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This seems like a good place to pose a question I've been thinking a lot about recently: What would be wrong with getting rid of options for employees, and jus

This seems like a good place to pose a question I've been thinking a lot about recently: What would be wrong with getting rid of options for employees, and just paying market salaries and cash incentives like profit-sharing or bonuses? HN has been replete lately with stories of early employees getting screwed because they got too little cash and not enough equity. I completely get wanting to let your employees share in the financial success of your business. That's only fair. But equity isn't just about sharing in the financial success, it's also about control. But unless I'm wrong, the 20% option pool for employees is there for financial incentive, not to give employees a vote in the election of the board or something. So why not just skip the equity mess and reward people with the cash they're trying to use equity as a proxy for? Of course, this presumes that startups CAN pay people market salaries and HAVE profits, both of which may be pipe dreams. Is that the only reason though? If you started a really profitable company and never gave employees equity, but were very generous with salaries, perks, bonuses, etc., would that dissuade the best from working for you?

deleted 15y ago
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jwegan 15y ago
With options, an employee can dream of making millions if the company becomes successful, but with most typical cash bonus/profit sharing there is no chance of that. The idea is that these mega cash-outs even if not very likely are more motivating than more modest size, but guaranteed bonuses. Even if you were to structure a bonus/profit sharing plan such that employees could make millions, then you run the risk of key employees making a bundle of money and then leaving for the next opportunity. With options, by the time it is clear the employee will make millions from the options they almost certainly do not have enough cash to deal with the tax implications of exercising (unless there is a secondary market) and will be unlikely to leave until the company reaches a liquidity event (which is good for the company).
wycats 15y ago
My preferred solution is consistent market salaries (a la Joel), annual profit sharing (pro rata based on salaries, applies to management too in lieu of bonuses), and a 10% employee bonus pool a la 37 Signals in the case of liquidation. This essentially gives employees regular shares of the annual windfall and a way to share in any ultimate windfall. I'd rather my employees get rewarded for their participation in company success regularly, rather than asking them to wait for a sale that may never come. And if an exit materializes, they should get something too. Then again, my opinions on this may change as I gain more experience as an entrepreneur.
- BrainInAJar 15y ago
  " Then again, my opinions on this may change as I gain more experience as an entrepreneur. " Translation: as I turn in to the typical greedy startup founder shyster
  - wycats 15y ago
    Meh, I doubt it. My opinions will change if the approach I am taking now result in significant failures to hire attract desired talent. My current hypothesis is that potential hires will consider good compensation, regular profit-sharing with the company, and significant upside in the case of an "exit" competitive with (and hopefully much better than) the "normal" offers. if my hypothesis is disproven, I will need to revisit things.

deleted 15y ago

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jwegan 15y ago

With options, an employee can dream of making millions if the company becomes successful, but with most typical cash bonus/profit sharing there is no chance of that. The idea is that these mega cash-outs even if not very likely are more motivating than more modest size, but guaranteed bonuses. Even if you were to structure a bonus/profit sharing plan such that employees could make millions, then you run the risk of key employees making a bundle of money and then leaving for the next opportunity. With options, by the time it is clear the employee will make millions from the options they almost certainly do not have enough cash to deal with the tax implications of exercising (unless there is a secondary market) and will be unlikely to leave until the company reaches a liquidity event (which is good for the company).

wycats 15y ago

My preferred solution is consistent market salaries (a la Joel), annual profit sharing (pro rata based on salaries, applies to management too in lieu of bonuses), and a 10% employee bonus pool a la 37 Signals in the case of liquidation. This essentially gives employees regular shares of the annual windfall and a way to share in any ultimate windfall. I'd rather my employees get rewarded for their participation in company success regularly, rather than asking them to wait for a sale that may never come. And if an exit materializes, they should get something too. Then again, my opinions on this may change as I gain more experience as an entrepreneur.

BrainInAJar 15y ago
" Then again, my opinions on this may change as I gain more experience as an entrepreneur. " Translation: as I turn in to the typical greedy startup founder shyster
- wycats 15y ago
  Meh, I doubt it. My opinions will change if the approach I am taking now result in significant failures to hire attract desired talent. My current hypothesis is that potential hires will consider good compensation, regular profit-sharing with the company, and significant upside in the case of an "exit" competitive with (and hopefully much better than) the "normal" offers. if my hypothesis is disproven, I will need to revisit things.