
Employee Equity (2014) - williswee
http://blog.samaltman.com/employee-equity
======
throwaway984890
I work for a top-5 YC investment (by current valuation) and none of the things
Sam discusses are true of our company:

-Employee equity is much lower than his recommendations.

-We have 90 days to exercise options.

-They refused to tell me what percentage my equity represented when I applied.

-They refused to tell me information about burn rate/money in the bank when I applied.

I still took the job, because money was not a primary motivating factor, but
it is disappointing to see one of the most successful YC investments fit none
of his criteria. He goes so far as to warn readers to "be very suspect of any
startup" that doesn't provide this information. I understand that Sam does not
personally control what decisions YC portfolio companies make on these topics,
but I certainly hope that he guides them strongly towards the recommendations
he has made here.

~~~
edanm
If it's a top-5 YC company, I assume it's relatively older. This post is
probably based on thinking and lessons learned over the last few years - why
would he have needed to write it if older YC companies _didn 't_ have the bad
structures?

~~~
knughit
It is crazy that this stuff that was well down and discussed on HN itself over
the years was somehow unknown to YC. When I was a startup employee noob five
years ago I learned all the advice of this article, from reading HN.

------
lewisl9029
So I've been looking at startup jobs on AngelList lately and came across many
postings claiming to give "significant" equity. And then I scroll up and
usually see something along the lines of 0.1%-0.2%.

Now I'm not exactly an expert on the intricacies of employee stock options,
but simple math indicates that 0.1%-0.2% translates into 1-2 million for a
_billion_ dollar company.

Sure, 1-2 million is a decent amount of money, but that's before taking into
account factors like dilution and opportunity costs of the associated golden
handcuffs. The chances for a given startup to grow to a billion dollars is
minuscule to begin with, and working at an established tech company could
easily net you that same 1-2 million within a few years with none of the
risks. And considering that the founders' equity will be worth hundreds of
millions for that same billion dollar company, calling 1-2 million significant
just feels downright condescending.

~~~
karterk
You have to look at the 0.2% in relation to the salary that they offer. And,
many companies do allow you to negotiate the salary vs options trade-off.

~~~
BinaryIdiot
> You have to look at the 0.2% in relation to the salary that they offer

I disagree. Salary is a real thing that you can use today. Options at a start-
up? Some studies indicate that start-up failure is at 90% within the first 3
years. This means those options, 90% of the time, don't mean anything. They're
literally useless.

The other 10% of the time? Depending on percentage, dilution and exit (IPO?
Sale? Neither?) it's still difficult to get a return on those options in any
reasonable timeframe.

In my opinion you should NEVER sacrifice salary for options UNLESS it's an
established company where you can see how to get your money out of those
options. There is a TON of competition out there for talent, if a company
wants a quality candidate they will pay for one.

~~~
karterk
I agree, but unfortunately that's not how it works. All founders believe that
they can succeed. Every VC believes that their investment is going to become
the next billion dollar company, etc. Ideally, options are the icing on cake,
but the reality is that most companies use options as a way to reduce their
immediate expenses - for start-ups, cash is like oxygen. Most start-ups die
not because of their competition, but they run out of money.

------
rdlecler1
As for more equity: founders have a qualitatively different risk profile than
employees. I've been running my startup for over two years, and I am the
lowest paid person on our team. I have to defer having a family and can't
enjoy the things that my employees enjoy. I also can't ask my employees to
work harder than me, which means I have to work harder than everyone else. A
couple of times I had to cover payroll with my credit card and would have been
bankrupt if we didn't pull through. If things get tough an employee can jump
ship at anytime, while I will be going down with the ship. And at the end, if
I'm lucky I end up with 5-15% of the company. I'm not complaining, this is
what I signed up for, but employees can be very well compensated in today's
market prior to equity upside.

~~~
angersock
Allow me to disagree slightly with this, in the cast of early (number less
than, say, 10) employees. My (hard-earned) experience here is as the first
engineering hire, functioning as engineering lead.

