
The four year vesting schedule doesn't make sense - groth
http://stuckinthevalley.tumblr.com/
======
tptacek
I don't invest in companies, but if I did, having nonstandard vesting schemes
would be a no-deal red flag, at least for any team that didn't have a mile-
long pedigree starting and successfully building companies. Vesting is one of
the most important protections the operating team has against hiring (and
foundational) mistakes, and anybody who has ever started a company knows those
mistakes happen routinely.

Some things to keep in mind when you feel the urge to twiddle the nods on how
vesting works:

* It can take 2-4 months, maybe even more for senior hires, to discover whether a new hire is going to fit with the team.

* Your rational incentive for allocating ownership of the company to someone who doesn't belong on your team is zero or worse. You are helped not-at-all by the warm fuzzies a fired employee gets when they contemplate their options, but you are harmed immensely by the share of the long-term upside that those employees take from everyone who comes after them and executes well.

* Equity grants are not just a proxy for future money. They're legal contracts that can drastically complicate later bizdev events. You don't want a large pool of former employees wandering around with executed options. Think of every such person as a P>0.10 risk of a lawsuit threat.

* It is very hard (often virtually impossible) to claw ownership stakes back from former employees. You will, P>0.90, discover candidates later in the life of the company that you'd love to entice with an ownership stake. You will, P>0.90, have a cofounder or employee<4 that doesn't work out. At the same time, a cofounder or employee #1 that's still with the company 3-4 years later almost certainly earned their stake. Vesting balances these needs out.

Don't fuck around with vesting. Do what your lawyer says, or get one to sign
off on the standard four-year+1-year-cliff scheme for your state. If you want
to incentivize people to stay with your company for a year, pull other levers
to make that happen. Don't pull the vesting lever for something as simple as
"students just out of school have shorter time horizons".

~~~
glimcat
Just from an efficiency standpoint, you don't _need_ other levers for new
grads. A reasonable engineering salary will already be highly motivational for
someone who is coming off a student's budget, probably with loans just kicking
in.

Some percentage of them are going to flake. That happens when you take people
who have spent their lives in an environment with one eval loop and place them
in a new environment with differing expectations.

Of those who would flake, some of them can be made into great employees. But a
bigger carrot is _almost_ _never_ effective at accomplishing this. The real
need is generally along the lines of "effective mentorship" - which is far
harder to implement than a revision to your employee benefits plan.

------
georgemcbay
I think there's plenty wrong with the way most startups handle equity
assignments (particularly as it relates to dilution without subsequent
regrants, etc), but the viewpoint here just seems bonkers to me.

A year is a _LONG_ time to a 6 year old, but to a 22-24 year old (avg. age of
college grad)? Really? When I was that age I could easily imagine committing
to things for a year. And even if that makes me an anomaly (which I seriously
doubt it does), why would you bend over backwards to reward people that are
going to jump ship right away due to their own ADD? Particularly considering
they're the least likely to be making really useful contributions to the code
and are basically (hopefully) mostly learning the ins and outs of professional
development (IME, very different than school work, or even open source
projects) on the company's dime at that point.

On top of all that, a lot of companies still use traditional options and other
than in some very extraordinary circumstances, anyone quitting prior to a year
of service and also prior to a major liquidity event would be foolish to
actually exercise their options, which they'd almost certainly have to do to
avoid losing them within 30-90 days (or so depending upon terms) of leaving.

Sorry, but this is just a half-baked idea all around.

------
powera
What a terrible idea. If people don't want to stay for even a year, they don't
need equity in a startup. That's what salary is for. And getting 1/4000th of
the first year's equity grant after the first month won't motivate anybody who
understands math, which is probably a trait that startups are looking for.

~~~
Firehed
The idea is that the longer you stay with the company, the larger percent of
your remaining equity you get per period. Hockey-stick equity, if you will ;)

I think it's actually a pretty reasonable approach. I've had people straight-
up tell me during interviews that they're leaving their current position
because they've reached either their one-year cliff or their four-year package
and want a new opportunity with potentially higher gains. While leaving after
four years if your options package isn't extended isn't unreasonable, the one-
year cliff does seem a rather broken approach for keeping all but the most-
dedicated people more than a year.

