DataRobot employee resigns over stock sales | Hacker News Reader

DataRobot employee resigns over stock sales

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166 pointsOzzie_osman80 comments

The compensation model for pre-RSU startups is broken right now. The combination of late exits, short exercise windows, and heavy taxes on illiquid gains, means you can wind up deeply in the red as often as in the black.

In my last job search all the startup founders whined about not being able to keep up with big company comp, but I can't justify giving up X00,000 RSU's for the real possibility of going deeply into debt. The reward structure needs to change so there's good chances of being rewarded.

It's a shame. I love working in these tiny startups, but I can no longer justify it.

Work at tiny startups as a contractor, I highly recommend it! All the motivation and autonomy and sense of achievement and none of the messy complicated risky stock option stuff :)

Dont you have to constantly find new gigs because these tiny startups keep going out of biz?

That’s happened once so far yeah :) so generally I tend to move on before companies go under

Same as if you were working for the startup directly, and as a contractor nobody will complain if you line up additional gigs on the side.

I'm kind of doing the same thing, usual stint at each of them range between 1-2 years, I'm fine jumping at that point as the company already grew too big for me to be comfortable. All of them are still ongoing, runways have been 6-12 months each time I joined.

Is this as financially viable as being an engineer at FAANG? E.g. you’re getting paid $400k+ liquid for senior/e5 roles.

Yeah I’m earning very roughly half that. 400k liquid sounds like a stretch to me though, you sure that’s not total comp?

I’ve been on both sides of that negotiating table. It’s ok to say the role won’t match a bigco compensation package, and if that’s you priority you should probably take the bigco offer. An early stage startup is a fundamentally different experience, with pluses and minuses relative to big co’s. If the +’s outweigh the minuses, take the job.

No whining need be involved, on either side :)

(Fwiw, I do think it is important for early stage startups to be even handed and fair on pay, but that doesn’t mean you necessarily have to go toe to toe with the biggest offers)

The problem is that the expected value of the equity itself is negative in the current environment.

If the tradeoff were to give up some guaranteed money for a low shot at a big payoff, then that would be a reasonable tradeoff! But right now it's prohibitively expensive to exercise.

I'm surprised that YC doesn't lobby to fix the tax code so startup's can attract experienced people, but maybe YC is just about supporting founders, and there still enough employees willing to take a bad deal and work at an early stage startup.

I should have been clearer. I’m saying it is ok that the expected comp is lower. If the other things add up for you, it’s not necessarily a bad deal. (But it can be, you have to evaluate with clear eyes)

Another way of thinking about this: developers aren’t really fungible , neither are roles.

For clarity, although this is probably buried by now: I definitely think that if there is real upside at some point it should be shared with early employees, not just key senior hires later - and I push for this wherever I am. I just don't believe you can make this stick in a expectation-value sense. Certainly not rigorously.

> that doesn’t mean you necessarily have to go toe to toe with the biggest offers

Most startups insist that their world changing idea can be built only by engineers from MIT or Stanford. That is where the whining on both sides come from.

My philosophy is if you think they're wrong and you don't need those people, then they have poor judgement, and you're better off not working with them in that case, and in fact could beat them by pursuing similar goals while not using that strategy.

And if they're right, well then what's there to be upset about?

I am not upset. I, as you said, avoid them.

I was offering it as an explanation.

I believe that there are startups that need special engineering skills. The 40-for-founders-40-for-VCs-20-for-employees math don't incentivize those, though. Which is a shame.

At the turn of the century, a new crop of VCs with founder-friendly terms came about. The industry benefited from it. Many startups that would not have otherwise been founded, were successful.

I am hoping that the market will eventually bring about VCs and founders with employee-friendly terms.

Me commenting here is towards that goal. You have a right to disagree with me, but why argue that I should not be making this point?

I wish someone would explain the rise of the the "everyone is an insider" trading windows thing. There's really no legitimate reason that I can come up with for the lack of proper controls that creates and perpetuates this situation. I imagine executive insiders like it for the stability it brings the stock, but still.

The theory at least, especially at a smaller public company, is that a fair number of people potentially have access to information about things, including some feel for where financial results are ending up. Therefore, rather than shrug and tell people to use their own best judgment about their trading on material non-public information, you put a trading window in place that takes a fair bit of judgment out of it.

Is there a reason these companies can't award stock and have to stick with options?

