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Shopify lets staff decide cash-stock pay mix as shares dive

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Re: Shopify lets staff decide cash-stock pay mix as shares dive

#121
post #35

Earlier quoted context omitted.

This is becoming more and more common at large tech companies. Stripe does the same thing. Over the last decade and a half tech employees have enjoyed massive returns due to stock appreciation during their vesting term, and now employers want to eliminate that. Of course the flip side is that when the stock goes down - like right now - then employees benefit. Ultimately they’re all going to cut out stocks entirely an…

Why on earth would employers want to eliminate those massive returns? That's been an amazing tool for employee retention, especially for FAANG. If they reverted to paying cash plus bonus, they would be less competitive when hiring and retaining people. The companies that are changing this are the ones whose stock tanked, and they are worried that employees will leave because of it. Companies whose stock did not tank…

This is foolish.

When public companies give stock to their employees, they dilute the stock as much as if they issued stock and sold it. So the cost of that compensation is the same as if it were in cash.

If everyone knows that say, Netflix's stock price is guaranteed to go up 20% a year for the next 5 years, then the market price of that stock would suddenly jump up to the point where it no longer makes excess returns. So the market price of the stock reflects the company's (risk-adjusted) growth potential already. This also applies to non-public companies with any amount of maturity - the marginal investor has a good sense of what the company is worth and does not want to lose out by issuing stock below that.

Put these two together and giving employees stock is economically not very different to giving them money and they choosing to invest it in mutual funds. The main difference is that you make your employees' lives slightly harder - with taxation and with the fact that they need to sell stock to get cash for what they want to buy or invest in.

The reason that stock options are preferred, especially for private companies, are none of them very good. Firstly employees have an inflated perception of what their company will be worth in the future. They assume that it's going to be AirBnB, not WeWork, not Palantir, and not the failed start-up that you've never heard of. Secondly employees also don't correctly discount uncertainty. Would you rather have the cash to buy your dream home/pay off your mortgage, or take a 10% chance of 10 times that amount of money? To most of us the second option is worth considerably less. Thirdly companies sometimes feel better about giving out pieces of paper that they have an unlimited supply of than giving out their own cash, even though it's a wash financially. And lastly there used to be some tax advantages to firms paying with stock options - those were loopholes which have largely been closed.

Making your employees into investors (by giving them stock options) only made economic sense when venture capital money was scarce and expensive. This has not been the case for a long time.

Re: Shopify lets staff decide cash-stock pay mix as shares dive

#124

Earlier quoted context omitted.

If your company had offered you the cash value of RSUs instead of the RSUs, would you not have ended up in the same position financially? For example, if your base pay was 200k, and you had a grant of RSUs worth 200k, how is that better financially than getting all 400k in cash?

Not quite. In the short term, perhaps, but I think the original comment was alluding to the fact that RSUs as an "investment" vehicle can have long term returns far greater than others. Put another way, 200k in RSUs at an early stage company might be worth 100x or even more at IPO or acquisition years down the line. If you were to take that same 200k in cash and invest it in other ways you might be able to have the s…

[deleted]

Re: Shopify lets staff decide cash-stock pay mix as shares dive

#125
post #28

One crucial thing not often talked about with this plan is that the stock is granted and vests quarterly . In fact, the amount of stock you get each quarter is also variable. E.g. if you choose to have 100k of equity each year, each quarter you get whatever amount of units equates to 25k of stock. So what they've done is nearly completely untie compensation from the stock price. You neither benefit significantly nor…

This might be better for most of employees. Big companies rarely benefit from the standard “lock in folks on the upswing” and “incentivize them to leave on the downswing” that stock grants usually do.

When the stock goes up, difficult conversations emerge when the company realizes it’s paying someone the equivalent of an entire team. On the way down it’s hard to manage comp expectations. An individual engineer rarely impacts the bottom line in a material way.

Which is to say, if tech workers can demand high six figure pay - it should probably be mostly cash for most public companies and individuals.

Re: Shopify lets staff decide cash-stock pay mix as shares dive

#126

Earlier quoted context omitted.

But as long as the cash bonus has the same nominal value as the stock grant there is not much of a downside for the employee as in the worst case they can just buy the stock on the market (which should be possible for a large tech company).