We have the same (maybe even worse!) risk profile: we are being paid below
market rates (because small startup), we probably don't have healthcare or
benefits (because small startup), we have the majority of the burden in terms
of actual leadership (because we probably have been hired with the explicit
intent of having us grow the team, tech, or sales). We don't get the glory or
good press that the founders do (because we're just employees, lol). We don't
get the same access or transparency to the business decisions (because we're
not founders).

If the business folds for the founders, they shut it down, walk away, and
maybe have to file some bankruptcy. In exchange, they get to join The Magical
Founders Club, wherein they can parlay their experience into speaking
engagements, recruiting for new gigs, senior-level business and tech positions
(regardless of skill), and funding from investors.

When the startup folds for early employees (or exits in such a way only the
founders are taken care of), the result is whatever personal harm comes of
stress and health issues (if not taken care of b/c of bad benefits), the net
loss of however much time spent working at below market prices, potentially no
portfolio work (because a lot of companies are shitty about NDAs and
proprietary software), and so on.

For third or forth wave employees, sure, it's just another round of job
hunting. For the first folks who actually had to _build_ the business, well,
_it can really suck_.

EDIT:

A minor elaboration...Micheal O'Church in an essay made an interesting claim
that the founders and employees are no longer considered in the same class,
compared with the 90s.

My observation has been that founders will merrily maintain three orders of
magnitude of equity while doing very little more than their first few hires.
In fact, they may be doing _less_ work, because they are inexperienced and
spend time doing the wrong things because they don't know any better and are
senior enough they feel they can ignore advice.

~~~
knughit
If you are the eng or sales lead at a startup, you can blog and tweet and
sprinkle the magic founder dust on yourself. There is no Office of Dust
Control .

~~~
angelbob
Nope. But the level of interest you'll draw is substantially lower. You can
also declare yourself a celebrity of some other kind -- there is no Office of
Celebrity Control. But similarly, it doesn't work as well.

------
choppaface
This is an old post. It's worth noting that 10/20/30/40 grants did not work
(duh!!) and companies (at least the smart ones) have moved away from them.
It's also worth noting 83b / early exercise is very common now (hurray!) and
can essentially double the value of the equity to the employee (only if they
can take advantage of it). ISOs are very toxic.

One last piece of advice if you're trying to value the equity in an offer:
keep in mind IPOs usually require share prices >= $10 and reverse splits are a
favored tool to make that happen.

~~~
Pyxl101
What was the problem with 10/20/30/40 grants and what kind of vesting schedule
is used instead?

~~~
throwitfaraway
10/20/30/40 is insane without double trigger. There's already enough stories
of people being pushed out of their stock.

The value a super-early employee provides is disproportionately in the first
couple years, so backweighting it is quite unfair. Even if the employee is in
for the long haul, the company may find it economical to terminate before the
compensation increases.

------
rdl
"As an aside, some companies now write in a repurchase right on vested shares
at the current common price when an employee leaves. It’s fine if the company
wants to offer to repurchase the shares, but it’s horrible for the company to
be able to demand this."

Which companies are those (and who are their advisors/investors/etc.) so I can
never work there, or with them? Seriously, fuck everything about that.

------
solidsnack9000
The only problematic aspect of this proposal is not pushing for faster
vesting. Slow vesting creates an adverse incentive for managers and founders;
and in the absence of any right to suspend them, removes the only leverage
that employees have today: departure.

------
lifeisstillgood
Why _options_ at all? At startup valuations is the cost that great?

According to the Buffett worldview (I think) Actual shares align shareholders
interests, unlike option grants, in later stage companies.

To my mind options are a free and usually worthless offer. But actual shares
have a value and significance, not for their monetary worth, but the actual
ownership.

I must admit I am hazy on the details of options - but then as I am a profile
of typical early employee perhaps that's also the point

~~~
slapshot
Taxes.

At least in the US, if a company with a non-zero valuation grants actual stock
to an employee, income tax is due at the time of grant on the difference
between what the employee paid and what the stock is "worth" (I'm assuming the
employee files an "83(b) election" \-- if not then it's even worse).

There are only two ways out: either charge the employee the current "fair
market value" of the stock (which can be very expensive on day 1) or the
employee has to pay taxes on grant (which can also be very expensive on day
1).

By contrast, if you grant ISO options, $0 is due in taxes at grant. $0 is due
when it vests. Taxes only become relevant when an employee decides whether or
not to exercise. As Altman discusses, there's an argument to be made that it
should be 10 years after quitting rather than 90 days after quitting, but
either way it gives the employee a lot more information about whether this is
a good company or not.

