This is a really good read. It pisses me off to no end, but anybody who is an engineer (especially an early engineer, christ!) should read this to try and understand the mindset of investors and new founders.
This article articulates what seems to be a common sentiment among founders I've met: early employees who want to do good work and cash out are a liability.
The rhetoric proposed here of "early employees who leave" vs "god-fearing quality employees who stay or join" is targeted directly at dividing and taking advantage of us.
EDIT: If you would like to downvote me, please do explain your reasoning.
I really don't understand why good employees work in startups instead of going to an IPO-ed company. Most of the time in the current climate they are worse off.
Ask the good employees of Facebook, Google, AirBnb, etc. who joined those companies early on. The upside for the employees where the company IPO-ed is just insane.
Another reason might be the product/technology that the startup is working with that might be of interest to a good employee. Money is not everything.
I'm working at one of those companies and I prefer the bureaucracy and real big data & machine learning over iterating on the web platform (Rails, Javascript, Angular...). With small companies it felt like I had to create features after features, but as there were not many users, I didn't have the same impact (number of users * $/user earned for the company)
Many companies allow you to exercise your options and file an 83b election with the IRS. This only really works well though for the earliest employees because valuations often go up so fast that the exercise prices becomes prohibitive a year or two in. Then later, if your price is low and the stock price is high, exercising becomes cost prohibitive on the tax side where you pay taxes on the difference (AMT) even though you can't sell the stock. It is complicated issue but at its core is the IRS IMHO.
The Donald Trump-esque "dear employee, getting to keep the options you've 'earned' is, like, actually bad for you! No really!" is amazing. And referring to vested yet unexercised options as dead money really demonstrates what a rip-off options are as a comp method.
Frankly, I don't think fairness has anything to do with anything. My bet is more that valley employees talk, and more of us know someone who's gotten screwed on options. Or are ourselves in that boat. (Raises hand! Dear former employer, please eventually go public. Pretty please? I'd really like my $15k back eventually.) Add in increasing times to ipo and frothy valuations and going to goog/apple/fb/amazon/LI/et al and getting RSUs which are essentially cash is way more attractive than options. So you see Sam Altman (to his credit, but also to his financial health) pushing 10 year vesting periods and an ISO NSO flip because YC needs engineers for all those startups, and if experienced engineers strongly prefer public companies, that's a big problem.
And the author admits his goals:
with the provision that a departing employee cannot exercise his or her
stock options unless there has been a liquidity event? If you stay, you’re a
serious owner, but if you don’t want to be part of the company for any
reason you won’t be an owner.
(note that this shouldn't be surprising from someone tangentially related to the Silver Lake / Skype option yankaroo)
But hey, good luck selling the idea that if you should leave any time in the 10-ish years before ipo, you get fuck and all from "your" options. But you should choose options over google stock! No really! Why aren't you jumping at this chance? Come back!
Edit: a friend just got $290 combined cash + rsus from a post-ipo company in sf. The total comp numbers eg patio11 talks about are real. You have to be a sucker to turn down that type of cash for options that disappear if you leave anytime before ipo.
I had to look up the Reacher Gilt reference (Terry Pratchett novel) but I know a handful of people who had to scrape together cash to buy their Gilt Groupe options and subsequently lost a lot of money in the sale.
Nice article! Good graphs. Of course, not having stock at all because you can't afford your options may limit the upside potential even more than RSUs. Maybe it could be choice.
No, it wouldn't, they come with their own problems, which is why tech companies switched to greater option packages to begin with.
There are financial instruments that could solve this problem, or simply any set of conditions, colloquially called a contract in some circles. It is difficult to introduce financial instruments in the US due to a variety of onerous regulations between the IRS, FASB, SEC and the associated capital structures companies take to comply with them. I have seen financial instruments that solve this problem, in Europe.
I forget the name of them but German companies offer them to employees, they are functionally similar to a hybrid stock bond, as they are 'granted', I think they represent shares, and they also give coupons for several years, until maturity.
But don't fawn over the possibilities of glorious Europe, because the grants are pitifully small. If you think the privilege of coughing up $7,000 for your worthless options is not good enough, well you'll get like 1/10th of that out of a European company, so lets focus on the issues that matter and try to culturally appropriate something that seems like it could work better.
Christ, I can't seriously believe this argument. As I understand it, the author believes that employees who have earned their options but can't afford to exercise them are a problem?
Such arrogance, A16Z should really have thought twice about what such a blatantly anti-employee piece would do to their reputation. The gall of them to insinuate that this is a good thing because the true believers get paid for their work is just grating.
I completely agree. I think the following quote really captures the argument of the article:
"There is a more fundamental issue at the heart of this seemingly good solution: A 10-year exercise window is really a direct wealth transfer from the employees who choose to remain at the company and build future shareholder value, to former employees who are no longer contributing to building the business/ its ultimate value."
In short, Kupor believes that even if you chose a lower-salary, higher-options/equity package, you should be stripped of your options if you leave. To him, it's only fair if only investors and employees who remain get to keep equity. Instead, you, who have been directly responsible for making the stock price rise so much that your options are costly to exercise, deserve nothing.
