Who pays when startup employees keep their equity?
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Who pays when startup employees keep their equity?
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Re: Who pays when startup employees keep their equity?
#2This is very interesting. Options are really an unappealing mechanism to incentivize employees. I feel like they prey on people who really don't know any better, and don't understand the tax implications or the possibilities around future dilution.
As a rule of thumb I discount face value of options by as much as 70%, that generally doesn't go over very well with people trying to convince you to accept them in lieu of cash.
The single trigger RSU is a very hard sell though, as we can see from this example it hurts both Investor and Founder equity stakes, unless people start balking at options (which they should) it won't fly.
Re: Who pays when startup employees keep their equity?
#3There was a PE firm that came around about 4-5 years ago trying to raise money on this very premise.
Their thesis was that
- startups would remain private longer.
- employee's lost their options when they leave
- longer periods to go public means more employees return options to the pool which means employee option pools can be smaller
- longer private periods leads to more rounds raised which benefits investors over employees as the former can participate on each round to keep from being diluted
- exits would come eventually and the investors would always have superior terms, I believe that they were working under the assumption that investors would never have mandatory black out periods after IPO so they could essentially participate in the opening day IPO pop.
This is one of the coolest and most maddening things about finance. Every time you think you've come to a big realization, usually you find out that someone else came to the same conclusion many years ago and has been making money "arbing" it out ever since.
Re: Who pays when startup employees keep their equity?
#4This is very interesting. Options are really an unappealing mechanism to incentivize employees. I feel like they prey on people who really don't know any better, and don't understand the tax implications or the possibilities around future dilution. As a rule of thumb I discount face value of options by as much as 70%, that generally doesn't go over very well with people trying to convince you to accept them in lieu o…
Quick question. Do you work for a startup now with options? Or, have you in the past? I'm trying to work out if people who object to options would ever join startups. Or, if they're appetite for risk is too small to be a potential candidate.
Re: Who pays when startup employees keep their equity?
#5Either way it's a losing game, consider a company like Google - how would they attract new employees on either scheme given that the company has been around for 15+ years?
The only people who win are those who get in early, or invest big. Any IPO ultimately results in people earning money who don't "work" for that money - that means the actual workers lose out everytime.
Re: Who pays when startup employees keep their equity?
#6I can imagine that there would be other consequences to the change. For example, I could see anyone on the edge around their 1 year vesting cliff would be fired to avoid parting with their equity. It would probably also push down the amount of equity offered because of the increase in value. Further, some companies are already doing this, vesting could be back loaded with the majority vesting in the later years.
Re: Who pays when startup employees keep their equity?
#7Is the presumption that founders and investors are not trying to screw employees? I genuinely can't tell from the article. I thought it's just common knowledge that they will try to screw employees at every chance. With options it was different strike prices for management/ founders vs employees. With RSU's it is weird vesting schedules and forcing forfeiture situations.
Re: Who pays when startup employees keep their equity?
#8Is the presumption that founders and investors are not trying to screw employees? I genuinely can't tell from the article. I thought it's just common knowledge that they will try to screw employees at every chance. With options it was different strike prices for management/ founders vs employees. With RSU's it is weird vesting schedules and forcing forfeiture situations.
This comment isn't very productive.
Some high-level valley participants are definitely bad actors but the bulk of them are just normal people in positions of power.
Re: Who pays when startup employees keep their equity?
#9Equity is one area where I would encourage YC to get more involved. We need someone to step in and lobby the government for tax treatment of options that reflects their economic reality to early stage employees. We also need to encourage companies to use a 'standard' stock option agreement which is well known by everyone so that equity offers can be compared across companies.
If you take equity from an early stage company that has also raised a ton of money with a liquidation preference, what are your chances of getting paid out, even on a big exit? That question is basically impossible for most people out here to answer.
Re: Who pays when startup employees keep their equity?
#10This is very interesting. Options are really an unappealing mechanism to incentivize employees. I feel like they prey on people who really don't know any better, and don't understand the tax implications or the possibilities around future dilution. As a rule of thumb I discount face value of options by as much as 70%, that generally doesn't go over very well with people trying to convince you to accept them in lieu o…
Quick question. Do you work for a startup now with options? Or, have you in the past? I'm trying to work out if people who object to options would ever join startups. Or, if they're appetite for risk is too small to be a potential candidate.
i would only ever join a startup as a co-founder. i would never own less % than anyone else, i.e. at least one other founder should have the same equity as i do. that's my personal heuristic, ymmv.
if i'm going to work for someone else it's going to be the most stable situation possible, i.e. an established company with market or better salary and benefits and a reasonable workload.