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We need to rethink employee compensation

aaronkharris.com

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Re: We need to rethink employee compensation

#161

Post by erobbins »

S4M wrote: post #88
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.…

> I prefer Wall Street's model of annual profit sharing. The difference is that Wall Street has profits to share. A standard company has much less profits than Wall Street, and a startup loses money. Find a way to create a company that creates a positive value for the society while having Wall Street like profits, and I can guarantee you will become rich.

> has profits

a crazy concept in silicon valley

Re: We need to rethink employee compensation

#162

Post by tptacek »

michaelochurch wrote: post #156
tptacek wrote: post #144

Earlier quoted context omitted.

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…

I'm confused how that could work. Let's take the same employee but have them leave the company, executing their options, just before Hooli acquires them. How do they end up vesting at all?

Are you saying: the vesting schedule on your as-yet unvested stock might reset when the company is acquired?

How often does that happen? How often does the exact opposite thing happen --- accelerated vesting on change of control? Because that other thing also happens.

Re: We need to rethink employee compensation

#163

Post by bcheung »

ryanSrich wrote: post #20
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.

> Which is too far in the future to count on. Actually you should count on them always being worth $0. Not only for compensation purposes but for your personal psychology. It's better to tie yourself to reality.

Sun Tzu would agree with you. People need to see things as they most likely are (worthless) not as they like to see things (I'm going to be rich).

Re: We need to rethink employee compensation

#164

Post by areyousure »

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…

I've long wondered about something, but I haven't been able to figure it out. This may be my best chance.

What is the difference between the following two compensation strategies: (1) You get 100 options, that vest at 1/4 after one year and 1/4 after every following year. (2) You don't get any options now. You will get 25 options, which can be exercised immediately (or whatever the equivalent status is of vested options), after one year. And similarly three more times.

I assume it's 30% (a) taxes, 65% (b) psychology, and 5% (c) something that happens if there's an IPO or other exciting event?

In short, where can I read about what startup compensation is, why it is the way it is, and the math behind how much it's worth?

Re: We need to rethink employee compensation

#165

Post by bcheung »

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.

That's an expensive lottery ticket. I used to do that, but on my 3rd startup now and yet to see anything. I could have bought a new car with what options I've converted.

Re: We need to rethink employee compensation

#166

Post by tptacek »

areyousure wrote: post #164
tptacek wrote: post #144

Earlier quoted context omitted.

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…

I've long wondered about something, but I haven't been able to figure it out. This may be my best chance. What is the difference between the following two compensation strategies: (1) You get 100 options, that vest at 1/4 after one year and 1/4 after every following year. (2) You don't get any options now. You will get 25 options, which can be exercised immediately (or whatever the equivalent status is of vested opti…

I'm not following.

The normal way it works: you get 1/48th of your allocation every month you work there, EXCEPT that you don't get the first 12 months worth until you stay for a whole year --- the first 12 months are "all or nothing".

Re: We need to rethink employee compensation

#167

Post by dman »

harryh wrote: post #120
pzb wrote: post #111

Earlier quoted context omitted.

The percentage really doesn't matter. Assume that you could get a $150K cash/stock at a public company (meaning concrete valuation). A startup offers you $80K and says "here is equity to make up the difference". If you assume three years and a 10% chance of them being worth something that means you need RSUs worth at least $2.1M to meet expected loss of salary. I highly doubt you are getting that.

Startups aren't a roll of the dice where they are all the same with equal probabilities of success. Make good decisions. Join the right team.

If youre great at identifying the right team, why not work as a VC rather than working as an employee :) .

Re: We need to rethink employee compensation

#168

Post by arbitrage314 »

I've made this point before, but since it's a bit relevant here, I'll make it again (sorry to repeat):

If you're primarily interested in making money, or if you love the startup but not the compensation, you should NOT work at that startup.

If you're a good developer, you can get a better deal by working at an established company and simply investing. This has been true for every startup offer I've ever seen. Ever.

I've considered lots of startup jobs because I believed strongly in the companies. Every single time, however, I was able to get a larger chunk of the company by keeping my current job and simply investing.

To give an example, my current job pays about $250k, and one year, I invested $100k of that into a startup, leaving me with ~$150k of salary. This $150k + startup equity was a better deal than the startup was offering in both salary and equity. Plus, equity bought as an investor is much less tax toxic than equity options received as an employee of a startup.

On the other hand, most people who work at startups aren't interested in money. If that's you, that's totally cool! I wish I could care less sometimes.

Re: We need to rethink employee compensation

#169

Post by jackgavigan »

fredkbloggs wrote: post #43
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.

Not all illiquid assets are worthless. It's specifically the combination of being prohibited from selling and no prospects for ever receiving a dividend that make these shares worthless. In fact, a share you cannot sell but does pay dividends is very similar to the kind of revenue- or profit-sharing arrangements the author suggests.

> ..prohibited from selling...

That would be a Big Red Flag for me.

Re: We need to rethink employee compensation

#170

Post by dreamdu5t »

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?

I don't know about 500k but 250k is achievable at big companies that are serious about tech talent and matching responsibility with compensation.
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