
The Lack of Options for Startup Employees’ Options - runesoerensen
http://a16z.com/2016/06/23/options-timing/
======
jamiequint
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.

~~~
100k
> 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.

------
dangelo
We were the first startup to use 10 year exercise periods, which started this
trend. I wrote a long response to this here:
[https://dangelo.quora.com/10-Year-Exercise-Periods-Make-
Sens...](https://dangelo.quora.com/10-Year-Exercise-Periods-Make-Sense)

~~~
solidsnack9000
> 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.

------
acslater00
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.

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](https://twitter.com/bhorowitz/status/746050999341584384)

~~~
wp1
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.

------
mattsoldo
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.

~~~
jsprogrammer
Perhaps what is needed are sunset clauses on investor/non-labor shares?

The riders-on should be shed while those who did the actual work get to enjoy
their profits, no?

~~~
eru
What do you mean? If you tell people upfront that their shares will be
worthless eventually, why would anyone invest time or money?

------
Stasis5001
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!

~~~
potatolicious
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?

------
sk5t
The author of this article should be ashamed.

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
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.

------
jamiequint
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?”

------
andrewvc
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.

~~~
arciini
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.

~~~
bravo22
I found that to be a bad argument as well. The author is conveniently ignoring
the fact that those options vested in the first place. By that logic, why
should investors get a lot of the windfall when they didn't "work hard" for
the life of the company?

Basically it is a disguised argument against shareholders who are not already
wealthy. "Here have these shares of the company. Oh, but you don't really
deserve them because you didn't buy it with cash like we did, you earned it
through sweat. Your labor is worth less than our capital".

------
dadkins
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.

~~~
csmeder
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.

Right? Or maybe I'm missing something?

~~~
nwatson
An Angel investor ends up with Series A stock which typically costs more per
share and has extended rights. The early-exercising employee buys cheaper
Common shares. In an IPO the classes may end up with the same value, meaning
the employee got a better financial deal per share for their sweat-equity. In
a non-IPO the employee may get a lot less per share often 0. Also, each
employee has access to a very limited supply of cheap stock, whereas no
founder/board will stop an Angel from buying more shares ... "wanna double
your investment? come to the trough. "

------
angersock
This is a really good read. It pisses me off to no end, but anybody who is an
engineer (especially an early engineer, christ!) should read this to try and
understand the mindset of investors and new founders.

This article articulates what seems to be a common sentiment among founders
I've met: early employees who want to do good work and cash out are a
liability.

The rhetoric proposed here of "early employees who leave" vs "god-fearing
quality employees who stay or join" is targeted _directly_ at dividing and
taking advantage of us.

EDIT: If you would like to downvote me, please do explain your reasoning.

~~~
tn13
I really don't understand why employers don't allow the employees to exercise
the options right in the beginning when the value is much much lower.

~~~
xiphias
I really don't understand why good employees work in startups instead of going
to an IPO-ed company. Most of the time in the current climate they are worse
off.

~~~
palakchokshi
Ask the good employees of Facebook, Google, AirBnb, etc. who joined those
companies early on. The upside for the employees where the company IPO-ed is
just insane.

Another reason might be the product/technology that the startup is working
with that might be of interest to a good employee. Money is not everything.

~~~
spinlock
I've asked them. To a one, they got lucky. None of them had an actual plan for
how their contribution would lead to a multi-billion dollar exit.

------
akkartik
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.

~~~
maxxxxx
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.

~~~
akkartik
Well, if you stay 4 years and don't get an equity refresh that's a pretty
strong signal they want you to move on. Starting year 5 you'd be taking a pay
cut. So I imagine it would be a rare outcome.

(Of course, this only holds under current conventions. With the OP's proposal
companies would have a _strong_ incentive to make life miserable for employees
past year 7 or so, because those who left wouldn't be able to take their stock
with them.)

------
a_small_island
>"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.

------
33a
So why even give them options in the first place then if the goal is to just
prevent them from ever using them?

~~~
jellicle
Well, the goal is to dangle the carrot in front of you but make sure you can't
ever actually take a bite of it.

------
mahyarm
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.

