10 ms·

10-Year Exercise Periods Make Sense

319 points by sama 10y ago

a_small_island 10y ago
>"He suggests paying 50% above market in stock, but including a clause that all employees must remain at the company until a liquidity event or else they cannot keep any stock at all (even if they could come up with the exercise cost)." Curious to what feelings this invokes for startup employees (nonfounders, investors) on HN.
- wpietri 10y ago
  In my case, wild laughter.
sama 10y ago
I agree with Adam's post and intensely disagree with A16Z's post on this topic. I don't think companies should take back stock compensation on a technicality. It'd be silly to even discuss taking back cash compensation when someone leaves a company! I appreciate Adam starting this trend years ago.
- american158931 10y ago
  What's your opinion on how an employee should deal with a founder who clearly believes more in the A16Z stance on stock options more than the Adam's? Apart from obvious knee-jerk reactions like "stop working there." Obviously it's in the founder's financial best interest (at least on the very surface level) for employees to not have the option to leave the company with shares at all. It is just lost money, from their perspective, and probably annoying to have an employee leave (creating a headache in your life) and take a bunch of equity with them. (And it severely limits an employees negotiating power over time, which can be of benefit to the founder...) What are some strategies an employee can use to make the point that Adam's perspective is a much more employee-friendly one and, thus, better for the company? Looking for some perspective.
  - qq66 10y ago
    I don't think anyone but a very early and very senior employee will be able to change a founder/company's perspective on this. The best attempt would be to walk away from the offer and explain explicitly why -- even if that doesn't work for the situation at hand, it will guide the market.
  - jc4p 10y ago
    I don't think you can do anything here once a culture's already been set. I also think that repeatedly pestering execs to ask about their efforts on this (as I've done at my current company every few weeks for the last 6 months) makes them think you're about to jump ship and want "free money", so watch out :)
  - jerf 10y ago
    "What's your opinion on how an employee should deal with a founder who clearly believes more in the A16Z stance on stock options more than the Adam's?" Value the options at zero and take appropriate steps. It may not be the statistical expected result, but it is the modal outcome anyhow. "Appropriate steps" isn't just "quit". If you're happy with the cash salary than you don't have a problem, for instance, or the experience, or the lifestyle, or any of the other reasons you may be choosing to work at a startup. "Obviously it's in the founder's financial best interest (at least on the very surface level) for employees to not have the option to leave the company with shares at all." Well, yeah, but that's sort of vacuous; it's not in the employer's best interest for employees to be compensated at all. But that makes hiring pretty challenging. "What are some strategies an employee can use to make the point that Adam's perspective is a much more employee-friendly one and, thus, better for the company?" There isn't a general answer to that question, because it depends on your status in the company. In some places, even opening that conversation will put you halfway out the door. In others, they'll fall over themselves to fix the problem if you just mention it, because they'll not have heard of this before. You need to judge the situation you're in, and play out the possible scenarios before you step in to something like this. But I'd suggest you're going to need a very solid position to change something this fundamental about a company. Generic advice: It's always easier to negotiate from a fallback position of strength; unless you're absolutely confident in your position, consider having a job in hand before starting this talk. (You don't have to tell your employers that you have an offer in hand.)
- jsprogrammer 10y ago
  >10-Year Exercise Periods Make Sense >I agree with Adam's post >I don't think companies should take back stock compensation on a technicality. Isn't a 10-year period a technicality? Anything that can take back compensation is a technicality. Heh, can't even get a response without downmods.
  - dmansen 10y ago
    here you go your post doesn't add anything to the conversation it might technically be a technicality but 10 years is long enough in startup life units that it doesn't matter you're pointing out definitions when it was clear what the author meant and people don't like that because it's very annoying
    - jsprogrammer 10y ago
      If it is technically a technicality, which it is, then all the other fluff pieces and unpunctuated sentences in the world do not matter. Maybe you could elucidate sama's "clear" meaning? It was lost on me. As far as I can tell, the post adds nothing but confusion to this conversation (you could counter by pointing out something of value contributed by the post). Annoying is when people continually post contradictory or unclear things and never respond to their rightful critiques, or even change their future actions.
      - dmansen 10y ago
        you said you wanted a response and not just downvotes. i tried ¯\_(ツ)_/¯
        jsprogrammer 10y ago
        Thank you for the effort. The sama account rarely makes responses and Sam Altman basically never responds to criticism of his pieces, or even outright proofs of wrongness. Honestly, this is the treatment I expect to receive here.
- tarr11 10y ago
  The answer here is for you to convince VCs and other investors to support this, publicly, and tell founders that they won't be punished for this on future fundraising. Hearing from A16Z that they don't support this is a big negative signal to any founder.
  - argonaut 10y ago
    a16z is a major investor (growth round resulting in a board seat for a16z) in many of the companies that have extended vesting periods, such as Coinbase, Pinterest, and Asana. So I doubt they block companies from doing this.
    - hkmurakami 10y ago
      Notice the companies you listed. They are/were the absolute hottest companies when they raised their rounds, and are still some of the most prominent startups around. Put another way, they have negotiating leverage. The ones with the leverage (including YC backed companies) have to lead the charge to change the status quo and "the standard". The average startup doesn't have the leverage to do something nonstandard. The fact that YC has come out in support of 10 year vesting periods and is making it a standard is a massive step forward.
      - argonaut 10y ago
        Asana was never a hot company. Barely any companies even have extended exercise windows, so you can't go around excluding companies from the list because "they don't count". Also your logic is almost circular, because a16z tends to only invest in hot/great companies, by definition. You can go down the list: https://github.com/holman/extended-exercise-windows https://github.com/holman/extended-exercise-windows. Many other companies have a16z as an investor. Tilt and CodeCombat are two of them.
- throwaway6497 10y ago
  What I find amazing, is that except YC no-other VC firm would publicly acknowledge that 10 year exercise periods make sense. In this age of social media, I find it absolutely appalling that they still endorse the current 90 day rule. I am guessing they categorised the PR nightmare of not endorsing is marginal. So, they kept quiet, since keeping status quo is in their interest. YC is trying to make things better and fair for employees. For a really long time the odds were always stacked against the employees the most. YC, Adam are hacking it for the better. All good entrepreneurs who believe in "making the world a better place" should endorse this. Unless, the idea gathers enough momemtum, the old-guard, vulture VCs will not change their stance. This includes A16Z.
mesozoic 10y ago
Wow I guess since employees should already value most stock options at near zero it's hard to value them any less.
- alonmower 10y ago
  I think a 10 year exercise window makes them much more valuable. Now instead of being faced with a decision of whether or not to spend thousands of dollars when leaving a company that I'll very likely never see again I can now defer that decision. Right now my options are to not exercise and risk kicking myself in the future if the company makes it, or exercising knowing that I'm very likely throwing my money away.
- argonaut 10y ago
  Valuing stock options at zero is one of those HN memes that are repeated endlessly, mostly, I suspect, by people not from Silicon Valley who know few, if any, engineers who got rich from stock options. Just because stock options should be valued at less than a company's private valuation does not mean they are worth 0. Very few engineers actually value them at zero. Adding on to this comment: It's a spectrum, not a black and white your options are worth zero dictum. At one end, (extremely early stage startup, < 5 employees, you're not a founder) your options are probably worthless, sure, although you have a minuscule chance of being worth $10M+. At the other extreme, you join a company that everyone knows is going to go IPO within two years, and essentially earn what you would earn at Google or Facebook, maybe slightly more. To give you one example, I knew someone that made about a million (vested over 4 years) in options by joining an already-successful startup as engineer ~70, that he believed would IPO within 4 years. On top of his market rate salary.
  - danielweber 10y ago
    It should be valued at 0 unless the company takes active steps to encourage you not to, which would include answering dozens of questions about vesting and dilution that they won't.
    - 10y ago
ergothus 10y ago