I found that to be a bad argument as well. The author is conveniently ignoring the fact that those options vested in the first place. By that logic, why should investors get a lot of the windfall when they didn't "work hard" for the life of the company?
Basically it is a disguised argument against shareholders who are not already wealthy. "Here have these shares of the company. Oh, but you don't really deserve them because you didn't buy it with cash like we did, you earned it through sweat. Your labor is worth less than our capital".
> Instead, you, who have been directly responsible for making the stock price rise so much that your options are costly to exercise
I agree with what you're saying, but to clarify, it'd be the taxes which are prohibitively costly, not the act of exercising the options themselves (your hard work doesn't change the price at which you exercise; it just changes the amount that is taxable).
You may still be unable to afford the money it'd cost to exercise your full grant, but that figure was determined before you started working at the company, based on the size of your grant and the price at that time.
Unfortunately, I'm not aware of anybody these days that actually is deliberately treating early employees well in this regard.
On the one hand, there's the wink-and-nudge that joining early will make you a millionaire--but then you've got folks like this who are undermining the entire mythos.
I think we are all interested in how this will play out.
That quote is almost verbatim what Ben Horowitz said in his "one management principle" Stanford lecture. A16Z is fully onboard with Scott Kupor writing this piece.
exactly. if you want people to stay at your company and add value, try not fucking them over. people who know that you have and will treat them fairly are more likely to add value to your business. people who know that they have 90 days to access the benefit of working for you will look for shortcuts to make sure that their interests are maximized.
"Rationally, the now-former employee will hold off until the end of the exercise expiration window before deciding whether to exercise at all."
Classic example of good maths, bad thinking.
This is nonsensical. For employees where these options represent 90% of their wealth, the benefit from marginal time value in these options is trivial when compared to getting liquidity and diversification.
"The bottom line is that if companies are going to continue to stay private longer, we need to fundamentally re-think the stock option compensation model. We need better, careful, and more thoughtful solutions."
Seems like the simplest solution is just for the investors to force the company to go public.
Going public creates the liquidity that solves this problem. It might be at a lower sticker price, but at least employees can arrange financing to pay for excercize and tax needs.
That and they might be able to actually diversify from a portfolio no self-respecting LP would tolerate.
I'll save everyone the click.. It's advocating secondary sales. But most companies don't allow those anymore because it turns out it creates a messy cap table and accounting headaches.
I thought from the title this article would be about the myriad of ways that startup employees can get screwed. Remarkably, all he does is propose another way to screw them.
Silicon Valley with its sky-high cost of living is nothing more than a lottery. Those who have won the lottery mistake their luck for "smarts" and become "venture capitalists" who exist simply to grease up their fellow winners.
I read it completely differently. I'm pretty sure he is empathizing with those employees. He's saying it sucks that people must decide between leaving their pre-IPO company or forfeiting their valuable options. (looking at you Uber)
"The 10-year “solution” thus takes money/option value out of the pockets of the current (and growing) employee base to line the pockets of former employees who are no longer contributing to the business."
No it doesn't, those people helped get your startup where it is today. They put in sweat equity in lieu of greater pay. You can make this same dumb argument in reverse as well about current employee benefitting from the work that people did on the ground floor.
Seriously the arrogance of this person is incredible.
This article states that former employees are "lining their pockets" at the expense of current employees who are "build[ing] future shareholder value" (i.e. creating value for VCs). But it ignores the fact that those former employees already built shareholder value when they were working. And by joining early on they took a much larger risk than employees who sign on during the growth stage - often receiving less salary and certainly holding more uncertainty over the future value of their equity.
A longer exercise window is a benefit that accrues to all employees, because it applies to all of them.
The author's proposed solution feels quite absurd to me - to prevent exercise of stock options by any employee who departs for a liquidity event. I wouldn't join a startup that had these provisions.
This is how I read it. He only feels that the employee is owed anything while they have something to offer the company. As soon as they're no longer working for the company, the amount they're owed becomes wasted 'dead money' that should be spent on keeping the remaining employees motivated, rather than given to someone who no longer matters.
> Are there any other management practices where one would
> optimize for former employees at the expense of current
> employees?
As a founder, you aren't optimizing for either case. The unexercised options were granted to former employees, based on the work they did. Extending the exercise window is a policy specifically to help all employees (current, former, future) in making financial decisions.
>"Thus, in order for the company to give existing employees more options or give options to new employees hired to grow the company, the option pool has to be refreshed at a faster rate than if some unexercised options had been returned to the pool. And since refreshing the pool means dilution for all those who are still employed by the company, it’s the remaining employees who get diluted in order to allow former employees to keep their optionality (not to mention also enabling those former employees to now collect a new set of options from another employer, in their next gig!)."
No where does this investor even mention investors in the mix. It's only about how bad 10 year vests are for employees, which is laughable. It's bad for the investor class who gets diluted in this model.
This article is incoherent, because the notion of dead equity being unfair doesn't make any sense. If I buy a share of Microsoft, that's 'dead equity' since I don't work there and am not contributing to the company's value, yet when Microsoft sold that stock, they got paid in cash. Is that unfair to current employees?
