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A 90-day window might be better for you if you want to stick around at a company for a while and there were other people that came before you, but left. "Dead e

A 90-day window might be better for you if you want to stick around at a company for a while and there were other people that came before you, but left. "Dead equity" of startup employees who have left but not exercised means that they can let you do all of the work while they dilute the available equity pool (i.e., take money directly out of your pocket). This a16z article goes into this: http://a16z.com/2016/06/23/options-timing/ http://a16z.com/2016/06/23/options-timing/ (Though I'm not saying I agree 100% with their naturally biased position) An extended exercise window is not an end-all-be-all solution. Other solutions that don't have the dead equity problem include: 1. Actually pay startup employees reasonable salaries and don't pretend their equity is 100% certain to lead to great riches since it is a risk 2. IRS / Congress could fix tax treatment in this situation, since it is not serving the purpose it was intended to (avoid rich people dodging taxes) 3. Startups actually IPO / get liquid faster instead of contributing to our existing private equity bubble where liquidity events are delayed indefinitely, rendering equity useless. More liquid cash flying around is generally better for everyone as long as it's not a dotcom-era bubble. Employees have just as much of a responsibility to learn this stuff as their employers do to act generally ethically. They're your employer, not your parents.

ThrustVectoring 10y ago
"Dead Equity" has some advantages as well. You align the long-term incentives of the company with those of employees who are moving on earlier. If you know that you'll never have to deal with a scaling issue, why would you spend the effort dealing with it? Getting employees invested in long-term outcomes helps with principle-agent problems like this, which can help company performance more than the cost of "Dead Equity".
- zenlikethat 10y ago
  I see your point but don't really agree with your argument -- in my experience engineers who consciously know what a good or a bad engineering decision for the future is will make the good decisions regardless -- it's the terrible engineers who don't know any better you need to worry about. In either case, given an extended exercise window both are sitting around collecting value indefinitely after leaving. They don't need to contribute anything to the next "generation" of work but they still collect the rewards. I'd expect that in most high-growth companies the impact of individual contributors quickly gets washed away after they leave.
  - ThrustVectoring 10y ago
    If you think that former early employees don't contribute to future "generations" of work, then the ethical thing to do is to offer better cash compensations and less equity. It's not really ethical to offer equity compensation that looks like it could be valuable but has significant hidden barriers to actually being used.
    - zenlikethat 10y ago
      > the ethical thing to do is to offer better cash compensations and less equity That's one of my main points: Employees have the power to refuse employers that offer equity in lieu of fair salary. But my experience has been that people keep falling for the equity carrot again and again, and as long as they keep falling for it, employers will keep doing it.
      - ThrustVectoring 10y ago
        Just because it's legal and in your best interest to do things doesn't mean that it's ethical. This is analogous to misleading advertising.
  - freddyc 10y ago
    >I'd expect that in most high-growth companies the impact of individual contributors quickly gets washed away after they leave I'd argue it's the opposite. Early employees often have an outsized impact on the trajectory of a company and get it to a point where additional hiring is possible. Future generations of workers tend to iterate on the existing (unless there's a significant pivot) and come on board in a more de-risked situation often with salaries much closer to market. Most start-ups also present equity as a form of compensation for work performed (trading cash for illiquid options). To take away that earned and vested compensation component because an employee doesn't have the money to exercise within the 90 day is not only arbitrarily absurd but also grossly unfair in my opinion.
    - zenlikethat 10y ago
xt00 10y ago
Good point. My thought is that to compensate the people who stick around you have to combine two things: 1) vesting period (already happening for virtually everybody), and 2) a predefined plan to give people increasing amount of options for staying longer. So basically get 20k options in year 1, 30k options in year 2, 50 options in year 3, 70k options in year 4, or something like that.. so if you leave after 1 year and have the 10 year vesting period, you end up missing out on multiple option granting periods. The dead equity often is a small portion of around 10-15% of total equity in the company. So assuming that there are maybe 5 employees floating out there in the wild with this "dead equity", they probably are comprising a tiny portion of the equity in the company -- most likely around 1% of the company equity max. If that 1% of dead equity is having any kind of real effect on the companies day to day situation or ability to raise funding, I would be thinking the company is in some serious shit.. Yea definitely agree with the IRS trying to fix this. Think of it this way, in one case the founders get a ton of money during the IPO event. They have tons of resources and time to figure out how to avoid paying as much taxes as possible. Versus if you have a ton of people who now get relatively large payouts of stock options worth say 300k or so, those people will likely end up paying 20-30% tax or more on that since they have less ways they can try to reclassify the capital gains -- and maybe will just opt to sell everything short term and pay maximum capital gains. But the rich guy who just did the IPO is like, "eh, I already got like 10 million in the bank, so lets see.. if I just say that my stock is worth 0.1 cents per share, then put into my Roth IRA, then I can cash it out in 20 years with a 1 million X gain with no taxes.."
pcmaffey 10y ago
"Dead equity" could also be used in reference to most of a company's investors. That is of course, tongue in cheek. Why should employees have their investment of time and energy taken away from them when investors' one-time cash investment earns preference? Another industry double-standard.
- zenlikethat 10y ago
  Because the investors' cash is the thing that enables high growth companies to survive and be, well, high growth (who do you think pays said employees' salaries?). Not saying they don't often make out much better than employees, but no one forces you to accept a term sheet you don't want to, and you should understand the implications of the equity you're getting walking in.
  - st3v3r 10y ago
    I don't buy that argument for a second. The employees actual work, causing the startup to be able to actually do something or sell something, is what allows the company to survive.
    - zenlikethat 10y ago
      And the investors are who pays for the employees, no?
      - st3v3r 10y ago
        And the employees are the ones who create the returns for the investors, no?
  - morgante 10y ago
    That's possibly the most bullshit argument I've ever heard. Any founder will tell you employees are more important than investors. It's possible to build a successful company without VC—it's impossible to build one without quality employees.
  - 10y ago
st3v3r 10y ago
"A 90-day window might be better for you if you want to stick around at a company for a while" I don't know many people that go into a job not wanting to stick around for a while. But that's at the beginning of the relationship, when everything is rosy. After the honeymoon, if it turns out that the company is toxic, things change. "They're your employer, not your parents." This statement makes no sense. That doesn't mean they aren't obligated to act ethically.
friendzis 10y ago
This a16z article states that some options not returning to option pool is a bad thing, because option pool has to be extended faster than expected. As I read it, this means that some employees granted stock options are expected not to exercise, or in other words, option pools are overcommitted (more options are scheduled than expected to be excercised). To my mind, this is a very dangerous mindset, driving actual option value even lower, because for every 100 options vested, only say 90 are expected to be exercised, meaning that upon liquidity event options are expected to be diluted to at least 90% of their value. Amount of options offered therefore must be discounted for this. Sadly a prospective employee has no idea what is the expected option pool commit ratio adding one more variable to the equation and tipping the scales towards hard cash compensation.
ouid 10y ago
or, you know, just get rid of the idea of a separate capital gains rate.

