16 ms·

If founders treated investors the way they treat employees

347 points by yodon 5y ago

eatonphil 5y ago
> Can’t you guys just replace this 90-day clause with a 10-year expiry, so that I wouldn’t have to deal with all these risks? I'm not an expert but my understanding is that everyone should be pushing for this or for options to be way cheaper to purchase when you leave. Without one of those two options the safest thing to do to not waste vesting time is join a public company or a late stage startup. Late stage startup you're more likely to be acquired or IPO while you're there and you don't purchase options out of pocket. Early stage startups are where you're least likely to stay the 7-12 years required for the exit event to take place and thus most likely to leave vested options on the table when you leave the company because you don't have cash and/or don't want to risk that cash.
- HWR_14 5y ago
  As I understand it, options being cheaper to purchase means a larger tax bill when you vest them, since they have a strike price below their current value.
  - lbotos 5y ago
    I'm not sure what you mean. You aren't taxed when options vest because there was no gain. Only when you exercise options, and you will be taxed on the gain. So if you make more money, sure your tax will be higher. RSUs are taxed at vest as that's a gain.
    - HWR_14 5y ago
      Because the options, when they vest, have no value. However, an ITM option does have value. The amount it's ITM. So you'd have to pay the amount it's below FMV as income, right?
      - lbotos 5y ago
        An options contract is the right to purchase shares at a certain price. Your vesting gives you the right to purchase more shares. If you do not purchase those shares, there was no gain, so there was no tax.
        tylerhou 5y ago
        I think the parent poster is saying that this tax treatment of options is inconsistent with the way RSUs are taxed, though. RSUs are taxed at vest time even if you hold the shares, presumably because they can be sold immediately since they have some FMV. Options are not taxed at vest time, even if they are ITM and have some large positive FMV. And for ISOs, even if you exercise immediately at vest and you don't sell the exercised shares, there is no tax (assuming no AMT). What is the reason for the different tax treatment?
        HWR_14 5y ago
        An option itself has fair market value. Like, I can buy options on Uber stock right now at a variety of price points. You can make the case that options at FMV have negligible value, which is why they get special treatment. But if you want to work at a startup unicorn and ask for stock options with a strike price of $0.01 as your whole income, it's still (possibly) extremely valuable.
        lbotos 5y ago
        This is going to sound mean but the more you talk the more confused I am about your original point. Please understand, I am trying to understand you. You originally said: > options being cheaper to purchase means a larger tax bill when you vest them The operative word here is vest. No tax on vest. I think you are trying to say "if you join a startup and get dirt cheap options, when you exercise them at a later date and they are worth something then, your tax bill will be larger than if you got more expensive options and exercise them. Yes, this is true. - strike price: $0.01 FMV at exercise: $20 - strike price: $15.00 FMV at exercise: $20 You have a larger gain in the first, so sure, you will pay more tax. Is this what you are trying to say?
- bspear 5y ago
  Believe the downside to 10-year is that they convert from ISOs to NSOs, which is far less tax-favorable But obviously, much better cashflow-wise
- anamax 5y ago
  If it's early, you should 83(b) the options. That eliminates the "tax at exercise" problem and starts the long-term holding clock. Yes, you have to come up with the cash to buy the stock at 83(b) time, but if it's early, that's pocket change.
  - bcassedy 5y ago
    It's not pocket change for people early in their career. An early engineer in a series A company could easily be getting 10k+ in options
    - anamax 5y ago
      Series A isn't "early" these days and 10k options reflects that. (100k is only 1% given 10M authorized, 10M being reasonably common for initial authorization and 1% being around market for an early engineer.) That said, the strike price for common should still be reasonable at Series A - not $0.0001, but not $10 either, so 5-10k options can be around $10k. (Yes, a company can raise at $100M valuation even though the 10M common have a strike price of $1. The $100M is preferred.) And, there's no law saying that 803(b) is all or nothing.
bspear 5y ago
Somehow I heard Adam Neumann's voice throughout this article :) But yes, the hypocrisy is real. Employees get screwed big-time by lack of information and 90-day exercise window: https://www.productlessons.xyz/article/how-stock-options-for-employees-work https://www.productlessons.xyz/article/how-stock-options-for... Important thing is that the message continues to get out there, and more people know to ask the right questions.
