
Employee Equity Is Broken – Here's Our Fix - BIackSwan
https://amplitude.com/blog/2015/12/01/employee-equity-is-broken-heres-our-fix/
======
Jemaclus
I dunno about anyone else, but I pretty much ignore equity when considering a
new position. Worrying about equity as an employee is like worrying about what
kind of Christmas gift you'll get from someone you know. It might be something
awesome, it might be something dumb, but more than likely, it's a pat on the
back and a "Happy Holidays" \-- nothing you can take to the bank.

I also think it doesn't _really_ matter how much your valuation is, because
the options are effectively worthless until there is a qualifying event. If
you're already public, then you might have a case for it, but for most
startups, it's as good as monopoly money.

Salary + benefits + culture is what gets me in the door every day. Equity is
just a bonus.

I once interviewed with a YC company and got an offer that was _significantly_
under my current salary. When I tried to negotiate, the founder insulted me
and basically told me I was an idiot for ignoring the equity component which
was "worth far more than the salary." Pretty glad I didn't take that position,
but it still bothers me how misguided he was about the whole situation.

I can't pay rent with equity. My landlord won't accept "I have stock options
in some startup you've never heard of" as payment.

There are a lot of posts about equity around here, and I just think it's
overrated in general. Kinda wish we'd talk more about salary and other
benefits and a little less about what basically amounts to a crapshoot. For
instance, my hearing aids are very often not covered by health insurance...
now that would be a nice perk for someone like me.

~~~
akkartik
It makes sense to be conservative in valuing equity, but if you think it's
_never_ worth _anything_ , you shouldn't be considering startups in your job
search.

(Your criticism still partially stands; it's common for founders to over-value
the equity they offer employees. Way past the last funding round, for example.
It's invariably a short-sighted decision. Used wisely, equity can be a great
motivator.)

~~~
Jemaclus
I didn't say it's never worth anything. I said it's not worth anything _until
a qualifying event has occurred_. It doesn't matter how much your equity is
_valued_ if I can't cash it out.

~~~
akkartik
Good luck getting equity in a 'startup' after a qualifying event like an IPO.

Nothing wrong in wanting certainty. But certainty on the downside matches
certainty on the upside. If you don't care about the upside then why would you
join a startup?

~~~
Jemaclus
Are you asserting that stock options are the only reason to join a startup?
Because that's fallacious at the very least. (And by the way, this "Why would
you join a startup?" question is exactly what that founder said to me when I
tried to negotiate on salary. Not exactly a great way to win people over.)

There are plenty of companies that have IPO'd that offer stock as
compensation, by the way. I've worked for a few. That stock directly
translates into cash once it vests. (Well, assuming the stock price goes up --
but at least cashing out is an option!)

You also seem to be asserting that I'm rejecting equity completely. As I've
said in my parent comments, I'm certainly not. I'm simply placing a premium on
salary (cash) over stock options (not likely to become cash). Of course I want
equity. I don't _not_ want it. But it doesn't replace salary, and I can't pay
my rent with options.

~~~
akkartik
The whole point of equity from a startup's perspective is to save on cash when
you're small, so why would you get equity if it won't replace salary?

Yes I'm aware of things like restricted stock units. But you shouldn't really
think of them as the same thing as private startup stock. Just like small-cap
stocks need different strategies from large-cap, or stocks from bonds. You
don't want to assess one category by the standards of another.

Salary and stock are separate categories, sure, but choosing an employer is
nothing _but_ an exercise in comparing apples and oranges anyway. You have to
decide how much liquid cash you need for rent or a down-payment on a house.
Once you account for such scenarios the rest is just an investment riding into
the future one way or another. Past that point things get fungible.

It sounds like the bad experience you had may not have had enough cash to
cover liquidity needs. The founder should have just expressed regret that they
can't afford the salary a larger place can. It's another common mistake
startups make: assuming (in the course of a hard sell) that there is one
rational choice for everyone regardless of their circumstances.

------
tptacek
You don't need your prospective new employer to adopt the second policy. You
can simply demand it of them when they tell you what your grant will be. I
think the best way to handle these kinds of questions is to bring them back to
dollars; never haggle over percentages, but instead get a "low", "medium", and
"high" scenario for what the equity will be worth when the company is sold,
then ask what the company's revenue is in each of those scenarios.

