7 ms·

Hold on, if we get this wrong we may be lowering the value of everyone's options and hurting startups. Are there any added protections here against high turnove

by abalone 11y ago

Hold on, if we get this wrong we may be lowering the value of everyone's options and hurting startups. Are there any added protections here against high turnover in infancy-stage startups? For 30(?) years since the invention of stock options there has also been a de facto added protection against high turnover in infancy-stage startups, where having to rehire and retrain employees is extremely costly. Pre-IPO you basically had to pick a team and take it to that level of maturity before you could leave. You couldn't hop around seed-level startups without giving up your options, usually. What's changed now is startups are staying private longer, leading to unfair scenarios. E.g. you're at a >$1B company with >100 employees for 6 years and you still lose your options. Traditionally a company would have gone public by that time, but now it's not, so we need a fix. But if you overcorrect and now eliminate that added protections for younger startups, you risk creating an incentive to leave companies just for the sake of options portfolio diversification. Why bet on one team when you can bet on three, since even 1/3rd of a unicorn that makes it is worth more than 100% of the one that doesn't. And that individual decision leads to higher turnover which can kill infant startups. Bottom line this fix should be more carefully targeted at what has changed to exacerbate unfair situations, namely startups that have reached "should be public" levels of maturity, yet are still staying private.

andreasklinger 11y ago
If not being able to buy the options when leaving is the only thing keeping your employees you are in a very bad place. Options usually have cliffs in the first year and vest monthly. So no-one would get more than they deserve.
- abalone 11y ago
  It's not about what one "deserves", it's about protecting infant startups from high turnover. One year is extremely high, potentially fatal turnover rate for companies with <30 employees.
  - st3v3r 11y ago
    "It's not about what one "deserves", it's about protecting infant startups from high turnover." Why should any of us care about that? High turnover is a very good signal that the company is a bad one. If the company dies because of it, it was probably for a good reason.
    - harryh 11y ago
      If you remove all financial incentives to stay after hitting a one year cliff there is a pretty strong force towards diversification that seems like it would lead to higher than desirable turnover. You can't just ignore that incentive.
      - jacobr1 11y ago
        If the company is more valuable a year later, with good prospects, then the size of the low price of the original grant (which will now vest monthly via standard terms) provide an incentive for staying. So could an additional performance grant, or salary increase.
      - solidsnack9000 11y ago
        Companies should pool equity with one another to address this.
        solidsnack9000 11y ago
        I guess people hate this idea. But it'll probably only hurt a few founders, who would have been losers anyway; VCs and employees will ultimately be better off.
      - x0x0 11y ago
        The financial incentive to stay is continued vesting of presumably more-valuable options, about which you have inside knowledge -- the state of development, the sales pipeline, high performance from founders, a deeper understanding of the industry, etc. It doesn't take much job hunting to realize as an employee you're taking a bigger risk than the company. There's some crazy people out there and some really terrible bosses. The same way it's really difficult to evaluate an employee in an interview it's just as hard to evaluate a working environment, a boss, whether the ceo is a meddler with the attention span of a hummingbird, etc. A sane boss with a solid development process that doesn't encourage late nights or lead to incredibly fragile software and/or heroic, stressful ops efforts is worth a hell of a lot. You just want to leverage golden handcuffs to retain employees... I think honesty all around is the best method. Unfortunately, that further devalues the (already low imo / in my advice) value of options and suggests people are much better off going to established companies.
cballard 11y ago
If startups do not want high turnover, they're free to offer above-market-rate salaries or a contract mandating a longer notice period on both sides. Overwhelmingly, they've chosen at-will employment instead.
- abalone 11y ago
  The whole point of options is to not have to offer above-market-rate salaries to attract great talent to infant startups.
  - cballard 11y ago
    Perhaps infant startups do not deserve "great talent". Engineers shouldn't have to give up cash for lottery tickets, especially when many founders won't even include the number of outstanding shares, preferences, etc. in the options agreement!
    - maerF0x0 11y ago
      Said engineers do not have to take startup jobs. Unless they do due to lack of options elsewhere.
      - st3v3r 11y ago
        That's not an excuse for dishonesty on the part of startups.
    - gaadd33 11y ago
      If you had the outstanding shares and preferences in the options agreement wouldn't you have to have everyone resign every time someone exercised their options (changing the number of outstanding shares) or they raised money? However I agree founders should be up front about the financial/investor makeup of the company.
