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We need to rethink employee compensation

aaronkharris.com

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Re: We need to rethink employee compensation

#51

Post by MCRed »

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.

IF there's enough liquidation preferences, even a successful exit in the $50M range could leave nothing more than a fraction of your annual salary for everyone but the founders.

Every dollar taken in investment reduces the likelihood of regular employees cashing out unless it boosts the ultimate stock price and success chance of the company significantly.

Too much money is chasing too many companies so the founders are tempted to take the money, roll the dice and hope they become a Facebook, even though the odds of that are extremely slim.

This is the difference between a "startup" and a business. Startups used to be a phase of business, but it's become it's own thing now.

A business will not take money it doesn't have to, realizing that profitability will fund growth. (And to be honest, I don't see a lot of mechanisms by which VC money funds growth-- all of the successes hit a viral growth loop or opened a massive unmet need... the VC money just made product development easier... mostly after the tornado started.)

Re: We need to rethink employee compensation

#52

Post by pbreit »

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.

Yeah, but no one ever got rich off salary.

Re: We need to rethink employee compensation

#53

Post by erichurkman »

mpdehaan2 wrote: post #10
markcerqueira wrote: post #8

Earlier quoted context omitted.

"until they vest." Don't options typically vest after one year of employment? Is that "too far in the future?"

The typical thing I've seen is 1/4 of your options will vest after 1 year, upon which 1/48 of your options vest every month thereafter. Other companies may do it differently. Also if you leave the company early, you will usually have to pay some trivial amount (possibly thousands though) to keep the options. This has at least been the case at all startups I've seen. With the 1-year cliff in place, I'd rather options…

The vast majority of new option grants for VC-backed companies are under the 1/48 monthly with a one year cliff.

More companies are now switching to converting ISO grants to NSO after you leave a company, and allowing a longer term to exercise. Pinterest famously allows, in some cases, employees to have up to 7 years to exercise vested shares after leaving [0]. Most companies do not do this (yet). Exercising an ISO grant can be much more favorable taxation wise than exercising a non-qualified NSO grant.

If you give shares to an employee, it will likely be a taxable event, as the IRS sees this as taxable compensation.

Also, most grants are at non-trivial strike prices. If you're a super early employee, you might have grants at a very low price, usually a few cents. However, the vast majority of grants are at much higher strike prices where exercise costs are processed in the tens to hundreds of $thousands.

Exercising and taxation are a difficult topic that very few fully grok.

Source: work at eShares.

[0] http://fortune.com/2015/03/23/pinterest-employee-taxes/

Re: We need to rethink employee compensation

#54

Post by MCRed »

wwweston wrote: post #16
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.

> I tend to think of options as worthless, until they vest This is a good idea, but I'm not sure it takes things far enough. For the majority of developers, options are often not especially valuable even when they vest. The most common value outcome of a success/sale seems to be "modest bonus" (4 figures to low five figures) rather than a jump up to a different economic class. I suspect many devs could do as well by…

Over many years as an employee for startups, I was employee number 24 of a $30M cash acquisition exit. The result was 6 figures, but just. Effectively it was a year's salary.

That's all my options were worth and to get that return, I worked for about 20 startups over 2 decades... only one paid off.

Re: We need to rethink employee compensation

#55

Post by Balgair »

MCRed wrote: post #41
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…

Worse, even with the %50 pay cut (or worse!) many startups expect you to take, the amount of options you're given are really trivial. It is possible to value options using black scholes or other valuation metrics. But every time I've run the numbers the present day value of the options is never even 1/10th of the value of the salary you're asked to give up. I've concluded the only way to do a startup is to be one of…

Know of any good web-apps or other easier to use programs for the layman to calculate these things? Thank you for mentioning these formulas too. These give a person something to argue with.

Re: We need to rethink employee compensation

#56

Post by MCRed »

stephengillie wrote: post #44
JoeAltmaier wrote: post #24

Earlier quoted context omitted.

OR even succeeds, get bought out for 40 million dollars, which all goes to pay investors' convertible debt. Net result: stock worthless.

It's like being paid in IOU: "1% of this lottery ticket's winnings". There's multiple layers of risk and trust, too many dependencies. The transaction is too complicated and takes too long to complete. So the probability for exceptions to occur is great, and handling for those exceptions will likely fail due to the complicated nature of the transaction.

%0.01 Because even if it's %1 at the time you join, by the time the lottery ticket can be cashed in it will be diluted, plus liquidations preferences, etc.

Re: We need to rethink employee compensation

#57

Post by pbreit »

threeeeawae wrote: post #35
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.

The latest shitty clause that Valley companies are including in their options contract prohibits you from selling fully vested and exercised shares even if you have a willing buyer . Apparently companies saw all the employees getting rich from private companies like Palantir and Facebook pre-IPO and considered that a problem to be solved. Check your contract, you probably don't "own" the stock you think you do.

Well, on one hand it is a pain the buns for the company in facilitating secondary transactions. On the other, it makes good sense that it should be doable. The secondary markets like Sharespost/Secondmarket don't seem to have made much progress in getting companies on board.

Re: We need to rethink employee compensation

#58

Post by harryh »

threeeeawae wrote: post #35
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.

The latest shitty clause that Valley companies are including in their options contract prohibits you from selling fully vested and exercised shares even if you have a willing buyer . Apparently companies saw all the employees getting rich from private companies like Palantir and Facebook pre-IPO and considered that a problem to be solved. Check your contract, you probably don't "own" the stock you think you do.

Yes, it was a problem to be solved for several reasons:

1) 409A (option pricing) valuation problems

2) Increase in # of shareholder problems

3) Legal issues (for both the company and employee) if buyers of shares later felt deceived by sellers

4) Team cohesion issues if different employees were getting radically different prices for there sales

You might disagree with the solution, but these are definitely real problems worthy of consideration.

Re: We need to rethink employee compensation

#59

Post by tghw »

paulpauper wrote: post #31

I don't mean to sound too dismissive, but this article is bunkum. SO I guess by the author's logic, Michael Bloomberg's net worth is zero because Bloomberg LP never went public? The private market is illiquid, but fundamentals will always trump liquidity. If you own equity, that equity - assuming there is no dilution or deterioration in the fundamentals of the underlying business - is wealth. Employee stock options a…

Bloomberg is an owner. While an employee that owns stock is technically an owner, it's not a significant distinction because they are in such a minority that they have no control over the stock, and are therefore at the whim of the majority owners. It doesn't mean the options are worthless, but they have to be discounted.

I owned stock in a company that will, very likely, never go public or get acquired. It doesn't need to. Because of the shareholder agreements, I could only really sell back to the company. Sometimes they were amenable to buying, other times they weren't. Essentially, I was playing in a monopoly market, except the monopoly was on the buyers side. Fortunately for me, the majority owners were much more generous than they needed to be. Without that, I wouldn't have been able to make anything from the stock.

Re: We need to rethink employee compensation

#60

Post by MCRed »

pbreit wrote: post #52
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.

Yeah, but no one ever got rich off salary.

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 able to buy CDOs against the market, but I did profit from it until 2007 when things got crazy and I got out of the market-- a year early but I'll take it.)

I suspect most people can't do this... but they can buy a house or two in up and coming areas, and put extra salary into that. Rent one out, get your mortgage paid by your tenants and you're building a real estate empire... slowly, but it can make you rich.

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