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Employee Equity Is Broken – Here's Our Fix

84 points by BIackSwan 11y ago

phamilton 11y ago
ELI5: "IRS tax artifacts" wrt to the 90 day window and how Amplitude is getting around it.
- eropple 11y ago
  More than that - they actually describe what those shares mean, rather than just throwing a number out there in a vacuum. I dig this.
- tptacek 11y ago
  Employee stock options are designed to comply with the IRS rules for Incentive Stock Options (ISOs), which allow employees to receive and execute options without being taxed on their value; tax is assessed only when the stock is sold. To qualify as an ISO, options have to be exercised within 3 months of an employee leaving the company. The alternative seems to be to use NSOs, or (maybe?) ISOs that turn into NSOs; NSOs have tax implications at the time of exercise, but the point of giving employees NSOs is to allow them to defer exercise, perhaps to a point where the options are liquid (remember: most options aren't liquid; that's the problem with requiring them to be exercised --- it requires employees to spend money to receive illiquid speculative options).
  - sjg007 11y ago
    Honestly, we should just lobby Congress to remove NSOs and make them ISOs by default.
rrecuero 11y ago
I really like the concept of progressive equity by Andrew Mason. IT helps align the interests of founders and early employees to achieve a "shared destiny mindset" http://blog.detour.com/introducing-progressive-equity/ http://blog.detour.com/introducing-progressive-equity/
- sskates 11y ago
  I hadn't seen Andrew's post before writing this but I think it's awesome. Will try this out at the next company.
  - rrecuero 11y ago
    Me too! I plan to setting this up at my new company :). I really believe in being a small part of something big vs being a big part of something small
  - dmnd 11y ago
    Amusingly your article states, "As far as I know, this is the most progressive take on equity compensation that I’ve seen." Now that you've heard of progressive equity, maybe you should tweak that sentence?
pc86 11y ago
It appears this domain (for whatever reason) is blocked by my work's firewall. If there happens to be a mirror or cache link I would greatly appreciate it!
- anonx 11y ago
  https://archive.is/0PYHv https://archive.is/0PYHv
- sskates 11y ago
  Google cache: http://webcache.googleusercontent.com/search?q=cache:EjpQDst4YbwJ:https://amplitude.com/blog/2015/12/01/employee-equity-is-broken-heres-our-fix/+&cd=1&hl=en&ct=clnk&gl=us http://webcache.googleusercontent.com/search?q=cache:EjpQDst...
tptacek 11y ago
You don't need your prospective new employer to adopt the second policy. You can simply demand it of them when they tell you what your grant will be. I think the best way to handle these kinds of questions is to bring them back to dollars; never haggle over percentages, but instead get a "low", "medium", and "high" scenario for what the equity will be worth when the company is sold, then ask what the company's revenue is in each of those scenarios.
- pc86 11y ago
  Serious question: Is that information you're going to be able to easily get (or calculate) if you're interviewing for Employee #1? #5? #50?
  - jt2190 11y ago
    Look at it another way: If the employer is willing to share information about what options might be worth in different scenarios, it's a signal that the employer is negotiating with a "win-win" mindset. Employers who don't share this information are signaling that they're negotiating using a "win-loose" mindset. Adjust your negotiation tactics accordingly.
  - blakecallens 11y ago
    If no one's willing to give you that info, at any of those stages, it's a good sign that they're not going to be up front with you about equity at all.
    - throwawaymaroon 11y ago
      You should also bear in mind though that these values are not a guarantee even if the founder's shares pay off in the 'high' range. There are a lot of ways for investors and founders to squeeze value away from employees. Your equity options are not the same quality as the big buckets of options: they are employee options.
  - tptacek 11y ago
    Yes. People I've worked with regularly ask me for advice negotiating new jobs --- I have no idea why --- and this is my standard answer. There are three kinds of cases where I've seen this information being hard to get: 1. Equity isn't a major part of compensation, and salaries are market-competitive. The employer says, in essence, "equity is not an important part of your compensation; let's concentrate on making sure you're happy with the salary and bonuses". 2. It's a relatively large company that is constantly hiring people, and they have a strong BATNA. 3. They simply don't know the answer, and the person hiring you isn't in a position to work with you to generate the answer (that work being "make three wild guesses at where revenue will be in 5 years, do a little research on what multiples companies are acquired for in their space, and figure out how much runway they have now"). If you know the % of the company you're getting, the dollars invested, and what the liquidation preferences are, you can come up with a somewhat decent guess here on your own. If you're a key hire and equity is a significant part of your compensation, you should be able to get this information. If equity is a significant part of your compensation, then, no matter what, you should be able to get: * The number of basis points you're getting in the company * The dollars invested in the company so far * The company's revenue target for the year * How much runway the company has at current headcount If you can't get all of these, value equity at zero.
bryanlarsen 11y ago
