41 ms·

We need to rethink employee compensation

481 points by katm 11y ago

birken 11y ago
Another really important, highly negative, combination of these factors is if you want to leave the company. If the company is public, then you can essentially leave whenever you want, exercise the options and sell the stock to pay the costs (exercise price + taxes). But if the company is private, you have to pay the exercise price + applicable taxes (which can exist even if you only have theoretical gains) yourself, without the ability to hedge your risk and sell the still illiquid stock. If you have ISO stock options, you have 90 days after you leave (or are fired) to figure this out or lose the stock options altogether. So if you are joining a company with the following combination of elements: 1) High exercise price (the math is: # of options * exercise price... is this a lot of money or not) 2) ISO stock options or the stock option plan gives you limited time to exercise after you leave 3) No reliable system to sell the private stock Then you should add in a further discount on the stock options, because there may be situations where you cannot afford to reap the benefits of the options if you leave (or are fired) before there is reliable liquidity for the stock.
- dschwartz88 11y ago
  Just a heads up, the 90 day out clauses are usually put in there by the company lawyers. The only rule the IRS has is that ISO options flip to NSO after 90 days[0]. Take a look at the Pinterest options plan[1], where Pinterest actually gives you 7 years from when you leave to exercise. Your ISO options just flip to NSO after 90 days. [0] http://www.mystockoptions.com/faq/index.cfm/catID/36274DB1-D3C4-4D93-B57E8FA2916B9477/objectID/F1E4EDF6-2B05-452D-9AFD3FB64A55AE1E http://www.mystockoptions.com/faq/index.cfm/catID/36274DB1-D... [1] http://fortune.com/2015/03/23/pinterest-employee-taxes/ http://fortune.com/2015/03/23/pinterest-employee-taxes/
  - kyleblarson 11y ago
    In this situation it would be great if there were something similar to the 83b letter for non-founder employees. I know too many people who have exercised options when leaving a company (and paid a hefty tax) only to see the value of the resulting equity trickle down to 0.
  - birken 11y ago
    Yes, but if the 90 day expiration is in the plan, then it is 90 days. It doesn't matter why the lawyers put it in there, though IRS treatment is a reason why it is very common. You aren't going to be able to negotiate changes in the stock option plan with a company you are thinking of joining. If you are working at a company like Pinterest with a more employee-friendly option plan, then you should value the stock options at a higher value as compared to less employee-friendly plans. I ultra-long expiration periods are awesome, and they are another practical method to deal with the longer period to IPO. These types of options aren't as good as having liquidity for the stock, but with them you can be sure that if you vest the option and the company value goes way up, you'll get the benefit from that.
  - kentonv 11y ago
    The ISO -> NSO switch can have severe tax consequences for the employee. Even if your company doesn't expire your options in 90 days, consider exercising within 90 days anyway (and talk to a tax lawyer, etc.). One not-as-obvious reason why companies are reluctant to set long expiration dates on options is because it means former employees take up space in the cap table even if they have no intention of ever exercising that option. The company essentially has to treat those shares as having been purchased, without having received any cash for said purchase. Cap table cruft can make it harder to negotiate subsequent funding rounds.
    - scurvy 11y ago
      Oh noes! Don't disrupt the almighty cap table with a few peons worth of shares! Please. These are discounted to zero by anyone worth a salt.
- zmillman 11y ago
  I've been hit with this too and it's not pretty at all. If anyone else is concerned about this, you should talk with your CEO/legal team about early exercise options which can remove a lot of the risk of massive tax liabilities. From my understanding, some companies offer an early exercise option where you pre-purchase the shares and then instead of being able to buy the shares after they've vested, the company instead gradually loses the right to buy them back at the original strike price. I'm not a tax lawyer, but Google "section 83(b) election" and you'll find more information.
  - kentonv 11y ago
    What you're describing is called "restricted stock" (not to be confused with "restricted stock units", which are entirely different). The idea is that you actually buy the shares upfront at the current 409(a) (legal) valuation, but the company has a right to buy them back if you leave. Founders usually get their shares this way, because at the time of founding the valuation is essentially zero. Early employees may take this route too, but usually the company switches over to options after a funding round forces a non-negligible valuation. Some companies (like mine, at least so far) continue to let new employees choose. The amount you would pay for restricted stock is exactly the same as what would otherwise be your strike price for stock options, assuming the same number of shares. For an employee, the major down side of choosing restricted stock (assuming non-negligible valuation) is that if the company fails and the stock ends up being worth nothing, you don't get that money back. Whereas with stock options, you have more time to find out if the stock will be worth anything before you buy into it. The up side is possible tax advantages, but of course I cannot give tax advice. (All this is information I've learned while being the founder of sandstorm.io; I am not an expert in these things.) PS. Don't forget to file your 83(b). (Any time you say "restricted stock" to a startup founder, they will instinctively reply with "Don't forget to file your 83(b)".)
    - jalonso510 11y ago
      You can also sometimes early-exercise an option (if the company authorizes it when they make the grant), which ends up being in practice a lot like buying restricted stock while still technically an option, and I think that's what the parent was referring to.
- danielweber 11y ago
  If you don't have a seat in the board room, you are at the mercy of the board as to whether your options retain any value. It's very easy for the board to completely dilute you to nothingness, and having exercised, well, the attitude is "fuck you" because there is nothing more you can give the company.
- dylanlacom 11y ago
  > you have to pay the exercise price + applicable taxes (which can exist even if you only have theoretical gains) yourself... Is this certain? My understanding is that the spread between the current stock price and exercise price _can_ be taxed at the AMT rate. And if you were to sell the stock, you can get any taxes paid back in the form of an AMT credit. Still liable to pay capital gains or short term gains tax though at the sale. Without the AMT credit, it would essentially be double taxation.
justizin 11y ago
"When shares can only be sold in private transactions on secondary markets, and, increasingly can only be sold with the consent of the company, the options are actually worth less." There's no space in the middle of "worthless" ;)
- paulpauper 11y ago
  that is the least of the article's problem. The whole premise is flawed.
  - mbrameld 11y ago
    Care to actually add anything to the discussion?
- stephengillie 11y ago
  In economics, you often deal with situations where an asset has devalued below another asset's value. The first asset still has value, but relatively less than the second. This is different from an asset which has zero value. Some economists enjoy the wordplay of "worth less" (first meaning) vs "worthless" (second meaning) In this instance, it looks like the article is describing how increasing controls further devalues the options. Edit: For instance, if the company decides on each attempt if you're allowed to exercise the option, you might value it at 25% of the stock price, or lower. Even moreso, you can't be certain that the company will still exist when your options can be traded for cash, which should devalue the options even more in your perspective. It should be the net same as if you're working for someone, and they paid you with an IOU for 1% of the money they might win from a lottery ticket. So the value might be infinitesimally small, but not zero.
  - fredkbloggs 11y ago
    The point here is that due to the factors the author noted (and probably others), the perceived value of options in nonpublic companies is now low enough that many (most?) candidates/employees no longer consider it relevant. I happen to agree with that choice, regardless of whether the expected value to the employee of the options is actually zero or just some very small number. We can debate the true ev of an option, we can apply various formulae to attempt to compute it, and we can each agree to devalue various restrictions differently according to our own preferences. But I think we can probably agree that in many if not most situations, the value of the options to the employee is too small to affect the decisions that employee is going to make. It doesn't matter whether that value is zero or $50 or $5000, it matters only that it's too small to be material. To the extent that this is a problem for founders/owners, it's largely of their own making. It seems like it should be easy enough to correct if they want to, but they will have to give up many if not all of the wildly favorable (to them) terms and/or give up more equity to their employees to do it. The alternatives all involve paying more cash, which is probably the right answer for everyone anyway; it's disappointing that the author didn't even seriously discuss the possibility of simply paying higher salaries in lieu of equity. Apparently that's simply taboo.
paymeyoumofo 11y ago
I start all jobs and approach compensation as simply: fuck you, pay me. Pay me a large salary. If you want to add discretionary bonuses on top? Nice. Additional equity? Great. Option? Ok. But first, big fat salary you mf. Once I have that, the rest if any are cherries on a cake. A big fat cake.
randomname2 11y ago
"They note that the average time to IPO is now 11 years vs. 4 in 99, and that the overall number of tech IPOs is plummeting as privately funded companies raise huge late stage private rounds instead." What part do the increased regulatory requirements for public companies play in this? Might this be one of the unintended consequences of Sarbanes-Oxley?
- tonnesoffun 11y ago
  Yes definitely. Increased regulatory requests means it takes longer and costs more to go public. The Emerging Growth Company Act (EGC) helps this somewhat: companies with < $1b in revenue have less reporting requirements if they file to go public. Most VC-backed companies that do an IPO will leverage this. Clearly, the benefit of staying private (and still being able to raise $100M+ rounds) outweighs the consequences of illiquidity for employees....at least in the eyes of the founders and management.
- tonnesoffun 11y ago
  Yes definitely. Increased regulatory requests means it takes longer and costs more to go public. The Emerging Growth Company Act (EGC) helps this somewhat: companies with < $1b in revenue have less reporting requirements if they file to go public. Most VC-backed companies that do an IPO will leverage this. Clearly, the benefit of staying private (and still being able to raise $100M+ rounds) outweighs the consequences of illiquidity for employees....at least in the eyes of the founders and management.
normloman 11y ago
Profit sharing.
- dhimes 11y ago
  Agree. http://blogs.balsamiq.com/team/2011/09/12/profitsharing/ http://blogs.balsamiq.com/team/2011/09/12/profitsharing/
dotBen 11y ago
Interesting article but it fails to mention a significant source of liquidity for startup shares (both currently and historically): Acquisition by a publicly traded company. IPO isn't the only way to obtain liquidity, but what's interesting is just like companies are shunning IPO they are also shunning acquisition. We don't normally get to know about failed acquisition offers but Snapchat's $3bn offer by Facebook is a great case in point. A few years ago practically no one would have turned down that kind of offer, which would have also created a liquidity event for everyone currently employed at Snapchat. Various factors today mean someone like Evan Siegel was prepared to turn that down. I'd love to see more discussion about that as much as the IPO market itself.
- paulpauper 11y ago
  exactly..fundamentals will always trump liquidity
bcg1 11y ago
The premise should be simple I think... pay people competitively with actual money for the work they are actually doing right now. If there is a chance their work could lead to a huge paypay... then give them a claim to a sliver of that payday. Don't cross the streams.
paulpauper 11y ago
I don't mean to sound too dismissive, but this article is bunkum. SO I guess by the author's logic, Michael Bloomberg's net worth is zero because Bloomberg LP never went public? The private market is illiquid, but fundamentals will always trump liquidity. If you own equity, that equity - assuming there is no dilution or deterioration in the fundamentals of the underlying business - is wealth. Employee stock options are a different matter, but deep in the money options are essentially as good as partial ownership. it may be harder to assess valuation in a private market, but it's done nonetheless.