Taxed as “wages” according to the IRS even though it actually has no present value because it’s not liquid / has no market / has no arms length value.

“Earned income” is the absolute worst way to receive an asset with tax rates over 50% in some cases.

The only thing worse than wages is getting an illiquid/unsellable and highly risky asset that counts as wages based on a made-up valuation which the company is incentivized to inflate.

No reason the company cant do that, usually, but it's not advantageous for (most) employees. RSU comp is taxable on vest, but if the stock is not liquid the employee must pay out of pocket at each vesting event to cover the taxes.

Using the 83(b) election, when you’re granted RSUs you are able to pay tax on the value at the time of grant. This can mitigate a lot of the pitfalls mention in the thread.

Disclaimer: this is not financial advice.

https://www.investopedia.com/terms/1/83b-election.asp

By the time a company is issuing RSUs instead of options, the cost to pay those taxes at time of grant is likely out of reach for all but the most already-well-off employees.

Not necessarily - I’ve worked for two startups now that issued RSUs to early employees first, and later switched to an option based package.

Your experiene may be different, but I've only even heard of this (RSUs before options) at the very early, pre-fundraising, stage. And this only works because the taxable value of these RSUs at grant is basically $0.

I'm not sure if this approach would make sense after any sort of traction/fundraising.

> RSU comp is taxable on vest

I’m in the job interview process right now

Looking at a pre-IPO company with RSUs

Does this mean that I pay taxes on those RSUs when I get them, _even_ if I don’t sell them?

You have to pay taxes on RSU when they vest, regardless of whether you sell or not. It's basically considered cash compensation, but instead of cash you receive shares.

Since your company is pre IPO, they may have a dual trigger vesting schedule, where shares vest over time but require an actual liquidity event for you to actually receive the shares, giving you no tax liability while the company isn't public. However, this means that once the company goes public, you'll have to pay all of that liability at once, at ordinary income tax rates.

Disclaimer: not an accountant, much less your accountant, this is not financial advice, seek proper advice from a qualified professional.

The tax rates will probably not be what most people consider "ordinary". In CA, the top marginal bracket is about 52%.

If you're getting N years of windfall-level income in one year, some of the income is likely to be in that top bracket. This means that all sorts of tax stragegies you probably are not familiar with will kick in.

For instance, it might make sense to move charitable contributions into that year, since the IRS will effectively be matching them.

Also, AMT will probably kick in, so consider hiring an accountant.

Depends on if they are set up with a double trigger. Here is a decent explainer, but you can research more about RSU double triggers that can help avoid taxes for large-but-private companies: https://www.parkworth.com/blogs/pre-ipo-tech-giants-using-do...

What this does mean, though, is that until the second trigger is hit you haven't technically vested the RSUs. So you get around the taxation but there may be additional conditions on your equity.

Basically - make sure you read the stock plan

> So you get around the taxation

And pay a lot more tax in the process, than if you were able to exercise early. IRS always has to have its cake and eat it.

Early exercise is rarely ever an option except for very early stage companies. Most are ISOs with 90d window (which if you’re lucky converts to NSOs with a longer window) which is worst of both world bc of AMT

Yes, because of IRS taxation rules

pre-IPO RSUs usually come with a double trigger. meaning you vest them monthly or quarterly etc but a liquidity event such as an IPO, is needed to actually "vest" them in a taxable sense.

This actually works pretty well at the very beginning when the stock isn’t worth anything. However, as soon as there is a supportable valuation, you can’t just give people stock with a nominal value for 0.01 or whatever, which means either they have to buy it at “market” or you are giving them a taxable benefit of same. This latter is terrible because you are getting taxed as income with an illiquid and risky, locked in, asset…

(All this depends on jurisdiction of course)

Why would you go into debt? Unless you borrow to exercise your stock options or get hit with the alternative minimum tax?

DataRobot executives should be ashamed for cashing out at the expense of all employees, many of whom apparently borrowed to buy shares at prices far above current ones.

The risk of an exodus looks significant -- and that would be a death knell for the business. A company that bills itself as having depth of expertise in AI & ML cannot afford to lose the employees who actually have that depth of expertise.

It’s a grift. The execs are not incentivized to act in the best interests of the company they work for. So most of them try to optimize for their own gains.

For example, execs who are incentivized to “improve operational efficiency” can fire a bunch of people, make the others work longer and collect their bonuses. Eventually when the burnout hits, the morale drops and people leave, a different exec (and in a lot of cases the same one) will be tasked with “meeting growth targets”. They will hire more people, collect their checks and the grift goes on.