The second fix might be good for amplitude, but it's probably bad for employees. Potential employees are highly likely to over-estimate the chances of the higher buyout scenarios, and to under-estimate the effects of dilution and preferred shares. By spending time going over the spreadsheet with them you're increasing their confidence in the numbers, making them more likely to make these mistakes. Without the second change, potential employees are much more likely to go with the more accurate heuristic that options are worthless.
lacker 11y ago
I don't think employee equity is broken - you just really have to pick the right startup, because most startups will have worthless equity. And all of the fixes promoted in blog posts like these are nice, but they pale in comparison to picking the right startup.
- marssaxman 11y ago
  Or you can just acknowledge the fact that it's basically a lottery and ignore equity altogether, since it never matters unless you're one of the founders, in which case it's your job to create the right startup.
  - ryandrake 11y ago
    After decades in this industry, I'm convinced that this is the only rational strategy. Treat equity compensation as "close to zero value" unless it's immediately convertible to cash.
- sskates 11y ago
  You make it sound so easy. Professionals at picking the right company (aka venture capitalists) get it wrong the vast majority of the time. Nobody has any guarantees about how things will end up. You really think the 90 day exercise window is fair? It means an employee who just left a company has a huge burden with their vested options- either come up with a lot of cash and take a massive risk or have your equity compensation be worth nothing.
  - SeoxyS 11y ago
    Picking winners is easy: oftentimes they're obvious. e.g. Uber, Slack. VCs have a much harder job: picking undervalued and not-yet-obvious winners. They need to find the winner first, before everyone else also realizes it's a winner
    - marssaxman 11y ago
      Those examples weren't obvious when they were still small enough that employee equity compensation would have meant something.
JonFish85 11y ago
I'm curious how this will play out over the long run. How do you reward later-stage employees fairly? A few early employees who leave the company will have an enormous advantage over later-stage employees who might do more meaningful work at the company. In my personal experience, I joined a company mid-pivot. At the time, the strike price on the options was $75+. People who were leaving the company had strike prices around $1. That was a tricky problem there, because stock is hard to use to incentivize people when the upside is taken by people who aren't at the company any more. One way to fix that is to issue lots of more shares, basically diluting the old employees out, but ultimately this is what these companies are trying NOT to do (effectively the 90-day window is a way of ensuring current employees' stock isn't diluted by old employees). The board isn't going to allow early investors to get diluted out, so after a few years, you're handing tiny amounts of stock to new employees. I guess the hope would be that you're paying market rate at that point? It sounds like a good way to attract talent in an early-stage company, but after a couple of years, it's going to be tough to attract new employees (at least with stock). These are just my opinions though, I'm convinced that unless the company is public or you're a first-20 employee, stock is not going to be worth much, especially considering the opportunity cost. There are other things that are worthwhile (it can be great for a career), but purely money-wise, you're probably going to be net-negative.
- sjg007 11y ago
  Early stage investors can indeed get diluted but they usually have the right to invest at the later stage.
- s73v3r 11y ago
  Why couldn't they simply do a split, in which case the original employee's share would be diluted, but they'd be given more.
  - JonFish85 11y ago
    Is that how a split works? I've always thought that a split was just that: 1 share now is 2 shares. The total value of holdings becomes the same. When Apple split, that's what happened with my shares there, anyways.
sjg007 11y ago
Even if you are an early employee you can still get hit by a later stage series that gives a high valuation but with a preferred ratchet if you IPO at less than a specific price. It is almost impossible to get information on the specifics of the deals. I am not sure if you vest at least 1 stock option if that will qualify you to see the docs and/or if companies have other ways to prevent that or if they will in the future.
pbreit 11y ago
How do they describe something that's working spectacularly well as, "broken". Sure, maybe it's not optimal or has some problems. But, broken? Really? But I do like what they're doing. Extending the option period makes perfect sense. I think they might have gone a bit far on the value sample. I think current % ownership + internal/external valuation should be sufficient.
- angersock 11y ago
  Is it really working "spectacularly well"? Or, is it just something that has kinda worked out because the workforce wasn't communicating how they were getting screwed to each other? I expect things to get more difficult for employers as employees wisen up.
  - pbreit 11y ago
    Well, it's a key driver of Silicon Valley success over the past 50+ years.
    - angersock 11y ago
      The employee equity relationship today is, I would suggest, quite different than even 20 years ago. EDIT: I refer you to the "The three-class society" section of this essay: https://michaelochurch.wordpress.com/2015/11/06/y-combinator-and-paul-graham-are-bad-for-the-world-part-1/ https://michaelochurch.wordpress.com/2015/11/06/y-combinator...
    - s73v3r 11y ago
      Is it? How so?
      - pbreit 11y ago
