
Palantir Buyback Plan Shows Need for New Silicon Valley Pay System - mathattack
http://www.nytimes.com/2016/06/29/business/dealbook/palantir-buyback-plan-shows-need-for-new-silicon-valley-pay-system.html
======
birken
Boy this article is a very friendly interpretation of Scott Kupor's blog post.

From NYTimes:

> He [Scott Kupor] also suggests a longer period for employees to exercise
> options after they leave, up to 10 years. That figure is endorsed by Y
> Combinator in an argument that any lesser period is unfair to employees.

Makes it seem like Scott Kupor is on the leading edge of caring about
employees, in agreement with YC (which has actually been employee friendly in
words and actions in regard to stock options).

However, read Scott's actual blog post and he refers to the 10 year exercise
idea incredulously:

> 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.

> Talk about disenfranchising your remaining employees and not being able to
> attract new ones.

Good reminder to always read your primary sources.

~~~
sverige
Indeed it is. I particularly like the 'no longer contributing to the business'
part, as if the work done by the original employees isn't what the current
business was built on, at a discounted rate if their stock options are
worthless. And as if the stock options were the only reason they're having
trouble attracting quality talent.

Stock options seem attractive as a form of compensation, since the hope is
that you're working for a unicorn and one day you'll be fabulously rich, but
the cash equivalent is better more often than not. It's just a form of risk
transfer from those who have plenty to those who hope to have plenty by dint
of talent and hard work. Having been burnt, I won't do it again.

~~~
jegutman
I actually disagree with the 10yr time frame (although will admit it has its
merits), but also agree with some of your logic. I just think that the 10yr
"fix" solves some problems and creates others. I think this issue is that you
should: A) not rob former employees of accrued stock value B) probably try to
somewhat reduce incentives to leave if the company is going to continue to do
well

There are a few problems I see here: 1) stock option grants are completely
arbitrary and sometimes end up very wrong 2) it's hard to fix that in the
future because you'll end up at a higher strike price 3) end up being
expensive and tax inefficient to exercise

The closest I've seen to people who seem to get this and have sensible
solutions are Andrew Mason at Detour (progressive equity) and Dustin Moskovitz
at Asana (larger grants, but back loaded into years 4-6).

I have great respect for Adam D'Angelo at Quora for suggesting a solution to
the problem, have known him in school he's certainly smarter than me on almost
every axis of intelligence, but I think there are other potentially creative
solutions that might be better (although I don't know tax compliance).

For example I think you could keep the status quo, but offer the option for
employees to exchange their options for shares (white meat) at the time they
can exercise. Example you have options for 100 shares at a strike price of
$50, at the time you leave the shares are worth $100, instead of having to
come up with $5000, you just get $50 shares free and clear. I think there's
still a tax hit issue, but at least it's not doubled with paying for the
shares.

~~~
argonaut
There's a huge tax hit. Giving shares is taxed as ordinary income.

~~~
lmm
All of these things should be taxed as ordinary income. Companies shouldn't be
able to do an end-run around taxation by giving you valuable stuff instead of
giving you money directly.

~~~
rplst8
> Companies shouldn't be able to do an end-run around taxation by giving you
> valuable stuff

They already do in the form of health and retirement benefits.

