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The issue is the principal-agent conflict that cash-out opportunities create. The executives have a fiduciary duty to shareholders, including their employees. C

The issue is the principal-agent conflict that cash-out opportunities create. The executives have a fiduciary duty to shareholders, including their employees. Cashing out not only reduces the alignment of incentives between executives and shareholders, it also frequently causes executives to accept funding deals that are suboptimal for other shareholders. E.g., they may accept funding at a lower valuation or with otherwise less favorable terms in exchange for a partial cash out. Of course, you're correct in saying that everything is a negotiation. Rank-and-file employees should have accounted for the risk that they'd get screwed over by the founders and required more cash or equity to compensate for that risk. But I worry about a future in which the best talent refuses to work at private startups because the risk of getting screwed renders employee equity next-to-worthless. Arguably we're already there.

lovich 4y ago
Are we not already there? Any equity grant I’ve been given has always seemed like a lottery ticket to a lottery ticket to a lottery ticket. The company not only has to do well, it has to decide to actually IPO, and then there are lockout dates, and it’s always given as options instead of straight grants, and the vesting, and all the other constraints that I’ve forgotten. I’ve just valued them as zero when considering offers and only consider the salary portion which has the insidious(for employers) effect of making me unaligned with the companies best interests beyond the end of the week. Talking to my coworkers at every place I’ve worked it seems like a common feeling. Granted I’ve never worked at a unicorn company or faang so it might just be a function of working for less competent employers who are cargo culting compensation and don’t understand how it’s supposed to bind the employees to the company having a good future It seems like a lot of companies are so afraid of their employees gaining any sort of value out of the company that they’d rather risk failure than risk the situation being a win/win. The employers aren’t completely brain dead and they seem fine enough at negotiating and evaluating risk when it’s company to company negotiations. I can only assume it’s some cultural component of the wealthy class that leads to the continual self sabotage
- tfehring 4y ago
  For private unicorns I think the answer is no, I've seen plenty of good people join companies that are perceived to be likely to IPO soon. There's plenty of shady stuff that can still happen in late-stage startups, but I think the perception (which is probably somewhat but not completely accurate) is that at that point the equity is enough of a known quantity to be somewhat de-risked. For earlier stage startups...yeah, I dunno. To be clear, I think the illiquidity and vesting period and all of that are basically fine, well-understood risks, and in principle startups can offer enough equity to compensate "true believers" for those risks. What gets me is the really shady unforeseeable stuff, like converting part of the acquisition price to retention bonuses avoid paying out ex-employees for their vested equity. Between that unquantifiable risk and the inherent risk and illiquidity of early startup equity, I'd personally discount the 409a valuation by something like a factor of 5 when evaluating a job offer from an early-stage startup. I don't see a ton of people leaving FAANG or similar companies for early-stage startups, but obviously there are lots of engineers outside of FAANG companies, and I'm sure it helps that valuations are rich enough (or were until recently) to compete with non-tech companies on cash comp.
  - lovich 4y ago
    To me it seems “fine” in terms of everyone is doing it, but it doesn’t fit what I understood the goal of even granting equity in the first place. Namely trying to mitigate the principal agent problem. Every layer of risk or new rules added on makes it more and more likely that the equity is worth nothing but it costs companies a lot to set up these systems. It would be a lot simpler and cheaper to just grant stocks and then the calculation for employees is easy, you get paid big bucks of the company succeeds. The employers that are not doing that signals to me that they value keeping compensation down over actually having the company succeed
    - dalyons 4y ago
      You can’t “just grant stocks” though without subjecting employees to massive tax liabilities on non-liquid shares. That’s the primary reason options and RSUs exist. Unless I didn’t understand what you were saying

lovich 4y ago

Are we not already there? Any equity grant I’ve been given has always seemed like a lottery ticket to a lottery ticket to a lottery ticket. The company not only has to do well, it has to decide to actually IPO, and then there are lockout dates, and it’s always given as options instead of straight grants, and the vesting, and all the other constraints that I’ve forgotten. I’ve just valued them as zero when considering offers and only consider the salary portion which has the insidious(for employers) effect of making me unaligned with the companies best interests beyond the end of the week. Talking to my coworkers at every place I’ve worked it seems like a common feeling. Granted I’ve never worked at a unicorn company or faang so it might just be a function of working for less competent employers who are cargo culting compensation and don’t understand how it’s supposed to bind the employees to the company having a good future It seems like a lot of companies are so afraid of their employees gaining any sort of value out of the company that they’d rather risk failure than risk the situation being a win/win. The employers aren’t completely brain dead and they seem fine enough at negotiating and evaluating risk when it’s company to company negotiations. I can only assume it’s some cultural component of the wealthy class that leads to the continual self sabotage

tfehring 4y ago
For private unicorns I think the answer is no, I've seen plenty of good people join companies that are perceived to be likely to IPO soon. There's plenty of shady stuff that can still happen in late-stage startups, but I think the perception (which is probably somewhat but not completely accurate) is that at that point the equity is enough of a known quantity to be somewhat de-risked. For earlier stage startups...yeah, I dunno. To be clear, I think the illiquidity and vesting period and all of that are basically fine, well-understood risks, and in principle startups can offer enough equity to compensate "true believers" for those risks. What gets me is the really shady unforeseeable stuff, like converting part of the acquisition price to retention bonuses avoid paying out ex-employees for their vested equity. Between that unquantifiable risk and the inherent risk and illiquidity of early startup equity, I'd personally discount the 409a valuation by something like a factor of 5 when evaluating a job offer from an early-stage startup. I don't see a ton of people leaving FAANG or similar companies for early-stage startups, but obviously there are lots of engineers outside of FAANG companies, and I'm sure it helps that valuations are rich enough (or were until recently) to compete with non-tech companies on cash comp.
- lovich 4y ago
  To me it seems “fine” in terms of everyone is doing it, but it doesn’t fit what I understood the goal of even granting equity in the first place. Namely trying to mitigate the principal agent problem. Every layer of risk or new rules added on makes it more and more likely that the equity is worth nothing but it costs companies a lot to set up these systems. It would be a lot simpler and cheaper to just grant stocks and then the calculation for employees is easy, you get paid big bucks of the company succeeds. The employers that are not doing that signals to me that they value keeping compensation down over actually having the company succeed
  - dalyons 4y ago
    You can’t “just grant stocks” though without subjecting employees to massive tax liabilities on non-liquid shares. That’s the primary reason options and RSUs exist. Unless I didn’t understand what you were saying