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10-Year Exercise Periods Make Sense (quora.com)
319 points by sama on June 27, 2016 | hide | past | web | favorite | 143 comments

I agree with Adam's post and intensely disagree with A16Z's post on this topic.

I don't think companies should take back stock compensation on a technicality. It'd be silly to even discuss taking back cash compensation when someone leaves a company!

I appreciate Adam starting this trend years ago.

What's your opinion on how an employee should deal with a founder who clearly believes more in the A16Z stance on stock options more than the Adam's? Apart from obvious knee-jerk reactions like "stop working there."

Obviously it's in the founder's financial best interest (at least on the very surface level) for employees to not have the option to leave the company with shares at all. It is just lost money, from their perspective, and probably annoying to have an employee leave (creating a headache in your life) and take a bunch of equity with them. (And it severely limits an employees negotiating power over time, which can be of benefit to the founder...)

What are some strategies an employee can use to make the point that Adam's perspective is a much more employee-friendly one and, thus, better for the company?

Looking for some perspective.

"What's your opinion on how an employee should deal with a founder who clearly believes more in the A16Z stance on stock options more than the Adam's?"

Value the options at zero and take appropriate steps.

It may not be the statistical expected result, but it is the modal outcome anyhow.

"Appropriate steps" isn't just "quit". If you're happy with the cash salary than you don't have a problem, for instance, or the experience, or the lifestyle, or any of the other reasons you may be choosing to work at a startup.

"Obviously it's in the founder's financial best interest (at least on the very surface level) for employees to not have the option to leave the company with shares at all."

Well, yeah, but that's sort of vacuous; it's not in the employer's best interest for employees to be compensated at all. But that makes hiring pretty challenging.

"What are some strategies an employee can use to make the point that Adam's perspective is a much more employee-friendly one and, thus, better for the company?"

There isn't a general answer to that question, because it depends on your status in the company. In some places, even opening that conversation will put you halfway out the door. In others, they'll fall over themselves to fix the problem if you just mention it, because they'll not have heard of this before. You need to judge the situation you're in, and play out the possible scenarios before you step in to something like this. But I'd suggest you're going to need a very solid position to change something this fundamental about a company.

Generic advice: It's always easier to negotiate from a fallback position of strength; unless you're absolutely confident in your position, consider having a job in hand before starting this talk. (You don't have to tell your employers that you have an offer in hand.)

Yours is the most reasonable answer and I wish more engineers understood this. As long as there is a nontrivial fraction of engineers that don't, then startups can take advantage of these ridiculous vesting periods and terms.

Let's put it this way. When considering a job offer from a startup, people say, you should value the options component of the offer at $0. Well, people say that, but I think everybody knows that someone who wants to work at a startup isn't really going to take that advice. They may try to factor it in by somewhat reducing the importance they give the options, but if they're accepting a below-market salary, as most startup employees do, they must be at least a little bit caught up in the hope of the options being worth something significant. I think even I, after years in the industry and several failed startups, could get caught up in that again, if wooed by the right startup.

On the other hand, if I were told that the options would be worthless if I left before a liquidity event, then I definitely would value them at exactly $0, and would therefore insist on a market-value salary, period.

If you've already joined such a startup, and taken a below-market salary, that's a different situation. I think the best advice I could give you -- unless you totally love working there -- would be to find another job.

Or at least discover what you're giving up by getting an offer that either gives equity that is better than a pipe dream (viz an unethical founder could fire you 1 day before ipo and you'd get jack) or a good salary. Then negotiate with that in hand.

> Obviously it's in the founder's financial best interest (at least on the very surface level) for employees to not have the option to leave the company with shares at all.

On the that same surface level, it's also in the founder's financial best interest for employees to work for free.

Fundamentally companies offer better terms in compensation to attract better talent. I spent 11 years at Google. I was recently looking around for new places to work, the lack of liquidity even in the face of success was a big deterrent for me to work at any early stage startup.