~~~
pc86
Serious question: Is that information you're going to be able to easily get
(or calculate) if you're interviewing for Employee #1? #5? #50?

~~~
tptacek
Yes. People I've worked with regularly ask me for advice negotiating new jobs
--- I have no idea why --- and this is my standard answer.

There are three kinds of cases where I've seen this information being hard to
get:

1\. Equity isn't a major part of compensation, and salaries are market-
competitive. The employer says, in essence, "equity is not an important part
of your compensation; let's concentrate on making sure you're happy with the
salary and bonuses".

2\. It's a relatively large company that is constantly hiring people, and they
have a strong BATNA.

3\. They simply don't know the answer, and the person hiring you isn't in a
position to work with you to generate the answer (that work being "make three
wild guesses at where revenue will be in 5 years, do a little research on what
multiples companies are acquired for in their space, and figure out how much
runway they have now"). If you know the % of the company you're getting, the
dollars invested, and what the liquidation preferences are, you can come up
with a somewhat decent guess here on your own.

If you're a key hire and equity is a significant part of your compensation,
you should be able to get this information.

If equity is a significant part of your compensation, then, no matter what,
you should be able to get:

* The number of basis points you're getting in the company

* The dollars invested in the company so far

* The company's revenue target for the year

* How much runway the company has at current headcount

If you can't get all of these, value equity at zero.

~~~
sskates
From the perspective of an employee, I completely agree this is the correct
method of getting an idea of what equity is worth. I've had exactly 0 new
hires ask me all those questions. Maybe 10% have asked me how many shares
outstanding we have. The number of people with the experience to ask the right
questions is really low, even for senior hires we've made with 10+ years of
experience in startups. I think the onus is on startups to start proactively
sharing this information with new hires- not just employees.

------
ryandrake
My view is that any equity compensation that rewards people more for how early
they were hired than for how much they contributed to the company's success
during their stay, is inherently broken. I'm not saying that taking the risk
as employee number 3 at a startup should not be rewarded. But you should be
substantially more rewarded for what you've done, regardless of your employee
number.

~~~
saganus
I always thought that part of the reason early employees got more equity was
not only because of the risks involved, but also because early employees
usually have to do all sorts of things aside from their regular duties.

Not saying this is always the case, but personally I always thought this was
part of the reward given.

For example, it's not the same to be a developer that, even though might
contribute a lot, didn't have to write the framework from scratch when there
are so many unknowns, there a lot of tougher decisions, when things are not as
clear and straight forward, responsibility is greater, etc.

Of course this depends a lot on the particular startup, but I've seen
employees hired to do say, design, end up having to do sales as well, even if
they don't enjoy it or they don't have the skill for it.

~~~
ryandrake
No, for sure. Early employees should definitely be rewarded for all those
things. But it would be nice if there were a better way to structure equity
for later employees so that high performing ones can be motivated
proportionately.

