6 ms·

The liquidity what if? Our alternative to employee options/equity grants

42 points by paulrosenzweig 10y ago

chollida1 10y ago
Kudos for trying to think outside the box here. I couldn't see any explanation on how this idea compares to one of the biggest issue with options, namely leaving the company before it gets sold. So say I work at basecamp for 5 years, and then leave to work somewhere else. What happens to my 5 units?
- Animats 10y ago
  Looks like you lose them. "It should reward current employees. This was about who was at the company at the time of a sale/IPO, not people who worked here years ago."
  - dshuang 10y ago
    This plan seems more similar to a profit sharing plan, but the profit in this case is 0 until a sale of the business occurs.
- iansane 10y ago
  The system aims to reward current employees not past ones, so it looks like they get nothing.
w1ntermute 10y ago
I think it makes a lot more sense to give lower-level employees yearly performance bonuses than illiquid equity. Lower-level employees generally don't have sufficient information or perspective about the company's performance or long-term outlook to make an informed decision about exercising illiquid options. As a result, most low-level employees value illiquid equity at 0 these days. On the other hand, their individual, short-term performance can be evaluated according to objective standards much more easily than a similar evaluation can be made for management. Asking an employee being promoted to management to give up the possibility of future performance bonuses in return for equity is also an effective way of making sure management is aligned with the long-term success of the company.
new299 10y ago
If you have no intension of every going public or selling the company do you still fall inside the current definition of a startup? It seems unfair, if the founders are able to sell their equity privately. Overall, in a startup my view is that equity offsets the risk that the company might just disappear. You're taking on that risk, you should get to keep that equity compensation (even if you leave). From the employers point of view, equity should help motivate staff so they don't just consider their own job security, but overall company success. If you're never going to IPO, perhaps do that via dividends? Or other profit sharing mechanism.
- kareemm 10y ago
  Would you really call Basecamp a startup? They've been around since 2003. They're more precisely a mature/ing software company.
- Tharkun 10y ago
  Why is this unfair? Since when do employees feel entitled to own a part of the company -- but only if it goes well, right? Wouldn't it be more fair if they had to pay up if the company went under? Misplaced sense of entitlement, this. You work for a company, they pay you. What the owners/founders do with it is up to them. And if you think this is unfair, then you should probably start your own -- with all the risks, hardships and possible benefits that come with it.
  - new299 10y ago
    Company 1: Established large software company with healthy market Company 2: Startup with 1.5 years runway. If the pay is the same, equity compensates for lack of job security in company 2.
ww520 10y ago
For non-profitable companies, option/equity/eventual-bonus like this one are good ways to dingle the carrot to motivate people. For profitable companies that have no plan to get liquidated, an annual dividend or bonus is fairer.
birken 10y ago
This is a cute system and I'm not going to be against a company having a secret bonus that might give employees free money. But c'mon, don't write a blog post about how this is great. This system is much worse than equity. This is basically like a lottery that might give extra money to employees lucky enough to be presently employed in case the magic numbers hit. The whole point of equity is to incentivize people to create value for the company and give them upside in case the company does grow a lot (how people personally value equity is another story, but the incentive is the same). This plan doesn't do that at all... 1) The company says it has no plans to exit so there really isn't an incentive for an employee to think their contributions might return them upside. 2) The 5% figure for all employees is tiny. A growing startup might give away 5-10% in equity, per year, to employees via stock grants. This is 5% total. Every year that goes by employees should own more of the company because they are doing more of the work, a fixed number makes no sense. 3) Past employees who might have made significant contributions and created tons of value get nothing. Do you think if any founders leave they are giving up their real equity? > it’s a great alternative to the organizational complexity of option grants, acceleration, strike prices, conversion into shares, private markets vs. public markets, dilution by outside parties, partial vesting, etc. So no, it isn't a great alternative to equity, it does completely different things. It is a random bonus that nobody can expect which is loosely correlated with whatever value they may have contributed. This is certainly better than no bonus, but maybe is worse than a good bonus (though they might also have other bonuses, I have no idea).
- williamscales 10y ago
  Well-put. I'll only add that even with options, 3) Past employees who might have made significant contributions and created tons of value get nothing is an issue because ISO options expire at most 90 days after termination. Some companies have begun to provide terms that allow employees to exercise their options for much longer (7 years in Pinterest's case I believe), but this is far from a universally accepted practice.
  - birken 10y ago
