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We need to rethink employee compensation

aaronkharris.com

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Re: We need to rethink employee compensation

#121

Post by kentonv »

zmillman wrote: post #94
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,…

I've been hit with this too and it's not pretty at all. If anyone else is concerned about this, you should talk with your CEO/legal team about early exercise options which can remove a lot of the risk of massive tax liabilities. From my understanding, some companies offer an early exercise option where you pre-purchase the shares and then instead of being able to buy the shares after they've vested, the company inste…

What you're describing is called "restricted stock" (not to be confused with "restricted stock units", which are entirely different). The idea is that you actually buy the shares upfront at the current 409(a) (legal) valuation, but the company has a right to buy them back if you leave. Founders usually get their shares this way, because at the time of founding the valuation is essentially zero. Early employees may take this route too, but usually the company switches over to options after a funding round forces a non-negligible valuation. Some companies (like mine, at least so far) continue to let new employees choose.

The amount you would pay for restricted stock is exactly the same as what would otherwise be your strike price for stock options, assuming the same number of shares.

For an employee, the major down side of choosing restricted stock (assuming non-negligible valuation) is that if the company fails and the stock ends up being worth nothing, you don't get that money back. Whereas with stock options, you have more time to find out if the stock will be worth anything before you buy into it.

The up side is possible tax advantages, but of course I cannot give tax advice.

(All this is information I've learned while being the founder of sandstorm.io; I am not an expert in these things.)

PS. Don't forget to file your 83(b). (Any time you say "restricted stock" to a startup founder, they will instinctively reply with "Don't forget to file your 83(b)".)

Re: We need to rethink employee compensation

#122

Post by danielweber »

harryh wrote: post #67
windust wrote: post #61

Earlier quoted context omitted.

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.

This advice could be risky. If they assign stock to you and you exercise it and there is any different between the current value and your strike price, that can be exactly what triggers the AMT.

If you exercise and sell at the same time, you will pay short-term income taxes, but without any AMT to worry about.

Re: We need to rethink employee compensation

#123

Post by damoncali »

ChuckMcM wrote: post #34

I am not sure I understand Aaron's point in this. Is it "We should pay people more?" But isn't that really a question of whether or not you can find people who will work for the salary your offering? If you can't you raise what your willing to pay until you find someone who will right? Or is it "We should make options always remunerative?" In which case they aren't really options are they? They are just salary so why…

I think it's more along the lines of "the old way we used to value and award options/equity isn't very compelling for employees these days. We need to think of better ways to give employees ownership."

That's a real problem for people trying to start a company without a lot of cash. If it's to be useful as compensation, equity should be valuable, but it's not because the payout is so uncertain and so far away. Throw in terms that leave multiple opportunities to kiss the whole payoff goodbye just because of life (or worse yet, get screwed over by the IRS), and it's no wonder employees don't particularly value equity.

Typical option agreements are not terribly effective, so you may as well just pay cash unless there is a better way to distribute ownership in today's environment.

It's not a simple problem to solve. Saying "give more equity" doesn't really do it if the problem is that the likelihood of seeing a payout is too small. And making the payout more certain is not easy.

Re: We need to rethink employee compensation

#124

Post by harryh »

nkurz wrote: post #103
harryh wrote: post #67

Earlier quoted context omitted.

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

It should be noted that the choice to allow "early exercise" is made by the company granting the options. While it might be a good tax strategy, you do not (to the best of my knowledge) have any guaranteed right to be allowed to exercise your options until they vest: http://www.startupcompanylawyer.com/2009/01/11/should-a-comp...

This is correct. But most of the time if you ask you can get it.

Re: We need to rethink employee compensation

#125

Post by danielweber »

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.

If you live on less than you make, you can indeed become quite rich.

It might not be your definition of "rich" depending on how you grew up.

Re: We need to rethink employee compensation

#126

Post by harryh »

x0x0 wrote: post #117
harryh wrote: post #101

Earlier quoted context omitted.

That is certainly one point of view. And if one person leaves it's not likely to materially affect the business as everyone else keeps it going. Another point of view is that if all the early employees disappear at the 4 year mark (or whenever they feel they've vested "enough") that could cause very serious problems for the business. There is an element of a prisoner's dilemma here and it's not unreasonable to think…

I'm operating under the assumption that most people aren't counting down the seconds until they can leave, but some will want to. Four years is a long time, and 10+ years to IPO is a quarter of your career.

Indeed. Your points here make things even more complicated. :)

Re: We need to rethink employee compensation

#127

Post by webb »

mpdehaan2 wrote: post #7
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.

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…

Giving out stock can be far from free..

Re: We need to rethink employee compensation

#128

Post by jackgavigan »

walshemj wrote: post #68
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.

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.

BT as in British Telecom?

Re: We need to rethink employee compensation

#130

Post by harryh »

danielweber wrote: post #122
harryh wrote: post #67

Earlier quoted context omitted.

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

This advice could be risky. If they assign stock to you and you exercise it and there is any different between the current value and your strike price, that can be exactly what triggers the AMT. If you exercise and sell at the same time, you will pay short-term income taxes, but without any AMT to worry about.

When the stock is assigned to you then there should be no difference between the current value and your strike price. That would be very unusual. That is why I was saying that waiting until you vest might not be a good idea because by then you might have an AMT issue.

I agree that exercising and selling can be a good strategy but we're (mostly) talking about private companies here where that may not be an option due to a lack of liquidity.

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