I decided to write about startup stock option expiration dates, given the ongoing discussion around the topic.

We like to believe, and are told by founders and hiring managers that we're being given a block of options to purchase shares in the company. We evaluate this grant, given the commonly presented "key terms" of strike price, company valuation, ownership %, etc., to have some value $X [1].

But what we're not explained is that we're actually given a block of options with expiration date of D (where D is most commonly length of tenure + 90 days). What I hadn't realized before is that this D really makes a difference in the value of an option.

Ask any trader about the value of an option, and they'll explain to you that short dated options are the cheapest, and option contracts (ex: puts, calls) become more expensive as the expiration dates become longer. Longer expiration dates directly translate to a higher intrinsic value of those options.

So going back to the option grant given to the startup employee, we can see that the expiration date clause on those options is actually a "key term" that is rarely, if ever, a point of contention. People negotiate for a larger number of options all the time (often trading salary for more options), but when's the last time someone tried to negotiate and trade the number of options for a longer expiration? That would actually be trading some amount of value for another amount of value, but it's never done.

But this is something you could do if you wanted to open a position on say, $AAPL, using options. You'd intently consider both the strike and the expiration date for an $AAPL option, and look at how much each would cost. A longer expiration contract with the same strike price will always cost more. Some hedge fund managers have very long dated (3+ years), out of money (ex: the strike price is higher than the current price) call options on Oil. Those contracts would be much cheaper if they'd expire in 3 months, not 3+ years.

So when we say "we've earned those options" (and thus they shouldn't be taken away by the 90 day exercise window), it's not entirely accurate. We've actually "earned those options with expiration D" (and other terms). Holding strike price constant, option grants with "equivalent value" with different expiration dates would mean that the longer the expiration date, the fewer options you should get.

Of course, figuring out the value of a longer expiration date would be incredibly difficult. I certainly have no idea how to price this, especially given that the value of the underlying asset (the company) is already a bit of a black box in the first place. But this is something worth being aware of, so that we can understand that there is real value at stake in the ongoing expiration date discussion.

Remembering the Intent

BUT -- we shouldn't forget that if the founders' intent truly is to "give Z% of the company to an employee in a tax efficient manner" (like they say in all their conversations), and if "the value of the option grant as computed by the value of the underlying option contract" is not a concern, then the founders will not actually be "giving up" any value by lengthening option expiration since that value was inadvertently created and was never intended to be claimed by the founders/company in the first place.

In this case, a founder who wishes to be consistent with herself and her own narrative should adopt a long expiration option contract to make the reality of the situation as close to the narrative as possible, given the legal limitations. If the narrative's purpose was marketing spin to subtly over promise something to make the sale, then carry on. If the founder just wasn't aware of what's at stake and why this matters, I hope that the recent flurry of articles has made them aware of the need to become educated on the subject.

[1] I tell friends to consider their option grant as $X == $0 to simplify things and protect themselves from being mislead, but all options do have some nonzero value.


ISO 101 - Introduction to Incentive Stock Options

An Ask HN thread prompted me to explain some Incentive Stock Option basics. I have copied my answers below:

I get that if I leave my startup today I have 90 days to exercise my options.

The number of days to exercise depends on your contract. The typical number is 45 days. Pinterest's number for employees that have more than 2 years of service is 7 years. This number is not set by law, and can be set to anything the founders/investors agree to.

The 90 day number you are thinking of is the law stating that ISOs become non-qualified options when not exercised after 90 days after termination of employment.

I get that I'll have to pay the agreed 'strike price'

You pay the "strike price" * "number of options you wish to exercise".

Note that you do not have to exercise all your vested options.

Would I be paying tax as if I'd made capital gains in the amount of the delta between the strike price and the stock's value today? Would the stock's value today be based on the company's valuation at the most recent round of funding?

Assuming you were awarded ISOs, you do not owe capital gains tax under "regular income tax" upon exercise. You only owe taxes upon sale of your stock that you have attained through exercise, at some future date.