~~~
holman
> The very public example of zach holman and other articles creates chilling
> effects on startup hiring.

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](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
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?

------
ThomPete
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.

Got it.

------
rdtsc
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.

~~~
mkehrt
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.

~~~
rdtsc
Ok, so it is not a completely crazy idea. It if funny that granting ownership
is more complicated than granting an option to ownership.

------
againstgreed
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.

------
thinkingkong
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.

~~~
chimeracoder
> Founders don't have to do that (surprise)

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
Ok, this one had me really wondering.

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.

------
mathattack
Despite some painful implications of his argument, one aspect of his solution
is ok: more options with a longer vesting period. This helps keep the best
people around for longer, as they continue to accrue benefits of the career
and comp risk they took by joining an early stage company. There would be a
lot less incentive for people to leave at 4 years. (In most companies, the
equity per employee handed out later on is tiny compared to what you can give
early employees)

~~~
jsprogrammer
The best people will stay around because they are doing their best work.
Longer vesting periods will just keep the best from working at that company.

------
a13n
A fantastic piece and a subject I've spent a lot of time thinking about as an
early-stage founder.

There's a ton of criticism in this thread but I think people are missing the
point.

 _1\. Why 90 days expiration sucks._

If you're an early employee at, say, Uber... your options have vested but you
can't afford to exercise them because you don't have $10m+ in cash. If you
leave you lose it all because you can't exercise them. There goes your big
payout, you are stuck working at Uber until they IPO (or forfeiting your
equity).

 _2\. Why 10 years expiration sucks (on its own, keep reading!)._

Consider the case where you have two employees who joined on day 1. Employee A
works for 4 years and vests X% in options, leaves. Employee B works for 10
years and vests X% in options.

Obviously you want to retain your most senior employees and turn them into
leaders within your company rather than see them leave. Those who stay and
help carry out the mission are way more valuable to you than those who leave
right when they vest.

If you change nothing except 10 years till option expiration after leaving,
employee A and B get compensated the EXACT same thing despite employee B
contributing 10 years and employee A contributing 4.

 _3\. Longer vesting + more equity fixes everything_

If you dish out more equity over longer periods of time then employee B would
rightfully be compensated more than employee A.

I don't understand the negativity in this thread whatsoever. Can someone
please level-headedly explain why they disagree rather than just downvoting
into oblivion?

~~~
acslater00
Because the 10-year employee will be granted additional shares after her
initial option grant is fully vested. And in a world where both have the
option of leaving and preserving their option value, the follow-up grant will
likely be larger than it is in the status quo, because the company will have
to incent B to give an additional 6 years of her life to the startup.

~~~
a13n
Sure but if you join on day 1 then the refresher grants could be peanuts
compared to your initial offer? Why wait 4 years to find out you won't get any
more equity instead of baking it into the original offer with a longer vesting
period?

Longer vesting periods + more equity guarantee that employees get more equity.
4 year vesting lets the board decide what happens.

~~~
encoderer
In this scenario you give those employees a new 4 year refresher grant every
single year. Not one at hire and one four years later. You pile them on both
as a form of performance based compensation and to prevent the exact situation
you describe.

In your example the guy who leaves after 4 years of low salary makes a lot
less than the guy who gets incremental grants and a growing salary who is a vp
at the end making 500k a year.

~~~
a13n
Seems like your incremental grants would be significantly less than the
initial ones joining early on, no? Or is it common that leaders get big
refreshers along the way?

