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We need to rethink employee compensation

aaronkharris.com

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Re: We need to rethink employee compensation

#311

Post by areyousure »

tptacek wrote: post #267
areyousure wrote: post #255

Earlier quoted context omitted.

Can't the strike price be set in the employment contract right now?

Possibly among other issues, because if you grant options to an employee that are below the fair market value of the company, you've just created immediately taxable income for the employee.

I think this hits the target.

As far as I understand, granting an option now with a currently "fair" strike price which "vests" in the future (but only if the person is still employed), does not create a taxable event at the time of vesting. However, granting an option in the future at the exact same strike price at the exact same time, creates a taxable event.

So my understanding is that option vesting is "simply" tax-preferred.

Re: We need to rethink employee compensation

#312

Post by bcheung »

mzzk wrote: post #292
bcheung wrote: post #176

Earlier quoted context omitted.

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?

You can't really but if you were to think about it that's how I would go about it. You can test different values and probabilities that you think are (likely|conservative|optimistic) and go from there. That gives you a range and a ballpark for different scenarios.

Personally though, if I can't predict something with > 90% accuracy/reliability then I'm not interested in investing in it.

Re: We need to rethink employee compensation

#313

Post by Bahamut »

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…

This is a fascinating idea - seems to be a lot less of a lottery than employee options.

Are there any other aspects that should be considered?

Re: We need to rethink employee compensation

#314

Post by joeblau »

I was going to write a blog post about this as well from the employee said based on a some quotes from Marc Andreessen. I just listened to an interview where Dan Primack interviewed Marc Andreessen and Marc made some really good points about timelines for public and private companies. Marc said:

> the time frame for how public companies think and how they are able to invest has shortened dramatically and correspondently the time frame for how private companies can think has elongated. [1]

> they (investors) tell the public company give us the money back this quarter and they tell the private company "no problem, go for ten years"

After I listened, I wondered why a talented employee would want to stay at private company that is going to take 10+ years to IPO?

[1] - https://soundcloud.com/a16z/a16z-podcast-taking-the-pulse-of...

Re: We need to rethink employee compensation

#315

Post by exacube »

ryandrake wrote: post #258
varelse wrote: post #192

Earlier quoted context omitted.

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…

Congratulate yourself, because you are, for sure, a fortunate outlier! I don't doubt that there exist engineers out there making $250K+, but they are definitely not the norm, big company or small. Check out a bigger sample of Bay Area companies on Glassdoor. My bet is you'll find the middle 90% to be between, say, $90K and $150K.

Every level 5 (senior) engineer at Google and Facebook converge around $250k in total yearly income (probably more for facebook recently since their stock tripled in the past year).

Re: We need to rethink employee compensation

#316

Post by areyousure »

vishvananda wrote: post #217
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 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.…

And just to see if I understand correctly, if you exercise on vest, you have an extra $25 of taxable income over the four years, but then $25 less at year 5? There is no sense in which you have more taxable income; its distribution over time has merely changed.

Re: We need to rethink employee compensation

#317

Post by dang »

MCRed wrote: post #205
tptacek wrote: post #202

Earlier quoted context omitted.

Here's the ground truth: if you build a company with someone else's money, they're going to get a huge chunk of the upside, and the original management is going to retain control only as long as they hit their numbers. Hopefully, nobody is saying employees shouldn't be wary of VC funded companies. They definitely should.

No, that's not the ground truth. That's the rationalization that founders tell themselves to justify being screwed over. If you take someone else's money, they should get ownership proportional to their investment, yes. Their impact on whether original management retains control should be proportional to their ownership. The problem is, the crazy ideology of VC worship that has taken hold allows VCs to get disproport…

> I'm getting downvoted for saying VCs are idiots. (elsewhere people are getting upvoted for saying "Deniers are morons", so it's not the name calling. Its' the "if I can just get thur YC and get VC funding I'll have it made!" ideology that pervades HN.

No, there's a critical difference between your statement and that one: VCs are an identifiable class of people. Saying they're all idiots (something you don't know, couldn't possibly know, and indeed is not only false but obviously so) is attacking a specific group of people. "Deniers are morons", while obviously not a high-quality thing to say, is closer to a tautology. Both break the HN guidelines, but the former is worse.

This is not ideological. One needn't agree with everything every VC ever did to insist that calling them all idiots is wrong, breaks the site rules, and is correctly downvoted.

Sam once wondered whether we should make it explicitly against the HN guidelines to attack whole classes of people. At the time I said that sounded too legalistic. But it stuck in my head, and I have to say that every example I've seen come up in practice since then has suggested the value of such a rule. This is a good example.

Re: We need to rethink employee compensation

#318

Post by tptacek »

RyanZAG wrote: post #277
areyousure wrote: post #214

Earlier quoted context omitted.

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.

It's much easier on the accountants and the share spreadsheets to just assign you 48000 shares and make up funny 'vesting' rules than to update the spreadsheet every month to add 1000 shares for you. It's literally just ease of bookkeeping. When the accounting and law professions catch up with the tech I think we'll see this all being much simpler, as with government and driving licenses and all the other pointless b…

When a company issues an employee an option at below its fair market value, it has literally created income for the employee, not in a funny accounting sense but in reality.

Replacing vesting with options artificially discounted to the FMV of the company at hire might not be different fundamentally from vesting, but it seems like there's lots of ways to abuse the capability of issuing discounted options.

Re: We need to rethink employee compensation

#320

Post by anon3_ »

The whole concept of options as something to supplement salary is bullshit. It essentially means that as an employee, you're hedging the risk and taking a lower salary for it.

In addition to you taking the risk of that option, even in the most optimistic outcomes for the company, your shares could have been watered down in various ways.

You could work for a startup for a year and get fired early on and receive no options.

The whole thing is a employees getting ripped off. We keep telling ourselves there's a rose garden after we get X.

I recommend the book "How to stop worrying and start living" by Dale Carnegie.

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