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We need to rethink employee compensation

aaronkharris.com

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Re: We need to rethink employee compensation

#171

Post by damoncali »

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…

it's disappointing that the author didn't even seriously discuss the possibility of simply paying higher salaries in lieu of equity. Apparently that's simply taboo.

I think most people would like that, but options can be created out of thin air, while money cannot.

Re: We need to rethink employee compensation

#172

Post by avz »

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 can't pay my rent with options.

This indicates that what you're looking for at the moment is cash, not ownership over assets. This is fine. However, this preference is by no means universal. I imagine that beyond certain amount cash isn't useful anymore and you begin looking for ways to invest it anyway.

Generally, cash loses value due to inflation, but offers high liquidity (you can spend it right away). Many other assets offer capital gains, but are a lot less liquid (you cannot easily sell them, e.g. the options in the blogpost).

I wonder to what degree the preference for cash expressed by the author of the blogpost may be driven by low interest rates (which reduce the appeal of many types of illiquid assets) and low inflation (which increases the appeal of cash) thus tipping the balance of incentives in favor of cash. Probably not the whole story, but may be a factor?

Re: We need to rethink employee compensation

#173

Post by bane »

tptacek wrote: post #114
branchless wrote: post #70

Earlier quoted context omitted.

That says it all really. $30M and you see under $100k as 24th employee. So 0.3%.

30bp is not a low number for employee #24. I got a huge windfall from a year and a half I worked for just 50bp, as employee #5 and a principal contributor. Do the math. Cut 30MM in half, and give half to investors. That leaves 15MM. Divide that 24 ways and nobody's getting 7 figures. But of course, that's not how it works; at 30MM, even an extremely egalitarian division of what's left after investors recoup is still…

Sure, $30m isn't a great exit from a VC fast growth point of view, but with burn rates as you stated (if their revenue is about their burn) it's at or better than the traditional 5 x Static Revenue figure used for more established buyouts.

Of course in crazy VC world this is probably supposed to be $12billion valuation or some nonsense to be worth it.

Re: We need to rethink employee compensation

#174

Post by totalrobe »

chrisdbaldwin wrote: post #158
totalrobe wrote: post #146

Earlier quoted context omitted.

$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.

I was hoping some of these big numbers would show up on the #talkpay twitter excitement a while back, but didn't see anything close.

Re: We need to rethink employee compensation

#175

Post by avz »

Options and equity are financial instruments. Like mortgage, but with different rules.

With a mortgage, you're buying a present house with your future income. Presumably because you cannot afford to pay for it in cash right now.

With options, the startup is compensating you for your present work with a future share of ownership of the company you're helping to build. Presumably because it cannot afford the risk of accepting the fixed expense of your salary right now.

It's hard to tell whether the author is right that the current compensation structure needs to change. The real question is: are there potential employees around the labour market who accept the risk and prefer the potentially large future bounty over fixed income at present?

Re: We need to rethink employee compensation

#176

Post by bcheung »

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.

Your potential payout is your number of shares x the share price.

So let's say that comes out to $100K.

You have to discount that to present value. Money is worth more now than it is in the future.

Assuming an interest rate of 5% and there being a liquidity event in 5 years that is (1.05 ^ 5).

So $100K in 5 years at 5% is worth $78K now.

You also have to factor in risk. There are various models but I like to simply multiply by the probability of exit.

So if there is a 10% chance you will see something then I take the $78K and multiply by 0.10 which comes out to $7.8K.

Also, if you exercise early there is even more risk. Let's say you paid $10K for them. That $10K invested at 5% would have netted $10K * 1.05 ^ 5 = $12.8K.

So you are risking $12.8K to make $78K. But I would compare it as $12.8K vs the adjusted average expected return ($7.8K).

Re: We need to rethink employee compensation

#177

Post by harryh »

dman wrote: post #167
harryh wrote: post #120

Earlier quoted context omitted.

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 :) .

Because I like making things and working with other people and don't really like meetings or traveling.

Re: We need to rethink employee compensation

#178

Post by tptacek »

bane wrote: post #173
tptacek wrote: post #114

Earlier quoted context omitted.

30bp is not a low number for employee #24. I got a huge windfall from a year and a half I worked for just 50bp, as employee #5 and a principal contributor. Do the math. Cut 30MM in half, and give half to investors. That leaves 15MM. Divide that 24 ways and nobody's getting 7 figures. But of course, that's not how it works; at 30MM, even an extremely egalitarian division of what's left after investors recoup is still…

Sure, $30m isn't a great exit from a VC fast growth point of view, but with burn rates as you stated (if their revenue is about their burn) it's at or better than the traditional 5 x Static Revenue figure used for more established buyouts. Of course in crazy VC world this is probably supposed to be $12billion valuation or some nonsense to be worth it.

I'm not following. I'm not venturing an opinion; I think I'm stating a fact. Stipulate:

* VC funded company

* 24 employees

* It doesn't matter how the VCs feel about the company. 30MM is not a very lucrative outcome for that company, mathematically.

You can make 30MM be an amazing outcome, but not if you bought yourself to an exit at barely-profitable on 6MM annual revenue using VC money.

30MM is a fantastic outcome for a bootstrapped company.

Re: We need to rethink employee compensation

#179

Post by chrisdbaldwin »

totalrobe wrote: post #174
chrisdbaldwin wrote: post #158

Earlier quoted context omitted.

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

I was hoping some of these big numbers would show up on the #talkpay twitter excitement a while back, but didn't see anything close.

I feel you. It seems like the very high paid tech workers prefer to be incognito. This makes sense since they must have an essential and scarce skill set to bring in that kind of money.

Re: We need to rethink employee compensation

#180

Post by rconti »

bcheung wrote: post #134

My thoughts on options are pretty much identical except I would say "worthless" no "worth less". I would also add that with an option position you are most likely giving up a higher salary and the opportunity cost that comes with it. An extra 30K each year invested at 5% in 5 years is worth more than 200K lump sum in 5 years (200K discounted at 5% for 5 years is $157K). You also have to factor in the probability of a…

I didn't quite follow your scenario, but of course you'd be paying 9.3 CA and 28 Fed on your salary as well. And you wouldn't be paying FICA on capital gains.
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