~~~
humanrebar
And tying an individual's future (health insurance, retirement, immigration
status) to an employer is a bad thing.

~~~
chimeracoder
> And tying an individual's future (health insurance, retirement, immigration
> status) to an employer is a bad thing.

Retirement isn't really 'tied to an employer', in that you can still open an
IRA without an employer[0], or use a non-tax-advantaged account for retirement
savings (most people outside the military or government service use non-tax-
advantaged accounts for at least a portion of their retirement, since the IRA
and 401(k) contribution limits are too low for most people to survive on
during retirement).

This might have been different 50 years ago, where employer-driven pensions
were more common, but today, the only real way your employer impacts your
retirement is the 401(k).

The purpose of both the IRA and the 401(k) is to provide people with an extra
incentive to plan for retirement. Putting away $450/month towards your
retirement[1] can be unpleasant, but if you're getting, say, $90 that back (in
the form of lower tax withholdings/taxes due), it makes it a bit easier,
because that's effectively only $360 out-of-pocket.

The incentives work similarly for the 401(k), except the tax savings work out
for the _employer_ as well, meaning that they are incentivized to give you
some portion of your compensation in the form of 401(k) matching (ie, they
have an extra incentive to nudge you towards saving more of your _own_ money
for retirement).

Personally, I do believe that, if you do not have access to a 401(k) through
an employer, your IRA contribution limit should be raised by $17,000 (which is
the 401(k) contribution limit for individual contributions). But without
employer contributions, at most that's saving you less than $6,000 - and
that's if you're already at the very top marginal tax brackets (even making
$100K gross in NYC, the most heavily taxed jurisdiction in the country, won't
be taxed at 35%).

[0] Well, you can't contribute more than your total annual income to an IRA,
but if you're making less than $450/month and living in the US, retirement
planning is not your most immediate problem.

[1] ie, enough to max out your IRA contribution limit

------
bane
This sounds like a company in big trouble and trying desperately to stem
attrition and improve tanking morale.

According to crunchbase they're basically owned by a private equity firm now
(which is rarely a fun place to be) and are raising something like a billion
dollars a year -- which basically appears to be around what their operating
costs are (employee count of that year * $250k/yr).

They're either not bringing in any real revenue, or growing at the rate of
revenue. Multiple raises per year (of weirdly different values) indicate
frequent requests for more money.

Are they growing or are they dying? Either way they aren't doing it through
revenue, and they're not going public so the financials stay very hidden.

~~~
pmiller2
Anybody who thinks this offer is meant to benefit employees isn't looking much
beyond the surface. The fact that it includes a release of claims, a
noncompete clause, and an NDA is a solid clue that this move is intended to
benefit Palantir and not employees.

Edit: forgot noncompete clause.

~~~
mifreewil
That's all standard stuff. If I was at a company for 11 years, I'd sure as
hell want to cash out. Whether their offer is a good price or not, who knows.

~~~
soup10
You can only cash out 12.5%. 12 month non-compete for a small cash out is a
pretty double edged deal.

~~~
daemin
But if you are still working there and do not plan to move then being able to
liquidate up to $500,000 worth of shares seems like a very good offer.

~~~
mrep
If you can liquidate $500,000 worth of shares, that means you still have at
least $3,500,000 worth of shares in a company that has no plans to ever go
public.

------
fossuser
Comments on this thread are not very interesting and generally off topic. This
article points out an issue in SV which is that it's hard for employees to get
value out of options held in companies that do not go public.

One reason for this not mentioned in the article is that in the US the tax
burden is extreme - partially because when it was implemented it expected
companies to go public.

If you hold options in a private company you get taxed on the exercise of
those options based on the fair market spread which is the difference in price
between your original strike price (the price of the options when they were
granted to you) and the current fair market valuation. This is taxed as
income.

This is problematic since once exercised you're holding shares of an illiquid
asset (since the company is not public) and they're difficult to sell. This
means even if you save up enough money to exercise your options you'll get hit
with a potentially enormous tax bill due that year that you can't easily sell
your newly exercised options to pay for. Additionally when you sell the actual
shares after you've exercised them you get taxed _again_ on the sale.

The one exception to this is if your options are ISOs (incentive stock
options) then the delta between the strike price and the fair market value
isn't taxed immediately, but it does count towards AMT (Alternative Minimum
Tax) and it's fairly easy to hit the AMT while exercising options (meaning you
could only exercise a tiny amount per year tax free).

