6 ms·

Employee Equity (2014)

88 points by williswee 11y ago

solidsnack9000 11y ago
The only problematic aspect of this proposal is not pushing for faster vesting. Slow vesting creates an adverse incentive for managers and founders; and in the absence of any right to suspend them, removes the only leverage that employees have today: departure.
rokhayakebe 11y ago
Quite frankly there is a need for a third party (an honest broker) that come handle all this on behalf of employees, along with salary, benefits, 401k, and other related financial matters. When people cannot balance their checkbooks, and cannot make simple financial planning for the next 6 months, how are they to understand these seemingly complex structures. UNLESS SOFTWARE.
- Too 11y ago
  What you are describing sounds like a trade union and collective agreements.
  - looptwasafail 11y ago
    Not a "trade union"; a "professional association," like the AMA or ADA.
    - gaius 11y ago
      A guild.
      - looptwasafail 11y ago
        Don't call it that. The idea is to avoid words like "union" or "guild" that arouse suspicion. Professional associations like the AMA and ADA fly under the anti-union radar.
        gaius 11y ago
        Whatever we call it, it will have to be a new thing. What exists right now in the UK is the BCS who are a laughing stock among any practitioner. Even the respected professional associations such as the IMechE barely look out for the interests of their members, not compared to the BMA at any rate.
  - rokhayakebe 11y ago
    Not necessarily. Example: Lawyers are not a union, but I can hire one for my divorce. Developers are not a union, but I can hire one to build my application. Accountants are not a union, but I can hire one to do my taxes.
puppetmaster3 11y ago
Great idea Sam. I assume going forward you will be asking for less equity for your LPs.
choppaface 11y ago
This is an old post. It's worth noting that 10/20/30/40 grants did not work (duh!!) and companies (at least the smart ones) have moved away from them. It's also worth noting 83b / early exercise is very common now (hurray!) and can essentially double the value of the equity to the employee (only if they can take advantage of it). ISOs are very toxic. One last piece of advice if you're trying to value the equity in an offer: keep in mind IPOs usually require share prices >= $10 and reverse splits are a favored tool to make that happen.
- Pyxl101 11y ago
  What was the problem with 10/20/30/40 grants and what kind of vesting schedule is used instead?
  - throwitfaraway 11y ago
    10/20/30/40 is insane without double trigger. There's already enough stories of people being pushed out of their stock. The value a super-early employee provides is disproportionately in the first couple years, so backweighting it is quite unfair. Even if the employee is in for the long haul, the company may find it economical to terminate before the compensation increases.
  - choppaface 11y ago
    Uniform vesting (1 year cliff, 25% per year) is typical. Some companies (startups and post-IPO) were doing non-uniform vesting in part because the company's valuation was rapidly soaring (and in some cases crashed shortly thereafter). Some did this for refresher grants. The evidence I've seen is that it doesn't help with retention. Well, maybe it helped retain certain execs implementing the programs...
bjterry 11y ago
I think it's unfortunate that he doesn't go into greater detail on the "considerable problems" posed by employees selling their options (or similar transactions). From the simple perspective of fair dealing with employees, it seems obvious that employees should be able to do with what they've earned as they will, so there must be some legal reason that this is inconvenient. If he actually thinks that the incentive argument is strong enough to override the moral argument I would be skeptical, but would love to hear a fully fleshed out argument, given that employers could instead change vesting schedules if they think employees don't actually deserve to own those shares at those times.
- idunno246 11y ago
  Shareholders have rights to information, increases paperwork and such. Also, can be forced to release financials to the public once you have 500: http://www.businessinsider.com/rule-12g5-1b3-or-how-facebook-just-announced-plans-to-go-public-2011-1 http://www.businessinsider.com/rule-12g5-1b3-or-how-facebook...
hitekker 11y ago
>Option pools are complete fiction; boards can increase them whenever they want. It should never be used as a reason for not making a grant. Is this true? I had one startup say they couldn't increase the equity portion of an offer because they'd have to go to the board and the amount of equity they had available was already set. Didn't heard a word about dilution there. Haven't heard what the other stories were/are yet.
- doublerebel 11y ago
  Both are true. (Generally) The percentage of equity dedicated to ESOP is fixed unless the board has a good reason to change it. Since increasing the ESOP causes dilution, it would be hard to argue for an increase just to hire a single employee. However, some dilution can be good for everyone. Wealthfront and others have described such a plan: https://blog.wealthfront.com/the-right-way-to-grant-equity-to-your-employees/ https://blog.wealthfront.com/the-right-way-to-grant-equity-t...
  - hitekker 11y ago
    Thank you for the informative reply. Have an upvote!
  - kriro 11y ago
    """it would be hard to argue for an increase just to hire a single employee.""" For a lot of tech startups hiring a single employee is actually a big enough deal in most cases to try and argue for it (imo)
