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Compound manages $1.5B+ for entrepreneurs, professionals, and retirees who want the personal touch of a trusted advisor and a beautiful digital experience.
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Last Seen Profiles
If you joined Figma in ~2018, received 250k stock options, and exercised them all, your net outcome today would be $8.16m
But if you waited until the acquisition to exercise, you’d take home $7.50m – a difference of $657,822
Let’s break it down:
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Early employees from some unicorn companies like Stripe and Quora may lose ALL of their unexercised startup equity
Some people may lose *tens of millions of dollars* of equity
Here is what is happening:
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If you own startup equity, you may be eligible for $10M+ in tax-free capital gains
You can get this treatment if you qualify for something called the qualified small business stock tax exemption (QSBS)
Here’s how it works:
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Imagine two engineers join Uber and Zoom in 2017:
- Uber engineer’s equity package: $676k over 4yrs
- Zoom engineer’s equity package: $228k over 4yrs
Today,
- Uber engineer’s equity is worth ~$537k
- Zoom engineer’s equity is worth ~$5.02m
Here’s how this happened:
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Before we get going: this thread draws from the excellent article by
@kellblog
on a similar topic
You can take a look at his full essay here:
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This is due to something called “stock option expiration”
For the majority of Silicon Valley compensation plans, your stock options expire after 10 years
So if you’ve been at a company for the past 10 years, you could have all of your options expire, leaving you with no equity
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This thread contains everything you need to know about startup stock options and taxes:
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When these rules were made, the average startup would go public in around 4 years (hence the standard 4-year vesting period)
10 years for option expiration was essentially a proxy for “infinite time” and didn’t cause these problems for employees until recently
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Imagine you joined a startup in 2012 as an early employee and received stock options (400,000 options with a strike price of $0.10)
The company has done very well and the latest 409A is now $20/share
You are now a paper millionaire, worth $8M (before taxes)
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If you pass away and you don’t have a trust, your estate may be on public record for anyone to see and your family can lose up to 7% of your assets to pay for probate (depending on which state you reside in)
Here’s how trusts work:
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Option 1: Exercise your stock options
Using the example above, this would cost $40k to exercise the options
You’d also have to pay the taxes on the spread which could be up to an additional $1.9m
As
@kellblog
mentions in his blog: “This is, in fact, the problem statement.”
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Since companies are staying private longer, employees sometimes face a situation where their options are going to expire
And because you’ll have to pay both the exercise cost and the taxes, getting out of this situation can cost hundreds of thousands or millions of dollars
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Everything seems like it’s going well. What’s the problem?
Unfortunately, sometime in the next few months these stock options are going to expire
When unexercised stock options expire, they will become worthless (i.e. $0!)
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The 10 year expiration limit isn’t an arbitrary number chosen by companies to screw over employees
Incentive stock options (ISOs) lose their tax advantages beyond 10 years
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Option 3: Exercise your stock options via a third-party fund (like
@Esofund
)
In this case, you structure a deal:
- They provide financing for you to exercise your options
- In exchange, they get to keep part of the upside (oftentimes between 10-50%) when your stock is sold
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If you receive a job offer from a startup, asking questions can help you evaluate your offer, negotiate your compensation, and look out for red flags.
Here are three common red flags to look out for—and how you can look out for them.
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Let’s say you joined Figma as a mid-level engineer in 2018
You might have been offered 250k incentive stock options (ISOs) vesting over 4 years with a 1-year cliff
Let’s also assume that Figma let their employees early exercise
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Option 2: Exercise your stock options, and sell some to pay taxes
If you sell some of your equity in a private market (if your company allows it), you might be able to sell some right away to cover the tax bill
(For example, exercising 400k shares then selling 150k for taxes)
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If you sold all of your Google stock at the IPO, you would have missed out on a 3,957.20% return
If you sold all of your Opendoor stock at the IPO, you would’ve avoided a -89.77% return
It’s hard to time the public market – if you hold company stock at IPO, what should you do?
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Startup job offer red flags 🚩🚩🚩
- Won't tell you the % of the company you're being offered
- Don't share runway or won't show you how it's calculated
- Try to sell you on the equity potential like it's a sure thing
- Don't want to share liquidation preferences
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We interviewed 6 early employees at now-unicorn startups
Their companies have generated $100B+ value for the world
Here’s the advice they gave on how to succeed as a startup employee:
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Imagine two employees joined a rapidly growing startup in 2016, received the same equity compensation, and their company just announced their IPO (like
@TripActions
)
- Employee 1 is going to earn $15M
- Employee 2 is going to earn $0 (literally)
How? Let’s break it down:
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So if you’re in this situation, what can you do?