I followed this link expecting to see a comment about some sort of "encoding" of the human body relating to long-but-not-indefinite period of physical exercise. Instead it's about stock options. As the article offered no background, I'm lost as to what is being discussed. In the last 20 years I've never had the same employer for 10 years, so can someone ELI5 what is being discussed? Thanks in advance!
- CyrusL 10y ago
  If a company grants you stock options as part of your compensation, you need still need to pay to get the stock. That's called exercising the options. If you leave the company, there is a limited window of time to exercise the option. If you don't exercise it, the stock gets returned back to the company. This post is favoring that window being long and is responding to blog post favoring that window being short.
  - niels_olson 10y ago
    So the white-shoe Sand Hill Road crowd is averse to having a potentially large long term liability if things go awesome. This is some bold, 19th century robber baron stuff. Wow.
- jdhawk 10y ago
  They're talking about the amount of time you have after leaving a company to exercise the stock options that you were granted, effectively purchasing them at par value. This has huge tax implications, and requires quite a bit of cash on the spot. Traditionally, the period has been ~90 days, which makes it even harder to weigh your tax options and come up with the $$$$ to exercise the options. Since its expensive, and has a short window of execution, the practice has been viewed by many to be unfair. The Stock Options were a part of your compensation - part of the Risk vs Reward balance you choose when you worked for a startup, and now if you don't have thousands of dollars to spare on a gamble - you forfit those options back to the Company. By extending the period to 10 years, you have the ability plan accordingly, see if the company will eventually exit, and exercise them when the time is right.
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devit 10y ago
Isn't any vesting for non-founding employees completely broken? If the employee loses the stock when he's fired early, then the company has a huge incentive in firing him a day before he vests, and thus he should regard the vesting compensation as nonexistent. If the employee retains the stock when he's fired early, then he can just get himself fired to ignore the vesting period, making the vesting pointless. It seems that vesting can only work if the employee is so essential that the company would never fire him because the company would then be highly likely to fail, which should only apply for founders in a functional company.
- dputtick 10y ago
  I'm not sure I agree that "the company has a huge incentive in firing him a day before he vests." First of all, the direct and indirect costs of hiring a replacement can be massive, and potentially larger than the value of the stock that isn't vested. An employee doesn't have to be "essential" in order to be extremely valuable, especially early on. Second, a company could make a habit of firing employees right before they vest, and even if they managed to completely mitigate the damage internally as soon as word got out about this practice they would suddenly find it impossible to hire quality talent.
- omgitstom 10y ago
  It isn't about the vesting periods, it is about the exercise period. Vesting periods are fine in most cases. The exercise period is usually 90 days, if you leave a company. What happens a lot is there is no liquidation event for years meaning that an employee with shares needs to make a decision fast to convert or lose their shares (which they earned) and that cost $$$. I've seen time and time again, where people get locked in because they need to drop 4-6 figures to exercise their shares. > If the employee loses the stock when he's fired early, then the company has a huge incentive in firing him a day before he vests, and thus he should regard the vesting compensation as nonexistent. I've seen this happen a few times in SV where employees are fired 1-2 weeks before their vesting period. Sad when it happens. Not saying that all times it is because of the cliff, but people talk and are aware of companies that have done this.
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abalone 10y ago
I agree with this, but what do you guys think about minimum service periods? Like requiring 2 or 3 years? Companies like Pinterest and Coinbase have added that condition.[1] Greater portability could in theory lead to higher turnover even among happy employees. They might go on to found their own company sooner. They might see good financial sense in diversifying their options portfolio. Yet young companies need the team to stick together for a certain time. Especially very small startups at the YC stage -- turnover is very harmful. Note: In Adam's example, nobody leaves the pre-IPO company in under 4 years of service.[2] [1] https://github.com/holman/extended-exercise-windows https://github.com/holman/extended-exercise-windows [2] "imagine a company takes 10 years to IPO. Employee A works at the company from years 0 to 4. Employee B works there from years 4 to 8. Employee C works there from years 8 to 10."
- jasoncrawford 10y ago
  Minimum service periods already basically exist, in the form of a vesting “cliff”. A typical vesting schedule has a 1-year cliff, meaning you don't really get any of your equity unless you work at the company for at least a year. However, 2- or 3-year cliffs could make sense as an alternate way of promoting a long-term mentality.
- dangelo 10y ago
  At Quora we decided not to have a higher "minimum service period" aside from the standard 1 year cliff. The rationale is that the vesting cliff is what everyone is expecting as the minimum. If a company wants to have a higher period before someone can leave and retain their stock, they should just increase the cliff to that length of time to make it fully transparent.
  - abalone 10y ago
    That's a fair point, but cliffs are more severe than exercise windows. Many employees still get to keep some of their equity in a 90 day exit window scenario. I think Kupor modeled it at about a third of vested shares on average.[1] More mature startups may be able to simply abolish the long-term incentive that the 90 day window provides, but I suspect younger (<30 employee) startups need added turnover protection. Perhaps backloaded vesting would be a more comparable replacement? Transparent, predictable, fair, and not as harsh as cliffs. You keep what you vest, but 70% of it vests in years 3-4. [1] (Although there's certainly unfair variability based on personal financial circumstances in that average.)
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dasil003 10y ago
Thank you for this Adam, as an early-stage startup guy who still hasn't made his FU money, this really nails all the salient points for me. Scott Kupor tries to decorate his article with references to employees' interests and considerations, but it's clear the guy has spent his career on the on the management/finance side where he doesn't really understand what it means to be a ground-level early-stage contributor to a young startup. Consider Kupor's "solution": > But, a way to truly compete for the very best and long-term oriented employees would be to offer even greater amounts of employee options grants. For example, why not offer stock option grants that are 50% more than the nearest competitor’s — but with the provision that a departing employee cannot exercise his or her stock options unless there has been a liquidity event? If you stay, you’re a serious owner, but if you don’t want to be part of the company for any reason you won’t be an owner. This solves all of the issues: cash rich vs. poor; competitive offers; and the bad incentive problem (e.g., encouraging employees to quit to build their own diversified stock portfolios). I don't even know where to begin with this. First of all, unless you are a VC, you don't have visibility into the market for options. Even if you did, startups are not commodities, you can't compare shares of early stage companies directly to each, particularly when you are a single-digit employee, you are going to be shaping the actual future of the company. Not only should the offer you receive reflect the value that your particular skills and expertise will bring the company, but you also have to gauge the potential of the company itself. 1% of a $1B company is worth a lot more than 2% of a $100M company, and of course how much funding will you need to get there? Obviously these things aren't predictable, but as a prospective employee you have to try. After all, unlike investing, you only have one working lifetime to spend as employee. That puts a different perspective on these things from the VC really is building a portfolio and playing the odds. Since the VC is not directly pulling the levers, startups are effectively fungible to them. But the part that really burns me up about his "solution" and it's purported comprehensiveness, is the idea that early stage employees who leave before a liquidity event don't deserve any equity at all. I'm sorry Scott, but that is absolute horse shit, and frankly it really will make me think twice about taking any investment from A16Z in the future. The early stage employees who take a huge pay cut in order to build something from scratch which will most likely fail completely, are making a huge investment in the company. They will literally pave the way for all the later employees to even have a company to work for. Can you imagine if VCs made the analogous argument that angel investors should not be entitled to their returns unless they matched the later VC investments? "That would be preposterous! Obviously those angels took a big financial risk and deserve their returns!" Financiers would never be this short-sighted, but somehow Scott thinks that someone putting their blood, sweat and tears into startup for a below-market salary are only as valuable as their latest month of work. I respect the role of capital in startup creation, I really respect it because I don't have it, but even so, money is nothing without execution, and A16Z would be nothing without talented founders and employees who are willing to sacrifice a lot more than them to bring a successful company into this world. Even if you are a complete sociopath who is interested solely in the short-term benefits to the company, you still wouldn't want to take this tack because (as Adam very aptly pointed out) then you end up with a lot of dead-weight in the company that's just hanging around to cash in their options. Startups are not fungible, employees are not fungible. Treating employees like humans is not only the right thing to do, it's how you cultivate reputation with "cash-poor" top performers. The danger for VCs like Scott Kupor is there will always be an army of sycophants and yes-men ready to consecrate his every word just to get a piece of that juicy VC fund, but they are in real danger of having their lunch eaten by the expanding reach of angels that actually worked their way up out of the trenches themselves and understand the tech employee mindset.
