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Who pays when startup employees keep their equity?

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Re: Who pays when startup employees keep their equity?

#11

Post by buttershakes »

jusben1369 wrote: post #4
buttershakes wrote: post #2

This is very interesting. Options are really an unappealing mechanism to incentivize employees. I feel like they prey on people who really don't know any better, and don't understand the tax implications or the possibilities around future dilution. As a rule of thumb I discount face value of options by as much as 70%, that generally doesn't go over very well with people trying to convince you to accept them in lieu o…

Quick question. Do you work for a startup now with options? Or, have you in the past? I'm trying to work out if people who object to options would ever join startups. Or, if they're appetite for risk is too small to be a potential candidate.

I have started multiple startups, and joined others at various times. I've also professionally traded options. I have a huge appetite for risk, but the risk/reward isn't there for most early employees who are getting paid less cash in exchange for options. You just can't take them at face value. I would say many early stage employees aren't taking appreciably less risk than the founders themselves, but at a fraction of the upside.

Re: Who pays when startup employees keep their equity?

#12

Post by JoshTriplett »

jusben1369 wrote: post #4
buttershakes wrote: post #2

This is very interesting. Options are really an unappealing mechanism to incentivize employees. I feel like they prey on people who really don't know any better, and don't understand the tax implications or the possibilities around future dilution. As a rule of thumb I discount face value of options by as much as 70%, that generally doesn't go over very well with people trying to convince you to accept them in lieu o…

Quick question. Do you work for a startup now with options? Or, have you in the past? I'm trying to work out if people who object to options would ever join startups. Or, if they're appetite for risk is too small to be a potential candidate.

Discounting the value of options doesn't mean objecting to them completely, or not having an appetite for risk. But an option has to have a sufficiently large potential upside to take that risk. When you work for a startup, you take the risk that it'll fail, and that you get nothing except what you've already received. To compensate for that, the options need to provide a potentially huge upside, of the "never have to work again if I don't want to" size, not just "if this succeeds, the options might be worth what I could have easily made in a year or two at a non-startup".

Re: Who pays when startup employees keep their equity?

#13

Post by trhway »

reminded how 10 years ago upper class was trying to initiate grass roots and steer protests against options expensing. They failed and as a result we have RSU pretty much everywhere instead of options. The startups are the last bastion, and i think with the modern "who needs an IPO with such great C round (and related caching out for chosen ones)" approach, people will start to get the picture and the RSU will come there too.

Re: Who pays when startup employees keep their equity?

#14

Post by [deleted] »

iaw wrote: post #8
codeonfire wrote: post #7

Is the presumption that founders and investors are not trying to screw employees? I genuinely can't tell from the article. I thought it's just common knowledge that they will try to screw employees at every chance. With options it was different strike prices for management/ founders vs employees. With RSU's it is weird vesting schedules and forcing forfeiture situations.

This comment isn't very productive. Some high-level valley participants are definitely bad actors but the bulk of them are just normal people in positions of power.

[deleted]

Re: Who pays when startup employees keep their equity?

#15

Post by bhickey »

jusben1369 wrote: post #4
buttershakes wrote: post #2

This is very interesting. Options are really an unappealing mechanism to incentivize employees. I feel like they prey on people who really don't know any better, and don't understand the tax implications or the possibilities around future dilution. As a rule of thumb I discount face value of options by as much as 70%, that generally doesn't go over very well with people trying to convince you to accept them in lieu o…

Quick question. Do you work for a startup now with options? Or, have you in the past? I'm trying to work out if people who object to options would ever join startups. Or, if they're appetite for risk is too small to be a potential candidate.

Framing it as an appetite for risk is too simplistic. Risk adjusted returns matter.

For example, I've got a friend who's been working at a startup for about eight years. They have a looming exit. If it goes through, he'll probably walk away with $1.5m. Had he gone the salaryman route, that'd be money in the bank.

Re: Who pays when startup employees keep their equity?

#16

Post by delphinius81 »

jusben1369 wrote: post #4
buttershakes wrote: post #2

This is very interesting. Options are really an unappealing mechanism to incentivize employees. I feel like they prey on people who really don't know any better, and don't understand the tax implications or the possibilities around future dilution. As a rule of thumb I discount face value of options by as much as 70%, that generally doesn't go over very well with people trying to convince you to accept them in lieu o…

Quick question. Do you work for a startup now with options? Or, have you in the past? I'm trying to work out if people who object to options would ever join startups. Or, if they're appetite for risk is too small to be a potential candidate.

I worked at a startup for 2 years (left without exercising my options). I objected to options right from the start and during negotiations with the CEO said they should max out my salary in lieu of options. Options are funny money to trick potential employees into thinking their lower salary will pay-out in the end. But the reality is most start-ups do not have exits where rank and file employees get anything for their stock. Investors get paid first, then founders, followed by employees if anything is left - and usually there isn't unless the company has an IPO or was bought out because of superior growth.

That said, I am now co-founding a company and we plan to give future employees a long time period to decide whether they wish to exercise their options or not. If employees are willing to take lower salaries for equity for the sake of the company, companies should reward that sacrifice by letting the employee keep their equity options.

Re: Who pays when startup employees keep their equity?

#18

Post by jedberg »

This is where having a lobbying group would be helpful -- this really needs to be fixed through policy.

We need to get the tax law changed so that RSUs are taxed on liquidity instead of vesting. Then you'll still avoid the corruption the tax is supposed to protect against (paying an executives millions in what was previously untaxed compensation through RSUs in the 80s) but still allowing them to be given as startup equity compensation.

Re: Who pays when startup employees keep their equity?

#19

Post by DominikR »

gringofyx wrote: post #5

Either way it's a losing game, consider a company like Google - how would they attract new employees on either scheme given that the company has been around for 15+ years? The only people who win are those who get in early, or invest big. Any IPO ultimately results in people earning money who don't "work" for that money - that means the actual workers lose out everytime.

> Any IPO ultimately results in people earning money who don't "work" for that money - that means the actual workers lose out everytime.

It is wrong to believe that people would invest large amounts of money randomly without spending significant amounts of their time to make sure the investment will create them some returns.

Also they have the risk to actually loose 100% of their investment, which some guy employed at Google with a 6 figure income doesn't have.

Of course they'll need more profit to cover for the risk.

Think about it this way: If there were no investors there wouldn't be a Google or Facebook as we know it today as these companies didn't make a dime for the first 5 or 6 years of their existence.

You can be critical of these two companies (I am) but there are thousands of other companies in the IT sector that just wouldn't exists if they had to make profit right from the start and grow organically.

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