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10-Year Exercise Periods Make Sense

dangelo.quora.com

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Re: 10-Year Exercise Periods Make Sense

#81

Post by sulam »

ska wrote: post #47
mahyarm wrote: post #46

Earlier quoted context omitted.

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.

You'd still have to pay taxes on it as per your (audit-able) 409a valuation.

Re: 10-Year Exercise Periods Make Sense

#82

Post by argonaut »

aaronbrethorst wrote: post #80
argonaut wrote: post #74

Earlier quoted context omitted.

Yes, because you are ignoring the fact that most engineers that make money off stock options are doing so at well-established startups that haven't gone IPO yet. Companies like Airbnb, etc. 4 years ago, everyone knew Airbnb, Pinterest, etc., would be successful.

Kind of like how everyone knew Evernote would be successful four years ago? Or Gilt? Or Dropbox? Or Fab? Or Foursquare?

The only companies whose options are worth 0 (zero) in your example are Gilt and Fab.

Evernote and Foursquare are still around - your options are worth less than their private valuations if you joined 4 years ago, but they are not worth 0, even after dilution. Foursquare is still a $650M company. And only in some twisted world is Dropbox not a success. They're a friggin multi-billion dollar company even if they aren't a 50 billion dollar company (the horror).

I also didn't say you're going to have a 100% stock option hit rate for companies that are pre-IPO. You are still taking on risk. But your hit rate is going to be a lot higher.

It's also rather telling that these are among the worst examples of pre-IPO tech companies you can think of.

Re: 10-Year Exercise Periods Make Sense

#83

Post by argonaut »

jc4p wrote: post #64
argonaut wrote: post #59

Earlier quoted context omitted.

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.

I think one of the points Adam repeatedly mentions in the article is that a contract in itself isn't really transparent. I get exactly what you are saying, it makes logical sense from the perspective of someone who knows what's going on, but in all of these discussions my thoughts are on the young naive person signing up for a deal they don't fully understand. I think stock options should be valued at zero. In an a-w…

None of that justifies valuing them at zero. Even if those reasons were valid, those reasons would maybe justify taking the official private valuation and cutting it by 75%.

Re: 10-Year Exercise Periods Make Sense

#84

Post by rconti »

guelo wrote: post #61
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…

Would you estimate the percentage of Web 2.0 Silicon Valley engineers that have been able to cash out anything significant (let's say > 1 year market salary) at greater than .1%?

Yes. I'd say easily 3-5%.

Re: 10-Year Exercise Periods Make Sense

#85

Post by morgante »

Scott's post genuinely makes me angry. It uses subtle language to imply that employees are inferior individuals who are lucky that the owners of capital deign to share anything with them.

In Scott's worldview, choosing to leave a company before it has exited is inherently disloyal. Even if they're paying you under market. Even if you could contribute more value elsewhere.

I wonder if he would accept similar terms:

1. Reduce his salary at a16z to something minimal. (2. He only gets his carry in a company if he invests in every subsequent round. If they ever decline to follow-on, it's clearly a sign of "disloyalty" and they should forfeit all equity.

I agree with Adam that it's at least nice to see the owners of capital so nakedly betraying their worldview (diversification is all well and good for them, but employees owe infinite loyalty).

I will think long and hard before ever working for a company where Scott is on the board.

This part is particularly troubling:

> One existing solution to the “dead equity” problem has been — and still can be — to make exceptions where appropriate for certain exiting employees.

It's essentially an argument for cronyism. The people who most need equity extensions are those unlikely to have the connections and political savvy to get them. I strongly suspect such systems would work to further disadvantaged already disadvantaged groups.

Re: 10-Year Exercise Periods Make Sense

#87

Post by ryandrake »

rconti wrote: post #84
guelo wrote: post #61

Earlier quoted context omitted.

Would you estimate the percentage of Web 2.0 Silicon Valley engineers that have been able to cash out anything significant (let's say > 1 year market salary) at greater than .1%?

Yes. I'd say easily 3-5%.

Quite honestly that would shock me, but I wouldn't know where to get data about this. I always believed that only a microscopic fraction of tech workers actually made off with more than a year or so of salary from options (but those who did likely made out extraordinarily well). I would not expect a very flat distribution.

Re: 10-Year Exercise Periods Make Sense

#88

Post by morgante »

abalone wrote: 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…

I don't like the idea of minimum service periods.

If you want to require a minimum commitment from employees, just increase the cliff. For one thing, cliffs are well-understood.

My chief objection to minimum service periods (whereby you only have 90 days to exercise if you leave "early") is that they actively hurt disadvantaged groups. An upper middle class engineer often has resources or access to resources which will let them exercise options early. In contrast, a disadvantaged employee is unlikely to be able to come up with those funds—which is particularly problematic because they often are leaving to escape a hostile work environment.

At least cliffs apply equally to everyone, regardless of their resources.

Re: 10-Year Exercise Periods Make Sense

#89

Post by jammur »

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 and in for the long haul, and either make a lot of money or none.

This used to be true, but I don't believe it is any longer. It's become fairly common for founders to do secondary sales and cash out some of their equity early on. For example, the founders of Secret famously sold $6M of their stock 6 months after starting the company.

Sometimes employees have access to those sales, but in many cases they don't.

Re: 10-Year Exercise Periods Make Sense

#90

Post by zekevermillion »

morgante wrote: post #85

Scott's post genuinely makes me angry. It uses subtle language to imply that employees are inferior individuals who are lucky that the owners of capital deign to share anything with them. In Scott's worldview, choosing to leave a company before it has exited is inherently disloyal. Even if they're paying you under market. Even if you could contribute more value elsewhere. I wonder if he would accept similar terms: 1.…

Yes. We use options for equity comp b/c the grant is not a taxable event (if properly organized). It's not supposed to be a way to deprive terminated employees of their equity comp, which potentially is a large portion of the compensation of a venture-backed startup employee.
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