      - cballard 11y ago
harryh 11y ago
You're going to get a lot of hate for this comment, but it's probably the smartest top level comment in the thread. I've struggled with this issue a lot. Personally I think it should be solved with creative vesting schedules. Instead of vesting evenly over 4 years, vest some shares over time but save a big chunk that vests at exit. Basically build in a big "you stayed until the end" equity bonus. Right now I think the problem is that people think of their vesting schedule as when their stock becomes theirs and that's not really true. And most startups encourage (or at least do not dissuade) this illusion. That's a problem worth fixing.
- abalone 11y ago
  Exactly. Be upfront. Ben Horowitz spoke critically on this topic, responding to Sam Altman's post on equity which is the genesis of all this. Really mandatory viewing. [1] Sam was in the room and added that he is "revising" his recommendation because "there needs to be more incentive to stay." (@26:00) I personally haven't seen Sam post about his revised position. Would be great if he did. [1] http://www.bhorowitz.com/one_management_concept_from_how_to_manage_startups http://www.bhorowitz.com/one_management_concept_from_how_to_...
  - harryh 11y ago
    Ya, I saw the Ben/Sam exchange when it happened. And I have to say, as huge of an admirer of Ben as I am, I think he gets it a bit wrong here. As you said above, startups are staying private longer. Much longer. This creates some really bad situations that you really can't address merely by being upfront with people. I don't think Ben really acknowledges this fact. I think structural changes are necessary.
    - abalone 11y ago
      Yes, agreed. He identifies one things that has changed: securities law that now makes it possible to extend options exercise windows past 90 days, whereas previously it was practically impossible. But the bigger thing that's changed is companies are staying private longer. Ben's strongest point is in asking "Why now?" Options have been this way since the 80s. What's changed? Nobody is examining that as closely as they should. Maybe most of us are young and hubristic and tend to discount the past. But as engineers we should all possess a certain conservatism, a healthy skepticism to changing systems that have been stable for a long time. We must look closely to ensure there are no unintended consequences. I think it is very notable that Sam Altman said he has revised his position to require stronger incentives to stay. Early stage startups need incentives to stick together as a team. If you don't have any extra protections at the earliest stage, then you're going to have smart, happy employees face the powerful economic logic of leaving to diversify their options portfolio. And that's not good for the value of anyone's options.
deleted 11y ago
[deleted]
st3v3r 11y ago
"Are there any added protections here against high turnover in infancy-stage startups?" No, and there shouldn't be. Any company that has high turnover usually deserves it.
mahyarm 11y ago
The internet has made it more clear that being an early startup employee will be worse in almost all possible cases compared to working at google even when you get to the $1 billion 'unicorn' status. For example, I was a jr. engineer at a stage A $5 million startup with ~%0.4 of the company in stock options. When it reached its $1 billion valuation 4 years later, my options with dilution were worth x25. But $500k/4 years is $125k/yr, which is pretty close to the stock compensation working at google. But these options were not cash equivalent like google's stock, and I had to drop it all on the floor because of the 90 day window. I lost $500k in compensation because I decided to work at the startup vs. google. Imagine if your employees had a good amount of savings and could easily afford the $10-20k it costs to pre-exercise their options in your infant stage startup. Then these rules are pretty moot. It takes advantage of people who don't have the money to pre-exercise options, who tend to be younger people. Also it's unfair, investors can diversify their income sources, while employees cannot.
- TTPrograms 11y ago
  Are any of the markets for employee equity seeing much action? You should be able to: 1) Get a loan from somebody who wants in on the startup to exercise the option. 2) Exercise option. 3) If company decides to buy back option via first right of refusal you return the loan plus a nominal increase and you pocket the difference in valuation between rounds minus the loan fee. If the company lets you sell it to the person than they get the equity in return for their early payment. Do most stock grants disallow this transaction? Or is there not much of a market for these sort of third party buyers?
  - mahyarm 11y ago
    For #1, I tried multiple places such as ESO fund, etc. They were not interested. I also tried selling directly. You also have to get a lot of paperwork together, that you usually don't have and it can take months as the company drags it's feet in giving it to you. There wasn't paperwork preventing this at the company I was at. If anyone is thinking about a startup offer, I would suggest getting equityzen's documentation checklist upfront. It can take longer than you think, and a few months later, people who were interested in buying might not be anymore. I was trying this a little less than a year ago, so it isn't as correlated to the current issues today. Also I would try to get the stock paperwork agreement that they will have you sign for your options. Very surprisingly, for even some big superstars today it is very hard to get this from them until you start working for them. There can be hidden gotchas like after exercise stock buyback options at the current FMV. Or restrictions that even stop you from doing things like ESO fund.
