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Employee Equity

blog.samaltman.com

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Re: Employee Equity

#251

Post by davidw »

alexandros wrote: post #205
Iftheshoefits wrote: post #89

Earlier quoted context omitted.

You've identified one of the reasons I hesitate to put myself in the "startup labor market" for any startup that isn't well-funded. Even well-funded startups give me pause. I'm not interested in putting in founder-like work for entry-level employee-like compensation plus a lottery ticket. Unless the equity is meaningful and imbues the recipient with an actual, real voice in the direction of the company it's just a wa…

I'd be loathe to join a company where 10 people have a "real voice in the direction of the company". When you join an early team the only way is to trust the founder(s) as knowing what they're doing and listening to the team when there's a good point being made. The alternative is a recipe for politics from day 1.

I work at a small-ish company, and while, no, I don't have a "real voice in the direction of the company", I do have a voice in my corner of things: technical decisions. That makes me significantly happier than showing up and just being told what to use and do.

Re: Employee Equity

#252

Post by johnrob »

prostoalex wrote: post #221
johnrob wrote: post #188

Earlier quoted context omitted.

It's a quid-pro-quo. Right now, if a company gives you private stock you have to treat it as income and pay taxes for it. It's not real income yet, since you can't sell it, but you pay taxes. Later on (hopefully), the stock turns into real money and you pay the (lower) long term capital gains rate. What I was proposing was: Hey IRS, if you let me skip the taxes early on, I'll pay a higher rate down the road. I will g…

> Right now, if a company gives you private stock you have to treat it as income and pay taxes for it. It's not real income yet, since you can't sell it, but you pay taxes. I think RSUs do exactly that. They're taxed at conversion time which typically coincides with a liquidity event. At issue time they're not treated as income precisely due to restricted nature of it.

After some googling, I agree with you. RSU's are much better than options. So... The solution to the problem of better compensating employees could simply be giving RSU's in place of options.

Re: Employee Equity

#253

Post by danbmil99 »

ridgeguy wrote: post #232
danbmil99 wrote: post #226

Has anyone had experience with "early exercise" of (non-ISO) options? As I understand it, this strategy lets you treat them for tax purposes as if you bought the underlying stock, meaning no tax liability at vesting or exercise, and capital gains are all you pay at final sale. The downside is you have to pony up for the full strike price of all the shares at hiring. Works great if the company valuation is still nomin…

I have experience with early grant of non-ISO shares, which may be different from what you're asking about. I was granted shares (on a vesting schedule) at the time of formation of the company. I paid tax up front on the entire potential share grant when the shares were valued at $0.000001/share, which was a reasonable valuation at the time (very high risk, no tech proof, no demonstrated market, etc.). Although I hav…

You were granted shares, similar to founder's stock. I'm talking about options, which have a strike price. In my scenario, you in effect exercise (buy) the shares before they vest, which is on its face kind of impossible. One way I've heard it done is you sign a letter authorizing the company to buy back the unvested shares if you leave -- in effect, you buy the shares, simultaneously giving the company an option to purchase them back, and that option vests backwards over time -- the longer you stay, the less shares they can buy back. Under this rubrick, you owe no taxes at all, since money flows from you to the company, therefore there is no taxable compensation. For the company, I assume it's like any investment round, they sold stock for working capital.

Damn complex but worth it to avoid IRS woes.

Re: Employee Equity

#254

Post by danbmil99 »

Iftheshoefits wrote: post #100
ska wrote: post #76

Earlier quoted context omitted.

And that's why in the latter case, an early stage startup may not be for you. You join later, with a higher salary, when it has stabilized and looks to be going somewhere. And without the risk, you don't expect the equity to offset it. Pretty simple, really.

An equity offering of 1-5% doesn't offset the reduced salary. That equity typically doesn't imbue the recipient with the same authority as the founders' equity imbues them. Yet, for example, Hire #1 in a two-founder startup is pretty darn close to sharing 1/3 rd of the risk as the founders. It's just that his risk is assumed to be amortized over the term of his tenure and slightly reduced by a salary, so it has the a…

I agree with the logic that gives very early employees 3-5% equity stakes. Any more than that I think is unfair to founders and angels -- there is real value in getting even a reduced salary. Most founders have worked for a year or two without any cash comp, at something that may look absolutely ridiculous on a resume. That is a humongous risk. Those coming in after that risk, plus the risk of failing to raise the seed money, are IMSHO taking about an order of magnitude less risk, therefore the 3-5-ish percent number makes sense.

Don't even get me started on this idiotic "we put 15% aside for employees" crap. Fogedaboudit. $80 to DE and you've got 10 million more shares to play with. Not my fault you failed to get the arithmetic right the first time around.

Re: Employee Equity

#255

Post by username223 »

tptacek wrote: post #237
username223 wrote: post #234

Earlier quoted context omitted.