Of course, if your employees don't want to stay more than year and are only
doing so because of the vesting cliff, you probably have bigger problems that
need sorting out. But let's assume that your employees are only going to stay
12 months no matter what - would you prefer to give them 25% of their options,
or ~3.6%[1]?

That assumes that the exponential grant continues for the entire period, not
just for the first year as the article suggests. I'd also be a bit concerned
about possible tax implications of that approach; three years in you only have
31% of your stock, and you get about 10% of the total in the last month.

Here's a graph, assuming my math is right.

[https://docs.google.com/spreadsheet/oimg?key=0AgIFMGYSPNuPdH...](https://docs.google.com/spreadsheet/oimg?key=0AgIFMGYSPNuPdHQyMGhxV2hEZC1uVlVqS19WbVBlYUE&oid=2&zx=9a33xzyohuq8)

Seems to me that this would be a pretty good way to get people to stay for
longer than a year, the issue is when employees still leave early. With the
cliff, there's one less shareholder around, helping the company stay under
that magical 500-shareholder limit. You lose that benefit with the exponential
grant.

[1] I've probably done the math wrong, but roughly solving m^48=100 (percent),
getting about 1.1007^(month#) = total percent of equity granted at the end of
that month

~~~
tptacek
_I've had people straight-up tell me during interviews that they're leaving
their current position because they've reached either their one-year cliff or
their four-year package and want a new opportunity with potentially higher
gains._

The person who told you "I'm looking because I just hit my first-year cliff"
actually told you "DO NOT HIRE ME". Listen harder.

People do leave when they hit four years. Four years is a long time! Some
teams are O.K. with this, but if you're not, there's no reason to mess with
vesting to solve the problem; just grant them more of the employee pool to
stay.

Everyone is always looking for better opportunities. That's fine. Be the best
opportunity for everyone on your team, or get better at recruiting. Vesting
can't help you with this problem, but it sure can hurt you.

~~~
loceng
Makes me wonder how hard they worked those 4 years, or perhaps just that last
year they didn't necessarily care to be kept on afterward.

~~~
j2labs
If they were there four years without being let go, the company was clearly
fine with the performance.

------
jaredstenquist
Terrible idea, and based on the title of your blog, it's no surprise to me
that you'd like all your equity in year one.

There are reasons for 3,4 or N year vesting - namely keeping employees
invested in the business. If employees at a startup turned over every year, it
simply wouldn't survive.

Salary is used to keep employees for a year. Salary and/or equity is used to
keep employees for a meaningful period of time. There will always be the ones
there to simply collect a paycheck, and likewise there will be ones who stick
around for their 50,000 shares of equity without doing the math to realize
their potential upside near 0.

------
trotsky
If there is only one thing I wished someone had told me when I started out it
would be not to include grants as part of your compensation calculations. It
is rare that they'll ever be worth a dime and even rarer that getting a little
less/more will make any real difference. I'm assuming we're not talking about
public companies here or ones obviously on an ipo track (very short list).

They are like getting a portion of your money in lottery tickets - sure there
is a minimal real value to them, but the only rational way to use them in
planning is to value them at zero.

Rank and file grants are only about retention. If you are bitching and moaning
about a cliff and your finances you really misunderstand how business works
here.

But that's very understandable - silicon valley thrives on misleading the
young and energetic on this very topic.

------
cbsmith
This is ridiculous. For starters, in what world is vesting based on value to
the employee?

It's also more than a bit ill informed to think that time at a company is less
"costly" for an employee the older they are, particularly when it comes to
equity. Based on success rates of startups, once you are older you likely only
have a few more shots at "winning the lottery", the costs of losing benefits
(particularly medical) is higher, and showing forward career progress is so
much more crucial. The cost of a few early setbacks is trivial as compared to
setbacks towards the end of your career (unless you've already won the
lottery, in which case, the discussion is moot).

------
snprbob86
Why would I want to treat new-grads better than experienced folks? And why
would I want to incentivize somebody who doesn't like it after 3 months to
stay for 4 months?

The 1 year cliff prevents disinterested parties from holding equity in my
company and helps me retain people who have become important over time during
that first year.

You're proposing improving my retention of lesser experienced people with
lower bus factors in my organization. That seems backwards...

------
jakejake
Equity is an incentive for loyalty and commitment to the company. If you
aren't even sticking around for year then chances are you are barely finished
training. You split just about the time you are actually becoming useful and
productive. So the company has invested in you - but you ditched the company.
That's the opposite of commitment.

This kinda reminds me of when I was a grade-school student and I used to
wonder why the teachers got paid because it was us students who were doing all
the homework!

------
vampirechicken
There is a reason that stock options are called Golden Handcuffs.

------
mattmaroon
I really don't think young people think/care much about equity until you're
one of the hotter startups, at which point 1 year doesn't seem so long. If
you're hiring on at Dropbox now, you're working that year. If you're hiring on
at some company that's 6 months old that nobody has heard of, the equity is
just a batch of lottery tickets.

Put another way, I doubt anyone has ever said "I would have worked there if
the cliff was only 6 months".

------
prostoalex
"After a couple of months at a company, a new grad may think “hey, this isn’t
THAT great’, and not stick out the next 9, 10, 11 months, because that seems
to them, an insanely long time."

Then he made a mistake during the interview process. Remember, it's not only
them interviewing you, it's also you interviewing them. Bring up issues you
care about (work ethic, work load, flexibility), and you'll have fewer
surpises later on.

"On the other hand, for someone who has been working for a few years, 8,9, or
11 months might seem to be a much shorter period of time, and proportionally
it is. They might stick it out, get equity, and become much more committed to
the enterprise."

Yes, the company can issue additional grants, there's no law in place to say
that what you get on day 1 is the only equity you're going to get, ever. The
company can structure performance (equity for shipping major products) or
retention (equity for 2nd, 3rd, 5th, 10th, 50th anniversary with the company)
however it pleases.

------
wellthat
Suppose someone (highly qualified, not from the startup world however) can
tweak your marketing message for a couple of weeks (i.e. work on your startup
for 80-150 hours intensively) and as a direct consquence get you an audience
of millions, because your message is now awesome. This person doensn't care
about startups.

Say you are pre-money. How should you pay for this person's time?

You would think, if this person can really work for two weeks and give you a
company that is worth seeding at a high valuation (due to traction), which
also becomes a good signal and thereafter with the company's fantastic
traction, money, and engaged audience, it has fantastic growth prospects - but
without these two weeks will simply languish as another "project" - then a two
percent stake with no cliff whatsoever is a no-brainer.