    - doublerebel 11y ago
      Sorry, most boards and most companies don't value employees that highly, which is why this post and discussion are still happening. YC companies are outliers and boards at YC companies are more likely to be better informed and closer to the employees of the business. For most boards and investors, they will focus on the numbers on the spreadsheet unless the potential hire is quite exceptional.
  - 11y ago
rdlecler1 11y ago
As for more equity: founders have a qualitatively different risk profile than employees. I've been running my startup for over two years, and I am the lowest paid person on our team. I have to defer having a family and can't enjoy the things that my employees enjoy. I also can't ask my employees to work harder than me, which means I have to work harder than everyone else. A couple of times I had to cover payroll with my credit card and would have been bankrupt if we didn't pull through. If things get tough an employee can jump ship at anytime, while I will be going down with the ship. And at the end, if I'm lucky I end up with 5-15% of the company. I'm not complaining, this is what I signed up for, but employees can be very well compensated in today's market prior to equity upside.
- angersock 11y ago
  Allow me to disagree slightly with this, in the cast of early (number less than, say, 10) employees. My (hard-earned) experience here is as the first engineering hire, functioning as engineering lead. We have the same (maybe even worse!) risk profile: we are being paid below market rates (because small startup), we probably don't have healthcare or benefits (because small startup), we have the majority of the burden in terms of actual leadership (because we probably have been hired with the explicit intent of having us grow the team, tech, or sales). We don't get the glory or good press that the founders do (because we're just employees, lol). We don't get the same access or transparency to the business decisions (because we're not founders). If the business folds for the founders, they shut it down, walk away, and maybe have to file some bankruptcy. In exchange, they get to join The Magical Founders Club, wherein they can parlay their experience into speaking engagements, recruiting for new gigs, senior-level business and tech positions (regardless of skill), and funding from investors. When the startup folds for early employees (or exits in such a way only the founders are taken care of), the result is whatever personal harm comes of stress and health issues (if not taken care of b/c of bad benefits), the net loss of however much time spent working at below market prices, potentially no portfolio work (because a lot of companies are shitty about NDAs and proprietary software), and so on. For third or forth wave employees, sure, it's just another round of job hunting. For the first folks who actually had to build the business, well, it can really suck. EDIT: A minor elaboration...Micheal O'Church in an essay made an interesting claim that the founders and employees are no longer considered in the same class, compared with the 90s. My observation has been that founders will merrily maintain three orders of magnitude of equity while doing very little more than their first few hires. In fact, they may be doing less work, because they are inexperienced and spend time doing the wrong things because they don't know any better and are senior enough they feel they can ignore advice.
caseysoftware 11y ago
The last startup I worked at had a small flock of employees that hit the 4 year mark this year. Unfortunately, most of them didn't do any sort of early exercise so they paid taxes on the difference after they exercised. The only thing that saved a few of them is that the company offered a buyback program so they were able to flip some (all, in some cases) of their shares to cover the exercise and the taxes.
deleted 11y ago
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- deleted 11y ago
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throwaway984890 11y ago
I work for a top-5 YC investment (by current valuation) and none of the things Sam discusses are true of our company: -Employee equity is much lower than his recommendations. -We have 90 days to exercise options. -They refused to tell me what percentage my equity represented when I applied. -They refused to tell me information about burn rate/money in the bank when I applied. I still took the job, because money was not a primary motivating factor, but it is disappointing to see one of the most successful YC investments fit none of his criteria. He goes so far as to warn readers to "be very suspect of any startup" that doesn't provide this information. I understand that Sam does not personally control what decisions YC portfolio companies make on these topics, but I certainly hope that he guides them strongly towards the recommendations he has made here.
- deleted 11y ago
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- meric 11y ago
  > They refused to tell me what percentage my equity represented when I applied. Did they tell you how much the equity was worth? You could take the latest round they raised and divide by that.
- edanm 11y ago
  If it's a top-5 YC company, I assume it's relatively older. This post is probably based on thinking and lessons learned over the last few years - why would he have needed to write it if older YC companies didn't have the bad structures?
  - knughit 11y ago
    It is crazy that this stuff that was well down and discussed on HN itself over the years was somehow unknown to YC. When I was a startup employee noob five years ago I learned all the advice of this article, from reading HN.