However, depending on your amount of gains, other income, and your effective tax rate, you may owe tax under AMT. Consult a CPA with experience in this. It should be simple for them. (I believe you get some tax credits for this AMT payment when you end up selling your shares in the future)

The company's stock's value is set by the BoD meetings (the company's 409A valuation). This may or may not be the same as the previous round of funding.

If the company goes on to raise more VC funding, would I be liable in future years for the 'capital gains' on this stock?

You are only liable for "capital gains" when you sell the stock.

If the company went on to fail, would I be entitled to tax breaks for loss of stock?

Yes, you would be able to claim a capital loss equal to the amount of money you paid to acquire your stock. That is your "cost basis", and the "sale proceeds" would be zero. You can claim the difference as a capital loss.

Further Reading


Part 1: Misinformation in Startup Equity Compensation

The pattern I see repeatedly in online articles regarding startup equity compensation is 80% accurate, 20% wrong. Because the information tends to be almost correct, it's easy to overlook the ways in which it is inaccurate. Here's one example:

Experienced shareholders (and Venture Hacks readers) focus on the current value of their shares and the company's prospects. Investors in public companies with wacky capital structures don't fancy that they own 0.0003% of a company that is worth $1B. Instead, they multiply today's share price by the quantity of their shares to determine their share value. They track percentage ownership and valuation, but they focus on share price.

Focus on your share price, not your valuation -- Venture Hacks

The article is very useful overall. But if you take it for what it is, you miss something that many startup employees forget about, especially in the heat of the moment of negotiating a job offer. I made this mistake once too.

You own call options, not equity.

Let's say you just got a job offer at Rocketship Startup Z that gives you a $120,000 base salary and $240,000 in options vesting over 4 years. It's easy to think that your annual compensation is $180,000/year with equity upside.

But recall that your $240,000 option package is in options, not equity. The $240,000 by itself is actually just a price tag for how much you'll have to pony up if you leave the company before it goes public. What it gives you is the right to buy $240,000 worth of the company's stock (at the current price).

This number does not represent the monetary value you can expect to gain. I think we are psychologically wired to overlook this.

In the most simplistic terms [1], the value of your option package is

value = (strike price) * (# of options) * (expected % increase in the company's valuation)

If Rocketship Startup Z is currently valued at $10 billion and your options' strike price is equal to the current value of the company's common stock, then the company must double its valuation for your option package to actually net you $240,000.

So when you are an employee with options, share value (like the article says) is less important than how much the valuation will grow in the future. In the extreme case that the company's valuation remains flat, your $240,000 option package is worth $0.

[1] For the sake of simplicity, I have overlooked things like liquidity preference or later round dilution.


I was recently asked by a friend of a friend about "Startup culture in Japan", particularly with respect to social entrepreneurship and Fukushima. This is my reply. Take it with a massive fistful of salt, since even though I am ostensibly involved in startups in Japan, there is a stark difference between an American who is peripherally involved versus a native born Japanese person fighting in the trenches day to day in Japan.

"Startup culture" can mean any number of things, from the culture within new companies to the way startups are seen by the public. But From what you mentioned about more "social startup" oriented observations, I'm going to assume that you're interested in what the prevailing attitudes of "starting companies / joining young companies" is like.

As you likely know, Japan is a place where the typical successful career trajectory is to join a large company and stay there until retirement. Compensation plans at these big companies are backloaded, and longevity is rewarded with promotions, social standing, pay, etc. Given this backdrop, staring companies and joining young companies is still very much an unpopular thing to do in a broader context. The most recent new grad employment polls showed that the top 4 places of desirable employment in Japan are the giant import export companies. Students are smart and flock to the best opportunities. They are no different than us in the states, other than those "best opportunities" being different from our economy.

That being said, compared to just 5 years ago, being involved in startups is seen as a much more reasonable endeavor, perhaps because these old big companies are seen as not being as stable and financially rewarding as they once were. Founders seem to be much more visible on media outlets. Funding climate is somewhat improved (though still far behind the States), and some younger people who don't quite fit the mainstream mold as well are finding startups to be a reasonable alternative given the tradeoffs. I see skilled software engineers (who have some of the highest career mobility in Tokyo right now) joining startups that have raised significant rounds and can afford to pay decent salaries.

