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10-Year Exercise Periods Make Sense

dangelo.quora.com

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Re: 10-Year Exercise Periods Make Sense

#41

Post by nedwin »

jeffdavis wrote: post #39

Founders are committed and in for the long haul, and either make a lot of money or none. Startup employees make less money on a nice exit, but aren't as committed and can work for a few companies (maybe 2 years each) to improve their odds. So having 10 years to exercise makes a lot of sense for the second group. Forcing the employees to stay until liquidation makes zero sense for the second group. So you need to give…

Forcing employees to stay until liquidation isn't in the founders interest either.

You retain employees who might have been great from the zero to 50 stage but not as well suited in the 50 - 5000 stage. But their incentive is to stick around or give up potentially millions in equity that they busted their asses to earn.

Checked out employees aren't doing anyone any favors. You might say you can fire the person or put them on a performance improvement plan but this is easier said than done - especially if it was a key early hire.

I've seen this in many SF-based companies.

Re: 10-Year Exercise Periods Make Sense

#42

Post by mahyarm »

jeffdavis wrote: post #39

Founders are committed and in for the long haul, and either make a lot of money or none. Startup employees make less money on a nice exit, but aren't as committed and can work for a few companies (maybe 2 years each) to improve their odds. So having 10 years to exercise makes a lot of sense for the second group. Forcing the employees to stay until liquidation makes zero sense for the second group. So you need to give…

Founders are committed, but usually have better cash out options than employees do in the middle of the process. There are founders get millions of dollars during later funding rounds to incentivize them to not take early buy out options by investors.

They also have no AMT worries, get long term capital gains taxation, have less restrictions on their stock and better access to investors who would like to buy a portion of their stock.

The reason why it's not as well known is they tend not to tell anyone, including their own employees, that they cashed out a little bit.

Re: 10-Year Exercise Periods Make Sense

#43

Post by ska »

erichurkman wrote: post #34
omgitstom wrote: post #21

Earlier quoted context omitted.

It isn't about the vesting periods, it is about the exercise period. Vesting periods are fine in most cases. The exercise period is usually 90 days, if you leave a company. What happens a lot is there is no liquidation event for years meaning that an employee with shares needs to make a decision fast to convert or lose their shares (which they earned) and that cost $$$. I've seen time and time again, where people get…

It's even worse when you consider AMT; sure, dropping $10k to buy your stock might be achievable, but if the FMV of those shares has gone up appreciable, you may find yourself in pain come tax day. (If your strike was $1/share, but the FMV is now $10/share, $9/share "gain" has to be considered as income for calculating your alternative minimum tax.)

The tax burden is the primary problem, that is what all this discussion is really about.

Re: 10-Year Exercise Periods Make Sense

#44

Post by mahyarm »

american158931 wrote: post #5
sama wrote: 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…

Now? Go shop around ESO fund, snow ventures, standard VCs, angels, etc and ask them to make a deal to help buy out your stock. If they say no, maybe your company isn't doing as well as you think it is or your company is too small.

Usually these founders give you the standard 90 day agreement and are not Uber-level aggressive in trying to prevent these kinds of deals.

Later? Don't work for those companies or do the math. If you get RSUs then it's somewhat equivalent to getting those 10 year options anyway.

Re: 10-Year Exercise Periods Make Sense

#45

Post by jdoliner »

> There is no concern for how many shares we granted in the past to other employees or whether or not they are still holding them; the only concern is the current market... it would be irrational not to increase the option pool if that’s what was needed to be able to hire someone.

This is the part of this post that I can't believe is true. At the end of the day a company only has so much equity. How can the amount you've given out be of no concern in issuing stock to new employees? Isn't that tantamount to saying equity isn't scarce? When does the amount you've given out become of concern and in what context? If the answer really is that the amount of equity you've already given out never becomes a concern to any aspect of your company then why would you ever limit the amount of equity you give to employees?

Re: 10-Year Exercise Periods Make Sense

#46

Post by mahyarm »

ska wrote: post #40

I think there is fundamental difference of opinion here, exposed by Adam's and A16Z's posts. A fairly typical early stage employee will forgo hundreds of thousands of dollars in salary over a vesting period, in exchange for options. The philosophical difference is here: At the end of that period, do you think of the shares as the employees, earned in exchange for both the work done in those years, and the hundreds of…

I'm starting to have the feeling that those very early employees are about equivalent to an angel investor, and they should be getting some sort of angel investor equivalent terms.

Otherwise once people really start realizing the negatives of being an early employee vs. founding your own startup it would be hard to hire otherwise.

Re: 10-Year Exercise Periods Make Sense

#47

Post by ska »

mahyarm wrote: post #46
ska wrote: post #40

I think there is fundamental difference of opinion here, exposed by Adam's and A16Z's posts. A fairly typical early stage employee will forgo hundreds of thousands of dollars in salary over a vesting period, in exchange for options. The philosophical difference is here: At the end of that period, do you think of the shares as the employees, earned in exchange for both the work done in those years, and the hundreds of…

I'm starting to have the feeling that those very early employees are about equivalent to an angel investor, and they should be getting some sort of angel investor equivalent terms. Otherwise once people really start realizing the negatives of being an early employee vs. founding your own startup it would be hard to hire otherwise.

One way to do this with very early employees is to avoid the whole mess by just giving stock.

Re: 10-Year Exercise Periods Make Sense

#48

Post by iambvk »

dasil003 wrote: post #29

Thank you for this Adam, as an early-stage startup guy who still hasn't made his FU money, this really nails all the salient points for me. Scott Kupor tries to decorate his article with references to employees' interests and considerations, but it's clear the guy has spent his career on the on the management/finance side where he doesn't really understand what it means to be a ground-level early-stage contributor to…

I completely agree with your assessment. I couldn't believe what I was reading and how A16Z even allowed such foolish article to be published on their website.

I would recommend everybody I know to stay away from Scott and may be, even A16Z.

Re: 10-Year Exercise Periods Make Sense

#49

Post by tarr11 »

sama wrote: 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.

The answer here is for you to convince VCs and other investors to support this, publicly, and tell founders that they won't be punished for this on future fundraising.

Hearing from A16Z that they don't support this is a big negative signal to any founder.

Re: 10-Year Exercise Periods Make Sense

#50

Post by danielweber »

jeffdavis wrote: post #39

Founders are committed and in for the long haul, and either make a lot of money or none. Startup employees make less money on a nice exit, but aren't as committed and can work for a few companies (maybe 2 years each) to improve their odds. So having 10 years to exercise makes a lot of sense for the second group. Forcing the employees to stay until liquidation makes zero sense for the second group. So you need to give…

If you aren't actively working for the company, and maybe even if you are, it's trivial for your options to end up diluted out to crap by any random funding event that might happen.

I raised this issue once at a company I was at and got the response that "they weren't helping move the company forward any more."

Assume your options are 0.

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