~~~
ghaff
And, if you're a consultant, with few exceptions, taking an equity stake
rather than cash is not a good idea. Happened a lot in the dot com bubble. Not
pretty. Sure, if you're looking for work and a genuinely intriguing
opportunity that only takes a couple weeks comes along, why not? But bad idea
as a business model.

------
whackedspinach
As an undergraduate at a top tier CS school, I have seen a lot of companies
boast about these vesting schemes. Honestly, I don't think most new grads
consider them due to the 1 year cliff. Most people I talk to will say "Well,
if I want to leave, the new signing bonus/RSU package will just make up for
the lost RSUs."

What really hurts companies is the drawn out exponential vesting periods. I
believe Amazon does a package that is 15% after the first year, 40% after the
second, 75% after the third, and 100% after four. Maybe my numbers are off,
but you are rarely going to get new grads to commit to four years, even with
that scheme. I'll take my 25% at another company after a year and move on.

Anyways, the work/experience/location/culture/salary is usually more of a
factor than the vesting schedule.

------
ajdecon
_For someone who sees 1 year as a long time, the one year vesting cliff may be
a reason to discount the equity portion of the compensation package
altogether, especially at a small startup where the chances of cashing out are
low anyway. After a couple of months at a company, a new grad may think “hey,
this isn’t THAT great’, and not stick out the next 9, 10, 11 months, because
that seems to them, an insanely long time._

1) From the employer perspective in a startup: do you actually want an
employee who's going to stay longer than a few months, based on any reason
except the company and the work?

2) From the employee perspective: unless you're an _extremely_ early employee,
discounting the equity portion of a startup compensation package is probably
the correct thing to do...

------
gojomo
A company is unlikely to want the overhead of option/equity paperwork (and
cap-table complications) for some restless joker who leaves after a few
months. Nor are they likely to want an official policy of offering
discriminatory vesting-schedules by candidate age.

