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The Lack of Options for Startup Employees’ Options

a16z.com

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Re: The Lack of Options for Startup Employees’ Options

#91

Post by rdtsc »

I am being quite ridiculous and ignorant probably, but to me options just seems a way to trick people into buying a lottery ticket, except it has very complicated rules how to cash it and you don't even know if you've won or not sometimes.

Why not just grant people stock / ownership. Wouldn't most people like to get a smaller guaranteed amount of ownership percentage than some mythical huge number of options which get diluted or become beyond the reach due to AMT? Why don't startups say "here is a low salary, but you get 0.25% of ownership after working for 2-3 years", write a contract and put in it that this person owns 0.25% of the company. They might not be able to sell or cash shares until the exit or the IPO or whatever. But if they leave, they leave, they keep the share, if they stay and work company gets better and bigger they get a bigger piece of the pie and so on.

I am probably missing very obvious things here, but that seems a bit simpler than the complicated scheme with options.

Re: The Lack of Options for Startup Employees’ Options

#92

Post by 100k »

jamiequint wrote: post #34

This piece is inane and I'm surprised to see it published by A16Z. Options are a form of compensation, it's not as if the value created by the early employee goes away if they leave before a liquidity event. They created value and got compensated for it. To call the process of making it easier for departed employees to actually get access to this part of their compensation "optimizing for former employees at the expe…

> it's not as if the value created by the early employee goes away if they leave before a liquidity event.

Exactly. The comparison with a football player is asinine. A player who no longer is on the team cannot contribute to winning a football game. But an employee builds something that persists and is built upon long after they're gone.

Re: The Lack of Options for Startup Employees’ Options

#96

Post by maxxxxx »

akkartik wrote: post #47

Just one addition to all the other critiques in this thread. "The challenge in broadly adopting the 10-year exercise rule for all employees at the outset of the company as a solution is that it disadvantages employees who choose to make a long-term commitment to the company relative to those who leave." Employees who stay longer get more options than employees who leave early. I don't see the problem.

Don't a lot of companies give you an initial number of options and then only sometimes more? That's how it was at startups I talked to in 1999 and 2000.

Re: The Lack of Options for Startup Employees’ Options

#97

Post by bogomipz »

andrewvc wrote: post #15

Christ, I can't seriously believe this argument. As I understand it, the author believes that employees who have earned their options but can't afford to exercise them are a problem? Such arrogance, A16Z should really have thought twice about what such a blatantly anti-employee piece would do to their reputation. The gall of them to insinuate that this is a good thing because the true believers get paid for their wor…

These were my thoughts exactly, specifically:

"The 10-year “solution” thus takes money/option value out of the pockets of the current (and growing) employee base to line the pockets of former employees who are no longer contributing to the business."

No it doesn't, those people helped get your startup where it is today. They put in sweat equity in lieu of greater pay. You can make this same dumb argument in reverse as well about current employee benefitting from the work that people did on the ground floor.

Seriously the arrogance of this person is incredible.

Re: The Lack of Options for Startup Employees’ Options

#98

Post by ThomPete »

throwaway2016a wrote: post #95

This may be being said elsewhere but I think the bigger problem is that you get taxed when buying options that are not liquid. I own a significant amount of a startup company and am fully vested but I can't exercise because of the tax bill.

You can. You just can't do long term capital gains.

Re: The Lack of Options for Startup Employees’ Options

#99

Post by efoto »

dadkins wrote: post #51

There's a much simpler solution: early exercise. It's already possible and good companies offer it as an option. You exercise all of your options immediately upon joining. The difference between the fair market value and strike price is zero, so there's no tax due upon exercise. If you stay for at least a year, which is where the cliff is, you're now in long-term capital gains territory. And if you leave before all o…

I fully agree with you, with a small caveat though: the mechanism to use is called IRS section 83b election.

It is applicable when instead of the stock options companies offer restricted stock, in a similar way founder stock works. This should solve the problem for at least early employees, for whom the tax paid upfront will be almost negligible: while the company valuation is still low, the shares are inexpensive.

https://www.cooleygo.com/what-is-a-section-83b-election/

Re: The Lack of Options for Startup Employees’ Options

#100

Post by mkehrt »

rdtsc wrote: post #91

I am being quite ridiculous and ignorant probably, but to me options just seems a way to trick people into buying a lottery ticket, except it has very complicated rules how to cash it and you don't even know if you've won or not sometimes. Why not just grant people stock / ownership. Wouldn't most people like to get a smaller guaranteed amount of ownership percentage than some mythical huge number of options which ge…

This is essentially what an RSU is: a stock grant with a vesting schedule. Many public tech companies grant them, but they are more complicated for the granting company taxwise[1], so they are rare in small startups.

[1] They have to withhold some for taxes, for one thing.

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