- choppaface 11y ago
  +1 can vouch I have had similar problems with YC companies, though not as bad as mentioned here. I think it's important to remember YC companies are totally free to ignore the advice of YC, especially if they believe (perhaps mistakenly) that they'll succeed doing so. That said, I've had still had very positive experiences with other YC companies.
inmygarage 11y ago
While convertible notes and SAFE documents have made seed stage financing much more streamlined and straightforward, employee equity is still a hot mess in terms of the legal, financial and tax difficulties that only present themselves after it's too late. The biggest issue IMO are those scenarios when private, completely illiquid stock gets taxed as ordinary income. There should be a way to pay the tax with the same shares, though counting on the IRS becoming "flexible" is probably a longshot. While I agree with the other points mentioned, that is one the largest and most painful when it presents itself. I do think there's also an opportunity for companies to be creative about exercising mechanics as well.
karterk 11y ago
The period (typically just 30-90 days) for exercising the options is the most unfair of the lot. Most of my friends who left, say, after 3-years, simply were not in a place to exercise their options because of the financial implications. People leave for various reasons, and it's extremely unfair for someone to be in this position after 2-3 years. I wish more companies would adopt the 10-year exercising period.
lewisl9029 11y ago
So I've been looking at startup jobs on AngelList lately and came across many postings claiming to give "significant" equity. And then I scroll up and usually see something along the lines of 0.1%-0.2%. Now I'm not exactly an expert on the intricacies of employee stock options, but simple math indicates that 0.1%-0.2% translates into 1-2 million for a billion dollar company. Sure, 1-2 million is a decent amount of money, but that's before taking into account factors like dilution and opportunity costs of the associated golden handcuffs. The chances for a given startup to grow to a billion dollars is minuscule to begin with, and working at an established tech company could easily net you that same 1-2 million within a few years with none of the risks. And considering that the founders' equity will be worth hundreds of millions for that same billion dollar company, calling 1-2 million significant just feels downright condescending.
- karterk 11y ago
  You have to look at the 0.2% in relation to the salary that they offer. And, many companies do allow you to negotiate the salary vs options trade-off.
  - lewisl9029 11y ago
    >And, many companies do allow you to negotiate the salary vs options trade-off. That's definitely true in principle. But in practice, it might not be a great idea. I actually tried to negotiate the salary vs options tradeoff recently, and I feel it didn't end well because even though I tried to be as objective as possible, the fact that I didn't want equity might have given the impression that I didn't really believe in the startup (which was true, since I really didn't believe they had any chance of becoming a billion dollar company, but it's not the kind of impression you'd want to leave if you want the job).
    - knughit 11y ago
      So, the process worked. The company finds people who have the most interest in the company's success, within the set of hirable candidates
kspaans 11y ago
Has anyone been thinking about or seen analyses on the potential changes to tax treatment of stock options for start-ups in Canada under the new government? http://www.lexology.com/library/detail.aspx?g=86190d96-b169-4774-885e-db04486ad63d http://www.lexology.com/library/detail.aspx?g=86190d96-b169-...
- lewisl9029 11y ago
  This is why I have mixed feelings about the Liberal party. I voted for them because I agree with their platform in principle (i.e. invest in infrastructure, take global warming seriously, help the middle class prosper), but between this and reverting of the TFSA contribution limits, their actual policies makes me a bit nervous about their definition of middle class. What definition of middle class consists of people who can't benefit from being able to save and invest 4.5k more per year or from working at a startup with low pay in hopes for a better quality of life down the line from equities?
  - kspaans 11y ago
    I've got mixed feelings about the TFSA as well. I think they are easier to understand than RRSPs and thus easier for people to use. But I have this nagging suspicion that the $10k/year would forgo too much revenue down the line. Though maybe I'm too optimistic about how much use TFSAs would get and what kind of growth they would see (assuming no "IRA-stuffing" equivalent).
  - tempestn 11y ago
    The thing is, basically by definition, no one who is middle class (aside from perhaps upper, upper middle class) maxes out both their TFSA and RRSP. Even with the reduced TFSA limit, that's 18% of income plus $5500 per year. So really all a lower TFSA means is that more RRSP needs to be used to get the same sheltered space. The TFSA certainly has advantages: flexibility being the biggest one. No bookkeeping, put money in whenever, and take it out with minimal restriction (aside from waiting until Jan. 1 to re-contribute). That said, as long as you invest the tax refund you get from contributing to the RRSP (or even better, file a T1213 so you don't pay those taxes in the first place), the RRSP is arguably a better retirement savings vehicle for most people (ie anyone who expects to be in a lower tax bracket in retirement than while they are contributing). Also, the lack of flexibility makes it more likely that the money will still be there in retirement. The TFSA is great, and selfishly I'd love to keep the extra space. I have to agree though that it (the larger size, not necessarily the TFSA in general) disproportionately benefits the wealthy, and that government revenue would be better spent elsewhere.