d23 5y ago
Ha! Really close to a conversation I had with a recruiter back when I was looking. They were promising a ton of equity, and when I asked to see just a high level picture of the finances to make sure basics like the amount of runway were reasonably long I was met with an awkward pause. It's really strange that companies not only expect you to take a massive risk on the "upside potential" and then won't even let you inspect the current state. So yeah: I'll just go with Google I guess /shrug
- ryandrake 5y ago
  I once interviewed for a software position at a risky looking small company, and I asked the CEO/owner if the books were available for me to verify their 1-5 year outlook before I moved my family across the country for the job. He looked totally shocked and gave a weirdly cagey “no”. I learned long after the fact that at first he was mortified and then later had a “wow who does he think he is” chuckle with the HR lady about me. They ended up making a barely acceptable offer because despite my horrible faux pas, I was a domain expert and they couldn’t keep staff for more than a year. And I accepted because I was 1 month away from being bankrupt and homeless. Lasted a year and a half. The business turned out to be solid but I left for greener pastures. I have no idea why owners are so cagey about the health of their businesses and funding sources, to potential employees. Especially when things are basically fine! He was bootstrapped and evidently had fine cash flow. Why is this a faux pas to ask? HN is full of entrepreneurs: why are you so offended when a candidate asks about cash flow or to see the cap table?
  - kmonsen 5y ago
    I once interviewed with a startup and the equity part of the offer was only x number of options. So I was like, OK what is current/expected evaluation and how many shares outstanding, like what is the percentage I get. That was apparently "big company thinking" and they rescinded the offer just for asking this question (through the experienced recruiter).
    - jacquesm 5y ago
      evaluation -> valuation?
rootusrootus 5y ago
(2020), and previously discussed here: https://news.ycombinator.com/item?id=24198228 https://news.ycombinator.com/item?id=24198228
ada1981 5y ago
I'd like to see the inverse of this -- if founders treated employees like they treat investors.
sl9dmk2 5y ago
Gotta love the satire. Another thing investors have is access to the full cap table and what people are paid across their entire portfolio. Employees have hearsay and scraps of info that friends are willing to share. Limited information = easy exploit Found this database of startup comp that sorta evens the playing field: https://topstartups.io/startup-salary-equity-database/ https://topstartups.io/startup-salary-equity-database/ Anything else out there?
- 21723 5y ago
  The long con of startups is that founders want you to think you're an investor--in truth, you are, because you're investing time, which ought to be more valuable than the money of people who have scads of it--and work like you're an investor... but they're still going to treat you like an employee. It's the same dysfunctional bureaucracy of the corporate ladder, except in this iteration it's across companies, so you don't even see the true executives (VCs). There are more rungs, more pitfalls, and greater socioeconomic distances than there ever were before. The innovation of Silicon Valley isn't anything to do with technology, and hasn't been since the 1990s. Rather, it's the disposable company. If the investors get sick of something existing, they can choose not to fund it in the next round, call their friends and tell everyone else not to fund it, and it dies, allowing them to build something new in its place. The advantages (to investors) of the disposable company are legion, but one if them is that it doesn't matter all that much if you pick a scumbag. Which is also why YC backs so many DVFs (domestic violence founders). If they're jerks who get stuff done, you can let them collect a few million before firing them and putting your buddies in executive positions; if they're jerks who don't get stuff done, then you scrap the company and fund some other DVF.
  - sl9dmk2 5y ago
    > Which is also why YC backs so many DVFs (domestic violence founders) Are you Ryan Breslow?
    - 21723 5y ago
      I don't know who he is. Should I?
akavi 5y ago
Huh, a lot of this doesn't ring true to me, as someone who's negotiated comp at 6 (mostly YC backed) startups over the past 5 years. In my experience, 10 year expiration dates for options and reasonably detailed financials (at the very least, ARR, ARR growth rate, churn rate) have been table stakes. And most companies were happy to let me view their latest round's pitch deck, after signing an NDA. It's frustrating that almost no company offers early exercise rights, given how significant a tax value that it can represent, but compared to most other industries, it does seem tech is particularly employee friendly.
