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We need to rethink employee compensation

aaronkharris.com

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Re: We need to rethink employee compensation

#71

Post by harryh »

x0x0 wrote: post #63
harryh wrote: post #58

Earlier quoted context omitted.

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

That too. Though that is a much more nuanced issue with a lot of arguments on both sides.

Re: We need to rethink employee compensation

#72

Post by michaelochurch »

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 prefer Wall Street's model of annual profit sharing.

VC-istan: you can get dicked out of your bonus for reasons you don't understand (liquidation preferences, vesting resets and cliffing) or that are purely political and lose 6 years' worth of expected bonus.

Wall Street: you can get dicked out of your bonus for reasons you don't understand or that are purely political and lose 11.9 months' worth of expected bonus.

I'd rather have the losses be limited, and have more opportunities for negotiation and revision. Wall Street's system is just better. We may not like that industry, but the facts are clear.

Re: We need to rethink employee compensation

#73

Post by justizin »

fredkbloggs wrote: post #66
stephengillie wrote: post #22

Earlier quoted context omitted.

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…

Indeed.

I have, for twenty years, used stock option agreements as a cheap alternative to toilet paper. I was talking with a friend who says he knows one guy that cashed in $8k worth one time. I prefer a bonus plan or profit sharing.

But the original response to my original comment was informative.

Re: We need to rethink employee compensation

#75

Post by harryh »

branchless wrote: post #70
MCRed wrote: post #54

Earlier quoted context omitted.

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%.

What % of the company do you think the 24th employee should get?

Obviously it's highly variable depending on the role. #24 could be a COO or could be a receptionist. But for the sake of argument let's assume they're a mid level engineer (taking a stab at what MCRed might have been at the gig in question).

Re: We need to rethink employee compensation

#76

Post by kyleblarson »

dschwartz88 wrote: post #27
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://fortu…

In this situation it would be great if there were something similar to the 83b letter for non-founder employees. I know too many people who have exercised options when leaving a company (and paid a hefty tax) only to see the value of the resulting equity trickle down to 0.

Re: We need to rethink employee compensation

#77

Post by ig1 »

There are other solutions:

1) The company could offer to buy back options at market rate.

2) The company's current investors could offer to buy equity from employees. The majority of investors returns come from a small number of portfolio companies, for those companies that are doing well the investors want a bigger stake even if it comes in as secondary.

3) Companies could appoint designated investors who could buy secondary stock from employees. Successful companies typically have over-subscribed rounds, companies could allow those investors who they like but couldn't get into the round to buy employee stock.

The general reason (2) and (3) don't happen is that individual employees don't have that much stock and the overhead involved makes it not worthwhile. But potentially there could be a solution which involves bundling together stock into meaningful amounts.

Re: We need to rethink employee compensation

#78

Post by toby »

Balgair wrote: post #55
MCRed wrote: post #41

Earlier quoted context omitted.

Worse, even with the %50 pay cut (or worse!) many startups expect you to take, the amount of options you're given are really trivial. It is possible to value options using black scholes or other valuation metrics. But every time I've run the numbers the present day value of the options is never even 1/10th of the value of the salary you're asked to give up. I've concluded the only way to do a startup is to be one of…

Know of any good web-apps or other easier to use programs for the layman to calculate these things? Thank you for mentioning these formulas too. These give a person something to argue with.

There's probably an even simpler model than that. Consider the pay cut you'd take to work at the startup... how much equity did the seed-round investors get for that much money? Multiply that by 1.5-2x (just a guess, perhaps someone has a better idea) to account for their liquidation preferences.

If that's less than your equity stake, then take the corporate job and use the extra cash to invest in startups.

Re: We need to rethink employee compensation

#79

Post by dnr »

tghw wrote: post #59
paulpauper wrote: post #31

I don't mean to sound too dismissive, but this article is bunkum. SO I guess by the author's logic, Michael Bloomberg's net worth is zero because Bloomberg LP never went public? The private market is illiquid, but fundamentals will always trump liquidity. If you own equity, that equity - assuming there is no dilution or deterioration in the fundamentals of the underlying business - is wealth. Employee stock options a…

Bloomberg is an owner. While an employee that owns stock is technically an owner, it's not a significant distinction because they are in such a minority that they have no control over the stock, and are therefore at the whim of the majority owners. It doesn't mean the options are worthless, but they have to be discounted. I owned stock in a company that will, very likely, never go public or get acquired. It doesn't n…

FYI, there's a word for a monopoly on the buyer's side: monopsony.

Re: We need to rethink employee compensation

#80

Post by j03m1 »

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…

This. A while ago I was looking for a job. I had offers from large companies at N00k per year with bonus. CEO of start up offered me 50% less of the combined salary and bonus and then explained he was making that up with equity. My counter point was that he was asking me to invest 50% of my total compensation over what could be 5+ years in the company and if that was the case the equity compensation should be higher to reflect that risk premium as well.

We didn't see eye to eye on that and I work at a large company now.

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