Exactly the same for startup stock. The company granted the stock to investors for cash and employees for their service as part as a compensation package, and as the employee fulfills their service, they earn the equity as well as their salary.
>Are there any other management practices where one would optimize for former employees at the expense of current employees? I can’t think of any.
This is exactly backwards. You don't offer the 10-year clause ex post, you do it when the employee signs. That's optimizing for new employees, not old ones!
Exactly this - companies can't have their cake and eat it too. Equity is part of the overall compensation package for employees, which is to say that without equity these companies would have to pay more cash to attract talent.
Which is just a long-winded way of saying: equity is compensation for services performed, just like your cash salary is. In fact this is exactly how it works in BigCos, where equity is treated as compensation for work performed. AmaGooFaceSoft don't try to claw back shares when you leave, even though the employee is now hanging onto equity and "no longer contributing to shareholder value".
They paid for these shares with labor, same as everyone else.
We wouldn't ever imagine getting an employee to repay their salary when leaving a company, but yet we're totally fine with getting them to cough up their equity?
Well the actual issue is paying taxes on equity which can't be sold on either public or private markets. Founders don't have to do that (surprise) and neither do VCs.
Suggesting that early employees who are sold lower relative salaries and a dream are "taking away" from future employees is rather suspect.
Founders do, but the taxable amount is zero. You can do this too as an employee, by early-exercising your entire grant on the day you join (assuming your company allows it). However, it's probably not advantageous to do this unless you're an early employee, because you're exposed to all the risk, and that money is now completely illiquid.
> and neither do VC
Correct, but VCs aren't getting their shares at a below market price (which is the whole point of options - you generally exercise them when they're "in the money", ie, cheaper than the market price).
Because that way you can't truly fuck them over. If you don't give a baby some candy, it won't cry, for it has no need to. You have to first give it the candy, and then take it away, for it to feel really bad.
The author's argument seems to be that it's better/easier for investors to wipe out employees who vested their options but couldn't afford to exercise. Well, no kidding.
I would like to present a corollary argument: early investors need to keep pumping money into the company in order to preserve their preferred shares, for as long as necessary until the company IPOs.
This seems weird to me that their model seems to retrieve "money left on the table" from unexercised options. If the company is doing well and employees have the cash, the probably _will_ exercise their options. The cash the company gets from the exercise is likely negligible. So unless I'm misunderstanding, the 10-year liabilities are probably employees that would have wanted to exercise but haven't been able to yet.
I don't get how this is any different from advocating for clawing back already-exercised options from former employees in order to issue them to new employees. It would be a convenient thing to do, but who in their right mind would want to work for a company like that?
I thought the whole point of startups was that there was a chance to come out ahead. If you extend the liquidity window to 8-10 years and invent models that provide "fair value" then what is the draw for working long hours at below market salaries?
This piece is inane and I'm surprised to see it published by A16Z.
Options are a form of compensation, it's not as if the value created by the early employee goes away if they leave before a liquidity event. They created value and got compensated for it. To call the process of making it easier for departed employees to actually get access to this part of their compensation "optimizing for former employees at the expense of current employees" is disingenuous. If it were somehow possible to claw-back the salary of former employees to pay for the salary of current employees would A16Z actually support that with a straight face? I don't see how this is any different. This whole piece is hopelessly amoral.
> it's not as if the value created by the early employee goes away if they leave before a liquidity event.
Exactly. The comparison with a football player is asinine. A player who no longer is on the team cannot contribute to winning a football game. But an employee builds something that persists and is built upon long after they're gone.
I also don't understand why the company acts as if the employee has no cash liquidity once those 90 days start ticking - can't the employee sell their stock on the secondary market? Companies like EquityZen, or 137 Ventures can do this entirely without company involvement in the form of transferring shares, by doing a derivative forward contract, or a loan for instance. That way, the employee wouldn't need to lose all their options, only sell enough to pay for the AMT and legal fees.
Sure, companies have worded in hidden and possibly completely unenforceable share restrictions on transfers, loans, or anything remotely involving equity. But until we have a court case and a TechCrunch headline of Company suing Employee over Secondary Transaction, how does one know if these are enforceable or not?
And practically speaking, how will the company find out if you made a deal with your rich uncle? With an angel investor? With a group of angels? With these companies? What is the practical difference?
Are there realistic alternatives to options? The point of them seems to be to attracting employees at less than market rate with the incentive that if the company grows they will get a financial reward. And doing so in such a way that it doesn't cost the company too much upfront.
Perhaps the company could buy a financial instrument from a company (secured against a portion of shares) that paid out employees according to a certain formula. If the company made it big the finance company would pay the workers and then recoup the cost from it's shareholding. IF the company died then the workers lose nothing.
Don't do options, just give the employees the stock and you eat the tax bill.
If that tax bill becomes too large to be worth it, then it's time to give your employees RSUs.
But you say, how about vesting and such? It's a waste to pay those taxes if the guy leaves after 2 years. You just paid 2 years of taxes for no reason!
That means in practice you'll be giving RSUs around the series A or B funding point.