- anamax 5y ago
  > And most companies were happy to let me view their latest round's pitch deck, after signing an NDA. If potential investors are seeing that deck without an NDA, why should you sign one?
  - 21723 5y ago
    The real answer, of course, is social class. Marx was right. Investors are the bourgeoisie, and you're a proletarian whose survival needs are an exploitable resource. They don't follow the rules you do. Investors are like Ancient Greek gods (or Ancient Greek something else) to founders, and you and I are shit to these people, and the moment you stop making excuses for their behavior and see it as it really is, it all makes sense. What even Marx didn't foresee was the effectiveness with which managerial bureaucrats (who might have been considered upper proletarian in the 1800s) would take the system over for their own purposes and merge into--and, arguably, become--the real elite... the same thing that happened in certain failed socialist experiments.
    - bombcar 5y ago
      It’s less class and a matter of who needs whom. Tell an investor to sign and NDA and he says pass. An employee or potential employee doesn’t have the bargaining chips.
      - 5y ago
21723 5y ago
If the investors had bought in, Episode 2 would have 60% of the investors either being made so miserable they quit, or fired "for performance" after 364 days of service ("cliff") so they get nothing--of course, even the employees who do hold on rarely get anything, but that's another story. The really sickening thing is that most acquisitions (since that's the likely route for these companys, if they succeed at all) involve the common stock getting wiped out while the executives get "management incentive plans" in new stock. They still get screwed if they leave the acquirer (since their vesting clocks usually reset) but they at least have a shot at getting something.
anm89 5y ago
I'd have to imagine that taking equity as an employee is in most cases a negative EV move. Keep in mind, people win powerball. That fact that something is negative EV doesn't mean there aren't winners. FAANG RSUs might potentially be another exception. But it seems like early stage startup options are an absolutely minefields for employees. I've seen instances where it was setup so regardless of how the company performed, people in the first 10 employees would have walked away with nothing in an exit. And that's before talking about Cliffs. Even if every other thing falls into place, you can just get fired on day 355 if a founder decides they'd prefer to hold more equity.
- barrkel 5y ago
  Equity (in reality, options, not stock) doesn't have a negative EV. What it has is an opportunity cost, but that's the whole package vs your alternative, not options. FAANG RSUs are free money.
  - dahart 5y ago
    Expected Value is what you get when you account for the opportunity cost, the opportunity cost is precisely what can turn equity into a negative EV.
    - anm89 5y ago
      Right. A thing that only has upside (options, let's forget about extreme tax situations for now) can't have negative EV on it's own. The implication is that it's negative EV when factoring the opportunity cost.
    - barrkel 5y ago
      Let's be more specific. Equity and options only have opportunity cost to the degree that accepting them means entering into an agreement which limits your opportunities. Generally, equity on its own does not require agreements like this. Accepting a job offer does. I don't think it's helpful to think of equity as having an opportunity cost. It makes it sound like taking equity, everything else being equal, could make you worse off. It won't. (Excepting externalities like taxes which are variable between jurisdictions.)
biomcgary 5y ago
On the other hands, some founders are amazing. I'm currently working at a biotech startup started by a very successful serial founder. At this company, the founder hired people that he has worked with before, so my colleagues are top-notch. The founder respects everyone he hired (and vice versa). The short-term compensation is highly competitive and rather than options, all employees were able to purchase shares (and the cost was covered by a bonus). All of the employees are regularly briefed on the fund-raising prospects (SAFE notes, Series A). Of course, I had just resigned from a company that fit the OP's description all too well.
- Liron 5y ago
  Note there are two components to this: (1) paying all cash-based compensation (2) giving the ability to invest at fair market price. I believe both components should be considered best practices.
carlosdp 5y ago