All of these things make it extremely difficult to realize any value in a
private company without enormous amounts of upfront cash and also losing
roughly half to taxes. It also makes it extremely difficult to exercise
options outside of a liquidity event. This can also make it hard to leave a
company since the agreements are often 90 days to exercise after leaving or
you lose your options (there's also usually a ten year expiration date).

If companies in SV intend to stay private and don't want their employees to
view the options as impossible to liquidate we'll probably see an uptick in
liquidity events like this one. The companies that value their employees will
probably figure out a way to make this work.

~~~
jonathankoren
Yeah, the ISO spread with the AMT is bullshit that basically keeps the plebes
in their place by not actually letting them get any windfall. However it seems
like the real problem is exercising post-IPO. In the post-IPO world, you're
dealing with say a 5x to 10x spread, possibly even more. In the pre-IPO world,
your spread is probably 2x at most, which is much more manageable.

One clarification with what you said, is that with the AMT ISO exercise is
that you're not _actually_ taxed on both the exercise and the sell. What's
actually going on is that you're prepaying your taxes when you sell the stock.
When you sell the shares, you'll only have to pay the taxes (either regular
income or capital gains) based on the difference of the fair market value of
the stock when exercised and when sold. If it went up, and you sold in less
than year from exercise or less than 2 years from ISO grant, then it's regular
income, otherwise it's capital gains. So you could actually get a tax refund
when you sell. (Same is true if the market price actually declined between
exercise and sell.)

The argument is that when you exercise, you received something of value for
less than market and so you made money, but in reality you actually haven't
realized any gains, and actually are at cash loss. I understand the argument,
but I don't agree with it, because you did not actually realize any gain.

FWIW, San Jose's congresswoman Zoe Lofgren has repeatedly tried to fix the AMT
and ISO taxation, but hasn't had much success.[0]

Where I disagree with you is thinking that private companies are going to
"figure out a way to make this work" in a way that's beneficial for workers.
I'm sorry, but I've _never_ seen high finance work out for workers. It's
basically a play for the financially desperate. It's no better than selling
you shares on sharespost or something. If it's illiquid market, you're never
going to get full value, and you know damn well those that are buying are
going to expect a few multiples in gain. They can just wait a bit longer.
Workers on the other hand, are busy trying to scrape together a down payment
on a $2,000,000 shack in the valley.

[0]
[https://lofgren.house.gov/news/documentsingle.aspx?DocumentI...](https://lofgren.house.gov/news/documentsingle.aspx?DocumentID=365511)

~~~
lmm
The notion of "realizing" seems like nonsense to me. You get given a piece of
paper worth $100, you should get taxed for $100. Whether that piece of paper
is a federal reserve note or a stock certificate should be an irrelevance, no?

~~~
chrisbennet
Can you buy anything with that piece of paper?

Can you sell it?

If not, it's not really "worth" $100. That's the difference.

------
codys
Palantir's official reason of "improving employee moral" doesn't seem to
really mesh with the conditions they are imposing on the buy-back:

> [...] employees who sell their shares agree agree that they will not compete
> with Palantir for 12 months or solicit any Palantir employees during that
> time [...] [and] agree to a nondisclosure arrangement that forbids them from
> even talking about the repurchase and waive any claims they might have
> against the company.

The nyt put forwards a reasonable idea that this is a mechanism to increase
their perceived value, and I'm inclined to agree.

EDIT: the buzzfeed article [1] paints an even worse picture:

> If they [employees] get any inquiries about Palantir from reporters, the
> contract says, they must immediately notify Palantir and then email the
> company a copy of the inquiry within three business days.

[1]: [https://www.buzzfeed.com/williamalden/palantir-seeks-to-
muzz...](https://www.buzzfeed.com/williamalden/palantir-seeks-to-muzzle-
former-employees)

~~~
ridgeguy
If Palantir is a CA business entity (I didn't check, maybe it's a DE corp),
its noncompete should be per se invalid (= automatically void) in CA. There
are only a few circumstances in which noncompetition agreements are valid in
CA, and this doesn't seem to be one of them. See section 2.1.2 in:

[https://en.wikipedia.org/wiki/Non-
compete_clause#Exceptions_...](https://en.wikipedia.org/wiki/Non-
compete_clause#Exceptions_-_valid_non-compete_agreements_in_California)

Palantir's attorneys surely can't have missed this, but I don't see an
alternative.

~~~
argonaut
This is one of the exceptions to noncompetes in California - when you sell
your interest in a company. They are a Delaware corp. They have tons of
employees outside of California (New York?).

