Offer and Negotiation Dangers

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Updated September 12, 2022
Equity Compensation

To wind up our discussion of offers and negotiations, here are some key dangers and mistakes to watch out for:

  • danger Do not accept an offer of stock or shares without also asking for the exact number of total shares (or, equivalently, the exact percentage of the company those shares represent). It’s quite common for some companies to give offers of stock or options and tell you only the number of shares. Without the percentage, the number of shares is meaningless. Not telling you is a deeply unfair practice. A company that refuses to tell you even when you’re ready to sign an offer is likely giving you a very poor deal.

  • caution If you’re looking at an offer, work out whether you can and should early exercise, and what the cost to exercise and tax will be, before accepting the offer.

  • danger If you join a startup right as it raises a new round, and don’t have the chance to exercise right away, they may potentially issue you the options with the low strike price, but the 409A valuation of the stock will have gone up. This means you won’t be able to early exercise without a large tax bill. In fact, it might not be financially feasible for you to exercise at all.

  • danger Vesting starts on a vesting commencement date. Sometimes stock option paperwork won’t reach you for weeks or months after you join a company, since it needs to be written by the lawyers and approved by the board of directors. In your negotiations, do make sure the vesting commencement date will reflect the true start date of when you joined the company, not the time at which the stock option is granted.

  • caution The offer letter is not the actual grant of your equity. After you sign your offer letter, ensure the company delivers you your actual equity grant documents within a few weeks. It is not uncommon for early-stage startups to be sloppy with their equity granting. If they take too long to send your grant documents, the fair market value (and exercise price) of the equity could rise in the time you’re waiting, which is money lost for you.

  • caution If you’re going to early exercise, consider it like any investment. Don’t believe every projection about the value of the company you hear. Founders will tell you the best-case scenario. Remember, most startups fail. Do your research and ask others’ opinions about likely outcomes for the company.

  • danger It may not be common, but some companies retain a right to repurchase (buy back) vested shares. It’s simple enough to ask, “Does the company have any repurchase right to vested shares?” (Note repurchasing unvested shares that were purchased via early exercise is different, and helps you.) If you don’t want to ask, the fair market value repurchase right should be included in the documents you are being asked to sign or acknowledge that you have read and understood. (Skype’s controversy related to repurchasing has some startup employees looking out for companies with similar plans.) You might find a repurchase right for vested shares in the Stock Plan itself, the Stock Option Agreement, the Exercise Agreement, the bylaws, the certificate of incorporation, or any other stockholder agreement.

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