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We need to rethink employee compensation

aaronkharris.com

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Re: We need to rethink employee compensation

#291

Post by bane »

MCRed wrote: post #216
tptacek wrote: post #209

Earlier quoted context omitted.

Once again, these aren't so much opinions as they are mathematical facts. The modal outcome for a portfolio of startup A rounds is a 0% return on investment. If fully half the companies in a portfolio exit in the money --- which seems wildly optimistic --- and their average return is 150%, the portfolio loses money. Nobody is entitled to venture capital. Plenty of people start companies without it.

Yep, but I couldn't care less about the portfolio, and the founders shouldn't either. You're pointing out why VCs need big exits, and even a profitable one like this one may not be profitable "enough", but that "enough" is their portfolio view. From a founder view, we shouldn't be carrying the weight of the effective cost of the fact that the VCs can't pick companies worth a damn and want to make it up on us, if we h…

You should care about the portfolio, because that's the model VCs have used to decide to invest in your company.

Re: We need to rethink employee compensation

#292

Post by mzzk »

bcheung wrote: post #176
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.

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 m…

The amount (and degree) of variables is so large that the exercise is essentially worthless. How can you estimate the share price or probability of exit?

Re: We need to rethink employee compensation

#293

Post by storgendibal »

varelse wrote: post #285
vlasev wrote: post #269

Earlier quoted context omitted.

Would you care to expand on what makes you such an outlier? Would another person be able to go along in your footsteps?

A) I am not a (major) outlier (or many of my friends are major outliers too). Bottom line: Senior Engineers can make $250K+ today. Burn that into your synapses. The Netflix listings already posted here demonstrate that. I know Facebookers and Googlers making twice that or more and they weren't even acqui-hires. Glassdoor (valuable information source it is) IMO oversamples the discontent. Senior engineering positions…

Curious, are you talking salary $250K, or total comp, including (public) equity $250K?

Re: We need to rethink employee compensation

#294

Post by tonnesoffun »

pbreit wrote: post #57
threeeeawae wrote: post #35

Earlier quoted context omitted.

The latest shitty clause that Valley companies are including in their options contract prohibits you from selling fully vested and exercised shares even if you have a willing buyer . Apparently companies saw all the employees getting rich from private companies like Palantir and Facebook pre-IPO and considered that a problem to be solved. Check your contract, you probably don't "own" the stock you think you do.

Well, on one hand it is a pain the buns for the company in facilitating secondary transactions. On the other, it makes good sense that it should be doable. The secondary markets like Sharespost/Secondmarket don't seem to have made much progress in getting companies on board.

There are a few other secondary solutions, including mine (full disclosure: co-founder of EquityZen here).

Ultimately the company (the issuer of the options) holds the cards on these transactions. For a robust secondary private market, you need to:

- keep the company aware of the transactions, and understand their transaction process (right of first refusal, board approval, other transfer restrictions)

- provide that the buyer has been vetted and is an appropriate entrant on the company's Cap Table

- ensure that you are non encroaching on the company's own plans to provide systematic liquidity to their employees

- keep an audit trail of the transaction process to ensure no leakage of sensitive (or non-public) information

We're headed in the right direction. Pinterest deserves credit on a few different fronts:

1) Allowing employees to extend their window to exercise their options once they leave the company 2) Providing liquidity to their employees

I'm curious to hear from any hiring managers on this thread: do you think that offering liquidity/financing solutions for exercising options/helps attract better talent?

Re: We need to rethink employee compensation

#295

Post by tonnesoffun »

randomname2 wrote: post #23

"They note that the average time to IPO is now 11 years vs. 4 in 99, and that the overall number of tech IPOs is plummeting as privately funded companies raise huge late stage private rounds instead." What part do the increased regulatory requirements for public companies play in this? Might this be one of the unintended consequences of Sarbanes-Oxley?

Yes definitely. Increased regulatory requests means it takes longer and costs more to go public.

