og-equity-compensation

The Open Guide to Equity Compensation ❇️ This guide is now published on Holloway. Read it there for search, booksmarks/highlights, expert commentary, and PDF/EPUB download. Introduction Equity compensation is the practice of granting partial ownership in a company in exchange for work. In its ideal form, equity compensation aligns the interests of individual employees with the goals of the company they work for, which can yield dramatic results in team building, innovation, and longevity of employment. Each of these contributes to the creation of value—for a company, for its users and customers, and for the individuals who work to make it a success. The ways equity can be granted as compensation—including restricted stock, stock options, and restricted stock units—are notoriously complex. Equity compensation involves confounding terminology, legal obscurities, and many high-stakes decisions for those who give and receive it. If you talk to enough employees and hiring managers, you’ll hear stories of how they or their colleagues met with the painful consequences of not learning enough up front. Though many people learn the basic ideas from personal experience or from colleagues or helpful friends who have been through it before, the intricacies of equity compensation are best understood by tax attorneys, corporate lawyers, and other professionals. Decisions related to negotiating an offer and exercising stock options, in particular, can have major financial consequences. Because the value of employee equity is determined by the fate of the company, an employee’s equity may be illiquid for a long time or ultimately worth nothing, while taxes and the costs of exercise, if they apply, may not be recouped. Even when a company is doing well, an employee may suffer catastrophic tax pitfalls because they didn’t anticipate the tax consequences of their decisions. Understanding the technicalities of equity compensation does not guarantee that fortune will smile upon you as warmly as it did the early hires of Facebook. But a thorough overview can help you be informed when discussing with professionals for further assistance, make better decisions for your personal situation, and avoid some common and costly mistakes. Why This Guide? The first edition of this work, written by the same lead authors as the one you’re reading now, received significant feedback and discussion on Hacker News, on GitHub, and from individual experts. Now, Holloway is pleased to publish this new edition of the Guide. We’ve expanded sections, added resources and visuals, and filled in gaps. There is a lot of information about equity compensation spread across blogs and articles that focus on specific components of the topic, such as vesting, types of stock options, or equity levels. We believe there is a need for a consolidated and shared resource, written by and for people on different sides of compensation decisions, including employees, hiring managers, founders, and students. Anyone can feel overwhelmed by the complex details and high-stakes personal choices that this topic involves. This reference exists to answer the needs of beginners and the more experienced. Holloway and our contributors are motivated by a single purpose: To help readers understand important details and their contexts well enough to make better decisions themselves. The Guide aims to be practical (with concrete suggestions and pitfalls to avoid), thoughtful (with context and multiple expert perspectives, including divergent opinion on controversial topics), and concise (it is dense but contains only notable details—still, it’s at least a three-hour read, with links to three hundred sources!). The Guide does not purport to be either perfect or complete. A reference like this is always in process. That’s why we’re currently testing features to enable the Holloway community to suggest improvements, contribute new sections, and call out anything that needs revision. We welcome (and will gladly credit) your help. We especially wish to recognize the dozens of people who have helped write, review, edit, and improve it so far—and in the future—and hope you’ll check back often as it improves. Scope This Guide currently covers: Equity compensation in C corporations in the United States. Equity compensation for most employees, advisors, and independent contractors in private companies, from startups through larger private corporations. Limited coverage of equity compensation in public companies. Topics not yet covered: Equity compensation programs, such as ESPPs in public companies. (We’d like to see this improve in the future.) Full details on executive equity compensation. Compensation outside the United States. Compensation in companies other than C corporations, including LLCs and S corporations, where equity compensation is approached and practiced in very different ways. For these situations, see other resources and get professional advice. Who May Find This Useful Our aim is to be as helpful to the beginner as to those with more experience. Having talked with employees, CEOs, investors, and lawyers, we can assure you that no matter how much you know about equity compensation, you will likely run into confusion at some point. If you’re an employee or a candidate for a job, some of these may apply to you: You’ve heard phrases like stock, stock options, strike price, ISOs, RSUs, 83(b) election, 409A valuation, AMT, or early exercise and know they are probably important but are mystified by what some of them really mean or whether they apply to your situation. You’re considering a job offer but don’t know how to navigate or negotiate the equity component of the offer. You’re joining a startup for the first time and are overwhelmed by all the paperwork. You’re quitting, taking a leave of absence, or are being laid off or fired from a company where you have stock or options and are thinking through the decisions and consequences. A company you work for i