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We need to rethink employee compensation

aaronkharris.com

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Re: We need to rethink employee compensation

#181

Post by guimarin »

tptacek wrote: post #162
michaelochurch wrote: post #156

Earlier quoted context omitted.

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? B…

It happens all the time. More often than not the C-level will get a bonus on employee retention and tie the new stock vesting schedule up with that retention period. They in the meantime are able to immediately get bought out.

I think Michael has a very legitimate position here, and one that is not well understood at all.

As a side note, I think Netflix' strategy of paying people a lot of money with no stock/rsu's/options is the right one.

Re: We need to rethink employee compensation

#182

Post by bcheung »

Another thing that would make the options worth more (less of a risk) is if the company started making a profit they started issuing dividends.

This is not likely to happen though because the company is going to be focused on growth and then an exit and they can't grow as fast if they are paying out their profits instead of reinvesting them.

Re: We need to rethink employee compensation

#183

Post by acaloiar »

Not to discount the OP's points, but this smells like the tech industry equivalent of your worst Facebook friend—the one with a penchant for selfies with Starbucks skinny vanilla lattes—hashtagging an inane event with "whitepeopleproblems".

Re: We need to rethink employee compensation

#184

Post by rconti »

balls187 wrote: post #147

If you believe that options are worthless and will always be worthless, aren't you tacitly saying you believe the company is worthless and will always remain that way? So why are you even working at that company to begin with? Is it because people are fatigued by having their options amount to nothing?

No, TFA outlined the reasons that options may not become liquid even if the company is successful.

Re: We need to rethink employee compensation

#185

Post by dogma1138 »

walshemj wrote: post #68
MCRed wrote: post #54

Earlier quoted context omitted.

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.

To put this in perspective that's a lot less than last years share options (5 year plan) at BT. The last sharesave to vest returned >£100,000 Tax free if you had the max amount.

BT is a multi billion dollar company, not to mention that sharesave isn't the same as an equity compensation.

Share As You Earn SAYE is a savings plan in the UK which allows employees to save money from their salary in company shares.

The UK has really weird schemes because people have historically had no pension or savings plans from their employees (most PAYE workers still do not have pension as the date mandated by law is always being deferred).

With SAYE as far as i know the employer is not allowed to grant you equity, what they can do is give a fixed yearly rate (usually heavily discounted) for share purchases, but it's not as sweet as it seems. The dividends and the equity rights from the shares belong to the employer not the employee, this is basically a way to allow employers issue shares (in large volumes) without losing control over the company, having to do payouts, and decreasing the market value of their normal shares as SAYE shares are not tradeable.

It also allows employers to bypass various laws preventing normal employees from having too high of a share of the company, and ties employees to their employer since not only do they rely on it for their salary but also as their investment/savings provider and since SAYE plans are either 5 or 3 years long it pretty much means that invested employees will not living the company during the SAYE period unless they want to lose their investment (and yes they will lose it).

BT's Sharesave is also a "unicorn" and from the current buy-in value it will probably won't repeat it self, yes a few people who saved up the max amount (225 GBP a month) gotten about 80K in return. But and this is a big but those were the 1st shares issues at 80p per share, when they matured the shares closed at over 300pp/s the last round of the SAYE program had a buyin of 250pp/s so pretty much no one will see these returns again.

P.S. The money you gain for SAYE Isn't tax free you pay capital gains tax on it if you sell them once they are matured.

Also since SAYE with all of it's bells and whistles is a company options plan (with heavy tax incentives to the employer) it's still a risk, some people got huge returns others didn't since the share price was lower than the option price.

Re: We need to rethink employee compensation

#186

Post by bcheung »

rconti wrote: post #180
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.

Yes, you are correct. 43% as W2 vs 15% from capital gains. That should be factored in as well. I'll add that to the original comment.

Re: We need to rethink employee compensation

#187

Post by tptacek »

guimarin wrote: post #181
tptacek wrote: post #162

Earlier quoted context omitted.

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? B…

It happens all the time. More often than not the C-level will get a bonus on employee retention and tie the new stock vesting schedule up with that retention period. They in the meantime are able to immediately get bought out. I think Michael has a very legitimate position here, and one that is not well understood at all. As a side note, I think Netflix' strategy of paying people a lot of money with no stock/rsu's/op…

Strong agree on cash over options. I like how I understand Bloomberg to do it, too: internally liquid equity; ie, equity that is practically immediately as good as cash.

Re: We need to rethink employee compensation

#188

Post by bane »

Options should be thought by employees as a future bonus based on performance - a "thanks for sticking around when there was lots of hard work to do". Meaning your salary should be market rate and not lowered in exchange for options.

It's been a while, and I can't find it right now, but somebody once put together an analysis of average employee payout for companies with exits that valued the price of the options above their strike price (meaning they were actually worth something). My memory is hazy, but they found that a tiny fraction of employees managed to make something under $20k per year worked out of their options. And many of them were working under market rates for their services meaning the financial outcome, the years of belt-tightened living, and missed opportunities came out to something like under $10k extra compensation per year worked.

On the flip side, I know from personal experience, you can learn more in startups than in more traditional businesses, and so the experience you gain might be worth more to you over a career than any specific financial compensation.

Basically go into startups as an employee expecting to learn, but don't expect a big pay out. If you get one, count yourself lucky and enjoy.

Re: We need to rethink employee compensation

#189

Post by MCRed »

ryandrake wrote: post #91
MCRed wrote: post #60

Earlier quoted context omitted.

I've made more money investing in stocks and options than I have from options. Over 20 years as an employee (so excluding time as a founder) my returns from investments is 2-3X the return from startup stock options. And that's as only a part time investor. I like sure things (like I knew in 2001 from an understanding of economics that there would be a housing bubble and that it would eventually burst. I was never abl…

But that's not "getting rich off of salary". That's gambling on the stock market. Sure, there are plenty of people who hit that jackpot too, but let's not lump that together with the idea that 9-5 salary is a way to get rich.

Investing in the stock market is not a game of chance. You may lack the skill or discipline to engage in that activity, and that's fine, don't do it, put your time elsewhere, such as the real estate method I described.

Calling it gambling, however, is dishonest, and is popular among those who want to use that characterization to serve the purpose of denying people the opportunity to invest. For instance, despite working in startups for 20 years, regulations prevent me from being an angel investor (though it seems its common in california to simply ignore those regulations) ... because people like you think that I shouldn't be allowed to decide where to invest my money. Yet I could go to Las Vegas and blow $100k in a weekend.

So, no, it's not gambling. It's investing. And shame on you for saying otherwise.

Re: We need to rethink employee compensation

#190

Post by tedunangst »

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 have options for 0.4% of BuzzFlop. After 2 years, I walk away with 0.2%. After 2.5 years, Hooli buys BuzzFlop for $100M in stock. What do I have?
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