        Equity compensation is probably the biggest difference between a startup and all other companies. Silicon Valley is probably the epicenter of startup success and that equity compensation has been a key driver of such success.
pbreit 11y ago
How do they describe something that's working spectacularly well, "broken". Sure, maybe it's not optimal or has some problems. But, broken? Really?
ryandrake 11y ago
My view is that any equity compensation that rewards people more for how early they were hired than for how much they contributed to the company's success during their stay, is inherently broken. I'm not saying that taking the risk as employee number 3 at a startup should not be rewarded. But you should be substantially more rewarded for what you've done, regardless of your employee number.
- sskates 11y ago
  Agreed that it's mainly a function of employee number and secondarily a function of contribution. I'd much rather it be based on contribution. The trouble is that contribution is hard to tell up front but you have to be agreed on baseline compensation. Perhaps there's a way to fix that as well.
  - tedmiston 11y ago
    Also time is easy to quantify and measure. Contribution across departments though? What % of building a major feature of your product for a key customer goes to marketing/sales/design/engineering/etc.?
- woah 11y ago
  You're looking at it the wrong way. For better or worse, people are made an offer when they first start. Stock in a company that is "less of a sure thing" (earlier stage) is worth less. So, they must receive more of it to have it correspond to a certain amount of salary they might be missing out on. What happens later is in the future. It's like the employee is an angle investor.
- saganus 11y ago
  I always thought that part of the reason early employees got more equity was not only because of the risks involved, but also because early employees usually have to do all sorts of things aside from their regular duties. Not saying this is always the case, but personally I always thought this was part of the reward given. For example, it's not the same to be a developer that, even though might contribute a lot, didn't have to write the framework from scratch when there are so many unknowns, there a lot of tougher decisions, when things are not as clear and straight forward, responsibility is greater, etc. Of course this depends a lot on the particular startup, but I've seen employees hired to do say, design, end up having to do sales as well, even if they don't enjoy it or they don't have the skill for it.
choppaface 11y ago
Dilution can also happen through a reverse-split prior to IPO to hit a target share price. (In this case, the bankers effectively dilute everybody else, although C-levels will probably get big new post-split grants to stay on after the IPO). The number of shares (rather than the percentage) might be more important given an IPO will probably require $10-15/share, and the share price will probably be no more than 2x-3x that after 6-month lockup. IMO telling an employee you have x% of $n billion is very misleading, as dilution can be rather unpredictable. You're really showing the employee the /max/ upside in 2-7 years, which IMO is a very weak sales position.
- sskates 11y ago
  Dilution is unpredictable and what's worse is you have the principal agent problem where employees who are affected don't have a seat at the negotiating table. You're definitely counting on upper management/the board not to do things like that. Not sure on the solution but agreed that it needs to be solved.
  - salem 11y ago
    These side-letter deals and exits optimized for founders are probably not legal since they are often not in the best interests of shareholders, but I've never heard of them being investigated.
- itaifrenkel 11y ago
  Could you explain in more detail how a reverse split (in which value should not change) is an indication for the bankers delluting everyone else? If there was no reverse split the delluting was any different?
Jemaclus 11y ago
I dunno about anyone else, but I pretty much ignore equity when considering a new position. Worrying about equity as an employee is like worrying about what kind of Christmas gift you'll get from someone you know. It might be something awesome, it might be something dumb, but more than likely, it's a pat on the back and a "Happy Holidays" -- nothing you can take to the bank. I also think it doesn't really matter how much your valuation is, because the options are effectively worthless until there is a qualifying event. If you're already public, then you might have a case for it, but for most startups, it's as good as monopoly money. Salary + benefits + culture is what gets me in the door every day. Equity is just a bonus. I once interviewed with a YC company and got an offer that was significantly under my current salary. When I tried to negotiate, the founder insulted me and basically told me I was an idiot for ignoring the equity component which was "worth far more than the salary." Pretty glad I didn't take that position, but it still bothers me how misguided he was about the whole situation. I can't pay rent with equity. My landlord won't accept "I have stock options in some startup you've never heard of" as payment. There are a lot of posts about equity around here, and I just think it's overrated in general. Kinda wish we'd talk more about salary and other benefits and a little less about what basically amounts to a crapshoot. For instance, my hearing aids are very often not covered by health insurance... now that would be a nice perk for someone like me.
- s73v3r 11y ago
  Rich people are allowed to borrow against their equity options. Why can't we?
  - woah 11y ago
    They have better judgement.
  - deleted 11y ago
    [deleted]
  - JonFish85 11y ago
