The Lack of Options for Startup Employees’ Options | Hacker News Reader

The Lack of Options for Startup Employees’ Options

a16z.com

120 pointsrunesoerensen121 comments

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.

It's basically admitting that their main protection against dilution is fucking over previous employees

And how are previous employees "dead equity" but not andreeson ?

Strongly agree.

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...

We were the first startup to use 10 year exercise periods, which started this trend. I wrote a long response to this here: https://dangelo.quora.com/10-Year-Exercise-Periods-Make-Sens...

> 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.

This is an absolutely embarrassing argument on the part of A16Z and it should be taken down.

Options have present value prior to exercise. You can compute that value using common financial models. Renouncing vested options by not exercising within a 90-day window is akin to taking that value and donating back to the existing shareholders of your firm, including current and future employees. So yes, it is true that not making a gift to all those people is worse for them, but what in God's name would lead a person to believe that this is the way it should be?

I'm not even going to get into the myriad ways in which founders and investors can conspire to create personal liquidity in a way that dilutes and actively harms the financial prospects of option-holders. But the fact that even the bare-minimum action of asserting a right to keep VESTED option value is being characterized as "additional dilution" and "maybe bad" is completely absurd.

I'm not prone to outrage, but this author, as well as Ben Horowitz, should apologize and retract this. https://twitter.com/bhorowitz/status/746050999341584384

A reasonable argument for a 90-day exercise window could have been: employees are told upfront that they need to remain with the company through a liquidity event for their options to be worth anything. The incentive to stay is both transparent and explicit. And aligns everyone's incentives, e.g. long-tenured employees perform better, making the startup's equity worth more, enriching the employee who stayed through the IPO.

The arguments in this article however were wholly incoherent.

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.

The VC gets to "create more value" for himself by paying employees with monopoly scrip rather than cash.

Perhaps what is needed are sunset clauses on investor/non-labor shares?

The riders-on should be shed while those who did the actual work get to enjoy their profits, no?

What do you mean? If you tell people upfront that their shares will be worthless eventually, why would anyone invest time or money?

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?

The author of this article should be ashamed.

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.

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.

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?”

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.

(IANAL)

Good summary.

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.

Similarly if everyone could afford to exercise they might make the same argument.

"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.

Our take... http://bit.ly/youshouldsellyourequity

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.

#overconfident

Not arguing for secondary sales, arguing that we take these companies public to clean up that crap.

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.

> Christ, I can't seriously believe this argument.

Capitalism!

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)

> A16Z should really have thought twice about what such a blatantly anti-employee piece would do to their reputation.

Does A16Z care about their reputation among the laboring class, or only among the ownership class?

These were my thoughts exactly, specifically:

"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.

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.

Right? Or maybe I'm missing something?

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."

[0]https://www.proformative.com/questions/exercise-stock-option... [1]http://www.jebachelder.com/articles/010321.html

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.

https://www.cooleygo.com/what-is-a-section-83b-election/

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.)

>"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.

So why even give them options in the first place then if the goal is to just prevent them from ever using them?

Well, the goal is to dangle the carrot in front of you but make sure you can't ever actually take a bite of it.

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.

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.

> The very public example of zach holman and other articles creates chilling effects on startup hiring.

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 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?

So you provide capital and you get to keep more or less no matter what.

You actually work in the company, get a lower pay in exchange for options and help them increase their value (even more true for early employees) and you can go fuck off.

Got it.

I am being quite ridiculous and ignorant probably, but to me options just seems a way to trick people into buying a lottery ticket, except it has very complicated rules how to cash it and you don't even know if you've won or not sometimes.

Why not just grant people stock / ownership. Wouldn't most people like to get a smaller guaranteed amount of ownership percentage than some mythical huge number of options which get diluted or become beyond the reach due to AMT? Why don't startups say "here is a low salary, but you get 0.25% of ownership after working for 2-3 years", write a contract and put in it that this person owns 0.25% of the company. They might not be able to sell or cash shares until the exit or the IPO or whatever. But if they leave, they leave, they keep the share, if they stay and work company gets better and bigger they get a bigger piece of the pie and so on.

I am probably missing very obvious things here, but that seems a bit simpler than the complicated scheme with options.

This is essentially what an RSU is: a stock grant with a vesting schedule. Many public tech companies grant them, but they are more complicated for the granting company taxwise[1], so they are rare in small startups.

[1] They have to withhold some for taxes, for one thing.

Ok, so it is not a completely crazy idea. It if funny that granting ownership is more complicated than granting an option to ownership.

This is the worst I have ever read from greedy a16z.

Why do investors need to be greedy? Startups went public in 4 years in 90s and 4-year stock option totally made sense. After the company goes public, retail investors are able to enjoy some post-IPO growth.

Now in 2010s, VCs became greed with money they raised from Wall Street and enjoy the 95% of the growth of startup at the expense of employee's stock options and take it to IPO selling the shares at high-cost to retail investors.

