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.
> 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.
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.
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'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 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.
"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.
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.
"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.
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)
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.
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."
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.
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.
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.
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.
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.
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.
>"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.
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.
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.
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.
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 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).
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.
[+] [-] jamiequint|9 years ago|reply
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.
[+] [-] 100k|9 years ago|reply
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.
[+] [-] sportanova|9 years ago|reply
And how are previous employees "dead equity" but not andreeson ?
[+] [-] dangelo|9 years ago|reply
[+] [-] solidsnack9000|9 years ago|reply
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.
[+] [-] ak2196|9 years ago|reply
[+] [-] acslater00|9 years ago|reply
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
[+] [-] wp1|9 years ago|reply
The arguments in this article however were wholly incoherent.
[+] [-] mattsoldo|9 years ago|reply
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.
[+] [-] taneq|9 years ago|reply
[+] [-] Spooky23|9 years ago|reply
[+] [-] jsprogrammer|9 years ago|reply
The riders-on should be shed while those who did the actual work get to enjoy their profits, no?
[+] [-] Stasis5001|9 years ago|reply
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!
[+] [-] potatolicious|9 years ago|reply
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?
[+] [-] sk5t|9 years ago|reply
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.
[+] [-] chasing|9 years ago|reply
[+] [-] jamiequint|9 years ago|reply
“Are there any other management practices where one would optimize for former investors at the expense of new investors?”
[+] [-] andrewvc|9 years ago|reply
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.
[+] [-] arciini|9 years ago|reply
"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.
[+] [-] sgustard|9 years ago|reply
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.
[+] [-] abcampbell|9 years ago|reply
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.
[+] [-] spinlock|9 years ago|reply
[+] [-] bogomipz|9 years ago|reply
"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.
[+] [-] unknown|9 years ago|reply
[deleted]
[+] [-] a13n|9 years ago|reply
[+] [-] thinkingkong|9 years ago|reply
[+] [-] jbapple|9 years ago|reply
Does A16Z care about their reputation among the laboring class, or only among the ownership class?
[+] [-] rodgerd|9 years ago|reply
Capitalism!
[+] [-] dadkins|9 years ago|reply
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.
[+] [-] a_small_island|9 years ago|reply
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
[+] [-] efoto|9 years ago|reply
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/
[+] [-] csmeder|9 years ago|reply
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?
[+] [-] jamiequint|9 years ago|reply
[+] [-] akkartik|9 years ago|reply
"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.
[+] [-] maxxxxx|9 years ago|reply
[+] [-] Zigurd|9 years ago|reply
[+] [-] a_small_island|9 years ago|reply
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.
[+] [-] 33a|9 years ago|reply
[+] [-] jellicle|9 years ago|reply
[+] [-] st3v3r|9 years ago|reply
[+] [-] mahyarm|9 years ago|reply
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.
[+] [-] holman|9 years ago|reply
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.
[+] [-] mnutt|9 years ago|reply
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?
[+] [-] ThomPete|9 years ago|reply
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.
[+] [-] rdtsc|9 years ago|reply
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.
[+] [-] mkehrt|9 years ago|reply
[1] They have to withhold some for taxes, for one thing.
[+] [-] againstgreed|9 years ago|reply
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.
[+] [-] thinkingkong|9 years ago|reply
Suggesting that early employees who are sold lower relative salaries and a dream are "taking away" from future employees is rather suspect.
[+] [-] chimeracoder|9 years ago|reply
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).
[+] [-] ChuckMcM|9 years ago|reply
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.