------
jaynate
Not an HR specialist and this may be beside the point, but i believe if you do
this for the new grad you'd also have to give that option to the tenured folks
as well otherwise you'd basically be discriminating based on age which is
illegal.

------
ChuckMcM
They make sense in the same way that dollar cost averaging makes sense.
Whinging that a year is too long to wait for the vest is pretty shallow. Now
if it didn't _start_ vesting for a year, sure that would be something, but
since your 25% vested on the day of the 'cliff' your good.

But the bottom line is that shares are compensation and compensation is money.
A startup needs to extract the most mileage out of the money they've got, this
vesting schedule has been shown to be a reasonable choice over the last 50
years.

------
dguido
Nice try, new grad.

------
pm24601
As someone with his not yet successful company, I am against 1-year cliffs. I
believe in the 6-month cliff and am considering dropping it to 3 months.

When I make a poor hiring decision, I usually know within 2-3 months. A
shorter cliff forces me to evaluate new-hires faster. No one needs 1 year to
determine if a new hire was a good fit.

~~~
tptacek
But it works both ways; there will be people who you like who decide not to
stick with _you_. You want to minimize the number of outsiders who hold shares
in your company. If you don't grok this, you need to talk to more experienced
people; this has to be one of the top horror story themes in startupland.

Also, stop kidding yourself. Evaluating startup team members is very hard. You
probably have a longer ramp-up than you think you do, during which you have
very little ability to evaluate people; also, there is a huge class of bad
hire that starts strong and decays rapidly.

There are all sorts of ways you can motivate yourself to evaluate new hires
quickly. Use salary or sign-on bonuses instead of vesting. Messing around with
your company ownership to accomplish such a simple tactical goal says
something about how seriously you take ownership; it's probably not something
you want to be saying out loud.

~~~
pm24601
I am very experienced. Re: the number of "outsiders" - not as big a deal as
you might believe. Good lawyering helps.

Its better to be considerate and balanced. The cliff only exists to protect
against bad hiring decisions, 6 months is plenty enough time to figure out
that someone is a bad fit.

You are correct about shares not being a very good tool for motivating people.
Your suggestions about salary or sign-on bonuses are actually worse because
that takes away from the working capital.

~~~
tptacek
You don't sound very experienced. I mean that factually, not as an insult. For
what it's worth, I've been in "key" roles (lead engineering, founder, and
m-team) since 1996; I've spent my whole career in startups. I am not making
the horror stories up, and they've happened in places with extremely good
"lawyering".

~~~
pm24601
There are always people with different experiences to learn from.

That said, 1 year cliff is an arbitrary period of time. 6 months is an
arbitrary period as well.

Your statement about experience is fine. I have my own collection of
experience.

In my experience, forcing a fit/retention decision about a new hire to be
earlier is a good thing. I do this with a 6 month cliff.

When I look at the people I have had to fire, I always saw the handwriting on
the wall by the 2nd-3rd month.

A 6-month cliff gives me and them a chance to correct the issue.

Yes I could do this review process with a 1-year cliff. The 6-month cliff
makes sure the issue is addressed consistently early after a new hire joins.

So if after 6-months I know I want to keep the person, why not say it with a
stock plan?

Conversely, if the goal is to reduce the number of outsiders with stock:

    
    
      * do you then support a 2-year cliff?
      * a 5-year vesting schedule?
    

If going earlier than a year cliff is bad then, using your argument, going
longer must be better.

------
photorized
4-yr vesting with a cliff works, and the concept should probably be left
alone. The are plenty of other mechanisms to provide incentives to good
people, for the business owner/founder to experiment with.

------
yresnob
Give new grads a faster vesting schedule..is that a joke?

Give everyone who is good enough to get hired alot more shares and be upfront
about their % it's real easy

------
zaroth
I don't agree with this at all. Vesting schedules are an extremely important
component of how equity in a company is awarded, and the one year cliff is an
essential part of the formula.

Options are priced, when they are awarded, to have no present value. The
exercise price of the option (the cost to buy a share) is equal to the current
market value of the share. Furthermore, you can only hold the options for as
long as you are an employee of the company. If you leave, you typically have
30 - 90 days to exercise (buy) whatever options you have vested, if you so
choose.

