5 ms·

Hi, thanks for the lucid interview. Why the 3 year minimum service period to extend the exercise window? > The main point is that if someone decides to not exe

by abalone 10y ago

Hi, thanks for the lucid interview. Why the 3 year minimum service period to extend the exercise window? > The main point is that if someone decides to not exercise and/or is not able to exercise and they leave the company, their options typically have a three-month expiration. So, unless the person exercises them within three months after leaving, they lose those options, which is kind of crazy to think about because the person has already invested time, already contributed to the company, already meaningfully helped the business. > So at Gusto... everyone that has stayed here at least three years, their expiration changes from three months to ten years. Doesn't everything just said about it being "crazy" to lose your options apply if you leave at 2.5 years? You've "already invested time, already contributed..." Why should you lose vested options, ever? I asked Adam D'Angelo about minimum service periods and he responded that it'd be more transparent to have a longer cliff. My perspective is that backloaded vesting would be closer to the probable intended effect here (a barrier to leaving early, but you don't lose everything). Put another way... Aren't "minimum service periods" exploiting opaqueness to make them seem like friendlier terms than longer cliffs or backloaded vesting?

serge2k 10y ago
> The thought process is that if hypothetically, an employee has to move home to live with their family or they’re getting married to a childhood sweetheart across the country, these are all things that are great decisions that should not be punished Unless you have only been at the company only 2 years 11 months. Then you have earned nothing. Don't let the door hit you on the way out. > My perspective is that backloaded vesting would be closer to the probable intended effect here (a barrier to leaving early, but you don't lose everything). Why is the approach of a cliff followed by getting a small amount of your stock every month afterwards not sufficient?
- abalone 10y ago
  > Why is the approach of a cliff followed by getting a small amount of your stock every month afterwards not sufficient? I think it is. My point is either a longer cliff or backloaded vesting would be a more transparent replacement for "90 day exercise window for X years, 10 year window after that". What you may not realize is that under the 90 day exercise window term, you don't actually "get" a small amount of stock every month. But that's exactly what most people think happens. In truth, you may lose it all. It is clearer to say "vesting = you get it", and then spell out the vesting terms clearly and directly. If you think people should actually be able to walk with 20%-25% of their grant after 1 year, like what their vesting schedule implies, then cool. If you think people should actually stay longer than that like what the 90 day rule kind of enforces as a side effect, then ok, no judgement, but make it transparent. Call it a multi-year cliff or a 10/20/30/40 vesting schedule, whatever clearly states the expectations. But "vesting" should always mean "you get it".
  - hkmurakami 10y ago
    Well if you vest, then you do "get it". But you vest options, which is not shares. You "get" the option to buy shares in the company at $X strike price. The confusion seems to lie more in ISOs vs RSUs (or just plain equity, which is what most people have exposure to via the public market), rather than what "vesting" means. The problem is that vesting to most will inaccurately imply "getting" something they are not.
    - teej 10y ago
      A major difference between a 3 month window and a 10 month window is that with the former, you "get" to purchase lottery tickets. With the latter you have massively reduced downside risk.
    - abalone 10y ago
      You are arguing technical details when the issue is one of exploiting laypeoples' misunderstanding of technical details. It's not about confusing options for shares. It's confusion about how the 90 day window works. It is not at all obvious that the tax consequences may be many times greater than the strike price, resulting in you losing your vested options. This has been a surprise for many otherwise smart people. If you replaced it with more transparent terms, such as a "cliff that goes all the way to the IPO" or a heavily backloaded vesting schedule, I'd say most would consider it a below-market offer, even though it's roughly comparable. That's a reflection of the opacity and poor understanding of the standard terms.
terravion 10y ago
This is a really tough policy to get right because there is a continuum of cases. At one end, someone has vested shares and is pushed out for being harmful to the company. At the other you have a valued loyal employee that is going to business school for two years and hopefully coming back. It is a no-brainer that the employee going to school should get the exercise period extended--but if the toxic employee doesn't want to risk cash, why should the staying employees take dilution on what was probably unhelpful service? It is really hard to make a contract that fully reflects what's fair. I think the thing that gets missed a lot in these discussions is that just because default docs are super company favorable (i.e. assuming the former rather than the latter), in the opposite case one can make an exception.
- toomuchtodo 10y ago
  > It is a no-brainer that the employee going to school should get the exercise period extended--but if the toxic employee doesn't want to risk cash, why should the staying employees take dilution on what was probably unhelpful service? Because in both cases, they earned their options. You can't take back their salary compensation, why should you be able to take back their options? > It is really hard to make a contract that fully reflects what's fair. No, it isn't. If you've earned your compensation, you have earned it. Unless you mean its difficult to write a contract where a company can weasel out of their obligations when its suits their purposes; I would agree with that.
  - beambot 10y ago
    > they earned their options Yes, and that option expires in 3 months after departing... In the same way that publicly traded stock options (ie calls) typically have expiration dates. Part of the conflict here is that "options" aren't "shares" -- the option, including all terms (such as execution windows) are what is earned. Everything is known upfront. If you wanted comp to be around shares, then just issue shares via RSPA and deal with the cap table consequences and extra legal wrangling. This entire "problem" is caused by tax code: you owe the IRS on gains from option conversion, even though the underlying asset is entirely illiquid and frequently non-transferrable. Sounds like a "real" solution is to lobby for tax code changes. EDIT: to be clear... I'm not saying I agree with short expirations after departure. But there needs to be a clear distinction between shares, options, and 'intent'. Clearly the existing two ways of comp are lacking since there are either tax consequences (options) or out of pocket employee expenses to purchase (shares).

