
Startup Stock Options – Why a Good Deal Has Gone Bad - furkansahin
https://steveblank.com/2019/04/10/startup-stock-options-why-a-good-deal-has-gone-bad/
======
MobileVet
I was part of a very well know incubator and a very early employee at a
flagship company. Founder blew tons of cash and dilutions but that is part of
it and I didn’t mind.

What was ethically shady was shortly after I left with 4yrs vested they
decided to restructure the entire company so they could attract investment.
They took all the debt from the original company and put that in a shell
company that then owned a portion of the new company. Guess where early
employees’ stock went? The debt vehicle.

I actually did make some money on the eventual exit, but probably 1 or 2
orders of magnitude off of what it would have been if my stock was in NewCo.
Consider the tech we built was a major driver of the acquisition, it was
frustrating.

People are greedy, no matter how nice they are to your face.

~~~
rottencupcakes
Curious why you don't mention their name? Feels like there's little recourse
against this sort of thing other than reputation risk, why not out them
publically?

~~~
entangledqubit
While I'm sure it would be quickly sued out of existence, are there sites
specializing in this sort of information? I'd love to see names of
founders/early investors/board members/... easily associated with these kinds
of decisions (i.e. track records of the good and bad). I have to send feelers
out into my network to dig up this kind of information but that's not an
option for a lot of people new to the industry.

~~~
CPLX
Shame we don’t have fuckedcompany.com around for this any more.

~~~
njepa
Valleywag was essentially that, but did get sued out of existence.

------
kabdib
I made a bunch of money from ISOs at large, established companies.

I made _zero_ (well, negative, really) from startup stock options, even before
things got really shifty in the 2000s. One startup that I left, that is now a
billion dollar company, simply decided to "extinguish" the shares I bought a
few years after I resigned. I was probably cheated, but it's not worth the
effort to go after them and they know it.

Treat startup options as wastepaper. You might get lucky, but it's really,
really unlikely.

~~~
deanmoriarty
I would be really curious if someone could shed some light on how a healthy
company could simply decide to "extinguish" exercised shares. Like how exactly
would they go about doing that, and do you have examples I can read up
describing where and how this happened?

I would understand if that happened when the company is in trouble (e.g.
valuation dropping below the last preferred valuation, so preferences kick in,
or as a result of the company having to honor very high liquidation
preferences), but otherwise?

The only couple very shady cases I know about where Facebook with the
Brazilian cofounder (with a complicated legal process where they
reincorporated the company into a new one or something like that) and Skype
with the employees (who naively signed a clawback clause in their agreement
stating that the company could repurchase shares in the future at the original
grant value even if their price skyrocketed, or something similar).

In all the other cases I know about where employees got screwed, it was
because the company saw its valuation plummet and the investors preferences
kicked in, in one way or another, so "extinguishing" common shares in that
case is "expected" and more similar to a public company declaring bankruptcy
and seeing the shareholders being wiped out while the bond holders can
generally recoup something, since they have "preferred" terms inherent in the
nature of the bonds.

~~~
xrd
This is what startups pay a lawyer to do. It's not that hard: restructure the
company ownership in a long document with complicated terms. Get the employee
to sign it and voila, early employees are screwed. The only real response is
just not signing, but they will tell you the company will die if you don't do
it, and you probably will just take it rather than fighting. At least I did.

~~~
deanmoriarty
But signing something without not understanding it is too naive.

So, assume I already left the company and exercised a big bag of common
options and so I have a decent amount of common shares. If they tell me to
sign something that looks shady I just say: "No, it looks shady".

What then, can they do?

~~~
stingraycharles
Send to lawyer's office to pressure you.

It doesn't take a lot of imagination to see that this can happen. People are
generally naive, and there are just a few that will resist and fight.

~~~
johannes1234321
Especially if you depend on the money the job pays _now_ and you can't pay a
legal battle while searching a new job.

~~~
xrd
This. Stated another way, you need to make a decision in the very small
timeframe about the tiny chance of success in the far away future, versus
guaranteed success (your next paycheck) in the very close future.