ThrustVectoring 10y ago

"Dead Equity" has some advantages as well. You align the long-term incentives of the company with those of employees who are moving on earlier. If you know that you'll never have to deal with a scaling issue, why would you spend the effort dealing with it? Getting employees invested in long-term outcomes helps with principle-agent problems like this, which can help company performance more than the cost of "Dead Equity".

zenlikethat 10y ago
I see your point but don't really agree with your argument -- in my experience engineers who consciously know what a good or a bad engineering decision for the future is will make the good decisions regardless -- it's the terrible engineers who don't know any better you need to worry about. In either case, given an extended exercise window both are sitting around collecting value indefinitely after leaving. They don't need to contribute anything to the next "generation" of work but they still collect the rewards. I'd expect that in most high-growth companies the impact of individual contributors quickly gets washed away after they leave.
- ThrustVectoring 10y ago
  If you think that former early employees don't contribute to future "generations" of work, then the ethical thing to do is to offer better cash compensations and less equity. It's not really ethical to offer equity compensation that looks like it could be valuable but has significant hidden barriers to actually being used.
  - zenlikethat 10y ago
    > the ethical thing to do is to offer better cash compensations and less equity That's one of my main points: Employees have the power to refuse employers that offer equity in lieu of fair salary. But my experience has been that people keep falling for the equity carrot again and again, and as long as they keep falling for it, employers will keep doing it.
    - ThrustVectoring 10y ago
      Just because it's legal and in your best interest to do things doesn't mean that it's ethical. This is analogous to misleading advertising.
- freddyc 10y ago
  >I'd expect that in most high-growth companies the impact of individual contributors quickly gets washed away after they leave I'd argue it's the opposite. Early employees often have an outsized impact on the trajectory of a company and get it to a point where additional hiring is possible. Future generations of workers tend to iterate on the existing (unless there's a significant pivot) and come on board in a more de-risked situation often with salaries much closer to market. Most start-ups also present equity as a form of compensation for work performed (trading cash for illiquid options). To take away that earned and vested compensation component because an employee doesn't have the money to exercise within the 90 day is not only arbitrarily absurd but also grossly unfair in my opinion.
  - zenlikethat 10y ago