Every time one of these is written, it comes off as if the 90-day window is something startups came up with to try and screw employees. A reminder that the 90-day window is a requirement by law in order for options to qualify as Incentive Stock Options, and receive favorable tax treatment for employees [1]. If you want to do 10-yr exercise, that's fine, but until the law is changed those will be NSOs and not receive that special tax treatment and will be taxed on exercise instead of on sale. [1] https://www.cooleygo.com/isos-v-nsos-whats-the-difference/ https://www.cooleygo.com/isos-v-nsos-whats-the-difference/
- woah 5y ago
  There was a talk that's been shared on here from Ben Horowitz where he explicitly pitches the 90-day window as a way to screw employees. That's probably where the perception comes from: > The second way to handle it - no companies do this, which is why I actually really like this post that he wrote - is you can say up front, " Look you are guaranteed to get your salary but for your stock to be meaningful, these are the things that have to happened. You have to have vested. Two, you have to stay until we get to an exit. Untile the company makes it. You've got other money." Finally, the company actually has to be worth something. Because 10 percent of nothing is nothing. The reason we set the policy this way is we really value people who stay. So don't join this company if you are going to join another one in 18 months because you're going to get screwed. Our policy guarantees you're going to get screwed. https://genius.com/B-horowitz-lecture-15-how-to-manage-annotated https://genius.com/B-horowitz-lecture-15-how-to-manage-annot...
  - ghiculescu 5y ago
    He pitches it as a way of screwing employees who aggressively job hop. Not really the same thing.
    - gkop 5y ago
      No, a16z is very explicit about their views. This is not from Ben but from the current managing partner: > A 10-year exercise window is really a direct wealth transfer from the employees who choose to remain at the company and build future shareholder value, to former employees who are no longer contributing to building the business/ its ultimate value. https://a16z.com/2016/06/23/options-timing/ https://a16z.com/2016/06/23/options-timing/
Animats 5y ago
That's what most crypto investments look like.
deleted 5y ago
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IncRnd 5y ago
Well, actually I had a similar conversation at a startup a few years back. I wanted to be paid in stock instead of money. This is actually not an uncommon sort of conversation when you intend to work at a company, but where they want you to sell a separate existing company you already hold. In any case working for a paycheck is different compared to investing for a possible payday.
guelo 5y ago
It's so unethical. Especially since most engineers aren't savvy enough to have this conversation, the whole pitch is designed to bamboozle.
deleted 5y ago
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zeruch 5y ago
...they'd be investors.
faangiq 5y ago
The best founders do. And their investors are returning the favor. The sooner you realize we live in a scam/clown/ponzi world, the better.
- bogomipz 5y ago
  Did you mean to say they best founders don't treat their investors like employees? This arrangement would be favorable to the investors no?
ydlr 5y ago
The article leaves out the part where investors living in low-cost areas are offered less equity than investors in other areas. They are told this is still a good deal because it is a better deal than they'd find investing in local companies.
usr1106 5y ago
I don't work in a start-up to get rich. There is this 0.01% chance it could happen, but I don't waste my time on thinking of it (and that others would get unfairly richer in that event). I work in a start-up because I got tired of corporate BS and middle managers that produce nothing in the best case and hinder progress of my work in the not so good ones.
- bogomipz 5y ago
  >"I work in a start-up because I got tired of corporate BS and middle managers that produce nothing in the best case and hinder progress of my work in the not so good ones." Perhaps I'm unlucky but I've worked for enough startups where that sadly still existed. I feel like there's some point in the growth trajectory where inevitably those folks show up. Sometimes they even bring others from their former corporate cabal to help with those things.
pards 5y ago
I recently went through the interview process at a startup and got an offer at the end. The RSU and bonus schemes were so difficult to value that I just took another contracting gig with a simple hourly rate. I'll keep my investments separate to my work, thank you.
advaitruia 5y ago
Never heard of companies 3X'ing their last 'investor' valuation while assigning ESOPs.
egberts1 5y ago
That’s why I always exercise my stock options as early as possible even though the company makes no mention of this employee rights. Know your vested dates and step on it.

