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To his point about finding undiscovered talent, VCs are obsessed with finding people they can underpay via selling them on their “vision” and “impact”. They cla

To his point about finding undiscovered talent, VCs are obsessed with finding people they can underpay via selling them on their “vision” and “impact”. They claim they can’t compete with Google and Facebook on comp, but the truth is they don’t even try to do so by offering fair equity deals. Instead they use rigged instruments like common ISOs with liquidation preference and 90 day exercise windows to intentionally screw early employees over. If they offered fair terms, many talented people would love to be involved in small companies over FAANG, but these types insist on screwing people over and paying them with speeches about “visions.” The vision of these VCs is always enriching themselves. It’s also absolutely hilarious that his example of finding undiscovered talent at PayPal was by looking at Stanford students. He’s trying to make a point that you should do out of the box thinking on recruiting and his best example is recruiting from the most prestigious university in Silicon Valley. It’s almost difficult to distinguish from satire.

renewiltord 6y ago
Opendoor was founded by Rabois and has a 3-year-exercise window if you're there for 3 years.
- jagged-chisel 6y ago
  Just to be clear: that's 3 years after leaving the company, they'll still honor your options agreement?
  - arcticbull 6y ago
    Pinterest began this trend back in 2014-ish, with a 7 year exercise window post-departure. A few companies followed suit, but many more established startups switched to RSUs -- and earlier-stage startups stuck to their 90 day exercise window because it's the 'beaten path' and they didn't want to waste their capital paying lawyers to draft bespoke options agreements.
  - renewiltord 6y ago
    Yes, AFAIK
nickff 6y ago
There was a very good talk (which I can't find right now) by Ben Horowitz about why companies have to use certain instruments for equity-based compensation. There are a number of legal and 'fairness' (HR and morale) issues which limit what companies can and should do. edit: found it, starts about 16:30 in https://www.youtube.com/watch?v=uVhTvQXfibU https://www.youtube.com/watch?v=uVhTvQXfibU
- arcticbull 6y ago
  Not to mention ISOs are far better for employees than NSOs. Moving to RSUs actually reduces the risk and reward for employees as switching over, startups usually cut the grant size substantially (as they are issuing instruments that have intrinsic value at issue rather than no intrinsic value at issue). tl;dr: Founder shares >>> ISO > NSO >> RSU in terms of risk and reward.
  - mdon 6y ago
    ISOs are not universally better. They have a 24 month time requirement while NSOs only have a 12 month requirement.
    - arcticbull 6y ago
      I believe selling within the 24 month window is considered a disqualifying disposition which effectively just converts your ISOs into NSOs [1] [1] https://www.mystockoptions.com/content/what-is-a-disqualifying-disposition-with-incentive-stock-options-what-causes-why-company-cares https://www.mystockoptions.com/content/what-is-a-disqualifyi...
- ignoramous 6y ago
  > There are a number of legal and 'fairness' (HR and morale) issues... Whatever it was, thank goodness this guy didn't get the memo: https://news.ycombinator.com/item?id=11583480 https://news.ycombinator.com/item?id=11583480
logicslave 6y ago
Startups in some sense are risky financial vehicles aimed at transferring wealth generated by employees to founders and investors.
- emteycz 6y ago
  How much risk do the employees carry? If it is that easy, why don't the employees start a business too?
  - logicslave 6y ago
    On an exit, its not uncommon for founders to have 20-50x the payout compared to the earliest employees. Are you telling me the founders took 20-50x the risk/provided that much more in value?
    - arcticbull 6y ago
      50X the risk is a tough one, often founders aren't paid, and opportunity cost is just so high today. If a 30-year old engineer is looking to make a jump, a senior IC role at $BIGCO pays $500-750K/yr starting, with significant refreshers each year, cash bonuses and promotion path to even more. The average time to liquidity for a successful startup is 7 years. Assuming the founders take small or negligible salary for the first 4-5 years then take market salaries, their opportunity cost is easily $5M. So considering a $5M opportunity cost, and the fact the company wouldn't exist without them, they literally can't just up and quit whenever they want, and are working 100 hour weeks for years on end... yeah, I'd say that's fair. tl;dr: $5M opportunity cost of guaranteed payout vs $100M maybe sometime in the future doesn't seem insane.
      - logicslave 6y ago
        a senior IC role at $BIGCO pays $500-750K/yr starting At age 30: This is really only at Facebook and Netflix. Its more like 375-450k at Google/Amazon/MSFT/smaller tech companies. Facebook and Netflix together definitely employ less than 40k engineers. Of which, no more than 10,000 are ICs with starting comp greater than 500k. So youre really talking about 10k people between those two companies, throw in the other FAANG, and its less than 40k people. Of those people, few have the well rounded ability to start a tech company and launch a product end to end, with the sales, product, design, tech etc. Your post makes no sense and is talking about unicorns that dont really exist.
steffi3690 6y ago
He is talking about hiring Stanford students in the year 1999. 20 years ago that was considered out of the box.
PragmaticPulp 6y ago
> VCs are obsessed with finding people they can underpay via selling them on their “vision” and “impact”. They claim they can’t compete with Google and Facebook on comp, but the truth is they don’t even try to do so by offering fair equity deals It’s not the VCs, it’s the founders making these calls. Most VCs have no problems with their companies paying market rate for top talent. It’s usually the founders who think they can extend their runway and minimize their own equity solution by minimizing compensation. Its often the founders, not the VCs, who try to negotiate for smaller employee equity pools.
carlosdp 6y ago
> Instead they use rigged instruments like common ISOs with liquidation preference and 90 day exercise windows to intentionally screw early employees over. I'm so tired of this being repeated as if founders choose ISOs to screw over employees, it's flat wrong. ISOs offer the best tax advantages for employees. The 90-day exercise window is a government-imposed thing. If you want it changed, go talk to them. I'd much rather give an employee an instrument in which they don't have to worry about any taxes at all until they actually want to exercise than have them sign a document they almost certainly don't understand and receive stock they get immediately taxed for and be confused why the IRS taxed them for stock they can't sell and that might end up being worthless.
- emagdnim2100 6y ago
  There's absolutely no reason companies can't issue options that automatically convert from ISOs to NSOs after the 90-day period, and leave the NSOs on the table for ten years. There is no downside to the employee or, really, to the company – other than that the options, which were pitched to employees as part of comp, aren't clawed back to the company's pool as quickly. I've observed many startup founders who are disdainful of employees who leave, ever, for any reason, and definitely don't want them to receive proceeds from any of the company's future successes.
  - jariel 6y ago
    One of the reasons is complexity. Yes, there should be evolution on this front. It's a little lop sided, but not trivially easy to fix either. These instruments are already very complicated.
    - rco8786 6y ago
      Not gonna sugarcoat it - this is weak. Companies don’t offer this solution that’s better because it’s “complex”. This is like when engineers say something is going to take a long time because “there’s a lot of moving parts”. The reality, IMO, is that employees do not have a seat at the table when it comes to negotiating ownership shares. And, predictably, they end up with the worst part of the deal.
jariel 6y ago
You're basically saying hat the VC's have too much comp, and are not handing enough to the FAANGers. Also - the weird tone about VC's 'enriching themselves' ... when that is 99% of the objective of most employees? People would not work at FAANGS for 1/4 the salary. The money is a 'big deal'. The power imbalance is probably not the issue. VC's are comped somewhere in the ballpark of 'correct'. There are zillions of new VC firms every year, capital is cheap - and most of them fail. It is actually competitive. If there's a systematic bias, it's the immense power of the FAANGS and their ability to hold on to top talent and not always putting them to very good use.

