We need to rethink employee compensation
aaronkharris.com
We need to rethink employee compensation
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Re: We need to rethink employee compensation
#2What about the increase in shares being sold in the private markets, and during financing rounds? Wouldn't that help make up some of the opportunity lost by staying private?
Re: We need to rethink employee compensation
#3In this market, I tend to think of options as incentives, and not as replacements for salary. Salary gets me in the door and work hard, great people and culture make me want to be there and evangelize, and options incentivize me to work my ass off. (I'd work my ass off without options, but the options really make it easy to say "I will do everything in my power to make this succeed" instead of "I'd rather go spend time with my friends tonight").
To put it a slightly different way, I can't pay my rent with options. You can offer me all the options in the world, but my landlord doesn't accept them as payment. Therefore, you cannot simply exchange salary for equity.
I received an offer from a company a year or two ago, and they offered me a salary almost 50% below my then-current salary, and then some equity. When I tried to negotiate on salary, the CEO berated me for ignoring the equity. The problem is that as far as equity is concerned, it's worth $0 until you exit. There's a potential for millions, but my lottery ticket is also worth potentially millions of dollars. My landlord won't accept my lottery ticket as payment.
Long story short, Aaron is correct: startups need to rethink the whole equity component. It's valuable -- but it's not valuable in the same way that salary is, especially in today's market.
Re: We need to rethink employee compensation
#4Another really important, highly negative, combination of these factors is if you want to leave the company.
If the company is public, then you can essentially leave whenever you want, exercise the options and sell the stock to pay the costs (exercise price + taxes).
But if the company is private, you have to pay the exercise price + applicable taxes (which can exist even if you only have theoretical gains) yourself, without the ability to hedge your risk and sell the still illiquid stock. If you have ISO stock options, you have 90 days after you leave (or are fired) to figure this out or lose the stock options altogether.
So if you are joining a company with the following combination of elements:
1) High exercise price (the math is: # of options * exercise price... is this a lot of money or not)
2) ISO stock options or the stock option plan gives you limited time to exercise after you leave
3) No reliable system to sell the private stock
Then you should add in a further discount on the stock options, because there may be situations where you cannot afford to reap the benefits of the options if you leave (or are fired) before there is reliable liquidity for the stock.
Re: We need to rethink employee compensation
#5In this market, I tend to think of options as incentives, and not as replacements for salary. Salary gets me in the door and work hard, great people and culture make me want to be there and evangelize, and options incentivize me to work my ass off. (I'd work my ass off without options, but the options really make it easy to say "I will do everything in my power to make this succeed" instead of "I'd rather go spend ti…
I tend to think of options as worthless, until they vest. Which is too far in the future to count on.
Pay me money. That's actually useful.
Re: We need to rethink employee compensation
#6"When shares can only be sold in private transactions on secondary markets, and, increasingly can only be sold with the consent of the company, the options are actually worth less."
There's no space in the middle of "worthless" ;)
Re: We need to rethink employee compensation
#7In this market, I tend to think of options as incentives, and not as replacements for salary. Salary gets me in the door and work hard, great people and culture make me want to be there and evangelize, and options incentivize me to work my ass off. (I'd work my ass off without options, but the options really make it easy to say "I will do everything in my power to make this succeed" instead of "I'd rather go spend ti…
I tend to think of options as worthless, until they vest. Which is too far in the future to count on. Pay me money. That's actually useful.
This. It seems that it's acceptable in tech culture to use "you have too much stock" a reason to even underpay founders. This is busted logic, as the company could explode at any time, not to the fault of anyone in particular (but sometimes yes).
So far, I think I've been in 3 decent startups that all of which failed and do not exist anymore. None of them exited cleanly. Some might, but you might not want to stick it out that long, and those are often hard commitments to make depending on the work environment.
New grads and skilled developers alike should never be seduced by "we can't pay more , because we are startup, because we'll give you more options". Not only is the probability of success a factor, but so is dillution, and so is the chance that you won't see that money for 8-10 years even if things go well (long after a company is acquired).
Many sales can end in a net-loss, or only VCs get paid out. Sometimes the CEO nets a really nice private deal to run the new company (and has also been extracting a nice salary all along, probably).
Stock is free to give out, so a company is going to try to give you that instead of money. While it can be nice, possible payouts for most are going to be low, and often enhanced salary over that N years would have been better - and especially from an expected value calculation perspective.
Obviously, there are exceptions, but I'm a big believer that companies should share profits, and probably evenly, without regard to title hierarchy instead. I'd also scrap or outlaw 'executive' bonuses when the employee bonuses are not along the same lines in terms of flat value (not % rate).
Re: We need to rethink employee compensation
#8In this market, I tend to think of options as incentives, and not as replacements for salary. Salary gets me in the door and work hard, great people and culture make me want to be there and evangelize, and options incentivize me to work my ass off. (I'd work my ass off without options, but the options really make it easy to say "I will do everything in my power to make this succeed" instead of "I'd rather go spend ti…
I tend to think of options as worthless, until they vest. Which is too far in the future to count on. Pay me money. That's actually useful.
"until they vest."
Don't options typically vest after one year of employment? Is that "too far in the future?"
Re: We need to rethink employee compensation
#9"When shares can only be sold in private transactions on secondary markets, and, increasingly can only be sold with the consent of the company, the options are actually worth less." There's no space in the middle of "worthless" ;)
that is the least of the article's problem. The whole premise is flawed.
Re: We need to rethink employee compensation
#10Earlier quoted context omitted.
I tend to think of options as worthless, until they vest. Which is too far in the future to count on. Pay me money. That's actually useful.
"until they vest." Don't options typically vest after one year of employment? Is that "too far in the future?"
The typical thing I've seen is 1/4 of your options will vest after 1 year, upon which 1/48 of your options vest every month thereafter. Other companies may do it differently.
Also if you leave the company early, you will usually have to pay some trivial amount (possibly thousands though) to keep the options.
This has at least been the case at all startups I've seen.
With the 1-year cliff in place, I'd rather options just be given to departing employees, as it seems like payment for their work.