4 ms·

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

by 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.
- erichurkman 10y ago
  It's even worse when you consider AMT; sure, dropping $10k to buy your stock might be achievable, but if the FMV of those shares has gone up appreciable, you may find yourself in pain come tax day. (If your strike was $1/share, but the FMV is now $10/share, $9/share "gain" has to be considered as income for calculating your alternative minimum tax.)
  - ska 10y ago
    The tax burden is the primary problem, that is what all this discussion is really about.
    - x0x0 10y ago
      I dunno, I had to pay nearly $15k to exercise options and while I barely escaped amt issues, the money wasn't easy. And represented a 10% rebate on after-tax salary for the period I worked for that company.
      - ska 10y ago
        Sure, that happens. But it is a very different situation from the one where AMT (in the US, other jurisdictions have similar issues) makes it financially impossible to exercise your options.
bduerst 10y ago
Only assuming that the benefit gained from firing the employee the day before they vest outweighs the cost of bringing on a new employee. Which probably comes down to the position.
beat 10y ago
Firings in ways that reduce the options available to the fired employee are actually quite common practice. They just don't reduce it this much, which would have a lot of the obnoxious MBA types who take over middle-aged companies licking their chops. My spouse worked 13 years at what was a startup-with-traction when she started there. Last year, they were bought out (public-to-private by a hedge fund). A week later, she was sent packing, along with a lot of the "old-timers". That's not even getting out of options (although there was some of that). That's a simple purge. Purges happen. When you ask employees to commit to ten years to get anything equity-wise, you're exposing them to tremendous risk. You're hampering their careers. You're exposing them to the risk that you'll take a down round three years down the road and their options will get diluted into near-worthlessness. You're exposing them to the risk that your business will be wiped out by a competitor, or put on the road to obsolescence by technical advances and market trends. For a 50% bump? Screw that.
- x0x0 10y ago
  Or that the employees might have changing life circumstances any time in the 10-15 year future. Find a partner that changes your life needs around working life or living location, have a kid, need more or different housing, have medical issues, have family with medical issues, etc and you're sol. ps -- a16z funded a company that, as an A round, refused to disclose outstanding shares to value my option grant and was already on the brute force 15% of comp is bonus that you don't get if you aren't there in early April every year retention ("bonus") plan. It may be unjustified, but with some other stories I'm not a liberty to disclose, they seem very employee unfriendly.
  - beat 10y ago
    Most option plans are employee unfriendly. And "This incredibly employee-hostile clause will force us to be more honest with employees, which makes it employee-friendly" leaves a bad taste in my mouth. It might work as long as the original founders are in control. They will be in control ten years later, right? Right?
tedmiston 10y ago
> 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 Not if they want to keep a reputation in the community of good developers, where demand far exceeds supply.
- dtemp 10y ago
  Short of something "going viral", I feel like it's likely an individual ex-employee's negative experience with a company won't become widely known.
argonaut 10y ago
If a company fires you the day before you reach your vesting cliff, you can sue them for breach of contract, if you were performing well. Yes, you can sue them (and win, though you'd probably want to settle) even if your contract says they can fire you for any reason. On a separate note, it's the same underlying principle behind why people are wrong when they talk about the DAO's contract meaning that the hacker was allowed to steal. No judge is going to enforce a contract clause that allows you to steal. And if you were performing well but were fired right before your cliff, a judge can find that your employers were acting in bad faith, etc. The underlying principle is that contracts are subject to reasonable interpretations by judges. Your other point about getting yourself fired makes no sense (you're ignoring the cliff, then month to month vesting schedule that is typical).
rmc 10y ago
In places with actual employment law (like the EU), you can't just fire someone with no reason.

by devit 10y ago

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.

erichurkman 10y ago
It's even worse when you consider AMT; sure, dropping $10k to buy your stock might be achievable, but if the FMV of those shares has gone up appreciable, you may find yourself in pain come tax day. (If your strike was $1/share, but the FMV is now $10/share, $9/share "gain" has to be considered as income for calculating your alternative minimum tax.)
- ska 10y ago
  The tax burden is the primary problem, that is what all this discussion is really about.
  - x0x0 10y ago
    I dunno, I had to pay nearly $15k to exercise options and while I barely escaped amt issues, the money wasn't easy. And represented a 10% rebate on after-tax salary for the period I worked for that company.
    - ska 10y ago
      Sure, that happens. But it is a very different situation from the one where AMT (in the US, other jurisdictions have similar issues) makes it financially impossible to exercise your options.

bduerst 10y ago

Only assuming that the benefit gained from firing the employee the day before they vest outweighs the cost of bringing on a new employee. Which probably comes down to the position.

beat 10y ago

Firings in ways that reduce the options available to the fired employee are actually quite common practice. They just don't reduce it this much, which would have a lot of the obnoxious MBA types who take over middle-aged companies licking their chops. My spouse worked 13 years at what was a startup-with-traction when she started there. Last year, they were bought out (public-to-private by a hedge fund). A week later, she was sent packing, along with a lot of the "old-timers". That's not even getting out of options (although there was some of that). That's a simple purge. Purges happen. When you ask employees to commit to ten years to get anything equity-wise, you're exposing them to tremendous risk. You're hampering their careers. You're exposing them to the risk that you'll take a down round three years down the road and their options will get diluted into near-worthlessness. You're exposing them to the risk that your business will be wiped out by a competitor, or put on the road to obsolescence by technical advances and market trends. For a 50% bump? Screw that.

x0x0 10y ago
Or that the employees might have changing life circumstances any time in the 10-15 year future. Find a partner that changes your life needs around working life or living location, have a kid, need more or different housing, have medical issues, have family with medical issues, etc and you're sol. ps -- a16z funded a company that, as an A round, refused to disclose outstanding shares to value my option grant and was already on the brute force 15% of comp is bonus that you don't get if you aren't there in early April every year retention ("bonus") plan. It may be unjustified, but with some other stories I'm not a liberty to disclose, they seem very employee unfriendly.
- beat 10y ago
  Most option plans are employee unfriendly. And "This incredibly employee-hostile clause will force us to be more honest with employees, which makes it employee-friendly" leaves a bad taste in my mouth. It might work as long as the original founders are in control. They will be in control ten years later, right? Right?

tedmiston 10y ago

> 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 Not if they want to keep a reputation in the community of good developers, where demand far exceeds supply.

dtemp 10y ago
Short of something "going viral", I feel like it's likely an individual ex-employee's negative experience with a company won't become widely known.

argonaut 10y ago

If a company fires you the day before you reach your vesting cliff, you can sue them for breach of contract, if you were performing well. Yes, you can sue them (and win, though you'd probably want to settle) even if your contract says they can fire you for any reason. On a separate note, it's the same underlying principle behind why people are wrong when they talk about the DAO's contract meaning that the hacker was allowed to steal. No judge is going to enforce a contract clause that allows you to steal. And if you were performing well but were fired right before your cliff, a judge can find that your employers were acting in bad faith, etc. The underlying principle is that contracts are subject to reasonable interpretations by judges. Your other point about getting yourself fired makes no sense (you're ignoring the cliff, then month to month vesting schedule that is typical).

rmc 10y ago

In places with actual employment law (like the EU), you can't just fire someone with no reason.