From experience, that's not true. A bonus of $N is worth $N. A stock grant of $N has turned out to be worth $2.5*N or even more, by the time it finishes vesting. Could it have gone the other way? Of course, and it's often likely that at startups stock could be worth zero. But at large companies, even with the recent dips in stock prices, employees who joined 2+ years ago are better off with stock grants than they wou…

> by the time it finishes vesting.

Right and during that vesting period if you had been paid cash you could have invested that money in a wide range of assets that are both more liquid and are not perfectly correlated with your source of income.

Now if we're talking a bonus that would be paid at the end of the vest period such that you can't invest that money until you would have vested anyway then stocks is theoretically going to have increased by the risk free rate, so it's expected value will be higher than the bonus (however it's much higher variance).

Everyone has weird thoughts in their heads about RSUs people the last decade has been insane, and no one remember the last tech crash. The next one will be bigger and when you realize you are getting laid off at the same time that your RSU drop to near zero, it will feel like the variance might not be worth it.

Re: Shopify lets staff decide cash-stock pay mix as shares dive

#127
post #29

Earlier quoted context omitted.

This is a large part of why I feel this way. I grew up near Ottawa, and had a lot of friends whose parents worked at Nortel. They were compensated with a lot of stock, which they held onto (it keeps rising, after all). Their pension plan was mostly invested in the company stock too. When the company fell apart (let's set aside whose fault that is- different topic), they lost their jobs, their savings, their pensions,…

It boggles my mind when people vest RSUs and just leave them there, hold onto their employers' stock and don't sell & diversify. The RSU vesting day is equivalent to having bought the stock on that day, there's no tax advantage to holding onto it. Whether at SHOP or at AMZN/MSFT/GOOG, why keep all your eggs in the same basket? And yet the average person does exactly that.

https://en.wikipedia.org/wiki/Endowment_effect

Re: Shopify lets staff decide cash-stock pay mix as shares dive

#128
post #29

Earlier quoted context omitted.

This is a large part of why I feel this way. I grew up near Ottawa, and had a lot of friends whose parents worked at Nortel. They were compensated with a lot of stock, which they held onto (it keeps rising, after all). Their pension plan was mostly invested in the company stock too. When the company fell apart (let's set aside whose fault that is- different topic), they lost their jobs, their savings, their pensions,…

It boggles my mind when people vest RSUs and just leave them there, hold onto their employers' stock and don't sell & diversify. The RSU vesting day is equivalent to having bought the stock on that day, there's no tax advantage to holding onto it. Whether at SHOP or at AMZN/MSFT/GOOG, why keep all your eggs in the same basket? And yet the average person does exactly that.

Yeah, even if I think my company will do well, having a large part of my net worth tied up in stock of my employer always feels a bit of an "eggs in one basket" scenario - if something happens to majorly impact the stock value, there's a decent change it will consequently impact my job security.

Re: Shopify lets staff decide cash-stock pay mix as shares dive

#129

Earlier quoted context omitted.

If your company had offered you the cash value of RSUs instead of the RSUs, would you not have ended up in the same position financially? For example, if your base pay was 200k, and you had a grant of RSUs worth 200k, how is that better financially than getting all 400k in cash?

Not quite. In the short term, perhaps, but I think the original comment was alluding to the fact that RSUs as an "investment" vehicle can have long term returns far greater than others. Put another way, 200k in RSUs at an early stage company might be worth 100x or even more at IPO or acquisition years down the line. If you were to take that same 200k in cash and invest it in other ways you might be able to have the s…

> Put another way, 200k in RSUs at an early stage company might be worth 100x or even more at IPO or acquisition years down the line. If you were to take that same 200k in cash and invest it in other ways you might be able to have the same return, but it's unlikely.

Identifying a company that is going to return 10000% is difficult. However, identifying a company that is going to return 10000% _and_ getting a job there is also difficult.

Re: Shopify lets staff decide cash-stock pay mix as shares dive

#130
post #2

I obviously don't want to give financial advice, but every time I've traded cash for stock in comp it's worked out for me in spades in the long run. This doesn't happen for everyone, it might not happen for you, but it's been very good to me on three separate occasions. Just remember that it's terribly illiquid and you're going to doubt your decision, potentially up to a decade later.

"Every time I've traded cash for winning lotto tickets it's worked out for me in spades in the long run."

https://xkcd.com/1827/
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