At this point, anybody offering those terms is well-aware it's not in the employee's best interest. And they don't give a shit. I agree, 90 days is totally ridiculous.
A 90-day window might be better for you if you want to stick around at a company for a while and there were other people that came before you, but left. "Dead equity" of startup employees who have left but not exercised means that they can let you do all of the work while they dilute the available equity pool (i.e., take money directly out of your pocket). This a16z article goes into this: http://a16z.com/2016/06/23/…
"Dead Equity" has some advantages as well. You align the long-term incentives of the company with those of employees who are moving on earlier. If you know that you'll never have to deal with a scaling issue, why would you spend the effort dealing with it? Getting employees invested in long-term outcomes helps with principle-agent problems like this, which can help company performance more than the cost of "Dead Equity".
After working at 4 different startups over the past 10 years I can tell you with a very high certainty that the only people who will make much $$$ from options are founders and investors. Early Employees generally are shafted. Don't think your 20-200 basis points will be worth anything at the end of it. Make a decent salary and avoid companies that work you to death. Take it as a learning experience and look at the o…
Do you have voice and power in future negotiations about the direction and equity breakdown of the company? If so, the promises are worth something. If not, they likely are only worth enough to convince you to not sue about it, because that's what the actual incentives are in future capital negotiations.
Stock options are not complicated. Most people who look into the details of them will find them very plain and actually quite simple. The issue is you don't often deal with this area of finance so it looks foreign until you spend some time looking into the terms. Your options are a contract between you and the company for you to buy shares at a given price. If the value of the shares is worth more then you pay, the d…
> If the value of the shares is worth more then you pay, the difference is income.
This turns out to be true, but I think it overlooks hidden complexity.
1) You'll find a bunch of stuff online that says you don't have to pay tax on that difference if you're getting ISOs. Options newbies who believe that ISOs have no tax burden, newbies who don't know that AMT is a thing, are going to have a bad time.
2) Since AMT is a thing, it's difficult ("complex") to use options safely, if only in the sense that it requires making a prediction about the future. Exercise early and you could lose your investment if the company fails. Exercise late but pre-IPO and you can find yourself in huge trouble, on the hook for hundreds of thousands in taxes with no way to sell your stock to pay your taxes. If you exercise post-IPO and sell on day one and you'll more tax than you would if you hold for a year. Making the right choice here can be difficult.
In my experience most people at startups who leave end up not exercising their options due to the cost of exercising them coupled with the fact that they may be underpaid due to the assumption that their options may end up quite valuable. So basically they pay somebody 90k/year then give them ~20k/year in options. Then they quit after 2 years and have 90 days to buy like 50k worth of stock at the strike price they we…
Our perspective depends on the relative value/scarcity of capital. If capital is scarce and valuable, it makes sense for a system to be designed to reward and protect capital risk. But the "standard terms" haven't changed much since the 80's and capital is definitely more abundant today than it was before. Valuations for early companies are ~10x what they used to be decades ago. Founders give up a fraction of ownersh…
There are two different things going on here though - one is whether we offer incentives for investors. The other is how the tax system works when people receive options / equity. The problem with 'receiving' equity is that 1) Current laws treat equity as if it was cash - but it's not. 2) Whether employees should be compensated and recognised for their potential opportunity costs - essentially given a similar deal to…
I definitely think (1) is in need of reform.
Could you elaborate on (2) on what you mean by "given a similar deal to investors"?
A 90-day window might be better for you if you want to stick around at a company for a while and there were other people that came before you, but left. "Dead equity" of startup employees who have left but not exercised means that they can let you do all of the work while they dilute the available equity pool (i.e., take money directly out of your pocket). This a16z article goes into this: http://a16z.com/2016/06/23/…
"Dead Equity" has some advantages as well. You align the long-term incentives of the company with those of employees who are moving on earlier. If you know that you'll never have to deal with a scaling issue, why would you spend the effort dealing with it? Getting employees invested in long-term outcomes helps with principle-agent problems like this, which can help company performance more than the cost of "Dead Equi…
I see your point but don't really agree with your argument -- in my experience engineers who consciously know what a good or a bad engineering decision for the future is will make the good decisions regardless -- it's the terrible engineers who don't know any better you need to worry about.