Options are worthless when their exercise price is <= the market price. So, in
the first place, it wouldn't make sense to vest options immediately (or
"exponentially") in order to accommodate employee drop-outs. The ex-employee
would have to exercise the option before the shares could have had time to
appreciate significantly relative to their beta.

The value of incentive stock options is simply the value of being able to
profit from increased market cap without having to actually risk or tie up any
of your own money. On the CBOE (options market), you can buy options with a
strike price equal to the market price, but with a set expiration date. The
option has no inherent value, but the farther out that expiration date, the
more "time value" the option has. I think LEAPs max out at expiring 3 years
out. Incentive stock options however will typically have a 10 year expiration
date. Just look at the time value of 3 year LEAPs and you will start to see
how much time value a 10-year option actually has.

More importantly, the primary purpose of giving your employees options is to
increase employee retention and align employees' and investors' goals. The
secondary purpose is to reward employees when their contributions add long-
term value to the company well beyond the scope of their salary. That type of
exceptional contribution is never about 'cranking out code' for a few months
to add some new feature. It happens when key employees bring with them a sort
of magic which helps their team or even the entire company perform at a higher
level. These are the people you want holding a meaningful equity share of your
company.

If you ever run a company, it will fundamentally change how you look at these
things. For example, you start to see _all_ the taxes being confiscated from
the money you are paying your employees (payroll, income, state, etc.) are
taxes that the _company_ is paying in order to reward their employees. There
is no "company share" / "employee share". All that matters is how much money
actually makes it to your employee's bank account. The more efficient the
company can make the transfer of wealth, the less money comes out of company
coffers.

Options, at least for now, are a more efficient way to pay your best employees
so that they are equitably rewarded for the contributions they are making.
After a certain point it's just too inefficient to try to compensate your key
employees with a pay check ("the taxes are too damn high").

When options are part of an offer letter, those options should always have at
least a 1 year cliff. It's pointless handing vested options to a new hire if
they're going to be leaving and exercising them just a few months after
they've been priced. In that case the options likely haven't appreciated, the
employee has likely not made an unpredictable and lasting contribution, the
employee is demonstrating they don't believe in the company, and furthermore
the first year you work at a company is the likely the easiest year to
establish a value for the services you'll be providing, and that should be
paid out as salary.

~~~
tossit1234
This is a throw away account for a couple of reasons...but I wanted to make a
point from the engineering grunt point of view...

>The value of incentive stock options is simply the value of >being able to
profit from increased market cap without having >to actually risk or tie up
any of your own money.

That may be true of the value of the option from a purely market point of
view. That said, unless you are part of the rare group who is part of a
facebook, twitter, or related that can actually trade on the private markets
before an exit event.

The reality is, most engineers working for a startup are gambling their time
and efforts for a single investment. More often than not, those investments of
effort and time do not always result in much of a return.

From experience - a number of startups will push for rates that are "below
market" for the promise of returns. That said, in the same time, day to day
engineers (not the founders) who have experienced an exit has been on the
order of basically $20-30k/year (over the term of one's employment). Often
finding an arrangement with a more established company will result in a better
return during the same time.

If you are in the market to join a startup for the exit, weigh your options
closely. If you are in it to learn, work with a close bunch, and want to build
something interesting, by all means pursue it.

Joining a startup is an investment of time and effort, you should not enter as
a non-founder with the expectation of a monetary return. Most fail.

------
ryguytilidie
I agree that the current system is broken, unfortunately this proposed system
seems more broken.

------
michaelochurch
It makes sense when there's real equity being disbursed. One person has
$500,000. The other has sweat equity. How do you calculate the relative value
of the latter? Come up with a fair salary, and turn it into equity. Four years
is a good starting estimate, but if the person leaves early, then the
assumption on which the equity level was set is invalidated.

I'm against cliffs, though.

~~~
tptacek
Being against the one-year cliff means you either (a) believe you will never
make a hiring mistake or (b) believe that it doesn't matter who holds equity
in your company. Both are dangerous assumptions.

Not having a cliff doesn't even help employees. It creates a culture where new
hires need to be on the defensive from the moment they're hired, because
management is strongly incentivized to release new hires as soon as they can
to contain the damage of bad hires. In cliff vesting companies, management has
a full year to figure out whether someone's going to work out, which is good,
because most equity-compensated jobs have ramp-up periods.

