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Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

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Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#51

Post by andrewingram »

mlthoughts2018 wrote: post #32
guywhocodes wrote: post #17

Earlier quoted context omitted.

Personally for me it has always been faster personal growth from wider responsibilities. This makes a lot of sense in some stages of your career and your career goals but hardly for everyone.

I’ve never heard of any startups where you can obtain faster skill or personal growth. “Wear many hats” means you must be whatever type of firefighting janitor the company needs this week, which often causes skill atrophy not skill growth. Larger companies not only offer better compensation, but usually offer much better career development, responsibility growth, training and “learn by doing” opportunities. The start…

I think it's more that if you're already the kind of person well-suited to float to the top at a startup, that's what you'll get out of it. But a startup will rarely develop you into that kind of person.

My own experience with after 8 years at various London startups is one of career stagnation because (for various personal reasons) I don't have a personality that lets me thrive in these environments.

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#52

Post by johannes1234321 »

eternalban wrote: post #20
beagle3 wrote: post #11

Earlier quoted context omitted.

Note GP asked about revenue sharing, whereas you discuss profit sharing. That's not the same thing. Salespeople and sales partners are often compensated with a sales based commission, which is a revenue sharing scheme. It's common and expected, and practiced everywhere there's deal flow. Technical people can rarely prove "ownership" of revenue, so they can't leverage that in negotiation and are left with "general" ow…

> Technical people can rarely prove "ownership" of revenue Maybe we geeks should let the sales teams run Powerpoint presentations instead of the actual product to address that misunderstanding.

The point is: You can see which sales rep closed which deal and therefore can see what they brought in. (While a good sales rep assigned to a bad territory or losing a big deal last minute, after long negotiations, due to product quality suffers)

Imma technical role that relationship isn't there as much. Sometimes one can implement a feature a specific customer (group) wants, sometimes a specific bug fix, but most of the time the value an individual enginees brings in is not separable.

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#53

Post by simonebrunozzi »

roflc0ptic wrote: post #26

I just started working somewhere that does a different equity scheme called “profit interest.” The gist is, they issue you equity whose worth is based on growth in valuation from when you joined. So if you’re granted 1% shares and the company grows from 100m to 200m on liquidity, you’re entitled to 1m. It avoids you having to front money for stock options, and it also avoids the tax burden b/c when issued, the shares…

I believe that the tax treatment of your hypothetical Million dollars is different than the treatment of an equivalent Million dollars earned through stock options.

I am not an accountant, so please correct me if I'm wrong.

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#54

Post by londons_explore »

konschubert wrote: post #47
thomasahle wrote: post #36

Earlier quoted context omitted.

> So if you’re granted 1% shares and the company grows from 100m to 200m on liquidity, you’re entitled to 1m. It avoids you having to front money for stock options, and it also avoids the tax burden b/c when issued, the shares are worth zero dollars Isn't that just like normal stock options?

It appears to simulate the normal stock options. Seems to be motivated by tax reasons. I think I've seen this called a "virtual option plan".

It might behave differently to dilution too...

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#55

Post by cj »

konschubert wrote: post #46
cj wrote: post #40

Earlier quoted context omitted.

> Not if they just issue themselves more shares This doesn't happen in the real world. When more shares are issued, it's because you've raised another capital round and the new shares go directly to the new shareholders (new VCs) and future employees who haven't yet been hired. New shares wouldn't go to the founders. Yes, it's hypothetically possible, but it doesn't happen in the real world.

It happens regularly and it's called a re-up http://christophjanz.blogspot.com/2018/11/founders-please-do...

The article is from 2018, and reads:

> In the last year, we have seen, on more than one occasion, a behavior among later-stage VCs that we’ve rarely observed in the years before

Which seems to imply it's not a common practice. As I mentioned, it's 100% theoretically possible to do it, but the percent of companies that actually do it is very low.

It would be not only bad for early employees, but also bad for early investors - it would hurt the founders reputation among their early investors (and employees) which most founders wouldn't be willing to do.

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#56

Post by mlthoughts2018 »

Nimitz14 wrote: post #45
mlthoughts2018 wrote: post #32

Earlier quoted context omitted.

I’ve never heard of any startups where you can obtain faster skill or personal growth. “Wear many hats” means you must be whatever type of firefighting janitor the company needs this week, which often causes skill atrophy not skill growth. Larger companies not only offer better compensation, but usually offer much better career development, responsibility growth, training and “learn by doing” opportunities. The start…

This does not match my experience.

Then you have an extremely rare experience.

It’s like a professor who did happen to get tenure listening to all the post docs talking about how awful academia is. I’m happy for that one lottery winner but their experience doesn’t count for anything.

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#57

Post by londons_explore »

jraby3 wrote: post #5
runawaybottle wrote: post #2

Are there any startups that offer revenue sharing so you don’t have to rely on the mythical exit?

Rev share is a tricky incentive. It can incentivize people to waste money chasing revenue. Revenue isn’t always in line with the success of the business. As a business owner and VC I’d be extremely reluctant to offer that to employees.

Most sales jobs offer some kind of revenue share. Sometimes revenue share is the only compensation.

When cosco buys apples from a farmer for $1 and resells them for $2, they are effectively taking a 50% revenue share.

A referral bonus for bringing in a new customer is also a kind of revenue share for the existing customer, and plenty of startups do those.

I think the key is to compensate based on a revenue share of what you bring in, rather than of the total revenue.

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#58

Post by JumpCrisscross »

jhowell wrote: post #8

> One possibility is to replace early employee (first ~10 employees) stock options with the same Restricted Stock Agreements (RSAs) as the founders. I am sure RSA are and will always be available to those with the skilleset that commands this level of compensation. I am unclear what would motivate the founding team or investors in a start-up to act otherwise.

> I am unclear what would motivate the founding team or investors in a start-up to act otherwise

RSAs and RSUs are far less liquid than equity. They can typically only be sold into a company-wide liquidity event.

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#59

Post by srtjstjsj »

ericbarrett wrote: post #41
roflc0ptic wrote: post #26

I just started working somewhere that does a different equity scheme called “profit interest.” The gist is, they issue you equity whose worth is based on growth in valuation from when you joined. So if you’re granted 1% shares and the company grows from 100m to 200m on liquidity, you’re entitled to 1m. It avoids you having to front money for stock options, and it also avoids the tax burden b/c when issued, the shares…

It is pretty remarkable if it prevents dilution. Are you sure there's no weasel-wording in your contract that allows arbitrary changes in the future, has funky exercise restrictions, etc.? Their special tax structure makes me suspicious as well (if this is the US). Sadly I think VCs saw all the mini-millionaires being created at FAANGs in the last decade and have pressured many companies into watering down stock comp…

I don't think it prevents dilution. Hard to believe investors would agree to a scheme where new rounds pay a % fee directly to employees.

Re: Startup Stock Options – Why A Good Deal Has Gone Bad (2019)

#60

Post by JumpCrisscross »

The elephant in the room are transfer restrictions. VCs demand their preferred stock trade in the secondary market. At the same time, common stock is locked down. If the common stock is sellable before the company exits, the risk-reward calculus for company equity shifts in employees’ favor.
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