Unfortunately, this is a tough situation, and there aren’t any easy options
You likely won’t walk away with the amount you were expecting, but there are steps to take to optimize what you still can own
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(Note: early exercise is when you exercise your options before they vest
This has the advantage of being able to exercise when the 409A valuation is lower, usually resulting in lower taxes
While most startups don’t offer early exercise, we’ll imagine that it’s available here)
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Option 4: Exercise your stock options via a company tender offer
Some companies offer employees the chance to sell their shares in a secondary sale
While the valuation might not be as high as you want, it’s better than letting your options expire
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From the Internal Revenue Code Section 422:
“such option by its terms is not exercisable after the expiration of 10 years from the date such option is granted”
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The idea for
@Compound
came from facing the same problem as every tech person:
There was no easy way to track illiquid startup assets or get investing and tax advice tailored to our unique situation
Our origin story, featured by
@turnernovak
:
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Back in 2018, these options probably had a strike price of ~$0.33
To exercise all 250k, you could spend $83,000
Certainly not a small amount of money, but if you had several years of engineering experience, something you could consider
What investors first paid for
@Figma
, which
@adobe
buying for ~$40.20 per share:
$0.088:
@dannyrimer
/
@IndexVentures
,
@semil
, Jacobsen/OATV
A $0.199:
@johnolilly
/
@GreylockVC
B $0.332:
@mamoonha
/
@kleinerperkins
C $1.098:
@andrew__reed
/
@sequoia
D $4.619: Peter Levine/
@a16z
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Compound is compounding (and merging with Alternativ Wealth).
Today, we are announcing that Compound has merged with Alternativ Wealth to form Compound Planning, a $1.1B digital family office for entrepreneurs, professionals, and retirees.
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While there are some equity and legal situations where the company *could* make it a lot easier on employees, this is not really one of them
The company might help with education (or refer you to
@compound
), but this is ultimately on you to understand and take action on
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*Early* exercising your startup options can save you hundreds of thousands of dollars in taxes
However, if you fail to file something called an “83(b) election” to the IRS, you could owe a large tax bill before you get cash from selling the shares
Here’s how it works:
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The market has changed materially
Most startup employees have no idea what their equity may be worth (if anything)
Here's a personal finance playbook for any employees who work at "potentially overvalued" startups:
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Option 5: Exercise your stock options earlier
This isn’t a real option now, but one way to have avoided this situation would’ve been to exercise your options earlier
While it would’ve been risky (by the numbers most startups fail), it would’ve kept the tax bill lower too
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Exercising all of your options early would’ve been risky as Figma was still a small company (only ~$4 million in ARR) and far from a sure thing
However, because the strike price would match the 409A price, you wouldn’t have to pay taxes upon exercising your shares
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A startup is acquired for $500 million, yet the founders and employees make nothing
How can a company get acquired yet not pay anything to the people who built it?
Here’s what a “liquidation preference” is and how it may impact your startup equity, especially in a down market:
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In this scenario, the big question is if you should early exercise or not. The tradeoff is:
- Investing $83k at a time when the company’s future is risky and uncertain
compared to
- The benefit of over $657k in tax savings at the time of acquisition
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Startups must update their 409A valuation every 12 months
Most growth stage startups will get a _LOWER_ 409A valuation in 2023
If you are a tech employee, you should understand what this means, why it matters, and what you can do about it:
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We spoke with
@tcosta_co
(founder of and
@narative
) about design and company building
Here is what we learned:
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In 2021 there was ~$330bn invested into startups
Most people tell you to ignore valuation at the early stages:
“If you’re offered a seat on a rocket ship, don’t ask what seat – just get on”
Here’s why you shouldn’t ignore valuation and how it impacts angel investing returns:
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There are public reports of Stripe raising ~ $2.5B at a $55B to $60B valuation
This is _down_ from their $95B valuation in 2021
But this fundraise could save some early employees *tens of millions of dollars*
Let’s break it down:
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(Note: the strike price is the price you can buy your shares at and the 409A price is the most recent valuation price
When you exercise your options, you are taxed on the difference between these two prices: immediately for NSOs, and deferred for ISOs until you sell your shares)
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Startup offer letters can be *very* confusing—especially the equity portion—as they rarely provide all of the information you need to make an informed decision
Here are the questions you should _always_ clarify to prevent making any big mistakes:
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Equity, taxes and all the complexity that come with it aren’t easy to understand (and are much less exciting than actually building companies)
Hopefully you learned something from this thread
To learn more about personal finances for tech, follow this account
@Compound
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Fast forward a few years and that stake is now worth $10.05m (250k shares * $40.20 price per share at sale) in a 50/50 combination[0] of cash and $ADBE stock
[0] According to Bloomberg
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An early employee join a startup in 2018
They early exercise their options
The company is now a unicorn and the employee saved ~$128k in taxes by early exercising
A case study:
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Equity is a big part of what differentiates startups from many other employment options. However, this equity-heavy approach to compensation is not unique in history.
