
A better offer letter - rdl
https://medium.com/@henrysward/a-better-offer-letter-4e9bf61a7365
======
dmurray
I don't like the language of "below is what our lawyers require we tell you".
The lawyers didn't decide that the offer is contingent on a background check,
or that the employment is at will. You decided that, the government insisted
that you communicated it to your prospective employee, and the lawyers
informed you of that requirement. Maybe it's splitting hairs, but it would
leave a better taste in my mouth if the company is took responsibility for
those decisions.

Other than that, the letter is great and shows a wonderful commitment to
transparency.

~~~
epicureanideal
Agreed. I personally would prefer if offers had, as a standard, 2 weeks or 4
weeks severance. If the company is not hiring a high percentage of people it
needs to fire or lay off, it's not a problem. This of course provides more
security to their employees.

All the tech companies are talking about a shortage of skilled workers, but
outside of management the terms of employment are still biased toward
minimizing the company's potential costs. If there were a real shortage we'd
see contractual changes.

------
agentgt
I actually saw this article and was immediately thinking of an additional
product my company could sell (we sell recruiting software).

But then I started playing devils advocate. If your sending an offer letter
wouldn't you want it really personal and not as much about the $$$. Wouldn't
you want to cite memorable and salient specifics about the individual.

This letter seemed like it was completely automated. It didn't seem "sticky"
at all. I think a "personal" letter might have greater success particularly
for smaller companies hiring expensive talent. Obviously you need to state
what the candidate would be receiving for compensation but I think making it
the only focus will lead to price comparisons.

~~~
wdewind
I disagree, not only does this give me a huge amount of insight into the
company (more than I've ever seen from an offer letter), if it _is_ automated
that's actually a plus to me: it shows that they know this stuff is an
important part of the offer and are showing it to everyone. I don't need to
hear nice stuff about myself, I need to deeply understand the deal I'm making.

Plus, there's nothing that stops them from adding a personal cover letter to
this.

------
jheriko
"live your life as though your equity is worthless"

that is really nice to see in an offer letter. a lot of hipster-y startups do
the opposite, and act like its an alternative to hard cash.

~~~
p4wnc6
But in this same letter they encourage you to _not_ do an expected value
calculation about the value of your compensation package. That's extremely bad
advice.

The more I read this letter, the more it looks like they are trying to be
selectively transparent in ways that don't actually cause them to give up any
information advantage over the candidate -- and they are putting overly
specific numbers in (like the magic 77MM figure for an exit) and tossing in
relatively meaningless graphs, and an incredibly meaningless salary
distribution, to add window dressing and make it sound like it's all much more
technical, facts-based, and non-negotiable than it really is.

While it is a move in the direction of transparency, which is good in theory,
this particular offer letter makes me feel like it's just a wolf in sheep's
clothing -- still fundamentally trying to get a candidate to agree to be
priced at a level well below their actual value to the company.

If the letter said "live your life as through your equity is worthless,
_because it is worthless and by agreeing to work for us for a lower wage you
're not likely to recover those lost earnings down the road_" .. then I might
be impressed by the honesty.

~~~
vehementi
Didn't they put the calculations near the top?

I think their point was that the expected value of the company is
approximately the same as the chance the company will Make It.

------
cpks
1) I really like this, for transparency, clarity, and design.

2) The actual numbers there are a little bit scary. 0.03% equity grant? That's
tiny. It's basically worthless.

When did startup equity get so tiny? I'm not singling eShares out here -- just
broadly speaking. That means that if eShares exits past a billion dollars,
those shares won't even buy a house in the area....

~~~
patio11
_When did startup equity get so tiny?_

Non-technical line employee past Series A. See also the top 25% salary of
$64.5k, which is roughly half of what new college grads get offered in
engineering at AppAmaGooFaceSoft.

Fundamentally this is driven by one number which is an iron law in the Valley:
the employee options pool gets 20% of the company. This is 2000 basis points.
It will never, under any circumstances, suddenly have more than 2000 basis
points in it. That's 2000 basis points you can issue to every employee from
engineer #1 to social media marketing intern #6 in year 8.

What's the average equity allocation going to be when you have 400 employees?
Well, it can't be 6 basis points, because 6 * 400 is greater than 2000. Is 400
employees a reasonable amount of a company at IPO? It's actually on the low
side, particularly as companies are waiting longer and longer to IPO.

This means that, as companies get de-risked by succeeding investment rounds,
equity available to employees drops _sharply_. Engineer #1 might get 200 basis
points out of that pool, for giving up a sleepwalk-to-$300k offer from Google
to take a flyer on a company paying $80k which needs to, ahem, build a CRUD
app. (Not casting aspersions on any company by calling them CRUD apps. CRUD
apps make the world go round.) That's still a low number relative to the
amount of risk that engineer is taking and their opportunity cost.

I've heard on the grapevine that the iron law might be relaxed. Investors are
pretty in favor of this, as long as the extra basis points come out of founder
pockets rather than investor pockets.