------
thesausageking
He glosses over an important point: it's now typical for founders to take
money off the table as part of financing rounds, sometimes as early as the A
round. Founders will request it as part of a funding round and, there's so
much competition to invest in the top startups, that VCs go along with it.
Decades ago, this wasn't the case. Founders waited for the IPO like employees.

If you're an engineer sitting on $5m of vested stock in a decacorn, it makes
financial sense to sell some of it. Today, companies make that really hard to
do.

If employees could easily sell their stock while the startup is still private,
this would solve a lot of the problems.

~~~
dalbasal
If early liquidity wasn't an option for founders, this massive pre-
ipo/private-ipo market wouldn't exist.

Without early liquidity, a pre-ipo zuck/kalanick/etc. would be a paper
billionaire with $0 in the bank and >$1bn "invested" in a risky tech startup.
That's not financially or mentally sound, even by their risk lovin standards.

If investors demanded every penny go towards growing the business, those CEOs
would just IPO earlier to get liquidity.

It's a necessary alignment of interests, if investors' interest is delaying
the IPO.

Employee options holders can't just decide to take a company public, so their
interests can stay misaligned.

~~~
mavelikara
> Employee options holders can't just decide to take a company public, so
> their interests can stay misaligned.

Not for long, though. The standard HN advice of "value options at $0" came
about from a generation of employees conned by this, as you call it,
misalignment.

Also, when you trap employees into heavy golden handcuffs, abuses of power in
line management thrives (as what happened at Uber).

~~~
antt
Given tech workers complete inability to form a union or guild I wouldn't bet
on it.

~~~
empath75
Tech workers now have a lot of power in negotiations and are using it to
demand high salaries. If options were ever offered to me in lieu of salary I
would simply say no.

~~~
antt
Do we?

Having a look at the revenue generated per person in Facebook vs General
Electric we seem pretty shit at negotiating. The revenue per employee at GE is
400,000 at Facebook it's ~1,400,000. I'm not hearing FB paying people ~4 times
the wages that GE does. Most I've heard is ~1.5 times for similar positions in
similar locales, having friends in both.

We have convinced ourselves we're special snowflakes while the lucky and
ruthless laugh all the way to the bank.

------
aiisahik
The article is right but misses the biggest problem with options: the need to
spend money you may never get back in order to have a chance to be paid
anything. There are two ways this happens:

\- You leave the company after 4 years and have 30-90 days to exercise. The
exercise will cost you $20,000. The company is nowhere near an exit. Do you do
it?

\- When you exercise you are either immediately hit with a tax bill for NSOs
or you get screwed on AMT with ISOs. You suddenly owe money to the IRS simply
because the company received a very high 409A valuation just before you left.
A liquidity event is nowhere in sight.

You've taken a huge gamble by joining a fledgling company that pays little
with a low probability of success. You toil for years an overcome tremendous
odds to just keep the company alive. But now when you leave the IRS and the
company itself wants you to take a final gamble with your hard earned cash.

I used to be an attorney who drafted option agreements. Now I've been at two
startups as early employees. The reason why this never comes up is because
employees do not know what they are getting themselves into. The options are
worth very little BY DESIGN. Unless you are among the first 5 hires, you will
have no leverage to negotiate a better deal.

~~~
nojvek
A number of startups screw over their employees with options. 90 days is a
terribly short exercise window. Kinda like a scam in a way.

But not all startups are like that. Where I work (Mixpanel), that window is 5
years. Which I feel is a much generous and fair offer.

With stock options, I pay no tax. If the company liquidates, then I convert
the options to real stock (yeah i’ll have to pay money to do that). If things
go better, I hold that stock for one year and when I sell, I pay capital gains
tax at a much lower rate on the gains.

But. Big BUT, there’s a lot of assumptions. Things may not go well, may it
doesn’t get valued as much, may be it takes longer than 5 years. Lots of may
be’s. That’s part of the startup gamble.