    I'm sure you can, at a discount. You probably won't find many/any banks willing to do that, but I imagine you can find private parties who are willing to give you $0.05 on the dollar for some options. I imagine the reason that "rich people" can borrow against their options is because they aren't common share options, or they have some sort of control over the destiny of those shares. For common shares there are several ways for them to become worthless, some of which people on this thread have mentioned (dilution & preference are the two big ones). If you're holding on-paper $100k worth of stock options, you probably couldn't get $10k for them except in very rare cases. If you were an early member of Uber, you can probably find institutions that want to buy shares, so maybe you can get money from them. But remember, that on-paper $100k has tax implications along with it when you buy them/sell them, so don't forget to set aside enough money to pay that.
enra 11y ago
Couple years ago I was considering joining a company. It wasn't a normal hiring situation, so I had some leverage. My lawyer suggested that we could try negotiating a shorter vesting period or longer exercise period. The company didn't go for the shorting vesting but the said ok for the longer exercise period. Their employee stock plan was in ISO with the standards 3-month period, so their lawyers basically changed one line there, saying "You may exercise this option for xx months after termination of your continuous service status". After the 3 months the option just changes to NSO. That was it. It was such a simple thing that I don't understand why companies don't do this more often.
- sskates 11y ago
  The crazy thing to me is: 1) the fact that employees are granted options instead of shares is an artifact of tax law, and 2) the fact that there's a 90 day exercise window is also an artifact of tax law. Yet, companies constantly come up with post-hoc justifications of why only giving a 90 day window is fair. There is big resistance to change on this point. Even Ben Horowitz and Sam Altman don't think it's a clear decision! http://genius.com/B-horowitz-lecture-15-how-to-manage-annotated/ http://genius.com/B-horowitz-lecture-15-how-to-manage-annota... If you were to derive how to think about employee ownership of a company as a form of compensation from first principles, you'd never come up with options and you'd never come up with a 90-day exercise window on top of that. Those are both artifacts from tax law yet it's become the standard form of compensation!
  - enra 11y ago
    Do you how a company would you give employees shares directly without them being taxed on the grant? One way I've seen this is with RSU double triggers: you are granted RSUs but you don't own them until the stock is actually liquid. However, at that time, you will have to pay taxes and you don't get long term capital gains. Update: Just read your link, it's crazy how on this topic, Ben goes on a rant about random things, and whether it's fair to give 10y exercise period, because the person working there doesn't somehow get that benefit. Even if you have a money, employees are not investors, they can't just throw $10-100k on one startup, without knowing liquidation preferences or anything else, and which may or may not have some kind of liquidity in the next 10 years. It's useless to give equity if most people get screwed.
paul 11y ago
This is really great! The 90 day window is bad for employees. I'd like to see this become the new standard. (and I hope the IRS doesn't give any trouble!)
sl8r 11y ago
My experience is that there are some "weird" effects of equity comp once one gets into the calculus of incentives: 1. Payoffs are too small to be consequential. If you own 0.01% of a company and are personal-profit-maximizing, then you are indifferent between (a.) Increasing the company's valuation by $1M and (b.) Getting $100. 2. Growth makes "rest and vest" a reasonable strategy. If a startup does well, then an employee's initial equity grant typically dwarfs all subsequent compensation; does it make sense to work hard for a $5k raise when your equity is worth $500k?
- sskates 11y ago
  Once you get to 0.01% per employee it's not a strictly profit maximizing decision. It's more of a way to align people and make them feel they have ownership. Agreed on the second point.
salem 11y ago
Longer exercise windows and more info are great and all, but if you are still expecting employees to take less than market rate salary in exchange for options, you should be giving people the same equity and terms (e.g. liquidation preferences) that investors get for the cash that you forgo. Founders I've talked to are sympathetic and see it as fair, but none have the courage to try it.
- sskates 11y ago
  Not sure that giving liquidation preferences to common stockholders would be fair- the idea with a 1x liquidation preference is that money into the company at least first goes to repaying the principal on the investment first before rewarding any upside.
  - salem 11y ago
    What's wrong for asking for the same terms as the latest round? Let's acknowledge that there is an opportunity cost for early hires.
the_watcher 11y ago
Everyone who comments that equity is worthless until the day you can actually turn it into cash is completely correct. That said, presenting potential outcomes in an easily understood table, and in particular, extending the exercise window is really a fantastic idea.
adamw2k 11y ago
Can't believe form 83b wasn't even mentioned... Truly the best way for any early stage employee to deal with options from a tax perspective.
the_cat_kittles 11y ago
has someone done a survey of tech equity that gives us an idea what the expected value of x points is worth? even so, its a lottery ticket to me, and i never consider it when considering an offer.