ldpg 11y ago
> Are there any added protections here against high turnover in infancy-stage startups? It is already the case that employee option agreements don't start dispersing options until at least one year. Two for some. This isn't about changing who deserves to get options, it's about making sure those who get them are likely to get actual the value from them.
23david 11y ago
Agreed... why not find a way to allow employees to get liquidity by selling their equity as part of funding rounds? The fact that founders sometimes are able to participate seems to imply that it's a possibility for regular employees too if the appropriate legal docs were standardized.
wilsynet 11y ago
So? Stock options are a form of compensation. If I vested those options, then I deserve to keep them. If a startup can't otherwise retain people, it has bigger problems. I am not your indentured servant, no matter how much you wish me to be.
hkmurakami 11y ago
Employees of seed stage startups who have typical option grants can already hop around once they reach the 1 year cliff, since at the seed stage, the strike price is small and the valuation increase won't be substantial. You're maybe out of pocket $X00~$X000, which is a small fraction of one's base salary. Since both the 90 day exercise window form of the options and this 10 year exercise window form of the options will both have the 1 year cliff until first vest, the ability to hop around is roughly equal for both.
- abalone 11y ago
  > at the seed stage, the strike price is small and the valuation increase won't be substantial. You're maybe out of pocket $X00~$X000 That's a bad assumption. Valuation increases can be substantial 1 year post seed funding at companies with traction.
  - mahyarm 11y ago
    Then they'll 83b pre-purchase after the first time it happens.
snowwolf 11y ago
Could high turnover in infancy stage startups be addressed by instead of giving 10 years from grant date you give 'time employed' from leaving date? Better than the current 90 days but still gives incentive to stay with a company for a reasonable length of time.
dahart 11y ago
Yes, IMO, this is added protection against turnover. The main protection any startup has against turnover is whether founders treat employees fairly and honestly, whether founders foster an environment where employees are valued, empowered and have a strong sense of identity. This puts a stop to giving something then taking it back because of legal fine print you didn't read when you signed up all starry-eyed. If it's happened to you, the first time it stings a little when you want to take advantage and can't, and leaves the impression that you got tricked, then after that, you get just a little bit jaded. By agreeing to stick by your word that stock is part of the compensation package, you build trust. Anyway, vesting schedules are already the main contractual level protection a startup has against turnover. Betting on three teams takes, at a minimum, three years. And then you're just trading options at one company for another. Might be a good bet, might not, but this doesn't change that equation at all, right? If you want to move around to collect different stocks, go for it.
- abalone 11y ago
  It absolutely changes the equation. Ask an investment advisor whether you should put all your money in one stock or diversify your portfolio. What will she say? Pre-IPO startups have had an added protection against this turnover pressure, which is actually stronger than vesting. It forces teams to stick together until IPO/acquisition. This change would now be taking away. Worth thinking through the consequences, because if startup turnover shoots up then nobody benefits, most of all stock option holders.
  - dahart 11y ago
    I meant that having a 10 year window vs a 90 day window for exercising options doesn't change the reasons to decide whether to diversify, not that you should or shouldn't diversify. The question of whether to diversify is independent of the terms on your options. I'm not sure I understand- you're saying the 90 day exercise window is a stronger anti-turnaround measure than the vesting cliff? How so? The vesting cliff says you don't get anything unless you stick around, usually for a year, and you don't get it all until four years. Or 3 or 5, whatever. That's a pretty strong anti-turnaround measure. The exercise window doesn't automatically prevent anything, as long as you can afford it, you can walk away and still buy your stock. Some people buy their stocks and some don't, so if you're a pre-IPO startup, the vesting schedule adds a deterrent to leaving 100% of the time, and the 90 day exercise window adds a deterrent to leaving less than 100% of the time. Don't forget you can buy as much stock as you can afford, when you have the option, but if you don't have the option in the first place, you get nada. I do appreciate your stopping to examine any possible unintended consequences, btw, I just don't forsee this causing any problems with turnaround. And it seems like it does solve a real problem with claiming options are part of compensation and then making it harder to realize any benefit. I do honestly believe this could help lower turnaround overall.