But whether any of these newer startups (post DeNA / GREE / Cyber Agent etc.) will achieve strong exits is yet to be seen. The latest high profile IPO, GUMI, just hand a spectacular crash as both of its topline and bottomline numbers suffered greatly shortly after its recent IPO. There is a noticeable dearth of large exits outside of mobile gaming. Even LINE (which has an IPO on the horizon) makes most of its revenue from games. Without strong exits, the entire startup ecosystem is on life support. Without exits, funding dries up, wages go down, and talent goes away. Talent is everything in starting a company, and exits trickle down to attracting better human capital.

On the area of more direct "social entrepreneurship", I believe that a company must make a profit and be sustainable as a business no matter how noble its intentions may be. If the company can't make money, then its death is just a matter of time and its beneficiaries (or customers) will suffer in the end when the company inevitably falls. This is in contrast to a nonprofit which could perpetually run in the red operationally and depend on government and foundation grants.

Regarding Fukushima, I think most of the endeavors are in the realm of nonprofits rather than startups. Other than very cheap skilled labor or land in the Sendai area, I don't see very many competitive advantages there. (I do know a guy who went back to Sendai where he's from to start a product design firm there to support the area there).

Regarding daycare centers, there is absolutely a market that is not being served by the currently available private and public options. However, it's a topic that has been in public discourse for at least 5 or 6 years now, so if there hasn't been significant progress by now, I question the economic feasibility of such an endeavor with respect to real estate costs and the customers' ability to pay a price above the cost of operation. Japan's low marriage and fertility rates are legendary now; there are various theories about this, but my thesis (and shared by many others) is that the young in Japan simply do not have much disposable income. That factor would also stifle efforts for childcare startups.

Perhaps there are other opportunities though. For instance, a friend of a friend has started a company that is a "yelp for young mothers", where users rate and leave reviews about restaurants and other establishments that are children-friendly (many places in Japan, particularly Tokyo, are very unfriendly for mothers with strollers, for instance).

If the country feels that this is an important area, then government should consider handing out grants or subsidies or credits, much like what we have seen in renewable energy all over the world (what allowed solar energy to be viable in its early years).


The best VC Blogs are among the best resources for learning about a range of subjects in the tech industry. Some examples (the usual suspects) that come to mind include:

These blogs offer both anecdotal and data-backed perspectives on subjects ranging from B2B SaaS pricing models to Series B fundraising dos and don'ts.

When I read something, afterwards I like to step back and consider things form one higher level of abstraction. If I'm reading a novel, this might be a reflection on the plot devices or syntax that was employed. If I'm reading a blog post, I like to think about the motivations of the author.

For VC Blogs, I can think of a few drivers:

  • Awareness & Expertise building (transition from founder to VC)
  • Paying it forward
  • Dishing out the dirt
  • Position Building
  • Inbound funnel

1. Awareness Building

Each blog listed above is affiliated with young funds that needed to differentiate itself and make itself known to the world (and have succeeded spectacularly at doing so). Demonstrating and communicating experience, perspective, and thought leadership goes a long way towards associating the fund's brand with one of competence.

2. Paying it Forward

It's long standing culture to "pay it forward" in this industry. We've all been helped by people more senior than us, where they took a chance on us even though they had very little to gain. Once we find our own bit of success, we're compelled to take a chance on the next generation and help out where possible. It's something that can have huge leverage -- a small amount of effort on our part can be a huge boost to someone else, hopefully leading to a virtuous cycle thereafter.

It's also "good for business". Good deeds tend to come back to us in unexpected ways.

3. Dishing out the Dirt

a.k.a. "Tell it Like it Is". Ben Horowitz is particularly (in)famous for this.