It must be pretty demotivating to spend your time at a small company busting
ass to make the stock go from $20 to $21 while you look across the office at
the early birds whose only current job description appears to be "sit around
and cash out my truckload of $0.01 stocks at $20 every two weeks".

~~~
dragonwriter
> It must be pretty demotivating to spend your time at a small company busting
> ass to make the stock go from $20 to $21 while you look across the office at
> the early birds whose only current job description appears to be "sit around
> and cash out my truckload of $0.01 stocks at $20 every two weeks".

It probably would be; if an early employee really is contributing so little,
they probably ought to be terminated (if they've got stock from early options,
they can keep selling it off for as long as they want, whether or not they are
hanging around the office demotivating other people.)

------
JonFish85
I'm curious how this will play out over the long run. How do you reward later-
stage employees fairly? A few early employees who leave the company will have
an enormous advantage over later-stage employees who might do more meaningful
work at the company.

In my personal experience, I joined a company mid-pivot. At the time, the
strike price on the options was $75+. People who were leaving the company had
strike prices around $1. That was a tricky problem there, because stock is
hard to use to incentivize people when the upside is taken by people who
aren't at the company any more.

One way to fix that is to issue lots of more shares, basically diluting the
old employees out, but ultimately this is what these companies are trying NOT
to do (effectively the 90-day window is a way of ensuring current employees'
stock isn't diluted by old employees). The board isn't going to allow early
investors to get diluted out, so after a few years, you're handing tiny
amounts of stock to new employees. I guess the hope would be that you're
paying market rate at that point?

It sounds like a good way to attract talent in an early-stage company, but
after a couple of years, it's going to be tough to attract new employees (at
least with stock).

These are just my opinions though, I'm convinced that unless the company is
public or you're a first-20 employee, stock is not going to be worth much,
especially considering the opportunity cost. There are other things that are
worthwhile (it can be great for a career), but purely money-wise, you're
probably going to be net-negative.

~~~
s73v3r
Why couldn't they simply do a split, in which case the original employee's
share would be diluted, but they'd be given more.

~~~
dragonwriter
> Why couldn't they simply do a split, in which case the original employee's
> share would be diluted, but they'd be given more.

A split has no effect on the total value or proportion of the company owned
versus not having the split, it just changes the "size" of the units you are
counting stock in. So the original employee would be in the exact same
position with a split as they would be without a split.

------
lacker
I don't think employee equity is broken - you just really have to pick the
right startup, because most startups will have worthless equity. And all of
the fixes promoted in blog posts like these are nice, but they pale in
comparison to picking the right startup.

~~~
sskates
You make it sound so easy. Professionals at picking the right company (aka
venture capitalists) get it wrong the vast majority of the time. Nobody has
any guarantees about how things will end up.

You really think the 90 day exercise window is fair? It means an employee who
just left a company has a huge burden with their vested options- either come
up with a lot of cash and take a massive risk or have your equity compensation
be worth nothing.

~~~
SeoxyS
Picking winners is easy: oftentimes they're obvious. e.g. Uber, Slack.

VCs have a much harder job: picking undervalued and not-yet-obvious winners.
They need to find the winner first, before everyone else also realizes it's a
winner

~~~
marssaxman
Those examples weren't obvious when they were still small enough that employee
equity compensation would have meant something.

~~~
optimusclimb
You're misinformed about how much equity employees have been getting then (be
it in RSUs or ISOs).

~~~
marssaxman
Perhaps I am and perhaps I'm not, but it's somewhat less than helpful to say
so without providing information which might correct my apparently inaccurate
understanding.

~~~
optimusclimb
If you joined Uber a year ago, it was pretty obvious they were a rocket ship,
and you'd easily be set up to make 200-300k a year with bonuses and equity.
Hardly chump change, and definitely more than joining the latest YC winter __
"we're 2 stanford MBAs hiring our first engineer to change the way the world
does analytics", here's $130k and .0something percent equity to come join us.

~~~
marssaxman
Is that real equity, or is it equity on the rolling-four-years-vesting plan?
Because I've only ever seen the latter offered to anyone but the first couple
of employees.

------
enra
Couple years ago I was considering joining a company. It wasn't a normal
hiring situation, so I had some leverage. My lawyer suggested that we could
try negotiating a shorter vesting period or longer exercise period. The
company didn't go for the shorting vesting but the said ok for the longer
exercise period.

Their employee stock plan was in ISO with the standards 3-month period, so
their lawyers basically changed one line there, saying "You may exercise this
option for xx months after termination of your continuous service status".
After the 3 months the option just changes to NSO.