84 points by BIackSwan 11y ago

phamilton 11y ago

ELI5: "IRS tax artifacts" wrt to the 90 day window and how Amplitude is getting around it.

eropple 11y ago
More than that - they actually describe what those shares mean, rather than just throwing a number out there in a vacuum. I dig this.
tptacek 11y ago
Employee stock options are designed to comply with the IRS rules for Incentive Stock Options (ISOs), which allow employees to receive and execute options without being taxed on their value; tax is assessed only when the stock is sold. To qualify as an ISO, options have to be exercised within 3 months of an employee leaving the company. The alternative seems to be to use NSOs, or (maybe?) ISOs that turn into NSOs; NSOs have tax implications at the time of exercise, but the point of giving employees NSOs is to allow them to defer exercise, perhaps to a point where the options are liquid (remember: most options aren't liquid; that's the problem with requiring them to be exercised --- it requires employees to spend money to receive illiquid speculative options).
- sjg007 11y ago
  Honestly, we should just lobby Congress to remove NSOs and make them ISOs by default.

rrecuero 11y ago

I really like the concept of progressive equity by Andrew Mason. IT helps align the interests of founders and early employees to achieve a "shared destiny mindset" http://blog.detour.com/introducing-progressive-equity/ http://blog.detour.com/introducing-progressive-equity/

sskates 11y ago
I hadn't seen Andrew's post before writing this but I think it's awesome. Will try this out at the next company.
- rrecuero 11y ago
  Me too! I plan to setting this up at my new company :). I really believe in being a small part of something big vs being a big part of something small
- dmnd 11y ago
  Amusingly your article states, "As far as I know, this is the most progressive take on equity compensation that I’ve seen." Now that you've heard of progressive equity, maybe you should tweak that sentence?

pc86 11y ago

It appears this domain (for whatever reason) is blocked by my work's firewall. If there happens to be a mirror or cache link I would greatly appreciate it!

anonx 11y ago
https://archive.is/0PYHv https://archive.is/0PYHv
sskates 11y ago
Google cache: http://webcache.googleusercontent.com/search?q=cache:EjpQDst4YbwJ:https://amplitude.com/blog/2015/12/01/employee-equity-is-broken-heres-our-fix/+&cd=1&hl=en&ct=clnk&gl=us http://webcache.googleusercontent.com/search?q=cache:EjpQDst...

tptacek 11y ago

You don't need your prospective new employer to adopt the second policy. You can simply demand it of them when they tell you what your grant will be. I think the best way to handle these kinds of questions is to bring them back to dollars; never haggle over percentages, but instead get a "low", "medium", and "high" scenario for what the equity will be worth when the company is sold, then ask what the company's revenue is in each of those scenarios.

pc86 11y ago
Serious question: Is that information you're going to be able to easily get (or calculate) if you're interviewing for Employee #1? #5? #50?
- jt2190 11y ago
  Look at it another way: If the employer is willing to share information about what options might be worth in different scenarios, it's a signal that the employer is negotiating with a "win-win" mindset. Employers who don't share this information are signaling that they're negotiating using a "win-loose" mindset. Adjust your negotiation tactics accordingly.
- blakecallens 11y ago
  If no one's willing to give you that info, at any of those stages, it's a good sign that they're not going to be up front with you about equity at all.
  - throwawaymaroon 11y ago
    You should also bear in mind though that these values are not a guarantee even if the founder's shares pay off in the 'high' range. There are a lot of ways for investors and founders to squeeze value away from employees. Your equity options are not the same quality as the big buckets of options: they are employee options.
- tptacek 11y ago
  Yes. People I've worked with regularly ask me for advice negotiating new jobs --- I have no idea why --- and this is my standard answer. There are three kinds of cases where I've seen this information being hard to get: 1. Equity isn't a major part of compensation, and salaries are market-competitive. The employer says, in essence, "equity is not an important part of your compensation; let's concentrate on making sure you're happy with the salary and bonuses". 2. It's a relatively large company that is constantly hiring people, and they have a strong BATNA. 3. They simply don't know the answer, and the person hiring you isn't in a position to work with you to generate the answer (that work being "make three wild guesses at where revenue will be in 5 years, do a little research on what multiples companies are acquired for in their space, and figure out how much runway they have now"). If you know the % of the company you're getting, the dollars invested, and what the liquidation preferences are, you can come up with a somewhat decent guess here on your own. If you're a key hire and equity is a significant part of your compensation, you should be able to get this information. If equity is a significant part of your compensation, then, no matter what, you should be able to get: * The number of basis points you're getting in the company * The dollars invested in the company so far * The company's revenue target for the year * How much runway the company has at current headcount If you can't get all of these, value equity at zero.