smsm42 10y ago
Longer exercise window would be very valuable, especially for employees not having big cash pile laying around somewhere. That would raise the value of options a lot. The other suggestion though - longer vesting period - would have the reverse effect. 4 years vesting options in startup are "extremely risky investment that with much luck and hard work may pay off". 8 years vesting options in a startup means "I guess Las Vegas gambling is too boring and way to little risk for you? How would you like to gamble with 10 years of your life?" 4 years vesting options in an established company is "we'll pay you if you agree to suffer us and drag yourself to work long after it stopped being fun for you". 8 years vesting options in an established company is "for how much would you agree to sell us your immortal soul?" In short, long period vesting for options may make total sense for company issuing it. It would have very low value for employee, and even long exercise period would not compensate for that.
bigbossman 10y ago
Have any companies implemented a sliding scale for the duration of the exercise period? 10 years makes sense for a super early stage startup, and 90 days is reasonable for public companies. I would think that some shorter windows can be implemented for companies at different growth stages -- perhaps by financing schedule, revenue size, expected time until exit, etc.
- mahyarm 10y ago
  For public companies it doesn't matter because there is immediate liquidity to cover options. Their vesting periods are often even shorter at 6 months and they tend to not even bother with options and just give you stock units directly or have stock purchasing plans at below market rates.
  - bigbossman 10y ago
    Yes, exactly, this is my point. The exercise period length should be correlated to the expected time until potential liquidity.
jeffdavis 10y ago
Founders are committed and in for the long haul, and either make a lot of money or none. Startup employees make less money on a nice exit, but aren't as committed and can work for a few companies (maybe 2 years each) to improve their odds. So having 10 years to exercise makes a lot of sense for the second group. Forcing the employees to stay until liquidation makes zero sense for the second group. So you need to give the people that do commit at that level a package that more closely resembles a founder. Otherwise it just distorts the market in all kinds of ways. Nobody would want to work for you until it looks like liquidation is around the corner, which means startups would constantly need to be positioning themselves on the auction block rather than focusing on lasting growth. In addition, it creates the normal kinds of distortions associated with illiquid assets and immobile people.
- nedwin 10y ago
  Forcing employees to stay until liquidation isn't in the founders interest either. You retain employees who might have been great from the zero to 50 stage but not as well suited in the 50 - 5000 stage. But their incentive is to stick around or give up potentially millions in equity that they busted their asses to earn. Checked out employees aren't doing anyone any favors. You might say you can fire the person or put them on a performance improvement plan but this is easier said than done - especially if it was a key early hire. I've seen this in many SF-based companies.
  - skewart 10y ago
    I completely agree. Very often the skill set needed for employees changes dramatically over the first several years of a startup's life. It's best for everyone if there is a highly liquid job market and employees can easily leave (or be let go) when they are no longer contributing at their max, but then easily find another place where they contribute more. It's a lot easier to let someone go if both parties know that the employee has been well compensated for the work and risk they took on. It's that much harder to fire someone when a consequence is that they will miss out on any equity. I'm sure there are edge cases, but I can't see how, in the general case, tying people to companies for long amounts of time is good for anyone involved.
ska 10y ago
I think there is fundamental difference of opinion here, exposed by Adam's and A16Z's posts. A fairly typical early stage employee will forgo hundreds of thousands of dollars in salary over a vesting period, in exchange for options. The philosophical difference is here: At the end of that period, do you think of the shares as the employees, earned in exchange for both the work done in those years, and the hundreds of thousands the company saved on salary? Or do you think of the options as an ongoing incentive to keep the employee with you (perhaps still below market rates), in exchange for the chance of a big payout later? Technical employees often feel the former, and will point to the fact that they've "given" the company much more in salary reduction than many early round investors paid per share they own outright. Corporations often state the latter point, or some variation, particularly pointing out that later employees don't have the same leverage on the option pool. Option agreements often encode the latter.
- mahyarm 10y ago
  I'm starting to have the feeling that those very early employees are about equivalent to an angel investor, and they should be getting some sort of angel investor equivalent terms. Otherwise once people really start realizing the negatives of being an early employee vs. founding your own startup it would be hard to hire otherwise.
  - ska 10y ago
    One way to do this with very early employees is to avoid the whole mess by just giving stock.
    - sulam 10y ago
      You'd still have to pay taxes on it as per your (audit-able) 409a valuation.
      - ska 10y ago
        Sure, depending on the country it works different ways. But if there is tax to pay, it is on a low valuation (very early, remember).
jdoliner 10y ago
> There is no concern for how many shares we granted in the past to other employees or whether or not they are still holding them; the only concern is the current market... it would be irrational not to increase the option pool if that’s what was needed to be able to hire someone. This is the part of this post that I can't believe is true. At the end of the day a company only has so much equity. How can the amount you've given out be of no concern in issuing stock to new employees? Isn't that tantamount to saying equity isn't scarce? When does the amount you've given out become of concern and in what context? If the answer really is that the amount of equity you've already given out never becomes a concern to any aspect of your company then why would you ever limit the amount of equity you give to employees?
- danielweber 10y ago
  The employee pool is typically small compared to the entire pot.
tlrobinson 10y ago
From the A16Z post: > This solves all of the issues: cash rich vs. poor; competitive offers; and the bad incentive problem (e.g., encouraging employees to quit to build their own diversified stock portfolios). Says the VC whose business depends on a diversified stock portfolio. A couple paragraphs above he admits that "median time-to-IPO for venture-backed companies is closer to 10 years". That's not a reasonable amount of time to expect employees to stay at a job, and seems like a recipe for burnout and/or "rest and vest".
andreasklinger 10y ago
Wow never disagreed with a16z content so far. > … at the same time disadvantaging employees who remain loyal to their employers just kicks the can down the road … The underlying assumption that people only leave companies because they are not "loyal" People get fired, people get mobbed out of teams, company cultures change, companies fail in management. employees lives change, people need to move to other countries. The whole notion about "loyalty" almost appears action-movie-like. "ARE YOU WITH ME? HELL YEA!" It's already hard enough to convince highly skilled people to join companies vs founding their own. No need to further decrease the upside compared to being a founder.
lifeisstillgood 10y ago
Everyone has a burn out point, a point when the company and the culture and just your life stages mean you want to move on. Being handcuffed to one is bad for everyone. I would worry about the value of employees who basically wanted to leave the company four years ago but are only hanging in because their shares are worth a million. Surely it would be better to get those people paid and then out the door rather than keeping your senior influential ranks full of people who stopped caring years ago. Surely there is a better way? Stock options are some kind of payment - so why not treat it as a pro rata accrument. You are the first hire - you get 2% of the company if you stay ten years. Leaving after five to get married and move country? Fine here is 1%, just sign here, and we all are happy. No matter how nice your arresting officer is, everyone resents handcuffs.
anf 10y ago
Why doesn't everyone just exercise as soon as they join a company? At least at earlier stage startups, it seems that the amount of salary offered as compansation is at least an order of magnitude more than the amount of options. Given this ratio, it seems like most employees should have enough in liquid savings after even a few years to avoid taxes on the appreciation between stock grant and vest times. Of course, there's the possibility that a startup will tank, but even in that case, losing out on having bought stock seems much smaller than the opportunity cost of not having worked at a sure-bet tech giant.
