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We need to rethink employee compensation

aaronkharris.com

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Re: We need to rethink employee compensation

#61

Post by windust »

joelgrus wrote: post #37
JonFish85 wrote: post #11

Earlier quoted context omitted.

But even if you're fully vested, if you can't sell your shares, they're essentially worthless (technically the term is probably "illiquid asset"). Until there's an "event" (IPO, acquisition, probably more), they can't be turned into real money.

And if you leave the company they actually cost you money , since you have to pay out of pocket to exercise them (for stock that may end up never being sellable) and you also have to pay AMT taxes based on the latest company valuation.

Can't stress this enough. If you have Employee Incentive Options is way better to exercise them as soon as they are vested than to wait (if thinking of exercising at all). When you exercise them you pay AMT on what they are worth when exercised (of course the "fair price" is a hidden secret left for the CFO). As time passes, the "fair price" is probably going to keep increasing, but with no liquidity and inability to sell your options you are stuck with the AMT with the fair price at the moment of exercise

Re: We need to rethink employee compensation

#62

Post by michaelochurch »

pbreit wrote: post #52
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.

Yeah, but no one ever got rich off salary.

Yeah, but no one ever got rich off salary.

These people called "executives" can. Programmers generally don't, unless they're very good and very mercenary, and even then "rich" means "7-figure net worth and the ability to consult at a decent rate as much as one wants". Which isn't bad at all but isn't VC MegaBux.

Re: We need to rethink employee compensation

#63

Post by x0x0 »

harryh wrote: post #58
threeeeawae wrote: post #35

Earlier quoted context omitted.

The latest shitty clause that Valley companies are including in their options contract prohibits you from selling fully vested and exercised shares even if you have a willing buyer . Apparently companies saw all the employees getting rich from private companies like Palantir and Facebook pre-IPO and considered that a problem to be solved. Check your contract, you probably don't "own" the stock you think you do.

Yes, it was a problem to be solved for several reasons: 1) 409A (option pricing) valuation problems 2) Increase in # of shareholder problems 3) Legal issues (for both the company and employee) if buyers of shares later felt deceived by sellers 4) Team cohesion issues if different employees were getting radically different prices for there sales You might disagree with the solution, but these are definitely real probl…

5) breaks golden handcuffs if the employees can afford to leave

Re: We need to rethink employee compensation

#64

Post by branchless »

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 tend to think of options as worthless

That's why they are trying to pay you with them. For them it's a one-way bet. It's sadly just another case of pushing risk onto the worker and not really passing on much of the upside.

Re: We need to rethink employee compensation

#65

Post by brudgers »

Salary is the only hedge employees get that is congruent to the liquidation preference preferred stock provides passive investment. It is increasingly important because capital is finding 1x liquidation preference in a startup investment a reasonable alternative to parking cash in near zero interest rate bonds. The same institutional investors who used to buy IP's can now provide capital directly and the beneficial outcome gap between passive capital and employee equity is increasingly wide.

Re: We need to rethink employee compensation

#66

Post by fredkbloggs »

stephengillie wrote: post #22
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 deval…

The point here is that due to the factors the author noted (and probably others), the perceived value of options in nonpublic companies is now low enough that many (most?) candidates/employees no longer consider it relevant. I happen to agree with that choice, regardless of whether the expected value to the employee of the options is actually zero or just some very small number. We can debate the true ev of an option, we can apply various formulae to attempt to compute it, and we can each agree to devalue various restrictions differently according to our own preferences. But I think we can probably agree that in many if not most situations, the value of the options to the employee is too small to affect the decisions that employee is going to make. It doesn't matter whether that value is zero or $50 or $5000, it matters only that it's too small to be material.

To the extent that this is a problem for founders/owners, it's largely of their own making. It seems like it should be easy enough to correct if they want to, but they will have to give up many if not all of the wildly favorable (to them) terms and/or give up more equity to their employees to do it. The alternatives all involve paying more cash, which is probably the right answer for everyone anyway; it's disappointing that the author didn't even seriously discuss the possibility of simply paying higher salaries in lieu of equity. Apparently that's simply taboo.

Re: We need to rethink employee compensation

#67

Post by harryh »

windust wrote: post #61
joelgrus wrote: post #37

Earlier quoted context omitted.

And if you leave the company they actually cost you money , since you have to pay out of pocket to exercise them (for stock that may end up never being sellable) and you also have to pay AMT taxes based on the latest company valuation.

Can't stress this enough. If you have Employee Incentive Options is way better to exercise them as soon as they are vested than to wait (if thinking of exercising at all). When you exercise them you pay AMT on what they are worth when exercised (of course the "fair price" is a hidden secret left for the CFO). As time passes, the "fair price" is probably going to keep increasing, but with no liquidity and inability to…

Don't wait until they vest. Do it as soon as they're assigned to you. Avoid the AMT completely.

Re: We need to rethink employee compensation

#68

Post by walshemj »

MCRed wrote: post #54
wwweston wrote: post #16

Earlier quoted context omitted.

> I tend to think of options as worthless, until they vest This is a good idea, but I'm not sure it takes things far enough. For the majority of developers, options are often not especially valuable even when they vest. The most common value outcome of a success/sale seems to be "modest bonus" (4 figures to low five figures) rather than a jump up to a different economic class. I suspect many devs could do as well by…

Over many years as an employee for startups, I was employee number 24 of a $30M cash acquisition exit. The result was 6 figures, but just. Effectively it was a year's salary. That's all my options were worth and to get that return, I worked for about 20 startups over 2 decades... only one paid off.

To put this in perspective that's a lot less than last years share options (5 year plan) at BT. The last sharesave to vest returned >£100,000 Tax free if you had the max amount.

Re: We need to rethink employee compensation

#69

Post by kabdib »

Treat options as wastepaper. They're lottery tickets. If they are worth something someday, then great, good job.

But you can pour yourself into a company heart and soul, one with options and one without, with exactly the same outcome: Zero. And to a large degree the outcome is not only not under your control, it is often under the control of predatory entities who do not want you to realize any return.

As an employee, get a competitive salary because the chances verge on certainty that those options will be worth zero, no matter how hard you work and no matter how much you think your contributions will move the needle.

The equation is different for honest-true-and-blue founders. But for a worker bee, sure, make a show that options are interesting to you, but don't trade them for cash compensation, it's a bad deal for you.

Re: We need to rethink employee compensation

#70

Post by branchless »

MCRed wrote: post #54
wwweston wrote: post #16

Earlier quoted context omitted.

> I tend to think of options as worthless, until they vest This is a good idea, but I'm not sure it takes things far enough. For the majority of developers, options are often not especially valuable even when they vest. The most common value outcome of a success/sale seems to be "modest bonus" (4 figures to low five figures) rather than a jump up to a different economic class. I suspect many devs could do as well by…

Over many years as an employee for startups, I was employee number 24 of a $30M cash acquisition exit. The result was 6 figures, but just. Effectively it was a year's salary. That's all my options were worth and to get that return, I worked for about 20 startups over 2 decades... only one paid off.

That says it all really. $30M and you see under $100k as 24th employee. So 0.3%.
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