That was it. It was such a simple thing that I don't understand why companies
don't do this more often.

~~~
sskates
The crazy thing to me is: 1) the fact that employees are granted options
instead of shares is an artifact of tax law, and 2) the fact that there's a 90
day exercise window is also an artifact of tax law. Yet, companies constantly
come up with post-hoc justifications of why only giving a 90 day window is
fair. There is big resistance to change on this point. Even Ben Horowitz and
Sam Altman don't think it's a clear decision! [http://genius.com/B-horowitz-
lecture-15-how-to-manage-annota...](http://genius.com/B-horowitz-
lecture-15-how-to-manage-annotated/)

If you were to derive how to think about employee ownership of a company as a
form of compensation from first principles, you'd never come up with options
and you'd never come up with a 90-day exercise window on top of that. Those
are both artifacts from tax law yet it's become the standard form of
compensation!

~~~
enra
Do you how a company would you give employees shares directly without them
being taxed on the grant?

One way I've seen this is with RSU double triggers: you are granted RSUs but
you don't own them until the stock is actually liquid. However, at that time,
you will have to pay taxes and you don't get long term capital gains.

Update: Just read your link, it's crazy how on this topic, Ben goes on a rant
about random things, and whether it's fair to give 10y exercise period,
because the person working there doesn't somehow get that benefit. Even if you
have a money, employees are not investors, they can't just throw $10-100k on
one startup, without knowing liquidation preferences or anything else, and
which may or may not have some kind of liquidity in the next 10 years. It's
useless to give equity if most people get screwed.

------
sl8r
My experience is that there are some "weird" effects of equity comp once one
gets into the calculus of incentives:

1\. Payoffs are too small to be consequential. If you own 0.01% of a company
and are personal-profit-maximizing, then you are indifferent between (a.)
Increasing the company's valuation by $1M and (b.) Getting $100.

2\. Growth makes "rest and vest" a reasonable strategy. If a startup does
well, then an employee's initial equity grant typically dwarfs all subsequent
compensation; does it make sense to work hard for a $5k raise when your equity
is worth $500k?

~~~
sskates
Once you get to 0.01% per employee it's not a strictly profit maximizing
decision. It's more of a way to align people and make them feel they have
ownership. Agreed on the second point.

------
bryanlarsen
The second fix might be good for amplitude, but it's probably bad for
employees. Potential employees are highly likely to over-estimate the chances
of the higher buyout scenarios, and to under-estimate the effects of dilution
and preferred shares. By spending time going over the spreadsheet with them
you're increasing their confidence in the numbers, making them more likely to
make these mistakes.

Without the second change, potential employees are much more likely to go with
the more accurate heuristic that options are worthless.

------
salem
Longer exercise windows and more info are great and all, but if you are still
expecting employees to take less than market rate salary in exchange for
options, you should be giving people the same equity and terms (e.g.
liquidation preferences) that investors get for the cash that you forgo.

Founders I've talked to are sympathetic and see it as fair, but none have the
courage to try it.

~~~
sskates
Not sure that giving liquidation preferences to common stockholders would be
fair- the idea with a 1x liquidation preference is that money into the company
at least first goes to repaying the principal on the investment first before
rewarding any upside.

~~~
salem
What's wrong for asking for the same terms as the latest round?

Let's acknowledge that there is an opportunity cost for early hires.

------
rrecuero
I really like the concept of progressive equity by Andrew Mason. IT helps
align the interests of founders and early employees to achieve a "shared
destiny mindset"

[http://blog.detour.com/introducing-progressive-
equity/](http://blog.detour.com/introducing-progressive-equity/)

~~~
sskates
I hadn't seen Andrew's post before writing this but I think it's awesome. Will
try this out at the next company.

~~~
dmnd
Amusingly your article states, "As far as I know, this is the most progressive
take on equity compensation that I’ve seen." Now that you've heard of
progressive equity, maybe you should tweak that sentence?

------
paul
This is really great! The 90 day window is bad for employees. I'd like to see
this become the new standard. (and I hope the IRS doesn't give any trouble!)

------
phamilton
ELI5: "IRS tax artifacts" wrt to the 90 day window and how Amplitude is
getting around it.