bryanlarsen 11y ago

The second fix might be good for amplitude, but it's probably bad for employees. Potential employees are highly likely to over-estimate the chances of the higher buyout scenarios, and to under-estimate the effects of dilution and preferred shares. By spending time going over the spreadsheet with them you're increasing their confidence in the numbers, making them more likely to make these mistakes. Without the second change, potential employees are much more likely to go with the more accurate heuristic that options are worthless.

lacker 11y ago

I don't think employee equity is broken - you just really have to pick the right startup, because most startups will have worthless equity. And all of the fixes promoted in blog posts like these are nice, but they pale in comparison to picking the right startup.

marssaxman 11y ago
Or you can just acknowledge the fact that it's basically a lottery and ignore equity altogether, since it never matters unless you're one of the founders, in which case it's your job to create the right startup.
- ryandrake 11y ago
  After decades in this industry, I'm convinced that this is the only rational strategy. Treat equity compensation as "close to zero value" unless it's immediately convertible to cash.
sskates 11y ago
You make it sound so easy. Professionals at picking the right company (aka venture capitalists) get it wrong the vast majority of the time. Nobody has any guarantees about how things will end up. You really think the 90 day exercise window is fair? It means an employee who just left a company has a huge burden with their vested options- either come up with a lot of cash and take a massive risk or have your equity compensation be worth nothing.
- SeoxyS 11y ago
  Picking winners is easy: oftentimes they're obvious. e.g. Uber, Slack. VCs have a much harder job: picking undervalued and not-yet-obvious winners. They need to find the winner first, before everyone else also realizes it's a winner
  - marssaxman 11y ago
    Those examples weren't obvious when they were still small enough that employee equity compensation would have meant something.

JonFish85 11y ago

I'm curious how this will play out over the long run. How do you reward later-stage employees fairly? A few early employees who leave the company will have an enormous advantage over later-stage employees who might do more meaningful work at the company. In my personal experience, I joined a company mid-pivot. At the time, the strike price on the options was $75+. People who were leaving the company had strike prices around $1. That was a tricky problem there, because stock is hard to use to incentivize people when the upside is taken by people who aren't at the company any more. One way to fix that is to issue lots of more shares, basically diluting the old employees out, but ultimately this is what these companies are trying NOT to do (effectively the 90-day window is a way of ensuring current employees' stock isn't diluted by old employees). The board isn't going to allow early investors to get diluted out, so after a few years, you're handing tiny amounts of stock to new employees. I guess the hope would be that you're paying market rate at that point? It sounds like a good way to attract talent in an early-stage company, but after a couple of years, it's going to be tough to attract new employees (at least with stock). These are just my opinions though, I'm convinced that unless the company is public or you're a first-20 employee, stock is not going to be worth much, especially considering the opportunity cost. There are other things that are worthwhile (it can be great for a career), but purely money-wise, you're probably going to be net-negative.

sjg007 11y ago
Early stage investors can indeed get diluted but they usually have the right to invest at the later stage.
s73v3r 11y ago
Why couldn't they simply do a split, in which case the original employee's share would be diluted, but they'd be given more.
- JonFish85 11y ago
  Is that how a split works? I've always thought that a split was just that: 1 share now is 2 shares. The total value of holdings becomes the same. When Apple split, that's what happened with my shares there, anyways.

sjg007 11y ago

Even if you are an early employee you can still get hit by a later stage series that gives a high valuation but with a preferred ratchet if you IPO at less than a specific price. It is almost impossible to get information on the specifics of the deals. I am not sure if you vest at least 1 stock option if that will qualify you to see the docs and/or if companies have other ways to prevent that or if they will in the future.

pbreit 11y ago

How do they describe something that's working spectacularly well as, "broken". Sure, maybe it's not optimal or has some problems. But, broken? Really? But I do like what they're doing. Extending the option period makes perfect sense. I think they might have gone a bit far on the value sample. I think current % ownership + internal/external valuation should be sufficient.

angersock 11y ago
Is it really working "spectacularly well"? Or, is it just something that has kinda worked out because the workforce wasn't communicating how they were getting screwed to each other? I expect things to get more difficult for employers as employees wisen up.
- pbreit 11y ago
  Well, it's a key driver of Silicon Valley success over the past 50+ years.
  - angersock 11y ago
    The employee equity relationship today is, I would suggest, quite different than even 20 years ago. EDIT: I refer you to the "The three-class society" section of this essay: https://michaelochurch.wordpress.com/2015/11/06/y-combinator-and-paul-graham-are-bad-for-the-world-part-1/ https://michaelochurch.wordpress.com/2015/11/06/y-combinator...
  - s73v3r 11y ago
    Is it? How so?
    - pbreit 11y ago
      Equity compensation is probably the biggest difference between a startup and all other companies. Silicon Valley is probably the epicenter of startup success and that equity compensation has been a key driver of such success.