    Yes there are a bunch of companies with extended exercise windows now [1]! I'm a huge proponent of extended exercise windows and would personally never work at a company that didn't offer that. However, even ISOs with 90 day expiry periods are way better than this. If you are presently employed at the company at the time of IPO/acquisition then you don't have any issue with the 90 day window, and if you do run into the 90 day window at least you have the choice to exercise them or not. And if early exercise is available then you could exercise options early on when the company is worth very little and then not have to worry about the 90 day expiry period later. 1: https://github.com/holman/extended-exercise-windows https://github.com/holman/extended-exercise-windows
pm 10y ago
I've always been curious about trying a system that rewarded people for the value they created now, instead of owning shares/options and waiting for a liquidity event. Bonuses are the traditional option I guess, but is there anything else? How else might you distribute a portion of funds earned by the company in a meaningful manner to employees?
- EpicEng 10y ago
  Salary?
  - moxious 10y ago
    All forms of cash comp are things startups will want to minimize for burn rate reasons. Also, startups are risky and giving out lots of cash comp takes employee risk out of the game, which is arguably undesirable.
  - pm 10y ago
    Apologies, I meant on top of the usual wages/salary.
- williamscales 10y ago
  Some companies have a profit-share program where they pay a percentage of the profit earned that year to employees in addition to salaries.
  - moxious 10y ago
    That's great but only for profitable companies which doesn't describe most startups. The other reason they usually use equity is because they're relatively cash poor
    - williamscales 10y ago
      The company I work for has in past years paid a bonus based on metrics that try to approximately characterize the value being created at the company. This could be considered an alternative to profit-share for companies that have no profit.
ccostes 10y ago
I like the idea as a way to distribute gains to employees. Wondering why the units are limited to integer years rather than allowing constant accrual up to the 5 units. Additionally, it seems unfair that employee units go immediately to 0 upon leaving, rather than some sort of decay. They're saying that employees contributed to the success and deserve a bonus, why would that contribution be worth nothing the minute they leave? Something like an exponential decay on the units seems much more equitable.
- slyall 10y ago
  Subject to the problems above I much prefer this system to one of giving out options. It is nice and transparent and would give me a bit more confidence in actually getting a payout than the more usual options route. Having said that I did work for a company that did something like this and didn't follow though (with creating the trust etc). When they eventually sold they made employees a cash offer to sign away they rights. Money was equivalent to a couple of months pay which is more than I've made on any other company share incentive..
aub3bhat 10y ago
This is an unbelievably bad plan to the point of sending a strong negative signal to former employees or any potential hires. Sure a typical option plan is loaded with cliff, restrictions on sale, vesting/expiration but at least end of the day you end up owning a "share" of the company however unpreferential it might be. Something which has at least some form of legal precedent. This on the other hand riducules the intelligence of an average employee and is equivalent to playing a near-sociopathic trick where everyone is "equal" so you better not ask for higher share or salary. To comapre this in same light as options/RSU or even bonuses is an insult.
adrienne 10y ago
Wages, compensation in general, and screwing your employees over are very political topics. Isn't that supposed to be off-limits this week?
substack 10y ago
Another alternative that is not often discussed in technology circles is to form cooperative businesses where workers wholly own the business and make democratic decisions about its governance. Why should the workers, who produce the value, not be paid according to their contributions? Why do we need management to tell us what to do and siphon off the surplus profits in the process?
- dmichulke 10y ago
  If the workers are doing everything, why don't they found the company themselves and get rich thereby? If it were that easy, surely everybody would be doing it and we would have only self-employment. Reasons are numerous but risk aversion (and lack of willingness to deal with consequences in case of a negative outcome) is probably one of the biggest among them.
rajacombinator 10y ago
Yea this isn't really clever at all and doesn't align incentives much. I doubt they pay well to make up for it either.
rdlecler1 10y ago
Even if they don't decide to go public, equity can pay dividends. Maybe it was just me but it felt like the founders are just trying maximize their upside by dangling a small bone for employees. But let'a not forget who this is benefiting. I'd love to hear from some Basecampers on this.
tdb7893 10y ago
Maybe I'm not familiar with how equity works but this seems to have all sorts of weird properties like how after 5 years the amount of money you would get starts to decrease (assuming that the total number of units rises, which in this system it is almost assured to), the amount of money you get decreases as more people join, and if you leave you get nothing at all. The cap on what percentage employees get seems weird to me and it really messes with the math in a way that seems to screw the employees.

