Who pays when startup employees keep their equity? • Hacker News Board

Re: Who pays when startup employees keep their equity?

#21

Post by chris11 » Tue, Jul 05, 2016, 5:50 PM UTC

buttershakes wrote: post #11

jusben1369 wrote: post #4

Earlier quoted context omitted.

Quick question. Do you work for a startup now with options? Or, have you in the past? I'm trying to work out if people who object to options would ever join startups. Or, if they're appetite for risk is too small to be a potential candidate.

I have started multiple startups, and joined others at various times. I've also professionally traded options. I have a huge appetite for risk, but the risk/reward isn't there for most early employees who are getting paid less cash in exchange for options. You just can't take them at face value. I would say many early stage employees aren't taking appreciably less risk than the founders themselves, but at a fraction…

How successful have you been in negotiating your options? Have you negotiated significantly more options/money or different terms?

Re: Who pays when startup employees keep their equity?

#22

Post by hodgesrm » Tue, Jul 05, 2016, 5:53 PM UTC

spullara wrote: post #6

I can imagine that there would be other consequences to the change. For example, I could see anyone on the edge around their 1 year vesting cliff would be fired to avoid parting with their equity. It would probably also push down the amount of equity offered because of the increase in value. Further, some companies are already doing this, vesting could be back loaded with the majority vesting in the later years.

Firing people to avoid paying them can get you into serious legal trouble. Good discussion on https://news.ycombinator.com/item?id=3962292.

Re: Who pays when startup employees keep their equity?

#23

Post by buttershakes » Tue, Jul 05, 2016, 5:58 PM UTC

chris11 wrote: post #21

buttershakes wrote: post #11

Earlier quoted context omitted.

I have started multiple startups, and joined others at various times. I've also professionally traded options. I have a huge appetite for risk, but the risk/reward isn't there for most early employees who are getting paid less cash in exchange for options. You just can't take them at face value. I would say many early stage employees aren't taking appreciably less risk than the founders themselves, but at a fraction…

How successful have you been in negotiating your options? Have you negotiated significantly more options/money or different terms?

I've been fairly successful at it. Most companies are willing to put up with some negotiation. I've gotten a lawyer to go over the options agreements on more than one occasion, usually money well spent if you don't understand all of the contract intricacies. I think how much people are willing to put up with is directly proportional to how valuable you would be to the company, your skill set, experience etc. If you are easily fungible or at least the perception is that you are than your ability to negotiate some of the finer points will suffer.

I think most early stage employees, especially ones who are ultimately going to be injecting the IP of the company on which it's future value will be based should be very aggressive about options and salary packages. Having seen both the bad and the good, I definitely gravitate towards being cautious when getting startup offers. I also think we need to educate people more about this. I recently asked a potential employer about the strike price, and he said I was the first person to ask that question. I think that says a lot about how weak the understanding of early employees is.

Re: Who pays when startup employees keep their equity?

#24

Post by delphinius81 » Tue, Jul 05, 2016, 5:58 PM UTC

spullara wrote: post #6

I can imagine that there would be other consequences to the change. For example, I could see anyone on the edge around their 1 year vesting cliff would be fired to avoid parting with their equity. It would probably also push down the amount of equity offered because of the increase in value. Further, some companies are already doing this, vesting could be back loaded with the majority vesting in the later years.

There are companies that already let people go before their 1 year cliff (or do other types of restructuring that results in the vesting period to reset).

However, I think it would be appropriate to give fewer options as a consequence of this change, since the options would be a more realistic part of the compensation package when you have a longer-period of time to determine if you want to exercise them.

I could definitely see the 1 year cliff going away too, else you'd have people collecting 25% of their options at various places and moving on to other companies each year. Eventually one of those companies will do well and your "work" investment will pay off. You can do shotgun investing with your employee options.

But a lot of this misses the point that your company's growth is entirely reliant on a productive employee base. If you back load vesting or start firing people right before their cliff, or do any other practices such as this, why would anyone choose to work for you?

Re: Who pays when startup employees keep their equity?

#25

Post by vidarh » Tue, Jul 05, 2016, 5:59 PM UTC

jusben1369 wrote: post #4

buttershakes wrote: post #2

This is very interesting. Options are really an unappealing mechanism to incentivize employees. I feel like they prey on people who really don't know any better, and don't understand the tax implications or the possibilities around future dilution. As a rule of thumb I discount face value of options by as much as 70%, that generally doesn't go over very well with people trying to convince you to accept them in lieu o…

Quick question. Do you work for a startup now with options? Or, have you in the past? I'm trying to work out if people who object to options would ever join startups. Or, if they're appetite for risk is too small to be a potential candidate.

I have, several times, and I generally treat them as pretty much lottery tickets. That is: I expect at least market rate, often above in order to compensate for risk, and the options are an extra bonus if you're lucky. This is achievable. It's mostly younger people that "buy" the story of how you're going to get rich off the options so you should accept a lower salary. I did that too, a couple of times, before I "accidentally" learned that this is not an issue. Either you're important enough that they'll stretch, or you're in a junior enough position that the options allocation will be tiny anyway, in which case you're better off in a more stable company.