Another option is you give the employees a non-recourse loan to 83b purchase their options on hiring. The loan is due on a liquidity event when it's higher than the price of the options. This makes it a tax optimal and zero-cost way to give stock to your employees. I don't know if that is legal although.
Another option is to make your options just expire after 100 years.
Despite some painful implications of his argument, one aspect of his solution is ok: more options with a longer vesting period. This helps keep the best people around for longer, as they continue to accrue benefits of the career and comp risk they took by joining an early stage company. There would be a lot less incentive for people to leave at 4 years. (In most companies, the equity per employee handed out later on is tiny compared to what you can give early employees)
Alternatively we can imagine a world in which Series A investors always get wiped out in a re-cap by Series B investors, who always get wiped out in a re-cap by Series C investors.
“Are there any other management practices where one would optimize for former investors at the expense of new investors?”
When an employee leaves, you should also claw back all of the pay you've ever given them. I mean, they're no longer helping the company grow. That's just lost money, flying out the door.
This is absolutely crazy. What is earned is earned. And it is, in fact, distinctly possible that early employees at t(0), now gone, have done more to contribute to shareholder value than the subset employed at t(1).
> That doesn’t seem very fair at all. Are there any other management practices where one would optimize for former employees at the expense of current employees? I can’t think of any.
Options with vesting seem little different from pensions in this respect.
Just one addition to all the other critiques in this thread.
"The challenge in broadly adopting the 10-year exercise rule for all employees at the outset of the company as a solution is that it disadvantages employees who choose to make a long-term commitment to the company relative to those who leave."
Employees who stay longer get more options than employees who leave early. I don't see the problem.
It's only a problem if you quickly get stingy about options. And then your early employees, expecting to get topped up, leave. In a well-managed company, with a CFO who is prompting the right moves, it isn't a problem.
Don't a lot of companies give you an initial number of options and then only sometimes more? That's how it was at startups I talked to in 1999 and 2000.
Well, if you stay 4 years and don't get an equity refresh that's a pretty strong signal they want you to move on. Starting year 5 you'd be taking a pay cut. So I imagine it would be a rare outcome.
(Of course, this only holds under current conventions. With the OP's proposal companies would have a strong incentive to make life miserable for employees past year 7 or so, because those who left wouldn't be able to take their stock with them.)
There's a much simpler solution: early exercise. It's already possible and good companies offer it as an option. You exercise all of your options immediately upon joining. The difference between the fair market value and strike price is zero, so there's no tax due upon exercise. If you stay for at least a year, which is where the cliff is, you're now in long-term capital gains territory. And if you leave before all of your options have officially vested, the company is entitled to buy the shares back.
Now, let's address the problem in the article of employees not having enough cash to even exercise their options. If the company is truly concerned about this, then they can provide a signing bonus with which to exercise the options, plus a bit more to cover the taxes on that additional payment. Since the cash goes straight to purchase shares, which goes back into the company's bank account, it's a net zero on the books. The only expense here is the taxes.
Please, explain to me why this won't work. I'm genuinely curious.
The cost of the options is too high. Take a company valued at 90m pre-money for their Series B (a $10m investment). Their post-money valuation is $100m. Now assume the common is valued at 5x less than preferred. If the company wanted to do this and their hiring plan has them hiring 20 employees for a total of 5% of their options pool in options they now need to set aside $1m of their financing (5% * 20m) just to finance purchasing the options. That's unlikely to happen.
I'm afraid I don't follow your math. The cash to exercise the options goes immediately back into the company's bank account. It's as if they were handing out shares instead of options. The only expense should be the tax on the fair market value of the shares, which should be considerably less than 100% of their value, no?
You're right, I somehow forgot who the money was going back to. I wonder if you could enforce this legally without the employee just having the ability to walk away with the current value of the options in cash. I also wonder what the tax implications of the purchase are to the company. I agree that this solution makes a lot of sense though.
Wouldn't this essentially just be the same as being an angel investor. This takes away all the value of getting options.
For example I am an early employee at a startup valued at 1M. If on day one I am given $10,000 worth of options and I buy all of them, how is this different than investing $10,000 worth of money for 1% of the company?
The value of options is that they are options. You get to wait and see if they are worth buying. If you have to buy them on day one, then they are not a compensation for taking a lower salary, they are simply an investment vehicle like a stock or a bond (a much riskier one).
> If the company is truly concerned about this, then they can provide a signing bonus with which to exercise the options
This is the only way it would make sense.
Say you can take a $150,000 salary with zero options.
Or a $120,000 salary with $30,000 worth of stock options.
But if the company needs to give a $30,000 signing bonus to pay for the stock on day one, then they aren't saving any money for runway. Thus the main reason they want to compensate with stock is taken away.
And a $30,000 bonus wouldn't do it, it would need to be $30,000 after taxes. The company would end up paying over $150,000 for this person's total salary.
You are missing that the $30K bonus to buy the options would immediately flow back into the company's coffers. Perhaps a better scenario would be $30K of stock via grant and $15K in cash to pay the tax man... the company is out $15K net and the employee owns something putatively worth $30K.