~~~
Steeeve
Actually, I think you have to be selling the whole business - but from my
comment above - it's not part of the employment agreement, so ... it's
_possibly_ enforceable. Maybe not, but I wouldn't count on it either way.

------
jasonthevillain
> It also makes them agree to a nondisclosure arrangement that forbids them
> from even talking about the repurchase and waive any claims they might have
> against the company. And the offer extends to some but not all former
> employees.

That smells funny and oddly specific.

~~~
codys
Indeed. I'd be curious which employees (if any) were included, and why.

------
abalone
This is called a PLP (Private Liquidity Plan). The comments here are kind of
vaguely negative but it's actually not a bad deal for employees. The main
problem is that most pre-IPO companies can't afford it. It uses up capital
that would otherwise go into operations.[1]

Where it _may_ make sense is in so-called "private IPOs", i.e. those 9 or 10
digit dollar rounds. There's enough money there to hand out. In olden days,
companies would have been public by then and employees would have had
liquidity. Planatir raised $880M last year so, yeah, they can afford it.[2]

[1] [http://venturebeat.com/2012/09/30/need-to-cash-out-a-bit-
pre...](http://venturebeat.com/2012/09/30/need-to-cash-out-a-bit-pre-ipo-
consider-a-private-liquidity-program/)

[2] [https://techcrunch.com/2015/12/23/palantir-has-
raised-880-mi...](https://techcrunch.com/2015/12/23/palantir-has-
raised-880-million-at-a-20-billion-valuation/)

------
BWStearns
Wouldnt it be nice to have coworkers (ish, they both have positions at
Berkeley) who can write willfully ignorant reinterpretations of your terrible
ideas in the Times?

Edit: I don't know for a fact that they are coworkers in a meaningful sense,
of course a university is a large place, but I would expect a professor of law
to have better reading comprehension than was on display here.

------
ChuckMcM
I could easily see the situation evolving that "unicorns" would either have to
provide liquidity for options or pay over market rates. An engineer at FB or
Google that getting paid in Restricted Stock units in addition to their salary
sees it as "extra pay" and an employee who sees a company that will never let
them sell options as not a smart place to work.

It does open up some creative financing though. Imagine a "common only"
startup, one where every share bought by investors or earned as an option had
the same rights and liquidation preference. Or my favorite[1] starting a
company with a fixed 5 billion shares all at a par value of $1 each. Then only
pay your employee in shares, only get investments by selling shares to
investors.

[1] I call it a favorite since we joked at a party once that if you did this,
and convinced a friend to buy a hundred shares for $100 you could call
yourself a self made billionaire! And be completely truthful.

------
solidsnack9000
> Mr. Kupor notes that extending the exercise time for former employees makes
> their options more valuable at the expense of employees and investors. (It
> does so because former employees have a longer time to exercise their
> options and dilute the other shareholders.)

This is simply a falsehood. Exercises of options of do not dilute shareholders
-- new issuances do. Former employees do not issue new shares.