I would say I'm pretty unfamiliar with early employee refreshes but from what
I've heard refreshers are usually small compared to the initial grant.

~~~
encoderer
Yeah I think if you have somebody who is a classic "first engineering hire"
and s/he grows into an engineering leader, each major promotion (to manager,
director, vp) brings an opportunity for a rich follow-on, as well as a normal
yearly grant. Now if somebody is particularly adept at negotiating and somehow
take a full point out in their initial grant, you're probably right that
incremental grants won't touch that value. But that is 2-4x what I've
internalized as the norm.

------
malchow
This is absolutely crazy. What is earned is earned. And it is, in fact,
distinctly possible that early employees at t(0), now gone, have done more to
contribute to shareholder value than the subset employed at t(1).

------
encoderer
This is a joke. Dual basis of options should be fixed. That is the solution to
the problem. It's not the cash for exercise, it's the AMT payment due at time
of exercise. At least today we have credits which is better than it once was.
But just fix this and this whole issue of 90 days or 10 years is way less
important.

------
abalone
_> 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... Matching vesting more closely to
the IPO time frame for companies [6-8 years] makes logical sense..._

It would be more logical to stick with four years and let employees
participate in the huge "private IPO" rounds. This would provide liquidity in
roughly the same timeframe as before. Companies are not staying private longer
because they need more time to mature, they're doing it because the private
markets are favorable. So treat those like the IPO surrogates they are and let
employees sell options.

(Note, this would have none of the cap table messiness of secondary sales.)

------
dman
I thought the whole point of startups was that there was a chance to come out
ahead. If you extend the liquidity window to 8-10 years and invent models that
provide "fair value" then what is the draw for working long hours at below
market salaries?

------
rdl
I can't believe a16z allowed this to be published. Part of being "founder
friendly" is not developing a reputation of shitting on your portfolio's
employees, because then good founders will have to avoid you.

------
chrdlu
There doesn't seem to be any elegant solutions for equity compensation yet.
The main issues seem to arise once an employee leaves or gets fired. While the
employee did put in many years of work, its not too fair to have the options
disappear after 90 days. At the same time, as mentioned in the article its not
100% fair for the employee to keep the unexercised options for a long period
of time.

A solution a few people have discuss would be to allow the unexercised options
to remain under the employees name, but the company would be able to re-issue
the options to new employees at a higher strike price. When the new employee
exercises the option (assuming the value has risen), the company would get the
strike price of the initial unexercised option and the former employee would
get the difference between the higher strike price and the original lower
strike price.

For example:

Employee A is granted options with a $1.00 strike price.

Employee A leaves the company after a few years but doesn't exercise the
options

The company re-issues the option grant at $3.00 to Employee B

Employee B decides to exercise and pays the company the strike price.

The company would keep $1.00 and Employee A would receive $2.00

This seems fairer than the current structure and allows Employee A to still
benefit from the options if the company continues to do well without him. Of
course, implementation would be much harder/complex.

~~~
ak2196
Lord, just please take him in his sleep. Besides the obvious stupidity
inherent to the argument you could simply accomplish this by having the
company buy back the unexercised options at the current FMV.

------
numlocked
I think folks might be misinterpreting this a bit -- his issue with the
10-year window isn't that it will 'prevent' shares coming back into the pool
(remember, the article started out talking about how employees _should_ be
able to exercise their options regardless of their cash constraints), but that
giving folks the ability to wait-and-see for years, with zero risk, before
pulling the trigger isn't really fair.

Let's say you are working at a start-up, and it's going well. You leave. You
exercise and spend the money for your shares in your 90 day window. Great.

Now, same thing, you have a 10-year exercise window. You don't exercise
because:

1\. Why spend the cash?

2\. Waiting will de-risk the thing.

Now the company starts struggling. You're holding 'dead' options, the company
needs to recruit and expand the pool, and you get to watch from the sidelines.
You may never exercise and in the mean time the pool has been refreshed
unnecessarily. That's the issue. By forcing a decision, the company has a
clear picture of its options pool, and employees have to make a decision based
on reasonably present information.

