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We need to rethink employee compensation

aaronkharris.com

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Re: We need to rethink employee compensation

#91

Post by ryandrake »

MCRed wrote: post #60
pbreit wrote: post #52

Earlier quoted context omitted.

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 abl…

But that's not "getting rich off of salary". That's gambling on the stock market. Sure, there are plenty of people who hit that jackpot too, but let's not lump that together with the idea that 9-5 salary is a way to get rich.

Re: We need to rethink employee compensation

#92

Post by abalone »

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…

"it's worth $0 until you exit"

Are lottery tickets worth $0 until the drawing happens?

No. They are worth $2, or the price you paid for them. Likewise, pre-exit options do have value (as you note), but it is nonsense to simultaneously say they are worth $0.

Maybe the reason this is harder to grok is options don't have an established market price like lottery tickets do. Their early-stage value is simply a negotiation between employer and recruit (note: it's not the strike price). But it's a mistake to conclude that they have no dollar value, yet are worth something, just because negotiating a dollar value is awkward and hard.

Re: We need to rethink employee compensation

#93

Post by toast0 »

JonFish85 wrote: post #83
harryh wrote: post #67

Earlier quoted context omitted.

Don't wait until they vest. Do it as soon as they're assigned to you. Avoid the AMT completely.

Which is a risk, especially in companies where the strike price is close to $100/share. If it's going to be in the $10k+ range, is it really worth it to potentially reduce your future tax burden? Maybe. But it's also possible that your shares aren't worth that exercise price. Speaking only for myself, in my experience I decided to wait to see if the price was ever justified before buying the shares, and if it means a…

I don't think the strike price is really important, it's the exercise amount that matters. But there's certainly an element of risk, and saving money on taxes is nice, but not losing money is nice too.

Re: We need to rethink employee compensation

#94

Post by zmillman »

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,…

I've been hit with this too and it's not pretty at all.

If anyone else is concerned about this, you should talk with your CEO/legal team about early exercise options which can remove a lot of the risk of massive tax liabilities. From my understanding, some companies offer an early exercise option where you pre-purchase the shares and then instead of being able to buy the shares after they've vested, the company instead gradually loses the right to buy them back at the original strike price.

I'm not a tax lawyer, but Google "section 83(b) election" and you'll find more information.

Re: We need to rethink employee compensation

#95

Post by mason55 »

abalone wrote: post #92
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…

"it's worth $0 until you exit" Are lottery tickets worth $0 until the drawing happens? No. They are worth $2, or the price you paid for them. Likewise, pre-exit options do have value (as you note), but it is nonsense to simultaneously say they are worth $0. Maybe the reason this is harder to grok is options don't have an established market price like lottery tickets do. Their early-stage value is simply a negotiation…

> No. They are worth $2, or the price you paid for them.

Depends how you're defining worth. The ticket has multiple "worths". The first is probably around $2 which is what you could theoretically sell it to someone else for. The second is the expected value of the payout based on the prizes, odds and number of tickets sold. This worth could be $1 or $1.74 or it could be greater than $2 (think about the case where the prize is really high).

Re: We need to rethink employee compensation

#97

Post by dsjoerg »

ig1 wrote: post #77

There are other solutions: 1) The company could offer to buy back options at market rate. 2) The company's current investors could offer to buy equity from employees. The majority of investors returns come from a small number of portfolio companies, for those companies that are doing well the investors want a bigger stake even if it comes in as secondary. 3) Companies could appoint designated investors who could buy…

A blend of 2) and 3) would be 4), options-holders get right of first refusal on stock sales with a valuation >$X

Re: We need to rethink employee compensation

#98

Post by nissimk »

branchless wrote: post #64
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 That's why they are trying to pay you with them. For them it's a one-way bet. It's sadly just another case of pushing risk onto the worker and not really passing on much of the upside.

It's also information asymetry. A classic financial arbitrage move. The founders offering the employees options understand all of the terms and scenarios that people in this thread are discussing, but most potential employees are not aware of these factors. Many potential employees will discuss their offer with trusted "experts" in their personal network who also are not familiar with the multiple scenarios that can devalue these options. Making complex financial deals with another party who is less sophisticated is always great for business. That's why employees should be even more careful when negotiating compensation with startups. If you can't spot the sucker at the table then the sucker is you.

Re: We need to rethink employee compensation

#99

Post by kelnos »

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.

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 the road to IPO or acquisition (look to see if their job listings include the word "compliance" anywhere), and the company has real revenue and growth, ignoring the options package just does you a disservice.

It's a lottery in the beginning... at some point later it becomes more of a calculated risk. Given a valuation and percent ownership, you have a good starting point. You can then discount based on future dilution, risk of failure, time horizon, etc. No, it's not a science, but automatically ignoring the value of an equity package is just as emotional a decision as a starry-eyed assumption of startup glamor.

Re: We need to rethink employee compensation

#100

Post by ryandrake »

toby wrote: post #78
Balgair wrote: post #55

Earlier quoted context omitted.

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.

There's probably an even simpler model than that. Consider the pay cut you'd take to work at the startup... how much equity did the seed-round investors get for that much money? Multiply that by 1.5-2x (just a guess, perhaps someone has a better idea) to account for their liquidation preferences. If that's less than your equity stake, then take the corporate job and use the extra cash to invest in startups.

How would they, as likely a non-accredited investor, "use extra cash to invest in startups?"
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