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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

#81

Post by Spooky23 »

velominati wrote: post #16

This article states that former employees are "lining their pockets" at the expense of current employees who are "build[ing] future shareholder value" (i.e. creating value for VCs). But it ignores the fact that those former employees already built shareholder value when they were working. And by joining early on they took a much larger risk than employees who sign on during the growth stage - often receiving less sal…

The VC gets to "create more value" for himself by paying employees with monopoly scrip rather than cash.

Re: The Lack of Options for Startup Employees’ Options

#82

Post by ridgeguy »

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…

I didn't downvote you, but I do disagree with your view.

A straightforward way to keep someone around after their four-year vesting clock expires is to grant them new shares on a new vesting schedule.

Their initial grant was part of compensation that reflected their probable value contribution to the company over the four-year vesting cycle. If the company would accrue additional value by their continuing to work beyond four years, it should compensate them for that additional value with more equity.

And it's not adequate to say their work will increase the value of their already-vested equity. Dilution happens.

Also, it's not true that the two employees receive the same compensation. The one who departs receives six years less (salary, bonus, benefits, etc.) than the one who continues for ten years.

Re: The Lack of Options for Startup Employees’ Options

#83

Post by ropiku »

xiphias wrote: post #7
tn13 wrote: post #5

Earlier quoted context omitted.

I really don't understand why employers don't allow the employees to exercise the options right in the beginning when the value is much much lower.

I really don't understand why good employees work in startups instead of going to an IPO-ed company. Most of the time in the current climate they are worse off.

If you are talking just about $ then totally but there's more than just money. Big companies have bureaucracy, corporate politics, etc.

Re: The Lack of Options for Startup Employees’ Options

#85

Post by jbapple »

andrewvc wrote: post #15

Christ, I can't seriously believe this argument. As I understand it, the author believes that employees who have earned their options but can't afford to exercise them are a problem? Such arrogance, A16Z should really have thought twice about what such a blatantly anti-employee piece would do to their reputation. The gall of them to insinuate that this is a good thing because the true believers get paid for their wor…

> A16Z should really have thought twice about what such a blatantly anti-employee piece would do to their reputation.

Does A16Z care about their reputation among the laboring class, or only among the ownership class?

Re: The Lack of Options for Startup Employees’ Options

#86

Post by abalone »

> Fundamentally, we are here because companies are choosing to stay private significantly longer than the time period for which the four-year option vesting program was originally invented... Matching vesting more closely to the IPO time frame for companies [6-8 years] makes logical sense...

It would be more logical to stick with four years and let employees participate in the huge "private IPO" rounds. This would provide liquidity in roughly the same timeframe as before. Companies are not staying private longer because they need more time to mature, they're doing it because the private markets are favorable. So treat those like the IPO surrogates they are and let employees sell options.

(Note, this would have none of the cap table messiness of secondary sales.)

Re: The Lack of Options for Startup Employees’ Options

#87

Post by wp1 »

acslater00 wrote: post #66

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 no…

A reasonable argument for a 90-day exercise window could have been: employees are told upfront that they need to remain with the company through a liquidity event for their options to be worth anything. The incentive to stay is both transparent and explicit. And aligns everyone's incentives, e.g. long-tenured employees perform better, making the startup's equity worth more, enriching the employee who stayed through the IPO.

The arguments in this article however were wholly incoherent.

Re: The Lack of Options for Startup Employees’ Options

#88

Post by holman »

mahyarm wrote: post #57

Management should not do this because it makes it harder to hire at all stages of the company until it's liquid. And founders know how fucking hard it's to hire in general. If you fuck over early employees, what prevents you from fucking over later employees? And imagine trying to do something equivalent to investors. How easy will it be to get funding then? If I'm an early employee trying to join, will you fuck me o…

> The very public example of zach holman and other articles creates chilling effects on startup hiring.

fwiw, this post has really bothered me a lot too. I keep track of companies with >90 day windows, and I just added a note about a16z portfolio companies on it: https://github.com/holman/extended-exercise-windows#vcs

This may be good for a16z's bottom line, but I think it's important for those of us actually doing the work that we talk about how this has that chilling effect on hiring. We're still early in the process — not many startup workers really understand this yet — but I think we're moving in the right direction.

Re: The Lack of Options for Startup Employees’ Options

#89

Post by jsprogrammer »

velominati wrote: post #16

This article states that former employees are "lining their pockets" at the expense of current employees who are "build[ing] future shareholder value" (i.e. creating value for VCs). But it ignores the fact that those former employees already built shareholder value when they were working. And by joining early on they took a much larger risk than employees who sign on during the growth stage - often receiving less sal…

Perhaps what is needed are sunset clauses on investor/non-labor shares?

The riders-on should be shed while those who did the actual work get to enjoy their profits, no?

Re: The Lack of Options for Startup Employees’ Options

#90

Post by a_small_island »

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…

This methodology isn't sound because of IRS treatment, I'm not an expert but I have these links bookmarked [0],[1]

From [0]: "I typically discourage companies from allowing option exercises by means of a promissory note. Promissory notes can provide employees a means of exercising options and starting their capital gains holding periods without coming up with cash. However, the promissory notes must be substantially full recourse to start the capital gains holding period, which creates a real obligation for the employee even if the stock eventually becomes worthless. A bankruptcy trustee might attempt to collect on a full recourse note in the event the company goes bankrupt. Full recourse means that the note is a general obligation of the employee, as opposed to recourse being limited to the stock purchased in the event of default."

[0]https://www.proformative.com/questions/exercise-stock-option... [1]http://www.jebachelder.com/articles/010321.html

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