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We need to rethink employee compensation

aaronkharris.com

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Re: We need to rethink employee compensation

#331

Post by JohnyLy »

sombremesa wrote: post #253
eastbayjake wrote: post #244

Earlier quoted context omitted.

> 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 time with my friends tonight" Just curious: are you under 25? Not meant as ad hominem -- I know tons of engineers who have this attitude from 22-25, but the closer I get to 30 the more I realize on a deep level that I'm going to die someday and I hav…

To work hard doesn't necessarily mean long hours.

I totally agree. I don't like the term "working hard", it doesn't mean anything. I'd rather use "efficiency". If you work 70 hours but you do as much as someone working 20 hours, I don't consider that you are working hard. About the low wages for startup employees with high equity; I don't find it right as if you want to attract great workers, you need to offer them something now and not only something which might come possible in the future. Even if you have very high hopes to become a successful startup, this is never 100% sure. Startups have to look forward but people tend to look at present.

Re: We need to rethink employee compensation

#332

Post by mpdehaan2 »

webb wrote: post #127
mpdehaan2 wrote: post #7

Earlier quoted context omitted.

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…

Giving out stock can be far from free..

It's pretty free. Hacker News loves the corrections. All good.

I founded and ran a good part of an A-round startup for a while.

I'm aware what stock does to equity, but it has minimal value to employees if it's not going to be a thing, and for a startup watching burn rate, it's pretty freaking free.

Are you going to give it all up and waste the option pool? Of course not. To me, I'd rather have employees with a good chunk of the equity because they were all doing a good chunk of the work, but I also want to see them treated well in stock. And you know your thing might not work out. Being stingy to employees with stock doesn't feel right.

I don't believe in founders hording stock when everybody working for them built a good chunk of what they sell. They should keep a decent chunk, but sharing stock well is basic ethics and costs nothing on the burn rate. It's the same reason I don't believe CEO's should make 50x of what an employee makes in a given year.

Stock is pretty cheap to give away in a startup. It's not cheap in a private company. I do especially object when it's used in lieu of market-rate compensation on the hope of future gain, with "we're giving you lots of stock" and then expecting the long hours and then it doesn't pay off for folks.

Re: We need to rethink employee compensation

#333

Post by areyousure »

tptacek wrote: post #318
RyanZAG wrote: post #277

Earlier quoted context omitted.

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.

When an option vests today with a fair market value from four years ago, the company has "literally created income" for the employee. But for whatever reason, this isn't a taxable event. I was inquiring as to the reason for this difference in treatment.

Options at the money are also incredibly valuable, and even more so when they're for a startup (hence their usage in compensation). It's instructive to look at the prices for at-the-money options on, say, GOOG 1--2 years out to see how much they're worth on the open market (easily 10% of the current stock price).

Re: We need to rethink employee compensation

#334

Post by probablycorey »

Has anyone used a service like https://www.equidateinc.com. They help you "sell" the right to buy your stock options to a third party. From their site:

> Traditional stock sales are time consuming, expensive, and clutter a company's cap table. Now it's easier: the Equidate contract transfers the economic upside and downside of your shares without actually selling them. It honors all exisiting transfer restrictions on your stock, and your identity is kept private throughout the entire process.

> The contracts Equidate has designed have aspects similar to both a derivative contract and a asset-backed loan. The result allows an investor to purchase the rights now to the economic upside/downside of a share now, without going through the complications of adding additional shareholders to the company's cap table or the hassles of a secondary stock transaction, postponing any transfer of shares until the company is ready.

Re: We need to rethink employee compensation

#335

Post by s73v3r »

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.

Why? Why do we, arguably the part of the startup that is responsible for the valuation, have to accept that?

Re: We need to rethink employee compensation

#336

Post by ChuckMcM »

akharris wrote: post #304
ChuckMcM wrote: post #34

I am not sure I understand Aaron's point in this. Is it "We should pay people more?" But isn't that really a question of whether or not you can find people who will work for the salary your offering? If you can't you raise what your willing to pay until you find someone who will right? Or is it "We should make options always remunerative?" In which case they aren't really options are they? They are just salary so why…

Chuck - the problem I'm trying to solve is that there's a mismatch in expectations around the value of options in comp discussions. The options are often a large portion of comp, so that's pretty bad. The pay to perform model could work, but that would raise burn quite a lot, which is something startups should be very careful about. End of the day, options are an imperfect way to incentivize employees, and they work…

Ok, that is helpful. How is the expectation being set? Do you feel like people are lying to prospective employees about the possible value or are the prospective employees lying to themselves?

