The four year vesting schedule doesn't make sense
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The four year vesting schedule doesn't make sense
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Re: The four year vesting schedule doesn't make sense
#2What a terrible idea. If people don't want to stay for even a year, they don't need equity in a startup. That's what salary is for. And getting 1/4000th of the first year's equity grant after the first month won't motivate anybody who understands math, which is probably a trait that startups are looking for.
Re: The four year vesting schedule doesn't make sense
#3Terrible idea, and based on the title of your blog, it's no surprise to me that you'd like all your equity in year one.
There are reasons for 3,4 or N year vesting - namely keeping employees invested in the business. If employees at a startup turned over every year, it simply wouldn't survive.
Salary is used to keep employees for a year. Salary and/or equity is used to keep employees for a meaningful period of time. There will always be the ones there to simply collect a paycheck, and likewise there will be ones who stick around for their 50,000 shares of equity without doing the math to realize their potential upside near 0.
Re: The four year vesting schedule doesn't make sense
#4There is a reason that stock options are called Golden Handcuffs.
Re: The four year vesting schedule doesn't make sense
#5I think there's plenty wrong with the way most startups handle equity assignments (particularly as it relates to dilution without subsequent regrants, etc), but the viewpoint here just seems bonkers to me.
A year is a LONG time to a 6 year old, but to a 22-24 year old (avg. age of college grad)? Really? When I was that age I could easily imagine committing to things for a year. And even if that makes me an anomaly (which I seriously doubt it does), why would you bend over backwards to reward people that are going to jump ship right away due to their own ADD? Particularly considering they're the least likely to be making really useful contributions to the code and are basically (hopefully) mostly learning the ins and outs of professional development (IME, very different than school work, or even open source projects) on the company's dime at that point.
On top of all that, a lot of companies still use traditional options and other than in some very extraordinary circumstances, anyone quitting prior to a year of service and also prior to a major liquidity event would be foolish to actually exercise their options, which they'd almost certainly have to do to avoid losing them within 30-90 days (or so depending upon terms) of leaving.
Sorry, but this is just a half-baked idea all around.
Re: The four year vesting schedule doesn't make sense
#6It makes sense when there's real equity being disbursed. One person has $500,000. The other has sweat equity. How do you calculate the relative value of the latter? Come up with a fair salary, and turn it into equity. Four years is a good starting estimate, but if the person leaves early, then the assumption on which the equity level was set is invalidated.
I'm against cliffs, though.
Re: The four year vesting schedule doesn't make sense
#7This is ridiculous. For starters, in what world is vesting based on value to the employee?
It's also more than a bit ill informed to think that time at a company is less "costly" for an employee the older they are, particularly when it comes to equity. Based on success rates of startups, once you are older you likely only have a few more shots at "winning the lottery", the costs of losing benefits (particularly medical) is higher, and showing forward career progress is so much more crucial. The cost of a few early setbacks is trivial as compared to setbacks towards the end of your career (unless you've already won the lottery, in which case, the discussion is moot).
Re: The four year vesting schedule doesn't make sense
#8Equity is an incentive for loyalty and commitment to the company. If you aren't even sticking around for year then chances are you are barely finished training. You split just about the time you are actually becoming useful and productive. So the company has invested in you - but you ditched the company. That's the opposite of commitment.
This kinda reminds me of when I was a grade-school student and I used to wonder why the teachers got paid because it was us students who were doing all the homework!
Re: The four year vesting schedule doesn't make sense
#9"After a couple of months at a company, a new grad may think “hey, this isn’t THAT great’, and not stick out the next 9, 10, 11 months, because that seems to them, an insanely long time."
Then he made a mistake during the interview process. Remember, it's not only them interviewing you, it's also you interviewing them. Bring up issues you care about (work ethic, work load, flexibility), and you'll have fewer surpises later on.
"On the other hand, for someone who has been working for a few years, 8,9, or 11 months might seem to be a much shorter period of time, and proportionally it is. They might stick it out, get equity, and become much more committed to the enterprise."
Yes, the company can issue additional grants, there's no law in place to say that what you get on day 1 is the only equity you're going to get, ever. The company can structure performance (equity for shipping major products) or retention (equity for 2nd, 3rd, 5th, 10th, 50th anniversary with the company) however it pleases.
Re: The four year vesting schedule doesn't make sense
#10What a terrible idea. If people don't want to stay for even a year, they don't need equity in a startup. That's what salary is for. And getting 1/4000th of the first year's equity grant after the first month won't motivate anybody who understands math, which is probably a trait that startups are looking for.
The idea is that the longer you stay with the company, the larger percent of your remaining equity you get per period. Hockey-stick equity, if you will ;)
I think it's actually a pretty reasonable approach. I've had people straight-up tell me during interviews that they're leaving their current position because they've reached either their one-year cliff or their four-year package and want a new opportunity with potentially higher gains. While leaving after four years if your options package isn't extended isn't unreasonable, the one-year cliff does seem a rather broken approach for keeping all but the most-dedicated people more than a year.
Of course, if your employees don't want to stay more than year and are only doing so because of the vesting cliff, you probably have bigger problems that need sorting out. But let's assume that your employees are only going to stay 12 months no matter what - would you prefer to give them 25% of their options, or ~3.6%[1]?
That assumes that the exponential grant continues for the entire period, not just for the first year as the article suggests. I'd also be a bit concerned about possible tax implications of that approach; three years in you only have 31% of your stock, and you get about 10% of the total in the last month.
Here's a graph, assuming my math is right.
https://docs.google.com/spreadsheet/oimg?key=0AgIFMGYSPNuPdH...
Seems to me that this would be a pretty good way to get people to stay for longer than a year, the issue is when employees still leave early. With the cliff, there's one less shareholder around, helping the company stay under that magical 500-shareholder limit. You lose that benefit with the exponential grant.
[1] I've probably done the math wrong, but roughly solving m^48=100 (percent), getting about 1.1007^(month#) = total percent of equity granted at the end of that month