We went deep with
@devonzuegel
talking about pirate history and why it's called venture capital for a reason
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Of course, this thread:
- is merely an illustrative example
- isn’t financial advice
- requires personal financial info to provide a recommendation
- is focused on one of the (very) few startups to announce a successful exit this year
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Equity is a big part of what differentiates startups from other employment options
Where did the idea of distributing equity to employees come from?
We worked with
@devonzuegel
to explore this fascinating history:
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On the $ADBE half, you’ll likely have a direct stock transfer which won’t impact taxes immediately
On the cash half, if you live in CA, you’ll pay a 37.1% tax rate (23.8% federal capital gains + 13.3% CA tax)
All in, you end up with $8.16m:
$5.03m ADBE stock + $3.13m in cash
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If you work in tech, you could save millions (or tens of millions) of dollars by setting up the appropriate estate plan
Or you could waste tons of time, money, and focus
Here’s an example to help you understand what type of estate planning may make sense for you:
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Successful startups are taking nearly twice as long to go public as they did twenty years ago
This shift greatly impacts tech people's finances
If you work at or are looking to join a startup, here’s what you should know:
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Thousands of family offices collectively invest an estimated $6 trillion in assets
But the birth of the modern family office happened almost by accident:
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If you’re a startup employee and you exercise illiquid stock options, you may owe a material amount of tax (before you can sell shares to cover it)
Depending on your circumstances, this could be $100k - $200k (or more)
Here’s how the Alternative Minimum Tax (AMT) works:
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New post!
@NeckarValue
has a wide-ranging conversation with leading investment researcher
@mjmauboussin
discussing:
- Holding AMZN through the dotcom bubble
- Elite teams of superforecasters
- Lessons for operators from Expectations Investing
- And more
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While your $ADBE shares will still be worth $5.03m, you’ll take home $2.48m in cash (vs the $3.13m in cash if you had exercised earlier)
In this scenario, the cash would be treated as ordinary income and be taxed at 37.0% federal + 13.3% CA
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Tech employees from private "growth stage" companies ($1B to $10B+ valuations) are in a tricky position with their stock options/grants
Most public market comparisons have dropped > 50%+ over the past year
What should these employees be thinking and doing with their equity?
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If you’re working at a different tech startup, this should be used as a reminder to figure out your own options situation
Spend the time making a choice
Even if you don’t exercise now, understanding the implications could be worth hundreds of thousands of dollars in an exit
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Obviously, the Figma acquisition is still great news – this is a clear win for anyone involved with Figma (founders, employees, and investors alike)
But because didn’t exercise your options earlier, you’ll face a larger tax bill now (ordinary income vs long-term capital gains)
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There have been layoffs at many tech companies recently
If you’re an employee at a private tech company, you might have to make a decision on your equity or risk losing all of the value you helped create
Here’s how to protect your equity:
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On the flip side, you may have waited until the Figma acquisition to take action on your equity
In this case, you didn’t exercise your options while Figma was private and now are facing a liquidity event
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New interview with
@yorios9312
, early PM at Robinhood
We chatted about:
- Building clearing from scratch (something she didn’t know anything about)
- Robinhood’s ritual of “putting a cat on it”
- Hiring an exec coach to try out management
1
2
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We spoke with
@dwr
(
#20
at
@coinbase
and founder of
@farcaster_xyz
) about company building
Here are some of his best stories and learnings:
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28
New post from
@zebriez
:
To accelerate your career, find your unique strength and do it more. But how do you know what you’re great at?
