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"First, if you are close to an employee’s anniversary and decide to move them out of the company, you should vest some of their equity even though you are not r
by portman 16y ago
"First, if you are close to an employee’s anniversary and decide to move them out of the company, you should vest some of their equity even though you are not required to do so. If it took you a year to figure out it was a bad hire then there is some blame on everyone and it is just bad faith to fire someone on the cusp of a cliff vesting event and not vest some stock. It may have been a bad hire but a year is a meaningful amount of employment and should be recognized."
Right on. I've never heard ANYONE publicly advocate this. But it is absolutely true. Terminating an employee right before his or her cliff vest is terrible, but unfortunately it happens A LOT.
- daviding 16y agoAgreed, it is good to see someone advocating this. Of course, an even more moral thing to do would be to make it legally binding from the start, as in just use a 6 month cliff vesting period. If you're a founder or VC that would give a proportion before a cliff vest then perhaps make life simpler by considering a shorter cliff instead?
- mmt 16y agoAlso agreed. The whole notion of cliff vesting never made sense to me, and the OP doesn't really explain it. The reason for the one year cliff is to protect the company and its shareholders (including the employees) from a bad hire which gets a huge grant of stock or options but proves to be a mistake right away. One year doesn't at all strike me as "right away." Even as few as 3 months seems a stretch, for a startup. A cliff vest allows the company to move the bad hire out of the company without any dilution.* Perhaps I'm missing something, since, with no cliff, isn't the amount of dilution proportional to the number of months of employment?
- gyardley 16y agoLess shareholders, less problems. You don't want to have to track down a bunch of short-term employees from four years ago when making corporate decisions. (Yes, I know the common generally has no rights to speak of, but sometimes you want to get the consent of everyone just to cover your butt, especially when things go bad.)
- mmt 16y agoHow big a deal is this? That is, how much does it cost? How many short-term employees does a typical startup tend to have? What percentage of short-term employees exercise if they leave? Are there any statistics, or does everyone blindly use a year-long cliff?
- gyardley 16y agoIt can be a huge deal if some disgruntled shareholder causes legal problems. Binary outcome - most of the time, no consequences, occasionally, massive ones. No stats for you but short-term employees seem pretty common. I've had them, and I've been one. I bet you've left jobs before a year was up as well. Zero percent of short-term employees exercise their options when they leave, because they can't. But options are really cheap prior to a Series A, so I imagine a lot of the early people would if they could. 'Blindly' is the wrong word for going with an established industry standard. Job candidates and investors both understand it and expect it - you don't have to waste cycles thinking about it or explaining it. Startups are fussy enough as it is, no point messing with something that works.
- alain94040 16y agoI'm in favor of 6-month cliffs. Frankly, one-year is company friendly. But since everyone is used to it, no one particular employee can change it. If you have been working for me for 6 months and I haven't fired you, then you must have produced something useful. It doesn't take me 6 months to know who is not performing.
- abstractbill 16y agoTotally agree. I've also seen the converse of this though - employees leaving almost immediately after their one-year anniversary. Of course I completely understand why they would do that, but it does leave a nasty taste in my mouth every time I see it happen.
- shazow 16y agoThe cliff is incentive to stay that first full year. The gradual vesting of the rest of the equity is incentive to stay past it. If people are leaving immediately after the first cliff, then the proportions might need to be adjusted. Perhaps they don't perceive the remaining stock as valuable and the cliff is just a wakeup call.
- kareemm 16y agoEnh. An employer who uses a cliff incentivizes an unhappy employee to leave only after passing the cliff. If there was no cliff, he/she could take his 11m of options and go. But in a binary situation, the employee might as well wait out the time to get past the cliff.
- deleted 16y ago[deleted]
- tomjen3 16y agoTrue, which is why it would be insane to accept a cliff as an employee.
- mmt 16y agoI disagree. The cliff is merely another aspect of risk to the stock-based compensation portion of the package. Personally, I don't put much value on it to begin with, since even half a percent is a bit skimpy given current exits. Of a $48million exit, it's only $60k extra for that cliff year. It's not pocket change, but it's not an insane risk. If the chance of an exit is 20%, we're down to $12k. I'd rather have that $12k in salary plus a cliff than the other way around.
- maxawaytoolong 16y agoIt doesn't really matter that much. The fired employee has to exercise the options, and they often don't have the money or want to take the risk.
- benmathes 16y agoIf it's a publicly-traded company and the value of the shares is higher than the strike price on your options, you can do a cashless exercise: http://www.investorwords.com/5448/cashless_exercise.html http://www.investorwords.com/5448/cashless_exercise.html
- jdavid 16y agoin even 3 months that employee has formed social bonds with a lot of people in the company. keeping everyone happy is good business. if someone is not working out, you should act quickly rather than slowly.