
Improving Equity Compensation at Coinbase - jorde
https://medium.com/@barmstrong/improving-equity-compensation-at-coinbase-8749979409c3
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sskates
That's awesome, glad to see Coinbase leading the charge on employee equity!
We've just implemented something similar at Amplitude as well.

The 90 day exercise window is one of the biggest "gotchas" of equity
compensation, especially for employees who are new to startups. Extending it
to 7 years allows the company get far enough along towards liquidity so the
employee knows more about whether it's worth it to exercise as well as not
forcing them to come up with a lot of cash on short notice. Really glad to see
Coinbase taking a stand for fairer compensation for employees.

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steven2012
I wonder if this encourages startups to give less options, since they can be
exercised so far in the future? If they know that a certain percentage of
their options won't be exercised or will be relinquished, it makes ownership
issues much simpler so wouldn't that incentivize giving smaller equity grants?

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Alex3917
I like how this only kicks in after two years. That seems like a great
compromise in terms of the employee getting initial options right after the
cliff, but getting additional benefits after the extra year.

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7Figures2Commas
> Most companies allow only 90 days for employees to purchase stock after they
> leave the company.

This is somewhat disingenuous because it neglects to mention that the 90 day
exercise window is typically the result of a company offering employees
incentive stock options (ISOs). A 90 day exercise window is required by the
rules associated with ISOs. Startups can't change the law.

When a company allows exercise after 90 days, the options become non-qualified
stock options (NQSOs), and those are subject to different tax treatment.

In reality, the favorable tax treatment of ISOs often doesn't benefit startup
employees, so there's an argument to be made that startups should just offer
NQSOs anyway, but that's neither here nor there.

The big lie is that extending the exercise window has a high probability of
being meaningful. Yes, it's true that companies are taking longer to deliver
liquidity, but a lot of companies simply aren't going to deliver liquidity,
_ever_. For those that do, in today's market, where valuations skyrocket early
and late-stage investors trade valuation for significant downside protections,
many employees will find that their equity isn't as valuable as they expected.

If a startup really wanted to stand out and reward employees differently, it
would look at alternative approaches, such as bonuses and profit sharing
plans, including profit sharing plans that contribute to a 401k. I think a lot
of people who are not new to the game would be attracted by alternative
structures and incidentally, these would probably do a lot more for retention.

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enra
> If a startup really wanted to stand out and reward employees differently, it
> would look at alternative approaches, such as bonuses and profit sharing
> plans, including profit sharing plans that contribute to a 401k.

Or just create optional liquidity with funding rounds. At least it should the
norm when the founders are selling some of their stock and taking money off
the table.

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dlevine
Does the tax treatment change if you exercise > 90 days after leaving?

From what I understand, options may be treated as NQSOs rather than ISOs if
exercised >90 days after the employee leaves. (source:
[http://blog.samaltman.com/employee-
equity](http://blog.samaltman.com/employee-equity))

~~~
jorde
They'll be NSOs, same for Pinterest.

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murbard2
As t→∞ an option becomes indistinguishable from its underlyer, why don't they
give RSUs? Taxes?

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mcfunley
Yes: taxes.

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murbard2
So are the taxes also worse if you increase the exercise window? Is it more
tax efficient to issue 100 year stock options vs RSU?

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rosser
While I appreciate the intention behind this, and would probably be grateful
to have it available from my current employer (or any other employer for whom
I've worked > 2 years), I shudder at the tax implications of exercising
options whose strike price is as much as _9 years_ below the fair-market
value.

Hello, AMT...

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walshemj
Well shouldn't sv employees be lobbying their congressmen and senators for tax
breaks for employee share schemes.

Take a leaf from Obamas play book set up a group in every company to lobby for
this

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zbrock
They did that already in the 80s, they're called Incentive Stock Options

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eldude
I really like all the effort startups are putting into making employee equity
more valuable, so awesome job here Coinbase! However, I was disappointed by
the headline because I'm always hoping to see someone come up with a solution
to the current cultural problem of employee equity's diminishing perceived
value.

I've thought a lot about it myself and have yet to come up with a solution,
but I really feel like it will cause major problems if equity is progressively
treated more and more like a near zero value lottery ticket.

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arielweisberg
This is really great. It really sucks to exercise only to have your stock
repeatedly crammed away into oblivion to make room for people who swoop in at
the end and take all the value you have created and pocket it.

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gull
Isn't the issue the exercise price instead of the time window?

Wouldn't it be more effective to keep the time window to 90 days and have the
exercise price be under $1 in total?

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harryh
Strike prices aren't set arbitrarily, they're set based on 3rd party
valuations of the value of the stock at the time of the option grant. Failing
to follow these rules can have huge negative consequences for both companies
and employees.

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Animats
There's no market in Coinbase stock. They haven't done an IPO, and it's not
likely that they will. It's a Bitcoin company, after all.

Meanwhile, more info about the Mt. Gox collapse is coming out now that Mark
Karpeles has been arrested and is in interrogation.[1] "The police are also
investigating whether Karpeles consolidated customer and corporate funds in a
bank account held by the company and embezzled around ¥1.1 billion, funneling
funds to an account of an affiliate company and for personal use."

[1]
[http://www.japantimes.co.jp/news/2015/08/04/national/crime-l...](http://www.japantimes.co.jp/news/2015/08/04/national/crime-
legal/mt-gox-ran-money-six-months-going-bust/)

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jsprogrammer
Only for new employees? Is this a backhanded way to try to push early
employees out? Why not roll this out for all employees at once instead of
generating management-induced divisions?

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harryh
Because management can't unilaterally rewrite old contracts.

Note that they say "Coinbase is considering additional options to provide
similar benefits to existing employees."

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x0x0
What is stopping management from asking employees' permission to rewrite their
contracts in this way? If the employees say sure! (why would you decline?)
then is there a problem?

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slapshot
It may require regranting a new strike price. I have no idea what their cap
table looks like, but assume old employees have options with a strike price of
$0.10 and new employees are being given a strike of $1.00 (each based on the
409A valuation of the company at the time of grant). It may not be possible to
change the old grants without updating the strike price or causing serious tax
issues for current employees (to remain compliant as ISOs, the strike must be
>= the 409A as of the grant date... failing to do that led to the stock
options backdating issues of the 2000s).

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jbob2000
Does this change anything? If I don't have $20,000 90 days after I quit, why
do you think I'll have $20,000 7 years later?

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technotony
Well presumably you'd exercise at some kind of liquidity event so you can
borrow the money for a short period of time. Lots of people will lend you $20k
if more than that is coming back soon. Of course if they haven't excited in 7
years then you still have the problem but at least then you'll have a clearer
idea of whether the company is going to be valuable and if it's worth
excising.

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djrogers
No need to borrow money if the stock is liquid, you can perform a 'sell to
cover' transaction, in which your options are exercised and enough of your
stock options are sold to pay for that at the same time. Any broker can handle
that without a loan required.

