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The Lack of Options for Startup Employees’ Options

a16z.com

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Re: The Lack of Options for Startup Employees’ Options

#61

Post by dadkins »

jamiequint wrote: post #56
dadkins wrote: post #51

There's a much simpler solution: early exercise. It's already possible and good companies offer it as an option. You exercise all of your options immediately upon joining. The difference between the fair market value and strike price is zero, so there's no tax due upon exercise. If you stay for at least a year, which is where the cliff is, you're now in long-term capital gains territory. And if you leave before all o…

The cost of the options is too high. Take a company valued at 90m pre-money for their Series B (a $10m investment). Their post-money valuation is $100m. Now assume the common is valued at 5x less than preferred. If the company wanted to do this and their hiring plan has them hiring 20 employees for a total of 5% of their options pool in options they now need to set aside $1m of their financing (5% * 20m) just to fina…

I'm afraid I don't follow your math. The cash to exercise the options goes immediately back into the company's bank account. It's as if they were handing out shares instead of options. The only expense should be the tax on the fair market value of the shares, which should be considerably less than 100% of their value, no?

Re: The Lack of Options for Startup Employees’ Options

#62

Post by againstgreed »

This is the worst I have ever read from greedy a16z.

Why do investors need to be greedy? Startups went public in 4 years in 90s and 4-year stock option totally made sense. After the company goes public, retail investors are able to enjoy some post-IPO growth.

Now in 2010s, VCs became greed with money they raised from Wall Street and enjoy the 95% of the growth of startup at the expense of employee's stock options and take it to IPO selling the shares at high-cost to retail investors.

In 90s, First 1-10 engineers used to get upto 20-25% of the company. Now I see college grads are fooled by startup founders for 1-2%. Thanks to greedy investors.

I heard Zenefits is going through a big dilution problem now as they are looking to dilute the company shares and there is zero incentive for employees to stay in Zenefits. a16z controls Zenefits as they may have around 300M in Zenefits and maybe this post is the result of their new dilution event.

Re: The Lack of Options for Startup Employees’ Options

#63

Post by csmeder »

dadkins wrote: post #51

There's a much simpler solution: early exercise. It's already possible and good companies offer it as an option. You exercise all of your options immediately upon joining. The difference between the fair market value and strike price is zero, so there's no tax due upon exercise. If you stay for at least a year, which is where the cliff is, you're now in long-term capital gains territory. And if you leave before all o…

Wouldn't this essentially just be the same as being an angel investor. This takes away all the value of getting options.

For example I am an early employee at a startup valued at 1M. If on day one I am given $10,000 worth of options and I buy all of them, how is this different than investing $10,000 worth of money for 1% of the company?

The value of options is that they are options. You get to wait and see if they are worth buying. If you have to buy them on day one, then they are not a compensation for taking a lower salary, they are simply an investment vehicle like a stock or a bond (a much riskier one).

> If the company is truly concerned about this, then they can provide a signing bonus with which to exercise the options

This is the only way it would make sense.

Say you can take a $150,000 salary with zero options. Or a $120,000 salary with $30,000 worth of stock options.

But if the company needs to give a $30,000 signing bonus to pay for the stock on day one, then they aren't saving any money for runway. Thus the main reason they want to compensate with stock is taken away. And a $30,000 bonus wouldn't do it, it would need to be $30,000 after taxes. The company would end up paying over $150,000 for this person's total salary.

Right? Or maybe I'm missing something?

Re: The Lack of Options for Startup Employees’ Options

#64

Post by jamiequint »

dadkins wrote: post #61
jamiequint wrote: post #56

Earlier quoted context omitted.

The cost of the options is too high. Take a company valued at 90m pre-money for their Series B (a $10m investment). Their post-money valuation is $100m. Now assume the common is valued at 5x less than preferred. If the company wanted to do this and their hiring plan has them hiring 20 employees for a total of 5% of their options pool in options they now need to set aside $1m of their financing (5% * 20m) just to fina…

I'm afraid I don't follow your math. The cash to exercise the options goes immediately back into the company's bank account. It's as if they were handing out shares instead of options. The only expense should be the tax on the fair market value of the shares, which should be considerably less than 100% of their value, no?

You're right, I somehow forgot who the money was going back to. I wonder if you could enforce this legally without the employee just having the ability to walk away with the current value of the options in cash. I also wonder what the tax implications of the purchase are to the company. I agree that this solution makes a lot of sense though.

Re: The Lack of Options for Startup Employees’ Options

#65

Post by sk5t »

csmeder wrote: post #63
dadkins wrote: post #51

There's a much simpler solution: early exercise. It's already possible and good companies offer it as an option. You exercise all of your options immediately upon joining. The difference between the fair market value and strike price is zero, so there's no tax due upon exercise. If you stay for at least a year, which is where the cliff is, you're now in long-term capital gains territory. And if you leave before all o…

Wouldn't this essentially just be the same as being an angel investor. This takes away all the value of getting options. For example I am an early employee at a startup valued at 1M. If on day one I am given $10,000 worth of options and I buy all of them, how is this different than investing $10,000 worth of money for 1% of the company? The value of options is that they are options. You get to wait and see if they ar…

You are missing that the $30K bonus to buy the options would immediately flow back into the company's coffers. Perhaps a better scenario would be $30K of stock via grant and $15K in cash to pay the tax man... the company is out $15K net and the employee owns something putatively worth $30K.