An Angel investor ends up with Series A stock which typically costs more per share and has extended rights. The early-exercising employee buys cheaper Common shares. In an IPO the classes may end up with the same value, meaning the employee got a better financial deal per share for their sweat-equity. In a non-IPO the employee may get a lot less per share often 0. Also, each employee has access to a very limited supply of cheap stock, whereas no founder/board will stop an Angel from buying more shares ... "wanna double your investment? come to the trough. "
This methodology isn't sound because of IRS treatment, I'm not an expert but I have these links bookmarked [0],[1]
From [0]:
"I typically discourage companies from allowing option exercises by means of a promissory note. Promissory notes can provide employees a means of exercising options and starting their capital gains holding periods without coming up with cash. However, the promissory notes must be substantially full recourse to start the capital gains holding period, which creates a real obligation for the employee even if the stock eventually becomes worthless. A bankruptcy trustee might attempt to collect on a full recourse note in the event the company goes bankrupt. Full recourse means that the note is a general obligation of the employee, as opposed to recourse being limited to the stock purchased in the event of default."
I fully agree with you, with a small caveat though: the mechanism to use is called IRS section 83b election.
It is applicable when instead of the stock options companies offer restricted stock, in a similar way founder stock works. This should solve the problem for at least early employees, for whom the tax paid upfront will be almost negligible: while the company valuation is still low, the shares are inexpensive.
I think folks might be misinterpreting this a bit -- his issue with the 10-year window isn't that it will 'prevent' shares coming back into the pool (remember, the article started out talking about how employees should be able to exercise their options regardless of their cash constraints), but that giving folks the ability to wait-and-see for years, with zero risk, before pulling the trigger isn't really fair.
Let's say you are working at a start-up, and it's going well. You leave. You exercise and spend the money for your shares in your 90 day window. Great.
Now, same thing, you have a 10-year exercise window. You don't exercise because:
1. Why spend the cash?
2. Waiting will de-risk the thing.
Now the company starts struggling. You're holding 'dead' options, the company needs to recruit and expand the pool, and you get to watch from the sidelines. You may never exercise and in the mean time the pool has been refreshed unnecessarily. That's the issue. By forcing a decision, the company has a clear picture of its options pool, and employees have to make a decision based on reasonably present information.
The cash requirement of buying options sucks and I'm not sure what to do about it (if you earned it, you should be able to get it), but I agree that a 10-year window isn't the right solution either.
Giving out options with the expectation they won't be exercised is a kind of double-selling. It's a risky practice and doesn't always work; those that engage in it deserve what they get.
There doesn't seem to be any elegant solutions for equity compensation yet. The main issues seem to arise once an employee leaves or gets fired. While the employee did put in many years of work, its not too fair to have the options disappear after 90 days. At the same time, as mentioned in the article its not 100% fair for the employee to keep the unexercised options for a long period of time.
A solution a few people have discuss would be to allow the unexercised options to remain under the employees name, but the company would be able to re-issue the options to new employees at a higher strike price. When the new employee exercises the option (assuming the value has risen), the company would get the strike price of the initial unexercised option and the former employee would get the difference between the higher strike price and the original lower strike price.
For example:
Employee A is granted options with a $1.00 strike price.
Employee A leaves the company after a few years but doesn't exercise the options
The company re-issues the option grant at $3.00 to Employee B
Employee B decides to exercise and pays the company the strike price.
The company would keep $1.00 and Employee A would receive $2.00
This seems fairer than the current structure and allows Employee A to still benefit from the options if the company continues to do well without him. Of course, implementation would be much harder/complex.
Lord, just please take him in his sleep. Besides the obvious stupidity inherent to the argument you could simply accomplish this by having the company buy back the unexercised options at the current FMV.
Management should not do this because it makes it harder to hire at all stages of the company until it's liquid. And founders know how fucking hard it's to hire in general. If you fuck over early employees, what prevents you from fucking over later employees?
And imagine trying to do something equivalent to investors. How easy will it be to get funding then?
If I'm an early employee trying to join, will you fuck me over or will you give me liquidity? I will look at your options program, if I can early exercise, if you will give me hell for using ESO fund.
Now the internet is starting to write how being an early startup employee is an extra bad idea. The very public example of zach holman and other articles creates chilling effects on startup hiring.
It's what made me choose to go to the big company after my last job.
This may be good for a16z's bottom line, but I think it's important for those of us actually doing the work that we talk about how this has that chilling effect on hiring. We're still early in the process — not many startup workers really understand this yet — but I think we're moving in the right direction.
> Do employees want to join companies with the expectation that if any of these things happen at any point over the course of 10 years before an IPO, they end up with nothing?
This is a great thing to highlight. There's the company and the opportunity and then there's all that random stuff that you only understand after a decade in the industry.
That is incorrect. My 2000 stock plan from Lime Wire had 10 year exercise period from grant. Completely agree with you about all of it but you weren't the first one not by some margin.
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[ 2.7 ms ] story [ 261 ms ] threadThis article articulates what seems to be a common sentiment among founders I've met: early employees who want to do good work and cash out are a liability.
The rhetoric proposed here of "early employees who leave" vs "god-fearing quality employees who stay or join" is targeted directly at dividing and taking advantage of us.