~~~
poof131
Definitely agree that the iron law needs to be relaxed. You can give special
voting rights to founders stock to make sure they maintain control of the
company, but currently the risk/reward ratio between founders and early
employees is way out of whack. Glad to hear investors are keen on this since I
think it should make startups stronger.

Equity is a key component of modern compensation with better tax implications
and more upside.[1] The “built in the garage” myth needs to die and doesn’t
justify 100-1000x payouts when early employees are taking a significant risk
too in opportunity cost. The main issue currently is information asymmetry as
most early employees don’t see the cap table, don’t realize how much others
own, don't understand how little risk most founders take, and don't know how
much they are truly giving up in total comp from more established companies.

[1] [https://medium.com/the-wtf-economy/what-paul-graham-is-
missi...](https://medium.com/the-wtf-economy/what-paul-graham-is-missing-
about-inequality-a9f7e1613059#.cins445fi)

~~~
tptacek
I wonder, if you do the math on equity compensation versus compensation in the
job market as a whole, if returns from equity aren't just a tiny,
insignificant sliver of overall compensation that we happen to take seriously
because of availability bias.

Either way, I do not believe it to be a "key component" of "modern
compensation". Tech companies can pay strong salaries just like other
companies. They choose not to. That could change, and I think should.

------
stygiansonic
Nitpick: The slide, "How we set your salary", shows a (presumably) normal
distribution (with specified mean and std. dev.) and then uses this to
determine the percentile value. (Since a normal distribution is fully
specified by mean and variance)

However, is a normal distribution appropriate for income/wages? (Or better:
Would this even have an effect on the percentile value?)

~~~
p4wnc6
It also comes off a little entitled of the company. So what if you have some
distribution? Maybe I don't agree with you about where _I_ fall in the
distribution.

A policy to set salaries without considering how far above average the
candidate is is unsettling. It speaks of seeing people as fungible cogs. If
one person won't accept our distribution-based-standard-offer, oh well,
next...

As a candidate I would see that and then begin to question whether other good
people turned them down, and what caliber is the team I'd actually join.

------
hodgesrm
Transparency is a noble goal but a substantial part of this offer letter boils
down to the counter-party in a financial transaction offering you financial
and legal advice. That's a bad practice in transactions and makes this letter
seem more like a sales tactic than something truly open.

The letter would be stronger if they just presented the facts (like revealing
the cap structure, which unusual and interesting) and referred you to a
neutral 3rd party for how to evaluate those facts.

By the way this letter seems to be incomplete because it has no reference to
assignment of technical inventions or protection of trade secrets, which is de
rigeur in most tech firms. There's also no mention of binding arbitration in
the event of disputes. In the event the latter is not an omission and they do
not attempt to impose arbitration I would say these folks are good eggs. The
fact that they don't try to evade legal requirements would have more value to
me than anything else in the letter when judging them as an potential
employer.

------
gumby
Five year vesting? Is this common? I've always used four -- the only company
I've heard of who uses five is Microsoft.

~~~
iolothebard
It's graded vesting, I've always seen it at 5 years (20%/year). It seems they
do 20% after the first year then 1/48th afterward monthly (which is nice).

Legally they can do up to 6 years.

~~~
akavi
I don't think the graded vesting was the surprising thing to the parent
comment, it's that it's five years instead of four.

All the tech companies I've seen use 1 year cliff/4 year total vesting. Ie,
25% after the first year, 1/36th of the remainder monthly.

~~~
p4wnc6
Yes, 4 years is the standard.

------
ryandrake
The capital structure graph is wonderful. Very clear. Would be nice to also
send out updated charts to existing employees every time the capital structure
changes. All startups and VC-funded companies should do this!

------
packetized
Why Palo Alto one day a week? That seems odd.

~~~
erichurkman
We have two offices, one in Palo Alto, one in SOMA. Our product teams are
based in Palo Alto, but client services, customer success, etc are based in
SOMA. We want a lot of cross-pollination between those groups and our product
teams, so we commute to the main office once a week. It works pretty well –
sometimes talking face to face is more effective than through Hangouts or
Slack.

Obvious disclaimer: engineering at eShares.

~~~
Eridrus
Does your commute to the non-home office count as work time?

~~~
phamilton
I did the opposite for about a year, PA to SF once a week. In our company, it
was pretty forgiving. Most people going to SF were in the office from 10:30-4.
I'd leave home and be back at roughly the same times as when I went to work
down the street.