I don't think anyone but a very early and very senior employee will be able to change a founder/company's perspective on this. The best attempt would be to walk away from the offer and explain explicitly why -- even if that doesn't work for the situation at hand, it will guide the market.

I don't think you can do anything here once a culture's already been set. I also think that repeatedly pestering execs to ask about their efforts on this (as I've done at my current company every few weeks for the last 6 months) makes them think you're about to jump ship and want "free money", so watch out :)

Now? Go shop around ESO fund, snow ventures, standard VCs, angels, etc and ask them to make a deal to help buy out your stock. If they say no, maybe your company isn't doing as well as you think it is or your company is too small.

Usually these founders give you the standard 90 day agreement and are not Uber-level aggressive in trying to prevent these kinds of deals.

Later? Don't work for those companies or do the math. If you get RSUs then it's somewhat equivalent to getting those 10 year options anyway.

Encourage your qualified friends to apply for jobs at the company, get through to the offer stage, then decline the offer for that reason.

During salary negotiations, say "tell me why I should think my options are safe against dilution."

From my (somewhat limited, but concrete) experience, there is no way to get a satisfactory answer to this question. Just value the options at $0 and set your salary expectations accordingly.

My answer was perhaps a little tongue-in-cheek, because I agree they won't. You'll hear things like "we want to encourage our employees to give it their all" and "we believe performers should be well-compensated," but those don't really answer the question.

You also might be told "you are in the same pot as the founders," which is technically true except that the founders can still be never-work-again-rich after a 90% dilution, and the founders will typically have a seat at the table when the question of "how do we re-up people who have been diluted so low but are still capable of spiking the deal if they don't like it?" comes up.

What I find amazing, is that except YC no-other VC firm would publicly acknowledge that 10 year exercise periods make sense. In this age of social media, I find it absolutely appalling that they still endorse the current 90 day rule. I am guessing they categorised the PR nightmare of not endorsing is marginal. So, they kept quiet, since keeping status quo is in their interest.

YC is trying to make things better and fair for employees. For a really long time the odds were always stacked against the employees the most. YC, Adam are hacking it for the better. All good entrepreneurs who believe in "making the world a better place" should endorse this. Unless, the idea gathers enough momemtum, the old-guard, vulture VCs will not change their stance. This includes A16Z.

The answer here is for you to convince VCs and other investors to support this, publicly, and tell founders that they won't be punished for this on future fundraising.

Hearing from A16Z that they don't support this is a big negative signal to any founder.

a16z is a major investor (growth round resulting in a board seat for a16z) in many of the companies that have extended vesting periods, such as Coinbase, Pinterest, and Asana. So I doubt they block companies from doing this.

Notice the companies you listed. They are/were the absolute hottest companies when they raised their rounds, and are still some of the most prominent startups around.

Put another way, they have negotiating leverage.

The ones with the leverage (including YC backed companies) have to lead the charge to change the status quo and "the standard". The average startup doesn't have the leverage to do something nonstandard. The fact that YC has come out in support of 10 year vesting periods and is making it a standard is a massive step forward.

Asana was never a hot company.

Barely any companies even have extended exercise windows, so you can't go around excluding companies from the list because "they don't count". Also your logic is almost circular, because a16z tends to only invest in hot/great companies, by definition.

You can go down the list: https://github.com/holman/extended-exercise-windows. Many other companies have a16z as an investor. Tilt and CodeCombat are two of them.

>10-Year Exercise Periods Make Sense

>I agree with Adam's post

>I don't think companies should take back stock compensation on a technicality.

Isn't a 10-year period a technicality?

Anything that can take back compensation is a technicality.

Heh, can't even get a response without downmods.

here you go

your post doesn't add anything to the conversation

it might technically be a technicality but 10 years is long enough in startup life units that it doesn't matter

you're pointing out definitions when it was clear what the author meant and people don't like that because it's very annoying

If it is technically a technicality, which it is, then all the other fluff pieces and unpunctuated sentences in the world do not matter.