We are hiring btw if anyone is interested in analytics space. DM me.

~~~
chauzer
But you have NSOs though, not ISOs right? From what I understand, ISOs are
required by law to have a 90 day exercise window, so companies that offer more
than 90 days after leaving a company are having ISOs converted to NSOs. When
you exercise the NSOs, you still will have a tax bill.

------
save_ferris
Why don't startups offer actual equity grants instead of options? It seemed
strange to me when I was starting out in my career that I needed to take a
lower salary and options to exercise upon my exit, which wound up costing me
thousands of dollars from that lower salary.

Two years later, one founder forced out his two other cofounders, started a
new company in the exact same space, and poached his best employees,
essentially jettisoning the cap table in the process.

The small frys who exercised their options were totally screwed. That was a
real lesson for me on how crazy this stuff can be.

~~~
andrew311
Share grants would be seen as income by the IRS and most states and taxed at
their Fair Market Value. Options on the other hand usually qualify as
Incentive Stock Options that aren’t taxed at grant time and “when exercised,
it isn't necessary to pay ordinary income tax. Instead, the options are taxed
at a capital gains rate.” [1]

Options are better up front because there is no outlay for the employee. They
are a hassle down the road. However, if you exercise during a liquidation
event your tax liability is probably covered.

Stock is a pain upfront unless granted before the first round of funding or
any real revenue when the stock value is very little. They are easier down the
road, though.

Just my two cents. HackerNews, please correct any errors in logic or how this
stuff works.

1\.
[https://www.investopedia.com/terms/i/iso.asp](https://www.investopedia.com/terms/i/iso.asp)

~~~
mlthoughts2018
Companies should either:

\- award RSUs that have a liquidity event as the final vesting requirement and
don’t expire (so you are not taxed until you can sell, and don’t risk losing
what you already earned), or

\- pay annual cash bonuses that are “grossed up” so that the after-tax amount
of the bonus is enough to cover the taxes levied against the employee’s value
of actual stock or vested RSUs, etc., and ensure the company bears that tax
burden.

I’d be more forgiving to fully bootstrapped companies, which are often fairer
to employees anyway.

Not willing to compromise at all for VC-backed companies, period. They also
should be paying full market wages and the equity portion is solely meant to
be competitive with the equity compensation or bonuses at public companies.

~~~
zrail
The IRS considers RSUs that don’t have an expiration date as being close
enough to actual shares to be taxable income. There has to be a “substantial
risk of forfeiture” to qualify for deferred taxation.

~~~
mlthoughts2018
In that case, then only the second suggestion.

~~~
phamilton
That's usually referred to as Phantom Stock, and is a thing.

------
seibelj
Valid reasons to work for a startup:

\- You are a cofounder.

\- You have little experience and you are using this to break into the
industry, and get experience on many different technologies ("wear many
hats").

\- They are working on a very specific problem or using a specific technology
that you strongly desire to work on and it's difficult to do it anywhere else.

\- You want to work a certain way (remote, on the beach, whatever) and they
are willing to go this route.

Invalid reasons for working at a startup:

\- Getting rich off stock options.

\- Making a lot of money in salary.

\- Work / life balance.

\- Stability.

~~~
ohaideredevs
Not exactly a unique experience, but my .05 - I started of at a startup with a
"lol just do it" attitude to whatever the problem was. Worked 12 hours a day a
lot, was stressed out all the time, didn't have a life, got calls at odd hours
to deploy...but, if I didn't have that experience, I wouldn't have grown
nearly as fast. Got to see all aspects of the products and the consequences of
the decisions we made early on. Learned more in a year than in the last 3 at
corp/consulting jobs. Then again, maybe it was noob gainz and I made at least
a third less than I would have at a corp job.

Not sure if going back to a startup would be nearly as beneficial in terms of
"levelling up." Seems like the game now is to grind whiteboard before I get
too old for Google.

A friend grew from junior developer to director of IT at that startup, so
there's that aspect as well, though I have also seen a number of startups hire
leadership outside.