by abalone 11y ago

andreasklinger 11y ago

If not being able to buy the options when leaving is the only thing keeping your employees you are in a very bad place. Options usually have cliffs in the first year and vest monthly. So no-one would get more than they deserve.

abalone 11y ago
It's not about what one "deserves", it's about protecting infant startups from high turnover. One year is extremely high, potentially fatal turnover rate for companies with <30 employees.
- st3v3r 11y ago
  "It's not about what one "deserves", it's about protecting infant startups from high turnover." Why should any of us care about that? High turnover is a very good signal that the company is a bad one. If the company dies because of it, it was probably for a good reason.
  - harryh 11y ago
    If you remove all financial incentives to stay after hitting a one year cliff there is a pretty strong force towards diversification that seems like it would lead to higher than desirable turnover. You can't just ignore that incentive.
    - jacobr1 11y ago
      If the company is more valuable a year later, with good prospects, then the size of the low price of the original grant (which will now vest monthly via standard terms) provide an incentive for staying. So could an additional performance grant, or salary increase.
    - solidsnack9000 11y ago
      Companies should pool equity with one another to address this.
      - solidsnack9000 11y ago
        I guess people hate this idea. But it'll probably only hurt a few founders, who would have been losers anyway; VCs and employees will ultimately be better off.
    - x0x0 11y ago
      The financial incentive to stay is continued vesting of presumably more-valuable options, about which you have inside knowledge -- the state of development, the sales pipeline, high performance from founders, a deeper understanding of the industry, etc. It doesn't take much job hunting to realize as an employee you're taking a bigger risk than the company. There's some crazy people out there and some really terrible bosses. The same way it's really difficult to evaluate an employee in an interview it's just as hard to evaluate a working environment, a boss, whether the ceo is a meddler with the attention span of a hummingbird, etc. A sane boss with a solid development process that doesn't encourage late nights or lead to incredibly fragile software and/or heroic, stressful ops efforts is worth a hell of a lot. You just want to leverage golden handcuffs to retain employees... I think honesty all around is the best method. Unfortunately, that further devalues the (already low imo / in my advice) value of options and suggests people are much better off going to established companies.

cballard 11y ago

If startups do not want high turnover, they're free to offer above-market-rate salaries or a contract mandating a longer notice period on both sides. Overwhelmingly, they've chosen at-will employment instead.

abalone 11y ago
The whole point of options is to not have to offer above-market-rate salaries to attract great talent to infant startups.
- cballard 11y ago
  Perhaps infant startups do not deserve "great talent". Engineers shouldn't have to give up cash for lottery tickets, especially when many founders won't even include the number of outstanding shares, preferences, etc. in the options agreement!
  - maerF0x0 11y ago
    Said engineers do not have to take startup jobs. Unless they do due to lack of options elsewhere.
    - st3v3r 11y ago
      That's not an excuse for dishonesty on the part of startups.
  - gaadd33 11y ago
    If you had the outstanding shares and preferences in the options agreement wouldn't you have to have everyone resign every time someone exercised their options (changing the number of outstanding shares) or they raised money? However I agree founders should be up front about the financial/investor makeup of the company.
    - cballard 11y ago

harryh 11y ago

You're going to get a lot of hate for this comment, but it's probably the smartest top level comment in the thread. I've struggled with this issue a lot. Personally I think it should be solved with creative vesting schedules. Instead of vesting evenly over 4 years, vest some shares over time but save a big chunk that vests at exit. Basically build in a big "you stayed until the end" equity bonus. Right now I think the problem is that people think of their vesting schedule as when their stock becomes theirs and that's not really true. And most startups encourage (or at least do not dissuade) this illusion. That's a problem worth fixing.