renewiltord 6y ago

Opendoor was founded by Rabois and has a 3-year-exercise window if you're there for 3 years.

jagged-chisel 6y ago
Just to be clear: that's 3 years after leaving the company, they'll still honor your options agreement?
- arcticbull 6y ago
  Pinterest began this trend back in 2014-ish, with a 7 year exercise window post-departure. A few companies followed suit, but many more established startups switched to RSUs -- and earlier-stage startups stuck to their 90 day exercise window because it's the 'beaten path' and they didn't want to waste their capital paying lawyers to draft bespoke options agreements.
- renewiltord 6y ago
  Yes, AFAIK

nickff 6y ago

There was a very good talk (which I can't find right now) by Ben Horowitz about why companies have to use certain instruments for equity-based compensation. There are a number of legal and 'fairness' (HR and morale) issues which limit what companies can and should do. edit: found it, starts about 16:30 in https://www.youtube.com/watch?v=uVhTvQXfibU https://www.youtube.com/watch?v=uVhTvQXfibU

arcticbull 6y ago
Not to mention ISOs are far better for employees than NSOs. Moving to RSUs actually reduces the risk and reward for employees as switching over, startups usually cut the grant size substantially (as they are issuing instruments that have intrinsic value at issue rather than no intrinsic value at issue). tl;dr: Founder shares >>> ISO > NSO >> RSU in terms of risk and reward.
- mdon 6y ago
  ISOs are not universally better. They have a 24 month time requirement while NSOs only have a 12 month requirement.
  - arcticbull 6y ago
    I believe selling within the 24 month window is considered a disqualifying disposition which effectively just converts your ISOs into NSOs [1] [1] https://www.mystockoptions.com/content/what-is-a-disqualifying-disposition-with-incentive-stock-options-what-causes-why-company-cares https://www.mystockoptions.com/content/what-is-a-disqualifyi...
ignoramous 6y ago
> There are a number of legal and 'fairness' (HR and morale) issues... Whatever it was, thank goodness this guy didn't get the memo: https://news.ycombinator.com/item?id=11583480 https://news.ycombinator.com/item?id=11583480

logicslave 6y ago

Startups in some sense are risky financial vehicles aimed at transferring wealth generated by employees to founders and investors.