~~~
mdorazio
FWIW, I've worked with a lot of entry-level people at normal companies over
the years and would estimate that noob gainz are 30-50% higher in startup land
for the first 1-2 years of career, maybe 10-20% higher the next two, then flat
or actually lower than corporate thereafter. I think it comes down to 1)
startups pile a lot more responsibility onto their young hires than normal
companies are comfortable with + 2) startups have a lot higher tolerance for
failure + 3) small companies in general don't have headcount for specialized
roles, so everyone has to level up in multiple areas.

~~~
jpm_sd
I've worked at two startups, then a BigCo, and now another startup. The
wearing of many hats was definitely a leveling-up experience, but I felt that
I plateaued in just the way you describe. Equity from both of those first two
startups is now worth zero.

In my years at BigCo I worked with engineers who have 10-20 years more
experience than I do. Often felt like the dumbest guy in the room. I learned a
ton. No comparison. But I would never have gotten the job there without my
previous startup experience. And without that experience I'm not sure I would
even have been able to learn from my BigCo co-workers so successfully.

I got tired of corporate politics and a high traffic commute, so now I'm
happily back in startup land.

~~~
twic
I think there's a similar dynamic with consulting - ThoughtWorks / Pivotal
Labs type places. You get shunted around between many different projects,
there are never enough people, so there are opportunities to take more
responsibilities, and things are often a bit fluid, because a consultancy
coming in tends to (should!) crack the organisation a bit. There are downsides
to all of that, but it's also a way of getting wider faster, if not getting a
lot deeper.

~~~
jacques_chester
I worked in Pivotal Labs for about two years. It is an _amazing_ place to
learn the craft.

------
btilly
To his suggestions, I have another.

Offer internal Dutch auctions on a regular basis to provide an opportunity for
investors/the company/etc to buy stock from employees at a reasonable price.
This makes the value of the company, from the point of view of the employee,
not "funny money" but something very tangible. With an opportunity to cash out
long before it is public.

~~~
kurthr
I'd be very careful with that... there are all sorts of internal/external
events that can influence the perceived value of the company and information
about them is not evenly distributed. Creating an environment where
individuals in some groups can profit from this disparity (or even
misinformation) is asking for ugly office politics.

~~~
btilly
All possible solutions come with downsides. It is still an option to consider.

------
iblaine
IPOs are increasingly turning into an exercise of the Greater Fool Theory [1].
I'm not sure if it's investors or employees who are the bigger fool. Investors
can fall back on ratchets [2]. Lyft may sue a bank for helping pre-IPO
investors short sell [3]. What does seem to be clear is the widening gap
between smart money (investors) and dumb money (employees).

[1]
[https://en.wikipedia.org/wiki/Greater_fool_theory](https://en.wikipedia.org/wiki/Greater_fool_theory)

[2]
[https://www.investopedia.com/terms/f/fullratchet.asp](https://www.investopedia.com/terms/f/fullratchet.asp)

[3] [https://www.cnbc.com/2019/04/06/lyft-is-threatening-
litigati...](https://www.cnbc.com/2019/04/06/lyft-is-threatening-litigation-
against-morgan-stanley-accusing-the-firm-of-supporting-short-selling.html)

------
l2c1928
It's bad for most people, but when it's good it's really good.

I was lucky to join a now unicorn as one of the first few dozen employees a
few years ago. I forward exercised with a few thousand out of pocket (section
83b) an equity grant now worth around $1.5m. Because I forward exercised my
options at a low valuation I didn't have to worry about paying taxes if I
exercised at a later time when the company's valuation grew. It also meant
that my gains became long-term capital gains, and thus taxed lower, as soon as
possible after I vested each month.

~~~
mlthoughts2018
Your story still leaves a lot of room for skepticism. For one, 1.5MM is not
actually a very good deal for an engineer in your situation, and likely the
company gave you very unfavorable terms. Electing 83b is a fairly irrelevant
detail in your story as it only affects taxes, not the outcome of the company.

Your shares are likely going to get hugely diluted exactly because of growth
investing like in the article. Investors and founders will essentially trade
away your share of the company in new rounds, while they get huge payouts for
it, your shares may grow a small amount, again realized over some long time
horizon.

Let’s take an extreme example and say your shares double in value (not likely)
through the remaining funding rounds, and eventually in another ~7 years you
can actually sell them in some liquidity event.