Maybe you could elucidate sama's "clear" meaning? It was lost on me. As far as I can tell, the post adds nothing but confusion to this conversation (you could counter by pointing out something of value contributed by the post).

Annoying is when people continually post contradictory or unclear things and never respond to their rightful critiques, or even change their future actions.

you said you wanted a response and not just downvotes. i tried ¯\_(ツ)_/¯

Thank you for the effort.

The sama account rarely makes responses and Sam Altman basically never responds to criticism of his pieces, or even outright proofs of wrongness. Honestly, this is the treatment I expect to receive here.

Founders are committed and in for the long haul, and either make a lot of money or none.

Startup employees make less money on a nice exit, but aren't as committed and can work for a few companies (maybe 2 years each) to improve their odds.

So having 10 years to exercise makes a lot of sense for the second group.

Forcing the employees to stay until liquidation makes zero sense for the second group. So you need to give the people that do commit at that level a package that more closely resembles a founder.

Otherwise it just distorts the market in all kinds of ways. Nobody would want to work for you until it looks like liquidation is around the corner, which means startups would constantly need to be positioning themselves on the auction block rather than focusing on lasting growth.

In addition, it creates the normal kinds of distortions associated with illiquid assets and immobile people.

Forcing employees to stay until liquidation isn't in the founders interest either.

You retain employees who might have been great from the zero to 50 stage but not as well suited in the 50 - 5000 stage. But their incentive is to stick around or give up potentially millions in equity that they busted their asses to earn.

Checked out employees aren't doing anyone any favors. You might say you can fire the person or put them on a performance improvement plan but this is easier said than done - especially if it was a key early hire.

I've seen this in many SF-based companies.

I completely agree.

Very often the skill set needed for employees changes dramatically over the first several years of a startup's life. It's best for everyone if there is a highly liquid job market and employees can easily leave (or be let go) when they are no longer contributing at their max, but then easily find another place where they contribute more. It's a lot easier to let someone go if both parties know that the employee has been well compensated for the work and risk they took on. It's that much harder to fire someone when a consequence is that they will miss out on any equity.

I'm sure there are edge cases, but I can't see how, in the general case, tying people to companies for long amounts of time is good for anyone involved.

Founders are committed, but usually have better cash out options than employees do in the middle of the process. There are founders get millions of dollars during later funding rounds to incentivize them to not take early buy out options by investors.

They also have no AMT worries, get long term capital gains taxation, have less restrictions on their stock and better access to investors who would like to buy a portion of their stock.

The reason why it's not as well known is they tend not to tell anyone, including their own employees, that they cashed out a little bit.

If you aren't actively working for the company, and maybe even if you are, it's trivial for your options to end up diluted out to crap by any random funding event that might happen.

I raised this issue once at a company I was at and got the response that "they weren't helping move the company forward any more."

Assume your options are 0.

That's another great point: if you invest more time at a company, and have no real control, then you are out of luck when the liquidation actually happens.

Startups are faith based to some extent, and it's unwise to put so much time on pure faith in a business relationship.

> Founders are committed and in for the long haul, and either make a lot of money or none.

This used to be true, but I don't believe it is any longer. It's become fairly common for founders to do secondary sales and cash out some of their equity early on. For example, the founders of Secret famously sold $6M of their stock 6 months after starting the company.

Sometimes employees have access to those sales, but in many cases they don't.

The real issue is 10 year vesting schedules increases your odds of success. Sure, it might have a tiny negative impact on your final returns but 'winning' is vastly more important than marginal gains on a win.

For young startups, I always recommend allowing Early Exercise. Put simply, it's the right by employees to exercise their options before they vest. The company retains a right to repurchase those options should the employee depart before they vest.

This enables them to exercise them as soon as they're granted, which greatly reduces the tax burden in two ways:

- First, the strike price and the value of the option are the same when they're granted, which means that the spread (i.e. the difference between exercise price and value of the options exercised which the IRS considers profit for AMT) is zero. Therefore, no taxes need to be paid. I've been stung by a 5-figure AMT tax bill on exercised options that were completely illiquid—all of which would've been avoided had I exercised early.

