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10-Year Exercise Periods Make Sense

dangelo.quora.com

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Re: 10-Year Exercise Periods Make Sense

#51

Post by x0x0 »

ScottBurson wrote: post #38
american158931 wrote: post #5

Earlier quoted context omitted.

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…

Let's put it this way. When considering a job offer from a startup, people say, you should value the options component of the offer at $0. Well, people say that, but I think everybody knows that someone who wants to work at a startup isn't really going to take that advice. They may try to factor it in by somewhat reducing the importance they give the options, but if they're accepting a below-market salary, as most st…

Or at least discover what you're giving up by getting an offer that either gives equity that is better than a pipe dream (viz an unethical founder could fire you 1 day before ipo and you'd get jack) or a good salary. Then negotiate with that in hand.

Re: 10-Year Exercise Periods Make Sense

#52

Post by mahyarm »

bigbossman wrote: post #37

Have any companies implemented a sliding scale for the duration of the exercise period? 10 years makes sense for a super early stage startup, and 90 days is reasonable for public companies. I would think that some shorter windows can be implemented for companies at different growth stages -- perhaps by financing schedule, revenue size, expected time until exit, etc.

For public companies it doesn't matter because there is immediate liquidity to cover options. Their vesting periods are often even shorter at 6 months and they tend to not even bother with options and just give you stock units directly or have stock purchasing plans at below market rates.

Re: 10-Year Exercise Periods Make Sense

#53

Post by Retric »

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…

The real issue is 10 year vesting schedules increases your odds of success. Sure, it might have a tiny negative impact on your final returns but 'winning' is vastly more important than marginal gains on a win.

Re: 10-Year Exercise Periods Make Sense

#54

Post by skewart »

nedwin wrote: post #41
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…

I completely agree.

Very often the skill set needed for employees changes dramatically over the first several years of a startup's life. It's best for everyone if there is a highly liquid job market and employees can easily leave (or be let go) when they are no longer contributing at their max, but then easily find another place where they contribute more. It's a lot easier to let someone go if both parties know that the employee has been well compensated for the work and risk they took on. It's that much harder to fire someone when a consequence is that they will miss out on any equity.

I'm sure there are edge cases, but I can't see how, in the general case, tying people to companies for long amounts of time is good for anyone involved.

Re: 10-Year Exercise Periods Make Sense

#55

Post by x0x0 »

beat wrote: post #28
devit wrote: 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…

Firings in ways that reduce the options available to the fired employee are actually quite common practice. They just don't reduce it this much , which would have a lot of the obnoxious MBA types who take over middle-aged companies licking their chops. My spouse worked 13 years at what was a startup-with-traction when she started there. Last year, they were bought out (public-to-private by a hedge fund). A week later…

Or that the employees might have changing life circumstances any time in the 10-15 year future. Find a partner that changes your life needs around working life or living location, have a kid, need more or different housing, have medical issues, have family with medical issues, etc and you're sol.

ps -- a16z funded a company that, as an A round, refused to disclose outstanding shares to value my option grant and was already on the brute force 15% of comp is bonus that you don't get if you aren't there in early April every year retention ("bonus") plan. It may be unjustified, but with some other stories I'm not a liberty to disclose, they seem very employee unfriendly.

Re: 10-Year Exercise Periods Make Sense

#56

Post by danielweber »

argonaut wrote: post #32
mesozoic wrote: post #3

Wow I guess since employees should already value most stock options at near zero it's hard to value them any less.

Valuing stock options at zero is one of those HN memes that are repeated endlessly, mostly, I suspect, by people not from Silicon Valley who know few, if any, engineers who got rich from stock options. Just because stock options should be valued at less than a company's private valuation does not mean they are worth 0. Very few engineers actually value them at zero. Adding on to this comment: It's a spectrum, not a b…

It should be valued at 0 unless the company takes active steps to encourage you not to, which would include answering dozens of questions about vesting and dilution that they won't.

Re: 10-Year Exercise Periods Make Sense

#57

Post by x0x0 »

ska wrote: post #43
erichurkman wrote: post #34

Earlier quoted context omitted.

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.

I dunno, I had to pay nearly $15k to exercise options and while I barely escaped amt issues, the money wasn't easy. And represented a 10% rebate on after-tax salary for the period I worked for that company.

Re: 10-Year Exercise Periods Make Sense

#58

Post by tlrobinson »

From the A16Z post:

> This solves all of the issues: cash rich vs. poor; competitive offers; and the bad incentive problem (e.g., encouraging employees to quit to build their own diversified stock portfolios).

Says the VC whose business depends on a diversified stock portfolio.

A couple paragraphs above he admits that "median time-to-IPO for venture-backed companies is closer to 10 years". That's not a reasonable amount of time to expect employees to stay at a job, and seems like a recipe for burnout and/or "rest and vest".

Re: 10-Year Exercise Periods Make Sense

#59

Post by argonaut »

danielweber wrote: post #56
argonaut wrote: post #32

Earlier quoted context omitted.

Valuing stock options at zero is one of those HN memes that are repeated endlessly, mostly, I suspect, by people not from Silicon Valley who know few, if any, engineers who got rich from stock options. Just because stock options should be valued at less than a company's private valuation does not mean they are worth 0. Very few engineers actually value them at zero. Adding on to this comment: It's a spectrum, not a b…

It should be valued at 0 unless the company takes active steps to encourage you not to, which would include answering dozens of questions about vesting and dilution that they won't.

This makes no sense. Any vesting details will be detailed right in your contract. Dilution depends on the company's fundraising in the future, you are essentially asking them to bring out a crystal ball and tell you exactly what their IPO/fundraising plans are. It's up to you to estimate how much you think you will get diluted, based on the type of company and how much they've raised so far.

Re: 10-Year Exercise Periods Make Sense

#60

Post by danielweber »

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…

During salary negotiations, say "tell me why I should think my options are safe against dilution."
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