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This is a solid post, and setting comp is both important and nuanced. One really important topic that isn't addressed here as part of Compensation Reviews is r

This is a solid post, and setting comp is both important and nuanced. One really important topic that isn't addressed here as part of Compensation Reviews is re-evaluation of equity grants – particularly at times like these when tech equities are falling rapidly. A scenario that I think we will unfortunately see a lot of: * Employees have equity grants worth $100k/year in equity, with the value based on a fundraise from last summer (not uncommon for senior engineers in tech) * Tech co valuations from last summer were white hot. 50x, 70x, 100x ARR * The market has cooled significantly with valuations at say 6x, 10x, 15x ARR * As a result, the "true" value of employee equity will be way lower than expected * With comp that far below market lots of people will quit Of course, there's the question of what to do as a manager. Topping up all employees or raising cash comp for all is more fair but also increases burn, which is _exactly_ what VCs or public markets don't want to see right now. Behind closed doors many companies will top-up high performers and tacitly encourage low performers to leave the company. I was also a bit surprised to see that this post didn't discuss how companies think about and create bands beyond percentiles (example of how many companies approach the creation of bands: https://www.aeqium.com/post/how-to-create-compensation-bands https://www.aeqium.com/post/how-to-create-compensation-bands). Using percentiles to determine pay can work, but is typically a lagging indicator, as these sorts of comp benchmarks are based off of surveys that only go out so often. This is especially true in times of considerable compensation volatility like right now –comp for roles like engineering, design, product management, data science have all increased dramatically in the last 3-4 quarters, but this growth will probably slow significantly or even reverse given the current tech market downturn. That's very unlikely to get captured by percentile-based assessments.

scarface74 4y ago
Well, since personally I value equity at any private company at $0, you could throw as much “equity” as you wanted and it wouldn’t help retain me.
- jasonladuke0311 4y ago
  Parent is presumably referring to public companies. Many of us have a sizable chunk of our compensation coming from RSUs.
  - scarface74 4y ago
    How can you “presume” that when they explicitly said… > Employees have equity grants worth $100k/year in equity, with the value based on a fundraise from last summer? Yes I have RSUs from FAANG that are down 30% YTD. But when they vest in the next two months, at least I can sell them and diversify and use them for something. If it were a private company, not so much.
    - 3bproblem 4y ago
      This issue impacts both private and public companies, although indeed my comment did reference a private company scenario. However, you could just as easily replace that language with something like "with RSUs granted last summer" or similar. The issue is going to impact anyone who has a major equity grant set during prior_market_conditions who is now vesting that equity during current_very_different_market_conditions. Also as you called out the problem is largely worse for private companies.
      - scarface74 4y ago
        It’s much much worse. At least with all of the BigTech companies (FAANG - Netflix + Microsoft), they have huge profit generating business and they can pivot to offering more cash (like Amazon did before the crash) or even more stock. No one believes that those five companies will have worthless stock during their vesting periods. Private non profitable companies are stuck in a catch-22. If they offer more cash they increase their burn rate. If they don’t, their best employees leave and they lessen their chances to ever go public. On top of that, how many VCs will just cut bait and let the business fail? What are the chances that they can get another round of funding and if so, it’s not a down round making it even worse for existing employees?
- code_biologist 4y ago
  How do you value equity in a public company like Netflix or Shopify? I don't think you're wrong, taking it further it's really hard to value anything but AAMG (not FAANG lol) at face value.
  - scarface74 4y ago
    Netflix was always a nothing burger when it came to BigTech. It was the 50th most valuable company before the stock crash. It’s an accident of history (and CNBC) that it was ever included as a FANG stop. Notice the missing “A”? Cramer didn’t include Apple even though Apple was already the most valuable company by then or Microsoft that had been in the top 5 since 2000. Fortunately for employees of Netflix, all of their compensation is cash.
    - barry-cotter 4y ago
      > Fortunately for employees of Netflix, all of their compensation is cash. No, but they can choose the mix of stock and cash as they please, from 100% stock to 100% cash.
      - matwood 4y ago
        Is that a recent change? At least to me, Netflix was known to pay the most base salary b/c they didn't believe in giving out RSUs or other stock based comp.
- 3bproblem 4y ago
  Yup and that's your prerogative, but practically speaking there are many people in the market who do put the expected value of their equity above $0, and they're going to present a retention risk if their total compensation inclusive of equity gets too low. Fwiw this problem exists for public companies too.
  - scarface74 4y ago
    And those people don’t know the statistics of how rare it is for any company “succeeding” well enough for their equity be meaningful, how long it takes a company to have an exit (on average 7 years) or how brutal the IPO market can be during a bear market. The majority of employees at startups have never experienced a bear market.
    - 3bproblem 4y ago
      I hear you, although for better or worse teams somewhat need to manage to their employees' expectations and perceptions as well as the statistics on startup survival and liquidity. There's also a wide spectrum for the probability of a profitable liquidity event based upon scale, market, stability, etc...
cpitman 4y ago
Would you suggest companies clawback equity when it over performs?
- deleted 4y ago
  [deleted]
- bin_bash 4y ago
  I see this argument a lot: companies shouldn’t offer more equity in a down market because employees wouldn’t be willing to give back equity if they were up significantly. It doesn’t matter if this situation is “fair” though. What matters to the company is people will quit if they’re making half of what they expected to make.
  - 3bproblem 4y ago
    This is exactly right. In some situations it's a matter of practicality not morality. Anyone compensated in equity in large part needs to be willing to accept some share price volatility, but at a certain point people are going to leave and the company has to be proactive about that.
hrpnk 4y ago
re-pricing of options or an exchange [1] is indeed a very important aspect of compensation of private companies. While public companies value options based on publicly reported figures (and are restricted by NYSE/NASDAQ), private ones have to follow set rules in the 409a [2]. [1] https://www.shearman.com/perspectives/2020/03/revisiting-stock-option-repricing https://www.shearman.com/perspectives/2020/03/revisiting-sto... [2] https://www.loeb.com/en/insights/publications/2007/05/section-409a-and-stock-options https://www.loeb.com/en/insights/publications/2007/05/sectio...