- It starts the clock for long-term capital gains. You need to hold the actual stock for over 1 year to be taxed at capital gains rates instead of income tax rates. Federally, this can lower your tax rates from up to ~40% to ~20%. (would've been 15% pre-Obama!) In CA, for state taxes there is no distinction, so you'd still be paying income tax rates of ~10-13%

Keep in mind, if you early exercise, that you must file an 83b election with the IRS within 30 days, or the tax consequences can be severe. (If you don't, you'd be taxed on the spread at the current option value every time some of your options vest.)

Now, I think extended exercise windows are great too, and ideally option agreements would have both. I think generally, early exercise makes more sense for employees who join pre-Series-B, while extended exercise windows make more sense for later stage employees.

Wow never disagreed with a16z content so far.

> … at the same time disadvantaging employees who remain loyal to their employers just kicks the can down the road …

The underlying assumption that people only leave companies because they are not "loyal"

People get fired, people get mobbed out of teams, company cultures change, companies fail in management. employees lives change, people need to move to other countries.

The whole notion about "loyalty" almost appears action-movie-like. "ARE YOU WITH ME? HELL YEA!"

It's already hard enough to convince highly skilled people to join companies vs founding their own. No need to further decrease the upside compared to being a founder.

From the A16Z post:

> This solves all of the issues: cash rich vs. poor; competitive offers; and the bad incentive problem (e.g., encouraging employees to quit to build their own diversified stock portfolios).

Says the VC whose business depends on a diversified stock portfolio.

A couple paragraphs above he admits that "median time-to-IPO for venture-backed companies is closer to 10 years". That's not a reasonable amount of time to expect employees to stay at a job, and seems like a recipe for burnout and/or "rest and vest".

I think there is fundamental difference of opinion here, exposed by Adam's and A16Z's posts.

A fairly typical early stage employee will forgo hundreds of thousands of dollars in salary over a vesting period, in exchange for options.

The philosophical difference is here: At the end of that period, do you think of the shares as the employees, earned in exchange for both the work done in those years, and the hundreds of thousands the company saved on salary? Or do you think of the options as an ongoing incentive to keep the employee with you (perhaps still below market rates), in exchange for the chance of a big payout later?

Technical employees often feel the former, and will point to the fact that they've "given" the company much more in salary reduction than many early round investors paid per share they own outright. Corporations often state the latter point, or some variation, particularly pointing out that later employees don't have the same leverage on the option pool. Option agreements often encode the latter.

I'm starting to have the feeling that those very early employees are about equivalent to an angel investor, and they should be getting some sort of angel investor equivalent terms.

Otherwise once people really start realizing the negatives of being an early employee vs. founding your own startup it would be hard to hire otherwise.

One way to do this with very early employees is to avoid the whole mess by just giving stock.

You'd still have to pay taxes on it as per your (audit-able) 409a valuation.

Sure, depending on the country it works different ways. But if there is tax to pay, it is on a low valuation (very early, remember).

To be fair, there is another catch-22, which is that a low valuation means the startup is early-stage, which means your options are worth less.

So sure, you can early exercise, but there is a greater chance your early exercising will lose you money (if the options end up worthless).

Note I said "give stock", not "give options". Granted, this doesn't solve everything - it was an aside comment about early stage vesting (where liquidation events can be a long way off)

My comment is equally valid if you replace "early exercise" with "paying taxes on" (assuming you do an 83b election).

Isn't any vesting for non-founding employees completely broken?

If the employee loses the stock when he's fired early, then the company has a huge incentive in firing him a day before he vests, and thus he should regard the vesting compensation as nonexistent.

If the employee retains the stock when he's fired early, then he can just get himself fired to ignore the vesting period, making the vesting pointless.

It seems that vesting can only work if the employee is so essential that the company would never fire him because the company would then be highly likely to fail, which should only apply for founders in a functional company.

