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We need to rethink employee compensation

aaronkharris.com

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Re: We need to rethink employee compensation

#391

Post by bpyne »

eastbayjake wrote: post #244
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'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…

I was a little slow. It took me until 28 to have the epiphany. What finally brought me there was a diagnosis of hypertension and a realization that I hadn't dated in close to 6 years.

Now I'm close to 48. Having more control over my time is worth more to me than the possibility of a big pay day.

Re: We need to rethink employee compensation

#392

Post by s73v3r »

harryh wrote: post #389
s73v3r wrote: post #344

Earlier quoted context omitted.

It's not complicated. If the company is that bad that people want to leave as soon as they're vested, then the company deserves to fail.

So you think the managers should just look around, say "yup, we deserve to fail" and give up? No. That's not the way it works.

I'm saying they shouldn't consider a solution being something that restricts they're employees. They should be looking at why people want to leave, instead of how they can prevent people from leaving.

Re: We need to rethink employee compensation

#393

Post by curun1r »

mikekchar wrote: post #264
kelnos wrote: post #99

Earlier quoted context omitted.

I used to also believe this, and would parrot it every chance I got, but I've since changed my tune. It's hard to value options. Really, really hard. Saying they're worthless, though, is lazy and counterproductive. If you're joining a seed-stage private company, then yeah, it probably makes sense to so heavily discount the options package that maybe it is close to worthless. But if you're joining a series C that's on…

Being granted equity as a bonus is an incentive. Being granted equity in lieu of salary is asking me to invest in the company. Let's say I'm asking for X salary. If the company offers me Y salary and W equity such that Y + W = X, then what they have done is gotten me to spend W of my salary investing in their company. If this pays off as an investment, that's great, but it isn't due to their generosity, but rather my…

> In fact, since I'm limited to investing in only their company (instead of being free to invest it in whatever I want), it is a large burden.

There's two ways to look at this. Yes, you're locked into investing in just the company, but you're also being given the chance to invest in something that's not available to the general public. These investments are risky, but often very good.

I'm currently coming to the end of my 4-year vest in a company that was acquired 9 months after I started. I gave back some salary in exchange for more options when I started since the company looked very likely to exit. That investment, over the past 4 years, has quadrupled. Even in a bull market, there aren't many stocks that have ~40% annual returns over that time. And that's not even accounting for the fact that these kinds of investments are better from a tax standpoint (flexibility to avoid AMT, long-term cap gains, etc).

As others have said, it's not a simple decision. You're being given an investment opportunity that is normally only available to VCs. But unlike VCs, you can't diversify across a portfolio. But, also unlike VCs, you can directly influence the success of the company...I learned after our acquisition that in the few short months I was there, some of my actions played a significant part in us getting acquired. It's a really unique investment opportunity that's available to very few people. It doesn't make stock options as a class of investment good or bad bets, the exact details of every situation determine that, which makes it very hard to make blanket statements like many people are doing here.

Re: We need to rethink employee compensation

#394

Post by jalonso510 »

kentonv wrote: post #280
jalonso510 wrote: post #142

Earlier quoted context omitted.

You can also sometimes early-exercise an option (if the company authorizes it when they make the grant), which ends up being in practice a lot like buying restricted stock while still technically an option, and I think that's what the parent was referring to.

Weird, what is the reason to do that instead of restricted stock? It sounds functionally identical except more complicated and with possibly worse tax implications. I'm sure there's some silly accounting reason having to do with option pools and cap tables.

Well since it's an option, the recipient has the choice to either exercise or not exercise, and they can early exercise at any time they'd like, not just on day one, so it's more flexible for the recipient.

On a restricted stock grant, the recipient has to either pay for the shares on day one, or the company gives them to the recipient for free and the recipient incurs a tax liability for the value of the stock on day one.

Re: We need to rethink employee compensation

#395

Post by dylanlacom »

birken wrote: post #4

Another really important, highly negative, combination of these factors is if you want to leave the company. If the company is public, then you can essentially leave whenever you want, exercise the options and sell the stock to pay the costs (exercise price + taxes). But if the company is private, you have to pay the exercise price + applicable taxes (which can exist even if you only have theoretical gains) yourself,…

> you have to pay the exercise price + applicable taxes (which can exist even if you only have theoretical gains) yourself...

Is this certain? My understanding is that the spread between the current stock price and exercise price _can_ be taxed at the AMT rate. And if you were to sell the stock, you can get any taxes paid back in the form of an AMT credit. Still liable to pay capital gains or short term gains tax though at the sale. Without the AMT credit, it would essentially be double taxation.