xt00 10y ago

Good point. My thought is that to compensate the people who stick around you have to combine two things: 1) vesting period (already happening for virtually everybody), and 2) a predefined plan to give people increasing amount of options for staying longer. So basically get 20k options in year 1, 30k options in year 2, 50 options in year 3, 70k options in year 4, or something like that.. so if you leave after 1 year and have the 10 year vesting period, you end up missing out on multiple option granting periods. The dead equity often is a small portion of around 10-15% of total equity in the company. So assuming that there are maybe 5 employees floating out there in the wild with this "dead equity", they probably are comprising a tiny portion of the equity in the company -- most likely around 1% of the company equity max. If that 1% of dead equity is having any kind of real effect on the companies day to day situation or ability to raise funding, I would be thinking the company is in some serious shit.. Yea definitely agree with the IRS trying to fix this. Think of it this way, in one case the founders get a ton of money during the IPO event. They have tons of resources and time to figure out how to avoid paying as much taxes as possible. Versus if you have a ton of people who now get relatively large payouts of stock options worth say 300k or so, those people will likely end up paying 20-30% tax or more on that since they have less ways they can try to reclassify the capital gains -- and maybe will just opt to sell everything short term and pay maximum capital gains. But the rich guy who just did the IPO is like, "eh, I already got like 10 million in the bank, so lets see.. if I just say that my stock is worth 0.1 cents per share, then put into my Roth IRA, then I can cash it out in 20 years with a 1 million X gain with no taxes.."

pcmaffey 10y ago

"Dead equity" could also be used in reference to most of a company's investors. That is of course, tongue in cheek. Why should employees have their investment of time and energy taken away from them when investors' one-time cash investment earns preference? Another industry double-standard.

zenlikethat 10y ago
Because the investors' cash is the thing that enables high growth companies to survive and be, well, high growth (who do you think pays said employees' salaries?). Not saying they don't often make out much better than employees, but no one forces you to accept a term sheet you don't want to, and you should understand the implications of the equity you're getting walking in.
- st3v3r 10y ago
  I don't buy that argument for a second. The employees actual work, causing the startup to be able to actually do something or sell something, is what allows the company to survive.
  - zenlikethat 10y ago
    And the investors are who pays for the employees, no?
    - st3v3r 10y ago
      And the employees are the ones who create the returns for the investors, no?
- morgante 10y ago
  That's possibly the most bullshit argument I've ever heard. Any founder will tell you employees are more important than investors. It's possible to build a successful company without VC—it's impossible to build one without quality employees.
- 10y ago

st3v3r 10y ago

"A 90-day window might be better for you if you want to stick around at a company for a while" I don't know many people that go into a job not wanting to stick around for a while. But that's at the beginning of the relationship, when everything is rosy. After the honeymoon, if it turns out that the company is toxic, things change. "They're your employer, not your parents." This statement makes no sense. That doesn't mean they aren't obligated to act ethically.

friendzis 10y ago

This a16z article states that some options not returning to option pool is a bad thing, because option pool has to be extended faster than expected. As I read it, this means that some employees granted stock options are expected not to exercise, or in other words, option pools are overcommitted (more options are scheduled than expected to be excercised). To my mind, this is a very dangerous mindset, driving actual option value even lower, because for every 100 options vested, only say 90 are expected to be exercised, meaning that upon liquidity event options are expected to be diluted to at least 90% of their value. Amount of options offered therefore must be discounted for this. Sadly a prospective employee has no idea what is the expected option pool commit ratio adding one more variable to the equation and tipping the scales towards hard cash compensation.

ouid 10y ago

or, you know, just get rid of the idea of a separate capital gains rate.