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The problem with this model is that the company at liquidity event often rarely resembles the company during the early phases. As such, the employees which ben

by drone 13y ago

The problem with this model is that the company at liquidity event often rarely resembles the company during the early phases. As such, the employees which benefit the company the most during the early phases, and whose skills are most aligned to those phases will not be fairly rewarded if they make the (IMO, correct) decision to leave the company to make room for the right people at those later stages. The assumption here seems to be that the primary value of an employee is their future effort, not their past. While there are certainly problems with poor employees leaving with some options vested, I fail to see this as an endemic issue where tons of bad employees are leaving companies one day after the initial vesting cliff (which should only result in the first tranche of options, not their full amount). If you have a big problem with this - I'd say the problem is not the vesting of stock options, but your failure to accurately create the right ISO plan and the failure to accurately identify which employees are likely to leave before you've attained the value you need from them.

the_watcher 13y ago
>> The problem with this model is that the company at liquidity event often rarely resembles the company during the early phases. As such, the employees which benefit the company the most during the early phases, and whose skills are most aligned to those phases will not be fairly rewarded if they make the (IMO, correct) decision to leave the company to make room for the right people at those later stages. Your concerns make sense, but can't you mitigate this with larger or better equity grants to those employees? Valuing their past effort is easily achieved with bonuses (I realize this requires the company to actually do it, but the concept works).
- drone 13y ago
  > but can't you mitigate this with larger or better equity grants to those employees In a perfect world, yes, however, most companies are reticent to offer additional equity to existing employees. Not that it doesn't happen, but it usually requires the employee to ask for it. One of the big issues, which I presume they expect this plan to help resolve, is how do you pre-judge a prospective employee's value? The employee wants a maximal initial grant, and the employer typically wants a minimal grant. The more they favor the grant desire of the employee, the longer the vesting period becomes - such that the employer is able to cut their losses if the employee doesn't pan out. Simply knowing that if you leave, some other guy that comes after you is going to get your 1% entices you to stay around long after your usefulness has ended. Either way, the company is already out of their 1%, but now they have an additional payroll drag. Much better to accept the 1% if you're going to give it, and be done with it. I'm also unaware of what the sourcing is by the article's author, wherein lies this huge problem that non-employees hold a bunch of stock in a company is making it difficult for companies to grow into their full potential. To be fair, if a company takes outside investment, it typically gives more stock to non-employees than employees, additionally giving them preferred upside and rights the employees as common stock option holders do not have. Again, if they feel the outside investors have much better aligned interests with the company than the current employees, they have a different problem than option grants.

by drone 13y ago

the_watcher 13y ago

>> The problem with this model is that the company at liquidity event often rarely resembles the company during the early phases. As such, the employees which benefit the company the most during the early phases, and whose skills are most aligned to those phases will not be fairly rewarded if they make the (IMO, correct) decision to leave the company to make room for the right people at those later stages. Your concerns make sense, but can't you mitigate this with larger or better equity grants to those employees? Valuing their past effort is easily achieved with bonuses (I realize this requires the company to actually do it, but the concept works).

drone 13y ago
> but can't you mitigate this with larger or better equity grants to those employees In a perfect world, yes, however, most companies are reticent to offer additional equity to existing employees. Not that it doesn't happen, but it usually requires the employee to ask for it. One of the big issues, which I presume they expect this plan to help resolve, is how do you pre-judge a prospective employee's value? The employee wants a maximal initial grant, and the employer typically wants a minimal grant. The more they favor the grant desire of the employee, the longer the vesting period becomes - such that the employer is able to cut their losses if the employee doesn't pan out. Simply knowing that if you leave, some other guy that comes after you is going to get your 1% entices you to stay around long after your usefulness has ended. Either way, the company is already out of their 1%, but now they have an additional payroll drag. Much better to accept the 1% if you're going to give it, and be done with it. I'm also unaware of what the sourcing is by the article's author, wherein lies this huge problem that non-employees hold a bunch of stock in a company is making it difficult for companies to grow into their full potential. To be fair, if a company takes outside investment, it typically gives more stock to non-employees than employees, additionally giving them preferred upside and rights the employees as common stock option holders do not have. Again, if they feel the outside investors have much better aligned interests with the company than the current employees, they have a different problem than option grants.