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Comment by cetico | Hacker News Reader

What are, in your opinion, things that startup founders should do to make things more financially rewarding for employees?

Any low hanging fruits you suggest we look at first?

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I am certainly biased but I would like to see the minimum employee comp package include:

* 83b election standard with employee on-boarding paperwork.

* Bonus of up to one year salary to cover 83b early exercise costs.

* Employee equity pool size disclosed along with 409a. Ideally contractual protection for the employee equity pool.

* Offer documents must include a 409a valuation and share price. (I have gotten multiple offers with just a number of shares. And in one case the company was literally peddling a false valuation in my offer).

* 401k with company match, even for a small company. Lottery ticket is not a retirement plan.

Ideally in my mind:

* Employees get convertible debt that is either as senior as investor debt or pays a 5% dividend.

* Double standard employee pool to 20%; keep 30% founder pool size.

* No ISOs or non-quals ever. Extremely tax toxic, and employees can actually get driven into debt from the job. Options should be outright forbidden for comp packages under $1m / year. The tax games are absolutely not worth it.

The main way any positive change can happen is for employees either to negotiate for it during offers or for founders to just start doing it to be more competitive. One might argue that Carta has made 83b easier by chasing a private stock marketplace... perhaps there are other mechanisms for change.

>Ideally in my mind: - Employees get convertible debt that is either as senior as investor debt or pays a 5% dividend.

I don't think this is financially realistic. Most employees (especially non C-suite executive employees) do not want to loan money to a startup to receive a "convertible note/debt". Even if employees wanted to loan money, most don't have the discretionary play money in their bank account to risk on a startup.

It's the investors that have the money and risk appetite to pay for convertible notes.

If you meant that employees should receive convertible notes even without paying anything (no loan)... then I think "convertible debt" is the wrong label to describe this transaction that you're proposing.

> If you meant that employees should receive convertible notes even without paying anything (no loan)... then I think "convertible debt" is the wrong label to describe this transaction that you're proposing.

How would you describe it? Note that the OP said "employees get convertible debt notes" not "employees buy convertible debt notes." Practically speaking the notes are indistinguishable from convertible debt that investors get, but they're compensation for employment rather than bought.

https://www.harnesswealth.com/articles/promissory-note-progr... What about a system like the one proposed here? This is the only tech startup I’ve heard of that uses an alternative equity system.

Agree with your point about 409(a) disclosures. As an ex-employee with outstanding options in two tech startups I find it crazy that nothing requires firms to annually disclose this information to options holders. And while I was working at these companies there was no mention of the #of shares outstanding and the % allocated to employees—even if you knew your personal percentage stake, you didn’t know how much was diluted with each subsequent round.

Rather than pay for early exercise costs and cover the tax burden, I think it makes more sense for early companies to extend the period employees can exercise options to 5-10+ years after they leave. Several places actually do this already, I've been offered it without asking in fact!

Small companies probably can't afford to pay taxes for everyone's 83b elections, nor can they afford the 401k match or the other missing perks. After all, if they could afford to compete on cash comp with big tech cos, surely the founders would rather do that and preserve their own equity stake.

But with exits taking longer and longer, such an exercise scheme lets rank and file employees preserve some small upside that they have earned themselves, and not worry about hurting their career by being forced to wait for an exit.

I think I generally agree that employees get a pretty bad deal. I think it used to look better, but these days you can make so much more money so much faster working at Google than you can at a random startup.

That is why when the 83b bonuses start making you choke, that its time to start converting into RSUs, and delivery of those RSUs happen at first liquidity, which means after the 6 month lock up period of an IPO, not at IPO.

What happens if you have an underperforming employee and end up having to fire them in the first 3-6 months? Do you really want to give them permanent equity in a company before they've proved at least some value? Some sort of clawback structure would be necessary here.

Employees take less cash in exchange for equity. They earn the equity as a part of compensation. Under what theory you want to claw it back?

In addition employers are protected by a vesting cliff, and after that it is their fault if they keep underperforming employee around.

In the case of 83b, the unvested shares are returned. Even the bonus-to-cover can be returned contractually—- the bonus-to-cover never even has to hit the employee’s bank account.

RSUs are probably better but the equity games are set up right now such that startups issue options.

Bonus-to-cover + early exercise seems strictly inferior to a 10 year guaranteed exercise window, what is your opinion on this?

There are 2 key tax advantages: Qualified Small Business, and avoiding AMT. (But should both be considered playing on expert mode, higher risk/reward.)

And AMT can mean a $5k/year accountant if you want to play it right. IMO AMT risk not worth it unless the comp package is well north of $1m.

The number of startups that IPO and 2x or better is strictly less than the number that even make it to IPO. The 10 year window is certainly better than 90 days, but options just increase your chance of being a bagholder.

In the case of an acquisition, options also can screw you. In my view, it’s always better to have either shares or equity most comparable to what the founders have. Be ready to sell early at any time.

Great points...believe it or not it happens, but privately, in a case by case manner. Also why do you think companies and founders are in the business of making employees wealthy?! What is the specific reason for all of these being implemented?

Your trying to recruit people who can go work at a FANG and or have been burned by or have researched about startup equity shenanigans, so they have high requirements before they would even consider talking to you.

Pay more money? Allow employees to include their shares in a round?

The more you pay, the shorter your runway. It’s a balancing act like most things in business.

>The more you pay, the shorter your runway.

The horror of asking a company to charge customers to finance their operations rather than running the VC treadmill.

I don't get how more founders don't realize it is in the VC's best interest to keep you on the treadmill, burning their money and giving away your equity.

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