EDIT: If you would like to downvote me, please do explain your reasoning.
Another reason might be the product/technology that the startup is working with that might be of interest to a good employee. Money is not everything.
Frankly, I don't think fairness has anything to do with anything. My bet is more that valley employees talk, and more of us know someone who's gotten screwed on options. Or are ourselves in that boat. (Raises hand! Dear former employer, please eventually go public. Pretty please? I'd really like my $15k back eventually.) Add in increasing times to ipo and frothy valuations and going to goog/apple/fb/amazon/LI/et al and getting RSUs which are essentially cash is way more attractive than options. So you see Sam Altman (to his credit, but also to his financial health) pushing 10 year vesting periods and an ISO NSO flip because YC needs engineers for all those startups, and if experienced engineers strongly prefer public companies, that's a big problem.
And the author admits his goals:
(note that this shouldn't be surprising from someone tangentially related to the Silver Lake / Skype option yankaroo)But hey, good luck selling the idea that if you should leave any time in the 10-ish years before ipo, you get fuck and all from "your" options. But you should choose options over google stock! No really! Why aren't you jumping at this chance? Come back!
Edit: a friend just got $290 combined cash + rsus from a post-ipo company in sf. The total comp numbers eg patio11 talks about are real. You have to be a sucker to turn down that type of cash for options that disappear if you leave anytime before ipo.
Marc Andresson is Reacher Gilt.
Strong recent article https://medium.com/@chamath/spending-money-to-make-money-aka...
There are financial instruments that could solve this problem, or simply any set of conditions, colloquially called a contract in some circles. It is difficult to introduce financial instruments in the US due to a variety of onerous regulations between the IRS, FASB, SEC and the associated capital structures companies take to comply with them. I have seen financial instruments that solve this problem, in Europe.
I forget the name of them but German companies offer them to employees, they are functionally similar to a hybrid stock bond, as they are 'granted', I think they represent shares, and they also give coupons for several years, until maturity.
But don't fawn over the possibilities of glorious Europe, because the grants are pitifully small. If you think the privilege of coughing up $7,000 for your worthless options is not good enough, well you'll get like 1/10th of that out of a European company, so lets focus on the issues that matter and try to culturally appropriate something that seems like it could work better.
Such arrogance, A16Z should really have thought twice about what such a blatantly anti-employee piece would do to their reputation. The gall of them to insinuate that this is a good thing because the true believers get paid for their work is just grating.
"There is a more fundamental issue at the heart of this seemingly good solution: A 10-year exercise window is really a direct wealth transfer from the employees who choose to remain at the company and build future shareholder value, to former employees who are no longer contributing to building the business/ its ultimate value."
In short, Kupor believes that even if you chose a lower-salary, higher-options/equity package, you should be stripped of your options if you leave. To him, it's only fair if only investors and employees who remain get to keep equity. Instead, you, who have been directly responsible for making the stock price rise so much that your options are costly to exercise, deserve nothing.
Basically it is a disguised argument against shareholders who are not already wealthy. "Here have these shares of the company. Oh, but you don't really deserve them because you didn't buy it with cash like we did, you earned it through sweat. Your labor is worth less than our capital".
I agree with what you're saying, but to clarify, it'd be the taxes which are prohibitively costly, not the act of exercising the options themselves (your hard work doesn't change the price at which you exercise; it just changes the amount that is taxable).
You may still be unable to afford the money it'd cost to exercise your full grant, but that figure was determined before you started working at the company, based on the size of your grant and the price at that time.
(IANAL)
Unfortunately, I'm not aware of anybody these days that actually is deliberately treating early employees well in this regard.
On the one hand, there's the wink-and-nudge that joining early will make you a millionaire--but then you've got folks like this who are undermining the entire mythos.
I think we are all interested in how this will play out.
Classic example of good maths, bad thinking.
This is nonsensical. For employees where these options represent 90% of their wealth, the benefit from marginal time value in these options is trivial when compared to getting liquidity and diversification.
"The bottom line is that if companies are going to continue to stay private longer, we need to fundamentally re-think the stock option compensation model. We need better, careful, and more thoughtful solutions."
Seems like the simplest solution is just for the investors to force the company to go public.
Going public creates the liquidity that solves this problem. It might be at a lower sticker price, but at least employees can arrange financing to pay for excercize and tax needs.
That and they might be able to actually diversify from a portfolio no self-respecting LP would tolerate.
Not arguing for secondary sales, arguing that we take these companies public to clean up that crap.
Silicon Valley with its sky-high cost of living is nothing more than a lottery. Those who have won the lottery mistake their luck for "smarts" and become "venture capitalists" who exist simply to grease up their fellow winners.
Capitalism!
Does A16Z care about their reputation among the laboring class, or only among the ownership class?
"The 10-year “solution” thus takes money/option value out of the pockets of the current (and growing) employee base to line the pockets of former employees who are no longer contributing to the business."
No it doesn't, those people helped get your startup where it is today. They put in sweat equity in lieu of greater pay. You can make this same dumb argument in reverse as well about current employee benefitting from the work that people did on the ground floor.
