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We need to rethink employee compensation

aaronkharris.com

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Re: We need to rethink employee compensation

#191

Post by bane »

tptacek wrote: post #178
bane wrote: post #173

Earlier quoted context omitted.

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…

Yeah, I agree. For VC funded, the investors won't be getting a good return (if any) on their investment. They'll probably lose money after all the venture banking fees are out of the way.

I think the question of what is a good return these days is a bit crazy. For this size company VC's should be looking at wanting a $150-300m exit on the low end. But unicorns are polluting this kind of idea.

For non-VC funded (bootstrapped, etc.) it's about an expected sale price for an established minimally growing company.

Re: We need to rethink employee compensation

#192

Post by varelse »

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 wouldn't even call this inflated in the valley anymore. There are outliers making serious money right here, right now. Such a salary pairs nicely with our lovely $1M+ median house price to insure we can never afford to buy one without living like a monk or going up to our eyeballs in debt. If you don't believe me, then just who's buying those $2M+ houses that stay on the market a week or two? SPOILER ALERT: Double income couples each making that kind of money.

In fact, I'm making the kind of money from my first post (not bragging, you asked for evidence). But what's really funny are the isolated unicorns out there making $1M+ annually because they were both very smart and very lucky to have the specific skills for a hot technology that ignited a runaway bidding war between giants. I have never been close to that lucky but I have witnessed it firsthand.

As for me, my offers are $250K+ when I've interviewed for big co or late stage startup positions. In contrast, my startup offers are $150-$200K with 0.7% or less equity. The startup offers are completely uninteresting to me at that level. I'm better served branching out on my own which I may or may not do someday (YOLO and all that).

Re: We need to rethink employee compensation

#193

Post by areyousure »

tptacek wrote: post #166
areyousure wrote: post #164

Earlier quoted context omitted.

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".

Why is it phrased as 1/48 of my (say) 48000 optipns/shares vest rather than a fixed amount of 1000 options/shares are awarded every month?

Alternatively, why aren't salary offers phrased as "you will get $640,000, which vests at 1/48 per month"? (Usually you'll hear "your salary is $160,000 per year and we do payroll monthly.)

Re: We need to rethink employee compensation

#194

Post by tedunangst »

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…

The strike price for options you receive two years from now will likely be much higher than the strike today.

Re: We need to rethink employee compensation

#195

Post by aaggarwal »

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…

As a student, I used to see all high valuations of upcoming companies, and think that getting options at a startup is the best strategy for an employee, and one can get a shortcut to be rich. Then, I woke up and realized its not really true 99.9% of the time.

Re: We need to rethink employee compensation

#196

Post by sytelus »

I think lot of these idiosyncrasy stems for arcane SEC rules like 500 investors and restrictions on IPOs. Startups and tech community should lobby to change all these. Why can't we have full fledged public exchange where anyone, any startup can come in and sell its stock with no restrictions at all. If people want to buy in to their vision, sure let them be. Lot of rules around IPO and SEC are placed to protect the general public from fraud and prevent their confidence evaporate from investments. But let's say if you build an exchange called "High Risk Securities Exchange" and let anyone list themselves, publish their stocks and allow anyone buy or trade them as they like then lot of artificial artifacts we see today will be gone. These kind of trading exchanges can live side by side of conventional public exchanges.

One thing we need to understand is that starups most likely won't have money to pay same amount as their established counter parts. All they have is their vision to sell and that means options must remain critical part of their offerings. If IPOs are fizzling and employees don't get rewarded for the risks they took then ultimately existence of startups itself is at risk.

Re: We need to rethink employee compensation

#197

Post by MCRed »

tptacek wrote: post #178
bane wrote: post #173

Earlier quoted context omitted.

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 the fee of taking half the company, in this situation the VCs: -- Cut the valuation by %90. If we had been allowed to execute the founders vision (which could have been done bootstrapped) we would have exited close to $300M. (A competitor went that route, they started after us, exited before us for > $300M

-- Set us back by 6-18 months. One of the decisions forced on us by the VCs was to build on top of [another one of their portfolio companies technologies, we'll call it FOO], but FOO didn't have the performance or features we needed. Literally lost at least half a year on the product because of this (And a whole lot of money paid to FOO and their consulting arm.)

-- Forced us to sell before we were ready. When the economy looked like it was turning the VCs needed to raise cash to make their funds look successful, and decided that we weren't going to get 5 years after investment, since they could offload us now for a nice multiple they did so.

It happens this company could have gone without the VC round and bootstrapped its way. If it had done so, it probably would have exited for around $1B, maybe much more given that it was kicking google's ass.

Re: We need to rethink employee compensation

#198

Post by tptacek »

areyousure wrote: post #193
tptacek wrote: post #166

Earlier quoted context omitted.

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".

Why is it phrased as 1/48 of my (say) 48000 optipns/shares vest rather than a fixed amount of 1000 options/shares are awarded every month? Alternatively, why aren't salary offers phrased as "you will get $640,000, which vests at 1/48 per month"? (Usually you'll hear "your salary is $160,000 per year and we do payroll monthly.)

Because when the four years are up, you don't automatically keep getting more options.

Re: We need to rethink employee compensation

#199

Post by tptacek »

MCRed wrote: post #197
tptacek wrote: post #178

Earlier quoted context omitted.

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 the fee of taking half the company, in this situation the VCs: -- Cut the valuation by %90. If we had been allowed to execute the founders vision (which could have been done bootstrapped) we would have exited close to $300M. (A competitor went that route, they started after us, exited before us for > $300M -- Set us back by 6-18 months. One of the decisions forced on us by the VCs was to build on top of [another…

Usually, the problem is the opposite. A 30MM acquisition is a limping outcome for a VC. Usually, the problem is that the team wants to sell, so that equity will be worth something, and VC wants the company to shoot the moon, because a 1.5x outcome doesn't move the dials, and the model is that the 10x's pay for the 0x's.

There's not a lot you can do as an employee about mismanagement that results in crappy outcomes. But it's an orthogonal concern to how equity is allocated. The commenter upthread was right when they said: part of your job as an employee is to pick the right company to work for.

Re: We need to rethink employee compensation

#200

Post by MCRed »

bane wrote: post #191
tptacek wrote: post #178

Earlier quoted context omitted.

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…

Yeah, I agree. For VC funded, the investors won't be getting a good return (if any) on their investment. They'll probably lose money after all the venture banking fees are out of the way. I think the question of what is a good return these days is a bit crazy. For this size company VC's should be looking at wanting a $150-300m exit on the low end. But unicorns are polluting this kind of idea. For non-VC funded (boots…

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.

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