347 points by yodon 5y ago

> Can’t you guys just replace this 90-day clause with a 10-year expiry, so that I wouldn’t have to deal with all these risks? I'm not an expert but my understanding is that everyone should be pushing for this or for options to be way cheaper to purchase when you leave. Without one of those two options the safest thing to do to not waste vesting time is join a public company or a late stage startup. Late stage startup you're more likely to be acquired or IPO while you're there and you don't purchase options out of pocket. Early stage startups are where you're least likely to stay the 7-12 years required for the exit event to take place and thus most likely to leave vested options on the table when you leave the company because you don't have cash and/or don't want to risk that cash.

HWR_14 5y ago
As I understand it, options being cheaper to purchase means a larger tax bill when you vest them, since they have a strike price below their current value.
- lbotos 5y ago
  I'm not sure what you mean. You aren't taxed when options vest because there was no gain. Only when you exercise options, and you will be taxed on the gain. So if you make more money, sure your tax will be higher. RSUs are taxed at vest as that's a gain.
  - HWR_14 5y ago
    Because the options, when they vest, have no value. However, an ITM option does have value. The amount it's ITM. So you'd have to pay the amount it's below FMV as income, right?
    - lbotos 5y ago
      An options contract is the right to purchase shares at a certain price. Your vesting gives you the right to purchase more shares. If you do not purchase those shares, there was no gain, so there was no tax.
      - tylerhou 5y ago
        I think the parent poster is saying that this tax treatment of options is inconsistent with the way RSUs are taxed, though. RSUs are taxed at vest time even if you hold the shares, presumably because they can be sold immediately since they have some FMV. Options are not taxed at vest time, even if they are ITM and have some large positive FMV. And for ISOs, even if you exercise immediately at vest and you don't sell the exercised shares, there is no tax (assuming no AMT). What is the reason for the different tax treatment?
      - HWR_14 5y ago
        An option itself has fair market value. Like, I can buy options on Uber stock right now at a variety of price points. You can make the case that options at FMV have negligible value, which is why they get special treatment. But if you want to work at a startup unicorn and ask for stock options with a strike price of $0.01 as your whole income, it's still (possibly) extremely valuable.
        lbotos 5y ago
        This is going to sound mean but the more you talk the more confused I am about your original point. Please understand, I am trying to understand you. You originally said: > options being cheaper to purchase means a larger tax bill when you vest them The operative word here is vest. No tax on vest. I think you are trying to say "if you join a startup and get dirt cheap options, when you exercise them at a later date and they are worth something then, your tax bill will be larger than if you got more expensive options and exercise them. Yes, this is true. - strike price: $0.01 FMV at exercise: $20 - strike price: $15.00 FMV at exercise: $20 You have a larger gain in the first, so sure, you will pay more tax. Is this what you are trying to say?
bspear 5y ago
Believe the downside to 10-year is that they convert from ISOs to NSOs, which is far less tax-favorable But obviously, much better cashflow-wise
anamax 5y ago
If it's early, you should 83(b) the options. That eliminates the "tax at exercise" problem and starts the long-term holding clock. Yes, you have to come up with the cash to buy the stock at 83(b) time, but if it's early, that's pocket change.
- bcassedy 5y ago
  It's not pocket change for people early in their career. An early engineer in a series A company could easily be getting 10k+ in options
  - anamax 5y ago
    Series A isn't "early" these days and 10k options reflects that. (100k is only 1% given 10M authorized, 10M being reasonably common for initial authorization and 1% being around market for an early engineer.) That said, the strike price for common should still be reasonable at Series A - not $0.0001, but not $10 either, so 5-10k options can be around $10k. (Yes, a company can raise at $100M valuation even though the 10M common have a strike price of $1. The $100M is preferred.) And, there's no law saying that 803(b) is all or nothing.