Re: The Lack of Options for Startup Employees’ Options

#66

Post by acslater00 »

This is an absolutely embarrassing argument on the part of A16Z and it should be taken down.

Options have present value prior to exercise. You can compute that value using common financial models. Renouncing vested options by not exercising within a 90-day window is akin to taking that value and donating back to the existing shareholders of your firm, including current and future employees. So yes, it is true that not making a gift to all those people is worse for them, but what in God's name would lead a person to believe that this is the way it should be?

I'm not even going to get into the myriad ways in which founders and investors can conspire to create personal liquidity in a way that dilutes and actively harms the financial prospects of option-holders. But the fact that even the bare-minimum action of asserting a right to keep VESTED option value is being characterized as "additional dilution" and "maybe bad" is completely absurd.

I'm not prone to outrage, but this author, as well as Ben Horowitz, should apologize and retract this. https://twitter.com/bhorowitz/status/746050999341584384

Re: The Lack of Options for Startup Employees’ Options

#67

Post by a13n »

A fantastic piece and a subject I've spent a lot of time thinking about as an early-stage founder.

There's a ton of criticism in this thread but I think people are missing the point.

1. Why 90 days expiration sucks.

If you're an early employee at, say, Uber... your options have vested but you can't afford to exercise them because you don't have $10m+ in cash. If you leave you lose it all because you can't exercise them. There goes your big payout, you are stuck working at Uber until they IPO (or forfeiting your equity).

2. Why 10 years expiration sucks (on its own, keep reading!).

Consider the case where you have two employees who joined on day 1. Employee A works for 4 years and vests X% in options, leaves. Employee B works for 10 years and vests X% in options.

Obviously you want to retain your most senior employees and turn them into leaders within your company rather than see them leave. Those who stay and help carry out the mission are way more valuable to you than those who leave right when they vest.

If you change nothing except 10 years till option expiration after leaving, employee A and B get compensated the EXACT same thing despite employee B contributing 10 years and employee A contributing 4.

3. Longer vesting + more equity fixes everything

If you dish out more equity over longer periods of time then employee B would rightfully be compensated more than employee A.

I don't understand the negativity in this thread whatsoever. Can someone please level-headedly explain why they disagree rather than just downvoting into oblivion?

Re: The Lack of Options for Startup Employees’ Options

#68

Post by acslater00 »

a13n wrote: post #67

A fantastic piece and a subject I've spent a lot of time thinking about as an early-stage founder. There's a ton of criticism in this thread but I think people are missing the point. 1. Why 90 days expiration sucks. If you're an early employee at, say, Uber... your options have vested but you can't afford to exercise them because you don't have $10m+ in cash. If you leave you lose it all because you can't exercise th…

Because the 10-year employee will be granted additional shares after her initial option grant is fully vested. And in a world where both have the option of leaving and preserving their option value, the follow-up grant will likely be larger than it is in the status quo, because the company will have to incent B to give an additional 6 years of her life to the startup.

Re: The Lack of Options for Startup Employees’ Options

#69

Post by megrimlock »

numlocked wrote: post #53

I think folks might be misinterpreting this a bit -- his issue with the 10-year window isn't that it will 'prevent' shares coming back into the pool (remember, the article started out talking about how employees should be able to exercise their options regardless of their cash constraints), but that giving folks the ability to wait-and-see for years, with zero risk, before pulling the trigger isn't really fair. Let's…

> giving folks the ability to wait-and-see for years, with zero risk, before pulling the trigger isn't really fair

Isn't that what an option represents? The freedom to choose later is the inherent value of the option.

And that value isn't acquired risk free: it's compensation for putting time in in lieu of salary.

Re: The Lack of Options for Startup Employees’ Options

#70

Post by a13n »

acslater00 wrote: post #68
a13n wrote: post #67

A fantastic piece and a subject I've spent a lot of time thinking about as an early-stage founder. There's a ton of criticism in this thread but I think people are missing the point. 1. Why 90 days expiration sucks. If you're an early employee at, say, Uber... your options have vested but you can't afford to exercise them because you don't have $10m+ in cash. If you leave you lose it all because you can't exercise th…

Because the 10-year employee will be granted additional shares after her initial option grant is fully vested. And in a world where both have the option of leaving and preserving their option value, the follow-up grant will likely be larger than it is in the status quo, because the company will have to incent B to give an additional 6 years of her life to the startup.

Sure but if you join on day 1 then the refresher grants could be peanuts compared to your initial offer? Why wait 4 years to find out you won't get any more equity instead of baking it into the original offer with a longer vesting period?

Longer vesting periods + more equity guarantee that employees get more equity. 4 year vesting lets the board decide what happens.

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