- fredkbloggs 11y ago
  Mr. Bloomberg's privately held equity undoubtedly makes distributions to its shareholders. Stock that does not pay dividends and is unlikely ever to do so is not wealth; it's just a piece of paper. And if you cannot legally sell it to someone else, it's effectively worthless as there is no way to convert it into something of value. The exception is if you have a majority of the voting rights, but that's not what this article is about.
  - 001sky 11y ago
    There are many liquidity events that are not in the set of 'IPO' events. But the issue remains that liquidity is a core element of asset value. Many later stage financing events can be structured to provide limited liquidity to founders and early investors; the issue is that this may not help all employees equally. The IPO is useful in this case.
- tghw 11y ago
  Bloomberg is an owner. While an employee that owns stock is technically an owner, it's not a significant distinction because they are in such a minority that they have no control over the stock, and are therefore at the whim of the majority owners. It doesn't mean the options are worthless, but they have to be discounted. I owned stock in a company that will, very likely, never go public or get acquired. It doesn't need to. Because of the shareholder agreements, I could only really sell back to the company. Sometimes they were amenable to buying, other times they weren't. Essentially, I was playing in a monopoly market, except the monopoly was on the buyers side. Fortunately for me, the majority owners were much more generous than they needed to be. Without that, I wouldn't have been able to make anything from the stock.
ChuckMcM 11y ago
I am not sure I understand Aaron's point in this. Is it "We should pay people more?" But isn't that really a question of whether or not you can find people who will work for the salary your offering? If you can't you raise what your willing to pay until you find someone who will right? Or is it "We should make options always remunerative?" In which case they aren't really options are they? They are just salary so why not just switch to a fixed + variable salary system like so many folks do. Heck you could even go all pay to perform like sales folks have been paid for ages, "Get this code done, you get paid, don't you don't." I personally don't think that incents the best choices but it can motivate. If you want to write into your corporate by laws that every round of funding includes a 10% of the shares in the funding must come from employees common stock, and you always divide by 'n' (the number of employees that want to participate) the amount of stock they can contribute, well that is ok, except your converting common to preferred in that case and the SEC is going to ask a lot of questions about that. There is the perception that founders of unicorns are rich, but trust me, they aren't, what they are is "rich on paper" and when they can't raise any more money and they are running out of cash on hand, the founders stock is going to be worth just as much as the employee's stock, which is near 0. So it will all even out. There are a lot of people who were working in the Bay Area during the 90s (and I'm one of them) that were multi-millionaires on paper at some point, and that same paper because worthless sometime later before it could be converted into cash. Did I "lose" 12 million dollars? No, of course not. I never had 12 million dollars, what I had was a concatenation of increasingly improbable if statements which if the 'true' path was followed to the end, could be converted into $12M. Since not all of those if statements resolved true, the actual result was about $83,000. Lots and lots of people had the same sort of experience. Aaron, if you're reading, what problem are you trying to solve?
- ryandrake 11y ago
  Sounds like this is an employee education problem at its root. Naive job candidates are evaluating offers and way overvaluing their equity compensation, sometimes even allowing it to substitute for cash. As discussed in a separate thread, the consensus is that options (vested or not) in a non-liquid company should be valued at or close to $zero. This could be an education job for college Career Services.
shawnee_ 11y ago
If IPOs are getting significantly delayed and are potentially at risk of not happening at all,[1] we need to change how compensation is structured. Not sure that this is the best opening argument here. With things like the JOBS Act passing, Reg A+ and such getting off the ground, my hypothesis is that we'll see an acceleration in the rate at which companies are able to get to the IPO stage. If anything, in the short / near-term future, we'll see an increase in value of paper. The whole point of offering equity to shareholders and stakeholders is to have people (ownership theory) who are rooting for and/or willing to work toward group success. The problem, of course, is that executives at far too many companies use equity like a dangling carrot... demanding more than reasonable time for even a basic ROI for the people whose risks are the riskiest (early employees).
onion2k 11y ago
The first is a founder pledge that they will do everything in their power to let common holders sell into secondary markets above a certain valuation, say, $500mm. How many VC backed startups get to that sort of valuation without going public? At the $1bn mark, globally, there are 98[1]. I imagine it's possible there are 50 times that number at $0.5bn, but that's still a pretty small number out of all the startups there are. To fix compensation we need things that are going to move the needle even for relatively small companies. [1] http://graphics.wsj.com/billion-dollar-club/ http://graphics.wsj.com/billion-dollar-club/
dkasper 11y ago
> companies need to standardize their secondary sale and options repurchase practices I realize this is somewhat trolling, but like Benedict Evans joked in the recent a16z podcast on this topic traditionally that's a process called... IPOing. http://a16z.com/2015/06/17/a16z-podcast-the-rise-of-the-quasi-ipo/ http://a16z.com/2015/06/17/a16z-podcast-the-rise-of-the-quas...
Animats 11y ago
This is for the special case of options in successful startups, a problem which affects well under 1% of the workforce. Nobody is going public because borrowing is so cheap, resulting in round after round of leveraged private equity. This may change when the Fed starts cranking up interest rates around the end of this year. Also, the new JOBS act rules for small IPOs are now in effect. So far, nobody seems to have done much with them, but that's now an option for companies at the point they need a follow-on round.
marssaxman 11y ago
Options are just a fancy lottery ticket. I have learned to consider their value as $0 when evaluating a prospective employer's compensation offer; they have lost all incentive power.
- balls187 11y ago
  Financially speaking, that is the most prudent thing to do.
brudgers 11y ago
Salary is the only hedge employees get that is congruent to the liquidation preference preferred stock provides passive investment. It is increasingly important because capital is finding 1x liquidation preference in a startup investment a reasonable alternative to parking cash in near zero interest rate bonds. The same institutional investors who used to buy IP's can now provide capital directly and the beneficial outcome gap between passive capital and employee equity is increasingly wide.
kabdib 11y ago
Treat options as wastepaper. They're lottery tickets. If they are worth something someday, then great, good job. But you can pour yourself into a company heart and soul, one with options and one without, with exactly the same outcome: Zero. And to a large degree the outcome is not only not under your control, it is often under the control of predatory entities who do not want you to realize any return. As an employee, get a competitive salary because the chances verge on certainty that those options will be worth zero, no matter how hard you work and no matter how much you think your contributions will move the needle. The equation is different for honest-true-and-blue founders. But for a worker bee, sure, make a show that options are interesting to you, but don't trade them for cash compensation, it's a bad deal for you.
brightball 11y ago
Something to keep in mind...there is nothing standing in the way of you negotiating your own compensation package.
ig1 11y ago
There are other solutions: 1) The company could offer to buy back options at market rate. 2) The company's current investors could offer to buy equity from employees. The majority of investors returns come from a small number of portfolio companies, for those companies that are doing well the investors want a bigger stake even if it comes in as secondary. 3) Companies could appoint designated investors who could buy secondary stock from employees. Successful companies typically have over-subscribed rounds, companies could allow those investors who they like but couldn't get into the round to buy employee stock. The general reason (2) and (3) don't happen is that individual employees don't have that much stock and the overhead involved makes it not worthwhile. But potentially there could be a solution which involves bundling together stock into meaningful amounts.
- dsjoerg 11y ago
  A blend of 2) and 3) would be 4), options-holders get right of first refusal on stock sales with a valuation >$X
- scurvy 11y ago
  I believe that Cloudflare does 2 and 3.
dsinsky 11y ago
One of the big issues here is that once employees start selling common stock, the strike price of the options can no longer be set at a large discount to the latest valuation as it can when the only transactions are the preferred stock shares that are sold when the company raises money from VCs. One of the most attractive things about employee stock options is that the strike price is often set at 30-40% of the valuation of the latest financing round. So a company that just raised (preferred) money at a $500m valuation can give their employees options with strike prices around $200m or less. Therefore, the employee can believe that they have a "locked-in" gain day one.* If employees sold their common shares at anywhere near fair value at the same time the company was raising the round, they would likely sell at a price between $400m-$500m a very slight discount to the preferred shares. Any future option grants given would have to have a strike price reflective of these recent common-stock transactions, and companies would no longer be able to use the low strike prices of options to attract employees. Obviously, this is just one trade-off among many and in no way means that companies shouldn't allow more sales of employee common stock over time, but its worth understanding the many reasons companies currently are resistant to doing so as much as individual employees would like. *Obviously, common shares should be priced at a discount to preferred shares but almost everyone I've talked to in the VC/startup community believes that the 60-70% discount applied is extremely generous as it implies that up 60-70% of the value the VCs investment is in downside protection (ie the debt-like element) rather than upside potential (ie the equity-like element), a pretty nonsensical amount for a high-risk, asset-light VC investment.
- scurvy 11y ago
  You're discounting the value of preferred stock vs common stock. Funding rounds sell different series of preferred stock. The relationship from common to preferred stock is loose at best, despite what any 409a "valuation expert" claims.
leopoldo 11y ago
How crazy would it be to say something along the lines of: "OK, I'll accept your offer but I want to be paid for overtime, and have [some] freedom to work in personal projects/consulting (as long as they don't expose 'trade' secrets from the company)" It's like saying, I'll take your low pay + stocks but you will also be risking that I start making more money on my own and leave.
danielweber 11y ago
I was at a startup company where an employee wanted to sell his stock and had a buyer, and the company said "no, if you want to do your own sale, you will need to hire an auditor in your own dime to determine the value, and we won't let your auditor see the books." And this company was above average in not pulling dirty tricks.
nhangen 11y ago
What about the increase in shares being sold in the private markets, and during financing rounds? Wouldn't that help make up some of the opportunity lost by staying private?
Jemaclus 11y ago
In this market, I tend to think of options as incentives, and not as replacements for salary. Salary gets me in the door and work hard, great people and culture make me want to be there and evangelize, and options incentivize me to work my ass off. (I'd work my ass off without options, but the options really make it easy to say "I will do everything in my power to make this succeed" instead of "I'd rather go spend time with my friends tonight"). To put it a slightly different way, I can't pay my rent with options. You can offer me all the options in the world, but my landlord doesn't accept them as payment. Therefore, you cannot simply exchange salary for equity. I received an offer from a company a year or two ago, and they offered me a salary almost 50% below my then-current salary, and then some equity. When I tried to negotiate on salary, the CEO berated me for ignoring the equity. The problem is that as far as equity is concerned, it's worth $0 until you exit. There's a potential for millions, but my lottery ticket is also worth potentially millions of dollars. My landlord won't accept my lottery ticket as payment. Long story short, Aaron is correct: startups need to rethink the whole equity component. It's valuable -- but it's not valuable in the same way that salary is, especially in today's market.
