Improving Equity Compensation at Coinbase | Hacker News Reader

Improving Equity Compensation at Coinbase

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93 pointsjorde41 comments

That's awesome, glad to see Coinbase leading the charge on employee equity! We've just implemented something similar at Amplitude as well.

The 90 day exercise window is one of the biggest "gotchas" of equity compensation, especially for employees who are new to startups. Extending it to 7 years allows the company get far enough along towards liquidity so the employee knows more about whether it's worth it to exercise as well as not forcing them to come up with a lot of cash on short notice. Really glad to see Coinbase taking a stand for fairer compensation for employees.

I wonder if this encourages startups to give less options, since they can be exercised so far in the future? If they know that a certain percentage of their options won't be exercised or will be relinquished, it makes ownership issues much simpler so wouldn't that incentivize giving smaller equity grants?

I like how this only kicks in after two years. That seems like a great compromise in terms of the employee getting initial options right after the cliff, but getting additional benefits after the extra year.

> Most companies allow only 90 days for employees to purchase stock after they leave the company.

This is somewhat disingenuous because it neglects to mention that the 90 day exercise window is typically the result of a company offering employees incentive stock options (ISOs). A 90 day exercise window is required by the rules associated with ISOs. Startups can't change the law.

When a company allows exercise after 90 days, the options become non-qualified stock options (NQSOs), and those are subject to different tax treatment.

In reality, the favorable tax treatment of ISOs often doesn't benefit startup employees, so there's an argument to be made that startups should just offer NQSOs anyway, but that's neither here nor there.

The big lie is that extending the exercise window has a high probability of being meaningful. Yes, it's true that companies are taking longer to deliver liquidity, but a lot of companies simply aren't going to deliver liquidity, ever. For those that do, in today's market, where valuations skyrocket early and late-stage investors trade valuation for significant downside protections, many employees will find that their equity isn't as valuable as they expected.

If a startup really wanted to stand out and reward employees differently, it would look at alternative approaches, such as bonuses and profit sharing plans, including profit sharing plans that contribute to a 401k. I think a lot of people who are not new to the game would be attracted by alternative structures and incidentally, these would probably do a lot more for retention.

> If a startup really wanted to stand out and reward employees differently, it would look at alternative approaches, such as bonuses and profit sharing plans, including profit sharing plans that contribute to a 401k.

Or just create optional liquidity with funding rounds. At least it should the norm when the founders are selling some of their stock and taking money off the table.

Does the tax treatment change if you exercise > 90 days after leaving?

From what I understand, options may be treated as NQSOs rather than ISOs if exercised >90 days after the employee leaves. (source: http://blog.samaltman.com/employee-equity)

They'll be NSOs, same for Pinterest.

As t→∞ an option becomes indistinguishable from its underlyer, why don't they give RSUs? Taxes?

Yay Unicode!

∞

fixed

Yes: taxes.

So are the taxes also worse if you increase the exercise window? Is it more tax efficient to issue 100 year stock options vs RSU?

While I appreciate the intention behind this, and would probably be grateful to have it available from my current employer (or any other employer for whom I've worked > 2 years), I shudder at the tax implications of exercising options whose strike price is as much as 9 years below the fair-market value.

Hello, AMT...

Nobody in their right mind would exercise 7-9 years later if they weren't exercising in order to sell, making more than the AMT they would be paying in the process.

Well yeah, if you had options in a private company that has grown your equity from $20k to $2M over 7 years... you'd find a way to exercise. Surely that company would have demonstrated enough value that your could borrow the money safely or use one of the option-funding schemes to cover the $700K tax bill.

But better that than scrounging $20k together when you quit only to see it evaporate.

Well shouldn't sv employees be lobbying their congressmen and senators for tax breaks for employee share schemes.

Take a leaf from Obamas play book set up a group in every company to lobby for this

They did that already in the 80s, they're called Incentive Stock Options

It allows more flexibility and risk profile for employee - and there's no way you can hide from AMT. If you're confident that the company will do well, you might just exercise early if you can scrape up the cash or wait for a long time to determine if it's even worth it (even high profile companies go south). I see it binary: if the company is wildly successful and you have the option to extend exercising to liquid markets, you're not going to care about AMT that much.

I really like all the effort startups are putting into making employee equity more valuable, so awesome job here Coinbase! However, I was disappointed by the headline because I'm always hoping to see someone come up with a solution to the current cultural problem of employee equity's diminishing perceived value.

I've thought a lot about it myself and have yet to come up with a solution, but I really feel like it will cause major problems if equity is progressively treated more and more like a near zero value lottery ticket.

This is really great. It really sucks to exercise only to have your stock repeatedly crammed away into oblivion to make room for people who swoop in at the end and take all the value you have created and pocket it.

Isn't the issue the exercise price instead of the time window?

Wouldn't it be more effective to keep the time window to 90 days and have the exercise price be under $1 in total?

Giving an employee an option on a $30 unit of stock with a $30 dollar strike price has no tax implications. Giving the same option with a $1 strike price means $29 of immediate taxable income. Multiply by an early employee grant size and you're looking at bankruptcy from taxes on completely illiquid assets.

This is also why options are strongly preferred to actual stock.

Strike prices aren't set arbitrarily, they're set based on 3rd party valuations of the value of the stock at the time of the option grant. Failing to follow these rules can have huge negative consequences for both companies and employees.

