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10-Year Exercise Periods Make Sense

dangelo.quora.com

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Re: 10-Year Exercise Periods Make Sense

#11
post #8
post #4

I followed this link expecting to see a comment about some sort of "encoding" of the human body relating to long-but-not-indefinite period of physical exercise. Instead it's about stock options. As the article offered no background, I'm lost as to what is being discussed. In the last 20 years I've never had the same employer for 10 years, so can someone ELI5 what is being discussed? Thanks in advance!

They're talking about the amount of time you have after leaving a company to exercise the stock options that you were granted, effectively purchasing them at par value. This has huge tax implications, and requires quite a bit of cash on the spot. Traditionally, the period has been ~90 days, which makes it even harder to weigh your tax options and come up with the $$$$ to exercise the options. Since its expensive, and…

Great explanation.

Re: 10-Year Exercise Periods Make Sense

#12
>"He suggests paying 50% above market in stock, but including a clause that all employees must remain at the company until a liquidity event or else they cannot keep any stock at all (even if they could come up with the exercise cost)."

Curious to what feelings this invokes for startup employees (nonfounders, investors) on HN.

Re: 10-Year Exercise Periods Make Sense

#13
Isn't any vesting for non-founding employees completely broken?

If the employee loses the stock when he's fired early, then the company has a huge incentive in firing him a day before he vests, and thus he should regard the vesting compensation as nonexistent.

If the employee retains the stock when he's fired early, then he can just get himself fired to ignore the vesting period, making the vesting pointless.

It seems that vesting can only work if the employee is so essential that the company would never fire him because the company would then be highly likely to fail, which should only apply for founders in a functional company.

Re: 10-Year Exercise Periods Make Sense

#14
I agree with this, but what do you guys think about minimum service periods? Like requiring 2 or 3 years? Companies like Pinterest and Coinbase have added that condition.[1]

Greater portability could in theory lead to higher turnover even among happy employees. They might go on to found their own company sooner. They might see good financial sense in diversifying their options portfolio. Yet young companies need the team to stick together for a certain time. Especially very small startups at the YC stage -- turnover is very harmful.

Note: In Adam's example, nobody leaves the pre-IPO company in under 4 years of service.[2]

[1] https://github.com/holman/extended-exercise-windows

[2] "imagine a company takes 10 years to IPO. Employee A works at the company from years 0 to 4. Employee B works there from years 4 to 8. Employee C works there from years 8 to 10."

Re: 10-Year Exercise Periods Make Sense

#15
post #2

I agree with Adam's post and intensely disagree with A16Z's post on this topic. I don't think companies should take back stock compensation on a technicality. It'd be silly to even discuss taking back cash compensation when someone leaves a company! I appreciate Adam starting this trend years ago.

What's your opinion on how an employee should deal with a founder who clearly believes more in the A16Z stance on stock options more than the Adam's? Apart from obvious knee-jerk reactions like "stop working there." Obviously it's in the founder's financial best interest (at least on the very surface level) for employees to not have the option to leave the company with shares at all. It is just lost money, from their…

I don't think you can do anything here once a culture's already been set. I also think that repeatedly pestering execs to ask about their efforts on this (as I've done at my current company every few weeks for the last 6 months) makes them think you're about to jump ship and want "free money", so watch out :)

Re: 10-Year Exercise Periods Make Sense

#16
post #2

I agree with Adam's post and intensely disagree with A16Z's post on this topic. I don't think companies should take back stock compensation on a technicality. It'd be silly to even discuss taking back cash compensation when someone leaves a company! I appreciate Adam starting this trend years ago.

What's your opinion on how an employee should deal with a founder who clearly believes more in the A16Z stance on stock options more than the Adam's? Apart from obvious knee-jerk reactions like "stop working there." Obviously it's in the founder's financial best interest (at least on the very surface level) for employees to not have the option to leave the company with shares at all. It is just lost money, from their…

"What's your opinion on how an employee should deal with a founder who clearly believes more in the A16Z stance on stock options more than the Adam's?"

Value the options at zero and take appropriate steps.

It may not be the statistical expected result, but it is the modal outcome anyhow.

"Appropriate steps" isn't just "quit". If you're happy with the cash salary than you don't have a problem, for instance, or the experience, or the lifestyle, or any of the other reasons you may be choosing to work at a startup.

"Obviously it's in the founder's financial best interest (at least on the very surface level) for employees to not have the option to leave the company with shares at all."

Well, yeah, but that's sort of vacuous; it's not in the employer's best interest for employees to be compensated at all. But that makes hiring pretty challenging.

"What are some strategies an employee can use to make the point that Adam's perspective is a much more employee-friendly one and, thus, better for the company?"

There isn't a general answer to that question, because it depends on your status in the company. In some places, even opening that conversation will put you halfway out the door. In others, they'll fall over themselves to fix the problem if you just mention it, because they'll not have heard of this before. You need to judge the situation you're in, and play out the possible scenarios before you step in to something like this. But I'd suggest you're going to need a very solid position to change something this fundamental about a company.

Generic advice: It's always easier to negotiate from a fallback position of strength; unless you're absolutely confident in your position, consider having a job in hand before starting this talk. (You don't have to tell your employers that you have an offer in hand.)

Re: 10-Year Exercise Periods Make Sense

#17
post #14

I agree with this, but what do you guys think about minimum service periods? Like requiring 2 or 3 years? Companies like Pinterest and Coinbase have added that condition.[1] Greater portability could in theory lead to higher turnover even among happy employees. They might go on to found their own company sooner. They might see good financial sense in diversifying their options portfolio. Yet young companies need the…

Minimum service periods already basically exist, in the form of a vesting “cliff”. A typical vesting schedule has a 1-year cliff, meaning you don't really get any of your equity unless you work at the company for at least a year.

However, 2- or 3-year cliffs could make sense as an alternate way of promoting a long-term mentality.

Re: 10-Year Exercise Periods Make Sense

#18
post #14

I agree with this, but what do you guys think about minimum service periods? Like requiring 2 or 3 years? Companies like Pinterest and Coinbase have added that condition.[1] Greater portability could in theory lead to higher turnover even among happy employees. They might go on to found their own company sooner. They might see good financial sense in diversifying their options portfolio. Yet young companies need the…

At Quora we decided not to have a higher "minimum service period" aside from the standard 1 year cliff. The rationale is that the vesting cliff is what everyone is expecting as the minimum. If a company wants to have a higher period before someone can leave and retain their stock, they should just increase the cliff to that length of time to make it fully transparent.

Re: 10-Year Exercise Periods Make Sense

#19
post #13

Isn't any vesting for non-founding employees completely broken? If the employee loses the stock when he's fired early, then the company has a huge incentive in firing him a day before he vests, and thus he should regard the vesting compensation as nonexistent. If the employee retains the stock when he's fired early, then he can just get himself fired to ignore the vesting period, making the vesting pointless. It seem…

I'm not sure I agree that "the company has a huge incentive in firing him a day before he vests." First of all, the direct and indirect costs of hiring a replacement can be massive, and potentially larger than the value of the stock that isn't vested. An employee doesn't have to be "essential" in order to be extremely valuable, especially early on. Second, a company could make a habit of firing employees right before they vest, and even if they managed to completely mitigate the damage internally as soon as word got out about this practice they would suddenly find it impossible to hire quality talent.
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