You've taken a leap of faith and gone all in on a startup you think has the potential to take off. As an early employee, you're building the plane as you fly it. It goes beyond "wearing different hats". Your job description seems to change by the week as you try to find product-market fit. That leaves little time to think through the nuances of equity optimization and how to manage your personal finances. Still, you know that these "unknown unknowns" will impact your later upside by orders of magnitude if what you build becomes something big. But you weren't hired for your in-depth knowledge of the tax code. Not to worry—we'll cover Startup Equity 101 so you can focus on creating the next iconic company.
For a startup employee, learning about your company’s initial public offering (IPO) is an exciting time. But it’s also overwhelming from a financial planning perspective. You have a variety of different equity grants, and you must decide what to do with each one. How many stock options should you exercise and sell, and when? What will your tax obligations be, and how can you minimize them?
Conventional wisdom says that startup equity is worthless. While most startups fail, there’s a chance your equity will become a life-changing pot of money. This guide explains how to make the most of your equity.
Planning for retirement often feels pointless. You’re young and your startup is taking off — why should you worry about retirement now?
Understanding Startup Offers
The cleanest path to financial freedom is to join an established company, perform well, invest wisely, and coast to retirement. Breakout startups propose a hack—an alternative career accelerated through learning, wealth, and reputation. Most startups fail, though, and provide no financial return. (Even if a startup fails, it can be great fun and provide a tremendous opportunity for rapid growth.) Picking the right company is hugely important; you will want to scrutinize every aspect of this decision to the best of your ability.
Stock Options 101
Your stock options represent the right to purchase shares of your company at a fixed price, known as the exercise price. You earn the right to exercise your options over time through a process called vesting, the timeframe of which is stipulated by a vesting schedule. There are two types—ISOs and NSOs—and early-stage companies will typically issue a mix of both to their employees.