Kudos for trying to think outside the box here. I couldn't see any explanation on how this idea compares to one of the biggest issue with options, namely leaving the company before it gets sold. So say I work at basecamp for 5 years, and then leave to work somewhere else. What happens to my 5 units?

Animats 10y ago
Looks like you lose them. "It should reward current employees. This was about who was at the company at the time of a sale/IPO, not people who worked here years ago."
- dshuang 10y ago
  This plan seems more similar to a profit sharing plan, but the profit in this case is 0 until a sale of the business occurs.
iansane 10y ago
The system aims to reward current employees not past ones, so it looks like they get nothing.

w1ntermute 10y ago

I think it makes a lot more sense to give lower-level employees yearly performance bonuses than illiquid equity. Lower-level employees generally don't have sufficient information or perspective about the company's performance or long-term outlook to make an informed decision about exercising illiquid options. As a result, most low-level employees value illiquid equity at 0 these days. On the other hand, their individual, short-term performance can be evaluated according to objective standards much more easily than a similar evaluation can be made for management. Asking an employee being promoted to management to give up the possibility of future performance bonuses in return for equity is also an effective way of making sure management is aligned with the long-term success of the company.

new299 10y ago

If you have no intension of every going public or selling the company do you still fall inside the current definition of a startup? It seems unfair, if the founders are able to sell their equity privately. Overall, in a startup my view is that equity offsets the risk that the company might just disappear. You're taking on that risk, you should get to keep that equity compensation (even if you leave). From the employers point of view, equity should help motivate staff so they don't just consider their own job security, but overall company success. If you're never going to IPO, perhaps do that via dividends? Or other profit sharing mechanism.

kareemm 10y ago
Would you really call Basecamp a startup? They've been around since 2003. They're more precisely a mature/ing software company.
Tharkun 10y ago
Why is this unfair? Since when do employees feel entitled to own a part of the company -- but only if it goes well, right? Wouldn't it be more fair if they had to pay up if the company went under? Misplaced sense of entitlement, this. You work for a company, they pay you. What the owners/founders do with it is up to them. And if you think this is unfair, then you should probably start your own -- with all the risks, hardships and possible benefits that come with it.
- new299 10y ago
  Company 1: Established large software company with healthy market Company 2: Startup with 1.5 years runway. If the pay is the same, equity compensates for lack of job security in company 2.

ww520 10y ago

For non-profitable companies, option/equity/eventual-bonus like this one are good ways to dingle the carrot to motivate people. For profitable companies that have no plan to get liquidated, an annual dividend or bonus is fairer.

birken 10y ago

This is a cute system and I'm not going to be against a company having a secret bonus that might give employees free money. But c'mon, don't write a blog post about how this is great. This system is much worse than equity. This is basically like a lottery that might give extra money to employees lucky enough to be presently employed in case the magic numbers hit. The whole point of equity is to incentivize people to create value for the company and give them upside in case the company does grow a lot (how people personally value equity is another story, but the incentive is the same). This plan doesn't do that at all... 1) The company says it has no plans to exit so there really isn't an incentive for an employee to think their contributions might return them upside. 2) The 5% figure for all employees is tiny. A growing startup might give away 5-10% in equity, per year, to employees via stock grants. This is 5% total. Every year that goes by employees should own more of the company because they are doing more of the work, a fixed number makes no sense. 3) Past employees who might have made significant contributions and created tons of value get nothing. Do you think if any founders leave they are giving up their real equity? > it’s a great alternative to the organizational complexity of option grants, acceleration, strike prices, conversion into shares, private markets vs. public markets, dilution by outside parties, partial vesting, etc. So no, it isn't a great alternative to equity, it does completely different things. It is a random bonus that nobody can expect which is loosely correlated with whatever value they may have contributed. This is certainly better than no bonus, but maybe is worse than a good bonus (though they might also have other bonuses, I have no idea).