In this particular case, it the sentiment in the tweet is true it’s arguable the board screwed up. I’m assuming of course the sale plan was approved there (otherwise deeper problems).

While I think there is a certain moral bankruptcy in the individuals for looking out for themselves over the employees writ large, I think in this particular case the board is certainly culpable for allowing these types of shenanigans to take place.

I recently left DataRobot to join another company. I was there a little over a year so I don’t have much stake in this controversy. There are a lot of good people at DataRobot but I’ve seen quite a bit of turmoil in my short tenure there. I hope they are able to get through it and survive.

Secondary sales and secondary sales rights generally impoverish the common engineer versus founders and exec management. It is extremely rare to find a scale-up that has had secondaries that put non-founder non-execs on equal footing. So sadly it is just business as usual in our industry.

Imagine working 10 years and having someone come in for less than 1 year, completely fail in their role by all metrics, yet have the ability make millions of your work, at the direct expense of your compensation.

Should be criminal.

Most startups, at the cusp of IPO, go through this.

Data point fwiw: the company I work for SOLD me some of their shares when I joined. I.e. not a grant. The company owns options to buy back the shares on the usual schedule of a cliff after one year, then monthly for 4 years. So no tax consequences until I sell the shares and pay capital gains. The caveat is that the valuation that they sold the shares at must be well below their last raise for it to make sense for me to buy the shares. So it only really works for early stage companies. After this early stage is over, selling me actual options works better.

So, they had 1000 shares, and said "if you pay $1000 (1/share) that these shares are now yours?

If so, and there is a gap between what you paid, and what your 409a says the value of the shares at purchase time, you owe tax on the difference, now.

And you are saying that the company also has an options contract to buy back those shares? why?

It feels like either this company is trying some advanced scenario with a bit of risk, or doesn't actually understand the value of options.

Why go through all of that when they could just give you options?

This is what’s typically done for founders—it’s called reverse vesting where the company gradually loses the right to repurchase them over time. Generally this is done when the company is new, pre-409a.

There’s nice tax advantages to this approach if you make an 83b election since the shares start counting toward long-term capital gains immediately.

Thanks! That does make a lot of sense for founders, but OP mentioned "the company sold him shares" which leads me to some sort of weird pseudo options thing. Hoping they can clear that up so I can understand more.

Reverse vesting seems way more straightforward: you sign, you get equity immediately, company can take back any at agreed upon price at whatever intervals defined in the contract.

Right, and it avoids some tax issues later as you have owned and held them since you started (jurisdiction dependent).

Reverse vesting is pretty common for founding employees, or near then, also, ime. The only problem is if the share value isn’t justifiable very low, it can be too expensive.

The moment you raise any significant amount , the implied valuation may make this impractical.

It was most likely a grant with early exercise: https://www.cooleygo.com/early-exercisable-stock-options-wha...

Any company claiming to be employee-friendly should offer this while its 409A valuation is low. 10-year exercise windows take care of the people who come later and should also be standard at this point.

Is there a public list of startup execs / VCs that have screwed over employees in the past? (The 11th-hour Skype dilution event also comes to mind.)

It'd help to have such a thing for future job searches.

We should put it in list in a Github markdown file.

Seems like a lawsuit magnet.

Why would that be? All of it would be factual/public info no?

Don’t be a sucker. Either get paid or get real assets that have a real likelihood of ending up liquid and worth something.

Corporate governance matters, startup/vc arrangements are inherently tilted toward the execs, founders and external financiers, but there is a burden on the employee to understand what your getting into. If your smart enough to work for one of these, your smart enough to learn the basics of corporate equity law.

> If your smart enough to work for one of these, your smart enough to learn the basics of corporate equity law.

Maybe in theory, but that doesn't work for me. I can build a computer out of a bucket of transistors and then program it to recognize your grandma, but the minute somebody starts trying to explain equity compensation my eyes glaze over. Then when somebody tries to explain the myriad ways the IRS can ruin my life with every mechanism of equity compensation, I run for the hills.

Just pay me cash, thank you very much. And a lot of it.

exactly, you've got a tech skillset you shouldn't need to acquire a corporate & legal skillset to understand how you'll get remunerated, or pay an accountant/lawyer $X to get advice.