------
sytelus
Simple question: Why not retire whole concept of stock options? Why not just
give RSUs? More I read about how stock options work and how it can ruin you
financially, I just don't think this whole thing is friendly to attract
talent. I would be _super hesitant_ to go to any company offering stock
options instead of RSUs - no matter how good the offer looks on paper. Even
though RSU value can go down to zero, you at least don't end up paying our of
pocket. And things don't require 3 pages of explanations and caveats in your
offer letter.

~~~
marme
the real problem is that options are meant to be given with a strike price so
low they are basically given to you like RSUs, like 1 cent. Instead companies
make the price much higher for no good reason other than to force you to be
unable to execute it until the company goes public. If you have to sink a
large amount of money to buy the shares and then are unable to sell them to
pay the taxes most people wont exercise the option and will wait it out until
the company goes public. People refer to this as the golden handcuff that
prevents you from leaving the company because you lose your options 90 days
after you leave the company. They then take your shares that should be
rightfully yours as you worked there for years and give them to the next new
hire. It is purely for the company to save money. Any company that has a
strike price greater than 1 dollar is being greedy and it should be a red flag
that they dont really want you to have those shares

~~~
slapshot
You're missing the role of the IRS and tax law here.

In order to grant ISOs (Incentive Stock Options), which are taxed less
unfavorably than NSOs (Non-qualified Stock Options), the strike price of the
options must be equal to or above the "Fair Market Value" of the underlying
stock.

The "Fair Market Value" is usually determined by an independent valuation firm
through a process called a "409A Valuation." Firms like SVB, Alvarez & Marsal,
Capshare and others do this.

The later-stage the company is, and the closer to IPO, the higher the 409A
valuation will be.

If a company were to grant below the fair market value, there would be several
bad consequences:

1 - You would owe taxes on vesting -- this means you could owe taxes possibly
as soon as the first day of work, and likely on your 1 year anniversary of
work. You owe these taxes whether you exercise or not;

2 - The company would have to withhold income taxes on your exercise date,
including "employer-side" payroll taxes.

Normally, with an ISO exercise, you may face "AMT" (Alternative Minimum Tax)
but you might not. By contrast, you certainly owe taxes with cheap NSOs.

Blame the IRS.

~~~
sokoloff
Blame Congress. They set the tax law; the IRS implements it.

(This is not intended to be pedantic, but practical. You can vote on who sets
the tax law. [at least most of us can])

------
p4wnc6
The part about exit values is a bit misleading. You don't include anything
about liquidity preference or anything else that would be taken off the top
before common shares are bought out.

And if shares are diluted or liquidity preference is added later after some
fundraising, do you always go back and share all of the specifics of all of
that with all employees? Kudos if you do, but if not it kinda renders the
initial transparency less impressive or useful.

I've generally found the advice here [0] to be a much better proxy for
hypothetical exit calculations.

One other thought: isn't it odd that you're willing to provide a distribution
over salaries to argue for the salary you offered, but you just pull a number
out of thin air for the possible exit?

Why not provide a distribution on exit values (and evidence for why you
believe it), and then show the _expected value_ along with risk, under that
distribution.

At the very least, this way if your distribution over exit values isn't a
severe power law drop off with uncomfortably low expected value, the candidate
knows you're blowing smoke and can walk away.

Instead, you _deny the premise_ that an expected value calculation is useful
towards the end. Wow, that is absolutely walk-away-immediately stuff right
there. "The distribution over outcomes is unknown..." Right, so of course you
should make zero attempt to gather data about it and model it. That's one of
the most bananas things I've ever seen, and it's right in the offer letter!

Picking a number like 77MM is almost like a dirty in-app purchase priming
trick or something. (And no, it's not the least bit redeeming to add a tiny
line at the bottom of the chart stating that it's just an example and not a
forecast.)

If you personally, actually believe no one should engage in an expected value
calculation regarding their start-up compensation package, then why not simply
omit any slides about what the options will be worth? The 77MM thing is a red
herring, and surely you would agree that in the absence of enough evidence to
put together a crude approximate distribution, it can hardly been viewed as a
better alternative to _just make shit up out of thin air_ ...

Pointing out the 77MM example is basically saying "Hey, look at this number!
It might not be related to your shares or your life at all, but look at it
anyway!" On the other hand, if you believe that 77MM is "reasonable" in some
sense, well then you are absolutely talking about some approximate notion of a
prior distribution on your exit value.

[0] [http://www.danshapiro.com/blog/2010/11/how-much-are-
startup-...](http://www.danshapiro.com/blog/2010/11/how-much-are-startup-
options-worth/)

~~~
jsprogrammer
The salary distribution isn't even sourced. It was probably pulled from a
source like salary.com which provides curves that look nearly identical to the
one shown in the offer letter.

I don't think there are similar sources for more complex distributions (option
payouts over all valuations).

It looks like the exit chart is designed to show what happens on the lower end
of valuations (ie. as a lowly employee you don't participate). Also note that
the X axis is serverely distorted: it ranges from $0-$100,000,000, but half
the space is taken up by a blow up of a range of just $7,000,000!

Further still, the information on that page is not consistent. The chart
refers to $2.35 options, but you are apparently granted $2.38 options.

The option payout calculator also doesn't appear to account for your costs to
exercise your options either?