- drivingmenuts 11y ago
  I tend to think of options as worthless, until they vest. Which is too far in the future to count on. Pay me money. That's actually useful.
  - mpdehaan2 11y ago
    This. It seems that it's acceptable in tech culture to use "you have too much stock" a reason to even underpay founders. This is busted logic, as the company could explode at any time, not to the fault of anyone in particular (but sometimes yes). So far, I think I've been in 3 decent startups that all of which failed and do not exist anymore. None of them exited cleanly. Some might, but you might not want to stick it out that long, and those are often hard commitments to make depending on the work environment. New grads and skilled developers alike should never be seduced by "we can't pay more , because we are startup, because we'll give you more options". Not only is the probability of success a factor, but so is dillution, and so is the chance that you won't see that money for 8-10 years even if things go well (long after a company is acquired). Many sales can end in a net-loss, or only VCs get paid out. Sometimes the CEO nets a really nice private deal to run the new company (and has also been extracting a nice salary all along, probably). Stock is free to give out, so a company is going to try to give you that instead of money. While it can be nice, possible payouts for most are going to be low, and often enhanced salary over that N years would have been better - and especially from an expected value calculation perspective. Obviously, there are exceptions, but I'm a big believer that companies should share profits, and probably evenly, without regard to title hierarchy instead. I'd also scrap or outlaw 'executive' bonuses when the employee bonuses are not along the same lines in terms of flat value (not % rate).
bcheung 11y ago
My thoughts on options are pretty much identical except I would say "worthless" no "worth less". I would also add that with an option position you are most likely giving up a higher salary and the opportunity cost that comes with it. An extra 30K each year invested at 5% in 5 years is worth more than 200K lump sum in 5 years (200K discounted at 5% for 5 years is $157K). You also have to factor in the probability of an exit. I just multiply the probability by the expected future amount. So 10% chance of exit in 5 years with a predicted equity position of $1M I would only count it as $100K. Discount it for 5 years and it is even worse: $78K. Of course you also have to factor in taxes. If you are already in a high bracket and in CA you are going to be paying 9.3 CA + 28 Fed + 6.2 FICA = 43.5%. So more salary is pretty much worth half as much. You might have to worry about AMT as well. Of course with a capital gains, assuming you exercised more than a year ago (possibly earlier with ISO options) then you will be taxed at only 15%. But you have also given up that cash and the associated opportunity cost. In effect, instead of a "free" lottery ticket taxed at 43.5% you now bought an expensive lottery ticket, for the option (hehe) of only being taxed at 15%. I'm on my 3rd startup and have equity in all of them and have yet to see a single penny. Honestly with tax brackets that high, and the chance of getting any equity so small, I'm more tempted to start a business on the side that can be taxed separately than try for a higher paying job. The way I pick a company to work at now is more based on what kind of personal and career growth it will offer, and also how much I will like working there.
- rconti 11y ago
  I didn't quite follow your scenario, but of course you'd be paying 9.3 CA and 28 Fed on your salary as well. And you wouldn't be paying FICA on capital gains.
  - bcheung 11y ago
    Yes, you are correct. 43% as W2 vs 15% from capital gains. That should be factored in as well. I'll add that to the original comment.
- gkop 11y ago
  It's even worse: California also taxes capital gains (as income!).
balls187 11y ago
If you believe that options are worthless and will always be worthless, aren't you tacitly saying you believe the company is worthless and will always remain that way? So why are you even working at that company to begin with? Is it because people are fatigued by having their options amount to nothing?
- rconti 11y ago
  No, TFA outlined the reasons that options may not become liquid even if the company is successful.
bcheung 11y ago
One thing that would increase the value of options, at least to me, is if you have Series A options that can be sold to investors at Series B or C. Why is it that this is never an option (pun intended)?
inspectahdeck 11y ago
The third point here seems wrong to me: >The third reason for why individual options are probably worth less now than they used to be is that both employer and employee need to account for the fact that the time until IPO or liquidity is longer than it used to be. This is a big issue. To get the true value of offered comp, employees need to add their offered salary to the present value of the options offered. When calculating that, the further out the payout, the less it is worth today This assumes a constant payout, which defeats the purpose of options. If there were a set date and set payout, the company should just offer cash bonuses or similar. The value of an option increases the further the expiration date is [0]. He even says: >You can be pretty sure that a company currently worth $10mm won't be worth $1b in 3 months, so you have a reasonable band of expectation. Sure, but it might be in 5 years. You're granted an option as a bet that it might grow that big by the time you cash out - not to lock in some set amount of compensation 3 months from now. Maybe I'm missing his point. Sure, employee compensation might need to be rethought - but not because options are a bad tool. Companies grant options at an early stage because of the long time horizon and high volatility [1]. That's what makes them valuable. If you want your compensation to be liquid and predictable, you should probably just ask for more cash. [0] https://en.wikipedia.org/wiki/Option_time_value https://en.wikipedia.org/wiki/Option_time_value [1] https://en.wikipedia.org/wiki/Black%E2%80%93Scholes_model https://en.wikipedia.org/wiki/Black%E2%80%93Scholes_model
11thEarlOfMar 11y ago
I'd consider tossing profit sharing into the compensation package. Not instead of, but in addition to. The 'CFO' could commit a (minor) portion of profit to profit sharing, perhaps on a tiered basis. Add that into the package, and the employees have a bridge between their (below market?) salary and in-money options that gets more cash in their pocket as the company starts to succeed. I'd even go so far as to say that motivating employees to strive towards a profitable business structure is a more pure motivator than equity. Does anyone have experience with this approach?
exelius 11y ago
There's a simple solution here: make employee options liquid during major fundraising events. So when you close your round B/C/etc, give employees 30 days or so to exercise their options at the pre-money valuation. If you're nervous about employees exiting too early, pick a high valuation (say, $50M) and the option exercise clause doesn't kick in until then (at that point dilution shouldn't be an issue).
deleted 11y ago
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arbitrage314 11y ago
I've made this point before, but since it's a bit relevant here, I'll make it again (sorry to repeat): If you're primarily interested in making money, or if you love the startup but not the compensation, you should NOT work at that startup. If you're a good developer, you can get a better deal by working at an established company and simply investing. This has been true for every startup offer I've ever seen. Ever. I've considered lots of startup jobs because I believed strongly in the companies. Every single time, however, I was able to get a larger chunk of the company by keeping my current job and simply investing. To give an example, my current job pays about $250k, and one year, I invested $100k of that into a startup, leaving me with ~$150k of salary. This $150k + startup equity was a better deal than the startup was offering in both salary and equity. Plus, equity bought as an investor is much less tax toxic than equity options received as an employee of a startup. On the other hand, most people who work at startups aren't interested in money. If that's you, that's totally cool! I wish I could care less sometimes.
- billmalarky 11y ago
  How are you able to find opportunities to invest in early stage startups though?
  - arbitrage314 11y ago
    Although it's sometimes a bit of work to find these opportunities, there are enough people with good ideas who need money these days. Friend of a friend-type stuff. Occasionally, after talking to a startup about a potential employment opportunity, I'll ask if I can simply invest. They are usually flattered that someone would be so excited, and they are usually quite happy to take your money. A final option is to invest in one of these new index funds that track startup performance. E.g., the SharesPost 100.
    - billmalarky 11y ago
      Wow that's a pretty bold and interesting method. Have you ever tried simply cold emailing? That seems like it could work as well if this works.
avz 11y ago
Options and equity are financial instruments. Like mortgage, but with different rules. With a mortgage, you're buying a present house with your future income. Presumably because you cannot afford to pay for it in cash right now. With options, the startup is compensating you for your present work with a future share of ownership of the company you're helping to build. Presumably because it cannot afford the risk of accepting the fixed expense of your salary right now. It's hard to tell whether the author is right that the current compensation structure needs to change. The real question is: are there potential employees around the labour market who accept the risk and prefer the potentially large future bounty over fixed income at present?
bcheung 11y ago
Another thing that would make the options worth more (less of a risk) is if the company started making a profit they started issuing dividends. This is not likely to happen though because the company is going to be focused on growth and then an exit and they can't grow as fast if they are paying out their profits instead of reinvesting them.
acaloiar 11y ago
Not to discount the OP's points, but this smells like the tech industry equivalent of your worst Facebook friend—the one with a penchant for selfies with Starbucks skinny vanilla lattes—hashtagging an inane event with "whitepeopleproblems".
bane 11y ago
Options should be thought by employees as a future bonus based on performance - a "thanks for sticking around when there was lots of hard work to do". Meaning your salary should be market rate and not lowered in exchange for options. It's been a while, and I can't find it right now, but somebody once put together an analysis of average employee payout for companies with exits that valued the price of the options above their strike price (meaning they were actually worth something). My memory is hazy, but they found that a tiny fraction of employees managed to make something under $20k per year worked out of their options. And many of them were working under market rates for their services meaning the financial outcome, the years of belt-tightened living, and missed opportunities came out to something like under $10k extra compensation per year worked. On the flip side, I know from personal experience, you can learn more in startups than in more traditional businesses, and so the experience you gain might be worth more to you over a career than any specific financial compensation. Basically go into startups as an employee expecting to learn, but don't expect a big pay out. If you get one, count yourself lucky and enjoy.
sytelus 11y ago
I think lot of these idiosyncrasy stems for arcane SEC rules like 500 investors and restrictions on IPOs. Startups and tech community should lobby to change all these. Why can't we have full fledged public exchange where anyone, any startup can come in and sell its stock with no restrictions at all. If people want to buy in to their vision, sure let them be. Lot of rules around IPO and SEC are placed to protect the general public from fraud and prevent their confidence evaporate from investments. But let's say if you build an exchange called "High Risk Securities Exchange" and let anyone list themselves, publish their stocks and allow anyone buy or trade them as they like then lot of artificial artifacts we see today will be gone. These kind of trading exchanges can live side by side of conventional public exchanges. One thing we need to understand is that starups most likely won't have money to pay same amount as their established counter parts. All they have is their vision to sell and that means options must remain critical part of their offerings. If IPOs are fizzling and employees don't get rewarded for the risks they took then ultimately existence of startups itself is at risk.
