I was an early employee at a hyper-growth startup. Life was rich until I tried to quit. This is the story of why I had to pay $300K to unshackle myself.
There’s surprisingly little coverage on this topic, maybe because nobody is incentivized to reveal the unsavory truth, or because VCs and founders get a lot more airtime.
Here’s everything I wish I knew before I joined a startup. I hope it can save you from burning piles of money like I did.
For all the talk around “disruption”, startups exert a surprising inertia over employees.
“Golden handcuffs” is most often used to describe the inertia experienced by big tech employees who make a ton of money and have a hard time leaving. It also applies to startup employees who make a ton of paper gains and have a hard time coming up with real money to keep them.
The real deal with stock options
Working at a startup generally requires taking a salary cut. The deal is sweetened with equity — an ownership stake that can mint millions.
The most common equity vehicle is the stock option. It’s the option to buy a certain # of shares at a set price, aka the strike price. That’s right. You don’t own shares of the company, you own the right to buy them.
There are two more catches:
- Options usually expire within 90 days of your leaving — so you have to either pay up or give them up
- If you pay up, you also owe taxes on your paper gains — the difference between your strike price and the current valuation
#2 is dangerous because your taxes grow with the valuation. Even if you have a cheap strike price, your tax burden can be multiples higher. In fact, your total bill can end up costing more than the startup has ever paid you in cash! Yes, it is actually possible to be net negative after devoting years of your life as an employee.
In my case, the price tag for my vested shares was $100K, but the tax bill will be another $200K. That’s a ton of cash just to keep the shares I worked for, with no guarantees that they will be worth real money.
Your true options
The financial defaults are terrible for startup employees, but they don’t need to be this way. You can and should negotiate the fine print, where all the devils lie. Exceptions are never granted unless you ask. Especially true if you are a strong hire and/or the startup really needs to fill the position (which is more common than you think).
First order of business is the exercise window. Instead of taking the punishing 90 day window, ask for 10 years. You can frame it like this: “I believe in the potential of X and I’m excited to take part in the upside. It’s important that I can do that regardless of my cash position at a specific moment in time.”
Best time to ask is before you sign the offer. This is when you have peak leverage, and if you make it the final sticking point, you’re more likely to get it. To gain an upper hand, try to secure competing offers that have more favorable terms.
Does negotiating make you look petty? No, if anything, it shows you’ve done your homework. Not negotiating terrible terms betrays your naivete — like me when I signed my offer.
Whatever you settle on, make sure to get it in writing. Many a verbal promise is broken when there’s large sums of money at stake.
If you still wind up with a crazy bill, see if the next company you join is willing to pay your switching cost. I forgot to do this when negotiating with Instagram, but it can work, especially with bigger companies. The downside is that if you need the new company to bail you out of your old one, you are at their mercy.
More points you can negotiate for:
- Accelerated vesting: if the startup gets acquired, your unvested shares immediately vest
- RSUs instead of stock options: restricted stock units have a strike price of $0, but early-stage startups may not offer this
Even if you don’t get everything you want, you’ll still develop a better understanding of how accessible your equity really is. Sometimes a higher salary is better than heaps of “life-changing” stock options you can never afford.
One more escape valve that just came to my attention: 83b election. If you believe in the growth potential of your shares AND you expect to stay and vest, you can choose to pay taxes on your full grant upfront, rather than on your paper gains down the line. This may save you a lot on taxes, but also comes with a dose of downsides:
- You need to file within 30 days of your grant
- You’re still paying cash upfront for an unknown outcome
- You can end up worse off if the shares decline in value OR you don’t fully vest
Why so employee hostile?
As much as startups talk about growing the pie, the finite pool of shares is treated as zero sum. There are only ever 100 points on a cap table. When you give up your options, they go back into the company pool. Your unused options can then be recycled to fund new employee packages.
Here's how a VC sums it up: extending the exercise window prioritizes the well-being of former employees over existing ones. What startup in its right mind would do that?! Probably one that recognizes it was built, brick by brick, from the hands of early employees. Sadly, 91.4% do not recognize this.
It’s also hard to decipher the terms in your offer package. If every startup had to walk employees through how the numbers play out, a lot of offers would go unsigned because they’re absurd. Instead, we're sold on the opportunity to “make a dent in the universe”.
It’s rarely about the money until the money becomes real.
Most people advised me to give up some shares, or find a third-party to front the cash and split the upside — both more rational choices than the one I took.
In the end, watching years of hard work evaporate in 90 days far exceeded the pain of just paying for the damn lottery ticket. I’m lucky I had access to that cash. Many people don’t. They are forced to give up their shares or stay shackled to a company in hopes of liquidity some day.
I never joined a startup to get rich. But I did naively assume that if all went well, I would ride off into the sunset, having paid for the equity in sweat. I didn’t comb through the fine print because I didn’t know any better.
Now you do! Maybe I should rebrand my $300K bill as a premium MBA — it’s sure taught me a lot, and I hope it brings you a wealth of lessons too.
Is a startup worth it?
I still believe the right startup offers endless amounts of learning, and a serious shot at earning. But the pot of gold at the end of Unicorn Road is littered with hidden minefields. It is not designed with you in mind.
To stay safe, negotiate for:
- 10-year exercise window on stock options
- Accelerated vesting in the event of an acquisition
- RSUs instead of stock options if possible
- Every single promise in writing
- Consider 83b election to save on taxes
On a brighter note, there’s a growing number of companies who offer extended exercise windows by default. Hopefully one day the short list will only call out companies that don’t offer the employee-humane choice.
👋 P.S. If you want to join a top startup, check out who's freshly funded and hiring!