interface with clear information.”
Individuals reported these company programs they found somewhat helpful:
Company-wide information meeting on stock options, but not provided until years after the employee joined the company.
Carta as stock administrator. This allows employees to “have more access and run the calculator more frequently. But it doesn’t speak to the non-price issues like post-termination exercise periods, forced share repurchase,” etc. Also, “Carta maximizes for startup friendliness, and here employee friendliness runs counter to that goal.”
ShareWorks as stock administrator. The “account includes the value of your options based on the latest valuation. From a user experience, [though,] it is clunky like most financial software products.”
Individuals reported these company programs they found not helpful or harmful:
Company education program on stock option exercise by a stock broker who was “in it for himself and not the employees. … The education they were offering was to inform the newly wealthy employees how to “invest” their new found cash. It is not a good strategy to use someone like that for that purpose … I lost about $1M of the money I earned from the startup. It was disastrous. If companies host an individual, make sure they are fiduciaries and not brokers.”
Company-wide information meeting with general information and many disclaimers, which was “not that helpful for making actionable decisions. … I think the presentations backfired because most either didn’t understand options any better than they did prior to the meeting and those that did realized their options weren’t that valuable (which was the opposite motivation of the CEO).”
In a geographic area where “most employees aren’t stock option aware …, although we granted stock options to all employees, most ignored them because they were difficult to understand. And HR was unable to answer any questions about options because they didn’t understand them. … In the case of recruiting and offers -- the lore was more important than the facts.”
Recruiters who “fail to disclose the material issues, and sometimes state that the equity situation is more favorable than it actually is.”
Individuals reported these wish-list items they had not yet seen:
“If this were my project, I would use a framework of virtual recorded introductory education sessions that give the basics of the compensation program, and a one-on-one follow up to cover any lingering questions. I would build out a self-help knowledge base that covers common lingering questions and/or use that info to improve the education sessions.”
“I like the idea of a 3rd party to provide the trainings, mixed with key staff or founder interaction to build trust.”
Examples, simplicity, transparency and opportunities for lots of Q&A in small groups. A library of content that addresses common questions, concerns and misconceptions would also be very valuable.
“It would be great if our law firm had established programs to walk us through the process.”
“What employees really want to know is -- what is the value of my options under various realistic scenarios. One approach might be several if-then scenarios and then employees can decide which one of those hypothetical scenarios most applies to them.”
“Options seem to be presented as a commodity component to most offerings with a presumed windfall. … It’s important to manage expectations of what the value is and how to think about that; how to act, when, why.”
An educational program would need to provide an “overview, some tools for employees to calculate future sums/ exit projections (dream a bit), and cover common tax issues, maybe an overview of company/venture process (what the near future could mean for equity holders), and gotchas like: what happens to my vested equity if I have to leave the company.”
Services providers reported these as service offerings they had available to companies:
Note: If you are a service provider in this area with an offering I have not included, please send me an email with a description of your services so I can add it to the list.
Dan Walter, FutureSense. Dan advises companies on executive pay, equity compensation, incentive compensation, and pay for performance. He says that employee education “is a normal piece of our deliverables for nearly every company we work with.” I’ve seen him speak on these topics and he has, as promised, “a unique ability to help anyone understand even the most complex and technical details in ways that are approachable and memorable.”
Bruce Brumberg, myStockOptions.com. Bruce’s site, myStockOptions.com, is the “premier source of web-based educational content and tools on stock compensation for plan participants, financial advisors, companies, and stock plan providers.” They license their educational resources to companies for their programs.
Tom Bondi, CPA, Armanino, LLP. Tom offers company-side employee stock/equity training programs to companies with from 25-500 employees, where the companies wish to give back to their employees with knowledge they are not able to offer.
Financial Advisors who are available to companies in the run-up to an IPO or acquisition to educate the company’s employees.
Carta’s Tax Advisory. Updated February 2023: This add-on to Carta’s cap table service allows startups to help their employees make tax decisions around their equity. Employees of subscribing companies have access to one-on-ones with tax advisors such as: Ask a Quick Question (15 minutes), Understand Equity Tax Basics (30 minutes), Create Tax Scenarios (45 minutes) and Discuss Tender Offer Participation (30 minutes).