rdl 11y ago
"As an aside, some companies now write in a repurchase right on vested shares at the current common price when an employee leaves. It’s fine if the company wants to offer to repurchase the shares, but it’s horrible for the company to be able to demand this." Which companies are those (and who are their advisors/investors/etc.) so I can never work there, or with them? Seriously, fuck everything about that.
lifeisstillgood 11y ago
Why options at all? At startup valuations is the cost that great? According to the Buffett worldview (I think) Actual shares align shareholders interests, unlike option grants, in later stage companies. To my mind options are a free and usually worthless offer. But actual shares have a value and significance, not for their monetary worth, but the actual ownership. I must admit I am hazy on the details of options - but then as I am a profile of typical early employee perhaps that's also the point
- lmeyerov 11y ago
  Early stage shares are illiquid paper money that you have to pay taxes on (or the cash-poor startup does). The higher the valuation, the more you / the startup forks over up front. Options skip that: you only pay if and when things go well, in which case you don't mind. If things fail, you only pay in lost time. They're way more employee friendly.
  - lifeisstillgood 11y ago
    But that seems a failure of the tax system (tax on a asset worth less than the tax is silly). And illiquid should not be the issue surely. We don't want the employees selling the shares - but we do want them as part owners. These days Inwoukd assume my right to an option could be tradeable, even securitisable.
    - knughit 11y ago
      Startups can't fix the tax system.
    - lmeyerov 11y ago
      Options are the right to buy shares at a frozen (& cheap) price. Incentives are aligned because, if the employee helps make the company more valuable, the share value goes up, and they get to walk away with the difference. (A slight oddity is that technically their value needs to go up to be worth exercising, but because of how they get valued -- ~20% of price early VCs pay ~ as soon as VCs would make money, so would anybody owning options.) Independent of my desires for reform around taxes and illiquidity, offers should be made in terms of the current system, not a make believe one. You may want to read up on this stuff, esp. if you want to work in startups..
looptwasafail 11y ago
This post would carry much more weight if Altman had made it before strings were pulled by Sequoia partners to get his failing startup, Loopt, acquihired, and if he'd actually practiced there with his own employees what he's preaching now here. Further, considering the only major accomplishment of Altman to date was a too-big-(for wealthy, well-connected VCs)-to-fail startup that in its last years served primarily as a gay hookup app(1), I don't see why everyone is so impressed with him, nor why they take these regular, grandiose pronouncements of his so seriously. 1) https://news.ycombinator.com/item?id=385178 https://news.ycombinator.com/item?id=385178
- lifeisstillgood 11y ago
  I am trying e generous here. It is reasonable to ask (if true) why Altman did not practise as he preaches. The interesting answer would be what changed his mind in the intervening years As for the second paragraph, I cannot find enough generosity to see it as anything other than ad hominem trolling, and I would suggest an edit. Especially as you have a troll throw away name.
  - looptwasafail 11y ago
    > The interesting answer would be what changed his mind in the intervening years Maybe employees are starting to wise up and reject the below-market salaries VC-backed startups offer in exchange for worthless options (that will be diluted considerably before acquisition, or are of some class of stock that won't be acquired with the rest of the firm, or that can't be affordably exercised if you leave the company)? > As for the second paragraph, I cannot find enough generosity to see it as anything other than ad hominem trolling, and I would suggest an edit. Especially as you have a troll throw away name. The second paragraph just expresses my honest confusion over why so many people think Altman is brilliant and near everything he says is worthy of serious consideration and discussion. As I see things, Sam has one failed startup under his belt and not much else.
    - lifeisstillgood 11y ago
      No your final paragraph here express your honest confusion. The paragraph we are talking about has a slightly poor taste reference to gay dating, and an argumentative statement Altman has done nothing but start Loopt. His Wikipedia page suggests he acted as an investor in many companies pre-YC, and worked some means for Reddit to have an unusual ownership form. This all suggests to me that a man who become rich at 19 on a startup used that to experiment and understand the startup world, and has grown an interest (and willingness to try new ideas) in how ownership affects the outcomes of companies, which is exactly what we are talking about. So his history suggests a learning path about company ownership and leads directly to here. I would look closely and internally at the causes of your confusion.

