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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 commit

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.
mahyarm 10y ago
Founders are committed, but usually have better cash out options than employees do in the middle of the process. There are founders get millions of dollars during later funding rounds to incentivize them to not take early buy out options by investors. They also have no AMT worries, get long term capital gains taxation, have less restrictions on their stock and better access to investors who would like to buy a portion of their stock. The reason why it's not as well known is they tend not to tell anyone, including their own employees, that they cashed out a little bit.
danielweber 10y ago
If you aren't actively working for the company, and maybe even if you are, it's trivial for your options to end up diluted out to crap by any random funding event that might happen. I raised this issue once at a company I was at and got the response that "they weren't helping move the company forward any more." Assume your options are 0.
- jeffdavis 10y ago
  That's another great point: if you invest more time at a company, and have no real control, then you are out of luck when the liquidation actually happens. Startups are faith based to some extent, and it's unwise to put so much time on pure faith in a business relationship.
Retric 10y ago
The real issue is 10 year vesting schedules increases your odds of success. Sure, it might have a tiny negative impact on your final returns but 'winning' is vastly more important than marginal gains on a win.
jammur 10y ago
> Founders are committed and in for the long haul, and either make a lot of money or none. This used to be true, but I don't believe it is any longer. It's become fairly common for founders to do secondary sales and cash out some of their equity early on. For example, the founders of Secret famously sold $6M of their stock 6 months after starting the company. Sometimes employees have access to those sales, but in many cases they don't.

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.

mahyarm 10y ago

Founders are committed, but usually have better cash out options than employees do in the middle of the process. There are founders get millions of dollars during later funding rounds to incentivize them to not take early buy out options by investors. They also have no AMT worries, get long term capital gains taxation, have less restrictions on their stock and better access to investors who would like to buy a portion of their stock. The reason why it's not as well known is they tend not to tell anyone, including their own employees, that they cashed out a little bit.

danielweber 10y ago

If you aren't actively working for the company, and maybe even if you are, it's trivial for your options to end up diluted out to crap by any random funding event that might happen. I raised this issue once at a company I was at and got the response that "they weren't helping move the company forward any more." Assume your options are 0.

jeffdavis 10y ago
That's another great point: if you invest more time at a company, and have no real control, then you are out of luck when the liquidation actually happens. Startups are faith based to some extent, and it's unwise to put so much time on pure faith in a business relationship.

Retric 10y ago

The real issue is 10 year vesting schedules increases your odds of success. Sure, it might have a tiny negative impact on your final returns but 'winning' is vastly more important than marginal gains on a win.

jammur 10y ago

> Founders are committed and in for the long haul, and either make a lot of money or none. This used to be true, but I don't believe it is any longer. It's become fairly common for founders to do secondary sales and cash out some of their equity early on. For example, the founders of Secret famously sold $6M of their stock 6 months after starting the company. Sometimes employees have access to those sales, but in many cases they don't.