- nstart 11y ago
  I think what we need to understand is that we shouldn't underestimate how naive people are when it comes to the chance of going home 'big', and how exploitative big companies can be of such naivete. Imagine big company X, listing a shady company Y (no official connections to company x though) which has a few employees and some very vague hocus pocus documents discussing their promise. Y gets a few googly eyed people who don't do their homework to buy in, by selling stock owned by X. Stock prices go up naturally, and then when all the stock is done, big company X closes up Y (discard office premises etc but keep the legal entity) and move on to their next similar venture. Money is laundered back into X's bank accounts and the thieves come out on top yet again. It's not like the current system stops people from being gamed, but any of these types of systems are bound to be exploited by the "evils". Cartels are formed in the shadows, markets are manipulated. I love the idea of a public market as an official process, but I'm not sure if it can be done without the system becoming polluted.
- scurvy 11y ago
  The 500 shareholder rule is gone. It doesn't exist any more.
dj_doh 11y ago
I'm probably going to get a lot of negative comments. I've a simple theory for compensation. First, pay me salary and bonus for my work that I deserve in a given market, for a set of skills and experiences I'll be bringing in. And second, give me stocks for the risk I'm taking on a nobody inc. 9 out of 10 companies or hiring managers don't give a second thought about failed startups and its stories.
gnorsot 11y ago
In some situations startups just don't have enough money to offer and the only thing that they could give is stocks. In those cases it is a matter of negotiating bigger cut of options to compensate for small salary.
- wmeredith 11y ago
  It doesn't matter if it's a bigger cut of zero. That's the problem.
- rhizome 11y ago
  I would call that a red flag for the company not being able to attract capital nor revenue.
mjbellantoni 11y ago
As a hiring manager I have found that this adjustment already started occurring about two years ago. Firstly, the market for technical talent is so competitive right now, that cash is an easy way to compete for people and salaries have been driven up. More importantly, people have become far more sophisticated about options and what a payoff is likely to look like. Ten years ago I would never be asked a question like "how many shares are there outstanding on a fully diluted basis" but now I hear it essentially all the time. edit: grammar
CodeMage 11y ago
> The first is a founder pledge that they will do everything in their power to let common holders sell into secondary markets above a certain valuation And that is where any company, big or small, would lose me. I've been burned too many times by all kinds of people -- from co-worker to VP -- promising to do "everything in their power" to do this or that. Weasel words like those are worth nothing at all.
- numbsafari 11y ago
  Agreed. If "everything in their power" doesn't extend to writing it into the contract, then they are already lying to you.
paulhauggis 11y ago
You can say it's over, but since there always seems to be a never-ending supply of young workers that think they are going to win the startup lottery. Companies won't start offering it until workers stop accepting it. A similar parallel is the gaming industry.
arielweisberg 11y ago
Equity, unlike salary, can be crammed (dilution not correlated to valuation or investment) away to an arbitrary degree at each funding event. Surprising not to see this mentioned. Every time you see a small company change CEOs you are probably seeing all the employees who have been there since the beginning crammed away into nothingness so the new CEO can get his 6%. The old CEO and execs won't walk away with nothing so it comes out of the share of the rest of the employees. I can tell when a company I have worked at is going to get a new CEO because I get a notice in the mail telling me that my ownership has been further crammed away into nothingness. This happens months before the actual handoff. Options at a small company are definitely not in your favor. Options at a pre-IPO company might be a different story, but pre-IPO you can get a real salary and the options just bump your income up a bit. Interesting things happen after you exercise. From now on I will always exercise one share once I reach the first cliff.
ninjakeyboard 11y ago
In my experience, you might see a startup get bought once or twice in your career. It happened to me. While it has been amazing for both my career and my income, I have not seen anyone around me get a dime from equity. If you get bought, it's probably not going to make you rich - if anything, you might get a bit of dough, get into a great shop, and have to make some utterly disturbing choices like pick up and relocate. This week. Do it go or you're out of a job.
joeblau 11y ago
I was going to write a blog post about this as well from the employee said based on a some quotes from Marc Andreessen. I just listened to an interview where Dan Primack interviewed Marc Andreessen and Marc made some really good points about timelines for public and private companies. Marc said: > the time frame for how public companies think and how they are able to invest has shortened dramatically and correspondently the time frame for how private companies can think has elongated. [1] > they (investors) tell the public company give us the money back this quarter and they tell the private company "no problem, go for ten years" After I listened, I wondered why a talented employee would want to stay at private company that is going to take 10+ years to IPO? [1] - https://soundcloud.com/a16z/a16z-podcast-taking-the-pulse-of-vc-and-tech-dan-primack-interviews-marc-andreessen#t=1:45 https://soundcloud.com/a16z/a16z-podcast-taking-the-pulse-of...
dk8996 11y ago
Well. I stoped read after the first paragraph. The time line for startup to IPO is getting shorter.
anon3_ 11y ago
The whole concept of options as something to supplement salary is bullshit. It essentially means that as an employee, you're hedging the risk and taking a lower salary for it. In addition to you taking the risk of that option, even in the most optimistic outcomes for the company, your shares could have been watered down in various ways. You could work for a startup for a year and get fired early on and receive no options. The whole thing is a employees getting ripped off. We keep telling ourselves there's a rose garden after we get X. I recommend the book "How to stop worrying and start living" by Dale Carnegie.
probablycorey 11y ago
Has anyone used a service like https://www.equidateinc.com https://www.equidateinc.com. They help you "sell" the right to buy your stock options to a third party. From their site: > Traditional stock sales are time consuming, expensive, and clutter a company's cap table. Now it's easier: the Equidate contract transfers the economic upside and downside of your shares without actually selling them. It honors all exisiting transfer restrictions on your stock, and your identity is kept private throughout the entire process. > The contracts Equidate has designed have aspects similar to both a derivative contract and a asset-backed loan. The result allows an investor to purchase the rights now to the economic upside/downside of a share now, without going through the complications of adding additional shareholders to the company's cap table or the hassles of a secondary stock transaction, postponing any transfer of shares until the company is ready.
- rsamvit 11y ago
  Equidate founder here! Feel free to email me directly at samvit@.. if you have any questions
AdieuToLogic 11y ago
I read the article, based on the title, thinking "I wonder what the author is going to address regarding employee compensation." Was it addressing performance? Or perhaps socially valuable contributions which have been traditionally under-compensated (such as teaching)? No. It was bemoaning how stock options offered to employees by a corporation might, might, be "worth less" when restricted sale is applicable. Just so we are all on the same page, here is the definition of "stock option" as provided by Merriam-Webster: > 2 : a right granted by a corporation to officers or employees as a form of compensation that allows purchase of corporate stock at a fixed price usually within a specified period (source: http://www.merriam-webster.com/dictionary/stock%20option http://www.merriam-webster.com/dictionary/stock%20option) The article then went into great depth skillfully supporting the author's thesis, done from the perspective of a partner at Y Combinator. All well and good, but what wages do "other people" make? According to here: http://www.census.gov/newsroom/releases/archives/income_wealth/cb11-157.html http://www.census.gov/newsroom/releases/archives/income_weal... The median household income in 2010 was $49,445 USD. The census does not mention stock options, though I think it reasonable to assume most US workers do not receive such consideration. Within this thread, "MCRed" shared their experience with stock options: > Over many years as an employee for startups, I was employee number 24 of a $30M cash acquisition exit. The result was 6 figures, but just. Effectively it was a year's salary. Since "MCRed" states the options were worth "a year's salary", it is safe to state that "MCRed" made at least $100,000 USD per year. And "varelse" writes: > Given that a seasoned and in-demand engineer can make anywhere from $250K to $500K annually working for a big co, without a 3-letter title and 3-letter title equity, there seems little incentive to accept $150K or less and ~0.5% or less equity. All of this leads to this simple, direct, question: how much do you think people outside of "tech" make in their jobs? Based on the median household income quoted above, the likelyhood is 1/5 to 1/10 what "varelse" estimates (which I think is high nationwide) and minimally 1/2 what "MCRed" was once given above and beyond a paycheck for at least the same amount. We, all of us in tech, need a reality check. There are literally millions of people in the US along (not including 6.5+ billion other people in the world) which do not come close to "just" the base salary many of us enjoy. And before anyone says "but the market demand...", I say be honest with yourself. And yet many are boo-hoo'ing over "gee, I didn't get Even More(TM)!" I tell ya what. Stop by the Walgreen's on Market and 9th (IIRC) in San Francisco and ask someone working there whether or not their stock options offerred to them when hired was worth it for making $50,000 USD less per year. For bonus points, present the same question to the Uber driver dropping you off. PS: "MCRed" and "varelse" are only two representative examples. Other statements in this thread would serve equally well and I bear no malice toward either "MCRed" or "varelse."
rdlecler1 11y ago
Founder here. Not sure what you're talking about. Talented people are expecting healthy salaries in this market and decent chunks of equity. I'm the least paid person on our team, take significant risk ( if the ship goes down I go down with it ) and I have just 6x more equity upside than our top compensated employee (who makes 3x my salary now).
jmalicki 11y ago
Public companies have already rethought this. They give equity compensation in RSUs (i.e. options with a strike price of 0), rather than options with a strike price at the current valuation. With RSUs, you are rewarded for meeting high expectations. With options, you are only rewarded if you dramatically beat already very high expectations.
westoque 11y ago
>> Thank you for writing this. Start-up comp is effed. I'm 30 and have worked at a few start-ups that didn't make it, thus the cut I was taking in salary never turned into anything better. I had to cut my losses at this point in life and head to a public company that was able to pay me a lot more, plus signing bonus, plus stock options that had real value, plus restricted stocks. Maybe I just got lucky. But my expectations now are well above what I've been given in the past. This.
StillBored 11y ago
I would like to see someone actually attempt to quantify the chance a random employee (that comes in post series A) at a random startup actually cashes out more than a years salary from stock options. Everyone would like to think that working their ass off at some start-up increases the chance of being in the big leagues, but I just have never seen it personally happen. I've spent 15+ years working at small companies/startups, and I have yet to see options that actually resulted in a fraction of what my salary was. I also don't personally know anyone that hit the big time either. So, do it because you love it and are happy with your current situation, not because you think your going to hit the lottery. I have now twice in my life created products that sold well, and made everyone enough money to live off. But never have I ever even been near a situation where I created a product that made tens of billions. And frankly I don't know anyone who has done that. The few millions a product got sold for here or there, wasn't enough to put even $100k in any single persons pocket.