~~~
lifeisstillgood
So the big issue is determining worth of the stock. Which suggests that while
the investment points are interesting, a genuine market in startup shares
would be a better way to value them. What are the legal hurdles to either
direct trading in shares in next-Facebook or in trading instruments that
represent the options an employee receives?

I am a fan of open markets and exchanges so this seems a good idea at solving
price discovery (is squares recent IPO should not have been such a surprise if
there was a market pricing its employees options)

------
bjterry
I think it's unfortunate that he doesn't go into greater detail on the
"considerable problems" posed by employees selling their options (or similar
transactions). From the simple perspective of fair dealing with employees, it
seems obvious that employees should be able to do with what they've earned as
they will, so there must be some legal reason that this is inconvenient. If he
actually thinks that the incentive argument is strong enough to override the
moral argument I would be skeptical, but would love to hear a fully fleshed
out argument, given that employers could instead change vesting schedules if
they think employees don't actually deserve to own those shares at those
times.

~~~
idunno246
Shareholders have rights to information, increases paperwork and such. Also,
can be forced to release financials to the public once you have 500:
[http://www.businessinsider.com/rule-12g5-1b3-or-how-
facebook...](http://www.businessinsider.com/rule-12g5-1b3-or-how-facebook-
just-announced-plans-to-go-public-2011-1)

------
inmygarage
While convertible notes and SAFE documents have made seed stage financing much
more streamlined and straightforward, employee equity is still a hot mess in
terms of the legal, financial and tax difficulties that only present
themselves after it's too late.

The biggest issue IMO are those scenarios when private, completely illiquid
stock gets taxed as ordinary income. There should be a way to pay the tax with
the same shares, though counting on the IRS becoming "flexible" is probably a
longshot.

While I agree with the other points mentioned, that is one the largest and
most painful when it presents itself. I do think there's also an opportunity
for companies to be creative about exercising mechanics as well.

------
hitekker
>Option pools are complete fiction; boards can increase them whenever they
want. It should never be used as a reason for not making a grant.

Is this true? I had one startup say they couldn't increase the equity portion
of an offer because they'd have to go to the board and the amount of equity
they had available was already set. Didn't heard a word about dilution there.
Haven't heard what the other stories were/are yet.

~~~
doublerebel
Both are true. (Generally) The percentage of equity dedicated to ESOP is fixed
unless the board has a good reason to change it. Since increasing the ESOP
causes dilution, it would be hard to argue for an increase just to hire a
single employee.

However, some dilution can be good for everyone. Wealthfront and others have
described such a plan:

[https://blog.wealthfront.com/the-right-way-to-grant-
equity-t...](https://blog.wealthfront.com/the-right-way-to-grant-equity-to-
your-employees/)

~~~
kriro
"""it would be hard to argue for an increase just to hire a single
employee."""

For a lot of tech startups hiring a single employee is actually a big enough
deal in most cases to try and argue for it (imo)

~~~
doublerebel
Sorry, most boards and most companies don't value employees that highly, which
is why this post and discussion are still happening. YC companies are outliers
and boards at YC companies are more likely to be better informed and closer to
the employees of the business.

For most boards and investors, they will focus on the numbers on the
spreadsheet unless the potential hire is quite exceptional.

------
karterk
The period (typically just 30-90 days) for exercising the options is the most
unfair of the lot. Most of my friends who left, say, after 3-years, simply
were not in a place to exercise their options because of the financial
implications. People leave for various reasons, and it's extremely unfair for
someone to be in this position after 2-3 years. I wish more companies would
adopt the 10-year exercising period.

------
kspaans
Has anyone been thinking about or seen analyses on the potential changes to
tax treatment of stock options for start-ups in Canada under the new
government?