We all have a desire to dish out the dirt, and lay it all out. But we can't. We're still beholden to the powers that be. Pissing off some famous guy or company (or even just saying how tough things are how mentally worn out we are) could come back to bite us. So we shut up. And wait. We wait until we've made it -- when we are no longer beholden to anyone.

Horowitz himself says in his book that he couldn't say most of the things in his book while he was running Opsware because of the possible negative effects it could have on the company. He has come out in full force since then.

Still, some VCs do things that I really don't like. This post is for them.

Four Things Some VCs Do That I Don't Like - Ben's Blog

Can you imagine anyone saying this while still running a (young) company? No way. A blog can be an outlet for all those years of not being able to publicly say things that you've wanted to scream at the top of your lungs to the world.

4. Position Building

Position Building is pretty interesting. It allows the blogger to gradually shift the trends in their favor by taking a position on an point that could be taken "either way". The key is that they take positions on issues where either position is arguably correct. This is in contrast to outright predatory behavior or misdirection.

The most visible form of this is often used by Venture Capital's older brother, Hedge Funds. The very visible founder takes the stage to shift discourse on a public security in his favor (ex: David Einhorn pushing hard for AAPL to buyback stock). VCs are more subtle than this. For example:

...some of the smartest founders I work with are taking advantage of the seed funding boom to raise larger early rounds, buying themselves more time to get more done and hit more of those critical inflection points. If you're only new and shiny once, get as much out of it as you can.

What the Seed Funding Boom Means for Raising a Series A - First Round Review

This is a well supported piece of advice within a well argued longer post. But "larger seed rounds" have recently been a point of contention between Angels / Seed Funds and VC Funds. Early stage or multistage VCs have been coming down the ladder into seed rounds, sometimes taking seed rounds for themselves and squeezing angels and Seed Funds out by offering more cash and a perhaps a higher valuation. Given this context, First Round Capital's (a young multi-stage fund founded in 2004) well reasoned advice can be taken as position talk that is beneficial to VCs over investors with shallower pockets.

Take Hunter Walk's (partner at Homebrew, a Seed stage fund) perspective on the matter:

Anecdotally, over the last 3-6 months we're definitely seeing more examples of larger early stage or multistage funds offer to do 80-100% of a company's seed round.


(c) Barbelling of VCs: There have been debates as to whether the VC industry is barbelling - that's to say, a number of near-billion dollar+ funds on one end and sub $250m funds on the other. To be caught in the middle, especially without a strong brand and partnership (aka the Benchmark exception), is to miss out. But theres a lot of capital concentrated in that middle right now, often in firms who have a partner or two known as top in their vertical but without necessarily a broader reputation in other spaces. Thus the firm doesn't see the breakout good deals in those other spaces. In order to go after them, they need to head earlier into seed. And they need to own enough of the company in order to get the returns they need from a $500m fund, so instead of owning 10% and splitting the seed round with another investor and some angels, they go to own 20%, which is more typical of their model in Series A and beyond. They're less price sensitive and more ownership sensitive, so these firms are willing to pay more to get the deal. This theory is the most structural one suggested here and I tend to believe is influencing some early stage investment behaviors.

Goodbye Party Round, Hello Piggy Round: Should Seed Stage Founders Raise From Just a Single Investor? - hunterwalk.com

He treads lightly in his post, offering 4 possible explanations as to why this may be happening (one of which I cited here). But as a seed stage VC, he isn't exactly enthused about this development.

It's a clash of positions. Both sides of the argument have perfectly valid points. As a founder, there is no clear right answer. But they write to steer things towards a more favorable future for themselves. There's nothing sinister or predatory about that.

5. Inbound Funnel

But ultimately...

Investors want to make sure they get 'the call' from founders when they begin fundraising - so they're motivated to send 'happy vibes' in order to stay around the hoop.

What the Seed Funding Boom Means for Raising a Series A - First Round Review

This is likely the biggest reason why VC Blogs exist today.

Ulterior motives aside, these blogs are like Google/Stackoverflow for a developer. Never have there been so many great free online resources to figure out what to do, what not to do, and where to go.

It's a good time to be a founder.