Firings in ways that reduce the options available to the fired employee are actually quite common practice. They just don't reduce it this much, which would have a lot of the obnoxious MBA types who take over middle-aged companies licking their chops.

My spouse worked 13 years at what was a startup-with-traction when she started there. Last year, they were bought out (public-to-private by a hedge fund). A week later, she was sent packing, along with a lot of the "old-timers". That's not even getting out of options (although there was some of that). That's a simple purge. Purges happen.

When you ask employees to commit to ten years to get anything equity-wise, you're exposing them to tremendous risk. You're hampering their careers. You're exposing them to the risk that you'll take a down round three years down the road and their options will get diluted into near-worthlessness. You're exposing them to the risk that your business will be wiped out by a competitor, or put on the road to obsolescence by technical advances and market trends.

For a 50% bump? Screw that.

Or that the employees might have changing life circumstances any time in the 10-15 year future. Find a partner that changes your life needs around working life or living location, have a kid, need more or different housing, have medical issues, have family with medical issues, etc and you're sol.

ps -- a16z funded a company that, as an A round, refused to disclose outstanding shares to value my option grant and was already on the brute force 15% of comp is bonus that you don't get if you aren't there in early April every year retention ("bonus") plan. It may be unjustified, but with some other stories I'm not a liberty to disclose, they seem very employee unfriendly.

Most option plans are employee unfriendly. And "This incredibly employee-hostile clause will force us to be more honest with employees, which makes it employee-friendly" leaves a bad taste in my mouth. It might work as long as the original founders are in control. They will be in control ten years later, right? Right?

If a company fires you the day before you reach your vesting cliff, you can sue them for breach of contract, if you were performing well. Yes, you can sue them (and win, though you'd probably want to settle) even if your contract says they can fire you for any reason.

On a separate note, it's the same underlying principle behind why people are wrong when they talk about the DAO's contract meaning that the hacker was allowed to steal. No judge is going to enforce a contract clause that allows you to steal. And if you were performing well but were fired right before your cliff, a judge can find that your employers were acting in bad faith, etc. The underlying principle is that contracts are subject to reasonable interpretations by judges.

Your other point about getting yourself fired makes no sense (you're ignoring the cliff, then month to month vesting schedule that is typical).

It isn't about the vesting periods, it is about the exercise period. Vesting periods are fine in most cases.

The exercise period is usually 90 days, if you leave a company.

What happens a lot is there is no liquidation event for years meaning that an employee with shares needs to make a decision fast to convert or lose their shares (which they earned) and that cost $$$. I've seen time and time again, where people get locked in because they need to drop 4-6 figures to exercise their shares.

> If the employee loses the stock when he's fired early, then the company has a huge incentive in firing him a day before he vests, and thus he should regard the vesting compensation as nonexistent.

I've seen this happen a few times in SV where employees are fired 1-2 weeks before their vesting period. Sad when it happens. Not saying that all times it is because of the cliff, but people talk and are aware of companies that have done this.

It's even worse when you consider AMT; sure, dropping $10k to buy your stock might be achievable, but if the FMV of those shares has gone up appreciable, you may find yourself in pain come tax day. (If your strike was $1/share, but the FMV is now $10/share, $9/share "gain" has to be considered as income for calculating your alternative minimum tax.)

The tax burden is the primary problem, that is what all this discussion is really about.

I dunno, I had to pay nearly $15k to exercise options and while I barely escaped amt issues, the money wasn't easy. And represented a 10% rebate on after-tax salary for the period I worked for that company.

Sure, that happens. But it is a very different situation from the one where AMT (in the US, other jurisdictions have similar issues) makes it financially impossible to exercise your options.

I'm not sure I agree that "the company has a huge incentive in firing him a day before he vests." First of all, the direct and indirect costs of hiring a replacement can be massive, and potentially larger than the value of the stock that isn't vested. An employee doesn't have to be "essential" in order to be extremely valuable, especially early on. Second, a company could make a habit of firing employees right before they vest, and even if they managed to completely mitigate the damage internally as soon as word got out about this practice they would suddenly find it impossible to hire quality talent.