There's no market in Coinbase stock. They haven't done an IPO, and it's not likely that they will. It's a Bitcoin company, after all.

Meanwhile, more info about the Mt. Gox collapse is coming out now that Mark Karpeles has been arrested and is in interrogation.[1] "The police are also investigating whether Karpeles consolidated customer and corporate funds in a bank account held by the company and embezzled around ¥1.1 billion, funneling funds to an account of an affiliate company and for personal use."

[1] http://www.japantimes.co.jp/news/2015/08/04/national/crime-l...

Only for new employees? Is this a backhanded way to try to push early employees out? Why not roll this out for all employees at once instead of generating management-induced divisions?

SEC rules make retroactively changing this complicated; it's not Coinbase's fault.

Which rules in particular?

Because management can't unilaterally rewrite old contracts.

Note that they say "Coinbase is considering additional options to provide similar benefits to existing employees."

Yes, "considering". That is management fluff.

Contracts can't be unilaterally rewritten, but new contracts which bridge to parity with current policies are easily achievable. Lazy management is nothing new or surprising.

This just feels like a premature management-product rollout to me. Why not finish considering first, decide to give everyone the same benefits, and then present the unified plan, instead of attempting a Python-like fork of your company with vague promises of possibly building a "2to3" automated upgrader.

You don't have nearly enough information to justify being so dismissive and so uncharitable. Dismissal for the sake of dismissal is something we need less of here.

This comment is an example of how HN threads could greatly improve by practicing the Principle of Charity, i.e. when unsure, prefer the strongest plausible interpretation of an argument.

http://philosophy.lander.edu/oriental/charity.html

Sorry, how am I being dismissive and uncharitable?

Where am I wrong?

You called them lazy and their statements fluff, and implied that they don't care about their existing employees, when they've just done something positive and you have no specific information about it.

A more charitable interpretation is easy: since they've just done something good for new employees, there may be be a constraint that makes it not as easy to do for everyone. I see no reason, other than what Max Scheler called the "compulsion to detract", to assume they don't care about their existing employees—it would be incongruent with what they're announcing, plus dumb.

It's fine to raise a question, but the willful sourness that wants to tear down a positive thing and turn it into a negative one is something we need less of in HN comments. This is a particularly good thread not to do that in, because the OP is a datapoint in a significant emerging trend about employee compensation. It deserves a serious, undistorted discussion.

It's not dismissal for the sake of dismissal. It's not even dismissal. It's pointing out incongruities in the corporate speech. There was enough specific information in this post by the CEO of Coinbase to at least speculate and seriously consider my scenario.

I was wrong about the possibility of it being a way to push early employees out. It's rather the opposite (duh! that is ostensibly why these ideas are being experimented with); Coinbase may decide that it wants to keep its early employees locked in.

If these actions are being taken in support of employees, why not take a comprehensive approach that solves the entire problem? Or at least actually promise that the entire solution will follow shortly instead of saying it is only being considered.

Anyway, I find the desire to reduce perceived negativity as misguided. The risk of an amplifying echochamber is real. Rather, it seems we should address root causes rather than superficial perceptions.

What is stopping management from asking employees' permission to rewrite their contracts in this way? If the employees say sure! (why would you decline?) then is there a problem?

It may require regranting a new strike price. I have no idea what their cap table looks like, but assume old employees have options with a strike price of $0.10 and new employees are being given a strike of $1.00 (each based on the 409A valuation of the company at the time of grant). It may not be possible to change the old grants without updating the strike price or causing serious tax issues for current employees (to remain compliant as ISOs, the strike must be >= the 409A as of the grant date... failing to do that led to the stock options backdating issues of the 2000s).

Does this change anything? If I don't have $20,000 90 days after I quit, why do you think I'll have $20,000 7 years later?

Well presumably you'd exercise at some kind of liquidity event so you can borrow the money for a short period of time. Lots of people will lend you $20k if more than that is coming back soon. Of course if they haven't excited in 7 years then you still have the problem but at least then you'll have a clearer idea of whether the company is going to be valuable and if it's worth excising.

No need to borrow money if the stock is liquid, you can perform a 'sell to cover' transaction, in which your options are exercised and enough of your stock options are sold to pay for that at the same time. Any broker can handle that without a loan required.

You might have been successful in saving $55 a week as a gainfully employed professional. You might be more willing to risk $20k given that the situation in 7 years is "The company is IPOed and there exists a highly liquid market for its stock" versus "It is entirely possible that I pay $20k and get nothing of value in return." You might, given a similar situation, convince any number of reputable financial institutions to advance you $20k in the anticipation that you'll be able to pay it back with ease (and are shortly going to be the sort of customer that reputable financial institutions try very, very hard to make happy).

You might simply benefit from having 7 years to find a few days and mental headspace to figure out what to do with your equity. Silicon Valley is rife with folks who lost exits, some small and some very-not-small, simply because in a stressful situation where they were switching jobs / apartments / marriages / etc day 91 came and went.

This is invariably in employees' interest.

7 years is a long time for the company to IPO, get acquired, or at least demonstrate enough long-term value that convinces you to find a way to exercise those options.

The most likely scenario is that the company would have an exit event in that time, in which case you would purchase your options and have them liquidated in the same moment, meaning you do not actually spend anything, you simply receive what your stock is worth.

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