~~~
argonaut
It's not an outright falsehood. He's referring to the (correct, but also
insidious) fact that compared to a 90-day exercise window, more people will
end up exercising under a more extended window - and this will dilute. In
other words, extended windows reduce the number of options returned to the
pool, and are thus slightly dilutive.

~~~
mavelikara
So the dilution does not come from the exercise period; it comes from rank and
file employees being unable to raise the required capital to exercise. So
imagine if Kupor had said "We should not be paying employees any salaries;
that puts cash in their pockets which enables them to exercise their options
when they vest which leads to dilution for every investor" \- that would have
been an obviously ridiculous position. So is the statement OP is commenting
on.

On a side note, you have been defending Kupor in the other thread too with
such nitpicks. Why?

------
swingbridge
This sounds like a move made out of desperation, not benevolence. Word on the
street is that all is not well at Palantir.

------
stanfordkid
My hunch is that the majority of revenue was forward looking with foreign
governments and large clients. This revenue was used as the basis for raising
at extremely high valuations. Investor diligence was weak and the exact terms
of these contracts was likely not understood in detail. When shit hit the fan
with the software/consulting services and the value was not realized (and or
budgets were cut, key champions retired etc.) ... contracts got cancelled.
When contracts got cancelled the house of cards started to fall. The issue
with huge contracts is that it's very easy to lose them. This is why a broad
revenue base is crucial.

Now they know that hundreds of employees are going to go blow the whistle so
they have to pay them off with buybacks while they figure out an exit
strategy.

My 2 cents.

------
francoisLabonte
What nobody talks about is the very good reason why employers give only 90
days after leaving a company to exercise options is that there is also a tax
liability to the company for an employee exercising an option. Usually
employer has to pay employment tax, now if you have a lot of options still
unexercised from former employees and your stock has appreciated a lot the
company can be on the hook for a lot of taxes. The company prefers only being
on the hook for current employees.

The true solution is to give stock options that can be exercised early as long
as the value of the stock is very low such that an employee's hiring bonus
after tax could cover the cost. There is no tax owed by the employee since he
purchased shares with no gain and then you vest outright stock. Once the stock
value goes up it would be best to grant RSUs of convertible notes that convert
into stock.

~~~
harryh
I'm pretty sure you are wrong about having to pay taxes if their are ex-
employees with unexercised options.

Citation?

------
vonklaus
I can't find the source so this is from memory; but Karp or Theil said they
wouldn't ever go public and essentially can't because they are essentially a
DoD contractor. While other companies notably do similar things and other
contractors are public, Palantir provides a unique platform to some extent and
their customer base, much of their technology and operations are secret.

It is known they will not likely go public as it would be detrimental to their
business and in-Q-tel (cia vc arm) is a major shareholder. While Silicon
Valley does need to rethink some of the ways they compensate employees;
especially at late stage private ones, I would not consider Palantir
indiicative of a typical SV unicorn

~~~
bane
All is not friendly in the shire, remember this post from a few years ago?

[https://www.quora.com/When-will-Palantir-go-
public](https://www.quora.com/When-will-Palantir-go-public)

~~~
vonklaus
In his response on quora he said he:

* left palantir in 09

* is a major shareholder

* left after he "had successfully replaced myself in both parts of the company we'd created and had fully vested".

So I am not going to speculate whether he was pushed out, but it sounds like
he has much less latitude for steering the company. Especially when you
consider the power of the other founders and the initial VC capital that was
put in. So this (claims of palantir going public) are what I would expect a
major shareholder without control of the company to say. It is effectively the
only way to put pressure on them.

Even if this is wildly incorrect, and it quite possibly is, that comment was
made several years after he had little more than an advisory role at palantir.

[https://www.quora.com/Why-did-Joe-Lonsdale-leave-
Palantir](https://www.quora.com/Why-did-Joe-Lonsdale-leave-Palantir)

------
zxcvvcxz
>Palantir's repurchase offer

Yes, it's an offer. I don't see why everyone is so up-in-arms over an offer.
People can reject offers just like they can make them. Other similar offers
include employment offers. I'm going to comment more generally on this issue
between founder and employee deals:

Here's what I think. HN is mostly of the employee class and so there's a
politicized negative sentiment about companies not leaning the way of the
employees.