Seriously the arrogance of this person is incredible.
A longer exercise window is a benefit that accrues to all employees, because it applies to all of them.
The author's proposed solution feels quite absurd to me - to prevent exercise of stock options by any employee who departs for a liquidity event. I wouldn't join a startup that had these provisions.
The riders-on should be shed while those who did the actual work get to enjoy their profits, no?
> Are there any other management practices where one would > optimize for former employees at the expense of current > employees?
As a founder, you aren't optimizing for either case. The unexercised options were granted to former employees, based on the work they did. Extending the exercise window is a policy specifically to help all employees (current, former, future) in making financial decisions.
No where does this investor even mention investors in the mix. It's only about how bad 10 year vests are for employees, which is laughable. It's bad for the investor class who gets diluted in this model.
Exactly the same for startup stock. The company granted the stock to investors for cash and employees for their service as part as a compensation package, and as the employee fulfills their service, they earn the equity as well as their salary.
>Are there any other management practices where one would optimize for former employees at the expense of current employees? I can’t think of any.
This is exactly backwards. You don't offer the 10-year clause ex post, you do it when the employee signs. That's optimizing for new employees, not old ones!
Which is just a long-winded way of saying: equity is compensation for services performed, just like your cash salary is. In fact this is exactly how it works in BigCos, where equity is treated as compensation for work performed. AmaGooFaceSoft don't try to claw back shares when you leave, even though the employee is now hanging onto equity and "no longer contributing to shareholder value".
They paid for these shares with labor, same as everyone else.
We wouldn't ever imagine getting an employee to repay their salary when leaving a company, but yet we're totally fine with getting them to cough up their equity?
Suggesting that early employees who are sold lower relative salaries and a dream are "taking away" from future employees is rather suspect.
Founders do, but the taxable amount is zero. You can do this too as an employee, by early-exercising your entire grant on the day you join (assuming your company allows it). However, it's probably not advantageous to do this unless you're an early employee, because you're exposed to all the risk, and that money is now completely illiquid.
> and neither do VC
Correct, but VCs aren't getting their shares at a below market price (which is the whole point of options - you generally exercise them when they're "in the money", ie, cheaper than the market price).
The author's argument seems to be that it's better/easier for investors to wipe out employees who vested their options but couldn't afford to exercise. Well, no kidding.
I would like to present a corollary argument: early investors need to keep pumping money into the company in order to preserve their preferred shares, for as long as necessary until the company IPOs.
I don't get how this is any different from advocating for clawing back already-exercised options from former employees in order to issue them to new employees. It would be a convenient thing to do, but who in their right mind would want to work for a company like that?
Options are a form of compensation, it's not as if the value created by the early employee goes away if they leave before a liquidity event. They created value and got compensated for it. To call the process of making it easier for departed employees to actually get access to this part of their compensation "optimizing for former employees at the expense of current employees" is disingenuous. If it were somehow possible to claw-back the salary of former employees to pay for the salary of current employees would A16Z actually support that with a straight face? I don't see how this is any different. This whole piece is hopelessly amoral.
Exactly. The comparison with a football player is asinine. A player who no longer is on the team cannot contribute to winning a football game. But an employee builds something that persists and is built upon long after they're gone.
And how are previous employees "dead equity" but not andreeson ?
I also don't understand why the company acts as if the employee has no cash liquidity once those 90 days start ticking - can't the employee sell their stock on the secondary market? Companies like EquityZen, or 137 Ventures can do this entirely without company involvement in the form of transferring shares, by doing a derivative forward contract, or a loan for instance. That way, the employee wouldn't need to lose all their options, only sell enough to pay for the AMT and legal fees.
Sure, companies have worded in hidden and possibly completely unenforceable share restrictions on transfers, loans, or anything remotely involving equity. But until we have a court case and a TechCrunch headline of Company suing Employee over Secondary Transaction, how does one know if these are enforceable or not?
And practically speaking, how will the company find out if you made a deal with your rich uncle? With an angel investor? With a group of angels? With these companies? What is the practical difference?
https://gist.github.com/jdmaturen/5830b83c1425c4767f7e1bd4c9...
Perhaps the company could buy a financial instrument from a company (secured against a portion of shares) that paid out employees according to a certain formula. If the company made it big the finance company would pay the workers and then recoup the cost from it's shareholding. IF the company died then the workers lose nothing.
If that tax bill becomes too large to be worth it, then it's time to give your employees RSUs.
But you say, how about vesting and such? It's a waste to pay those taxes if the guy leaves after 2 years. You just paid 2 years of taxes for no reason!
That means in practice you'll be giving RSUs around the series A or B funding point.
Another option is you give the employees a non-recourse loan to 83b purchase their options on hiring. The loan is due on a liquidity event when it's higher than the price of the options. This makes it a tax optimal and zero-cost way to give stock to your employees. I don't know if that is legal although.
Another option is to make your options just expire after 100 years.
“Are there any other management practices where one would optimize for former investors at the expense of new investors?”
Options with vesting seem little different from pensions in this respect.
