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It's designed to screw employees out of upside and they sell it pretending it's employee favorable.

If you reprice equity comp each year then you lose most of the upside.

Compare the two following equity plans:

Example Year 1:

---

PLAN 1

FMV: $1

Strike: $1

Total #: 40k ISOs

Vesting: 4yrs

---

PLAN 2

FMV: $1

Strike: $1

Total #: 10k ISOs

Vesting: 1yr

---

In the second plan you get granted new equity per year targeting some total comp. This means if the equity goes up in value a lot in the first year, when your new amount is recalculated it'll be way less than 10k.

Example Year 2:

---

PLAN 1

FMV: $2

Strike: $1

Total #: 40k ISOs (10k vesting in year 2)

Vesting: 1yr into 4yr period

---

PLAN 2

FMV: $2

Strike: $2 (new grant)

Total #: 5k ISOs (The 10k from the first year, and now half that # determined by new FMV for a cumulative total of 15k instead of 20k ISOs).

Vesting: 1yr on new grant

---

This lets the company keep the majority of the upside, taking it away from employees. It also hurts employees that stay longer or have a longer term interest in the company from capturing the value they helped create.

And the more the company goes up in value, the worse the trade off becomes.

Sure in the case of a crash you may get more stock (maybe assuming they don't reduce that given hard times, target comp is just a target after all - I don't think they commit to it). Typically companies regrant underwater equity in the case of a crash anyway (see peloton). Even in the best case, I'd guess it's unlikely the grants during a down year make up for being excluded from being able to get more at a lower price 5yrs out.

In the case of a crash, "typical" companies do not re-grant equity. Look at your typical big tech company, did they regrant equity? All of tech is down -- few tech companies have granted additional equity.

Depends on the crash and if employees are underwater or not.

In this case Stripe cut their validation by 28% and may give more stock based on that price. Assuming they do, will employees come out ahead when compared to if they had been able to lock in 5yrs of equity up front at whatever the price was when they started?

You can always negotiate for more if your locked equity becomes worth a lot less, it's a stronger position to be in as an employee. The equity is a bet on capturing value of large upside imo, their structure limits that.

You’re thinking way too hard - they have talent they need to retain. Promise status quo for the foreseeable to common shares even in the “wild world.” When the exit comes, see how common vs debt/preferred are treated.

I think 1 down year has more of an affect than your crediting, although it does depend on timing.

If you're given a 4 year grant for $X and during the first year, stock/options/whatever equity form drops 25%, then you now need to wait for the company to grow 33% to get back to your original target comp.

If that same situation happens except the drop happens in year 4 of a grant and you're above your target equity, then you'll be ahead only if the company has grown more than 33% since your initial grant date.

Now let's say you're granted an amount annually. And it drops 25% your first year and you plan to stay 4 years. Your equity portion of pay goes down for 1 year and then it goes back up. Now on year 2 you're given 1.33x the number of shares you were year 1. So let's say the company goes back up by year 4 to the original price and it steadily climbed back. If you sell at time of vesting, year 1 you took a 25% loss, year 2 you made some sort of gain. Year 3 you also made some sort of gain.

Let's say you held all vested stock and decided to sell at the end of year 4. Well your 1st year is flat but it's a loss due to opportunity cost and inflation. Year 2 has gone up 33%. Year 3 has gone up some amount as well. Year 4 probably has as well (assuming equity is priced at the beginning of the year).

I'd have to run real numbers to understand this, but again, I think people under estimate the affect a drop has. 4 year grants up front are just more risky and more of a gamble since you've basically bought 4 years worth of stock at a single price (e.g. you're timing the market).

Think preferences - there’s no way a vc is getting diluted on the back end

I'm not familiar with this. Are you referring to common vs preferred shares?

Preferred shares, covenants, etc - there’s no way you can guarantee an employee static dollars without finessing the cap table. The things that keep the compensation static on paper are usually tested and stressed during an acquisition, and a public offering at a valuation lower than the highest priced round - additional terms begin at those points: clawbacks, earn outs, lockups, tips, first rights of refusal, and new things fresh mbas dream up…

I don't know how stripe does it , but employees want to know what his stock is worth and the company needs to know how much stock to give. Since we are private we just say "our internal best guess for our evaluation is $XXmillion therefore we will give you X number of shares worth $200k at this valuation. There is no finessing of the cap table. We have pre allocated a certain percentage of stock for employees, we issue out of that allocation.

I don't see an answer here for why reducing the unofficial internal valuation is bad except for the fact that they are saying we might not sell for as much anymore which affects all current stock holders if it ends up being true.

If they’re able to keep all things equal, with your example in mind, then they cushioned the employee pool at an earlier round and are burning through the shares faster than when the round closed. It’s a bandaid, the real hope hope is that the injury in terms of valuation is truly a scratch that won’t leave a scar.

They’re not taking new funding though?

Maybe it’s time they did.

> 1. If you're granted options at price X, and the new share price is lower than X, you're under no obligation to exercise your options. So no real financial loss or cost to you.

> 2. If you're granted options at price X, and the new share price is higher than X, you're still under no obligation to exercise your options. So it's up to you now.

The payout on a call option is min(exercise - strike, 0). If you are granted options and X and the new share price is lower than X your options are now worth 0[1]. If the price is higher than X, you have lost some function of the volatility, time to expiry and Price_new - Price_old.

In both cases there is a real mark to market financial loss to you even if you haven't yet crystallized that loss by exercising (which of course you would never exercise if the value was zero).

[1] Actually very close to but not exactly zero because of the vol and the time to expiry. They could get above water again.

One, why would you ever want more of a growth company that is shrinking 13 years in with no exit in sight. Two, you miss out on 3 years of upside relative to a 4-year grant. It’s a terrible deal, but I see why they’d want to give it.

> One, why would you ever want more of a growth company that is shrinking 13 years in with no exit in sight.

Because if your given a fixed dollar amount of shares, and the overall evaluation goes down, you get a higher percentage of ownership.

Why would you want this? In the event that there is an exit, I presume the payout is better.

Public companies are also declining currently if you're using valuation to determine growth. And some of these are 20+ year old companies.

> Two, you miss out on 3 years of upside relative to a 4-year grant. It’s a terrible deal, but I see why they’d want to give it.

This only true assuming things keep going up. Which as we can see, is not true. It's not a "terrible deal". It's a more risk averse deal. If you started a new job at a company in the last 6-12 months and were granted 4 years of stock at a higher price, then stripes offering probably looks pretty good right now.