But the options I've made the most money on was ironically from the only post-IPO company I've worked for (and where I joined years after the IPO), rather than the startups where I've had shares that have at some point or other had a paper-value magnitudes higher.

And the reason I did well there was that they clearly didn't value their options very highly - they threw a large options allocation after me to get me to accept a lower salary than I asked for for the first 6 months for political reasons (it would have put my salary above the salary of one of the higher ranked people who had to sign off on the hire, and they clearly didn't think that'd go down very well... so instead HR quietly promised me a "review" after 6 months and bumped up then).

Re: Who pays when startup employees keep their equity?

#26

Post by timcederman » Tue, Jul 05, 2016, 5:59 PM UTC

There is a downside to RSUs. Say you work for a private company with a high valuation, e.g. AirBnB at $25B, and you are granted 0.01% equity over 4 years. That means you are vesting $2.5m of RSUs over 4 years, and these RSUs are taxable at that amount. Typically for folks earning over $150k/year in base salary, particularly if married, even half as much will put you into AMT territory, and you will end up paying a significant chunk of cash each year in taxes (even if RSUs are withheld for taxes, because the withholding cannot account for things like AMT).

Options with extremely long exercise windows helps obviate this tax burden and allows the employee to decide when/if to improve their tax position by exercising ahead of a liquidity event.

Re: Who pays when startup employees keep their equity?

#27

Post by superuser2 » Tue, Jul 05, 2016, 6:04 PM UTC

ktothemc wrote: post #17

Wouldn't RSUs open employees to a different and more punitive tax regime (income tax) than options (which would fall under capital gains if you exercised early enough)?

I believe if you hold your RSU-granted stock for 1 year, you can pay capital gains tax on it instead.

I'm not a CPA.

Re: Who pays when startup employees keep their equity?

#28

Post by dasil003 » Tue, Jul 05, 2016, 6:04 PM UTC

gringofyx wrote: post #5

Either way it's a losing game, consider a company like Google - how would they attract new employees on either scheme given that the company has been around for 15+ years? The only people who win are those who get in early, or invest big. Any IPO ultimately results in people earning money who don't "work" for that money - that means the actual workers lose out everytime.

So getting paid way above market and working at a place where software engineering talent is highly respected and valued is "losing out"?

I'm sorry but this entitled attitude just grates at me. If you are in SV getting paid 3-5 times the median household income you already are in the 1% and you already have all the advantages in terms of upward mobility. If you want to earn millions go out and start your own company, it is ridiculous to demand a high salary and a high equity payout. You are not entitled to anything except what you can negotiate.

There is nothing inherent in software engineering that makes it worth $100k minimum per head, it is only worth that much if it supports a business that can earn that much. The fact that SV is one of the bright spots in the economy of the last decade has really started to go to software engineers heads. If you believe you are worth more than what you are being offered, the only way to prove it is to go out and build a business yourself. You can't look at the 1% of the 1% who got a lucky windfall from being in the right place at the right time, and use that as your baseline for "fairness". Try facing the economic struggles that 50% of the country is dealing with, and then tell me how bad Google is screwing its employees.

Re: Who pays when startup employees keep their equity?

#29

Post by Joeri » Tue, Jul 05, 2016, 6:06 PM UTC

jusben1369 wrote: post #4

buttershakes wrote: post #2

This is very interesting. Options are really an unappealing mechanism to incentivize employees. I feel like they prey on people who really don't know any better, and don't understand the tax implications or the possibilities around future dilution. As a rule of thumb I discount face value of options by as much as 70%, that generally doesn't go over very well with people trying to convince you to accept them in lieu o…

Quick question. Do you work for a startup now with options? Or, have you in the past? I'm trying to work out if people who object to options would ever join startups. Or, if they're appetite for risk is too small to be a potential candidate.

Let me flip that question. Is risk a positive quality for a startup employee? After all, the startup is already taking a risk in terms of its product/market fit, so it should not be taking risks in terms of technology or internal processes, and hiring employees who like risk means they will make professional choices that involve risk even in situations where they shouldn't.

Re: Who pays when startup employees keep their equity?

#30

Post by codeonfire » Tue, Jul 05, 2016, 6:07 PM UTC

iaw wrote: post #8

codeonfire wrote: post #7

Is the presumption that founders and investors are not trying to screw employees? I genuinely can't tell from the article. I thought it's just common knowledge that they will try to screw employees at every chance. With options it was different strike prices for management/ founders vs employees. With RSU's it is weird vesting schedules and forcing forfeiture situations.

This comment isn't very productive. Some high-level valley participants are definitely bad actors but the bulk of them are just normal people in positions of power.

Normal people that like money. If this article is about how equity compensation can be improved, then that is a fairly messed up world view and kind of insulting. Employee equity compensation is always designed to explode or have no value. Workers are sick of the schemes. Just pay cash. Companies don't want to and never will improve equity compensation. A better solution would be a law that requires a cash value of granted options or RSU's to be reported to workers which would require a look at sale-ability, strike price, volality, expected employee turnover, etc.