I think startups would have a lot easier time recruiting great people if they offered Stock Appreciation Rights [1] instead of typical options. I didn’t even know SARs existed, they’re so non-standard in the startup industry, until as a founder considering an open-ended hiring offer for the first time I desperately looked for some legal upside compensation system that wouldn’t screw me in all likely scenarios. Stock would mean tax bill upfront with high chance of failure. Options would likely expire before I could securely exercise and liquidate to cover costs.
I ultimately decided to stay the founder course, but glad to have found what I think is an acceptable compensation structure. Even if requiring it adds friction to deals until docs are standardized, at least people should know it’s an option. I’d be curious to understand if anyone has found a downside, except to the investors that build these anti-employee systems to arbitrage on knowledge asymmetry.
One downside here is that SARs are taxed as ordinary income. This means you might end up paying 30-50% taxes instead of the 15-20% long term capital gains rate you'd pay on ISOs, RSUs, or selling shares from exercised NSOs.
I ultimately decided to stay the founder course, but glad to have found what I think is an acceptable compensation structure. Even if requiring it adds friction to deals until docs are standardized, at least people should know it’s an option. I’d be curious to understand if anyone has found a downside, except to the investors that build these anti-employee systems to arbitrage on knowledge asymmetry.
[1] https://en.m.wikipedia.org/wiki/Stock_appreciation_right