I’ve made a huge mistake. Actually, I made a couple huge mistakes. As employee 17 at a high growth startup, I spent 7 years working long hours at below market salaries because I had dreams of acquisitions, IPOs, and dollar signs keeping me going. Today, as I move on from that startup and look back on my journey, I wish I could go back to provide some much needed advice to that young dreamer joining a startup for the first time. I still don’t pretend to be an expert in contract negotiations or equity, but if I could jump in my Delorean and offer just a few wise words from the future, this is what I would say:

Jon – congrats on battling your way through the internship. I know you’re very excited about the offer letter sitting in your inbox, but before you sign, there are a couple things you need to know, and for some reason, no one ever teaches you these things in school.

1. Never take the first offer. I know you think you have no leverage and you need this job more than they need you, but you’re wrong. At this point in a company’s life cycle, they need all the smart, hungry employees they can get. Even if you’re right, it never hurts to ask for more – the worst they can say is “no.” If you ask for a salary that doesn’t make you a little uncomfortable, you’re probably not asking for enough. 
2. Equity is great, but don’t count on it. If the equity becomes something one day, then consider yourself a lucky man. But remember that the equity is not actually ownership in the company – it is the option to buy ownership in the company. So when they offer you a low salary but “make up for it” with equity, keep in mind that you won’t actually be able to buy that equity unless you are able to save money, which might be difficult with the low salary they’re offering.

Let’s put this in more practical terms. Let’s say they offer you 100,000 shares, and they tell you that’s .2% of the company. Sounds great, right? 100,000 is a big number, and they tell you .2% is pretty standard for an employee like you. Those shares have a strike price of 20 cents (.20). That sounds pretty cheap, so that must be good, right? You will have to live paycheck to paycheck for a couple of years, but it’s all part of the startup grind, and when we scale this rocketship to $500 million, you’ll own .2% of that – holy shit, you’re basically a millionaire!

But wait just a second. What they don’t tell you is that when you leave the company, you actually need to put up $20,000 to exercise the option to purchase those 100,000 shares (100,000 * .20). If you aren’t able to save an extra $20,000 before you leave because it’s impossible to save money while living in Manhattan and getting paid like an intern? Well then you’ll join the many others like you who left unexercised options on the table (in 2020, employees left $4.9 billion worth of options unexercised). 

Oh and one more thing – that .2%? Every time they raise money, plan on that number getting smaller and smaller. Ideally, that’s fine – you’d rather have .1% of $100 million than .2% of $1 million. But every time there is a new fundraise with a new shiny valuation, don’t start doing the equations in your head and scouting what kind of yacht you’re going to buy.

So my advice to you – make sure you are getting enough equity that when the company does well, you do well, but don’t let them use it as an excuse to pay you less than you are worth. 

3. Don’t forget about taxes. Specifically, learn the difference between an ISO and NSO. Here is a little crash course. 

You were granted ISOs (Incentive Stock Options), and that’s a good thing. 

With ISOs, the only way you will have to pay income tax when you exercise is if your “phantom income” is greater than $70k. In other words, if you have 100,000 shares at a strike price of .20, and today the shares are worth .90, then you would not have to pay any income tax when you exercise (you purchase for $20k and the shares are worth $90k for a phantom income of $70k). However, if the shares are worth $1.00 today, then you would pay income tax on a phantom income of $10,000 despite not actually receiving any money until the company is acquired or goes public. This is not great, but is also a champagne problem and means the company has done incredibly well. If you really believe this is a risk, then I would recommend exercising your options as they vest, before future fundraises that would increase the value of the shares.

However, ISOs can automatically turn into NSOs (Non-qualified Stock Options) in a number of different situations, and that’s a bad thing. Most likely scenarios for you would be:

1. The company is acquired or sold within 2 years of when you were granted the options
2. The company is acquired or sold within 1 year of when you exercise the options. So if the company is acquired or sold while you are still working there, and you haven’t exercised yet, you would be on the hook for ordinary income tax
3. You wait longer than 90 days to exercise the options

The first one is more or less out of your control. You can avoid Scenario 2 by exercising your options as soon as they vest, but the timing of an acquisition or public listing is still largely out of your control. 

Scenario 3, however, is very much up to you. When it comes time to leave the company, don’t wait to exercise your options.  

Let’s go back to our hypothetical 100,000 shares at a strike price of .20. Let’s say the company doubles in value during your time there, and on the day you leave, they are now worth .40. With no income tax on ISOs, you have a $20,000 bill to exercise. But once those convert to NSOs, you now also have to pay income tax on your $20,000 of profit resulting from the valuation doubling, so instead of the $20k you were planning on spending, it will probably be closer to $28k, including the income tax, to purchase the exact same 100,000 shares. Then when the company gets acquired, you will again pay taxes, although this time at the lower long-term capital gains tax rate, when you sell!

I know there were a lot of numbers there, but if I could boil all of that into a simple summary: if you believe the company will turn into a unicorn rocketship, save enough cash to buy your options as soon as they vest. If you believe it will turn into a nice return, save enough cash to buy your options as soon as you leave the company. And either way, negotiate enough cash in your base salary to be able to afford a high quality of life and the ability to buy your options at all.

 I’m certainly no expert in tax law, but as I move on to my second startup, these are the learnings I take with me. I’m sure there will be more along the way, so I’ll keep some gas in the Delorean in case anything else comes up in round 2. 

PS. Actually, forget everything I said and just invest it all in Bitcoin. To the moon!