bspear 5y ago

Somehow I heard Adam Neumann's voice throughout this article :) But yes, the hypocrisy is real. Employees get screwed big-time by lack of information and 90-day exercise window: https://www.productlessons.xyz/article/how-stock-options-for-employees-work https://www.productlessons.xyz/article/how-stock-options-for... Important thing is that the message continues to get out there, and more people know to ask the right questions.

d23 5y ago

Ha! Really close to a conversation I had with a recruiter back when I was looking. They were promising a ton of equity, and when I asked to see just a high level picture of the finances to make sure basics like the amount of runway were reasonably long I was met with an awkward pause. It's really strange that companies not only expect you to take a massive risk on the "upside potential" and then won't even let you inspect the current state. So yeah: I'll just go with Google I guess /shrug

ryandrake 5y ago
I once interviewed for a software position at a risky looking small company, and I asked the CEO/owner if the books were available for me to verify their 1-5 year outlook before I moved my family across the country for the job. He looked totally shocked and gave a weirdly cagey “no”. I learned long after the fact that at first he was mortified and then later had a “wow who does he think he is” chuckle with the HR lady about me. They ended up making a barely acceptable offer because despite my horrible faux pas, I was a domain expert and they couldn’t keep staff for more than a year. And I accepted because I was 1 month away from being bankrupt and homeless. Lasted a year and a half. The business turned out to be solid but I left for greener pastures. I have no idea why owners are so cagey about the health of their businesses and funding sources, to potential employees. Especially when things are basically fine! He was bootstrapped and evidently had fine cash flow. Why is this a faux pas to ask? HN is full of entrepreneurs: why are you so offended when a candidate asks about cash flow or to see the cap table?
- kmonsen 5y ago
  I once interviewed with a startup and the equity part of the offer was only x number of options. So I was like, OK what is current/expected evaluation and how many shares outstanding, like what is the percentage I get. That was apparently "big company thinking" and they rescinded the offer just for asking this question (through the experienced recruiter).
  - jacquesm 5y ago
    evaluation -> valuation?

rootusrootus 5y ago

(2020), and previously discussed here: https://news.ycombinator.com/item?id=24198228 https://news.ycombinator.com/item?id=24198228

ada1981 5y ago

I'd like to see the inverse of this -- if founders treated employees like they treat investors.

sl9dmk2 5y ago

Gotta love the satire. Another thing investors have is access to the full cap table and what people are paid across their entire portfolio. Employees have hearsay and scraps of info that friends are willing to share. Limited information = easy exploit Found this database of startup comp that sorta evens the playing field: https://topstartups.io/startup-salary-equity-database/ https://topstartups.io/startup-salary-equity-database/ Anything else out there?

21723 5y ago
The long con of startups is that founders want you to think you're an investor--in truth, you are, because you're investing time, which ought to be more valuable than the money of people who have scads of it--and work like you're an investor... but they're still going to treat you like an employee. It's the same dysfunctional bureaucracy of the corporate ladder, except in this iteration it's across companies, so you don't even see the true executives (VCs). There are more rungs, more pitfalls, and greater socioeconomic distances than there ever were before. The innovation of Silicon Valley isn't anything to do with technology, and hasn't been since the 1990s. Rather, it's the disposable company. If the investors get sick of something existing, they can choose not to fund it in the next round, call their friends and tell everyone else not to fund it, and it dies, allowing them to build something new in its place. The advantages (to investors) of the disposable company are legion, but one if them is that it doesn't matter all that much if you pick a scumbag. Which is also why YC backs so many DVFs (domestic violence founders). If they're jerks who get stuff done, you can let them collect a few million before firing them and putting your buddies in executive positions; if they're jerks who don't get stuff done, then you scrap the company and fund some other DVF.
- sl9dmk2 5y ago
  > Which is also why YC backs so many DVFs (domestic violence founders) Are you Ryan Breslow?
  - 21723 5y ago
    I don't know who he is. Should I?