Re: We need to rethink employee compensation

#396

Post by vlasev »

varelse wrote: post #285
vlasev wrote: post #269

Earlier quoted context omitted.

Would you care to expand on what makes you such an outlier? Would another person be able to go along in your footsteps?

A) I am not a (major) outlier (or many of my friends are major outliers too). Bottom line: Senior Engineers can make $250K+ today. Burn that into your synapses. The Netflix listings already posted here demonstrate that. I know Facebookers and Googlers making twice that or more and they weren't even acqui-hires. Glassdoor (valuable information source it is) IMO oversamples the discontent. Senior engineering positions…

Thank you for your detailed response!

> But who knows what they future will bring, so don't follow it exactly but instead go learn the things that are both in demand and that people complain are too hard. That's what worked for me. When game developers said 3D was too hard, I jumped into it. When game developers said multi-core was too difficult, I mastered it. And those are the skills that led to my biggest paydays(1).

That sounds like a rather neat advice right there.

Re: We need to rethink employee compensation

#397

Post by totalrobe »

Bahamut wrote: post #338
totalrobe wrote: post #146

Earlier quoted context omitted.

$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 pro…

Had to turn down an offer for $350k for frontend development?! There are worse problems to have...

Re: We need to rethink employee compensation

#398

Post by Retra »

AdieuToLogic wrote: post #352

I read the article, based on the title, thinking "I wonder what the author is going to address regarding employee compensation." Was it addressing performance? Or perhaps socially valuable contributions which have been traditionally under-compensated (such as teaching)? No. It was bemoaning how stock options offered to employees by a corporation might, might , be "worth less" when restricted sale is applicable. Just…

Who are you making that argument to? If your company is making absurd profits, you should be tap into it as an employee. Comparing your earning to people elsewhere isn't going to mean anything unless the money is there as well. And saying "Oh, but other people don't make any money" doesn't mean that they shouldn't make money. Or that people in the tech sector developing the social tools and economic methods to make for fairer compensation wouldn't also apply elsewhere.

You're not going to convince people that they should except peanuts from a multi-billion dollar industry because "there are starving children in Africa(TM)." That's not a progressive argument.

Re: We need to rethink employee compensation

#399

Post by bcheung »

gkop wrote: post #341
bcheung wrote: post #134

My thoughts on options are pretty much identical except I would say "worthless" no "worth less". I would also add that with an option position you are most likely giving up a higher salary and the opportunity cost that comes with it. An extra 30K each year invested at 5% in 5 years is worth more than 200K lump sum in 5 years (200K discounted at 5% for 5 years is $157K). You also have to factor in the probability of a…

It's even worse: California also taxes capital gains (as income!).

Wow. I'm surprised I didn't know that. Thanks for mentioning it. Definitely another nail in the coffin for early exercising.

Re: We need to rethink employee compensation

#400

Post by Akkuma »

ryan90 wrote: post #385
Akkuma wrote: post #384

Earlier quoted context omitted.

Maybe I don't properly understand equity, but if two founders each take 20%, an employee pool is created with 10%, the convertible notes eat another 20%, and the seed ate 20%, this leaves 10% of shares available. How are you only going to take dilution if it increases your employees existing share value if you need funding to survive and have very little shares to give up leading into a series A?

You do not properly understand equity. If I'm a founder and I own 100% then give up half the company to investors, that 50% I give up better improve my overall outcome by at least 2x. Usually that's reflected in the overall valuation. http://paulgraham.com/equity.html

Looking over PG's post it is about whether you should take equity and improving your outcome/valuation. Outcome seems vaguely defined and is used both as valuation and the chance of success. You as an employee want people to follow this as your own ownership drop isn't a big deal if your company becomes worth hundreds of millions through only favorable PG equation deals.

The chance of failure as a startup is significantly higher than its success. Plus, not everyone can achieve favorable offers that adhere to PG's equation. This is what real life is like, so you have to take into account unfavorable offers having to be accepted to possibly keep the lights on. Additionally, I threw up a quick scenario on http://www.tejusparikh.com/projects/equity_calculator/index....

I used a similar offer as mine, using .1% with rounds that had 1 million @ 1 million pre-money valuation, 5 million @ 15 million, 30 million @ 100 million and finally a sale of 200 million. The difference between 10k salary over 4 years in this scenario comes out to be a net gain of ~13k for an individual at the startup.

In my particular case if I switch this to a .17% offer and take a 10k salary cut, I am actually losing roughly 1k running through a scenario like that without factoring in the interest on 40k.

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