So that’s $3 MM (gross) over 10 years. That works out to be $300,000 / yr in
equity compensation.

Certainly very high. But not any kind of crazy number. Definitely there are
rank and file engineers in FAANG companies, Wall Street, and other industries
getting annual RSUs or bonuses well beyond that without having to wait 10
years to realize it or have the risk that it folds or you get laid off and
lose a bunch of future value, and have a high base salary, good benefits, and
good work/life balance the whole time.

Given that even a crazy outcome like $3 MM annualized over 10 years isn’t
_significantly_ better than other reasonable total comp opportunities, this
overall paints a really bad picture for start-ups.

Your case, which is nearly about the best lottery ticket someone could get, is
only slightly better than a competitive position at many public companies,
finance shops, etc.

Meanwhile, almost all start-up outcomes would be far worse.

~~~
l2c1928
There's a myth that you can't realize gains if a company doesn't IPO...I've
already sold some shares in a tender offer. There is an active secondary
market for shares if I chose to sell more.

Not sure what your point is about $3MM over 10 years. Why would you divide it
over anything other than the number of years you actually worked at the
company?

You've assumed I was a senior engineering hire. I was in a junior non-
technical role a year out of college.

~~~
mlthoughts2018
Early selling for employees is exceedingly rare and also often on bad terms,
this was mentioned in the OP article. Again, it’s lucky that you were able to,
but is such a wildly unlikely outcome that functionally everyone else has to
ignore that aspect of your story. To boot, being able to sell in a secondary
market transaction only after about 3 years is even more ridiculously rare (to
the point that it makes me question if your whole story is even true, or just
some trolling). The few companies I’ve heard of allowing that type of thing
(late pre-IPO Spotify, Squarespace), only allowed it after early employees
like yourself would have waited 7-10 years before getting any payout.

> “Not sure what your point is about $3MM over 10 years.”

Please re-read my comment to help understand.

> “You've assumed I was a senior engineering hire. I was in a junior non-
> technical role a year out of college.”

Where did I make an assumption about junior vs senior level?

As for your claim you were given this grant for a non-technical role 1 year
out of college, I think it’s more likely you’re just lying to troll this
comment thread. Just in a Bayesian sense, the conditional probability that
you’re lying is higher than that this is a true story.

It’s not impossible that this could have happened for a non-tech hire with no
experience, but that mere possibility also is irrelevant compared with the far
greater probability that this is just made up.

~~~
l2c1928
I never said how many years ago I joined...by a "few years" I meant 5. I said
I sold some shares via a tender offer, which are company sponsored, and last
year was the first time I was offered that opportunity. Companies can't block
you from selling on a secondary market unless you've specifically agreed to
that as part of the initial grant. It's far more common that they have the
"right of first refusal" clause which means they get the chance to buy back
your shares before selling to a third party.

I don't think there's anything particularly special about my situation other
than I was fortunate to join a now unicorn early on.

------
bitL
It's sad that VC/founder's greed and throwing early employees under the bus
became the norm :-( I guess that's a sign of maturity of our field and an
indication for bright people to move on to take risks directly, offer their
services to companies as legal persons and ignore startups as employers.

------
mlthoughts2018
It’s not just that the structure of option grants has worsened (also,
expiration practices still are pretty bad for employees), but also that the
valuation of the option grants is often way too low.

If, as in the article, a start-up is effectively offering a low salary + a
lottery ticket and expecting candidates to see it as at least equally as
valuable as a high total comp figure from a competitor, then the lottery
ticket has to be priced very highly, to drag up the expected value after
accounting for all the high likelihood outcomes that have poor payoffs.

Add to this the fact that, despite false promises, you won’t get more freedom,
career opportunities, cutting edge work, etc., at most start-ups than you
would at even average-case public companies, and it’s a bleak picture. No
aspects of the work experience will create additional forms of “payoff” that
help offset the low salary and poor lottery ticket equity, and in many cases
the work environment will be toxic, full of immature behavior, unprofessional,
etc., and candidates should really be requiring _higher_ compensation than at
a big company, to deal with the start-up dysfunction.

When the option valuation (even assuming a hilariously unlikely high value
exit or IPO) is eventually diluted and spread out across ~10 years that you
have to delay getting that money you earned (or even lose it all because of a
layoff + poor expiration policy), and at best it turns out to be the
annualized equivalent of a pretty modest bonus, it’s just deeply not worth it.

You will not have gotten anything else out of it (specialized experience,
leadership or business skills, networking, oddball perks) that offsets the
income you could have been earning almost anywhere else.