~~~
tptacek
Employee stock options are designed to comply with the IRS rules for Incentive
Stock Options (ISOs), which allow employees to receive and execute options
without being taxed on their value; tax is assessed only when the stock is
sold. To qualify as an ISO, options have to be exercised within 3 months of an
employee leaving the company.

The alternative seems to be to use NSOs, or (maybe?) ISOs that turn into NSOs;
NSOs have tax implications at the time of exercise, but the point of giving
employees NSOs is to allow them to defer exercise, perhaps to a point where
the options are liquid (remember: most options aren't liquid; that's the
problem with requiring them to be exercised --- it requires employees to spend
money to receive illiquid speculative options).

~~~
sjg007
Honestly, we should just lobby Congress to remove NSOs and make them ISOs by
default.

------
choppaface
Dilution can also happen through a reverse-split prior to IPO to hit a target
share price. (In this case, the bankers effectively dilute everybody else,
although C-levels will probably get big new post-split grants to stay on after
the IPO). The number of shares (rather than the percentage) might be more
important given an IPO will probably require $10-15/share, and the share price
will probably be no more than 2x-3x that after 6-month lockup.

IMO telling an employee you have x% of $n billion is very misleading, as
dilution can be rather unpredictable. You're really showing the employee the
/max/ upside in 2-7 years, which IMO is a very weak sales position.

~~~
sskates
Dilution is unpredictable and what's worse is you have the principal agent
problem where employees who are affected don't have a seat at the negotiating
table. You're definitely counting on upper management/the board not to do
things like that. Not sure on the solution but agreed that it needs to be
solved.

~~~
salem
These side-letter deals and exits optimized for founders are probably not
legal since they are often not in the best interests of shareholders, but I've
never heard of them being investigated.

------
sjg007
Even if you are an early employee you can still get hit by a later stage
series that gives a high valuation but with a preferred ratchet if you IPO at
less than a specific price. It is almost impossible to get information on the
specifics of the deals. I am not sure if you vest at least 1 stock option if
that will qualify you to see the docs and/or if companies have other ways to
prevent that or if they will in the future.

------
pc86
It appears this domain (for whatever reason) is blocked by my work's firewall.
If there happens to be a mirror or cache link I would greatly appreciate it!

~~~
sskates
Google cache:
[http://webcache.googleusercontent.com/search?q=cache:EjpQDst...](http://webcache.googleusercontent.com/search?q=cache:EjpQDst4YbwJ:https://amplitude.com/blog/2015/12/01/employee-
equity-is-broken-heres-our-fix/+&cd=1&hl=en&ct=clnk&gl=us)

------
the_watcher
Everyone who comments that equity is worthless until the day you can actually
turn it into cash is completely correct. That said, presenting potential
outcomes in an easily understood table, and in particular, extending the
exercise window is really a fantastic idea.

------
adamw2k
Can't believe form 83b wasn't even mentioned... Truly the best way for any
early stage employee to deal with options from a tax perspective.

------
pbreit
How do they describe something that's working spectacularly well as, "broken".
Sure, maybe it's not optimal or has some problems. But, broken? Really?

But I do like what they're doing. Extending the option period makes perfect
sense. I think they might have gone a bit far on the value sample. I think
current % ownership + internal/external valuation should be sufficient.

~~~
angersock
Is it really working "spectacularly well"?

Or, is it just something that has kinda worked out because the workforce
wasn't communicating how they were getting screwed to each other?

I expect things to get more difficult for employers as employees wisen up.

~~~
pbreit
Well, it's a key driver of Silicon Valley success over the past 50+ years.

~~~
s73v3r
Is it? How so?

~~~
pbreit
Equity compensation is probably the biggest difference between a startup and
all other companies. Silicon Valley is probably the epicenter of startup
success and that equity compensation has been a key driver of such success.

~~~
s73v3r
You're gonna need more to back up that statement. Especially given how much
people get fucked over with options, and how many startups just fail.

------
the_cat_kittles
has someone done a survey of tech equity that gives us an idea what the
expected value of x points is worth? even so, its a lottery ticket to me, and
i never consider it when considering an offer.