The Emerging Growth Company Act (EGC) helps this somewhat: companies with Clearly, the benefit of staying private (and still being able to raise $100M+ rounds) outweighs the consequences of illiquidity for employees....at least in the eyes of the founders and management.

Re: We need to rethink employee compensation

#296

Post by tonnesoffun »

randomname2 wrote: post #23

"They note that the average time to IPO is now 11 years vs. 4 in 99, and that the overall number of tech IPOs is plummeting as privately funded companies raise huge late stage private rounds instead." What part do the increased regulatory requirements for public companies play in this? Might this be one of the unintended consequences of Sarbanes-Oxley?

Yes definitely. Increased regulatory requests means it takes longer and costs more to go public.

The Emerging Growth Company Act (EGC) helps this somewhat: companies with Clearly, the benefit of staying private (and still being able to raise $100M+ rounds) outweighs the consequences of illiquidity for employees....at least in the eyes of the founders and management.

Re: We need to rethink employee compensation

#297

Post by kzhahou »

MCRed wrote: post #54
wwweston wrote: post #16

Earlier quoted context omitted.

> I tend to think of options as worthless, until they vest This is a good idea, but I'm not sure it takes things far enough. For the majority of developers, options are often not especially valuable even when they vest. The most common value outcome of a success/sale seems to be "modest bonus" (4 figures to low five figures) rather than a jump up to a different economic class. I suspect many devs could do as well by…

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.

The founders received (probably) an amount equal to all employees combined. Do you know?

Re: We need to rethink employee compensation

#298

Post by tptacek »

bane wrote: post #290
MCRed wrote: post #200

Earlier quoted context omitted.

Don't be silly. Putting in 3 million and taking 15 million out in 2-3 years is not a "loss after banking fees". VCs can want $100M or $1B, but it was the VCs that chose to sell this company for $30M when it could have been $300B Here's the ground truth: VCs are idiots. Yes, that one too. They have money, though, so people pretend otherwise.

You're certainly not paying for 24 people's salaries for 3 years with a $3m investment unless the company hits profitability very quickly (within the first year).

In fairness, it's more like Qtr1:5FTE, Q3:10, Q5:15, Q7:20 and so on.

Re: We need to rethink employee compensation

#299

Post by thoman23 »

abalone wrote: post #92
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…

"it's worth $0 until you exit" Are lottery tickets worth $0 until the drawing happens? No. They are worth $2, or the price you paid for them. Likewise, pre-exit options do have value (as you note), but it is nonsense to simultaneously say they are worth $0. Maybe the reason this is harder to grok is options don't have an established market price like lottery tickets do. Their early-stage value is simply a negotiation…

There is no way you could sell a lottery ticket for the price you paid for it. You could probably sell a $2 lottery ticket for $1...maybe. I know I wouldn't buy it...I would just buy the $2 ticket at the store and avoid the complications of the ownership trail and possible fraud.

I know, not exactly your main point.

Re: We need to rethink employee compensation

#300

Post by SeoxyS »

harryh wrote: post #58
threeeeawae wrote: post #35

Earlier quoted context omitted.

The latest shitty clause that Valley companies are including in their options contract prohibits you from selling fully vested and exercised shares even if you have a willing buyer . Apparently companies saw all the employees getting rich from private companies like Palantir and Facebook pre-IPO and considered that a problem to be solved. Check your contract, you probably don't "own" the stock you think you do.

Yes, it was a problem to be solved for several reasons: 1) 409A (option pricing) valuation problems 2) Increase in # of shareholder problems 3) Legal issues (for both the company and employee) if buyers of shares later felt deceived by sellers 4) Team cohesion issues if different employees were getting radically different prices for there sales You might disagree with the solution, but these are definitely real probl…

That's the value in derivatives. Equidate & others like it avoid all these problems by selling the economic interest of the stock without adding shareholders.
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