Startup Case Study: “My stock options are so confusing that they feel worthless”
Note: all names of people and companies have been anonymized to protect their privacy.
“I view my startup stock options as worthless, because it feels like my company doesn’t care about helping me understand them.”
These are the words of Annette, a frustrated 27-year old female who has now worked at two unicorn startups in California over the past four years.
“To my co-workers and me, it feels like the options are a way to provide a vague morale boost for employees while the founders get rich.”
What has caused Annette to reach such a skeptical, frustrated conclusion?
It wasn’t always this way. Four years ago, Annette was working at a steady, high-paying corporate job in the Midwest. Her life was comfortable. But she wanted something more exciting. Ultimately, the allure of the California dream and a successful interview process brought her to the West Coast despite the uncertainty of working at a startup. As Annette boarded her flight, she couldn’t help but smile as she thought of stories she had overheard about how ISOs (incentive stock options) had changed the lives of employees at companies like WhatsApp and Google.
“Will this happen to me as well?” Annette felt a rush of adrenaline pump through her veins as she boarded her flight.
Annette received job offers from three companies. Each of these three companies had a recruiter send Annette a PDF job offer. The job offers were formatted differently but more-or-less listed the same structure of compensation information:
- Cash salary
- Target cash performance bonus
- Benefits information (health insurance, PTO, free lunches, etc.)
- A certain number of stock options at a predicted strike price
“Wait, what?” Annette asked herself. “How much are these options worth?”
Annette went to each of the recruiters she had been dealing with for more information.
- One of the three companies sent her a PDF with a generic description about how ISOs work.
- Another recruiter called her on the phone and explained a bit about how the ISOs work. But this recruiter didn’t have a perfect understanding of how ISOs operate, and Annette was a bit skeptical when the recruiter loosely stated “if we continue our 10x growth trajectory, your options will be worth $2 million if not more!”
- The third company — the one whose offer Annette ended up taking — was difficult to get a hold of when she asked specific questions about the ISO grant in her offer letter. Despite an honest effort, Annette couldn’t get a grasp of basic facts such as the strike price she’d receive, the current company valuation, fundraising status, or how to think about her options.
How Pave helps
If you consider equity compensation to be an important part of your total compensation strategy, you need to help candidates and employees feel the same way. The Pave compensation portal integrates your company’s narrative and assumptions with equity and cash compensation data to tell a compelling story: As the company grows, the total compensation value grows with it.
To exercise or not to exercise, that is the question
Eager to move forward with her life, Annette accepted the third offer and happily started working. She had no way to understand or predict the value of her options, so she more-or-less ignored them. For the first year, Annette focused intensely on performing well at her job.
After a year, Annette received an email from Carta that said “Congrats! You have passed your one-year vest date.” Jubilant, Annette logged into her portal and saw that she could exercise her options if she wanted to do so. Should she do it?
Annette first asked some co-workers. They all told her conflicting things. One co-worker was extremely optimistic about the company’s future and said it would be a great idea to exercise. Another co-worker said it was too risky, especially because she’d have to pay taxes when she exercised.
“Taxes?” Annette asked. “I thought we don’t have to pay taxes when we exercised because these are ISOs rather than NSOs?”
“Oh, our company has appreciated a lot in value, so you’ll probably have to pay an AMT tax next April when it’s time to pay your taxes” her co-worker responded.
“AMT? Wait, what’s that?”
“Ah! I used to work in finance…!” Annette’s co-worker then jumped into a lengthy, energetic explanation of how ISOs work. Unfortunately, Annette left the conversation feeling even more confused and stressed than when she started.
Next, Annette went to talk with her boyfriend, Charlie, who was working at a large, publicly-traded tech company at the time. He responded, “Hmm…I think you should exercise because you should want to own some of the company. Right? But where I work, we have RSUs which we get automatically and we can sell immediately once they vest. So, actually, now that I think about it, I don’t know if it’s worth it for you to exercise.” He then started going back and forth as he frantically researched blog posts from various sources.
Feeling a bit flustered, Annette called her dad who works in finance. “Well…” her dad started. “Tell me this. What’s the current 409A status? And the current fair-market share price. As well as your grant’s strike price, your tax bracket, and market information about similar startups in your space. And how much cash do you have saved? Enough to exercise?”
Annette was feeling so stressed that she decided to simply ignore the stock options and pretend they didn’t exist. This ignorance is bliss tactic worked well until she decided to switch jobs a year later. Once Annette officially switched jobs, she started receiving frequent “Hey, you have fewer than 90 days to exercise your vested options!” emails from Carta.
How Pave helps
Pave removes the frustration from learning about ISOs, resulting in less back and forth emails from candidates and employees to recruiters and HR managers. By making education a first-class experience in the total compensation hub, your top talent will be able to confidently understand the value of their equity compensation.
Analysis Paralysis
Ultimately, Annette did nothing. She was so uncertain about the tax implications and future value of the options that she simply left them sitting on the table. “Maybe I’ll be wiser at my new company about how and when to exercise…” Annette thought to herself.
Once Annette passed the one-year cliff at her new company, she considered exercising. However, the new company had granted her options with a significantly higher strike price than at her previous company. After another heated conversation with Charlie (still working at the same large, tech company basking in his healthy-sized RSU grants), she just couldn’t understand if it was worth it to shell out so much money to exercise. And she was still extremely uncertain about the tax implications.
Annette felt her heart race as she wondered to herself, “Am I missing out on a million-dollar opportunity by not exercising?”
Sensing her pessimism about startups and frustration at large, Charlie said, “Well, how about you come work with me at my big tech company? The compensation there just makes a lot more sense…”
How Pave helps
You shouldn’t need an MBA to understand how you’re compensated. Pave’s integrated lesson modules allow candidates to learn the basics and common gotcha’s of equity compensation.
Pave is a suite of compensation tools that helps companies plan and communicate total compensation. Eliminate the confusion around equity and help candidates and employees dream big about their futures at your company. Learn more at www.pave.com.