pbreit 11y ago

How do they describe something that's working spectacularly well, "broken". Sure, maybe it's not optimal or has some problems. But, broken? Really?

ryandrake 11y ago

My view is that any equity compensation that rewards people more for how early they were hired than for how much they contributed to the company's success during their stay, is inherently broken. I'm not saying that taking the risk as employee number 3 at a startup should not be rewarded. But you should be substantially more rewarded for what you've done, regardless of your employee number.

sskates 11y ago
Agreed that it's mainly a function of employee number and secondarily a function of contribution. I'd much rather it be based on contribution. The trouble is that contribution is hard to tell up front but you have to be agreed on baseline compensation. Perhaps there's a way to fix that as well.
- tedmiston 11y ago
  Also time is easy to quantify and measure. Contribution across departments though? What % of building a major feature of your product for a key customer goes to marketing/sales/design/engineering/etc.?
woah 11y ago
You're looking at it the wrong way. For better or worse, people are made an offer when they first start. Stock in a company that is "less of a sure thing" (earlier stage) is worth less. So, they must receive more of it to have it correspond to a certain amount of salary they might be missing out on. What happens later is in the future. It's like the employee is an angle investor.
saganus 11y ago
I always thought that part of the reason early employees got more equity was not only because of the risks involved, but also because early employees usually have to do all sorts of things aside from their regular duties. Not saying this is always the case, but personally I always thought this was part of the reward given. For example, it's not the same to be a developer that, even though might contribute a lot, didn't have to write the framework from scratch when there are so many unknowns, there a lot of tougher decisions, when things are not as clear and straight forward, responsibility is greater, etc. Of course this depends a lot on the particular startup, but I've seen employees hired to do say, design, end up having to do sales as well, even if they don't enjoy it or they don't have the skill for it.

choppaface 11y ago

Dilution can also happen through a reverse-split prior to IPO to hit a target share price. (In this case, the bankers effectively dilute everybody else, although C-levels will probably get big new post-split grants to stay on after the IPO). The number of shares (rather than the percentage) might be more important given an IPO will probably require $10-15/share, and the share price will probably be no more than 2x-3x that after 6-month lockup. IMO telling an employee you have x% of $n billion is very misleading, as dilution can be rather unpredictable. You're really showing the employee the /max/ upside in 2-7 years, which IMO is a very weak sales position.

sskates 11y ago
Dilution is unpredictable and what's worse is you have the principal agent problem where employees who are affected don't have a seat at the negotiating table. You're definitely counting on upper management/the board not to do things like that. Not sure on the solution but agreed that it needs to be solved.
- salem 11y ago
  These side-letter deals and exits optimized for founders are probably not legal since they are often not in the best interests of shareholders, but I've never heard of them being investigated.
itaifrenkel 11y ago
Could you explain in more detail how a reverse split (in which value should not change) is an indication for the bankers delluting everyone else? If there was no reverse split the delluting was any different?

Jemaclus 11y ago

I dunno about anyone else, but I pretty much ignore equity when considering a new position. Worrying about equity as an employee is like worrying about what kind of Christmas gift you'll get from someone you know. It might be something awesome, it might be something dumb, but more than likely, it's a pat on the back and a "Happy Holidays" -- nothing you can take to the bank. I also think it doesn't really matter how much your valuation is, because the options are effectively worthless until there is a qualifying event. If you're already public, then you might have a case for it, but for most startups, it's as good as monopoly money. Salary + benefits + culture is what gets me in the door every day. Equity is just a bonus. I once interviewed with a YC company and got an offer that was significantly under my current salary. When I tried to negotiate, the founder insulted me and basically told me I was an idiot for ignoring the equity component which was "worth far more than the salary." Pretty glad I didn't take that position, but it still bothers me how misguided he was about the whole situation. I can't pay rent with equity. My landlord won't accept "I have stock options in some startup you've never heard of" as payment. There are a lot of posts about equity around here, and I just think it's overrated in general. Kinda wish we'd talk more about salary and other benefits and a little less about what basically amounts to a crapshoot. For instance, my hearing aids are very often not covered by health insurance... now that would be a nice perk for someone like me.

