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We need to rethink employee compensation

aaronkharris.com

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Re: We need to rethink employee compensation

#151

Post by inspectahdeck »

The third point here seems wrong to me:

>The third reason for why individual options are probably worth less now than they used to be is that both employer and employee need to account for the fact that the time until IPO or liquidity is longer than it used to be. This is a big issue. To get the true value of offered comp, employees need to add their offered salary to the present value of the options offered. When calculating that, the further out the payout, the less it is worth today

This assumes a constant payout, which defeats the purpose of options. If there were a set date and set payout, the company should just offer cash bonuses or similar.

The value of an option increases the further the expiration date is [0]. He even says:

>You can be pretty sure that a company currently worth $10mm won't be worth $1b in 3 months, so you have a reasonable band of expectation.

Sure, but it might be in 5 years. You're granted an option as a bet that it might grow that big by the time you cash out - not to lock in some set amount of compensation 3 months from now.

Maybe I'm missing his point. Sure, employee compensation might need to be rethought - but not because options are a bad tool. Companies grant options at an early stage because of the long time horizon and high volatility [1]. That's what makes them valuable. If you want your compensation to be liquid and predictable, you should probably just ask for more cash.

[0] https://en.wikipedia.org/wiki/Option_time_value [1] https://en.wikipedia.org/wiki/Black%E2%80%93Scholes_model

Re: We need to rethink employee compensation

#153

Post by 11thEarlOfMar »

I'd consider tossing profit sharing into the compensation package. Not instead of, but in addition to. The 'CFO' could commit a (minor) portion of profit to profit sharing, perhaps on a tiered basis. Add that into the package, and the employees have a bridge between their (below market?) salary and in-money options that gets more cash in their pocket as the company starts to succeed. I'd even go so far as to say that motivating employees to strive towards a profitable business structure is a more pure motivator than equity.

Does anyone have experience with this approach?

Re: We need to rethink employee compensation

#154

Post by icedchai »

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.

Not exactly true. You can get pretty rich in ~15 years if you save and invest a good percentage. The average American consumer is incapable of doing this, of course. Why save when you can spend, spend, spend?

Re: We need to rethink employee compensation

#155

Post by rconti »

JonFish85 wrote: post #83
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.

Which is a risk, especially in companies where the strike price is close to $100/share. If it's going to be in the $10k+ range, is it really worth it to potentially reduce your future tax burden? Maybe. But it's also possible that your shares aren't worth that exercise price. Speaking only for myself, in my experience I decided to wait to see if the price was ever justified before buying the shares, and if it means a…

Yep. Just because you CAN early exercise does not mean you can afford to do so. I was fortunate because I was able to early exercise shortly after grant but when I knew the company was going public. Had to borrow some money to do so, but the couple hundred I probably paid in interest was more than made up for in the tens of thousands I saved in income taxes. It takes the right scenario, to be sure. At the time I had no mortgage interest deduction so I could afford a double-digit paper AMT gain; I was still only subject to normal income taxes. In theory when you leave the company, if it has not gone public, you get paid back the money you put in. In practice, if it goes out of business, you just lost all of the money you put in.

Re: We need to rethink employee compensation

#156

Post by michaelochurch »

tptacek wrote: post #144
michaelochurch wrote: post #72

Earlier quoted context omitted.

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…

Vesting resets wouldn't apply to an IPO, but they'd apply to an acquisition where the bought company is paid-for in stock and vesting applies to the new stock.

Let's say that the employee has 0.4% (after dilution) of BuzzFlop with a 4-year vesting cycle. After 2.5 years, BuzzFlop is bought by Hooli for $100M in Hooli stock. The employee doesn't get $250k in walk-away cash, but $250k in Hooli stock, subject itself to a vesting schedule (and possibly a "refresher"). If that employee gets cliffed (which can happen in a merger) then none of that stock ever vests.

Re: We need to rethink employee compensation

#157

Post by exelius »

There's a simple solution here: make employee options liquid during major fundraising events. So when you close your round B/C/etc, give employees 30 days or so to exercise their options at the pre-money valuation. If you're nervous about employees exiting too early, pick a high valuation (say, $50M) and the option exercise clause doesn't kick in until then (at that point dilution shouldn't be an issue).

Re: We need to rethink employee compensation

#158

Post by chrisdbaldwin »

totalrobe wrote: post #146
varelse wrote: post #143

Earlier quoted context omitted.

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?

FWIW I knew a systems architect/senior dev making ~$350k back in 2002. Those numbers are not as blown up as they seem.

Re: We need to rethink employee compensation

#160

Post by mahyarm »

erichurkman wrote: post #53
mpdehaan2 wrote: post #10

Earlier quoted context omitted.

The typical thing I've seen is 1/4 of your options will vest after 1 year, upon which 1/48 of your options vest every month thereafter. Other companies may do it differently. Also if you leave the company early, you will usually have to pay some trivial amount (possibly thousands though) to keep the options. This has at least been the case at all startups I've seen. With the 1-year cliff in place, I'd rather options…

The vast majority of new option grants for VC-backed companies are under the 1/48 monthly with a one year cliff. More companies are now switching to converting ISO grants to NSO after you leave a company, and allowing a longer term to exercise. Pinterest famously allows, in some cases, employees to have up to 7 years to exercise vested shares after leaving [0]. Most companies do not do this (yet). Exercising an ISO g…

How are ISO grants better if your likely to hit AMT even after exercising a few thousand dollars of options?
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