- overdrivetg 10y ago
  Vesting. You can't exercise unvested options - the company needs to have set up an early exercise option as a part of it's stock plan for this to work. But whether they offer an early exercise program is a very good question to ask any early-stage company you're planning to join.
hkmurakami 10y ago
I've written several times in the past that only companies with substantial negotiating leverage against the gatekeepers of capital can afford to buck what is considered standard. Hence we've only seen the hottest companies achieve 7-10 year exercise terms. https://github.com/holman/extended-exercise-windows https://github.com/holman/extended-exercise-windows I've argued that as a cohort, YC is the best candidate to make a large push against VCs and make 7-10 years vesting terms an industry standard. Learning that this is now the case is incredibly exciting. https://news.ycombinator.com/item?id=11198991 https://news.ycombinator.com/item?id=11198991 harj 119 days ago | parent | on: Fixing the Inequity of Startup Equity We're excited to make 10 years the new standard option exercise window for startup employees. Each of us have personally experienced someone close to us dealing with the stress of trying to exercise their options within 90 days and it sucks. We'd like to see more companies making this change, we'll be keeping the public list of YC companies who have either implemented or pledged to implement an extended window, updated here: https://triplebyte.com/ycombinator-startups/extended-options https://triplebyte.com/ycombinator-startups/extended-options
morgante 10y ago
Scott's post genuinely makes me angry. It uses subtle language to imply that employees are inferior individuals who are lucky that the owners of capital deign to share anything with them. In Scott's worldview, choosing to leave a company before it has exited is inherently disloyal. Even if they're paying you under market. Even if you could contribute more value elsewhere. I wonder if he would accept similar terms: 1. Reduce his salary at a16z to something minimal. (<$100k) 2. He only gets his carry in a company if he invests in every subsequent round. If they ever decline to follow-on, it's clearly a sign of "disloyalty" and they should forfeit all equity. I agree with Adam that it's at least nice to see the owners of capital so nakedly betraying their worldview (diversification is all well and good for them, but employees owe infinite loyalty). I will think long and hard before ever working for a company where Scott is on the board. This part is particularly troubling: > One existing solution to the “dead equity” problem has been — and still can be — to make exceptions where appropriate for certain exiting employees. It's essentially an argument for cronyism. The people who most need equity extensions are those unlikely to have the connections and political savvy to get them. I strongly suspect such systems would work to further disadvantaged already disadvantaged groups.
- zekevermillion 10y ago
  Yes. We use options for equity comp b/c the grant is not a taxable event (if properly organized). It's not supposed to be a way to deprive terminated employees of their equity comp, which potentially is a large portion of the compensation of a venture-backed startup employee.
- themartorana 10y ago
  Couldn't agree more. If part of my compensation is equity, then I should get to keep it when I depart. If I don't, you're basically telling me I wasn't worth the compensation I was getting. Taking back shares is akin to a temper tantrum, and Scott's post really, really shows no respect for the engineers that make his companies worth any money at all. It also hyper-values people who can flog a Power Point presentation, whether or not those people end up contributing the lion's share of the engineering. It's a rather bald-faced admission of how employees are actually valued, and how distasteful compensating them is.
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zekevermillion 10y ago
Scott basically argues that there should be a 10-year cliff on vesting. That's what it means to price employees out of their equity comp if terminated early.
pfarnsworth 10y ago
This is a well thought out answer, and frankly embarrasses the response from the VC. Of course the VC wants to protect his own interests, he's just obfuscating it by pretending he's talking about "wealth transfer" and "fairness". What a bunch of BS, and I'll never work for a company that he is "advising". Who knows what sort of dirty tricks he'll play against the employees.
SeoxyS 10y ago
For young startups, I always recommend allowing Early Exercise. Put simply, it's the right by employees to exercise their options before they vest. The company retains a right to repurchase those options should the employee depart before they vest. This enables them to exercise them as soon as they're granted, which greatly reduces the tax burden in two ways: - First, the strike price and the value of the option are the same when they're granted, which means that the spread (i.e. the difference between exercise price and value of the options exercised which the IRS considers profit for AMT) is zero. Therefore, no taxes need to be paid. I've been stung by a 5-figure AMT tax bill on exercised options that were completely illiquid—all of which would've been avoided had I exercised early. - It starts the clock for long-term capital gains. You need to hold the actual stock for over 1 year to be taxed at capital gains rates instead of income tax rates. Federally, this can lower your tax rates from up to ~40% to ~20%. (would've been 15% pre-Obama!) In CA, for state taxes there is no distinction, so you'd still be paying income tax rates of ~10-13% Keep in mind, if you early exercise, that you must file an 83b election with the IRS within 30 days, or the tax consequences can be severe. (If you don't, you'd be taxed on the spread at the current option value every time some of your options vest.) Now, I think extended exercise windows are great too, and ideally option agreements would have both. I think generally, early exercise makes more sense for employees who join pre-Series-B, while extended exercise windows make more sense for later stage employees.
laurencerowe 10y ago
You can't pay rent or save for a mortgage downpayment with illiquid stock options. It takes something like $200-400K to get on the housing ladder in the Bay Area so the idea of putting it off for 8-10 years with no guarantee of success is already unattractive. To shackle yourself to a single company for the duration? Nuts. When did you last work anywhere for 8 years?
cloudjacker 10y ago
Man Silicon Valley companies are living in a parallel dimension! They collectively think they have the LUXURY to hire employees that are in love with their random idea And they collectively think that the employees have the LUXURY to play russian roulette with the compensation terms Let's address that, because these factors have are completely disjointed with the success of the company and the employees' INTEGRITY (instead of "aligned incentive") to deliver amazing products and code
genericpseudo 10y ago
The answer is clear – not easy, but clear; refuse to work with people who act in ways you find unethical. If Scott Kupor's position is a company's position, and the total package value (including salary, benefits, etc), isn't acceptable to you when valuing options at zero – and given you don't control the company, and they can fire you at any time, you have to – then they're on the list. Refuse to work with them and tell your friends. If you disapprove of his or A16Z's attitude, just don't accept investment from him. Let the market tell them they're wrong.
cpks 10y ago
I felt dirty reading the a16z post. Really dirty. They tried to phrase screwing over the employees for the investors as somehow employee-friendly.
ak2196 10y ago
Quora was definitely not the first startup to do 10 year exercise period, not by some margin. My Lime Wire stock options from 2000 had a 10 year exercise with a 6 year vesting schedule, no cliff and vesting every 3 months. Here's the proof: http://imgur.com/6eTUyui http://imgur.com/6eTUyui Adam's on the right track though. I just had to write a 6 figure check today to exercise my vested options at my current employer because of the 90 day clause. It makes me angry because the company's official stance is that the board wants to use stock options as an employee retention tool. I was fortunate enough to have had the cash but a lot of other people are not and there is no secondary market. So if you get fired or have to quit during a bad market you are basically screwed.
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snowwolf 10y ago
I understand where the 10 year exercise period came from and I can understand the arguments against it. A solution I haven't seen put forward is a compromise between the common 90 day window and the 10 year window, which is to have an exercise period equal to the amount of time you were an employee. This discourages people from bouncing around jobs collecting equity but gives a reasonable timeframe in which to exercise if you do want to leave after putting 5 years into growing the company.
- mywittyname 10y ago
  > This discourages people from bouncing around jobs collecting equity Vesting periods solve this problem.
  - snowwolf 10y ago
    How does vesting solve that? Which would you rather have (giving a simple example of 1% options vested over 4 years) - 0.25% in 4 different companies or 1% in 1? This is essentially the argument against 10 year exercise windows - it allows exactly the above scenario.
    - mywittyname 10y ago
      If your vesting cliff is 1 year, then people who job hop after 8 months get nothing. Thus discouraging people from bouncing around to collect equity because there is a minimum tenure needed to collect. Just set the cliff to match your definition of "bouncing around jobs".