abalone 11y ago
Exactly. Be upfront. Ben Horowitz spoke critically on this topic, responding to Sam Altman's post on equity which is the genesis of all this. Really mandatory viewing. [1] Sam was in the room and added that he is "revising" his recommendation because "there needs to be more incentive to stay." (@26:00) I personally haven't seen Sam post about his revised position. Would be great if he did. [1] http://www.bhorowitz.com/one_management_concept_from_how_to_manage_startups http://www.bhorowitz.com/one_management_concept_from_how_to_...
- harryh 11y ago
  Ya, I saw the Ben/Sam exchange when it happened. And I have to say, as huge of an admirer of Ben as I am, I think he gets it a bit wrong here. As you said above, startups are staying private longer. Much longer. This creates some really bad situations that you really can't address merely by being upfront with people. I don't think Ben really acknowledges this fact. I think structural changes are necessary.
  - abalone 11y ago
    Yes, agreed. He identifies one things that has changed: securities law that now makes it possible to extend options exercise windows past 90 days, whereas previously it was practically impossible. But the bigger thing that's changed is companies are staying private longer. Ben's strongest point is in asking "Why now?" Options have been this way since the 80s. What's changed? Nobody is examining that as closely as they should. Maybe most of us are young and hubristic and tend to discount the past. But as engineers we should all possess a certain conservatism, a healthy skepticism to changing systems that have been stable for a long time. We must look closely to ensure there are no unintended consequences. I think it is very notable that Sam Altman said he has revised his position to require stronger incentives to stay. Early stage startups need incentives to stick together as a team. If you don't have any extra protections at the earliest stage, then you're going to have smart, happy employees face the powerful economic logic of leaving to diversify their options portfolio. And that's not good for the value of anyone's options.

deleted 11y ago

[deleted]

st3v3r 11y ago

"Are there any added protections here against high turnover in infancy-stage startups?" No, and there shouldn't be. Any company that has high turnover usually deserves it.

mahyarm 11y ago

The internet has made it more clear that being an early startup employee will be worse in almost all possible cases compared to working at google even when you get to the $1 billion 'unicorn' status. For example, I was a jr. engineer at a stage A $5 million startup with ~%0.4 of the company in stock options. When it reached its $1 billion valuation 4 years later, my options with dilution were worth x25. But $500k/4 years is $125k/yr, which is pretty close to the stock compensation working at google. But these options were not cash equivalent like google's stock, and I had to drop it all on the floor because of the 90 day window. I lost $500k in compensation because I decided to work at the startup vs. google. Imagine if your employees had a good amount of savings and could easily afford the $10-20k it costs to pre-exercise their options in your infant stage startup. Then these rules are pretty moot. It takes advantage of people who don't have the money to pre-exercise options, who tend to be younger people. Also it's unfair, investors can diversify their income sources, while employees cannot.

TTPrograms 11y ago
Are any of the markets for employee equity seeing much action? You should be able to: 1) Get a loan from somebody who wants in on the startup to exercise the option. 2) Exercise option. 3) If company decides to buy back option via first right of refusal you return the loan plus a nominal increase and you pocket the difference in valuation between rounds minus the loan fee. If the company lets you sell it to the person than they get the equity in return for their early payment. Do most stock grants disallow this transaction? Or is there not much of a market for these sort of third party buyers?
- mahyarm 11y ago
  For #1, I tried multiple places such as ESO fund, etc. They were not interested. I also tried selling directly. You also have to get a lot of paperwork together, that you usually don't have and it can take months as the company drags it's feet in giving it to you. There wasn't paperwork preventing this at the company I was at. If anyone is thinking about a startup offer, I would suggest getting equityzen's documentation checklist upfront. It can take longer than you think, and a few months later, people who were interested in buying might not be anymore. I was trying this a little less than a year ago, so it isn't as correlated to the current issues today. Also I would try to get the stock paperwork agreement that they will have you sign for your options. Very surprisingly, for even some big superstars today it is very hard to get this from them until you start working for them. There can be hidden gotchas like after exercise stock buyback options at the current FMV. Or restrictions that even stop you from doing things like ESO fund.

ldpg 11y ago

> Are there any added protections here against high turnover in infancy-stage startups? It is already the case that employee option agreements don't start dispersing options until at least one year. Two for some. This isn't about changing who deserves to get options, it's about making sure those who get them are likely to get actual the value from them.