Or maybe people think these offers and deals are bad for both the company
founders and the employees. So here is my proposition if you believe that.
Start your own company and enact whichever agreements you think are best. Do
what Palantir does, or what YC advises, or whatever you make up. Give a 20
year exercise period if you want. Your call.

But you have to actually found a company.

I find it hard to believe in a moral "good and bad" on this issue. We're just
talking about deals and contracts between people. And if people act with
agency with regards to accepting and declining offers, and inventive
individuals can come up with new systems and agreements that work better for
everyone, then it will be fine. A moral bad would be something like Google and
Apple and Facebook colluding behind closed doors to keep engineer pay below a
certain threshold.

For the employees who will have to negotiate: you can't get a deal that's good
for you if you aren't prepared to walk.

------
kriro
How does the non compete and soliciting work for ex-employees. Is it 12 month
after they left (likely void/expired for some already) or 12 month after
signing in which case some ex-employees probably can't even sign this.

Either way I'm very skeptical of anything involving NDAs or non competes. I
can understand a non poaching clause (but am also opposed to that on
ideological grounds). If I could afford it I wouldn't sign anything that has
NDAs or non disclosure.

I also doubt that many of the ex-employees need liquidity as they are likely
to hold well paying jobs. I suppose some could need it but those are probably
exactly the people least likely to compete with Palantir.

------
coldcode
Exercising options in a non-public company should not be taxed or valued in
any way until the stock can be sold in a public market or to a purchasing
entity. Of course what are the odds Congress would ever do that? Nil.

~~~
Mtinie
Can't this be mitigated to a large degree by setting the value per share to an
tiny fraction of a dollar? Sure, you'll have a tax to pay when the shares are
granted, but it should be reasonable.

I could get behind the scheme you commented with, but I'm unsure of generally
why we have the system we currently do, so I would want to understand the
rationale for the status quo.

~~~
hx87
It probably has something to do with preventing creative ways of liquidating
illiquid assets, such as borrowing against the assets and promptly defaulting.

------
krschultz
There is an easier solution. Go public. I've gotten options in a private
company, RSUs in a private company that got acquired, options in a public
company, and RSUs in a public company.

The only thing that I would count on an offer in the future are RSUs in a
public company.

------
nefitty
Peter Thiel is a cofounder of Palantir. He is also on the board of directors
of Facebook.

------
stromatew
This puts them closer for an IPO for sure, buying stock today!

------
curiouscat321
Does anybody think that this puts them closer to an IPO?

------
ihsw
Just pay people more.

------
curiousDog
They should still get props for the rate at which they were able to recruit
from Stanf/MIT/Princeton etc.

~~~
honkhonkpants
Why should they "get props" for duping graduates into wasting time joining
their flailing business? That sounds like a trick, not a benefit.

~~~
stale2002
Yeah, CMU grad here. My impression of Palantir is that they hire the top 1% of
developers and pay them what a 50 percentile developer would make.

If you ever get a palantir job offer, you'd be better off just forwarding it
to Uber, or Google or FB, and waiting for them to give you a 50% increased
counteroffer on the spot.

~~~
freditup
Curious what your estimate of a 50th and a 99th percentile developer salary is
for a new grad? And do you mean a 50th percentile CMU grad, or a 50th
percentile CMU grad developer, or just overall?

~~~
stale2002
Perhaps I exaggerate with the 99 percentile number, but the people I know who
work at a top(high paying) company like Uber or Jane Street will get something
like 150k easy (and maybe a signing bonus), and Palantir is more middle of the
road with 100k base salary or less, and stock options of dubious value.

~~~
dreaminvm
Are you saying 150k salaries for new grads or total comp?

ASAIK, Goog/Uber/FB starting salaries are closer to 110k base with $40-50k
RSUs vesting per year (refreshes each year), performance bonus 10-15% salary
and sometimes a generous signing bonus.