319 points by sama 10y ago

>"He suggests paying 50% above market in stock, but including a clause that all employees must remain at the company until a liquidity event or else they cannot keep any stock at all (even if they could come up with the exercise cost)." Curious to what feelings this invokes for startup employees (nonfounders, investors) on HN.

wpietri 10y ago
In my case, wild laughter.

sama 10y ago

I agree with Adam's post and intensely disagree with A16Z's post on this topic. I don't think companies should take back stock compensation on a technicality. It'd be silly to even discuss taking back cash compensation when someone leaves a company! I appreciate Adam starting this trend years ago.

american158931 10y ago
What's your opinion on how an employee should deal with a founder who clearly believes more in the A16Z stance on stock options more than the Adam's? Apart from obvious knee-jerk reactions like "stop working there." Obviously it's in the founder's financial best interest (at least on the very surface level) for employees to not have the option to leave the company with shares at all. It is just lost money, from their perspective, and probably annoying to have an employee leave (creating a headache in your life) and take a bunch of equity with them. (And it severely limits an employees negotiating power over time, which can be of benefit to the founder...) What are some strategies an employee can use to make the point that Adam's perspective is a much more employee-friendly one and, thus, better for the company? Looking for some perspective.
- qq66 10y ago
  I don't think anyone but a very early and very senior employee will be able to change a founder/company's perspective on this. The best attempt would be to walk away from the offer and explain explicitly why -- even if that doesn't work for the situation at hand, it will guide the market.
- jc4p 10y ago
  I don't think you can do anything here once a culture's already been set. I also think that repeatedly pestering execs to ask about their efforts on this (as I've done at my current company every few weeks for the last 6 months) makes them think you're about to jump ship and want "free money", so watch out :)
- jerf 10y ago
  "What's your opinion on how an employee should deal with a founder who clearly believes more in the A16Z stance on stock options more than the Adam's?" Value the options at zero and take appropriate steps. It may not be the statistical expected result, but it is the modal outcome anyhow. "Appropriate steps" isn't just "quit". If you're happy with the cash salary than you don't have a problem, for instance, or the experience, or the lifestyle, or any of the other reasons you may be choosing to work at a startup. "Obviously it's in the founder's financial best interest (at least on the very surface level) for employees to not have the option to leave the company with shares at all." Well, yeah, but that's sort of vacuous; it's not in the employer's best interest for employees to be compensated at all. But that makes hiring pretty challenging. "What are some strategies an employee can use to make the point that Adam's perspective is a much more employee-friendly one and, thus, better for the company?" There isn't a general answer to that question, because it depends on your status in the company. In some places, even opening that conversation will put you halfway out the door. In others, they'll fall over themselves to fix the problem if you just mention it, because they'll not have heard of this before. You need to judge the situation you're in, and play out the possible scenarios before you step in to something like this. But I'd suggest you're going to need a very solid position to change something this fundamental about a company. Generic advice: It's always easier to negotiate from a fallback position of strength; unless you're absolutely confident in your position, consider having a job in hand before starting this talk. (You don't have to tell your employers that you have an offer in hand.)
jsprogrammer 10y ago
>10-Year Exercise Periods Make Sense >I agree with Adam's post >I don't think companies should take back stock compensation on a technicality. Isn't a 10-year period a technicality? Anything that can take back compensation is a technicality. Heh, can't even get a response without downmods.
- dmansen 10y ago
  here you go your post doesn't add anything to the conversation it might technically be a technicality but 10 years is long enough in startup life units that it doesn't matter you're pointing out definitions when it was clear what the author meant and people don't like that because it's very annoying
  - jsprogrammer 10y ago
    If it is technically a technicality, which it is, then all the other fluff pieces and unpunctuated sentences in the world do not matter. Maybe you could elucidate sama's "clear" meaning? It was lost on me. As far as I can tell, the post adds nothing but confusion to this conversation (you could counter by pointing out something of value contributed by the post). Annoying is when people continually post contradictory or unclear things and never respond to their rightful critiques, or even change their future actions.
    - dmansen 10y ago
      you said you wanted a response and not just downvotes. i tried ¯\_(ツ)_/¯
      - jsprogrammer 10y ago
        Thank you for the effort. The sama account rarely makes responses and Sam Altman basically never responds to criticism of his pieces, or even outright proofs of wrongness. Honestly, this is the treatment I expect to receive here.
tarr11 10y ago
The answer here is for you to convince VCs and other investors to support this, publicly, and tell founders that they won't be punished for this on future fundraising. Hearing from A16Z that they don't support this is a big negative signal to any founder.
- argonaut 10y ago
  a16z is a major investor (growth round resulting in a board seat for a16z) in many of the companies that have extended vesting periods, such as Coinbase, Pinterest, and Asana. So I doubt they block companies from doing this.
  - hkmurakami 10y ago
    Notice the companies you listed. They are/were the absolute hottest companies when they raised their rounds, and are still some of the most prominent startups around. Put another way, they have negotiating leverage. The ones with the leverage (including YC backed companies) have to lead the charge to change the status quo and "the standard". The average startup doesn't have the leverage to do something nonstandard. The fact that YC has come out in support of 10 year vesting periods and is making it a standard is a massive step forward.
    - argonaut 10y ago
      Asana was never a hot company. Barely any companies even have extended exercise windows, so you can't go around excluding companies from the list because "they don't count". Also your logic is almost circular, because a16z tends to only invest in hot/great companies, by definition. You can go down the list: https://github.com/holman/extended-exercise-windows https://github.com/holman/extended-exercise-windows. Many other companies have a16z as an investor. Tilt and CodeCombat are two of them.
throwaway6497 10y ago
What I find amazing, is that except YC no-other VC firm would publicly acknowledge that 10 year exercise periods make sense. In this age of social media, I find it absolutely appalling that they still endorse the current 90 day rule. I am guessing they categorised the PR nightmare of not endorsing is marginal. So, they kept quiet, since keeping status quo is in their interest. YC is trying to make things better and fair for employees. For a really long time the odds were always stacked against the employees the most. YC, Adam are hacking it for the better. All good entrepreneurs who believe in "making the world a better place" should endorse this. Unless, the idea gathers enough momemtum, the old-guard, vulture VCs will not change their stance. This includes A16Z.

mesozoic 10y ago

Wow I guess since employees should already value most stock options at near zero it's hard to value them any less.

alonmower 10y ago
I think a 10 year exercise window makes them much more valuable. Now instead of being faced with a decision of whether or not to spend thousands of dollars when leaving a company that I'll very likely never see again I can now defer that decision. Right now my options are to not exercise and risk kicking myself in the future if the company makes it, or exercising knowing that I'm very likely throwing my money away.
argonaut 10y ago
Valuing stock options at zero is one of those HN memes that are repeated endlessly, mostly, I suspect, by people not from Silicon Valley who know few, if any, engineers who got rich from stock options. Just because stock options should be valued at less than a company's private valuation does not mean they are worth 0. Very few engineers actually value them at zero. Adding on to this comment: It's a spectrum, not a black and white your options are worth zero dictum. At one end, (extremely early stage startup, < 5 employees, you're not a founder) your options are probably worthless, sure, although you have a minuscule chance of being worth $10M+. At the other extreme, you join a company that everyone knows is going to go IPO within two years, and essentially earn what you would earn at Google or Facebook, maybe slightly more. To give you one example, I knew someone that made about a million (vested over 4 years) in options by joining an already-successful startup as engineer ~70, that he believed would IPO within 4 years. On top of his market rate salary.
- danielweber 10y ago
  It should be valued at 0 unless the company takes active steps to encourage you not to, which would include answering dozens of questions about vesting and dilution that they won't.
  - 10y ago

ergothus 10y ago

I followed this link expecting to see a comment about some sort of "encoding" of the human body relating to long-but-not-indefinite period of physical exercise. Instead it's about stock options. As the article offered no background, I'm lost as to what is being discussed. In the last 20 years I've never had the same employer for 10 years, so can someone ELI5 what is being discussed? Thanks in advance!