23david 11y ago

Agreed... why not find a way to allow employees to get liquidity by selling their equity as part of funding rounds? The fact that founders sometimes are able to participate seems to imply that it's a possibility for regular employees too if the appropriate legal docs were standardized.

wilsynet 11y ago

So? Stock options are a form of compensation. If I vested those options, then I deserve to keep them. If a startup can't otherwise retain people, it has bigger problems. I am not your indentured servant, no matter how much you wish me to be.

hkmurakami 11y ago

Employees of seed stage startups who have typical option grants can already hop around once they reach the 1 year cliff, since at the seed stage, the strike price is small and the valuation increase won't be substantial. You're maybe out of pocket $X00~$X000, which is a small fraction of one's base salary. Since both the 90 day exercise window form of the options and this 10 year exercise window form of the options will both have the 1 year cliff until first vest, the ability to hop around is roughly equal for both.

abalone 11y ago
> at the seed stage, the strike price is small and the valuation increase won't be substantial. You're maybe out of pocket $X00~$X000 That's a bad assumption. Valuation increases can be substantial 1 year post seed funding at companies with traction.
- mahyarm 11y ago
  Then they'll 83b pre-purchase after the first time it happens.

snowwolf 11y ago

Could high turnover in infancy stage startups be addressed by instead of giving 10 years from grant date you give 'time employed' from leaving date? Better than the current 90 days but still gives incentive to stay with a company for a reasonable length of time.

dahart 11y ago

Yes, IMO, this is added protection against turnover. The main protection any startup has against turnover is whether founders treat employees fairly and honestly, whether founders foster an environment where employees are valued, empowered and have a strong sense of identity. This puts a stop to giving something then taking it back because of legal fine print you didn't read when you signed up all starry-eyed. If it's happened to you, the first time it stings a little when you want to take advantage and can't, and leaves the impression that you got tricked, then after that, you get just a little bit jaded. By agreeing to stick by your word that stock is part of the compensation package, you build trust. Anyway, vesting schedules are already the main contractual level protection a startup has against turnover. Betting on three teams takes, at a minimum, three years. And then you're just trading options at one company for another. Might be a good bet, might not, but this doesn't change that equation at all, right? If you want to move around to collect different stocks, go for it.

abalone 11y ago
It absolutely changes the equation. Ask an investment advisor whether you should put all your money in one stock or diversify your portfolio. What will she say? Pre-IPO startups have had an added protection against this turnover pressure, which is actually stronger than vesting. It forces teams to stick together until IPO/acquisition. This change would now be taking away. Worth thinking through the consequences, because if startup turnover shoots up then nobody benefits, most of all stock option holders.
- dahart 11y ago
  I meant that having a 10 year window vs a 90 day window for exercising options doesn't change the reasons to decide whether to diversify, not that you should or shouldn't diversify. The question of whether to diversify is independent of the terms on your options. I'm not sure I understand- you're saying the 90 day exercise window is a stronger anti-turnaround measure than the vesting cliff? How so? The vesting cliff says you don't get anything unless you stick around, usually for a year, and you don't get it all until four years. Or 3 or 5, whatever. That's a pretty strong anti-turnaround measure. The exercise window doesn't automatically prevent anything, as long as you can afford it, you can walk away and still buy your stock. Some people buy their stocks and some don't, so if you're a pre-IPO startup, the vesting schedule adds a deterrent to leaving 100% of the time, and the 90 day exercise window adds a deterrent to leaving less than 100% of the time. Don't forget you can buy as much stock as you can afford, when you have the option, but if you don't have the option in the first place, you get nada. I do appreciate your stopping to examine any possible unintended consequences, btw, I just don't forsee this causing any problems with turnaround. And it seems like it does solve a real problem with claiming options are part of compensation and then making it harder to realize any benefit. I do honestly believe this could help lower turnaround overall.