481 points by katm 11y ago

Another really important, highly negative, combination of these factors is if you want to leave the company. If the company is public, then you can essentially leave whenever you want, exercise the options and sell the stock to pay the costs (exercise price + taxes). But if the company is private, you have to pay the exercise price + applicable taxes (which can exist even if you only have theoretical gains) yourself, without the ability to hedge your risk and sell the still illiquid stock. If you have ISO stock options, you have 90 days after you leave (or are fired) to figure this out or lose the stock options altogether. So if you are joining a company with the following combination of elements: 1) High exercise price (the math is: # of options * exercise price... is this a lot of money or not) 2) ISO stock options or the stock option plan gives you limited time to exercise after you leave 3) No reliable system to sell the private stock Then you should add in a further discount on the stock options, because there may be situations where you cannot afford to reap the benefits of the options if you leave (or are fired) before there is reliable liquidity for the stock.

dschwartz88 11y ago
Just a heads up, the 90 day out clauses are usually put in there by the company lawyers. The only rule the IRS has is that ISO options flip to NSO after 90 days[0]. Take a look at the Pinterest options plan[1], where Pinterest actually gives you 7 years from when you leave to exercise. Your ISO options just flip to NSO after 90 days. [0] http://www.mystockoptions.com/faq/index.cfm/catID/36274DB1-D3C4-4D93-B57E8FA2916B9477/objectID/F1E4EDF6-2B05-452D-9AFD3FB64A55AE1E http://www.mystockoptions.com/faq/index.cfm/catID/36274DB1-D... [1] http://fortune.com/2015/03/23/pinterest-employee-taxes/ http://fortune.com/2015/03/23/pinterest-employee-taxes/
- kyleblarson 11y ago
  In this situation it would be great if there were something similar to the 83b letter for non-founder employees. I know too many people who have exercised options when leaving a company (and paid a hefty tax) only to see the value of the resulting equity trickle down to 0.
- birken 11y ago
  Yes, but if the 90 day expiration is in the plan, then it is 90 days. It doesn't matter why the lawyers put it in there, though IRS treatment is a reason why it is very common. You aren't going to be able to negotiate changes in the stock option plan with a company you are thinking of joining. If you are working at a company like Pinterest with a more employee-friendly option plan, then you should value the stock options at a higher value as compared to less employee-friendly plans. I ultra-long expiration periods are awesome, and they are another practical method to deal with the longer period to IPO. These types of options aren't as good as having liquidity for the stock, but with them you can be sure that if you vest the option and the company value goes way up, you'll get the benefit from that.
- kentonv 11y ago
  The ISO -> NSO switch can have severe tax consequences for the employee. Even if your company doesn't expire your options in 90 days, consider exercising within 90 days anyway (and talk to a tax lawyer, etc.). One not-as-obvious reason why companies are reluctant to set long expiration dates on options is because it means former employees take up space in the cap table even if they have no intention of ever exercising that option. The company essentially has to treat those shares as having been purchased, without having received any cash for said purchase. Cap table cruft can make it harder to negotiate subsequent funding rounds.
  - scurvy 11y ago
    Oh noes! Don't disrupt the almighty cap table with a few peons worth of shares! Please. These are discounted to zero by anyone worth a salt.
zmillman 11y ago
I've been hit with this too and it's not pretty at all. If anyone else is concerned about this, you should talk with your CEO/legal team about early exercise options which can remove a lot of the risk of massive tax liabilities. From my understanding, some companies offer an early exercise option where you pre-purchase the shares and then instead of being able to buy the shares after they've vested, the company instead gradually loses the right to buy them back at the original strike price. I'm not a tax lawyer, but Google "section 83(b) election" and you'll find more information.
- kentonv 11y ago
  What you're describing is called "restricted stock" (not to be confused with "restricted stock units", which are entirely different). The idea is that you actually buy the shares upfront at the current 409(a) (legal) valuation, but the company has a right to buy them back if you leave. Founders usually get their shares this way, because at the time of founding the valuation is essentially zero. Early employees may take this route too, but usually the company switches over to options after a funding round forces a non-negligible valuation. Some companies (like mine, at least so far) continue to let new employees choose. The amount you would pay for restricted stock is exactly the same as what would otherwise be your strike price for stock options, assuming the same number of shares. For an employee, the major down side of choosing restricted stock (assuming non-negligible valuation) is that if the company fails and the stock ends up being worth nothing, you don't get that money back. Whereas with stock options, you have more time to find out if the stock will be worth anything before you buy into it. The up side is possible tax advantages, but of course I cannot give tax advice. (All this is information I've learned while being the founder of sandstorm.io; I am not an expert in these things.) PS. Don't forget to file your 83(b). (Any time you say "restricted stock" to a startup founder, they will instinctively reply with "Don't forget to file your 83(b)".)
  - jalonso510 11y ago
    You can also sometimes early-exercise an option (if the company authorizes it when they make the grant), which ends up being in practice a lot like buying restricted stock while still technically an option, and I think that's what the parent was referring to.
danielweber 11y ago
If you don't have a seat in the board room, you are at the mercy of the board as to whether your options retain any value. It's very easy for the board to completely dilute you to nothingness, and having exercised, well, the attitude is "fuck you" because there is nothing more you can give the company.
dylanlacom 11y ago
> you have to pay the exercise price + applicable taxes (which can exist even if you only have theoretical gains) yourself... Is this certain? My understanding is that the spread between the current stock price and exercise price _can_ be taxed at the AMT rate. And if you were to sell the stock, you can get any taxes paid back in the form of an AMT credit. Still liable to pay capital gains or short term gains tax though at the sale. Without the AMT credit, it would essentially be double taxation.

justizin 11y ago

"When shares can only be sold in private transactions on secondary markets, and, increasingly can only be sold with the consent of the company, the options are actually worth less." There's no space in the middle of "worthless" ;)

paulpauper 11y ago
that is the least of the article's problem. The whole premise is flawed.
- mbrameld 11y ago
  Care to actually add anything to the discussion?
stephengillie 11y ago
In economics, you often deal with situations where an asset has devalued below another asset's value. The first asset still has value, but relatively less than the second. This is different from an asset which has zero value. Some economists enjoy the wordplay of "worth less" (first meaning) vs "worthless" (second meaning) In this instance, it looks like the article is describing how increasing controls further devalues the options. Edit: For instance, if the company decides on each attempt if you're allowed to exercise the option, you might value it at 25% of the stock price, or lower. Even moreso, you can't be certain that the company will still exist when your options can be traded for cash, which should devalue the options even more in your perspective. It should be the net same as if you're working for someone, and they paid you with an IOU for 1% of the money they might win from a lottery ticket. So the value might be infinitesimally small, but not zero.
- fredkbloggs 11y ago
  The point here is that due to the factors the author noted (and probably others), the perceived value of options in nonpublic companies is now low enough that many (most?) candidates/employees no longer consider it relevant. I happen to agree with that choice, regardless of whether the expected value to the employee of the options is actually zero or just some very small number. We can debate the true ev of an option, we can apply various formulae to attempt to compute it, and we can each agree to devalue various restrictions differently according to our own preferences. But I think we can probably agree that in many if not most situations, the value of the options to the employee is too small to affect the decisions that employee is going to make. It doesn't matter whether that value is zero or $50 or $5000, it matters only that it's too small to be material. To the extent that this is a problem for founders/owners, it's largely of their own making. It seems like it should be easy enough to correct if they want to, but they will have to give up many if not all of the wildly favorable (to them) terms and/or give up more equity to their employees to do it. The alternatives all involve paying more cash, which is probably the right answer for everyone anyway; it's disappointing that the author didn't even seriously discuss the possibility of simply paying higher salaries in lieu of equity. Apparently that's simply taboo.

paymeyoumofo 11y ago

I start all jobs and approach compensation as simply: fuck you, pay me. Pay me a large salary. If you want to add discretionary bonuses on top? Nice. Additional equity? Great. Option? Ok. But first, big fat salary you mf. Once I have that, the rest if any are cherries on a cake. A big fat cake.

randomname2 11y ago

"They note that the average time to IPO is now 11 years vs. 4 in 99, and that the overall number of tech IPOs is plummeting as privately funded companies raise huge late stage private rounds instead." What part do the increased regulatory requirements for public companies play in this? Might this be one of the unintended consequences of Sarbanes-Oxley?

tonnesoffun 11y ago
Yes definitely. Increased regulatory requests means it takes longer and costs more to go public. The Emerging Growth Company Act (EGC) helps this somewhat: companies with < $1b in revenue have less reporting requirements if they file to go public. Most VC-backed companies that do an IPO will leverage this. Clearly, the benefit of staying private (and still being able to raise $100M+ rounds) outweighs the consequences of illiquidity for employees....at least in the eyes of the founders and management.
tonnesoffun 11y ago
Yes definitely. Increased regulatory requests means it takes longer and costs more to go public. The Emerging Growth Company Act (EGC) helps this somewhat: companies with < $1b in revenue have less reporting requirements if they file to go public. Most VC-backed companies that do an IPO will leverage this. Clearly, the benefit of staying private (and still being able to raise $100M+ rounds) outweighs the consequences of illiquidity for employees....at least in the eyes of the founders and management.

normloman 11y ago

Profit sharing.

dhimes 11y ago
Agree. http://blogs.balsamiq.com/team/2011/09/12/profitsharing/ http://blogs.balsamiq.com/team/2011/09/12/profitsharing/

dotBen 11y ago

Interesting article but it fails to mention a significant source of liquidity for startup shares (both currently and historically): Acquisition by a publicly traded company. IPO isn't the only way to obtain liquidity, but what's interesting is just like companies are shunning IPO they are also shunning acquisition. We don't normally get to know about failed acquisition offers but Snapchat's $3bn offer by Facebook is a great case in point. A few years ago practically no one would have turned down that kind of offer, which would have also created a liquidity event for everyone currently employed at Snapchat. Various factors today mean someone like Evan Siegel was prepared to turn that down. I'd love to see more discussion about that as much as the IPO market itself.

paulpauper 11y ago
exactly..fundamentals will always trump liquidity

bcg1 11y ago

The premise should be simple I think... pay people competitively with actual money for the work they are actually doing right now. If there is a chance their work could lead to a huge paypay... then give them a claim to a sliver of that payday. Don't cross the streams.