akavi 5y ago

Huh, a lot of this doesn't ring true to me, as someone who's negotiated comp at 6 (mostly YC backed) startups over the past 5 years. In my experience, 10 year expiration dates for options and reasonably detailed financials (at the very least, ARR, ARR growth rate, churn rate) have been table stakes. And most companies were happy to let me view their latest round's pitch deck, after signing an NDA. It's frustrating that almost no company offers early exercise rights, given how significant a tax value that it can represent, but compared to most other industries, it does seem tech is particularly employee friendly.

anamax 5y ago
> And most companies were happy to let me view their latest round's pitch deck, after signing an NDA. If potential investors are seeing that deck without an NDA, why should you sign one?
- 21723 5y ago
  The real answer, of course, is social class. Marx was right. Investors are the bourgeoisie, and you're a proletarian whose survival needs are an exploitable resource. They don't follow the rules you do. Investors are like Ancient Greek gods (or Ancient Greek something else) to founders, and you and I are shit to these people, and the moment you stop making excuses for their behavior and see it as it really is, it all makes sense. What even Marx didn't foresee was the effectiveness with which managerial bureaucrats (who might have been considered upper proletarian in the 1800s) would take the system over for their own purposes and merge into--and, arguably, become--the real elite... the same thing that happened in certain failed socialist experiments.
  - bombcar 5y ago
    It’s less class and a matter of who needs whom. Tell an investor to sign and NDA and he says pass. An employee or potential employee doesn’t have the bargaining chips.
    - 5y ago

21723 5y ago

If the investors had bought in, Episode 2 would have 60% of the investors either being made so miserable they quit, or fired "for performance" after 364 days of service ("cliff") so they get nothing--of course, even the employees who do hold on rarely get anything, but that's another story. The really sickening thing is that most acquisitions (since that's the likely route for these companys, if they succeed at all) involve the common stock getting wiped out while the executives get "management incentive plans" in new stock. They still get screwed if they leave the acquirer (since their vesting clocks usually reset) but they at least have a shot at getting something.

anm89 5y ago

I'd have to imagine that taking equity as an employee is in most cases a negative EV move. Keep in mind, people win powerball. That fact that something is negative EV doesn't mean there aren't winners. FAANG RSUs might potentially be another exception. But it seems like early stage startup options are an absolutely minefields for employees. I've seen instances where it was setup so regardless of how the company performed, people in the first 10 employees would have walked away with nothing in an exit. And that's before talking about Cliffs. Even if every other thing falls into place, you can just get fired on day 355 if a founder decides they'd prefer to hold more equity.

barrkel 5y ago
Equity (in reality, options, not stock) doesn't have a negative EV. What it has is an opportunity cost, but that's the whole package vs your alternative, not options. FAANG RSUs are free money.
- dahart 5y ago
  Expected Value is what you get when you account for the opportunity cost, the opportunity cost is precisely what can turn equity into a negative EV.
  - anm89 5y ago
    Right. A thing that only has upside (options, let's forget about extreme tax situations for now) can't have negative EV on it's own. The implication is that it's negative EV when factoring the opportunity cost.
  - barrkel 5y ago
    Let's be more specific. Equity and options only have opportunity cost to the degree that accepting them means entering into an agreement which limits your opportunities. Generally, equity on its own does not require agreements like this. Accepting a job offer does. I don't think it's helpful to think of equity as having an opportunity cost. It makes it sound like taking equity, everything else being equal, could make you worse off. It won't. (Excepting externalities like taxes which are variable between jurisdictions.)

biomcgary 5y ago

On the other hands, some founders are amazing. I'm currently working at a biotech startup started by a very successful serial founder. At this company, the founder hired people that he has worked with before, so my colleagues are top-notch. The founder respects everyone he hired (and vice versa). The short-term compensation is highly competitive and rather than options, all employees were able to purchase shares (and the cost was covered by a bonus). All of the employees are regularly briefed on the fund-raising prospects (SAFE notes, Series A). Of course, I had just resigned from a company that fit the OP's description all too well.