"The challenge in broadly adopting the 10-year exercise rule for all employees at the outset of the company as a solution is that it disadvantages employees who choose to make a long-term commitment to the company relative to those who leave."
Employees who stay longer get more options than employees who leave early. I don't see the problem.
(Of course, this only holds under current conventions. With the OP's proposal companies would have a strong incentive to make life miserable for employees past year 7 or so, because those who left wouldn't be able to take their stock with them.)
Now, let's address the problem in the article of employees not having enough cash to even exercise their options. If the company is truly concerned about this, then they can provide a signing bonus with which to exercise the options, plus a bit more to cover the taxes on that additional payment. Since the cash goes straight to purchase shares, which goes back into the company's bank account, it's a net zero on the books. The only expense here is the taxes.
Please, explain to me why this won't work. I'm genuinely curious.
For example I am an early employee at a startup valued at 1M. If on day one I am given $10,000 worth of options and I buy all of them, how is this different than investing $10,000 worth of money for 1% of the company?
The value of options is that they are options. You get to wait and see if they are worth buying. If you have to buy them on day one, then they are not a compensation for taking a lower salary, they are simply an investment vehicle like a stock or a bond (a much riskier one).
> If the company is truly concerned about this, then they can provide a signing bonus with which to exercise the options
This is the only way it would make sense.
Say you can take a $150,000 salary with zero options. Or a $120,000 salary with $30,000 worth of stock options.
But if the company needs to give a $30,000 signing bonus to pay for the stock on day one, then they aren't saving any money for runway. Thus the main reason they want to compensate with stock is taken away. And a $30,000 bonus wouldn't do it, it would need to be $30,000 after taxes. The company would end up paying over $150,000 for this person's total salary.
Right? Or maybe I'm missing something?
From [0]: "I typically discourage companies from allowing option exercises by means of a promissory note. Promissory notes can provide employees a means of exercising options and starting their capital gains holding periods without coming up with cash. However, the promissory notes must be substantially full recourse to start the capital gains holding period, which creates a real obligation for the employee even if the stock eventually becomes worthless. A bankruptcy trustee might attempt to collect on a full recourse note in the event the company goes bankrupt. Full recourse means that the note is a general obligation of the employee, as opposed to recourse being limited to the stock purchased in the event of default."
[0]https://www.proformative.com/questions/exercise-stock-option... [1]http://www.jebachelder.com/articles/010321.html
It is applicable when instead of the stock options companies offer restricted stock, in a similar way founder stock works. This should solve the problem for at least early employees, for whom the tax paid upfront will be almost negligible: while the company valuation is still low, the shares are inexpensive.
https://www.cooleygo.com/what-is-a-section-83b-election/
Let's say you are working at a start-up, and it's going well. You leave. You exercise and spend the money for your shares in your 90 day window. Great.
Now, same thing, you have a 10-year exercise window. You don't exercise because:
1. Why spend the cash?
2. Waiting will de-risk the thing.
Now the company starts struggling. You're holding 'dead' options, the company needs to recruit and expand the pool, and you get to watch from the sidelines. You may never exercise and in the mean time the pool has been refreshed unnecessarily. That's the issue. By forcing a decision, the company has a clear picture of its options pool, and employees have to make a decision based on reasonably present information.
The cash requirement of buying options sucks and I'm not sure what to do about it (if you earned it, you should be able to get it), but I agree that a 10-year window isn't the right solution either.
Isn't that what an option represents? The freedom to choose later is the inherent value of the option.
And that value isn't acquired risk free: it's compensation for putting time in in lieu of salary.
A solution a few people have discuss would be to allow the unexercised options to remain under the employees name, but the company would be able to re-issue the options to new employees at a higher strike price. When the new employee exercises the option (assuming the value has risen), the company would get the strike price of the initial unexercised option and the former employee would get the difference between the higher strike price and the original lower strike price.
For example:
Employee A is granted options with a $1.00 strike price.
Employee A leaves the company after a few years but doesn't exercise the options
The company re-issues the option grant at $3.00 to Employee B
Employee B decides to exercise and pays the company the strike price.
The company would keep $1.00 and Employee A would receive $2.00
This seems fairer than the current structure and allows Employee A to still benefit from the options if the company continues to do well without him. Of course, implementation would be much harder/complex.
And imagine trying to do something equivalent to investors. How easy will it be to get funding then?
If I'm an early employee trying to join, will you fuck me over or will you give me liquidity? I will look at your options program, if I can early exercise, if you will give me hell for using ESO fund.
Now the internet is starting to write how being an early startup employee is an extra bad idea. The very public example of zach holman and other articles creates chilling effects on startup hiring.
It's what made me choose to go to the big company after my last job.
fwiw, this post has really bothered me a lot too. I keep track of companies with >90 day windows, and I just added a note about a16z portfolio companies on it: https://github.com/holman/extended-exercise-windows#vcs
This may be good for a16z's bottom line, but I think it's important for those of us actually doing the work that we talk about how this has that chilling effect on hiring. We're still early in the process — not many startup workers really understand this yet — but I think we're moving in the right direction.
This is a great thing to highlight. There's the company and the opportunity and then there's all that random stuff that you only understand after a decade in the industry.