~~~
commandlinefan
I was awarded RSU's at my last company (a perpetual startup) - not millions,
but maybe tens of thousands of dollars. I had a signed contract that
guaranteed them. But then the company merged/consolidated/de-consolidated/re-
merged and shuffled around so that when they finally got rid of all of us,
they said that those stock options were worth nothing, too bad, so sad. And
what am I going to do, spend $100K on a lawyer to maybe recover a quarter of
that ten years from now? And they know we won't, that's why they get away with
what they get away with.

~~~
CalChris
I don't know but you may have been the victim of 'liquidation preference' (and
participation). Your perpetual startup never went public. Each of the
investors, seed, A, ... has a preference in case of a liquidity event (exit)
over earlier investors and a participation (multiple) as well. Your RSU was
just at the bottom of the heap and there was nothing left.

The founders would have had something equivalent to your RSUs but ... they
were doing the negotiation. For example, IIRC, Anthony Levandowski cut his
employees out when he sold 510 to Google. (So it shouldn't have surprised
anyone at Google when he later screwed them as well.)

[https://www.invigorlaw.com/key-term-sheet-provisions-
liquida...](https://www.invigorlaw.com/key-term-sheet-provisions-liquidation-
preference/)

Edit: the article even says it:

    
    
      Today, if you’re an employee you’re now are at the bottom of the stock preference pile.
    

In this case, I'd only work for a startup if my preference seniority was equal
to that of the founders. And the article says that too:

    
    
      If you’re one of the early senior hires, there’s no downside of asking for the same Restricted Stock Agreements (RSAs) as the founders.

------
dalbasal
The weird thing is that this state of affairs (a) doesn't save investors very
much dilution.

Meanwhile, (b) options do a much poorer job of motivating/recruiting
employees, (c) an even worse job of aligning interests and (d) the
risk/downsides aren't reduced at all.

If stock "values" start to drop, it can really make a company feel like a
sinking ship. That's the risk of equity sharing. They can make bad times
worse. This happens no matter how distant/unlikely a liquidity event is.

The solution has been mentioned all over this thread: make them liquid
somehow.

Alternatively, stop doing options and do something else instead. Aren't
startups supposed to be breaking conventions and being creative?

I agree this Steve B's implication, the average stock option scheme is a
vestigial artefact. Unless you're in a position (and of a mind) to negotiate
terms, it's a checkbox.

------
rmrm
having worked at a lot of startups with various outcomes, I've come to firmaly
believe the net preset value of your options is actually correct. If you take
all the shares I've ever had options given on, and multiplied them by the
strike price, it isn't far off from the ultimate amount of money they've been
worth. The variance is high between each one, but taken together..

If you get a 100,000 shares at 0.10 each...they are likely over multiple
trials going to be worth around 10K. Act accordingly.

------
gwbas1c
I joined a company where my offer letter had two salary options: A higher
salary with less stock, or a lower salary with higher stock. (It wasn't a very
large difference.)

About a year later, we were sold, and the payout from the stock did not
justify the salary difference. In order to justify the difference, the payout
needed to be about 20x.

When I confronted the CEO she just changed the subject, and didn't understand
why I stopped keeping it a secret that I was looking for another job.

