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We need to rethink employee compensation

aaronkharris.com

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Re: We need to rethink employee compensation

#21

Post by jjuhl »

drivingmenuts wrote: post #5
Jemaclus wrote: post #3

In 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.

I agree. Pay me what I'm worth every month. Keep your options.

Re: We need to rethink employee compensation

#22

Post by stephengillie »

justizin wrote: post #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" ;)

In economics, you often deal with situations where an asset has devalued below another asset's value. The first asset still has value, but relatively less than the second.

This is different from an asset which has zero value. Some economists enjoy the wordplay of "worth less" (first meaning) vs "worthless" (second meaning)

In this instance, it looks like the article is describing how increasing controls further devalues the options.

Edit: For instance, if the company decides on each attempt if you're allowed to exercise the option, you might value it at 25% of the stock price, or lower. Even moreso, you can't be certain that the company will still exist when your options can be traded for cash, which should devalue the options even more in your perspective.

It should be the net same as if you're working for someone, and they paid you with an IOU for 1% of the money they might win from a lottery ticket. So the value might be infinitesimally small, but not zero.

Re: We need to rethink employee compensation

#23

Post by randomname2 »

"They note that the average time to IPO is now 11 years vs. 4 in 99, and that the overall number of tech IPOs is plummeting as privately funded companies raise huge late stage private rounds instead."

What part do the increased regulatory requirements for public companies play in this? Might this be one of the unintended consequences of Sarbanes-Oxley?

Re: We need to rethink employee compensation

#24

Post by JoeAltmaier »

toephu2 wrote: post #19
drivingmenuts wrote: post #5

Earlier 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.

Even if options vest, they could still be viewed as worthless. E.g., Pre-ipo company, 4 years pass, all your shares vest, however Company might tank in the next 5 years, goes bankrupt, never gets bought out nor goes IPO, your vested shares are worthless.

OR even succeeds, get bought out for 40 million dollars, which all goes to pay investors' convertible debt. Net result: stock worthless.

Re: We need to rethink employee compensation

#25

Post by tetraodonpuffer »

Jemaclus wrote: post #3

In 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'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").

that implies that it is somehow better to work 24/7, when in fact often you get your best ideas when you are away from work, with friends, working out and so on, all things that are just as important to remain fresh and not burn out.

Considering that until you exit you can't know how much your options are worth (due to valuation, dilution, quarter results during the lockdown period after going public, etc. etc. etc.) to me options are worth $0 and do not come into play at all when evaluating a job at a company.

From my perspective it's all about what I'd be working on and with: is it something I believe in? is it something that has a chance of success? is it something I would see myself happy to work on every day? are the people I would work with people I can mesh well with? All of those are a lot more important than a lottery ticket.

Another thing you might want to consider on the hiring side is that paying way below market salaries and offering options instead you are likely to attract employees that find that agreeable, which might or might not be who would help you be successful: sometimes it might be better hiring a single experienced developer at market than 2 less experienced ones that are willing to work for cheap, especially towards the beginning when it comes to making architectural decisions that might stick around for a long time and come back to bite you later.

Re: We need to rethink employee compensation

#27

Post by dschwartz88 »

birken wrote: post #4

Another 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,…

Just a heads up, the 90 day out clauses are usually put in there by the company lawyers. The only rule the IRS has is that ISO options flip to NSO after 90 days[0].

Take a look at the Pinterest options plan[1], where Pinterest actually gives you 7 years from when you leave to exercise. Your ISO options just flip to NSO after 90 days.

[0] http://www.mystockoptions.com/faq/index.cfm/catID/36274DB1-D... [1] http://fortune.com/2015/03/23/pinterest-employee-taxes/

Re: We need to rethink employee compensation

#28

Post by dotBen »

Interesting article but it fails to mention a significant source of liquidity for startup shares (both currently and historically):

Acquisition by a publicly traded company.

IPO isn't the only way to obtain liquidity, but what's interesting is just like companies are shunning IPO they are also shunning acquisition.

We don't normally get to know about failed acquisition offers but Snapchat's $3bn offer by Facebook is a great case in point. A few years ago practically no one would have turned down that kind of offer, which would have also created a liquidity event for everyone currently employed at Snapchat. Various factors today mean someone like Evan Siegel was prepared to turn that down.

I'd love to see more discussion about that as much as the IPO market itself.

Re: We need to rethink employee compensation

#29

Post by jfoutz »

Jemaclus wrote: post #3

In 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…

Yeah, i think it's important to do the math. And do that math together. Say, 1000 shares @$20. how many companies make it to IPO? let's be generous and say 10%. What are the odds you'll still be there in 4 years - even with the best of intentions 95%? That right there is down from $20,000 to $1900. Also, that's in future dollars, so inflation will eat away another 3-4%. $50 dollars a month more at some other company wins by over $500.

They are not worthless, but it's important to value them accurately.

Re: We need to rethink employee compensation

#30

Post by bcg1 »

The premise should be simple I think... pay people competitively with actual money for the work they are actually doing right now. If there is a chance their work could lead to a huge paypay... then give them a claim to a sliver of that payday. Don't cross the streams.
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