CyrusL 10y ago
If a company grants you stock options as part of your compensation, you need still need to pay to get the stock. That's called exercising the options. If you leave the company, there is a limited window of time to exercise the option. If you don't exercise it, the stock gets returned back to the company. This post is favoring that window being long and is responding to blog post favoring that window being short.
- niels_olson 10y ago
  So the white-shoe Sand Hill Road crowd is averse to having a potentially large long term liability if things go awesome. This is some bold, 19th century robber baron stuff. Wow.
jdhawk 10y ago
They're talking about the amount of time you have after leaving a company to exercise the stock options that you were granted, effectively purchasing them at par value. This has huge tax implications, and requires quite a bit of cash on the spot. Traditionally, the period has been ~90 days, which makes it even harder to weigh your tax options and come up with the $$$$ to exercise the options. Since its expensive, and has a short window of execution, the practice has been viewed by many to be unfair. The Stock Options were a part of your compensation - part of the Risk vs Reward balance you choose when you worked for a startup, and now if you don't have thousands of dollars to spare on a gamble - you forfit those options back to the Company. By extending the period to 10 years, you have the ability plan accordingly, see if the company will eventually exit, and exercise them when the time is right.

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devit 10y ago

Isn't any vesting for non-founding employees completely broken? If the employee loses the stock when he's fired early, then the company has a huge incentive in firing him a day before he vests, and thus he should regard the vesting compensation as nonexistent. If the employee retains the stock when he's fired early, then he can just get himself fired to ignore the vesting period, making the vesting pointless. It seems that vesting can only work if the employee is so essential that the company would never fire him because the company would then be highly likely to fail, which should only apply for founders in a functional company.

dputtick 10y ago
I'm not sure I agree that "the company has a huge incentive in firing him a day before he vests." First of all, the direct and indirect costs of hiring a replacement can be massive, and potentially larger than the value of the stock that isn't vested. An employee doesn't have to be "essential" in order to be extremely valuable, especially early on. Second, a company could make a habit of firing employees right before they vest, and even if they managed to completely mitigate the damage internally as soon as word got out about this practice they would suddenly find it impossible to hire quality talent.
omgitstom 10y ago
It isn't about the vesting periods, it is about the exercise period. Vesting periods are fine in most cases. The exercise period is usually 90 days, if you leave a company. What happens a lot is there is no liquidation event for years meaning that an employee with shares needs to make a decision fast to convert or lose their shares (which they earned) and that cost $$$. I've seen time and time again, where people get locked in because they need to drop 4-6 figures to exercise their shares. > If the employee loses the stock when he's fired early, then the company has a huge incentive in firing him a day before he vests, and thus he should regard the vesting compensation as nonexistent. I've seen this happen a few times in SV where employees are fired 1-2 weeks before their vesting period. Sad when it happens. Not saying that all times it is because of the cliff, but people talk and are aware of companies that have done this.
- 10y ago

abalone 10y ago

I agree with this, but what do you guys think about minimum service periods? Like requiring 2 or 3 years? Companies like Pinterest and Coinbase have added that condition.[1] Greater portability could in theory lead to higher turnover even among happy employees. They might go on to found their own company sooner. They might see good financial sense in diversifying their options portfolio. Yet young companies need the team to stick together for a certain time. Especially very small startups at the YC stage -- turnover is very harmful. Note: In Adam's example, nobody leaves the pre-IPO company in under 4 years of service.[2] [1] https://github.com/holman/extended-exercise-windows https://github.com/holman/extended-exercise-windows [2] "imagine a company takes 10 years to IPO. Employee A works at the company from years 0 to 4. Employee B works there from years 4 to 8. Employee C works there from years 8 to 10."

jasoncrawford 10y ago
Minimum service periods already basically exist, in the form of a vesting “cliff”. A typical vesting schedule has a 1-year cliff, meaning you don't really get any of your equity unless you work at the company for at least a year. However, 2- or 3-year cliffs could make sense as an alternate way of promoting a long-term mentality.
dangelo 10y ago
At Quora we decided not to have a higher "minimum service period" aside from the standard 1 year cliff. The rationale is that the vesting cliff is what everyone is expecting as the minimum. If a company wants to have a higher period before someone can leave and retain their stock, they should just increase the cliff to that length of time to make it fully transparent.
- abalone 10y ago
  That's a fair point, but cliffs are more severe than exercise windows. Many employees still get to keep some of their equity in a 90 day exit window scenario. I think Kupor modeled it at about a third of vested shares on average.[1] More mature startups may be able to simply abolish the long-term incentive that the 90 day window provides, but I suspect younger (<30 employee) startups need added turnover protection. Perhaps backloaded vesting would be a more comparable replacement? Transparent, predictable, fair, and not as harsh as cliffs. You keep what you vest, but 70% of it vests in years 3-4. [1] (Although there's certainly unfair variability based on personal financial circumstances in that average.)

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dasil003 10y ago

Thank you for this Adam, as an early-stage startup guy who still hasn't made his FU money, this really nails all the salient points for me. Scott Kupor tries to decorate his article with references to employees' interests and considerations, but it's clear the guy has spent his career on the on the management/finance side where he doesn't really understand what it means to be a ground-level early-stage contributor to a young startup. Consider Kupor's "solution": > But, a way to truly compete for the very best and long-term oriented employees would be to offer even greater amounts of employee options grants. For example, why not offer stock option grants that are 50% more than the nearest competitor’s — but with the provision that a departing employee cannot exercise his or her stock options unless there has been a liquidity event? If you stay, you’re a serious owner, but if you don’t want to be part of the company for any reason you won’t be an owner. This solves all of the issues: cash rich vs. poor; competitive offers; and the bad incentive problem (e.g., encouraging employees to quit to build their own diversified stock portfolios). I don't even know where to begin with this. First of all, unless you are a VC, you don't have visibility into the market for options. Even if you did, startups are not commodities, you can't compare shares of early stage companies directly to each, particularly when you are a single-digit employee, you are going to be shaping the actual future of the company. Not only should the offer you receive reflect the value that your particular skills and expertise will bring the company, but you also have to gauge the potential of the company itself. 1% of a $1B company is worth a lot more than 2% of a $100M company, and of course how much funding will you need to get there? Obviously these things aren't predictable, but as a prospective employee you have to try. After all, unlike investing, you only have one working lifetime to spend as employee. That puts a different perspective on these things from the VC really is building a portfolio and playing the odds. Since the VC is not directly pulling the levers, startups are effectively fungible to them. But the part that really burns me up about his "solution" and it's purported comprehensiveness, is the idea that early stage employees who leave before a liquidity event don't deserve any equity at all. I'm sorry Scott, but that is absolute horse shit, and frankly it really will make me think twice about taking any investment from A16Z in the future. The early stage employees who take a huge pay cut in order to build something from scratch which will most likely fail completely, are making a huge investment in the company. They will literally pave the way for all the later employees to even have a company to work for. Can you imagine if VCs made the analogous argument that angel investors should not be entitled to their returns unless they matched the later VC investments? "That would be preposterous! Obviously those angels took a big financial risk and deserve their returns!" Financiers would never be this short-sighted, but somehow Scott thinks that someone putting their blood, sweat and tears into startup for a below-market salary are only as valuable as their latest month of work. I respect the role of capital in startup creation, I really respect it because I don't have it, but even so, money is nothing without execution, and A16Z would be nothing without talented founders and employees who are willing to sacrifice a lot more than them to bring a successful company into this world. Even if you are a complete sociopath who is interested solely in the short-term benefits to the company, you still wouldn't want to take this tack because (as Adam very aptly pointed out) then you end up with a lot of dead-weight in the company that's just hanging around to cash in their options. Startups are not fungible, employees are not fungible. Treating employees like humans is not only the right thing to do, it's how you cultivate reputation with "cash-poor" top performers. The danger for VCs like Scott Kupor is there will always be an army of sycophants and yes-men ready to consecrate his every word just to get a piece of that juicy VC fund, but they are in real danger of having their lunch eaten by the expanding reach of angels that actually worked their way up out of the trenches themselves and understand the tech employee mindset.