williamscales 10y ago
Well-put. I'll only add that even with options, 3) Past employees who might have made significant contributions and created tons of value get nothing is an issue because ISO options expire at most 90 days after termination. Some companies have begun to provide terms that allow employees to exercise their options for much longer (7 years in Pinterest's case I believe), but this is far from a universally accepted practice.
- birken 10y ago
  Yes there are a bunch of companies with extended exercise windows now [1]! I'm a huge proponent of extended exercise windows and would personally never work at a company that didn't offer that. However, even ISOs with 90 day expiry periods are way better than this. If you are presently employed at the company at the time of IPO/acquisition then you don't have any issue with the 90 day window, and if you do run into the 90 day window at least you have the choice to exercise them or not. And if early exercise is available then you could exercise options early on when the company is worth very little and then not have to worry about the 90 day expiry period later. 1: https://github.com/holman/extended-exercise-windows https://github.com/holman/extended-exercise-windows

pm 10y ago

I've always been curious about trying a system that rewarded people for the value they created now, instead of owning shares/options and waiting for a liquidity event. Bonuses are the traditional option I guess, but is there anything else? How else might you distribute a portion of funds earned by the company in a meaningful manner to employees?

EpicEng 10y ago
Salary?
- moxious 10y ago
  All forms of cash comp are things startups will want to minimize for burn rate reasons. Also, startups are risky and giving out lots of cash comp takes employee risk out of the game, which is arguably undesirable.
- pm 10y ago
  Apologies, I meant on top of the usual wages/salary.
williamscales 10y ago
Some companies have a profit-share program where they pay a percentage of the profit earned that year to employees in addition to salaries.
- moxious 10y ago
  That's great but only for profitable companies which doesn't describe most startups. The other reason they usually use equity is because they're relatively cash poor
  - williamscales 10y ago
    The company I work for has in past years paid a bonus based on metrics that try to approximately characterize the value being created at the company. This could be considered an alternative to profit-share for companies that have no profit.

ccostes 10y ago

I like the idea as a way to distribute gains to employees. Wondering why the units are limited to integer years rather than allowing constant accrual up to the 5 units. Additionally, it seems unfair that employee units go immediately to 0 upon leaving, rather than some sort of decay. They're saying that employees contributed to the success and deserve a bonus, why would that contribution be worth nothing the minute they leave? Something like an exponential decay on the units seems much more equitable.

slyall 10y ago
Subject to the problems above I much prefer this system to one of giving out options. It is nice and transparent and would give me a bit more confidence in actually getting a payout than the more usual options route. Having said that I did work for a company that did something like this and didn't follow though (with creating the trust etc). When they eventually sold they made employees a cash offer to sign away they rights. Money was equivalent to a couple of months pay which is more than I've made on any other company share incentive..

aub3bhat 10y ago

This is an unbelievably bad plan to the point of sending a strong negative signal to former employees or any potential hires. Sure a typical option plan is loaded with cliff, restrictions on sale, vesting/expiration but at least end of the day you end up owning a "share" of the company however unpreferential it might be. Something which has at least some form of legal precedent. This on the other hand riducules the intelligence of an average employee and is equivalent to playing a near-sociopathic trick where everyone is "equal" so you better not ask for higher share or salary. To comapre this in same light as options/RSU or even bonuses is an insult.

adrienne 10y ago

Wages, compensation in general, and screwing your employees over are very political topics. Isn't that supposed to be off-limits this week?

substack 10y ago

Another alternative that is not often discussed in technology circles is to form cooperative businesses where workers wholly own the business and make democratic decisions about its governance. Why should the workers, who produce the value, not be paid according to their contributions? Why do we need management to tell us what to do and siphon off the surplus profits in the process?

dmichulke 10y ago
If the workers are doing everything, why don't they found the company themselves and get rich thereby? If it were that easy, surely everybody would be doing it and we would have only self-employment. Reasons are numerous but risk aversion (and lack of willingness to deal with consequences in case of a negative outcome) is probably one of the biggest among them.

rajacombinator 10y ago

Yea this isn't really clever at all and doesn't align incentives much. I doubt they pay well to make up for it either.

rdlecler1 10y ago

Even if they don't decide to go public, equity can pay dividends. Maybe it was just me but it felt like the founders are just trying maximize their upside by dangling a small bone for employees. But let'a not forget who this is benefiting. I'd love to hear from some Basecampers on this.

tdb7893 10y ago

Maybe I'm not familiar with how equity works but this seems to have all sorts of weird properties like how after 5 years the amount of money you would get starts to decrease (assuming that the total number of units rises, which in this system it is almost assured to), the amount of money you get decreases as more people join, and if you leave you get nothing at all. The cap on what percentage employees get seems weird to me and it really messes with the math in a way that seems to screw the employees.