Liron 5y ago
Note there are two components to this: (1) paying all cash-based compensation (2) giving the ability to invest at fair market price. I believe both components should be considered best practices.

carlosdp 5y ago

Every time one of these is written, it comes off as if the 90-day window is something startups came up with to try and screw employees. A reminder that the 90-day window is a requirement by law in order for options to qualify as Incentive Stock Options, and receive favorable tax treatment for employees [1]. If you want to do 10-yr exercise, that's fine, but until the law is changed those will be NSOs and not receive that special tax treatment and will be taxed on exercise instead of on sale. [1] https://www.cooleygo.com/isos-v-nsos-whats-the-difference/ https://www.cooleygo.com/isos-v-nsos-whats-the-difference/

woah 5y ago
There was a talk that's been shared on here from Ben Horowitz where he explicitly pitches the 90-day window as a way to screw employees. That's probably where the perception comes from: > The second way to handle it - no companies do this, which is why I actually really like this post that he wrote - is you can say up front, " Look you are guaranteed to get your salary but for your stock to be meaningful, these are the things that have to happened. You have to have vested. Two, you have to stay until we get to an exit. Untile the company makes it. You've got other money." Finally, the company actually has to be worth something. Because 10 percent of nothing is nothing. The reason we set the policy this way is we really value people who stay. So don't join this company if you are going to join another one in 18 months because you're going to get screwed. Our policy guarantees you're going to get screwed. https://genius.com/B-horowitz-lecture-15-how-to-manage-annotated https://genius.com/B-horowitz-lecture-15-how-to-manage-annot...
- ghiculescu 5y ago
  He pitches it as a way of screwing employees who aggressively job hop. Not really the same thing.
  - gkop 5y ago
    No, a16z is very explicit about their views. This is not from Ben but from the current managing partner: > A 10-year exercise window is really a direct wealth transfer from the employees who choose to remain at the company and build future shareholder value, to former employees who are no longer contributing to building the business/ its ultimate value. https://a16z.com/2016/06/23/options-timing/ https://a16z.com/2016/06/23/options-timing/

Animats 5y ago

That's what most crypto investments look like.

deleted 5y ago

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IncRnd 5y ago

Well, actually I had a similar conversation at a startup a few years back. I wanted to be paid in stock instead of money. This is actually not an uncommon sort of conversation when you intend to work at a company, but where they want you to sell a separate existing company you already hold. In any case working for a paycheck is different compared to investing for a possible payday.

guelo 5y ago

It's so unethical. Especially since most engineers aren't savvy enough to have this conversation, the whole pitch is designed to bamboozle.

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zeruch 5y ago

...they'd be investors.

faangiq 5y ago

The best founders do. And their investors are returning the favor. The sooner you realize we live in a scam/clown/ponzi world, the better.

bogomipz 5y ago
Did you mean to say they best founders don't treat their investors like employees? This arrangement would be favorable to the investors no?

ydlr 5y ago

The article leaves out the part where investors living in low-cost areas are offered less equity than investors in other areas. They are told this is still a good deal because it is a better deal than they'd find investing in local companies.

usr1106 5y ago

I don't work in a start-up to get rich. There is this 0.01% chance it could happen, but I don't waste my time on thinking of it (and that others would get unfairly richer in that event). I work in a start-up because I got tired of corporate BS and middle managers that produce nothing in the best case and hinder progress of my work in the not so good ones.

bogomipz 5y ago
>"I work in a start-up because I got tired of corporate BS and middle managers that produce nothing in the best case and hinder progress of my work in the not so good ones." Perhaps I'm unlucky but I've worked for enough startups where that sadly still existed. I feel like there's some point in the growth trajectory where inevitably those folks show up. Sometimes they even bring others from their former corporate cabal to help with those things.

pards 5y ago

I recently went through the interview process at a startup and got an offer at the end. The RSU and bonus schemes were so difficult to value that I just took another contracting gig with a simple hourly rate. I'll keep my investments separate to my work, thank you.

advaitruia 5y ago

Never heard of companies 3X'ing their last 'investor' valuation while assigning ESOPs.

egberts1 5y ago

That’s why I always exercise my stock options as early as possible even though the company makes no mention of this employee rights. Know your vested dates and step on it.