4 ms·

It seems that the fairest way to compensate employees at a startup is to pay them in cash, but also allow them to invest at each funding round with the same ter

It seems that the fairest way to compensate employees at a startup is to pay them in cash, but also allow them to invest at each funding round with the same terms and conditions and liquidation preferences that the VC's are getting.

hkmurakami 7y ago
Reminds me of employee stock purchase plans at big (non tech, older industries) companies where you can buy your employer's stock with your pre-tax income. There might be something to this idea.
- WaxProlix 7y ago
  Starbucks employees get to apply up to 10% of their (pre-tax, I believe) income to a fund that quarterly buys stock at a discounted rate (iirc, 90% of the stock price as of start or end of the quarter, whichever is lower). It's a nice benefit, and it'd be cool to see something similar in tech.
  - eanzenberg 7y ago
    ESPP is available to many (all?) public companies.
    - toast0 7y ago
      Certainly not all. They last public company did not have a plan; and of course, some plans are better than others.
  - why_only_15 7y ago
    Apple has a program like this. It's a 15% discount by default. Last quarter it was like 50% I think because the stock plan started when AAPL was at $200 or something and ended at $320
- clintonb 7y ago
  Tech firms have ESPPs. I first learned of them when I interned at Texas Instruments in 2005.
- rconti 7y ago
  That's relatively common; I haven't had it at my past couple of tech/public employers, but have it currently.
- paxys 7y ago
  ESPP is never using pre-tax income. You are taxed on the money you use to purchase the shares, same as everything else.
hn_throwaway_99 7y ago
A huge point of compensating employees with equity is that startups don't have cash, at least not very much of it.
- downerending 7y ago
  If you can't pay in cash, you're a charity, not a business. At best.
  - paulddraper 7y ago
    Wow, this is the first time I've ever seen a VC described as "charity."
  - hn_throwaway_99 7y ago
    That's an absurd interpretation. First, I don't know any startups that aren't paying their employees a cash salary. But the tradeoff always used to be that startups paid somewhat below market (and I'm not talking hugely under-market, usually in the 10-20% range), with a much larger potential upside if the startup was successful. The problem with that tradeoff nowadays is that in many cases you're just barely breaking even or coming out ahead with what a FAANG can pay even if the startup is wildly successful. The only way that tradeoff will start being worth it again is if founders and VCs give more real equity to employees so they can benefit if the start up is wildly successful.
- hinkley 7y ago
  Yes, but they can still be quite stupid about it. Once I was told, well, we want to give you a raise of X% of your base salary, but money is tight. So here's X-5%, and 5% in stock options. Not stock, options. So, not only do we have to go public, but we also have to double (triple really, because you know I didn't get that 5% as cash the second year) for me to get the raise you say I deserve. Plus, in order to exercise those options to get compensated, I have to pay you that 5% in cash. Super. Honestly, and along the lines of another responder, a big raise is never as sweet as a modest raise and a little autonomy. If money is tight, a little raise and a little more autonomy can smooth things over pretty well.
usaar333 7y ago
But that causes employees to lose a powerful tool they have: ability to invest future earnings in the company and recall their future investment (by quitting) if things don't work out.
- aiiane 7y ago
  "Recall future investment" makes no sense. Isn't that just a fancy way of saying "not invest"?
  - usaar333 7y ago
    Well not quite. If a startup offers me $800k in equity over 4 years, I'm fully invested. If it doubles in a year, I'm now earning $400k in equity a year for next 3 years rather than $200k. (I recall my investment) If it dies after a year, I only lost $200k, not the entire $700k.
spottybanana 7y ago
If the company also actually grows and is profitable, there is also little reason not to give out cash, because the equity is more valuable than cash. Usually equity is given so that employees would work more like owners, taking care of the long-term value of the company. However I don't see this working for many people because many people just don't see the value of owning companies - they don't invest in stocks etc.

hkmurakami 7y ago

Reminds me of employee stock purchase plans at big (non tech, older industries) companies where you can buy your employer's stock with your pre-tax income. There might be something to this idea.

WaxProlix 7y ago
Starbucks employees get to apply up to 10% of their (pre-tax, I believe) income to a fund that quarterly buys stock at a discounted rate (iirc, 90% of the stock price as of start or end of the quarter, whichever is lower). It's a nice benefit, and it'd be cool to see something similar in tech.
- eanzenberg 7y ago
  ESPP is available to many (all?) public companies.
  - toast0 7y ago
    Certainly not all. They last public company did not have a plan; and of course, some plans are better than others.
- why_only_15 7y ago
  Apple has a program like this. It's a 15% discount by default. Last quarter it was like 50% I think because the stock plan started when AAPL was at $200 or something and ended at $320
clintonb 7y ago
Tech firms have ESPPs. I first learned of them when I interned at Texas Instruments in 2005.
rconti 7y ago
That's relatively common; I haven't had it at my past couple of tech/public employers, but have it currently.
paxys 7y ago
ESPP is never using pre-tax income. You are taxed on the money you use to purchase the shares, same as everything else.

hn_throwaway_99 7y ago

A huge point of compensating employees with equity is that startups don't have cash, at least not very much of it.

downerending 7y ago
If you can't pay in cash, you're a charity, not a business. At best.
- paulddraper 7y ago
  Wow, this is the first time I've ever seen a VC described as "charity."
- hn_throwaway_99 7y ago
  That's an absurd interpretation. First, I don't know any startups that aren't paying their employees a cash salary. But the tradeoff always used to be that startups paid somewhat below market (and I'm not talking hugely under-market, usually in the 10-20% range), with a much larger potential upside if the startup was successful. The problem with that tradeoff nowadays is that in many cases you're just barely breaking even or coming out ahead with what a FAANG can pay even if the startup is wildly successful. The only way that tradeoff will start being worth it again is if founders and VCs give more real equity to employees so they can benefit if the start up is wildly successful.
hinkley 7y ago
Yes, but they can still be quite stupid about it. Once I was told, well, we want to give you a raise of X% of your base salary, but money is tight. So here's X-5%, and 5% in stock options. Not stock, options. So, not only do we have to go public, but we also have to double (triple really, because you know I didn't get that 5% as cash the second year) for me to get the raise you say I deserve. Plus, in order to exercise those options to get compensated, I have to pay you that 5% in cash. Super. Honestly, and along the lines of another responder, a big raise is never as sweet as a modest raise and a little autonomy. If money is tight, a little raise and a little more autonomy can smooth things over pretty well.

usaar333 7y ago

But that causes employees to lose a powerful tool they have: ability to invest future earnings in the company and recall their future investment (by quitting) if things don't work out.

aiiane 7y ago
"Recall future investment" makes no sense. Isn't that just a fancy way of saying "not invest"?
- usaar333 7y ago
  Well not quite. If a startup offers me $800k in equity over 4 years, I'm fully invested. If it doubles in a year, I'm now earning $400k in equity a year for next 3 years rather than $200k. (I recall my investment) If it dies after a year, I only lost $200k, not the entire $700k.

spottybanana 7y ago

If the company also actually grows and is profitable, there is also little reason not to give out cash, because the equity is more valuable than cash. Usually equity is given so that employees would work more like owners, taking care of the long-term value of the company. However I don't see this working for many people because many people just don't see the value of owning companies - they don't invest in stocks etc.