We need to rethink employee compensation • Hacker News Board

Re: We need to rethink employee compensation

#321

Post by vishvananda » Thu, Jun 25, 2015, 2:17 AM UTC

areyousure wrote: post #261

vishvananda wrote: post #217

Earlier quoted context omitted.

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.…

Why can't the options have a strike price of 0.10 in option 2? (I assume I should look up "409a", the magic keyword to answer my questions?)

Yes once upon a time companies could set whatever they wanted for the strike price but not anymore. I think there might still be a way to do it with complex bookkeeping but AFAIK everyone just uses the 409a value.

Re: We need to rethink employee compensation

#322

Post by vishvananda » Thu, Jun 25, 2015, 2:18 AM UTC

areyousure wrote: post #316

vishvananda wrote: post #217

Earlier quoted context omitted.

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.

Actually your taxable income in the second case is less because you made less money. :)

Re: We need to rethink employee compensation

#323

Post by rgbrgb » Thu, Jun 25, 2015, 2:30 AM UTC

bane wrote: post #301

tptacek wrote: post #298

Earlier quoted context omitted.

In fairness, it's more like Qtr1:5FTE, Q3:10, Q5:15, Q7:20 and so on.

True, but I think lots of folks here have no idea how much revenue you have to bring in to cover 20+ employees. Lots of people think it's just salary*20.

Well in a software company salary is generally the dominating factor, so it is on the order of what you mentioned (times a multiple depending on how cushy the amenities). In my unqualified estimation, the multiple can kill you... seems like about 2x salary for SF, 1.6x for NYC, though my company prides ourselves on keeping it a lot leaner than many of our compatriots.

Re: We need to rethink employee compensation

#324

Post by ryan90 » Thu, Jun 25, 2015, 2:35 AM UTC

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…

There are plenty of people who join startups for the upside, and would gladly give up a certain amount of salary for options. Especially super-experienced people who are well-off, and would rather have more equity.

Re: We need to rethink employee compensation

#325

Post by encoderer » Thu, Jun 25, 2015, 2:38 AM UTC

drivingmenuts wrote: post #5

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…

I tend to think of options as worthless, until they vest. Which is too far in the future to count on. Pay me money. That's actually useful.

I think you really have to put it in context. There are companies that are objectively "pre IPO". That's no guarantee, but it's a probability. So you can start to make educated guesses at Expected Value.

If you're joining as the 5th or 50th guy, your options are probably a long-shot and they're not really worth considering. But if you're joining a pre-IPO company i suggest that you minimize salary and maximize options. There are a lot of great outcomes in the $50-250k/year range in option value. It's no lotto ticket, more like an extra salary in addition to your base salary. And it's tax advantaged!

https://blog.wealthfront.com/college-vs-retirement-savings-s...

Re: We need to rethink employee compensation

#326

Post by ryan90 » Thu, Jun 25, 2015, 2:38 AM UTC

Akkuma wrote: post #309

eastbayjake wrote: post #284

Earlier quoted context omitted.

Forgive my assumption. So when you're referring to equity in a company, you're talking about a founder-sized chunk of the company and not the 0.1-0.5% pittance that an engineer hired under a technical co-founder would receive? If so, that makes total sense -- and I think in both cases, whether 0.5% or 20%, it's best to view equity as gravy -- but 0.5% of a pre-Series A company should not be a reason to work 70 hour w…

I just had an offer that had, depending on chosen comp .1% to .17% equity with a 10k loss in salary all for an extra .07%. By the way, they have a lot of convertible notes and are pre-series A. I turned around with a counter offer/request that pointed out the equity is largely worthless with no anti-dilution provisions, while seemingly gearing up for a heavy dilution.

Founders don't take dilution unless it makes each existing share more valuable. Unless it's a down round of course.

Dilution is life; just accept it. No employee or founder stock will ever have an anti-dilution provision.

Re: We need to rethink employee compensation

#327

Post by ryan90 » Thu, Jun 25, 2015, 2:40 AM UTC

mpdehaan2 wrote: post #7

drivingmenuts wrote: post #5

Earlier quoted context omitted.

I tend to think of options as worthless, until they vest. Which is too far in the future to count on. Pay me money. That's actually useful.

This. It seems that it's acceptable in tech culture to use "you have too much stock" a reason to even underpay founders. This is busted logic, as the company could explode at any time, not to the fault of anyone in particular (but sometimes yes). So far, I think I've been in 3 decent startups that all of which failed and do not exist anymore. None of them exited cleanly. Some might, but you might not want to stick it…

Stock is not free. Equity is expensive if you're working for a good company. As a founder I would much rather pay out cash , but that's generally not what people are after (esp director, vp level)

Re: We need to rethink employee compensation

#328

Post by andrewvc » Thu, Jun 25, 2015, 2:55 AM UTC

tptacek wrote: post #138

andrewvc wrote: post #17

Earlier quoted context omitted.

To employees options are a free lottery ticket. You could work your ass off and make your company a huge success, but due to vesting and liquidity preference wind up with nothing. Unless you have enough skin in the game (read, you are an investor or founder), your options mostly useless.

A company whose equity outcome is wiped out by liquidation preferences is practically by definition not a "huge success".

That is not actually the case! You found a company with idea X, which turns out to be a terrible idea that takes 3 rounds of funding to find out how terrible it indeed is. You pivot to idea XY, work your ass off and find traction! Take another round to grow and exit for 100mm. You're rich! All thanks to your great work! Too bad you were diluted to all hell in the previous rounds and you're not actually rich.

My point is that the company's success is defined in terms of current revenue and future prospects. Your personal definition of success in determined by the delta in the value of your stock options between when they were issued and the present.

Re: We need to rethink employee compensation

#329

Post by [deleted] » Thu, Jun 25, 2015, 2:56 AM UTC

ryan90 wrote: post #326

Akkuma wrote: post #309

Earlier quoted context omitted.

I just had an offer that had, depending on chosen comp .1% to .17% equity with a 10k loss in salary all for an extra .07%. By the way, they have a lot of convertible notes and are pre-series A. I turned around with a counter offer/request that pointed out the equity is largely worthless with no anti-dilution provisions, while seemingly gearing up for a heavy dilution.

Founders don't take dilution unless it makes each existing share more valuable. Unless it's a down round of course. Dilution is life; just accept it. No employee or founder stock will ever have an anti-dilution provision.

[deleted]

Re: We need to rethink employee compensation

#330

Post by thedufer » Thu, Jun 25, 2015, 2:59 AM UTC

rgbrgb wrote: post #323

bane wrote: post #301

Earlier quoted context omitted.

True, but I think lots of folks here have no idea how much revenue you have to bring in to cover 20+ employees. Lots of people think it's just salary*20.

Well in a software company salary is generally the dominating factor, so it is on the order of what you mentioned (times a multiple depending on how cushy the amenities). In my unqualified estimation, the multiple can kill you... seems like about 2x salary for SF, 1.6x for NYC, though my company prides ourselves on keeping it a lot leaner than many of our compatriots.

I think that multiplier is what bane was alluding to. Incidentally, your numbers seem low for software devs - I'm fairly certain I cost well over 2x salary (NYC). Although my company prides itself on compensating well, so maybe most startups run a lot leaner than that.