88 points by williswee 11y ago

The only problematic aspect of this proposal is not pushing for faster vesting. Slow vesting creates an adverse incentive for managers and founders; and in the absence of any right to suspend them, removes the only leverage that employees have today: departure.

rokhayakebe 11y ago

Quite frankly there is a need for a third party (an honest broker) that come handle all this on behalf of employees, along with salary, benefits, 401k, and other related financial matters. When people cannot balance their checkbooks, and cannot make simple financial planning for the next 6 months, how are they to understand these seemingly complex structures. UNLESS SOFTWARE.

Too 11y ago
What you are describing sounds like a trade union and collective agreements.
- looptwasafail 11y ago
  Not a "trade union"; a "professional association," like the AMA or ADA.
  - gaius 11y ago
    A guild.
    - looptwasafail 11y ago
      Don't call it that. The idea is to avoid words like "union" or "guild" that arouse suspicion. Professional associations like the AMA and ADA fly under the anti-union radar.
      - gaius 11y ago
        Whatever we call it, it will have to be a new thing. What exists right now in the UK is the BCS who are a laughing stock among any practitioner. Even the respected professional associations such as the IMechE barely look out for the interests of their members, not compared to the BMA at any rate.
- rokhayakebe 11y ago
  Not necessarily. Example: Lawyers are not a union, but I can hire one for my divorce. Developers are not a union, but I can hire one to build my application. Accountants are not a union, but I can hire one to do my taxes.

puppetmaster3 11y ago

Great idea Sam. I assume going forward you will be asking for less equity for your LPs.

choppaface 11y ago

This is an old post. It's worth noting that 10/20/30/40 grants did not work (duh!!) and companies (at least the smart ones) have moved away from them. It's also worth noting 83b / early exercise is very common now (hurray!) and can essentially double the value of the equity to the employee (only if they can take advantage of it). ISOs are very toxic. One last piece of advice if you're trying to value the equity in an offer: keep in mind IPOs usually require share prices >= $10 and reverse splits are a favored tool to make that happen.

Pyxl101 11y ago
What was the problem with 10/20/30/40 grants and what kind of vesting schedule is used instead?
- throwitfaraway 11y ago
  10/20/30/40 is insane without double trigger. There's already enough stories of people being pushed out of their stock. The value a super-early employee provides is disproportionately in the first couple years, so backweighting it is quite unfair. Even if the employee is in for the long haul, the company may find it economical to terminate before the compensation increases.
- choppaface 11y ago
  Uniform vesting (1 year cliff, 25% per year) is typical. Some companies (startups and post-IPO) were doing non-uniform vesting in part because the company's valuation was rapidly soaring (and in some cases crashed shortly thereafter). Some did this for refresher grants. The evidence I've seen is that it doesn't help with retention. Well, maybe it helped retain certain execs implementing the programs...

bjterry 11y ago

I think it's unfortunate that he doesn't go into greater detail on the "considerable problems" posed by employees selling their options (or similar transactions). From the simple perspective of fair dealing with employees, it seems obvious that employees should be able to do with what they've earned as they will, so there must be some legal reason that this is inconvenient. If he actually thinks that the incentive argument is strong enough to override the moral argument I would be skeptical, but would love to hear a fully fleshed out argument, given that employers could instead change vesting schedules if they think employees don't actually deserve to own those shares at those times.

idunno246 11y ago
Shareholders have rights to information, increases paperwork and such. Also, can be forced to release financials to the public once you have 500: http://www.businessinsider.com/rule-12g5-1b3-or-how-facebook-just-announced-plans-to-go-public-2011-1 http://www.businessinsider.com/rule-12g5-1b3-or-how-facebook...

hitekker 11y ago

>Option pools are complete fiction; boards can increase them whenever they want. It should never be used as a reason for not making a grant. Is this true? I had one startup say they couldn't increase the equity portion of an offer because they'd have to go to the board and the amount of equity they had available was already set. Didn't heard a word about dilution there. Haven't heard what the other stories were/are yet.