paulpauper 11y ago

I don't mean to sound too dismissive, but this article is bunkum. SO I guess by the author's logic, Michael Bloomberg's net worth is zero because Bloomberg LP never went public? The private market is illiquid, but fundamentals will always trump liquidity. If you own equity, that equity - assuming there is no dilution or deterioration in the fundamentals of the underlying business - is wealth. Employee stock options are a different matter, but deep in the money options are essentially as good as partial ownership. it may be harder to assess valuation in a private market, but it's done nonetheless.

fredkbloggs 11y ago
Mr. Bloomberg's privately held equity undoubtedly makes distributions to its shareholders. Stock that does not pay dividends and is unlikely ever to do so is not wealth; it's just a piece of paper. And if you cannot legally sell it to someone else, it's effectively worthless as there is no way to convert it into something of value. The exception is if you have a majority of the voting rights, but that's not what this article is about.
- 001sky 11y ago
  There are many liquidity events that are not in the set of 'IPO' events. But the issue remains that liquidity is a core element of asset value. Many later stage financing events can be structured to provide limited liquidity to founders and early investors; the issue is that this may not help all employees equally. The IPO is useful in this case.
tghw 11y ago
Bloomberg is an owner. While an employee that owns stock is technically an owner, it's not a significant distinction because they are in such a minority that they have no control over the stock, and are therefore at the whim of the majority owners. It doesn't mean the options are worthless, but they have to be discounted. I owned stock in a company that will, very likely, never go public or get acquired. It doesn't need to. Because of the shareholder agreements, I could only really sell back to the company. Sometimes they were amenable to buying, other times they weren't. Essentially, I was playing in a monopoly market, except the monopoly was on the buyers side. Fortunately for me, the majority owners were much more generous than they needed to be. Without that, I wouldn't have been able to make anything from the stock.

ChuckMcM 11y ago

I am not sure I understand Aaron's point in this. Is it "We should pay people more?" But isn't that really a question of whether or not you can find people who will work for the salary your offering? If you can't you raise what your willing to pay until you find someone who will right? Or is it "We should make options always remunerative?" In which case they aren't really options are they? They are just salary so why not just switch to a fixed + variable salary system like so many folks do. Heck you could even go all pay to perform like sales folks have been paid for ages, "Get this code done, you get paid, don't you don't." I personally don't think that incents the best choices but it can motivate. If you want to write into your corporate by laws that every round of funding includes a 10% of the shares in the funding must come from employees common stock, and you always divide by 'n' (the number of employees that want to participate) the amount of stock they can contribute, well that is ok, except your converting common to preferred in that case and the SEC is going to ask a lot of questions about that. There is the perception that founders of unicorns are rich, but trust me, they aren't, what they are is "rich on paper" and when they can't raise any more money and they are running out of cash on hand, the founders stock is going to be worth just as much as the employee's stock, which is near 0. So it will all even out. There are a lot of people who were working in the Bay Area during the 90s (and I'm one of them) that were multi-millionaires on paper at some point, and that same paper because worthless sometime later before it could be converted into cash. Did I "lose" 12 million dollars? No, of course not. I never had 12 million dollars, what I had was a concatenation of increasingly improbable if statements which if the 'true' path was followed to the end, could be converted into $12M. Since not all of those if statements resolved true, the actual result was about $83,000. Lots and lots of people had the same sort of experience. Aaron, if you're reading, what problem are you trying to solve?

ryandrake 11y ago
Sounds like this is an employee education problem at its root. Naive job candidates are evaluating offers and way overvaluing their equity compensation, sometimes even allowing it to substitute for cash. As discussed in a separate thread, the consensus is that options (vested or not) in a non-liquid company should be valued at or close to $zero. This could be an education job for college Career Services.

shawnee_ 11y ago

If IPOs are getting significantly delayed and are potentially at risk of not happening at all,[1] we need to change how compensation is structured. Not sure that this is the best opening argument here. With things like the JOBS Act passing, Reg A+ and such getting off the ground, my hypothesis is that we'll see an acceleration in the rate at which companies are able to get to the IPO stage. If anything, in the short / near-term future, we'll see an increase in value of paper. The whole point of offering equity to shareholders and stakeholders is to have people (ownership theory) who are rooting for and/or willing to work toward group success. The problem, of course, is that executives at far too many companies use equity like a dangling carrot... demanding more than reasonable time for even a basic ROI for the people whose risks are the riskiest (early employees).

onion2k 11y ago

The first is a founder pledge that they will do everything in their power to let common holders sell into secondary markets above a certain valuation, say, $500mm. How many VC backed startups get to that sort of valuation without going public? At the $1bn mark, globally, there are 98[1]. I imagine it's possible there are 50 times that number at $0.5bn, but that's still a pretty small number out of all the startups there are. To fix compensation we need things that are going to move the needle even for relatively small companies. [1] http://graphics.wsj.com/billion-dollar-club/ http://graphics.wsj.com/billion-dollar-club/

dkasper 11y ago

> companies need to standardize their secondary sale and options repurchase practices I realize this is somewhat trolling, but like Benedict Evans joked in the recent a16z podcast on this topic traditionally that's a process called... IPOing. http://a16z.com/2015/06/17/a16z-podcast-the-rise-of-the-quasi-ipo/ http://a16z.com/2015/06/17/a16z-podcast-the-rise-of-the-quas...

Animats 11y ago

This is for the special case of options in successful startups, a problem which affects well under 1% of the workforce. Nobody is going public because borrowing is so cheap, resulting in round after round of leveraged private equity. This may change when the Fed starts cranking up interest rates around the end of this year. Also, the new JOBS act rules for small IPOs are now in effect. So far, nobody seems to have done much with them, but that's now an option for companies at the point they need a follow-on round.

marssaxman 11y ago

Options are just a fancy lottery ticket. I have learned to consider their value as $0 when evaluating a prospective employer's compensation offer; they have lost all incentive power.

balls187 11y ago
Financially speaking, that is the most prudent thing to do.

brudgers 11y ago

Salary is the only hedge employees get that is congruent to the liquidation preference preferred stock provides passive investment. It is increasingly important because capital is finding 1x liquidation preference in a startup investment a reasonable alternative to parking cash in near zero interest rate bonds. The same institutional investors who used to buy IP's can now provide capital directly and the beneficial outcome gap between passive capital and employee equity is increasingly wide.

kabdib 11y ago

Treat options as wastepaper. They're lottery tickets. If they are worth something someday, then great, good job. But you can pour yourself into a company heart and soul, one with options and one without, with exactly the same outcome: Zero. And to a large degree the outcome is not only not under your control, it is often under the control of predatory entities who do not want you to realize any return. As an employee, get a competitive salary because the chances verge on certainty that those options will be worth zero, no matter how hard you work and no matter how much you think your contributions will move the needle. The equation is different for honest-true-and-blue founders. But for a worker bee, sure, make a show that options are interesting to you, but don't trade them for cash compensation, it's a bad deal for you.

brightball 11y ago

Something to keep in mind...there is nothing standing in the way of you negotiating your own compensation package.

ig1 11y ago

There are other solutions: 1) The company could offer to buy back options at market rate. 2) The company's current investors could offer to buy equity from employees. The majority of investors returns come from a small number of portfolio companies, for those companies that are doing well the investors want a bigger stake even if it comes in as secondary. 3) Companies could appoint designated investors who could buy secondary stock from employees. Successful companies typically have over-subscribed rounds, companies could allow those investors who they like but couldn't get into the round to buy employee stock. The general reason (2) and (3) don't happen is that individual employees don't have that much stock and the overhead involved makes it not worthwhile. But potentially there could be a solution which involves bundling together stock into meaningful amounts.

dsjoerg 11y ago
A blend of 2) and 3) would be 4), options-holders get right of first refusal on stock sales with a valuation >$X
scurvy 11y ago
I believe that Cloudflare does 2 and 3.

dsinsky 11y ago

One of the big issues here is that once employees start selling common stock, the strike price of the options can no longer be set at a large discount to the latest valuation as it can when the only transactions are the preferred stock shares that are sold when the company raises money from VCs. One of the most attractive things about employee stock options is that the strike price is often set at 30-40% of the valuation of the latest financing round. So a company that just raised (preferred) money at a $500m valuation can give their employees options with strike prices around $200m or less. Therefore, the employee can believe that they have a "locked-in" gain day one.* If employees sold their common shares at anywhere near fair value at the same time the company was raising the round, they would likely sell at a price between $400m-$500m a very slight discount to the preferred shares. Any future option grants given would have to have a strike price reflective of these recent common-stock transactions, and companies would no longer be able to use the low strike prices of options to attract employees. Obviously, this is just one trade-off among many and in no way means that companies shouldn't allow more sales of employee common stock over time, but its worth understanding the many reasons companies currently are resistant to doing so as much as individual employees would like. *Obviously, common shares should be priced at a discount to preferred shares but almost everyone I've talked to in the VC/startup community believes that the 60-70% discount applied is extremely generous as it implies that up 60-70% of the value the VCs investment is in downside protection (ie the debt-like element) rather than upside potential (ie the equity-like element), a pretty nonsensical amount for a high-risk, asset-light VC investment.

scurvy 11y ago
You're discounting the value of preferred stock vs common stock. Funding rounds sell different series of preferred stock. The relationship from common to preferred stock is loose at best, despite what any 409a "valuation expert" claims.

leopoldo 11y ago

How crazy would it be to say something along the lines of: "OK, I'll accept your offer but I want to be paid for overtime, and have [some] freedom to work in personal projects/consulting (as long as they don't expose 'trade' secrets from the company)" It's like saying, I'll take your low pay + stocks but you will also be risking that I start making more money on my own and leave.

danielweber 11y ago

I was at a startup company where an employee wanted to sell his stock and had a buyer, and the company said "no, if you want to do your own sale, you will need to hire an auditor in your own dime to determine the value, and we won't let your auditor see the books." And this company was above average in not pulling dirty tricks.

nhangen 11y ago

What about the increase in shares being sold in the private markets, and during financing rounds? Wouldn't that help make up some of the opportunity lost by staying private?