emteycz 6y ago
How much risk do the employees carry? If it is that easy, why don't the employees start a business too?
- logicslave 6y ago
  On an exit, its not uncommon for founders to have 20-50x the payout compared to the earliest employees. Are you telling me the founders took 20-50x the risk/provided that much more in value?
  - arcticbull 6y ago
    50X the risk is a tough one, often founders aren't paid, and opportunity cost is just so high today. If a 30-year old engineer is looking to make a jump, a senior IC role at $BIGCO pays $500-750K/yr starting, with significant refreshers each year, cash bonuses and promotion path to even more. The average time to liquidity for a successful startup is 7 years. Assuming the founders take small or negligible salary for the first 4-5 years then take market salaries, their opportunity cost is easily $5M. So considering a $5M opportunity cost, and the fact the company wouldn't exist without them, they literally can't just up and quit whenever they want, and are working 100 hour weeks for years on end... yeah, I'd say that's fair. tl;dr: $5M opportunity cost of guaranteed payout vs $100M maybe sometime in the future doesn't seem insane.
    - logicslave 6y ago
      a senior IC role at $BIGCO pays $500-750K/yr starting At age 30: This is really only at Facebook and Netflix. Its more like 375-450k at Google/Amazon/MSFT/smaller tech companies. Facebook and Netflix together definitely employ less than 40k engineers. Of which, no more than 10,000 are ICs with starting comp greater than 500k. So youre really talking about 10k people between those two companies, throw in the other FAANG, and its less than 40k people. Of those people, few have the well rounded ability to start a tech company and launch a product end to end, with the sales, product, design, tech etc. Your post makes no sense and is talking about unicorns that dont really exist.

steffi3690 6y ago

He is talking about hiring Stanford students in the year 1999. 20 years ago that was considered out of the box.

PragmaticPulp 6y ago

> VCs are obsessed with finding people they can underpay via selling them on their “vision” and “impact”. They claim they can’t compete with Google and Facebook on comp, but the truth is they don’t even try to do so by offering fair equity deals It’s not the VCs, it’s the founders making these calls. Most VCs have no problems with their companies paying market rate for top talent. It’s usually the founders who think they can extend their runway and minimize their own equity solution by minimizing compensation. Its often the founders, not the VCs, who try to negotiate for smaller employee equity pools.

carlosdp 6y ago

> Instead they use rigged instruments like common ISOs with liquidation preference and 90 day exercise windows to intentionally screw early employees over. I'm so tired of this being repeated as if founders choose ISOs to screw over employees, it's flat wrong. ISOs offer the best tax advantages for employees. The 90-day exercise window is a government-imposed thing. If you want it changed, go talk to them. I'd much rather give an employee an instrument in which they don't have to worry about any taxes at all until they actually want to exercise than have them sign a document they almost certainly don't understand and receive stock they get immediately taxed for and be confused why the IRS taxed them for stock they can't sell and that might end up being worthless.

emagdnim2100 6y ago
There's absolutely no reason companies can't issue options that automatically convert from ISOs to NSOs after the 90-day period, and leave the NSOs on the table for ten years. There is no downside to the employee or, really, to the company – other than that the options, which were pitched to employees as part of comp, aren't clawed back to the company's pool as quickly. I've observed many startup founders who are disdainful of employees who leave, ever, for any reason, and definitely don't want them to receive proceeds from any of the company's future successes.
- jariel 6y ago
  One of the reasons is complexity. Yes, there should be evolution on this front. It's a little lop sided, but not trivially easy to fix either. These instruments are already very complicated.
  - rco8786 6y ago
    Not gonna sugarcoat it - this is weak. Companies don’t offer this solution that’s better because it’s “complex”. This is like when engineers say something is going to take a long time because “there’s a lot of moving parts”. The reality, IMO, is that employees do not have a seat at the table when it comes to negotiating ownership shares. And, predictably, they end up with the worst part of the deal.

jariel 6y ago

You're basically saying hat the VC's have too much comp, and are not handing enough to the FAANGers. Also - the weird tone about VC's 'enriching themselves' ... when that is 99% of the objective of most employees? People would not work at FAANGS for 1/4 the salary. The money is a 'big deal'. The power imbalance is probably not the issue. VC's are comped somewhere in the ballpark of 'correct'. There are zillions of new VC firms every year, capital is cheap - and most of them fail. It is actually competitive. If there's a systematic bias, it's the immense power of the FAANGS and their ability to hold on to top talent and not always putting them to very good use.