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I've been making similar points too, it's actually shocking how founders and VCs are convinced that their way is the absolute correct way Instead of pointing o

I've been making similar points too, it's actually shocking how founders and VCs are convinced that their way is the absolute correct way Instead of pointing out how stock options are primarily a reaction to accounting and taxation changes over the years , or the conflicts of interest in giving a more objective answer There are plenty of financial products possible that will tread the line of compensating employees for their risk and the lack of money and liquidity startups have

techterrier 10y ago
Do you have any examples of these products?
- beachstartup 10y ago
  yeah, cash money. if a startup has VC's and lawyers sitting around dreaming up and codifying a complicated and rather arbitrary set of rules to protect their investment from the little people, there's enough cash floating around to pay the employees a fair salary, they just don't want to. options are fool's gold, plain and simple. you are either a founder, or a venture capitalist, or lawyer, or you should expect a zero or negative value from this silly charade. if you can't tell which person sitting at the poker table is the sucker...
  - zaroth 10y ago
    >>> There are plenty of financial products possible that will tread the line of compensating employees for their risk and the lack of money and liquidity startups have >> Do you have any examples of these products? > yeah, cash money. Sorry, I don't follow. The standard term sheets available today can reduce the cost of issuing options or RSUs to a few thousand dollars. It's actually a very straightforward and simple process to get stared, and has to be done anyway to at least get shares into the Founder's hands on Day 1. So, yes, there are startup legal expenses, but you are paying it no matter what, adding an option pool up front does not really cost any extra.
- cloudjacker 10y ago
  I know of a german financial product, I keep forgetting the name of it, it is a hybrid of a stock and a bond, but it isn't what is typically considered a convertible note. But basically it is granted at no cost to the employee, offers coupon payments, and matures at a point in time for the full cash value. In the US, this would be OTC product limiting its utility much like every other kind of financial product that the government is 'protecting us' from. But it wouldn't be impossible to offer to employees. For startups, the coupon payments would be relatively small, and refresher grants can still be done. If the startup goes bust, it goes bust. Provisions to make it callable can be implemented so in a bigger liquidity event valuing the company higher, employees can still get a lot of liquidity early, and it would likely be senior to common stock. Anyway, I'll try to get the name of it. It was a lot more counterintuitive than hybrid bond. edit: genussscheine , or participation certificate. Exempt from securities regulation in germany, but would be OTC in US.
  - qazwsxedcyco 10y ago
    Having been involved in a startup which offered participation certificates, I'll say this: Stay far, far away. Nope, even further than that. Participation certificates are derivatives of an underlying, either a separate share class, or even worse, options on a separate share class. Startup equity is hard enough to value outright. Derivatives on customized terms in a market which is by definition highly illiquid? No thanks. (It doesn't help when the terms of both shareholder agreement and participation certificate agreement are slanted in favour of the early employees/founders by so much that the participation certificates are worthless on close inspection, but that's a different rant.)
st3v3r 10y ago
Well, if your goal is not to compensate employees, but to get all of the money, their way is the correct way.

techterrier 10y ago

Do you have any examples of these products?

beachstartup 10y ago
yeah, cash money. if a startup has VC's and lawyers sitting around dreaming up and codifying a complicated and rather arbitrary set of rules to protect their investment from the little people, there's enough cash floating around to pay the employees a fair salary, they just don't want to. options are fool's gold, plain and simple. you are either a founder, or a venture capitalist, or lawyer, or you should expect a zero or negative value from this silly charade. if you can't tell which person sitting at the poker table is the sucker...
- zaroth 10y ago
  >>> There are plenty of financial products possible that will tread the line of compensating employees for their risk and the lack of money and liquidity startups have >> Do you have any examples of these products? > yeah, cash money. Sorry, I don't follow. The standard term sheets available today can reduce the cost of issuing options or RSUs to a few thousand dollars. It's actually a very straightforward and simple process to get stared, and has to be done anyway to at least get shares into the Founder's hands on Day 1. So, yes, there are startup legal expenses, but you are paying it no matter what, adding an option pool up front does not really cost any extra.
cloudjacker 10y ago
I know of a german financial product, I keep forgetting the name of it, it is a hybrid of a stock and a bond, but it isn't what is typically considered a convertible note. But basically it is granted at no cost to the employee, offers coupon payments, and matures at a point in time for the full cash value. In the US, this would be OTC product limiting its utility much like every other kind of financial product that the government is 'protecting us' from. But it wouldn't be impossible to offer to employees. For startups, the coupon payments would be relatively small, and refresher grants can still be done. If the startup goes bust, it goes bust. Provisions to make it callable can be implemented so in a bigger liquidity event valuing the company higher, employees can still get a lot of liquidity early, and it would likely be senior to common stock. Anyway, I'll try to get the name of it. It was a lot more counterintuitive than hybrid bond. edit: genussscheine , or participation certificate. Exempt from securities regulation in germany, but would be OTC in US.
- qazwsxedcyco 10y ago
  Having been involved in a startup which offered participation certificates, I'll say this: Stay far, far away. Nope, even further than that. Participation certificates are derivatives of an underlying, either a separate share class, or even worse, options on a separate share class. Startup equity is hard enough to value outright. Derivatives on customized terms in a market which is by definition highly illiquid? No thanks. (It doesn't help when the terms of both shareholder agreement and participation certificate agreement are slanted in favour of the early employees/founders by so much that the participation certificates are worthless on close inspection, but that's a different rant.)

st3v3r 10y ago

Well, if your goal is not to compensate employees, but to get all of the money, their way is the correct way.