~~~
anonytrary
To clarify, were you expecting a 20x payout on your stock, or was the payout
was 20x less than what you were expecting? Either way, sounds like you got
bamboozled when you signed the offer letter. I'd almost always take a higher
salary at a startup. The vast majority of startups aren't anywhere near
Facebook or Google.

~~~
gwbas1c
I didn't expect anything with regard to stock value. I know that most startups
are fly-by-night, and if the sale didn't happen when it happened, I was going
to go somewhere else and leave behind my options.

The reason why I confronted her had less to do with the payout from the sale,
and more to do with her general attitude towards compensation.

To put it bluntly, she continued to pay well below market rate, and if she
didn't pay up, everyone was going to trickle out the door as we got market
rate jobs elsewhere. No one works in an aqui-hire situation below market rate.
Her views on compensation were so bad that she had me at the same starting
salary that I had when I worked under the same parent company, 5 years prior.

Needless to say, shortly after my conversation with our CEO, she was fired by
the parent company, and the new owners promptly fixed the compensation
problem.

------
markbnj
> As Venture Capital emerged as an industry in the mid 1970’s, investors in
> venture-funded startups began to give stock options to all their employees.

I don't understand this part of the post. When do "investors" grant stock
options? When I did a startup back in the 90's the founders owned all the
equity the day after the company was incorporated and a stockholder agreement
signed specifying what each of us owned. We then sold equity to angel and
venture investors by carving out a piece of the common in the former case, and
issuing new preferred shares in the latter. Later the company granted ISOs to
employees by an act of management, ratified by the board which did of course
include investors. But at no time would I have said that the investors "shared
their ownership" with employees. All current owners were diluted by the
issuance of new shares or rights to new shares, but it was never a flat-out
decision by the investors to share what they owned. It was a management
decision.

~~~
breischl
I imagine that was just a shorthand or maybe he misspoke. It would be a
management decision, but they would most likely need to clear it with the
investors. Frequently the funding deal between investors and management will
even carve out a chunk of equity for incentives.

------
gumby
A super trivial and tangental point but Fairchild was funded to make discrete
semiconductors -- specifically transistors. In those days they were all
assembled by hand! The chip (IC) was invented a year or so later.

------
jpmattia
I think an important point was missed: Steve writes:

> _The first big idea is that unlike in the 20th century when there were two
> phases of funding startups–Seed capital and Venture capital–today there is a
> new, third phase. It’s called Growth capital._

It used to be that The Public would provide the "Growth capital" via an IPO;
Now the public is providing, I suppose, post-Growth capital via the IPO. In an
current era where the market believes P/E ratios of 24 make sense [1], that
has so far been viable.

If more historically normal valuations return to public companies, or if the
latest crop of unicorns fail to provide great returns for the IPO investors, I
strongly suspect this new division of funding phases will come to an end.

[1] [https://www.macrotrends.net/2577/sp-500-pe-ratio-price-to-
ea...](https://www.macrotrends.net/2577/sp-500-pe-ratio-price-to-earnings-
chart)

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JohnFen
I've never really considered stock options to be a good deal, really. There's
a reason they're widely referred to as "wallpaper".

Options are a bit like lottery tickets. All other things being equal, it's
marginally better to have them than not, but their existence has never
affected my decisions about where to work.

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jordanwlong
Check out the Employee Stock Option Fund (www.esofund.com), we help employees
fund the cost of exercise and any taxes. Our funding is on a non-recourse
basis so we can help alleviate any risk (especially given the long time to
exit that is mentioned here).

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shay_ker
> Better yet, offer restricted stock units (RSUs). Restricted Stock Units are
> a company’s promise to give you shares of the company’s stock

Do startups commonly offer RSUs? I suppose my follow-up is whether it's easy
to do, using Carta or something similar.

------
brownkonas
I think another correction to the diminishing value of stock options and
longer IPO horizon is that insane hours are less common now, even at the peril
of the success of the median startup. It's also a result of the tight tech
labor market and the wealth divide between new startup comp and FAANG comp.
Why should I would disproportionate hours if there's another job with a more
certain outcome that does not require this.