s73v3r 11y ago
Rich people are allowed to borrow against their equity options. Why can't we?
- woah 11y ago
  They have better judgement.
- deleted 11y ago
  [deleted]
- JonFish85 11y ago
  I'm sure you can, at a discount. You probably won't find many/any banks willing to do that, but I imagine you can find private parties who are willing to give you $0.05 on the dollar for some options. I imagine the reason that "rich people" can borrow against their options is because they aren't common share options, or they have some sort of control over the destiny of those shares. For common shares there are several ways for them to become worthless, some of which people on this thread have mentioned (dilution & preference are the two big ones). If you're holding on-paper $100k worth of stock options, you probably couldn't get $10k for them except in very rare cases. If you were an early member of Uber, you can probably find institutions that want to buy shares, so maybe you can get money from them. But remember, that on-paper $100k has tax implications along with it when you buy them/sell them, so don't forget to set aside enough money to pay that.

enra 11y ago

Couple years ago I was considering joining a company. It wasn't a normal hiring situation, so I had some leverage. My lawyer suggested that we could try negotiating a shorter vesting period or longer exercise period. The company didn't go for the shorting vesting but the said ok for the longer exercise period. Their employee stock plan was in ISO with the standards 3-month period, so their lawyers basically changed one line there, saying "You may exercise this option for xx months after termination of your continuous service status". After the 3 months the option just changes to NSO. That was it. It was such a simple thing that I don't understand why companies don't do this more often.

sskates 11y ago
The crazy thing to me is: 1) the fact that employees are granted options instead of shares is an artifact of tax law, and 2) the fact that there's a 90 day exercise window is also an artifact of tax law. Yet, companies constantly come up with post-hoc justifications of why only giving a 90 day window is fair. There is big resistance to change on this point. Even Ben Horowitz and Sam Altman don't think it's a clear decision! http://genius.com/B-horowitz-lecture-15-how-to-manage-annotated/ http://genius.com/B-horowitz-lecture-15-how-to-manage-annota... If you were to derive how to think about employee ownership of a company as a form of compensation from first principles, you'd never come up with options and you'd never come up with a 90-day exercise window on top of that. Those are both artifacts from tax law yet it's become the standard form of compensation!
- enra 11y ago
  Do you how a company would you give employees shares directly without them being taxed on the grant? One way I've seen this is with RSU double triggers: you are granted RSUs but you don't own them until the stock is actually liquid. However, at that time, you will have to pay taxes and you don't get long term capital gains. Update: Just read your link, it's crazy how on this topic, Ben goes on a rant about random things, and whether it's fair to give 10y exercise period, because the person working there doesn't somehow get that benefit. Even if you have a money, employees are not investors, they can't just throw $10-100k on one startup, without knowing liquidation preferences or anything else, and which may or may not have some kind of liquidity in the next 10 years. It's useless to give equity if most people get screwed.

paul 11y ago

This is really great! The 90 day window is bad for employees. I'd like to see this become the new standard. (and I hope the IRS doesn't give any trouble!)

sl8r 11y ago

My experience is that there are some "weird" effects of equity comp once one gets into the calculus of incentives: 1. Payoffs are too small to be consequential. If you own 0.01% of a company and are personal-profit-maximizing, then you are indifferent between (a.) Increasing the company's valuation by $1M and (b.) Getting $100. 2. Growth makes "rest and vest" a reasonable strategy. If a startup does well, then an employee's initial equity grant typically dwarfs all subsequent compensation; does it make sense to work hard for a $5k raise when your equity is worth $500k?

sskates 11y ago
Once you get to 0.01% per employee it's not a strictly profit maximizing decision. It's more of a way to align people and make them feel they have ownership. Agreed on the second point.

salem 11y ago

Longer exercise windows and more info are great and all, but if you are still expecting employees to take less than market rate salary in exchange for options, you should be giving people the same equity and terms (e.g. liquidation preferences) that investors get for the cash that you forgo. Founders I've talked to are sympathetic and see it as fair, but none have the courage to try it.

sskates 11y ago
Not sure that giving liquidation preferences to common stockholders would be fair- the idea with a 1x liquidation preference is that money into the company at least first goes to repaying the principal on the investment first before rewarding any upside.
- salem 11y ago
  What's wrong for asking for the same terms as the latest round? Let's acknowledge that there is an opportunity cost for early hires.

the_watcher 11y ago

Everyone who comments that equity is worthless until the day you can actually turn it into cash is completely correct. That said, presenting potential outcomes in an easily understood table, and in particular, extending the exercise window is really a fantastic idea.

adamw2k 11y ago

Can't believe form 83b wasn't even mentioned... Truly the best way for any early stage employee to deal with options from a tax perspective.

the_cat_kittles 11y ago

has someone done a survey of tech equity that gives us an idea what the expected value of x points is worth? even so, its a lottery ticket to me, and i never consider it when considering an offer.