[http://www.lexology.com/library/detail.aspx?g=86190d96-b169-...](http://www.lexology.com/library/detail.aspx?g=86190d96-b169-4774-885e-db04486ad63d)

~~~
lewisl9029
This is why I have mixed feelings about the Liberal party.

I voted for them because I agree with their platform in principle (i.e. invest
in infrastructure, take global warming seriously, help the middle class
prosper), but between this and reverting of the TFSA contribution limits,
their actual policies makes me a bit nervous about their definition of middle
class. What definition of middle class consists of people who can't benefit
from being able to save and invest 4.5k more _per year_ or from working at a
startup with low pay in hopes for a better quality of life down the line from
equities?

~~~
tempestn
The thing is, basically by definition, no one who is middle class (aside from
perhaps upper, upper middle class) maxes out both their TFSA and RRSP. Even
with the reduced TFSA limit, that's 18% of income plus $5500 per year. So
really all a lower TFSA means is that more RRSP needs to be used to get the
same sheltered space.

The TFSA certainly has advantages: flexibility being the biggest one. No
bookkeeping, put money in whenever, and take it out with minimal restriction
(aside from waiting until Jan. 1 to re-contribute). That said, as long as you
invest the tax refund you get from contributing to the RRSP (or even better,
file a T1213 so you don't pay those taxes in the first place), the RRSP is
arguably a better retirement savings vehicle for most people (ie anyone who
expects to be in a lower tax bracket in retirement than while they are
contributing). Also, the lack of flexibility makes it more likely that the
money will still be there in retirement.

The TFSA is great, and selfishly I'd love to keep the extra space. I have to
agree though that it (the larger size, not necessarily the TFSA in general)
disproportionately benefits the wealthy, and that government revenue would be
better spent elsewhere.

~~~
lewisl9029
This post got me interested in the actual statistics of what income range the
middle class represents in Canada, and I found an early 2015 Macleans article
[1] listing the following statistics:

\- Lowest 20% individual income is 18717 and below

\- Highest 20% individual income is 55498 and above

That definitely brought some perspective to my view on this issue. I guess my
views on what qualified as a middle class income was pretty heavily skewed
towards my own salary range. Now I definitely agree with the conclusions made
by you and the Liberal party regarding the TFSA contribution limits.

[1] [http://www.macleans.ca/economy/money-economy/are-you-in-
the-...](http://www.macleans.ca/economy/money-economy/are-you-in-the-middle-
class/)

~~~
tempestn
That's why politicians love to cater to the middle class, right? Almost
everyone self-identifies that way.

Edit: Ha, wrote that before clicking through to your link, which leads off
with the same point in almost identical wording.

Interesting numbers in general too. Thanks!

------
caseysoftware
The last startup I worked at had a small flock of employees that hit the 4
year mark this year. Unfortunately, most of them didn't do any sort of early
exercise so they paid taxes on the difference after they exercised.

The only thing that saved a few of them is that the company offered a buyback
program so they were able to flip some (all, in some cases) of their shares to
cover the exercise and the taxes.

------
puppetmaster3
Great idea Sam. I assume going forward you will be asking for less equity for
your LPs.

------
rokhayakebe
Quite frankly there is a need for a third party (an honest broker) that come
handle all this on behalf of employees, along with salary, benefits, 401k, and
other related financial matters.

When people cannot balance their checkbooks, and cannot make simple financial
planning for the next 6 months, how are they to understand these seemingly
complex structures.

UNLESS SOFTWARE.

~~~
Too
What you are describing sounds like a trade union and collective agreements.

~~~
looptwasafail
Not a "trade union"; a "professional association," like the AMA or ADA.

~~~
gaius
A guild.

~~~
looptwasafail
Don't call it that. The idea is to avoid words like "union" or "guild" that
arouse suspicion. Professional associations like the AMA and ADA fly under the
anti-union radar.

~~~
gaius
Whatever we call it, it will have to be a new thing. What exists right now in
the UK is the BCS who are a laughing stock among any practitioner. Even the
respected professional associations such as the IMechE barely look out for the
interests of their members, not compared to the BMA at any rate.

