Employee Equity

You can early exercise non-ISO options if your stock agreement allows it (also ISO but it's a little more complicated). If you also file an 83(b) election then you are indeed treated for tax purposes as if all the shares vested immediately, so if you exercise before the value of the shares exceeds your strike price then you pay no taxes until you sell the shares (or there's an acquisition or something).

http://www.mystockoptions.com/faq/index.cfm/catID/B7469ACD-2...

As you say, the big issue with this is paying the exercise price. There's not really any way around that. If you're going to pay your employees extra money to cover the exercise price then you might as well just give them shares instead of options. Another option is to loan the money to employees. I don't know how common that is with startups.

'(on a bogus "performance" case where you're set up to fail) ' Can you elaborate?

Altman's post suggests that the context needs changing. I suspect it needs changing to keep up with some of the very changes YC has wrought - changes to VC and the creation of startups and the options available to the sorts of employees startup founders need.

The issue is that the new startup culture has diversified power and our concept of 'business founder' is out of date. A software company founder is not the analog of a white shoe law firm partner. A personal realtionship with Jeff Bezos isn't why people buy toasters from Amazon or host their SAS on AWS, because it's not some Rolodex full of 30 year of golf course relationships and keeping the jobs of bureaucrats secure that make it rain. "On the internet nobody knows you're a dog.* [1] Or cares that you're a founder.

While I agree with Altman that something needs to change in the direction of making employee's richer ,I think he probably doesn't go far enough. The problem isn't so much tax code as capital structure and the rigidity of company structure that results.

A key hire is a key hire because it changes the company. Ideally, a company would change it's structure to reflect that change. Ideally, a company's capital and corporate structures would be agile as in development.

Key employees are just as exposed to the 'you can be a founder' meme as everyone else, and they're in a better position to pursue it than most. A founder shouldn't expect talent to hang around making them rich. In terms of game theory, I think of it as a founder's dilemma. Altman's piece suggests YC might be seeing it too.

In the current context, a founders's 30% of a $40,000,000 exit is better than even a 1% employe share of a $1,000,000,000 one - much better perhaps than the numbers would suggest because 30% gets a seat at the table, and that old Mark Cuban idea of looking around the table? Well if you're not at the table, the worst case is you're just dead money picking up the tab for someone's boat payment.

[1] http://www.paulgraham.com/hiring.html

HR people do not as a rule do salary negotiation. You have to be a particularly "special" degree of bad at negotiating to end up out-negotiated by an HR person.

I am sure there are companies that, by outward appearance, do have candidates negotiating with HR people after the interview is over. Step 1 in handling negotiation with those companies: realize that you are not negotiating with HR.

There's several factors that make this irrelevant.

1) YC's incentives look very different from VC's: they get common shares, not preferred. This means their incentives are more aligned with the founders than with future investors (for example, if a VC has a controlling stake in the company & wants to fire the founder and dilute the common shares to basically nothing, then YC gets similarly diluted).

2) The dilution effect of the option pool on YC's shares is trumped by the dilution effect of future investments on YC's shares. If expanding the option pool has a marginal dilution affect but dramatically increases the likelihood of success, then that's a no-brainer for YC to push for.

3) YC's business model is dominated by the extreme outlier successes (e.g. Dropbox, AirBnb). Thus, YC does better by doing these three things better:

A. Increasing the likelihood that future successes are funded by YC (i.e. the founding team chooses YC early on)

B. Increasing the probability that a startup will become an outlier success.

C. Given that a startup is becoming an outlier success, multiply that success to the extent possible.

This piece hits nicely at each of those points. For A, YC takes a leadership role in how to structure a cap table, making founders look more to YC. Also, YC startup employees (ie future YC founders) think better of YC. For B and C, once a company grows beyond the founders, each employee makes very meaningful decisions on a daily basis that impact both the company's likelihood of success and magnitude of success. Aligning these employee's motivations with the company's further helps make these decisions better for the company.