In 90s, First 1-10 engineers used to get upto 20-25% of the company. Now I see college grads are fooled by startup founders for 1-2%. Thanks to greedy investors.

I heard Zenefits is going through a big dilution problem now as they are looking to dilute the company shares and there is zero incentive for employees to stay in Zenefits. a16z controls Zenefits as they may have around 300M in Zenefits and maybe this post is the result of their new dilution event.

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 don't have to do that (surprise)

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).

Ok, this one had me really wondering.

From the piece: "Fundamentally, we are here because companies are choosing to stay private significantly longer than the time period for which the four-year option vesting program was originally invented. It’s a historical anachronism from the days when companies actually went public around four years from founding. Today, however, the median time-to-IPO for venture-backed companies is closer to 10 years."

This is just plain wrong. We are here because Congress decided to close "loopholes" in the Tax code associated with stock options.

Before they did this, you could exercise your option, at the strike price, and if you did nothing else you owed no tax. It was only when you sold the stock you held, were any gains or losses computed, and the taxation was based entirely on how long you held that stock (long term or short term).

Now the reason they did this, was that giving someone stock options in a publicly traded company is very much like paying them cash. And so the IRS wanted to "capture" from those people income tax they would otherwise avoid. And you could see it if someone paid you $1, and gave you an option for 1000 shares with a strike price of .001 but a current trading value of $50. You paid income tax on $1, used that to exercise your 1000 shares, and a year later you sold them for $50,000 paying only long term capital gains. Clearly avoiding the income taxes on $50,000 they really "paid" you.

They closed this loophole with "alternative minimum tax" and which basically a rule where if someone gives you a lottery ticket you have to "pretend in some alternate universe" that you won the lottery and actually pay the taxes you would have paid if you had, and only when its clear that you couldn't possibly have won the lottery can you treat that as a tax "loss", but they don't give you that money back, rather they let you write it off slowly over years and years and years. And as you can probably tell I've written a number of angry letters to my congresscritter about it, especially in the context of an illiquid asset like pre-IPO startup stock.

Without all the tax shenanigans options would work just fine. When you left the company you'd exercise them, owe no tax, and hold them for later. If you happened to be in a universe where "later" they were tradable, or you figured out a way to trade them non-publicly, only then would you have to pay taxes on the gain.

The trick is getting tax law changed to exclude artificially valued shares (which all non market traded securities are) from the AMT and income calculations.

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)

The best people will stay around because they are doing their best work. Longer vesting periods will just keep the best from working at that company.

A fantastic piece and a subject I've spent a lot of time thinking about as an early-stage founder.

There's a ton of criticism in this thread but I think people are missing the point.

1. Why 90 days expiration sucks.

If you're an early employee at, say, Uber... your options have vested but you can't afford to exercise them because you don't have $10m+ in cash. If you leave you lose it all because you can't exercise them. There goes your big payout, you are stuck working at Uber until they IPO (or forfeiting your equity).

2. Why 10 years expiration sucks (on its own, keep reading!).

Consider the case where you have two employees who joined on day 1. Employee A works for 4 years and vests X% in options, leaves. Employee B works for 10 years and vests X% in options.

Obviously you want to retain your most senior employees and turn them into leaders within your company rather than see them leave. Those who stay and help carry out the mission are way more valuable to you than those who leave right when they vest.

If you change nothing except 10 years till option expiration after leaving, employee A and B get compensated the EXACT same thing despite employee B contributing 10 years and employee A contributing 4.

3. Longer vesting + more equity fixes everything

If you dish out more equity over longer periods of time then employee B would rightfully be compensated more than employee A.

I don't understand the negativity in this thread whatsoever. Can someone please level-headedly explain why they disagree rather than just downvoting into oblivion?

Because the 10-year employee will be granted additional shares after her initial option grant is fully vested. And in a world where both have the option of leaving and preserving their option value, the follow-up grant will likely be larger than it is in the status quo, because the company will have to incent B to give an additional 6 years of her life to the startup.

Sure but if you join on day 1 then the refresher grants could be peanuts compared to your initial offer? Why wait 4 years to find out you won't get any more equity instead of baking it into the original offer with a longer vesting period?

Longer vesting periods + more equity guarantee that employees get more equity. 4 year vesting lets the board decide what happens.

No one is going to 2.5x their 4 year early grant and vest it over 10.

You could do 1.5x over 8. Employee gets more equity in the long run if they stay and still a great payout if they only stay 4 years. It's similar to what I plan to do for my company.

In this scenario you give those employees a new 4 year refresher grant every single year. Not one at hire and one four years later. You pile them on both as a form of performance based compensation and to prevent the exact situation you describe.

In your example the guy who leaves after 4 years of low salary makes a lot less than the guy who gets incremental grants and a growing salary who is a vp at the end making 500k a year.

Seems like your incremental grants would be significantly less than the initial ones joining early on, no? Or is it common that leaders get big refreshers along the way?

