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We need to rethink employee compensation

aaronkharris.com

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Re: We need to rethink employee compensation

#211

Post by areyousure »

tedunangst wrote: post #194
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…

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

Why can't I be told what the strike price will be for the options for the next four years?

Re: We need to rethink employee compensation

#212

Post by MCRed »

harryh wrote: post #75
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%.

What % of the company do you think the 24th employee should get? Obviously it's highly variable depending on the role. #24 could be a COO or could be a receptionist. But for the sake of argument let's assume they're a mid level engineer (taking a stab at what MCRed might have been at the gig in question).

It's not a simply "$100k/$30M = Equity" situation, and I wasn't expecting people to go into this much detail.

My equity at hiring time was probably %1.5, I think. But there was vesting, of course, and also a whole lot of unsavory business, mostly perpetrated by the VCs.

Trying to go into the detail and tangle out exactly why I got what I got would be just airing a lot of drama from the past and not really applicable to others.

I only presented those numbers because they're two objective facts from the best payout I got working for a startup.

Re: We need to rethink employee compensation

#213

Post by billmalarky »

arbitrage314 wrote: post #168

I've made this point before, but since it's a bit relevant here, I'll make it again (sorry to repeat): If you're primarily interested in making money, or if you love the startup but not the compensation, you should NOT work at that startup. If you're a good developer, you can get a better deal by working at an established company and simply investing. This has been true for every startup offer I've ever seen. Ever. I…

How are you able to find opportunities to invest in early stage startups though?

Re: We need to rethink employee compensation

#214

Post by areyousure »

tptacek wrote: post #198
areyousure wrote: post #193

Earlier quoted context omitted.

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.

I don't understand. The alternative, as I detailed above, is "you get 1000 options per month for the next four years", which is also time-limited.

Re: We need to rethink employee compensation

#215

Post by pekk »

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.

How is that any worse than gambling with options?

Re: We need to rethink employee compensation

#216

Post by MCRed »

tptacek wrote: post #209
MCRed wrote: post #204

Earlier quoted context omitted.

That's the theoretical view of the VCs that they propagandize and that is accepted pretty widely. The reality is, VCs are herd animals, and when the herd is spooked they make a lot of stupid decisions. I've seen this more than once-- a later company was forced to sell for $10M, by the VCs, during another "oh the money spigot might be turning off!" It is not an orthogonal concern-- how was I to know the VCs were going…

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 happen to be good.

Nobody is entitled to venture capital, and starting a company without it is a good idea.

And VCs are not entitled to more equity & control than makes economic sense for the founders. That's what I'm opposing, but I don't think you disagree.

Re: We need to rethink employee compensation

#217

Post by vishvananda »

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 main difference would be the strike price of the options, which can make a huge difference in both taxes and income at a liquidity event. Assuming the company is growing over time, you absolutely want option 1. The strike price is determined by a 409a evaluations.

Example: assume the valuations each year are 0.10, 0.20, 0.30, 0.40, 0.50 and the sale price is $1 at year 5.

In option 1 your strike price will be $0.10 for all 100 options so should you choose to exercise you have to pay $10, netting you $90. You can choose to exercise these as they vest, paying $2.50 each year. If you choose to exercise on vest, your cost is the same, although you potentially will owe AMT.

This means that if you make enough money you essentially have to declare the difference between strike price and current value as income. This means you will have to potentially pay taxes on an extra $25 over the four years.

In option 2, exercising the options will require $5.00, $7.50, $10, $12.50 for a total of $35. This means you only make $65 in the sale.

Re: We need to rethink employee compensation

#219

Post by [deleted] »

areyousure wrote: post #214
tptacek wrote: post #198

Earlier quoted context omitted.

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

I don't understand. The alternative, as I detailed above, is "you get 1000 options per month for the next four years", which is also time-limited.

[deleted]

Re: We need to rethink employee compensation

#220

Post by aetherson »

icedchai wrote: post #154
pbreit wrote: post #52

Earlier quoted context omitted.

Yeah, but no one ever got rich off salary.

Not exactly true. You can get pretty rich in ~15 years if you save and invest a good percentage. The average American consumer is incapable of doing this, of course. Why save when you can spend, spend, spend?

Let's say that you get paid $100k for 5 years, then $150k for 5 years, and then $200k for 5 years. Nominal. So you take home $80k, $120k, $150k.

You invest half of your take-home salary, so $40k, $60k, $75k.

You invest everything at 4% real return.

That about $1 million after those fifteen years.

It's....... pretty rich, sure. It's also a LOT of savings. I'd say it's possible to get rich on salary if your salary gets high early and fast, or by the time you retire, maybe less so in fifteen years.

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