scarface74 4y ago

Well, since personally I value equity at any private company at $0, you could throw as much “equity” as you wanted and it wouldn’t help retain me.

jasonladuke0311 4y ago
Parent is presumably referring to public companies. Many of us have a sizable chunk of our compensation coming from RSUs.
- scarface74 4y ago
  How can you “presume” that when they explicitly said… > Employees have equity grants worth $100k/year in equity, with the value based on a fundraise from last summer? Yes I have RSUs from FAANG that are down 30% YTD. But when they vest in the next two months, at least I can sell them and diversify and use them for something. If it were a private company, not so much.
  - 3bproblem 4y ago
    This issue impacts both private and public companies, although indeed my comment did reference a private company scenario. However, you could just as easily replace that language with something like "with RSUs granted last summer" or similar. The issue is going to impact anyone who has a major equity grant set during prior_market_conditions who is now vesting that equity during current_very_different_market_conditions. Also as you called out the problem is largely worse for private companies.
    - scarface74 4y ago
      It’s much much worse. At least with all of the BigTech companies (FAANG - Netflix + Microsoft), they have huge profit generating business and they can pivot to offering more cash (like Amazon did before the crash) or even more stock. No one believes that those five companies will have worthless stock during their vesting periods. Private non profitable companies are stuck in a catch-22. If they offer more cash they increase their burn rate. If they don’t, their best employees leave and they lessen their chances to ever go public. On top of that, how many VCs will just cut bait and let the business fail? What are the chances that they can get another round of funding and if so, it’s not a down round making it even worse for existing employees?
code_biologist 4y ago
How do you value equity in a public company like Netflix or Shopify? I don't think you're wrong, taking it further it's really hard to value anything but AAMG (not FAANG lol) at face value.
- scarface74 4y ago
  Netflix was always a nothing burger when it came to BigTech. It was the 50th most valuable company before the stock crash. It’s an accident of history (and CNBC) that it was ever included as a FANG stop. Notice the missing “A”? Cramer didn’t include Apple even though Apple was already the most valuable company by then or Microsoft that had been in the top 5 since 2000. Fortunately for employees of Netflix, all of their compensation is cash.
  - barry-cotter 4y ago
    > Fortunately for employees of Netflix, all of their compensation is cash. No, but they can choose the mix of stock and cash as they please, from 100% stock to 100% cash.
    - matwood 4y ago
      Is that a recent change? At least to me, Netflix was known to pay the most base salary b/c they didn't believe in giving out RSUs or other stock based comp.
3bproblem 4y ago
Yup and that's your prerogative, but practically speaking there are many people in the market who do put the expected value of their equity above $0, and they're going to present a retention risk if their total compensation inclusive of equity gets too low. Fwiw this problem exists for public companies too.
- scarface74 4y ago
  And those people don’t know the statistics of how rare it is for any company “succeeding” well enough for their equity be meaningful, how long it takes a company to have an exit (on average 7 years) or how brutal the IPO market can be during a bear market. The majority of employees at startups have never experienced a bear market.
  - 3bproblem 4y ago
    I hear you, although for better or worse teams somewhat need to manage to their employees' expectations and perceptions as well as the statistics on startup survival and liquidity. There's also a wide spectrum for the probability of a profitable liquidity event based upon scale, market, stability, etc...

cpitman 4y ago

Would you suggest companies clawback equity when it over performs?

deleted 4y ago
[deleted]
bin_bash 4y ago
I see this argument a lot: companies shouldn’t offer more equity in a down market because employees wouldn’t be willing to give back equity if they were up significantly. It doesn’t matter if this situation is “fair” though. What matters to the company is people will quit if they’re making half of what they expected to make.
- 3bproblem 4y ago
  This is exactly right. In some situations it's a matter of practicality not morality. Anyone compensated in equity in large part needs to be willing to accept some share price volatility, but at a certain point people are going to leave and the company has to be proactive about that.

hrpnk 4y ago

re-pricing of options or an exchange [1] is indeed a very important aspect of compensation of private companies. While public companies value options based on publicly reported figures (and are restricted by NYSE/NASDAQ), private ones have to follow set rules in the 409a [2]. [1] https://www.shearman.com/perspectives/2020/03/revisiting-stock-option-repricing https://www.shearman.com/perspectives/2020/03/revisiting-sto... [2] https://www.loeb.com/en/insights/publications/2007/05/section-409a-and-stock-options https://www.loeb.com/en/insights/publications/2007/05/sectio...