I would say I'm pretty unfamiliar with early employee refreshes but from what I've heard refreshers are usually small compared to the initial grant.

Yeah I think if you have somebody who is a classic "first engineering hire" and s/he grows into an engineering leader, each major promotion (to manager, director, vp) brings an opportunity for a rich follow-on, as well as a normal yearly grant. Now if somebody is particularly adept at negotiating and somehow take a full point out in their initial grant, you're probably right that incremental grants won't touch that value. But that is 2-4x what I've internalized as the norm.

I didn't downvote you, but I do disagree with your view.

A straightforward way to keep someone around after their four-year vesting clock expires is to grant them new shares on a new vesting schedule.

Their initial grant was part of compensation that reflected their probable value contribution to the company over the four-year vesting cycle. If the company would accrue additional value by their continuing to work beyond four years, it should compensate them for that additional value with more equity.

And it's not adequate to say their work will increase the value of their already-vested equity. Dilution happens.

Also, it's not true that the two employees receive the same compensation. The one who departs receives six years less (salary, bonus, benefits, etc.) than the one who continues for ten years.

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).

This is a joke. Dual basis of options should be fixed. That is the solution to the problem. It's not the cash for exercise, it's the AMT payment due at time of exercise. At least today we have credits which is better than it once was. But just fix this and this whole issue of 90 days or 10 years is way less important.

> Fundamentally, we are here because companies are choosing to stay private significantly longer than the time period for which the four-year option vesting program was originally invented... Matching vesting more closely to the IPO time frame for companies [6-8 years] makes logical sense...

It would be more logical to stick with four years and let employees participate in the huge "private IPO" rounds. This would provide liquidity in roughly the same timeframe as before. Companies are not staying private longer because they need more time to mature, they're doing it because the private markets are favorable. So treat those like the IPO surrogates they are and let employees sell options.

(Note, this would have none of the cap table messiness of secondary sales.)

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?

I can't believe a16z allowed this to be published. Part of being "founder friendly" is not developing a reputation of shitting on your portfolio's employees, because then good founders will have to avoid you.

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.

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.

Hard to imagine this merits downvotes...happy to be corrected though.

> giving folks the ability to wait-and-see for years, with zero risk, before pulling the trigger isn't really fair

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.

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.

The fundamental question is really misleading.

> 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.

I had to chuckle at the end. One way to compete for the stupidest and most naive employees is to offer really drawn-out vesting periods, where if you leave before the IPO, you get nothing! Considering that the average length of a job in sillicon valley is about 2 years, that would effectively put an end to anyone with any talent or brains working for a startup.

> 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.

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.

This is idiotic. The author harps on the "direct wealth transfer" and optimizing for previous employees. This "optimization" happens before employees are hired, not after they leave. The effect is realized after the ex-employees have left.

> ...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...

Doesn't it mean dilution for the former employees, as well?

This may be being said elsewhere but I think the bigger problem is that you get taxed when buying options that are not liquid. I own a significant amount of a startup company and am fully vested but I can't exercise because of the tax bill.

You can. You just can't do long term capital gains.

It's my understanding I have to pay tax on the difference between excise price and fair market value for the year I exercise my option that year. And I've gotten conflicting tax advise on whether or not private investor rounds set a fair market value as far as the IRS is concerned.

This article seems to be of the same opinion.

Either way, if you can't do capital gains and you're still at the company no use wasting the money on buying in early.

Yeah but thats gets done right away in the process.

It's the long term thats the problem because thats more like a loan.

Yes, but without the tax if you have a 90 day window when you leave it wouldn't be a big deal that the company isn't liquid yet, you might just buy the shares as an investment. My point is that because if the tax, buying the shares in this scenario (if the stock isn''t liquid enough) is not obtainable.

Thats true.

Would issuing RSUs instead of options avoid this issue?

Avoids some of the issues, creates more particularly limiting upside potential.

Strong recent article https://medium.com/@chamath/spending-money-to-make-money-aka...

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.

The equity of previous investors feels just as "dead".

Why have a limit at 10 years?

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.

When I left my last company I had to write a check for about $10K to buy my options. It's like rolling the dice.

I really don't understand why employers don't allow the employees to exercise the options right in the beginning when the value is much much lower.

Usually you are allowed to exercise the options as soon as they are vested.

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've asked them. To a one, they got lucky. None of them had an actual plan for how their contribution would lead to a multi-billion dollar exit.

Public companies can be a drag.

If you are talking just about $ then totally but there's more than just money. Big companies have bureaucracy, corporate politics, etc.

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)

I must second you here. Many times the stock options that you get at Google, or Facebook even today outperform all other forms of investment.

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.

Employers need to get an independent valuation prior to issuing options. If you're hiring employees at a later stage, your hands are tied.

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.

> try and understand the mindset of investors and new founders.

Marc Andresson is Reacher Gilt.

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.

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