doublerebel 11y ago
Both are true. (Generally) The percentage of equity dedicated to ESOP is fixed unless the board has a good reason to change it. Since increasing the ESOP causes dilution, it would be hard to argue for an increase just to hire a single employee. However, some dilution can be good for everyone. Wealthfront and others have described such a plan: https://blog.wealthfront.com/the-right-way-to-grant-equity-to-your-employees/ https://blog.wealthfront.com/the-right-way-to-grant-equity-t...
- hitekker 11y ago
  Thank you for the informative reply. Have an upvote!
- kriro 11y ago
  """it would be hard to argue for an increase just to hire a single employee.""" For a lot of tech startups hiring a single employee is actually a big enough deal in most cases to try and argue for it (imo)
  - doublerebel 11y ago
    Sorry, most boards and most companies don't value employees that highly, which is why this post and discussion are still happening. YC companies are outliers and boards at YC companies are more likely to be better informed and closer to the employees of the business. For most boards and investors, they will focus on the numbers on the spreadsheet unless the potential hire is quite exceptional.
- 11y ago

rdlecler1 11y ago

As for more equity: founders have a qualitatively different risk profile than employees. I've been running my startup for over two years, and I am the lowest paid person on our team. I have to defer having a family and can't enjoy the things that my employees enjoy. I also can't ask my employees to work harder than me, which means I have to work harder than everyone else. A couple of times I had to cover payroll with my credit card and would have been bankrupt if we didn't pull through. If things get tough an employee can jump ship at anytime, while I will be going down with the ship. And at the end, if I'm lucky I end up with 5-15% of the company. I'm not complaining, this is what I signed up for, but employees can be very well compensated in today's market prior to equity upside.

angersock 11y ago
Allow me to disagree slightly with this, in the cast of early (number less than, say, 10) employees. My (hard-earned) experience here is as the first engineering hire, functioning as engineering lead. We have the same (maybe even worse!) risk profile: we are being paid below market rates (because small startup), we probably don't have healthcare or benefits (because small startup), we have the majority of the burden in terms of actual leadership (because we probably have been hired with the explicit intent of having us grow the team, tech, or sales). We don't get the glory or good press that the founders do (because we're just employees, lol). We don't get the same access or transparency to the business decisions (because we're not founders). If the business folds for the founders, they shut it down, walk away, and maybe have to file some bankruptcy. In exchange, they get to join The Magical Founders Club, wherein they can parlay their experience into speaking engagements, recruiting for new gigs, senior-level business and tech positions (regardless of skill), and funding from investors. When the startup folds for early employees (or exits in such a way only the founders are taken care of), the result is whatever personal harm comes of stress and health issues (if not taken care of b/c of bad benefits), the net loss of however much time spent working at below market prices, potentially no portfolio work (because a lot of companies are shitty about NDAs and proprietary software), and so on. For third or forth wave employees, sure, it's just another round of job hunting. For the first folks who actually had to build the business, well, it can really suck. EDIT: A minor elaboration...Micheal O'Church in an essay made an interesting claim that the founders and employees are no longer considered in the same class, compared with the 90s. My observation has been that founders will merrily maintain three orders of magnitude of equity while doing very little more than their first few hires. In fact, they may be doing less work, because they are inexperienced and spend time doing the wrong things because they don't know any better and are senior enough they feel they can ignore advice.

caseysoftware 11y ago

The last startup I worked at had a small flock of employees that hit the 4 year mark this year. Unfortunately, most of them didn't do any sort of early exercise so they paid taxes on the difference after they exercised. The only thing that saved a few of them is that the company offered a buyback program so they were able to flip some (all, in some cases) of their shares to cover the exercise and the taxes.

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throwaway984890 11y ago

I work for a top-5 YC investment (by current valuation) and none of the things Sam discusses are true of our company: -Employee equity is much lower than his recommendations. -We have 90 days to exercise options. -They refused to tell me what percentage my equity represented when I applied. -They refused to tell me information about burn rate/money in the bank when I applied. I still took the job, because money was not a primary motivating factor, but it is disappointing to see one of the most successful YC investments fit none of his criteria. He goes so far as to warn readers to "be very suspect of any startup" that doesn't provide this information. I understand that Sam does not personally control what decisions YC portfolio companies make on these topics, but I certainly hope that he guides them strongly towards the recommendations he has made here.