The cash requirement of buying options sucks and I'm not sure what to do about
it (if you earned it, you should be able to get it), but I agree that a
10-year window isn't the right solution either.

~~~
megrimlock
> giving folks the ability to wait-and-see for years, with zero risk, before
> pulling the trigger isn't really fair

Isn't that what an option represents? The freedom to choose later is the
inherent value of the option.

And that value isn't acquired risk free: it's compensation for putting time in
in lieu of salary.

------
tyre
The fundamental question is really misleading.

> Are there any other management practices where one would > optimize for
> former employees at the expense of current > employees?

As a founder, you aren't optimizing for either case. The unexercised options
were granted to former employees, based on the work they did. Extending the
exercise window is a policy specifically to help _all_ employees (current,
former, future) in making financial decisions.

------
reality_czech
I had to chuckle at the end. One way to compete for the stupidest and most
naive employees is to offer really drawn-out vesting periods, where if you
leave before the IPO, you get nothing! Considering that the average length of
a job in sillicon valley is about 2 years, that would effectively put an end
to anyone with any talent or brains working for a startup.

------
aab0
> That doesn’t seem very fair at all. 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.

Options with vesting seem little different from pensions in this respect.

------
slyall
Are there realistic alternatives to options? The point of them seems to be to
attracting employees at less than market rate with the incentive that if the
company grows they will get a financial reward. And doing so in such a way
that it doesn't cost the company too much upfront.

Perhaps the company could buy a financial instrument from a company (secured
against a portion of shares) that paid out employees according to a certain
formula. If the company made it big the finance company would pay the workers
and then recoup the cost from it's shareholding. IF the company died then the
workers lose nothing.

~~~
mahyarm
Don't do options, just give the employees the stock and you eat the tax bill.

If that tax bill becomes too large to be worth it, then it's time to give your
employees RSUs.

But you say, how about vesting and such? It's a waste to pay those taxes if
the guy leaves after 2 years. You just paid 2 years of taxes for no reason!

That means in practice you'll be giving RSUs around the series A or B funding
point.

Another option is you give the employees a non-recourse loan to 83b purchase
their options on hiring. The loan is due on a liquidity event when it's higher
than the price of the options. This makes it a tax optimal and zero-cost way
to give stock to your employees. I don't know if that is legal although.

Another option is to make your options just expire after 100 years.

------
jerrycabbage
This is idiotic. The author harps on the "direct wealth transfer" and
optimizing for previous employees. This "optimization" happens before
employees are hired, not after they leave. The effect is realized after the
ex-employees have left.

------
solidsnack9000
> ...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...

Doesn't it mean dilution for the former employees, as well?

------
throwaway2016a
This may be being said elsewhere but I think the bigger problem is that you
get taxed when buying options that are not liquid. I own a significant amount
of a startup company and am fully vested but I can't exercise because of the
tax bill.

~~~
ThomPete
You can. You just can't do long term capital gains.

~~~
throwaway2016a
It's my understanding I have to pay tax on the difference between excise price
and fair market value for the year I exercise my option that year. And I've
gotten conflicting tax advise on whether or not private investor rounds set a
fair market value as far as the IRS is concerned.

This article seems to be of the same opinion.

Either way, if you can't do capital gains and you're still at the company no
use wasting the money on buying in early.

~~~
ThomPete
Yeah but thats gets done right away in the process.

It's the long term thats the problem because thats more like a loan.

~~~
throwaway2016a
Yes, but without the tax if you have a 90 day window when you leave it
wouldn't be a big deal that the company isn't liquid yet, you might just buy
the shares as an investment. My point is that because if the tax, buying the
shares in this scenario (if the stock isn''t liquid enough) is not obtainable.

~~~
ThomPete
Thats true.

------
nulltype
Would issuing RSUs instead of options avoid this issue?

~~~
nedwin
Avoids some of the issues, creates more particularly limiting upside
potential.

Strong recent article [https://medium.com/@chamath/spending-money-to-make-
money-aka...](https://medium.com/@chamath/spending-money-to-make-money-aka-
stock-based-compensation-aka-listen-up-founders-feac1dea3d28#.scc067jjf)

~~~
nulltype
Nice article! Good graphs. Of course, not having stock at all because you
can't afford your options may limit the upside potential even more than RSUs.
Maybe it could be choice.

------
mattpratt
The equity of previous investors feels just as "dead".

------
msdos
Why have a limit at 10 years?