In either case, given an extended exercise window both are sitting around collecting value indefinitely after leaving. They don't need to contribute anything to the next "generation" of work but they still collect the rewards. I'd expect that in most high-growth companies the impact of individual contributors quickly gets washed away after they leave.
In my experience most people at startups who leave end up not exercising their options due to the cost of exercising them coupled with the fact that they may be underpaid due to the assumption that their options may end up quite valuable. So basically they pay somebody 90k/year then give them ~20k/year in options. Then they quit after 2 years and have 90 days to buy like 50k worth of stock at the strike price they we…
Not to mention $90k person is likely leaving because they have low faith in the company in the first place.
Just playing devil's advocate here: So they are leaving because they have low faith in the company, but still expect to be able to collect rewards on other peoples' work years later if the company happens to succeed?
If they didn't have a high degree of confidence in the company, the safe bet would always be to not exercise.
At this point, anybody offering those terms is well-aware it's not in the employee's best interest. And they don't give a shit. I agree, 90 days is totally ridiculous.
A 90-day window might be better for you if you want to stick around at a company for a while and there were other people that came before you, but left. "Dead equity" of startup employees who have left but not exercised means that they can let you do all of the work while they dilute the available equity pool (i.e., take money directly out of your pocket). This a16z article goes into this: http://a16z.com/2016/06/23/…
Good point. My thought is that to compensate the people who stick around you have to combine two things: 1) vesting period (already happening for virtually everybody), and 2) a predefined plan to give people increasing amount of options for staying longer. So basically get 20k options in year 1, 30k options in year 2, 50 options in year 3, 70k options in year 4, or something like that.. so if you leave after 1 year and have the 10 year vesting period, you end up missing out on multiple option granting periods. The dead equity often is a small portion of around 10-15% of total equity in the company. So assuming that there are maybe 5 employees floating out there in the wild with this "dead equity", they probably are comprising a tiny portion of the equity in the company -- most likely around 1% of the company equity max. If that 1% of dead equity is having any kind of real effect on the companies day to day situation or ability to raise funding, I would be thinking the company is in some serious shit.. Yea definitely agree with the IRS trying to fix this. Think of it this way, in one case the founders get a ton of money during the IPO event. They have tons of resources and time to figure out how to avoid paying as much taxes as possible. Versus if you have a ton of people who now get relatively large payouts of stock options worth say 300k or so, those people will likely end up paying 20-30% tax or more on that since they have less ways they can try to reclassify the capital gains -- and maybe will just opt to sell everything short term and pay maximum capital gains. But the rich guy who just did the IPO is like, "eh, I already got like 10 million in the bank, so lets see.. if I just say that my stock is worth 0.1 cents per share, then put into my Roth IRA, then I can cash it out in 20 years with a 1 million X gain with no taxes.."
"Dead Equity" has some advantages as well. You align the long-term incentives of the company with those of employees who are moving on earlier. If you know that you'll never have to deal with a scaling issue, why would you spend the effort dealing with it? Getting employees invested in long-term outcomes helps with principle-agent problems like this, which can help company performance more than the cost of "Dead Equi…
I see your point but don't really agree with your argument -- in my experience engineers who consciously know what a good or a bad engineering decision for the future is will make the good decisions regardless -- it's the terrible engineers who don't know any better you need to worry about. In either case, given an extended exercise window both are sitting around collecting value indefinitely after leaving. They don'…
If you think that former early employees don't contribute to future "generations" of work, then the ethical thing to do is to offer better cash compensations and less equity. It's not really ethical to offer equity compensation that looks like it could be valuable but has significant hidden barriers to actually being used.
At this point, anybody offering those terms is well-aware it's not in the employee's best interest. And they don't give a shit. I agree, 90 days is totally ridiculous.
A 90-day window might be better for you if you want to stick around at a company for a while and there were other people that came before you, but left. "Dead equity" of startup employees who have left but not exercised means that they can let you do all of the work while they dilute the available equity pool (i.e., take money directly out of your pocket). This a16z article goes into this: http://a16z.com/2016/06/23/…
"Dead equity" could also be used in reference to most of a company's investors.
That is of course, tongue in cheek. Why should employees have their investment of time and energy taken away from them when investors' one-time cash investment earns preference? Another industry double-standard.