Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

Stock options are complicated

benkuhn.net

Post reply on HN
Print view View original

61–70 of 132 posts

Re: Stock options are complicated

#61

Post by xt00 »

danpalmer wrote: post #40
xt00 wrote: post #16

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…

> I honestly think the 90 day exercise is totally ludicrous in the startup world. I think that should be a major negotiation point with anybody who is joining a startup. They should just insist on it no matter what. Unfortunately, while the number of options, salary, holiday, etc are relatively easy for a company to change, I think changing the contracts around exercising for a single employee is a change large and c…

Yea I'll have to find some term sheets laying around, but I can't remember seeing the 90 day exercise being explicitly written into most term sheets. I only have seen it written into people's offer letters. Does anybody know where that language would be written actually otherwise? Some sort of bylaws or something -- seems like that could be relatively easily changed to read something like "exercise period of employee stock options is 90 days after termination of employment unless otherwise stated in employee offer letter and should not be greater than 10 years."

Re: Stock options are complicated

#62

Post by CalChris »

xt00 wrote: post #16

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…

Wise advice but if the distinction between preferred+common is a real difference, then don't take the stock. Hella don't take the stock.

Re: Stock options are complicated

#63

Post by freddyc »

zenlikethat wrote: post #56
ThrustVectoring wrote: post #51

Earlier quoted context omitted.

"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'…

>I'd expect that in most high-growth companies the impact of individual contributors quickly gets washed away after they leave

I'd argue it's the opposite. Early employees often have an outsized impact on the trajectory of a company and get it to a point where additional hiring is possible. Future generations of workers tend to iterate on the existing (unless there's a significant pivot) and come on board in a more de-risked situation often with salaries much closer to market.

Most start-ups also present equity as a form of compensation for work performed (trading cash for illiquid options). To take away that earned and vested compensation component because an employee doesn't have the money to exercise within the 90 day is not only arbitrarily absurd but also grossly unfair in my opinion.

Re: Stock options are complicated

#64

Post by zenlikethat »

pcmaffey wrote: post #60
zenlikethat wrote: post #42

Earlier quoted context omitted.

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.

Because the investors' cash is the thing that enables high growth companies to survive and be, well, high growth (who do you think pays said employees' salaries?). Not saying they don't often make out much better than employees, but no one forces you to accept a term sheet you don't want to, and you should understand the implications of the equity you're getting walking in.

Re: Stock options are complicated

#65

Post by LouisSayers »

hkmurakami wrote: post #55
LouisSayers wrote: post #43

Earlier quoted context omitted.

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"?

on 2) I think if investors are rewarded for the risk they take, then other stock holders should also be rewarded for the opportunity cost they've sacrificed. So specifically, in terms of 'a similar deal' I'm talking about tax incentives.

At the very least, I think tax shouldn't apply until you cash out - this just makes sense.

Perhaps the system could also offer a tax incentive for lower returns for non-investor shareholders to recognise sacrificed opportunity cost as well.

Re: Stock options are complicated

#66

Post by zenlikethat »

freddyc wrote: post #63
zenlikethat wrote: post #56

Earlier quoted context omitted.

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'…

> I'd expect that in most high-growth companies the impact of individual contributors quickly gets washed away after they leave I'd argue it's the opposite. Early employees often have an outsized impact on the trajectory of a company and get it to a point where additional hiring is possible. Future generations of workers tend to iterate on the existing (unless there's a significant pivot) and come on board in a more…

> Early employees often have an outsized impact on the trajectory of a company

Mmm... I think we'll have to agree to disagree there... Seems to me that the bulk of the work adding value in a company, even if it's "just maintenance", is in the marathon and not the sprint. The initial engineers who contributed to Google Search no doubt contributed value but it's the folks who kept it going strong (and changing for the better) for many years afterwards that are the real company heroes.

And if someone is really such a special snowflake, I don't see why they'd bother working for someone else instead of founding their own company. If they expect to get paid proportionally that is.

> get it to a point where additional hiring is possible

Usually investors do this by injecting cash, at least in your traditional high growth "startup".

> To take away that earned and vested compensation ... is ... grossly unfair

How is it unfair if the employee agrees to the terms walking in?

If Joe Vendor down the street sells something to you at a loss, do you feel bad about buying it anyway? Likely not, since he happily signed it over to you for a reduced price.

Re: Stock options are complicated

#67

Post by zenlikethat »

ThrustVectoring wrote: post #59
zenlikethat wrote: post #56

Earlier quoted context omitted.

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.

> the ethical thing to do is to offer better cash compensations and less equity

That's one of my main points: Employees have the power to refuse employers that offer equity in lieu of fair salary. But my experience has been that people keep falling for the equity carrot again and again, and as long as they keep falling for it, employers will keep doing it.

Re: Stock options are complicated

#68

Post by zenlikethat »

CalChris wrote: post #62
xt00 wrote: post #16

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…

Wise advice but if the distinction between preferred+common is a real difference, then don't take the stock. Hella don't take the stock.

Curious about this, what "distinction" are you referring to here exactly? My understand is that the whole point of preferred vs. common shares is that there's a distinction: preferred shares get, well, preference in a liquidity event. This ensures investors recoup their losses if things go awry.

Re: Stock options are complicated

#69

Post by freddyc »

xt00 wrote: post #61
danpalmer wrote: post #40

Earlier quoted context omitted.

> I honestly think the 90 day exercise is totally ludicrous in the startup world. I think that should be a major negotiation point with anybody who is joining a startup. They should just insist on it no matter what. Unfortunately, while the number of options, salary, holiday, etc are relatively easy for a company to change, I think changing the contracts around exercising for a single employee is a change large and c…

Yea I'll have to find some term sheets laying around, but I can't remember seeing the 90 day exercise being explicitly written into most term sheets. I only have seen it written into people's offer letters. Does anybody know where that language would be written actually otherwise? Some sort of bylaws or something -- seems like that could be relatively easily changed to read something like "exercise period of employee…

It's usually in the underlying option plan I believe. I think the challenge with changing the 90 day window is that you run the risk of the option not qualifying as an ISO. If that's the case, it would instead be classified as a non-qualified stock option and the holder would lose the capital gains benefits and be subject to ordinary income tax (IANAL though, so could be way off base).

Re: Stock options are complicated

#70

Post by st3v3r »

zenlikethat wrote: post #57
pinot wrote: post #41

Earlier quoted context omitted.

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.

"Other people's work" that builds on their work, too.
Post reply on HN