Who pays when startup employees keep their equity?

The problem with startup RSUs is that you are taxed when the RSUs vest. If there is no liquidity (which is the case for most startups) then you're paying taxes on RSUs which you can't sell and may never be worth anything.

I would like to point out that there is a practical third option given that some people say "Pay Employees A Market Salary", whereas some companies may not yet be able to afford it.

In practice when you're a technical founder (or cofounder with one), you might have three fantastic people you can't afford, great technical roles. They'd do great work for 40 hours per week, they believe in your vision and you, because your vision has a competitive advantage they can execute well with, and you can essentially generate equity value out of thin air together. They cost way less than the amount of value that could be generated, so they make sense from a business investment perspective.

But the company just might not have the funds yet.

So, besides giving out options as compensation, or giving out a market salary, the third, practical alternative, is not to hire any of the three persons, but instead work for 130 hours per week doing their 3 jobs and your job, and sleep 5.4 hours per day.

This divides to 32.5 hours per "job" (130 / (3+1)). In practice by not hiring these great engineers, you've also not hired their coffee breaks, lunches, not hired the time they spend reading Hacker News, reading about new technologies, trying various stuff such as a new framework they'd like to try, you've not hired the time they spend writing documentation or any kind of testing whatsoever, and you've not hired any downtime they spend waiting for anything whatsoever. In fact, with these concessions, the 130 hours turns out to be an exaggeration.

So, some people call the results of this "technical debt", which is a bit of a misnomer.

It's a misnomer because if the project doesn't start generating value, you can kill it and nobody has to clean up anything. So in this sense, rather than a "technical debt" - it's more of a technical option. Instead of generating employee stock options, you've created technical stock options, where if the technical results actually make it rain, then at that point the project is investable, people can be hired for a market salary, and they can rewrite all the code that you've optioned. In this very real sense it really is an option, rather than debt.

So, in practice a lot of silicon valley seems to work this way. A lot of successful people have succeeded using more or less this formula.

We've all heard lots of stories of seasoned developers being brought on to clean up spaghetti code written by a founder or cofounder, that proved the business case but was hideous, poorly documented, structured, tested, with even security and backup policies and redundancy policies making it a miracle that nothing melted down.

So when one wonders why some founders work so much - well, this is the reason.

The people who could have written all this properly from the start, weren't available given the finances the company had at the time.

Often other people aren't willing to share the vision, and if you want something built, regardless of its value, at times you just have to do it - before anyone has funded you.

So this is a very real third possibility that many people do not realize really is a kind of "option".

An essay on this is here:

http://higherorderlogic.com/2010/07/bad-code-isnt-technical-...

The assumption that every employee leaves after 3 years and keeps none of their equity is absurd. I don't see any value in that example at all.

RSUs are simpler and can be planned for. For example, a company could grant RSUs with a mandatory buy back vesting schedule (basically 83b election) upon hire and include the taxes as part of the comp package.

Examples:

Junior Engineer Sally joins Company A and is offered 0.25% of the company in RSUs. Company A recent raised at a 20M post money with a preferred share price of $1 and a FMV of $0.20. She owes tax on $10k of RSU gains. Company A either: 1) Buys back $4000 of stock in order to cover taxes 2) Provides a $4000 signing bonus to cover taxes.

Senior Engineer Bill joins Company B and is offered 0.05% in RSUS. Company B recently raised at a $500M valuation with a preferred share price of $10 and FMV of $3. He owes tax on $75k of RSU gains. Company B either 1) Buys back $30k of stock or 2) provides a $30k signing bonus.

In my experience the salary difference isn't usually that large. Sometimes it is, and some companies do pay unusually low salaries in exchange for options, obviously increasing risk, perhaps to an undesirable level.

I'm CEO and co-founder of a funded company. We pay competitive salaries + options. I don't begrudge someone who isn't interested in options. Options are actually expensive to me. We are still fairly early stage (Series A funded) so the founders own most of the company and the option pool primarily dilutes the founders. I want to give options to someone who wants them. I'm fine paying more salary in lieu of of options.

I think of options like a profit-sharing plan in a mature company. If the company does very well then the employees should share in that success. Some folks feel that paying very low salaries and heavy options breeds loyalty. I personally don't subscribe to that. I prefer to pay something competitive and have options as nice upside for the employee.