4 ms·

A vesting idea

9 points by abstractbill 16y ago

jwecker 16y ago
What's the mechanism that would allow a company to attract highly qualified late-comers via equity- even in the 23rd hour in order to help make the exit happen- without upsetting the fairness? (not saying this is a flaw- just would rather you spell it out since you're a math genius) (seriously, he's a math genius- I saw his CV).
- abstractbill 16y ago
  Late-comers would, like everyone else who stuck around until the exit, vest 100% on exit (ignoring things like cliffs for now). This might seem a little unfair given they didn't put in much time, but of course you get to play with the size of the option grant, and make it big or small depending on how highly qualified they are and how much they're really adding to the exit.
rewind 16y ago
Employees want to balance options vs. salary vs. time. They need fixed numbers to calculate this. With your approach, they get penalized if your company takes too long to sell/go public. If I have a four year vesting schedule, I know that if I commit four years to your company, I'll be fully vested. But if I bust my ass for four years then it takes you another four to have some sort of liquidity event, your company has actually put less value on my initial four years (in fact, reduced it by 50%). That won't fly with most people. I think that's why fixed vesting schedules work best, and issuing new options to retain employees after they're fully vested makes the most sense.
- abstractbill 16y ago
  With your approach, they get penalized if your company takes too long to sell/go public. Sure, it aligns everyone's incentives with getting the company to an exit (not necessarily as quickly as possible, but if it's going to take a long time, everyone should have the incentive to make it a big exit). Is that a bad thing?
  - rewind 16y ago
    Put a value on the options, then ask yourself the same question: I'll give you $200,000 to work for me for four years. But if we don't go public for eight years, I'll give you $200,000 to work for me for eight years. Doesn't make much sense to me.
kd5bjo 16y ago
The biggest problem with this that I can see is logistical. You're trying to define how many shares of stock an employee earns for a month of work now by something that may happen in the future. How many shares of stock do you issue when an employee decides to exercise his options four years in, and will a court uphold you trying to rescind a third of his stock when you exit in another two?
- abstractbill 16y ago
  ...will a court uphold you trying to rescind a third of his stock when you exit in another two? That sounds pretty much like reverse-vesting, which is a fairly common practice (my Justin.TV stock has reverse-vesting). You transfer ownership of 100% immediately, but the company has the right to buy back unvested options for a very low nominal price.
maxawaytoolong 16y ago
If an employee leaves prior to a liquidity event they have to exercise their vested options, which involves spending their own money. The employee who stays on does not have to take any such financial risk. I don't know what problem you are really trying to solve. You mention employee retention at the end, but the rest of the piece makes it sound like you're really trying to eliminate some sort of hypothetical sour grapes. I don't think the latter is really worth solving, and the former has proven to be mostly unsolvable.

9 points by abstractbill 16y ago

What's the mechanism that would allow a company to attract highly qualified late-comers via equity- even in the 23rd hour in order to help make the exit happen- without upsetting the fairness? (not saying this is a flaw- just would rather you spell it out since you're a math genius) (seriously, he's a math genius- I saw his CV).

abstractbill 16y ago
Late-comers would, like everyone else who stuck around until the exit, vest 100% on exit (ignoring things like cliffs for now). This might seem a little unfair given they didn't put in much time, but of course you get to play with the size of the option grant, and make it big or small depending on how highly qualified they are and how much they're really adding to the exit.

rewind 16y ago

Employees want to balance options vs. salary vs. time. They need fixed numbers to calculate this. With your approach, they get penalized if your company takes too long to sell/go public. If I have a four year vesting schedule, I know that if I commit four years to your company, I'll be fully vested. But if I bust my ass for four years then it takes you another four to have some sort of liquidity event, your company has actually put less value on my initial four years (in fact, reduced it by 50%). That won't fly with most people. I think that's why fixed vesting schedules work best, and issuing new options to retain employees after they're fully vested makes the most sense.

abstractbill 16y ago
With your approach, they get penalized if your company takes too long to sell/go public. Sure, it aligns everyone's incentives with getting the company to an exit (not necessarily as quickly as possible, but if it's going to take a long time, everyone should have the incentive to make it a big exit). Is that a bad thing?
- rewind 16y ago
  Put a value on the options, then ask yourself the same question: I'll give you $200,000 to work for me for four years. But if we don't go public for eight years, I'll give you $200,000 to work for me for eight years. Doesn't make much sense to me.

kd5bjo 16y ago

The biggest problem with this that I can see is logistical. You're trying to define how many shares of stock an employee earns for a month of work now by something that may happen in the future. How many shares of stock do you issue when an employee decides to exercise his options four years in, and will a court uphold you trying to rescind a third of his stock when you exit in another two?

abstractbill 16y ago
...will a court uphold you trying to rescind a third of his stock when you exit in another two? That sounds pretty much like reverse-vesting, which is a fairly common practice (my Justin.TV stock has reverse-vesting). You transfer ownership of 100% immediately, but the company has the right to buy back unvested options for a very low nominal price.

maxawaytoolong 16y ago

If an employee leaves prior to a liquidity event they have to exercise their vested options, which involves spending their own money. The employee who stays on does not have to take any such financial risk. I don't know what problem you are really trying to solve. You mention employee retention at the end, but the rest of the piece makes it sound like you're really trying to eliminate some sort of hypothetical sour grapes. I don't think the latter is really worth solving, and the former has proven to be mostly unsolvable.