smsm42 10y ago

Longer exercise window would be very valuable, especially for employees not having big cash pile laying around somewhere. That would raise the value of options a lot. The other suggestion though - longer vesting period - would have the reverse effect. 4 years vesting options in startup are "extremely risky investment that with much luck and hard work may pay off". 8 years vesting options in a startup means "I guess Las Vegas gambling is too boring and way to little risk for you? How would you like to gamble with 10 years of your life?" 4 years vesting options in an established company is "we'll pay you if you agree to suffer us and drag yourself to work long after it stopped being fun for you". 8 years vesting options in an established company is "for how much would you agree to sell us your immortal soul?" In short, long period vesting for options may make total sense for company issuing it. It would have very low value for employee, and even long exercise period would not compensate for that.

bigbossman 10y ago

Have any companies implemented a sliding scale for the duration of the exercise period? 10 years makes sense for a super early stage startup, and 90 days is reasonable for public companies. I would think that some shorter windows can be implemented for companies at different growth stages -- perhaps by financing schedule, revenue size, expected time until exit, etc.

mahyarm 10y ago
For public companies it doesn't matter because there is immediate liquidity to cover options. Their vesting periods are often even shorter at 6 months and they tend to not even bother with options and just give you stock units directly or have stock purchasing plans at below market rates.
- bigbossman 10y ago
  Yes, exactly, this is my point. The exercise period length should be correlated to the expected time until potential liquidity.

jeffdavis 10y ago

Founders are committed and in for the long haul, and either make a lot of money or none. Startup employees make less money on a nice exit, but aren't as committed and can work for a few companies (maybe 2 years each) to improve their odds. So having 10 years to exercise makes a lot of sense for the second group. Forcing the employees to stay until liquidation makes zero sense for the second group. So you need to give the people that do commit at that level a package that more closely resembles a founder. Otherwise it just distorts the market in all kinds of ways. Nobody would want to work for you until it looks like liquidation is around the corner, which means startups would constantly need to be positioning themselves on the auction block rather than focusing on lasting growth. In addition, it creates the normal kinds of distortions associated with illiquid assets and immobile people.

nedwin 10y ago
Forcing employees to stay until liquidation isn't in the founders interest either. You retain employees who might have been great from the zero to 50 stage but not as well suited in the 50 - 5000 stage. But their incentive is to stick around or give up potentially millions in equity that they busted their asses to earn. Checked out employees aren't doing anyone any favors. You might say you can fire the person or put them on a performance improvement plan but this is easier said than done - especially if it was a key early hire. I've seen this in many SF-based companies.
- skewart 10y ago
  I completely agree. Very often the skill set needed for employees changes dramatically over the first several years of a startup's life. It's best for everyone if there is a highly liquid job market and employees can easily leave (or be let go) when they are no longer contributing at their max, but then easily find another place where they contribute more. It's a lot easier to let someone go if both parties know that the employee has been well compensated for the work and risk they took on. It's that much harder to fire someone when a consequence is that they will miss out on any equity. I'm sure there are edge cases, but I can't see how, in the general case, tying people to companies for long amounts of time is good for anyone involved.

ska 10y ago

I think there is fundamental difference of opinion here, exposed by Adam's and A16Z's posts. A fairly typical early stage employee will forgo hundreds of thousands of dollars in salary over a vesting period, in exchange for options. The philosophical difference is here: At the end of that period, do you think of the shares as the employees, earned in exchange for both the work done in those years, and the hundreds of thousands the company saved on salary? Or do you think of the options as an ongoing incentive to keep the employee with you (perhaps still below market rates), in exchange for the chance of a big payout later? Technical employees often feel the former, and will point to the fact that they've "given" the company much more in salary reduction than many early round investors paid per share they own outright. Corporations often state the latter point, or some variation, particularly pointing out that later employees don't have the same leverage on the option pool. Option agreements often encode the latter.

mahyarm 10y ago
I'm starting to have the feeling that those very early employees are about equivalent to an angel investor, and they should be getting some sort of angel investor equivalent terms. Otherwise once people really start realizing the negatives of being an early employee vs. founding your own startup it would be hard to hire otherwise.
- ska 10y ago
  One way to do this with very early employees is to avoid the whole mess by just giving stock.
  - sulam 10y ago
    You'd still have to pay taxes on it as per your (audit-able) 409a valuation.
    - ska 10y ago
      Sure, depending on the country it works different ways. But if there is tax to pay, it is on a low valuation (very early, remember).

jdoliner 10y ago

> There is no concern for how many shares we granted in the past to other employees or whether or not they are still holding them; the only concern is the current market... it would be irrational not to increase the option pool if that’s what was needed to be able to hire someone. This is the part of this post that I can't believe is true. At the end of the day a company only has so much equity. How can the amount you've given out be of no concern in issuing stock to new employees? Isn't that tantamount to saying equity isn't scarce? When does the amount you've given out become of concern and in what context? If the answer really is that the amount of equity you've already given out never becomes a concern to any aspect of your company then why would you ever limit the amount of equity you give to employees?

danielweber 10y ago
The employee pool is typically small compared to the entire pot.

tlrobinson 10y ago

From the A16Z post: > This solves all of the issues: cash rich vs. poor; competitive offers; and the bad incentive problem (e.g., encouraging employees to quit to build their own diversified stock portfolios). Says the VC whose business depends on a diversified stock portfolio. A couple paragraphs above he admits that "median time-to-IPO for venture-backed companies is closer to 10 years". That's not a reasonable amount of time to expect employees to stay at a job, and seems like a recipe for burnout and/or "rest and vest".

andreasklinger 10y ago

Wow never disagreed with a16z content so far. > … at the same time disadvantaging employees who remain loyal to their employers just kicks the can down the road … The underlying assumption that people only leave companies because they are not "loyal" People get fired, people get mobbed out of teams, company cultures change, companies fail in management. employees lives change, people need to move to other countries. The whole notion about "loyalty" almost appears action-movie-like. "ARE YOU WITH ME? HELL YEA!" It's already hard enough to convince highly skilled people to join companies vs founding their own. No need to further decrease the upside compared to being a founder.

lifeisstillgood 10y ago

Everyone has a burn out point, a point when the company and the culture and just your life stages mean you want to move on. Being handcuffed to one is bad for everyone. I would worry about the value of employees who basically wanted to leave the company four years ago but are only hanging in because their shares are worth a million. Surely it would be better to get those people paid and then out the door rather than keeping your senior influential ranks full of people who stopped caring years ago. Surely there is a better way? Stock options are some kind of payment - so why not treat it as a pro rata accrument. You are the first hire - you get 2% of the company if you stay ten years. Leaving after five to get married and move country? Fine here is 1%, just sign here, and we all are happy. No matter how nice your arresting officer is, everyone resents handcuffs.

anf 10y ago

Why doesn't everyone just exercise as soon as they join a company? At least at earlier stage startups, it seems that the amount of salary offered as compansation is at least an order of magnitude more than the amount of options. Given this ratio, it seems like most employees should have enough in liquid savings after even a few years to avoid taxes on the appreciation between stock grant and vest times. Of course, there's the possibility that a startup will tank, but even in that case, losing out on having bought stock seems much smaller than the opportunity cost of not having worked at a sure-bet tech giant.