Jemaclus 11y ago

In this market, I tend to think of options as incentives, and not as replacements for salary. Salary gets me in the door and work hard, great people and culture make me want to be there and evangelize, and options incentivize me to work my ass off. (I'd work my ass off without options, but the options really make it easy to say "I will do everything in my power to make this succeed" instead of "I'd rather go spend time with my friends tonight"). To put it a slightly different way, I can't pay my rent with options. You can offer me all the options in the world, but my landlord doesn't accept them as payment. Therefore, you cannot simply exchange salary for equity. I received an offer from a company a year or two ago, and they offered me a salary almost 50% below my then-current salary, and then some equity. When I tried to negotiate on salary, the CEO berated me for ignoring the equity. The problem is that as far as equity is concerned, it's worth $0 until you exit. There's a potential for millions, but my lottery ticket is also worth potentially millions of dollars. My landlord won't accept my lottery ticket as payment. Long story short, Aaron is correct: startups need to rethink the whole equity component. It's valuable -- but it's not valuable in the same way that salary is, especially in today's market.

drivingmenuts 11y ago
I tend to think of options as worthless, until they vest. Which is too far in the future to count on. Pay me money. That's actually useful.
- mpdehaan2 11y ago
  This. It seems that it's acceptable in tech culture to use "you have too much stock" a reason to even underpay founders. This is busted logic, as the company could explode at any time, not to the fault of anyone in particular (but sometimes yes). So far, I think I've been in 3 decent startups that all of which failed and do not exist anymore. None of them exited cleanly. Some might, but you might not want to stick it out that long, and those are often hard commitments to make depending on the work environment. New grads and skilled developers alike should never be seduced by "we can't pay more , because we are startup, because we'll give you more options". Not only is the probability of success a factor, but so is dillution, and so is the chance that you won't see that money for 8-10 years even if things go well (long after a company is acquired). Many sales can end in a net-loss, or only VCs get paid out. Sometimes the CEO nets a really nice private deal to run the new company (and has also been extracting a nice salary all along, probably). Stock is free to give out, so a company is going to try to give you that instead of money. While it can be nice, possible payouts for most are going to be low, and often enhanced salary over that N years would have been better - and especially from an expected value calculation perspective. Obviously, there are exceptions, but I'm a big believer that companies should share profits, and probably evenly, without regard to title hierarchy instead. I'd also scrap or outlaw 'executive' bonuses when the employee bonuses are not along the same lines in terms of flat value (not % rate).

bcheung 11y ago

My thoughts on options are pretty much identical except I would say "worthless" no "worth less". I would also add that with an option position you are most likely giving up a higher salary and the opportunity cost that comes with it. An extra 30K each year invested at 5% in 5 years is worth more than 200K lump sum in 5 years (200K discounted at 5% for 5 years is $157K). You also have to factor in the probability of an exit. I just multiply the probability by the expected future amount. So 10% chance of exit in 5 years with a predicted equity position of $1M I would only count it as $100K. Discount it for 5 years and it is even worse: $78K. Of course you also have to factor in taxes. If you are already in a high bracket and in CA you are going to be paying 9.3 CA + 28 Fed + 6.2 FICA = 43.5%. So more salary is pretty much worth half as much. You might have to worry about AMT as well. Of course with a capital gains, assuming you exercised more than a year ago (possibly earlier with ISO options) then you will be taxed at only 15%. But you have also given up that cash and the associated opportunity cost. In effect, instead of a "free" lottery ticket taxed at 43.5% you now bought an expensive lottery ticket, for the option (hehe) of only being taxed at 15%. I'm on my 3rd startup and have equity in all of them and have yet to see a single penny. Honestly with tax brackets that high, and the chance of getting any equity so small, I'm more tempted to start a business on the side that can be taxed separately than try for a higher paying job. The way I pick a company to work at now is more based on what kind of personal and career growth it will offer, and also how much I will like working there.

rconti 11y ago
I didn't quite follow your scenario, but of course you'd be paying 9.3 CA and 28 Fed on your salary as well. And you wouldn't be paying FICA on capital gains.
- bcheung 11y ago
  Yes, you are correct. 43% as W2 vs 15% from capital gains. That should be factored in as well. I'll add that to the original comment.
gkop 11y ago
It's even worse: California also taxes capital gains (as income!).

balls187 11y ago

If you believe that options are worthless and will always be worthless, aren't you tacitly saying you believe the company is worthless and will always remain that way? So why are you even working at that company to begin with? Is it because people are fatigued by having their options amount to nothing?

rconti 11y ago
No, TFA outlined the reasons that options may not become liquid even if the company is successful.

bcheung 11y ago

One thing that would increase the value of options, at least to me, is if you have Series A options that can be sold to investors at Series B or C. Why is it that this is never an option (pun intended)?

inspectahdeck 11y ago

The third point here seems wrong to me: >The third reason for why individual options are probably worth less now than they used to be is that both employer and employee need to account for the fact that the time until IPO or liquidity is longer than it used to be. This is a big issue. To get the true value of offered comp, employees need to add their offered salary to the present value of the options offered. When calculating that, the further out the payout, the less it is worth today This assumes a constant payout, which defeats the purpose of options. If there were a set date and set payout, the company should just offer cash bonuses or similar. The value of an option increases the further the expiration date is [0]. He even says: >You can be pretty sure that a company currently worth $10mm won't be worth $1b in 3 months, so you have a reasonable band of expectation. Sure, but it might be in 5 years. You're granted an option as a bet that it might grow that big by the time you cash out - not to lock in some set amount of compensation 3 months from now. Maybe I'm missing his point. Sure, employee compensation might need to be rethought - but not because options are a bad tool. Companies grant options at an early stage because of the long time horizon and high volatility [1]. That's what makes them valuable. If you want your compensation to be liquid and predictable, you should probably just ask for more cash. [0] https://en.wikipedia.org/wiki/Option_time_value https://en.wikipedia.org/wiki/Option_time_value [1] https://en.wikipedia.org/wiki/Black%E2%80%93Scholes_model https://en.wikipedia.org/wiki/Black%E2%80%93Scholes_model

11thEarlOfMar 11y ago

I'd consider tossing profit sharing into the compensation package. Not instead of, but in addition to. The 'CFO' could commit a (minor) portion of profit to profit sharing, perhaps on a tiered basis. Add that into the package, and the employees have a bridge between their (below market?) salary and in-money options that gets more cash in their pocket as the company starts to succeed. I'd even go so far as to say that motivating employees to strive towards a profitable business structure is a more pure motivator than equity. Does anyone have experience with this approach?

exelius 11y ago

There's a simple solution here: make employee options liquid during major fundraising events. So when you close your round B/C/etc, give employees 30 days or so to exercise their options at the pre-money valuation. If you're nervous about employees exiting too early, pick a high valuation (say, $50M) and the option exercise clause doesn't kick in until then (at that point dilution shouldn't be an issue).

deleted 11y ago

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arbitrage314 11y ago

I've made this point before, but since it's a bit relevant here, I'll make it again (sorry to repeat): If you're primarily interested in making money, or if you love the startup but not the compensation, you should NOT work at that startup. If you're a good developer, you can get a better deal by working at an established company and simply investing. This has been true for every startup offer I've ever seen. Ever. I've considered lots of startup jobs because I believed strongly in the companies. Every single time, however, I was able to get a larger chunk of the company by keeping my current job and simply investing. To give an example, my current job pays about $250k, and one year, I invested $100k of that into a startup, leaving me with ~$150k of salary. This $150k + startup equity was a better deal than the startup was offering in both salary and equity. Plus, equity bought as an investor is much less tax toxic than equity options received as an employee of a startup. On the other hand, most people who work at startups aren't interested in money. If that's you, that's totally cool! I wish I could care less sometimes.

billmalarky 11y ago
How are you able to find opportunities to invest in early stage startups though?
- arbitrage314 11y ago
  Although it's sometimes a bit of work to find these opportunities, there are enough people with good ideas who need money these days. Friend of a friend-type stuff. Occasionally, after talking to a startup about a potential employment opportunity, I'll ask if I can simply invest. They are usually flattered that someone would be so excited, and they are usually quite happy to take your money. A final option is to invest in one of these new index funds that track startup performance. E.g., the SharesPost 100.
  - billmalarky 11y ago
    Wow that's a pretty bold and interesting method. Have you ever tried simply cold emailing? That seems like it could work as well if this works.

avz 11y ago

Options and equity are financial instruments. Like mortgage, but with different rules. With a mortgage, you're buying a present house with your future income. Presumably because you cannot afford to pay for it in cash right now. With options, the startup is compensating you for your present work with a future share of ownership of the company you're helping to build. Presumably because it cannot afford the risk of accepting the fixed expense of your salary right now. It's hard to tell whether the author is right that the current compensation structure needs to change. The real question is: are there potential employees around the labour market who accept the risk and prefer the potentially large future bounty over fixed income at present?

bcheung 11y ago

Another thing that would make the options worth more (less of a risk) is if the company started making a profit they started issuing dividends. This is not likely to happen though because the company is going to be focused on growth and then an exit and they can't grow as fast if they are paying out their profits instead of reinvesting them.

acaloiar 11y ago

Not to discount the OP's points, but this smells like the tech industry equivalent of your worst Facebook friend—the one with a penchant for selfies with Starbucks skinny vanilla lattes—hashtagging an inane event with "whitepeopleproblems".

bane 11y ago

Options should be thought by employees as a future bonus based on performance - a "thanks for sticking around when there was lots of hard work to do". Meaning your salary should be market rate and not lowered in exchange for options. It's been a while, and I can't find it right now, but somebody once put together an analysis of average employee payout for companies with exits that valued the price of the options above their strike price (meaning they were actually worth something). My memory is hazy, but they found that a tiny fraction of employees managed to make something under $20k per year worked out of their options. And many of them were working under market rates for their services meaning the financial outcome, the years of belt-tightened living, and missed opportunities came out to something like under $10k extra compensation per year worked. On the flip side, I know from personal experience, you can learn more in startups than in more traditional businesses, and so the experience you gain might be worth more to you over a career than any specific financial compensation. Basically go into startups as an employee expecting to learn, but don't expect a big pay out. If you get one, count yourself lucky and enjoy.

sytelus 11y ago

I think lot of these idiosyncrasy stems for arcane SEC rules like 500 investors and restrictions on IPOs. Startups and tech community should lobby to change all these. Why can't we have full fledged public exchange where anyone, any startup can come in and sell its stock with no restrictions at all. If people want to buy in to their vision, sure let them be. Lot of rules around IPO and SEC are placed to protect the general public from fraud and prevent their confidence evaporate from investments. But let's say if you build an exchange called "High Risk Securities Exchange" and let anyone list themselves, publish their stocks and allow anyone buy or trade them as they like then lot of artificial artifacts we see today will be gone. These kind of trading exchanges can live side by side of conventional public exchanges. One thing we need to understand is that starups most likely won't have money to pay same amount as their established counter parts. All they have is their vision to sell and that means options must remain critical part of their offerings. If IPOs are fizzling and employees don't get rewarded for the risks they took then ultimately existence of startups itself is at risk.