Brie shares 18 tactics across data collection, working sessions and asking others to find your person-problem fit
1
2
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Startup job offer red flags 🚩 🚩🚩
- Won't tell you the % of the company you're being offered
- Don't share runway or won't show you how it's calculated
- Try to sell you on the equity potential like it's a sure thing
- Don't want to share liquidation preferences
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4
26
So what can you do?
If you’re a Figma employee, take stock of your situation. Figure out:
- How many options you own
- Your tax burden
- A strategy for your new cash and $ABDE stock
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This thread contains everything you need to know about startup stock options and taxes:
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Lesson?
Not all pre-IPO startups are equal
Even though you would’ve been given ~3x the equity at Uber, your net outcome would’ve been ~10x better at Zoom
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To qualify for QSBS:
1. You must acquire original, issued shares
2. They must be directly issued by a qualified small business taxed as a C-corp
3. The business must have no more than $50M in gross assets at the time of issuance
4. You must hold onto the shares for >5 years
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On Wednesday, we’re hosting a seminar on equity compensation with
@ycombinator
and
@cjc
. We’ll cover the basic terminology, what to ask when you receive a job offer, how to manage your equity if you leave a company—and more!
RSVP here:
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Some of the hottest private companies are publicly rumored to have recently completed/are in the process of completing a "tender offer" (OpenAI, Notion, SpaceX, Stripe)
This could mean liquidity for employees
If you are an employee, what should you do?
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1/ We’re excited to have
@jrdngonen
speak with the
@YCombinator
community on July 13th at 3:00pm PST.
We’ll cover everything you need to know about startup equity and offer letters.
You can RSVP here:
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New interview with
@juliadewahl
, employee
#10
@Opendoor
We chatted about:
- Learning what customers like (and what they don’t)
- How Opendoor changed their org structure to accommodate the business needs
- A framework for diversifying stock positions
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Investing in venture capital can offer very high returns, but is also high-risk and comes with a long payout time (often 10 years)
So should you invest in VC? How should you do it?
We worked with
@joinallocate
to write a guide:
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Very excited to announce a new integration with
@cartainc
:
If you have a Carta account, you can now view your equity holdings in your Compound account. For more info, the Carta team wrote a great blog post about it:
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It can be difficult to fully understand a job offer from a startup. What is your equity actually worth? And how likely is it that your equity will end up being worth that much money?
Our new calculator can help you evaluate your job offer:
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If you own startup equity, you may be eligible for $10M+ in tax-free capital gains
You can get this treatment if you qualify for something called the qualified small business stock tax exemption (QSBS)
Here’s how it works:
1
1
18
If you make private investments in startups, PE funds, or hedge funds, then you'll probably be getting a Schedule K-1 this year.
We wrote this thread to help you avoid common K-1 mistakes:
1
3
18
New conversation with
@lennysan
, writer of Lenny's Newsletter
We chatted about:
- Why he decided to start a newsletter
- How he decides on essay topics
- How he started angel investing
- And more
0
2
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Startup job offer red flags 🚩 🚩🚩
- Won't tell you the % of the company you're being offered
- Don't share runway or won't show you how it's calculated
- Try to sell you on the equity potential like it's a sure thing
- Don't want to share liquidation preferences
2
2
18
New conversation with
@patrickscoleman
, former VP Growth
@Replit
and current growth & ops
@useinterval
A few highlights:
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The Dashboard tracks your assets, models your taxes, and projects your cash flow. Now you can try it without entering any of your personal information:
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So you just got a job offer from a startup. But you're not sure how much it's actually worth — equity can get complicated. We've created a (free) offer calculator that lets you evaluate how much you could realistically make. Try it here:
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We've spent close to 500 hours writing essays for tech people about their equity.
"When should I exercise?"
"What happens if my company valuation goes down?"
"What are the tax implications of selling my equity?"
7 essays that answer your questions:
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0
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We spoke with
@rchoi
(engineer
#7
at
@salesforce
and current director at
@ycombinator
)
"Getting to work at a startup like Salesforce in 2000 was an amazing and formative experience"
Here are some of his learnings:
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1
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It’s the end of the year, and you might be thinking about giving to charity
While you could donate directly, you might not know about a structure that is more:
- Consistent for charities
- Tax-efficient for you
Here’s what tech employees should know about donor-advised funds:
1
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QSBS refers to the tax exemption found in Section 1202 of the US tax code that enables each taxpayer to receive tax-free gains from the sale of stock, up to the greater of (i) $10 million, or (ii) 10x their original investment
*Note that the tax code may change over time*
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