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Thursday, May 13, 2010

Hoisted from my Buzz

This started off as a post on Buzz, but then I realized that most people probably neither read nor follow my Buzz/Reader feeds (which is admitted a torrent of information that more than one person has complained about not being able to follow).

Google has just handed out a Founders' Award to the Android team. By all accounts it was substantial, ranging from a pat on the back to millions of dollars in restricted stock (vested over 4 years, of course --- Google is not stupid). Yet Google has seen two recent departures (neither of which I know well, so this is all outside information) from the Android team. Presumably, if the stock was vesting and it was substantial, people wouldn't leave now, yet precisely that's what's been happening! Why is that?

One possibility is that the people who left didn't get to take part in the substantial stock awards. If Google handed out a million bucks to your cube-mate and not to you, that's a pretty strong signal that you should leave right now. This obviously applies to you if all you were was a Senior Software Engineer who has next to no prospects of promotion under the current regime. I find that hard to believe, however, of the Senior Product Manager. There are a lot fewer PMs than there are Engineers, so the chances of a low payout is less likely there (but it could still happen!).

The deeper possibility is that not all $1M awards are the same. A $1M award out of Google vested over four years is the same as a $250k/year increase in salary. But that's going to be taxed at your highest marginal tax rate, somewhere around 45% in California. To make things simple and to account for the possibility of a tax hike, I'll call that 50%. That's a $125k/year increase in salary. That's great, but let's take a look at the alternative if you were getting $1M from LinkedIn. (My sources say that LinkedIn is worth about $4b-$5b today)

If you've read my book, you'll do the right thing and immediately pre-exercise all your LinkedIn options. 4 years later (or whenever you can), you could sell the stock for $1M. However, that's all taxed at Long Term Capital Gains tax rates, which are currently at 15%. Tack on another 10% California taxes, and now you're at 25% tax rates. So that nets $750,000 over 4 years. (Note: tax rates can change) Compare this with $500,000 over 4 years, and the person who joined the startup gets $250,000 more. That's 30% more money!

But that's assuming that the startup's package is worth $1M as well. The startup options carry a lot more uncertainty, and LinkedIn is much more likely to double over the next four years than Google. It's also much more likely to go to $0 (No risk, no reward!). Furthermore, you can control when you extract income out of your LinkedIn stock (through an 83b election as described in the book), whereas Google's Restricted Stock gets taxed as you vest.

Of course, the best deal is to do what these gentlemen probably did, which is to use the founder's award to extract more equity from the respective companies they joined, as well as promotions, salary increases, and other benefits. On top of that, the bigger impact you make as a person in a smaller company also makes the potential career path there much more satisfying, provided you did your homework when you selected the startup. Note that you can also have a very satisfying career at Google by being on the fast track and getting promoted every year --- Andy Rubin wouldn't join Facebook any time soon. But if you're not one of those, then Beust's and Tseng's approach makes a lot of sense.


Tom Galloway said...

To be fair, you've somewhat rigged the game with respect to taxes. For regular income, you've tossed in a possible 5% increase just to make math simpler, while for long-term gains you're ignoring that it will be up 5% to 20% next year. That's a good 10% difference right there, when actually it's 5% the other way.

There's also the upcoming increase to pay for the recent health care bill on high income, but I'm not clear how that breaks down vis a vis income and long-term.

Unknown said...

I haven't seen any indication that Obama has the guts to raise LGCG taxes next year or any other year. I'll believe it when I see it, especially given that Republicans are likely to win the house this year.

Tax cuts for the rich seems to be the rule for the forseeable future.