Curious if others have seen a drop in hours expected from your average startup
(separate discussion if longer hours is a key ingredient and overall a good
thing).

~~~
president
If anything, I have only seen an increase in work hours in my peer circle.
Which startups are cutting hours?

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thebyrd
I've made money on my ISOs at every startup I was an early employee of. The
secondary markets are fairly liquid if you know how to navigate them. None of
the companies were in the Bay Area either.

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geggam
From my experience most startup stock are common so they dont get paid until
the preferred get settled up.

You can have 20k shares of stock and walk away with nothing even in an a
successful IPO

------
olliej
This is exactly the point I have been making: the equity grant structure for
startup employees is not (or no longer?) compensates risk for employees

------
m0zg
It never was a "good deal", it was always a lottery. And one that you're set
up to lose if you're not a co-founder.

------
dgudkov
>VC’s typically have pro-rata rights to keep their percentage of ownership
intact, but employees don’t

Either all shares must be diluted, or none. When someone's shares are diluted
but someone's not, it's a scam. The concept of privileged shareholders is just
wrong.

The whole system looks overly complicated and corrupted.

~~~
6gvONxR4sf7o
I believe pro-rata rights are rights to invest in further rounds. They can
keep their percent ownership only if they contribute more money. This is like
employees on vesting schedules, who can continue to get more options by
continuing to work. Startup shares are a shitty deal, but this doesn't strike
me as one of the reasons.

~~~
jm20
Correct, you don't just "gift" them more equity, you have to pay more (usually
a much higher per-share price) to keep that equity.

------
habosa
There are so many absolutely horrifying stories in this thread about startups
deliberately restructuring to take money away from rank and file employees. Of
all the reasons I've been told not to take startup stock, this one is new to
me.

What can be done about this? At the very least can we name and shame?

------
matchagaucho
Sure companies are worth more in 10-12 years. But when VCs are managing 7 year
funds, their LPs may require returns sooner.

I'm surprised this article didn't mention Investors ability to simply hold
shares post-IPO. Leave it to the LP pension managers to decide how much upside
they want to risk.

------
dustingetz
If options are busted how should a startup compensate and align employees?

------
pmarreck
I feel like you almost need a business degree as a work-seeking technologist
to understand all the financial structures and future implications at play,
here

------
fisherjeff
IMO, startup options should be treated like lottery tickets: some people might
win big, but the EV is ~0.

Negotiate compensation accordingly.

------
naveen99
Other employees can liquidate shares in the secondary market too, fairly
easily.

------
jiveturkey
this is a contorted, misguided, wrong argument. as evidenced by the lack of a
proposed solution.

i could refute his arguments point-by-point but i'll just highlight a few.

1\. in a couple of places, he notes that "employees" put in as much hard work
as "founders" but don't receive equivalent compensation. this is an absurd
comparison. the amount of hard work is irrelevant, it's the value you bring to
the table. part of that value is via hard work, and part is via the unique (or
not) skill set. the unskilled janitor or maintenance man might put in hard
work, but is an easily replaceable skill. if in fact you think you are
bringing as much value as the founders, but aren't getting rewarded, the
solution is very, very, _very_ simple: become a founder.

2\. _So while the VCs gain the upside from keeping a startup private,
employees get the downside._ What? Given the very well known, no excuses for
not knowing this, fact that the large majority of startups fail, VCs take 100%
of the risk, by virtue of laying out 100% of the capital. The employees get a
salary during this time (no "downside"), and any upside is _free money_ to
them. Now this isn't a perfect rebuttal, but steve's argument is also lacking
in nuance so i'll leave it there.

3\. _VCs have moved the liquidity goal posts _but_ haven 't moved the vesting
goal posts._ Is he suggesting the vesting schedule needs to be _longer_?? To
match liquidity??? this is nonsensical.

the overriding problem, he suggests, is this new "growth capital" phase. i
don't agree this has made the stock option deal "bad". yes, it changes the
nature of it, but not to as negative a degree as he implies. if he wants
companies to IPO earlier, well what happens is that your 1 basis point of
options will be worth 10x less than if you stick it out. it's like people
complaining about dilution: dilution isn't a problem ... your net cash value
increases with each round. it's not really feasible to have the hoi polloi be
able to liquidate options at each round.

------
dman
Thank you for writing this! This discussion is long overdue.