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meric 11y ago
> They refused to tell me what percentage my equity represented when I applied. Did they tell you how much the equity was worth? You could take the latest round they raised and divide by that.
edanm 11y ago
If it's a top-5 YC company, I assume it's relatively older. This post is probably based on thinking and lessons learned over the last few years - why would he have needed to write it if older YC companies didn't have the bad structures?
- knughit 11y ago
  It is crazy that this stuff that was well down and discussed on HN itself over the years was somehow unknown to YC. When I was a startup employee noob five years ago I learned all the advice of this article, from reading HN.
choppaface 11y ago
+1 can vouch I have had similar problems with YC companies, though not as bad as mentioned here. I think it's important to remember YC companies are totally free to ignore the advice of YC, especially if they believe (perhaps mistakenly) that they'll succeed doing so. That said, I've had still had very positive experiences with other YC companies.

inmygarage 11y ago

While convertible notes and SAFE documents have made seed stage financing much more streamlined and straightforward, employee equity is still a hot mess in terms of the legal, financial and tax difficulties that only present themselves after it's too late. The biggest issue IMO are those scenarios when private, completely illiquid stock gets taxed as ordinary income. There should be a way to pay the tax with the same shares, though counting on the IRS becoming "flexible" is probably a longshot. While I agree with the other points mentioned, that is one the largest and most painful when it presents itself. I do think there's also an opportunity for companies to be creative about exercising mechanics as well.

karterk 11y ago

The period (typically just 30-90 days) for exercising the options is the most unfair of the lot. Most of my friends who left, say, after 3-years, simply were not in a place to exercise their options because of the financial implications. People leave for various reasons, and it's extremely unfair for someone to be in this position after 2-3 years. I wish more companies would adopt the 10-year exercising period.

lewisl9029 11y ago

So I've been looking at startup jobs on AngelList lately and came across many postings claiming to give "significant" equity. And then I scroll up and usually see something along the lines of 0.1%-0.2%. Now I'm not exactly an expert on the intricacies of employee stock options, but simple math indicates that 0.1%-0.2% translates into 1-2 million for a billion dollar company. Sure, 1-2 million is a decent amount of money, but that's before taking into account factors like dilution and opportunity costs of the associated golden handcuffs. The chances for a given startup to grow to a billion dollars is minuscule to begin with, and working at an established tech company could easily net you that same 1-2 million within a few years with none of the risks. And considering that the founders' equity will be worth hundreds of millions for that same billion dollar company, calling 1-2 million significant just feels downright condescending.

karterk 11y ago
You have to look at the 0.2% in relation to the salary that they offer. And, many companies do allow you to negotiate the salary vs options trade-off.
- lewisl9029 11y ago
  >And, many companies do allow you to negotiate the salary vs options trade-off. That's definitely true in principle. But in practice, it might not be a great idea. I actually tried to negotiate the salary vs options tradeoff recently, and I feel it didn't end well because even though I tried to be as objective as possible, the fact that I didn't want equity might have given the impression that I didn't really believe in the startup (which was true, since I really didn't believe they had any chance of becoming a billion dollar company, but it's not the kind of impression you'd want to leave if you want the job).
  - knughit 11y ago
    So, the process worked. The company finds people who have the most interest in the company's success, within the set of hirable candidates

kspaans 11y ago

Has anyone been thinking about or seen analyses on the potential changes to tax treatment of stock options for start-ups in Canada under the new government? http://www.lexology.com/library/detail.aspx?g=86190d96-b169-4774-885e-db04486ad63d http://www.lexology.com/library/detail.aspx?g=86190d96-b169-...

lewisl9029 11y ago
This is why I have mixed feelings about the Liberal party. I voted for them because I agree with their platform in principle (i.e. invest in infrastructure, take global warming seriously, help the middle class prosper), but between this and reverting of the TFSA contribution limits, their actual policies makes me a bit nervous about their definition of middle class. What definition of middle class consists of people who can't benefit from being able to save and invest 4.5k more per year or from working at a startup with low pay in hopes for a better quality of life down the line from equities?
- kspaans 11y ago
  I've got mixed feelings about the TFSA as well. I think they are easier to understand than RRSPs and thus easier for people to use. But I have this nagging suspicion that the $10k/year would forgo too much revenue down the line. Though maybe I'm too optimistic about how much use TFSAs would get and what kind of growth they would see (assuming no "IRA-stuffing" equivalent).
- tempestn 11y ago
  The thing is, basically by definition, no one who is middle class (aside from perhaps upper, upper middle class) maxes out both their TFSA and RRSP. Even with the reduced TFSA limit, that's 18% of income plus $5500 per year. So really all a lower TFSA means is that more RRSP needs to be used to get the same sheltered space. The TFSA certainly has advantages: flexibility being the biggest one. No bookkeeping, put money in whenever, and take it out with minimal restriction (aside from waiting until Jan. 1 to re-contribute). That said, as long as you invest the tax refund you get from contributing to the RRSP (or even better, file a T1213 so you don't pay those taxes in the first place), the RRSP is arguably a better retirement savings vehicle for most people (ie anyone who expects to be in a lower tax bracket in retirement than while they are contributing). Also, the lack of flexibility makes it more likely that the money will still be there in retirement. The TFSA is great, and selfishly I'd love to keep the extra space. I have to agree though that it (the larger size, not necessarily the TFSA in general) disproportionately benefits the wealthy, and that government revenue would be better spent elsewhere.