overdrivetg 10y ago
Vesting. You can't exercise unvested options - the company needs to have set up an early exercise option as a part of it's stock plan for this to work. But whether they offer an early exercise program is a very good question to ask any early-stage company you're planning to join.

hkmurakami 10y ago

I've written several times in the past that only companies with substantial negotiating leverage against the gatekeepers of capital can afford to buck what is considered standard. Hence we've only seen the hottest companies achieve 7-10 year exercise terms. https://github.com/holman/extended-exercise-windows https://github.com/holman/extended-exercise-windows I've argued that as a cohort, YC is the best candidate to make a large push against VCs and make 7-10 years vesting terms an industry standard. Learning that this is now the case is incredibly exciting. https://news.ycombinator.com/item?id=11198991 https://news.ycombinator.com/item?id=11198991 harj 119 days ago | parent | on: Fixing the Inequity of Startup Equity We're excited to make 10 years the new standard option exercise window for startup employees. Each of us have personally experienced someone close to us dealing with the stress of trying to exercise their options within 90 days and it sucks. We'd like to see more companies making this change, we'll be keeping the public list of YC companies who have either implemented or pledged to implement an extended window, updated here: https://triplebyte.com/ycombinator-startups/extended-options https://triplebyte.com/ycombinator-startups/extended-options

morgante 10y ago

Scott's post genuinely makes me angry. It uses subtle language to imply that employees are inferior individuals who are lucky that the owners of capital deign to share anything with them. In Scott's worldview, choosing to leave a company before it has exited is inherently disloyal. Even if they're paying you under market. Even if you could contribute more value elsewhere. I wonder if he would accept similar terms: 1. Reduce his salary at a16z to something minimal. (<$100k) 2. He only gets his carry in a company if he invests in every subsequent round. If they ever decline to follow-on, it's clearly a sign of "disloyalty" and they should forfeit all equity. I agree with Adam that it's at least nice to see the owners of capital so nakedly betraying their worldview (diversification is all well and good for them, but employees owe infinite loyalty). I will think long and hard before ever working for a company where Scott is on the board. This part is particularly troubling: > One existing solution to the “dead equity” problem has been — and still can be — to make exceptions where appropriate for certain exiting employees. It's essentially an argument for cronyism. The people who most need equity extensions are those unlikely to have the connections and political savvy to get them. I strongly suspect such systems would work to further disadvantaged already disadvantaged groups.

zekevermillion 10y ago
Yes. We use options for equity comp b/c the grant is not a taxable event (if properly organized). It's not supposed to be a way to deprive terminated employees of their equity comp, which potentially is a large portion of the compensation of a venture-backed startup employee.
themartorana 10y ago
Couldn't agree more. If part of my compensation is equity, then I should get to keep it when I depart. If I don't, you're basically telling me I wasn't worth the compensation I was getting. Taking back shares is akin to a temper tantrum, and Scott's post really, really shows no respect for the engineers that make his companies worth any money at all. It also hyper-values people who can flog a Power Point presentation, whether or not those people end up contributing the lion's share of the engineering. It's a rather bald-faced admission of how employees are actually valued, and how distasteful compensating them is.

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zekevermillion 10y ago

Scott basically argues that there should be a 10-year cliff on vesting. That's what it means to price employees out of their equity comp if terminated early.

pfarnsworth 10y ago

This is a well thought out answer, and frankly embarrasses the response from the VC. Of course the VC wants to protect his own interests, he's just obfuscating it by pretending he's talking about "wealth transfer" and "fairness". What a bunch of BS, and I'll never work for a company that he is "advising". Who knows what sort of dirty tricks he'll play against the employees.

SeoxyS 10y ago

For young startups, I always recommend allowing Early Exercise. Put simply, it's the right by employees to exercise their options before they vest. The company retains a right to repurchase those options should the employee depart before they vest. This enables them to exercise them as soon as they're granted, which greatly reduces the tax burden in two ways: - First, the strike price and the value of the option are the same when they're granted, which means that the spread (i.e. the difference between exercise price and value of the options exercised which the IRS considers profit for AMT) is zero. Therefore, no taxes need to be paid. I've been stung by a 5-figure AMT tax bill on exercised options that were completely illiquid—all of which would've been avoided had I exercised early. - It starts the clock for long-term capital gains. You need to hold the actual stock for over 1 year to be taxed at capital gains rates instead of income tax rates. Federally, this can lower your tax rates from up to ~40% to ~20%. (would've been 15% pre-Obama!) In CA, for state taxes there is no distinction, so you'd still be paying income tax rates of ~10-13% Keep in mind, if you early exercise, that you must file an 83b election with the IRS within 30 days, or the tax consequences can be severe. (If you don't, you'd be taxed on the spread at the current option value every time some of your options vest.) Now, I think extended exercise windows are great too, and ideally option agreements would have both. I think generally, early exercise makes more sense for employees who join pre-Series-B, while extended exercise windows make more sense for later stage employees.

laurencerowe 10y ago

You can't pay rent or save for a mortgage downpayment with illiquid stock options. It takes something like $200-400K to get on the housing ladder in the Bay Area so the idea of putting it off for 8-10 years with no guarantee of success is already unattractive. To shackle yourself to a single company for the duration? Nuts. When did you last work anywhere for 8 years?

cloudjacker 10y ago

Man Silicon Valley companies are living in a parallel dimension! They collectively think they have the LUXURY to hire employees that are in love with their random idea And they collectively think that the employees have the LUXURY to play russian roulette with the compensation terms Let's address that, because these factors have are completely disjointed with the success of the company and the employees' INTEGRITY (instead of "aligned incentive") to deliver amazing products and code

genericpseudo 10y ago

The answer is clear – not easy, but clear; refuse to work with people who act in ways you find unethical. If Scott Kupor's position is a company's position, and the total package value (including salary, benefits, etc), isn't acceptable to you when valuing options at zero – and given you don't control the company, and they can fire you at any time, you have to – then they're on the list. Refuse to work with them and tell your friends. If you disapprove of his or A16Z's attitude, just don't accept investment from him. Let the market tell them they're wrong.

cpks 10y ago

I felt dirty reading the a16z post. Really dirty. They tried to phrase screwing over the employees for the investors as somehow employee-friendly.

ak2196 10y ago

Quora was definitely not the first startup to do 10 year exercise period, not by some margin. My Lime Wire stock options from 2000 had a 10 year exercise with a 6 year vesting schedule, no cliff and vesting every 3 months. Here's the proof: http://imgur.com/6eTUyui http://imgur.com/6eTUyui Adam's on the right track though. I just had to write a 6 figure check today to exercise my vested options at my current employer because of the 90 day clause. It makes me angry because the company's official stance is that the board wants to use stock options as an employee retention tool. I was fortunate enough to have had the cash but a lot of other people are not and there is no secondary market. So if you get fired or have to quit during a bad market you are basically screwed.

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snowwolf 10y ago

I understand where the 10 year exercise period came from and I can understand the arguments against it. A solution I haven't seen put forward is a compromise between the common 90 day window and the 10 year window, which is to have an exercise period equal to the amount of time you were an employee. This discourages people from bouncing around jobs collecting equity but gives a reasonable timeframe in which to exercise if you do want to leave after putting 5 years into growing the company.

mywittyname 10y ago
> This discourages people from bouncing around jobs collecting equity Vesting periods solve this problem.
- snowwolf 10y ago
  How does vesting solve that? Which would you rather have (giving a simple example of 1% options vested over 4 years) - 0.25% in 4 different companies or 1% in 1? This is essentially the argument against 10 year exercise windows - it allows exactly the above scenario.
  - mywittyname 10y ago
    If your vesting cliff is 1 year, then people who job hop after 8 months get nothing. Thus discouraging people from bouncing around to collect equity because there is a minimum tenure needed to collect. Just set the cliff to match your definition of "bouncing around jobs".