nstart 11y ago
I think what we need to understand is that we shouldn't underestimate how naive people are when it comes to the chance of going home 'big', and how exploitative big companies can be of such naivete. Imagine big company X, listing a shady company Y (no official connections to company x though) which has a few employees and some very vague hocus pocus documents discussing their promise. Y gets a few googly eyed people who don't do their homework to buy in, by selling stock owned by X. Stock prices go up naturally, and then when all the stock is done, big company X closes up Y (discard office premises etc but keep the legal entity) and move on to their next similar venture. Money is laundered back into X's bank accounts and the thieves come out on top yet again. It's not like the current system stops people from being gamed, but any of these types of systems are bound to be exploited by the "evils". Cartels are formed in the shadows, markets are manipulated. I love the idea of a public market as an official process, but I'm not sure if it can be done without the system becoming polluted.
scurvy 11y ago
The 500 shareholder rule is gone. It doesn't exist any more.

dj_doh 11y ago

I'm probably going to get a lot of negative comments. I've a simple theory for compensation. First, pay me salary and bonus for my work that I deserve in a given market, for a set of skills and experiences I'll be bringing in. And second, give me stocks for the risk I'm taking on a nobody inc. 9 out of 10 companies or hiring managers don't give a second thought about failed startups and its stories.

gnorsot 11y ago

In some situations startups just don't have enough money to offer and the only thing that they could give is stocks. In those cases it is a matter of negotiating bigger cut of options to compensate for small salary.

wmeredith 11y ago
It doesn't matter if it's a bigger cut of zero. That's the problem.
rhizome 11y ago
I would call that a red flag for the company not being able to attract capital nor revenue.

mjbellantoni 11y ago

As a hiring manager I have found that this adjustment already started occurring about two years ago. Firstly, the market for technical talent is so competitive right now, that cash is an easy way to compete for people and salaries have been driven up. More importantly, people have become far more sophisticated about options and what a payoff is likely to look like. Ten years ago I would never be asked a question like "how many shares are there outstanding on a fully diluted basis" but now I hear it essentially all the time. edit: grammar

CodeMage 11y ago

> The first is a founder pledge that they will do everything in their power to let common holders sell into secondary markets above a certain valuation And that is where any company, big or small, would lose me. I've been burned too many times by all kinds of people -- from co-worker to VP -- promising to do "everything in their power" to do this or that. Weasel words like those are worth nothing at all.

numbsafari 11y ago
Agreed. If "everything in their power" doesn't extend to writing it into the contract, then they are already lying to you.

paulhauggis 11y ago

You can say it's over, but since there always seems to be a never-ending supply of young workers that think they are going to win the startup lottery. Companies won't start offering it until workers stop accepting it. A similar parallel is the gaming industry.

arielweisberg 11y ago

Equity, unlike salary, can be crammed (dilution not correlated to valuation or investment) away to an arbitrary degree at each funding event. Surprising not to see this mentioned. Every time you see a small company change CEOs you are probably seeing all the employees who have been there since the beginning crammed away into nothingness so the new CEO can get his 6%. The old CEO and execs won't walk away with nothing so it comes out of the share of the rest of the employees. I can tell when a company I have worked at is going to get a new CEO because I get a notice in the mail telling me that my ownership has been further crammed away into nothingness. This happens months before the actual handoff. Options at a small company are definitely not in your favor. Options at a pre-IPO company might be a different story, but pre-IPO you can get a real salary and the options just bump your income up a bit. Interesting things happen after you exercise. From now on I will always exercise one share once I reach the first cliff.

ninjakeyboard 11y ago

In my experience, you might see a startup get bought once or twice in your career. It happened to me. While it has been amazing for both my career and my income, I have not seen anyone around me get a dime from equity. If you get bought, it's probably not going to make you rich - if anything, you might get a bit of dough, get into a great shop, and have to make some utterly disturbing choices like pick up and relocate. This week. Do it go or you're out of a job.

joeblau 11y ago

I was going to write a blog post about this as well from the employee said based on a some quotes from Marc Andreessen. I just listened to an interview where Dan Primack interviewed Marc Andreessen and Marc made some really good points about timelines for public and private companies. Marc said: > the time frame for how public companies think and how they are able to invest has shortened dramatically and correspondently the time frame for how private companies can think has elongated. [1] > they (investors) tell the public company give us the money back this quarter and they tell the private company "no problem, go for ten years" After I listened, I wondered why a talented employee would want to stay at private company that is going to take 10+ years to IPO? [1] - https://soundcloud.com/a16z/a16z-podcast-taking-the-pulse-of-vc-and-tech-dan-primack-interviews-marc-andreessen#t=1:45 https://soundcloud.com/a16z/a16z-podcast-taking-the-pulse-of...

dk8996 11y ago

Well. I stoped read after the first paragraph. The time line for startup to IPO is getting shorter.

anon3_ 11y ago

The whole concept of options as something to supplement salary is bullshit. It essentially means that as an employee, you're hedging the risk and taking a lower salary for it. In addition to you taking the risk of that option, even in the most optimistic outcomes for the company, your shares could have been watered down in various ways. You could work for a startup for a year and get fired early on and receive no options. The whole thing is a employees getting ripped off. We keep telling ourselves there's a rose garden after we get X. I recommend the book "How to stop worrying and start living" by Dale Carnegie.

probablycorey 11y ago

Has anyone used a service like https://www.equidateinc.com https://www.equidateinc.com. They help you "sell" the right to buy your stock options to a third party. From their site: > Traditional stock sales are time consuming, expensive, and clutter a company's cap table. Now it's easier: the Equidate contract transfers the economic upside and downside of your shares without actually selling them. It honors all exisiting transfer restrictions on your stock, and your identity is kept private throughout the entire process. > The contracts Equidate has designed have aspects similar to both a derivative contract and a asset-backed loan. The result allows an investor to purchase the rights now to the economic upside/downside of a share now, without going through the complications of adding additional shareholders to the company's cap table or the hassles of a secondary stock transaction, postponing any transfer of shares until the company is ready.

rsamvit 11y ago
Equidate founder here! Feel free to email me directly at samvit@.. if you have any questions

AdieuToLogic 11y ago

I read the article, based on the title, thinking "I wonder what the author is going to address regarding employee compensation." Was it addressing performance? Or perhaps socially valuable contributions which have been traditionally under-compensated (such as teaching)? No. It was bemoaning how stock options offered to employees by a corporation might, might, be "worth less" when restricted sale is applicable. Just so we are all on the same page, here is the definition of "stock option" as provided by Merriam-Webster: > 2 : a right granted by a corporation to officers or employees as a form of compensation that allows purchase of corporate stock at a fixed price usually within a specified period (source: http://www.merriam-webster.com/dictionary/stock%20option http://www.merriam-webster.com/dictionary/stock%20option) The article then went into great depth skillfully supporting the author's thesis, done from the perspective of a partner at Y Combinator. All well and good, but what wages do "other people" make? According to here: http://www.census.gov/newsroom/releases/archives/income_wealth/cb11-157.html http://www.census.gov/newsroom/releases/archives/income_weal... The median household income in 2010 was $49,445 USD. The census does not mention stock options, though I think it reasonable to assume most US workers do not receive such consideration. Within this thread, "MCRed" shared their experience with stock options: > Over many years as an employee for startups, I was employee number 24 of a $30M cash acquisition exit. The result was 6 figures, but just. Effectively it was a year's salary. Since "MCRed" states the options were worth "a year's salary", it is safe to state that "MCRed" made at least $100,000 USD per year. And "varelse" writes: > Given that a seasoned and in-demand engineer can make anywhere from $250K to $500K annually working for a big co, without a 3-letter title and 3-letter title equity, there seems little incentive to accept $150K or less and ~0.5% or less equity. All of this leads to this simple, direct, question: how much do you think people outside of "tech" make in their jobs? Based on the median household income quoted above, the likelyhood is 1/5 to 1/10 what "varelse" estimates (which I think is high nationwide) and minimally 1/2 what "MCRed" was once given above and beyond a paycheck for at least the same amount. We, all of us in tech, need a reality check. There are literally millions of people in the US along (not including 6.5+ billion other people in the world) which do not come close to "just" the base salary many of us enjoy. And before anyone says "but the market demand...", I say be honest with yourself. And yet many are boo-hoo'ing over "gee, I didn't get Even More(TM)!" I tell ya what. Stop by the Walgreen's on Market and 9th (IIRC) in San Francisco and ask someone working there whether or not their stock options offerred to them when hired was worth it for making $50,000 USD less per year. For bonus points, present the same question to the Uber driver dropping you off. PS: "MCRed" and "varelse" are only two representative examples. Other statements in this thread would serve equally well and I bear no malice toward either "MCRed" or "varelse."

rdlecler1 11y ago

Founder here. Not sure what you're talking about. Talented people are expecting healthy salaries in this market and decent chunks of equity. I'm the least paid person on our team, take significant risk ( if the ship goes down I go down with it ) and I have just 6x more equity upside than our top compensated employee (who makes 3x my salary now).

jmalicki 11y ago

Public companies have already rethought this. They give equity compensation in RSUs (i.e. options with a strike price of 0), rather than options with a strike price at the current valuation. With RSUs, you are rewarded for meeting high expectations. With options, you are only rewarded if you dramatically beat already very high expectations.

westoque 11y ago

>> Thank you for writing this. Start-up comp is effed. I'm 30 and have worked at a few start-ups that didn't make it, thus the cut I was taking in salary never turned into anything better. I had to cut my losses at this point in life and head to a public company that was able to pay me a lot more, plus signing bonus, plus stock options that had real value, plus restricted stocks. Maybe I just got lucky. But my expectations now are well above what I've been given in the past. This.

StillBored 11y ago

I would like to see someone actually attempt to quantify the chance a random employee (that comes in post series A) at a random startup actually cashes out more than a years salary from stock options. Everyone would like to think that working their ass off at some start-up increases the chance of being in the big leagues, but I just have never seen it personally happen. I've spent 15+ years working at small companies/startups, and I have yet to see options that actually resulted in a fraction of what my salary was. I also don't personally know anyone that hit the big time either. So, do it because you love it and are happy with your current situation, not because you think your going to hit the lottery. I have now twice in my life created products that sold well, and made everyone enough money to live off. But never have I ever even been near a situation where I created a product that made tens of billions. And frankly I don't know anyone who has done that. The few millions a product got sold for here or there, wasn't enough to put even $100k in any single persons pocket.