Here's a fairly good Boston Globe article on the company: https://www.bostonglobe.com/2022/07/13/business/once-heralde...

https://archive.ph/DrYES

Can I ask two dumb questions though? If DataRobot is doing so poorly- why did investors want to purchase the executives' shares? Presumably they are sophisticated investors and had a look at the company books, etc.

So let's say they liked what they say, and it made sense for them to purchase a certain amount of DataRobot shares. If that's the case- why not let the employees sell to the investors too? If there's a pool of investors who are willing to purchase X number of shares at Y value, presumably either they or other investors would like to purchase 3X number of shares.... Wouldn't this be win-win, the employees can sell if they like, and the investors can buy if they'd like? Why not allow that too?

Executives are incentivised to liquidate as soon as possible because unrealised gains in a startup are very risky. Executives are disincentivised from allowing employees to liquidate because the illiquid nature of the stock is a large part of what keeps the employees working at the company.

This happened in 2021, anyone will buy anything when the market is doing well. DataRobot is doing badly by 2022 standards, by 2021 standards it was a great investment simply by virtue of being an investment — it’s hard to overstate how absolutely batshit the private market was in 20/21.

Because this was a decision made by the executive team to cash out their own shares? If they let employees sell, then the executives could sell fewer shares. Isn’t that obvious?

It may have been smarter to do this.

In general letting any earlier equity holders into a round effectively reduces the amount of cash you end up with, so there is no reason to do it except keeping those equity holders happy. It’s also a bit harder to manage with a bunch of smaller blocks, but you can pool this easily enough.

It’s always going to be a balance, but it might have been better to allow anyone to include a small percent of vested stock in the round (to the same total amount ) rather than just let execs cash out.

This is a real "why did the scorpion sting me?" sort of question

Employees can sell to the investor. I don’t think investors want to manage 100+ stock sales including sending in tax forms etc. There are active secondary market to sell shares in private companies.

>There are active secondary market to sell shares in private companies.

Some startups make is harder by having a clause of first refusal for selling stock.

First right refusal just gives the company/current investors first dibs at any potential stock sale.

Some have no secondary sale clauses too. Depending where you are they may not be enforceable. Or you any have got RSU’s that aren’t saleable the way anyhow.

For very small/early startups, there may not be an effective secondary market at all, let alone permission to participate in a raise.

Sure and that means investors are much less likely to buy the stock. They go through all the effort and then if it's a good deal someone else buys it instead. Some secondary markets will outright refuse to deal with shares that have such clauses.

How much better is their tooling vs what you can get right out if aws GCP azure?

I want to know this too. With some good autoML libraries out there what’s the differentiation for DR?

I’d be livid, too. Torch the founders and the mgmt team.

Its not even founders. Its execs that came in after founders got pushed out.

I’m a bit ignorant to RSU’s and secondary markets. Why were the executives able to sell but not regular employees? What stopped regular employees from selling ?

If a company is private then you cannot sell/purchase shares on public markets.

So, execs can go fundraise, which is selling shares to new investors. But what shares are they gonna sell? Newly minted ones, or shares someone already own?

The execs get to decide. In theory, there is no reason that "regular" vested employees couldn't also sell shares if execs designed it that way, beyond some complexity in management overhead (think figuring out information for 1000 people vs 10) as well as "turnover risk" where employees can cash out and leave.

Now you are saying, well, seems like employees are gonna leave now without cashing out, and you are right. That's why it's dumb. Poor decision making by execs. I'm sure there are a lot of people at datarobot that didn't even know this, and are just learning this now.

(Unless execs want both to make a lot of money and re-form the company, if that's the case, well then, great decision making by the execs)

It just comes down to who the board allows to sell stock and at what time. Most option contracts don’t allow sale of stock to secondary markets without approval and rank and file employees have much more restricted stock. Often founders and key executives will also get some liquidity and stock top up during funding rounds while no one else at the company has that option. By the time a company goes public most founders and key execs have already made quite a bit of money on the side.

Loyalty is near akin to naivety in the game 'Capitalism 2.0'.

Is there a TL;DR on what happened?

Can someone tldr what happened

I dont have sympathy for someone who took out huge loans expecting to make bank but didn't.

Common wisdom is that startup equity is merely a bunch of lottery tickets due to odds being systematically against employees becoming rich from that, despite founders and upper management talking otherwise. Unsurprisingly, some people lost the lottery.

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