by abalone 10y ago

serge2k 10y ago

> The thought process is that if hypothetically, an employee has to move home to live with their family or they’re getting married to a childhood sweetheart across the country, these are all things that are great decisions that should not be punished Unless you have only been at the company only 2 years 11 months. Then you have earned nothing. Don't let the door hit you on the way out. > My perspective is that backloaded vesting would be closer to the probable intended effect here (a barrier to leaving early, but you don't lose everything). Why is the approach of a cliff followed by getting a small amount of your stock every month afterwards not sufficient?

abalone 10y ago
> Why is the approach of a cliff followed by getting a small amount of your stock every month afterwards not sufficient? I think it is. My point is either a longer cliff or backloaded vesting would be a more transparent replacement for "90 day exercise window for X years, 10 year window after that". What you may not realize is that under the 90 day exercise window term, you don't actually "get" a small amount of stock every month. But that's exactly what most people think happens. In truth, you may lose it all. It is clearer to say "vesting = you get it", and then spell out the vesting terms clearly and directly. If you think people should actually be able to walk with 20%-25% of their grant after 1 year, like what their vesting schedule implies, then cool. If you think people should actually stay longer than that like what the 90 day rule kind of enforces as a side effect, then ok, no judgement, but make it transparent. Call it a multi-year cliff or a 10/20/30/40 vesting schedule, whatever clearly states the expectations. But "vesting" should always mean "you get it".
- hkmurakami 10y ago
  Well if you vest, then you do "get it". But you vest options, which is not shares. You "get" the option to buy shares in the company at $X strike price. The confusion seems to lie more in ISOs vs RSUs (or just plain equity, which is what most people have exposure to via the public market), rather than what "vesting" means. The problem is that vesting to most will inaccurately imply "getting" something they are not.
  - teej 10y ago
    A major difference between a 3 month window and a 10 month window is that with the former, you "get" to purchase lottery tickets. With the latter you have massively reduced downside risk.
  - abalone 10y ago
    You are arguing technical details when the issue is one of exploiting laypeoples' misunderstanding of technical details. It's not about confusing options for shares. It's confusion about how the 90 day window works. It is not at all obvious that the tax consequences may be many times greater than the strike price, resulting in you losing your vested options. This has been a surprise for many otherwise smart people. If you replaced it with more transparent terms, such as a "cliff that goes all the way to the IPO" or a heavily backloaded vesting schedule, I'd say most would consider it a below-market offer, even though it's roughly comparable. That's a reflection of the opacity and poor understanding of the standard terms.

terravion 10y ago

This is a really tough policy to get right because there is a continuum of cases. At one end, someone has vested shares and is pushed out for being harmful to the company. At the other you have a valued loyal employee that is going to business school for two years and hopefully coming back. It is a no-brainer that the employee going to school should get the exercise period extended--but if the toxic employee doesn't want to risk cash, why should the staying employees take dilution on what was probably unhelpful service? It is really hard to make a contract that fully reflects what's fair. I think the thing that gets missed a lot in these discussions is that just because default docs are super company favorable (i.e. assuming the former rather than the latter), in the opposite case one can make an exception.

toomuchtodo 10y ago
> It is a no-brainer that the employee going to school should get the exercise period extended--but if the toxic employee doesn't want to risk cash, why should the staying employees take dilution on what was probably unhelpful service? Because in both cases, they earned their options. You can't take back their salary compensation, why should you be able to take back their options? > It is really hard to make a contract that fully reflects what's fair. No, it isn't. If you've earned your compensation, you have earned it. Unless you mean its difficult to write a contract where a company can weasel out of their obligations when its suits their purposes; I would agree with that.
- beambot 10y ago
  > they earned their options Yes, and that option expires in 3 months after departing... In the same way that publicly traded stock options (ie calls) typically have expiration dates. Part of the conflict here is that "options" aren't "shares" -- the option, including all terms (such as execution windows) are what is earned. Everything is known upfront. If you wanted comp to be around shares, then just issue shares via RSPA and deal with the cap table consequences and extra legal wrangling. This entire "problem" is caused by tax code: you owe the IRS on gains from option conversion, even though the underlying asset is entirely illiquid and frequently non-transferrable. Sounds like a "real" solution is to lobby for tax code changes. EDIT: to be clear... I'm not saying I agree with short expirations after departure. But there needs to be a clear distinction between shares, options, and 'intent'. Clearly the existing two ways of comp are lacking since there are either tax consequences (options) or out of pocket employee expenses to purchase (shares).