Lets consider other scenarios, people buying a lottery ticket. They choose to believe that its possible it will be worth millions but the expectation is that it will be worthless. Do we put up a large explanation about how unlikely it is to win anything in the lottery so that people will stop buying them?

I get that especially young people with little experience will delude themselves into believing a big chunk of equity will mean a big payday later, and take a lower salary to secure a larger chunk. But it isn't that anyone has forced them, they are just inexperienced. They will likely not get any extra benefit and the next job they will negotiate harder on the salary and be less swayed by equity. At some point they might be "cash only" type of people, no equity required.

The biggest problem with stock in my mind is that the investors aren't aligned with the company. The investors want a payout, period. If they can fire everyone and sell off the two patents and get 2x their money back, fine, they will do that. They want the company to be successful so that their investment is worth more, but they don't really care how it is worth more really.

Equity "payouts" haven't changed a whole lot in 30 years. There are an extraordinary number of millionaires and billionaires in the tech industry (compared to other industries) because of the wide and generous distribution of shares. Not everyone is a winner, but nobody really works at only one company either. Five to ten companies is more like it, and often the equity grants from one or more of those companies provides additional financial liquidity to the employees.

I'd agree that first time startup employees are often way more optimistic about their stock than more seasoned employees are, but I have never met anyone who has been through 2 or 3 such companies to have unrealistic expectations any more. That is why I have a hard time seeing what we can do to change it, on the job training is on the job training.

Re: We need to rethink employee compensation

#337

Post by s73v3r »

tptacek wrote: post #202
MCRed wrote: post #200

Earlier quoted context omitted.

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.

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.

Why? When did simply having money become more valuable than actually doing the work?

Re: We need to rethink employee compensation

#338

Post by Bahamut »

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've been contacted recently about a VC firm offering $350k+ for a frontend developer to own the frontend web app. I had to turn it down due to lack of flexible hours, but it otherwise intrigued me.

I also have been told by a friend that his brother ran a company that was acquired by Google for $100m, and suspects that his brother makes several million $ a year from Google (he wasn't ever told how much) - that is probably more of an outlier though.

Re: We need to rethink employee compensation

#339

Post by s73v3r »

DenisM wrote: post #148
tptacek wrote: post #108

Earlier quoted context omitted.

In my experience it's the opposite: the fact that employees generally either (a) regard options as worthless or (b) round allocations down to the nearest 100 basis points is a reason not to use them in compensation: the implied discount employees give them makes equity comp very expensive. In fact: for this reason, I'd be especially wary of companies trying to buy a few thousand dollars of annual fully loaded cost wi…

Or plain lack of money to pay more. In the life of every company there is a moment when there is not enough money to hire the next two people, but there is also a feeling that hiring those two people would take the company to the next stage so much faster as to make the hiring worthwhile. At that point you either raise more money directly from investors, or offer more equity to prospect employees, or hold back on the…

And sometimes a family needs to pay rent and buy food but doesn't have the money.

Re: We need to rethink employee compensation

#340

Post by s73v3r »

tptacek wrote: post #238
vacri wrote: post #221

Earlier quoted context omitted.

There's been a couple of stories here in the past where employee stocks have literally been worth $0 when they vested, due to financial shennanigans pulled by the founders. options should be seen in the same vein as bonus money - they don't exist until the money is in your hands. Some people work at places where bonuses can be relied on like bedrock, but usually I see people struggle to get their promised bonuses.

It's very easy for shares in a liquid-seeming exit to be worth nothing, even with no shenanigans. For instance: raise a B round, and then sell for low 8 figures. Liquidation preferences will wipe out most of the outcome. People lose perspective about this, because they only see the final number (and the "employee shares worth 0"), but if you raise 20MM and then sell for 20MM, it's not hard to see why the shares aren'…

Actually, it is hard. Why are the employees the only ones that have to take it on the chin?
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