7 ms·

"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

"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.
- mnutt 10y ago
  Employees are effectively making an investment in the company in the form of work instead of cash. If a startup chose not to give out stock options, they'd likely have to pay their employees more, and they may have to raise another round to get cash to do so. The dilution from that round would never come back to the original stockholders under any circumstances. When employees accepted the options in lieu of cash, they were taking a risk in exchange for a potential future reward. The work they put in often makes that success happen, whether or not they're actually working for the company at the time a liquidation event occurs. I liken the scheme a16z proposes to something like using a loophole to buy back all of your investors' stock at their original valuation, just because you got to profitability. At that point you no longer _need_ their money, so why do investors deserve to reap the rewards?
- dlubarov 10y ago
  IMO there's no point in arguing about the relative importance of investors versus employees, because everyone should be in favor of more flexible equity terms. The 90 day rule creates a lot of risk for employees who lack the capital for early exercise. If employees are rational and well-informed, they'll heavily discount the value of any options with a 90 day expiration. By offering more flexible terms (like Quora's), companies should be able to hire the same candidates while giving away less equity. Granted, some employees don't ask about the equity terms in their offers, or don't carefully consider the risks. But I think this is improving, and eventually more flexible terms will become standard. I've personally declined a few offers based on the equity terms.
  - acjohnson55 10y ago
    > If employees are rational and well-informed [...] That's a biiiiiig if. In my experience, this is definitely not the case for the vast majority of startup employees I know.
prostoalex 10y ago
It's not really a double standard. A share of stock and an option to buy such share of stock are two distinct products, priced differently. E.g. MSFT share price today is $64.27, a contract allowing you to buy a share of MSFT on March 17, 2017 for $64 is 83c. Investors buy their shares in full, cash-on-delivery, so to speak. Would investors like to be able to buy call options in the companies at pre-specified valuations for just 1.5% of the price and complete freedom to exercise (as well as forfeit) those options four years down the road? You betcha. Not only do they need to pay significantly less to participate, they can spread those bets around and cover roughly 60x more companies, if they choose. Or double or triple down on this one specific company. Or just sell their option down the road in case it's the next FB or Uber without ever needing to put up cash. Both investors and employees get to buy their shares for cash. Employees though do get the luxury of time, and can not only benefit immensely from stock's rise, but also save their hard-earned money in case of a dud. Investors do not get the latter option. Therefore they seek compensation elsewhere, usually in the liquidation preference department (which is moot anyways if the liquidation value is $0).
- acjohnson55 10y ago
  Well then that's doubly ironic, because most startup employees would probably much prefer to have shares over options. I know I would.
  - prostoalex 10y ago
    If the company allows 83(b) early exercise, they can.
    - acjohnson55 10y ago
      Yeah, but you still have to buy the shares at strike price. So not only are you getting paid below market rate, but you have to spend some of that pay exercise cost and taxes to have proper equity. So it's not so simple.
      - 10y ago

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.
mnutt 10y ago
Employees are effectively making an investment in the company in the form of work instead of cash. If a startup chose not to give out stock options, they'd likely have to pay their employees more, and they may have to raise another round to get cash to do so. The dilution from that round would never come back to the original stockholders under any circumstances. When employees accepted the options in lieu of cash, they were taking a risk in exchange for a potential future reward. The work they put in often makes that success happen, whether or not they're actually working for the company at the time a liquidation event occurs. I liken the scheme a16z proposes to something like using a loophole to buy back all of your investors' stock at their original valuation, just because you got to profitability. At that point you no longer _need_ their money, so why do investors deserve to reap the rewards?
dlubarov 10y ago
IMO there's no point in arguing about the relative importance of investors versus employees, because everyone should be in favor of more flexible equity terms. The 90 day rule creates a lot of risk for employees who lack the capital for early exercise. If employees are rational and well-informed, they'll heavily discount the value of any options with a 90 day expiration. By offering more flexible terms (like Quora's), companies should be able to hire the same candidates while giving away less equity. Granted, some employees don't ask about the equity terms in their offers, or don't carefully consider the risks. But I think this is improving, and eventually more flexible terms will become standard. I've personally declined a few offers based on the equity terms.
- acjohnson55 10y ago
  > If employees are rational and well-informed [...] That's a biiiiiig if. In my experience, this is definitely not the case for the vast majority of startup employees I know.

prostoalex 10y ago

It's not really a double standard. A share of stock and an option to buy such share of stock are two distinct products, priced differently. E.g. MSFT share price today is $64.27, a contract allowing you to buy a share of MSFT on March 17, 2017 for $64 is 83c. Investors buy their shares in full, cash-on-delivery, so to speak. Would investors like to be able to buy call options in the companies at pre-specified valuations for just 1.5% of the price and complete freedom to exercise (as well as forfeit) those options four years down the road? You betcha. Not only do they need to pay significantly less to participate, they can spread those bets around and cover roughly 60x more companies, if they choose. Or double or triple down on this one specific company. Or just sell their option down the road in case it's the next FB or Uber without ever needing to put up cash. Both investors and employees get to buy their shares for cash. Employees though do get the luxury of time, and can not only benefit immensely from stock's rise, but also save their hard-earned money in case of a dud. Investors do not get the latter option. Therefore they seek compensation elsewhere, usually in the liquidation preference department (which is moot anyways if the liquidation value is $0).

acjohnson55 10y ago
Well then that's doubly ironic, because most startup employees would probably much prefer to have shares over options. I know I would.
- prostoalex 10y ago
  If the company allows 83(b) early exercise, they can.
  - acjohnson55 10y ago
    Yeah, but you still have to buy the shares at strike price. So not only are you getting paid below market rate, but you have to spend some of that pay exercise cost and taxes to have proper equity. So it's not so simple.
    - 10y ago