> software developers are as a demographic cohort terrible at negotiating. Yep. It's no real surprise that coders are mostly men with poor social skills, while HR is mostly women with good ones, most of whom those men find attractive. Classic Valley symbiosis.

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.

If your Human Resources people don't play a significant role in purchasing your human resources, something has gone wrong.

Re: Employee Equity

#256

Post by danbmil99 »

acgourley wrote: post #210
paulbaumgart wrote: post #164

Earlier quoted context omitted.

The valuation is the expected value. And since we're talking about investors who get preferred shares, the actual valuation for determining the value of the common shares (which employees get) is lower than that, still.

You're not wrong and that view represents the normal thinking I suppose. But don't you think it feels weird to say, "We're going to pay you next year in equity at this years valuation"? if you choose to stay in the company for year 2, it's strange to think that your risk goes down while value per share goes up. Your effective cash+stock compensation for year 2/3/4 goes way way up if you think in those terms. Then dro…

> Your effective cash+stock compensation for year 2/3/4 goes way way up

Not if the company flails or fails. If it does well, your increased comp makes up for the even more probable counterfactual, where your equity was worth bupkiss but you plugged away like a true belieber until the lights went out and the last pizza box was empty.

Re: Employee Equity

#257

Post by tptacek »

username223 wrote: post #255
tptacek wrote: post #237

Earlier quoted context omitted.

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.

If your Human Resources people don't play a significant role in purchasing your human resources, something has gone wrong.

Give me a break. In most companies, "human resources" exists primarily to cut people's health insurance benefits.

Re: Employee Equity

#258

Post by tptacek »

droopyEyelids wrote: post #250
tptacek wrote: post #237

Earlier quoted context omitted.

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.

This is a weird bit of advice. From my experience I have to assume you're saying "HR isn't the decision maker when hiring in elite tech companies" but the fact of the matter is HR/Recruiting is going to present the offer to most people, and it takes a career worth of preparation to move the conversation beyond that offer.

Well, I'm happy to have moved you a "career's worth" of wisdom forward in a single comment. You aren't negotiating with HR. HR does not know what you do, and HR's best idea of what you're worth comes from those ridiculous salary survey sites.

Re: Employee Equity

#259

Post by danbmil99 »

paulbaumgart wrote: post #215
acgourley wrote: post #210

Earlier quoted context omitted.

You're not wrong and that view represents the normal thinking I suppose. But don't you think it feels weird to say, "We're going to pay you next year in equity at this years valuation"? if you choose to stay in the company for year 2, it's strange to think that your risk goes down while value per share goes up. Your effective cash+stock compensation for year 2/3/4 goes way way up if you think in those terms. Then dro…

Value per share goes up, but presumably the employee had a significant role in making it go up, so that part seems fair. The 5th year discontinuity is an unresolved problem, though. It seems that, for the most part, people don't expect their employees to stick around that long. In the blog post, it mentions that some people are moving to 5 or 6 year vesting.

> The 5th year discontinuity is an unresolved problem, though.

By the end of year 3, you should be having "that talk" with whomever is running the show at that point. If you are a valued, productive member of the team, you'll negotiate another package that is at market. If not, it's probably time to move on to the next town 'cuz you're a rolling stone, always looking for the next adventure....

Re: Employee Equity

#260

Post by hundt »

danbmil99 wrote: post #253
ridgeguy wrote: post #232

Earlier quoted context omitted.

I have experience with early grant of non-ISO shares, which may be different from what you're asking about. I was granted shares (on a vesting schedule) at the time of formation of the company. I paid tax up front on the entire potential share grant when the shares were valued at $0.000001/share, which was a reasonable valuation at the time (very high risk, no tech proof, no demonstrated market, etc.). Although I hav…

You were granted shares, similar to founder's stock. I'm talking about options, which have a strike price. In my scenario, you in effect exercise (buy) the shares before they vest, which is on its face kind of impossible. One way I've heard it done is you sign a letter authorizing the company to buy back the unvested shares if you leave -- in effect, you buy the shares, simultaneously giving the company an option to…

"One way I've heard it done is you sign a letter authorizing the company to buy back the unvested shares if you leave"

That is the only way I have heard of early exercise working.

"Under this rubrick, you owe no taxes at all, since money flows from you to the company, therefore there is no taxable compensation."

To be clear, the way this works is that the time of exercise you have income (AMT only for ISOs, regular income for other options) equal to the difference between the fair market value and your exercise price. So you owe no taxes if your exercise price is the fair market value, which is usually the case if you exercise soon enough after the options were granted. It's not about which way cash is flowing, it's about whether what you get back in exchange for the cash is worth more than the cash you are paying.

"I assume it's like any investment round, they sold stock for working capital."

I'm more hazy on this, but I don't think it would normally be similar to an investment round, because in an investment round typically new shares are issued; in this case you are buying shares that were previously issued for the employee stock pool.

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