rdl 11y ago

"As an aside, some companies now write in a repurchase right on vested shares at the current common price when an employee leaves. It’s fine if the company wants to offer to repurchase the shares, but it’s horrible for the company to be able to demand this." Which companies are those (and who are their advisors/investors/etc.) so I can never work there, or with them? Seriously, fuck everything about that.

lifeisstillgood 11y ago

Why options at all? At startup valuations is the cost that great? According to the Buffett worldview (I think) Actual shares align shareholders interests, unlike option grants, in later stage companies. To my mind options are a free and usually worthless offer. But actual shares have a value and significance, not for their monetary worth, but the actual ownership. I must admit I am hazy on the details of options - but then as I am a profile of typical early employee perhaps that's also the point

lmeyerov 11y ago
Early stage shares are illiquid paper money that you have to pay taxes on (or the cash-poor startup does). The higher the valuation, the more you / the startup forks over up front. Options skip that: you only pay if and when things go well, in which case you don't mind. If things fail, you only pay in lost time. They're way more employee friendly.
- lifeisstillgood 11y ago
  But that seems a failure of the tax system (tax on a asset worth less than the tax is silly). And illiquid should not be the issue surely. We don't want the employees selling the shares - but we do want them as part owners. These days Inwoukd assume my right to an option could be tradeable, even securitisable.
  - knughit 11y ago
    Startups can't fix the tax system.
  - lmeyerov 11y ago
    Options are the right to buy shares at a frozen (& cheap) price. Incentives are aligned because, if the employee helps make the company more valuable, the share value goes up, and they get to walk away with the difference. (A slight oddity is that technically their value needs to go up to be worth exercising, but because of how they get valued -- ~20% of price early VCs pay ~ as soon as VCs would make money, so would anybody owning options.) Independent of my desires for reform around taxes and illiquidity, offers should be made in terms of the current system, not a make believe one. You may want to read up on this stuff, esp. if you want to work in startups..

looptwasafail 11y ago

This post would carry much more weight if Altman had made it before strings were pulled by Sequoia partners to get his failing startup, Loopt, acquihired, and if he'd actually practiced there with his own employees what he's preaching now here. Further, considering the only major accomplishment of Altman to date was a too-big-(for wealthy, well-connected VCs)-to-fail startup that in its last years served primarily as a gay hookup app(1), I don't see why everyone is so impressed with him, nor why they take these regular, grandiose pronouncements of his so seriously. 1) https://news.ycombinator.com/item?id=385178 https://news.ycombinator.com/item?id=385178

lifeisstillgood 11y ago
I am trying e generous here. It is reasonable to ask (if true) why Altman did not practise as he preaches. The interesting answer would be what changed his mind in the intervening years As for the second paragraph, I cannot find enough generosity to see it as anything other than ad hominem trolling, and I would suggest an edit. Especially as you have a troll throw away name.
- looptwasafail 11y ago
  > The interesting answer would be what changed his mind in the intervening years Maybe employees are starting to wise up and reject the below-market salaries VC-backed startups offer in exchange for worthless options (that will be diluted considerably before acquisition, or are of some class of stock that won't be acquired with the rest of the firm, or that can't be affordably exercised if you leave the company)? > As for the second paragraph, I cannot find enough generosity to see it as anything other than ad hominem trolling, and I would suggest an edit. Especially as you have a troll throw away name. The second paragraph just expresses my honest confusion over why so many people think Altman is brilliant and near everything he says is worthy of serious consideration and discussion. As I see things, Sam has one failed startup under his belt and not much else.
  - lifeisstillgood 11y ago
    No your final paragraph here express your honest confusion. The paragraph we are talking about has a slightly poor taste reference to gay dating, and an argumentative statement Altman has done nothing but start Loopt. His Wikipedia page suggests he acted as an investor in many companies pre-YC, and worked some means for Reddit to have an unusual ownership form. This all suggests to me that a man who become rich at 19 on a startup used that to experiment and understand the startup world, and has grown an interest (and willingness to try new ideas) in how ownership affects the outcomes of companies, which is exactly what we are talking about. So his history suggests a learning path about company ownership and leads directly to here. I would look closely and internally at the causes of your confusion.