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We need to rethink employee compensation

aaronkharris.com

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Re: We need to rethink employee compensation

#141

Post by kentonv »

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…

The ISO -> NSO switch can have severe tax consequences for the employee. Even if your company doesn't expire your options in 90 days, consider exercising within 90 days anyway (and talk to a tax lawyer, etc.).

One not-as-obvious reason why companies are reluctant to set long expiration dates on options is because it means former employees take up space in the cap table even if they have no intention of ever exercising that option. The company essentially has to treat those shares as having been purchased, without having received any cash for said purchase. Cap table cruft can make it harder to negotiate subsequent funding rounds.

Re: We need to rethink employee compensation

#142

Post by jalonso510 »

kentonv wrote: post #121
zmillman wrote: post #94

Earlier quoted context omitted.

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 ta…

You can also sometimes early-exercise an option (if the company authorizes it when they make the grant), which ends up being in practice a lot like buying restricted stock while still technically an option, and I think that's what the parent was referring to.

Re: We need to rethink employee compensation

#143

Post by varelse »

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…

Given that a seasoned and in-demand engineer can make anywhere from $250K to $500K annually working for a big co, without a 3-letter title and 3-letter title equity, there seems little incentive to accept $150K or less and ~0.5% or less equity.

Calculate your expected return over the next 5 years. Most startups come up really short.

Re: We need to rethink employee compensation

#144

Post by tptacek »

michaelochurch wrote: post #72
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.…

You're the second person on this thread to bring vesting (and "cliffing") into the same sentence as liquidation preferences. They seem like totally unrelated concepts.

Preferences are a trap (for everyone in the company, founders included): if the company takes money at an ambitious valuation, their investors probably have terms that claw back their money if the company sells for an unspectacular number.

Vesting and cliffs are pretty straightforward. You get no equity unless you last a year. You get get your equity in pieces over 4 years. That's pretty much the only sane way for a company to operate, and it's how every well-managed company runs.

I'm not sure what you mean by "vesting resets". How do you reset someone's vesting schedule?

Re: We need to rethink employee compensation

#145

Post by bcheung »

kelnos wrote: post #99
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.

I used to also believe this, and would parrot it every chance I got, but I've since changed my tune. It's hard to value options. Really, really hard. Saying they're worthless, though, is lazy and counterproductive. If you're joining a seed-stage private company, then yeah, it probably makes sense to so heavily discount the options package that maybe it is close to worthless. But if you're joining a series C that's on…

At series C you are not likely to get a significant enough position to make it worthwhile. If they do indeed have revenue then they should be able to pay you a decent salary.

This is the way I look at it:

A 50% chance to make $100K in 5 years with an interest rate of 5% is worth:

($100K * 0.5) / (1.05 ^ 5) = $39K

And if you have credit card debt then you should be discounting at something closer to 15%.

Re: We need to rethink employee compensation

#146

Post by totalrobe »

varelse wrote: post #143
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…

Given that a seasoned and in-demand engineer can make anywhere from $250K to $500K annually working for a big co, without a 3-letter title and 3-letter title equity, there seems little incentive to accept $150K or less and ~0.5% or less equity. Calculate your expected return over the next 5 years. Most startups come up really short.

$250 - $500k? Got anything to back up this claim?

Re: We need to rethink employee compensation

#147

Post by balls187 »

If you believe that options are worthless and will always be worthless, aren't you tacitly saying you believe the company is worthless and will always remain that way?

So why are you even working at that company to begin with?

Is it because people are fatigued by having their options amount to nothing?

Re: We need to rethink employee compensation

#148

Post by DenisM »

tptacek wrote: post #108
branchless wrote: post #64

Earlier quoted context omitted.

> 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.

In my experience it's the opposite: the fact that employees generally either (a) regard options as worthless or (b) round allocations down to the nearest 100 basis points is a reason not to use them in compensation: the implied discount employees give them makes equity comp very expensive. In fact: for this reason, I'd be especially wary of companies trying to buy a few thousand dollars of annual fully loaded cost wi…

Or plain lack of money to pay more.

In the life of every company there is a moment when there is not enough money to hire the next two people, but there is also a feeling that hiring those two people would take the company to the next stage so much faster as to make the hiring worthwhile. At that point you either raise more money directly from investors, or offer more equity to prospect employees, or hold back on the growth.

Raising extra money takes time, so it may not fit with the timing of things. Holding back should probably be preferential to giving away equity, however somethings growth is unusually important, for example when you're in the middle of a land-grab.

Re: We need to rethink employee compensation

#150

Post by Balgair »

toby wrote: post #78
Balgair wrote: post #55

Earlier quoted context omitted.

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.

Good idea, but then you are relying on what they told you the investors put in for that equity. If you can find another method to verify that info, all the better. Also, you are correct in saying that you should get at least that valuation matching, if not more due to the seat you put in.
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