My takeaways:
Some company-side education programs are helpful to employees in navigating their equity. However, it is up to individual employees to empower themselves by taking the initiative to learn about startup equity and ask their companies for the information they need to make informed decisions.
Here’s a quick primer on how individuals can do this (based on this blog post):
Number of Shares. The offer letter may include the number of shares, but this number is certainly not all you need to evaluate and negotiate the offer. I encourage candidates to ask questions about the equity package and number of shares until they have the information they need to make an informed decision. More on evaluating the number of shares in an offer letter here.
Equity Grant Form Documents. The equity incentive plan and form stock option agreement contain important details about the equity grant, so it makes sense to request and review them before signing the offer letter. These agreements may give the company clawback rights for vested shares or other terms that may dramatically limit the value of the equity offer. If these red flags appear in the form documents, it makes sense to negotiate to remove them from your individual grant or add additional compensation to make up for that loss in value.
Tax Structure. The right tax structure for an option or RSU offer will balance your interests in total value, low tax rates, tax deferral and investment deferral. This balance is different for each individual and at each company stage. You will want to have a tax strategy in mind before accepting the offer letter, so you can negotiate any necessary terms to enable that strategy as part of the offer letter itself.
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
One-Off Startup Stock Secondary Sale & 409A Valuation
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Q:Would a sale of private company /startup common stock by a former employee trigger a change in 409A / fair market value?
Short answer:
Not in all cases. It comes down to logic. How significant is the market for this company's stock? Is it enough to really show there is a market? Or that there is a clear value? Probably not, unless it is a company-sponsored sale or a Facebook-type frenzy. But companies do use this as an excuse to prohibit secondary sales or drag their feet on allowing their employees to do them.
Lawyer answer:
Based on the tax code rules, the Board needs to change the fair market value price at which they grant options / employee stock any time a major change has occurred that either reduces risk or materially changes company forecasts. Is a secondary sale of private company stock a material change that would have to be seen by the Board as a sign that the risk of investment in common stock has changed?
There are arguments on both sides of this question.
One one side, the secondary sale of shares of common stock shows that common stock is "liquid," or convertible into cash. The lack of liquidity is a big factor in the riskiness of stock and in the logic of discounting common stock value compared to preferred stock value, so liquidity for common stock would raise the "market" price of common stock. Also, the investor who invested has clearly signaled that he/she thinks the stock is less risky than the prior 409A valuation if he/she pays more than that valuation.
However, there are good arguments on the other side as well. The basic argument is that a one-off sale of common stock does not a market make. When you look at the FMV of publicly traded stock, it is based on many sales and the presumption that anyone who holds common stock can trade at any time. Small sales of private company common stock do not mean that any shareholder could find a buyer or that any shareholder could sell at that price. Another argument is that a single buyer or even group of buyers who do not have access to inside company information do not have enough information to know if the stock is more or less risky than the Board has determined it to be in setting the FMV. So one buyer or small group of buyers acting with limited information would not be the appropriate group to define the risk of the stock and, therefore, its fair market value.
Many thanks to Aranca for the following additions to this analysis:
In addition to 2 key points (# of sale points for the price paid, and profile of buyer + seller) that have been mentioned for assessing reasonability of price paid as reflection of FMV, I would like to add 2 more angles that would need to be evaluated while making the determination:
How many different buyers participated at the price that has been paid for the security: If there have been lets say a couple of parties that have transacted, the applicability for the price paid to be considered as reflection of FMV would be weak. However, if there are several buyers who bought from the seller, the applicability of price paid as a FMV can be high.
What has been the valuation range (if any) / bid-ask spread offered by buyers: If the available buyers give a valuation range which is wide and significantly different from the transacted price, then again the applicability of price paid as reflection of FMV becomes questionable. However, if there are sizable number of buyers providing a tight valuation range, then the applicability of price paid as an FMV can be a good indicator.
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Many thanks for the contributions of Dylan Gittleman, Vice-President, ARANCA US and Manpreet Singh, ASA, Manager, Valuation Services, ARANCA US. Aranca is a leading provider of 409A valuation services.