> If the employee loses the stock when he's fired early, then the company has a huge incentive in firing him a day before he vests

Not if they want to keep a reputation in the community of good developers, where demand far exceeds supply.

Short of something "going viral", I feel like it's likely an individual ex-employee's negative experience with a company won't become widely known.

Only assuming that the benefit gained from firing the employee the day before they vest outweighs the cost of bringing on a new employee.

Which probably comes down to the position.

In places with actual employment law (like the EU), you can't just fire someone with no reason.

I agree with this, but what do you guys think about minimum service periods? Like requiring 2 or 3 years? Companies like Pinterest and Coinbase have added that condition.[1]

Greater portability could in theory lead to higher turnover even among happy employees. They might go on to found their own company sooner. They might see good financial sense in diversifying their options portfolio. Yet young companies need the team to stick together for a certain time. Especially very small startups at the YC stage -- turnover is very harmful.

Note: In Adam's example, nobody leaves the pre-IPO company in under 4 years of service.[2]

[1] https://github.com/holman/extended-exercise-windows

[2] "imagine a company takes 10 years to IPO. Employee A works at the company from years 0 to 4. Employee B works there from years 4 to 8. Employee C works there from years 8 to 10."

At Quora we decided not to have a higher "minimum service period" aside from the standard 1 year cliff. The rationale is that the vesting cliff is what everyone is expecting as the minimum. If a company wants to have a higher period before someone can leave and retain their stock, they should just increase the cliff to that length of time to make it fully transparent.

That's a fair point, but cliffs are more severe than exercise windows. Many employees still get to keep some of their equity in a 90 day exit window scenario. I think Kupor modeled it at about a third of vested shares on average.[1]

More mature startups may be able to simply abolish the long-term incentive that the 90 day window provides, but I suspect younger (<30 employee) startups need added turnover protection. Perhaps backloaded vesting would be a more comparable replacement? Transparent, predictable, fair, and not as harsh as cliffs. You keep what you vest, but 70% of it vests in years 3-4.

[1] (Although there's certainly unfair variability based on personal financial circumstances in that average.)

Minimum service periods already basically exist, in the form of a vesting “cliff”. A typical vesting schedule has a 1-year cliff, meaning you don't really get any of your equity unless you work at the company for at least a year.

However, 2- or 3-year cliffs could make sense as an alternate way of promoting a long-term mentality.

I don't like the idea of minimum service periods.

If you want to require a minimum commitment from employees, just increase the cliff. For one thing, cliffs are well-understood.

My chief objection to minimum service periods (whereby you only have 90 days to exercise if you leave "early") is that they actively hurt disadvantaged groups. An upper middle class engineer often has resources or access to resources which will let them exercise options early. In contrast, a disadvantaged employee is unlikely to be able to come up with those funds—which is particularly problematic because they often are leaving to escape a hostile work environment.

At least cliffs apply equally to everyone, regardless of their resources.

> "minimum service periods"

Is this different from a cliff?

Yes; your shares vest earlier (starting at your cliff), but if you leave before your minimum service period, you don't get the benefit of the 3-10 year exercise period. You're subject to the 'regular' exercise period, typically 30 to 90 days after termination.

Wow I guess since employees should already value most stock options at near zero it's hard to value them any less.

Valuing stock options at zero is one of those HN memes that are repeated endlessly, mostly, I suspect, by people not from Silicon Valley who know few, if any, engineers who got rich from stock options.

Just because stock options should be valued at less than a company's private valuation does not mean they are worth 0. Very few engineers actually value them at zero.

Adding on to this comment:

It's a spectrum, not a black and white your options are worth zero dictum. At one end, (extremely early stage startup, < 5 employees, you're not a founder) your options are probably worthless, sure, although you have a minuscule chance of being worth $10M+. At the other extreme, you join a company that everyone knows is going to go IPO within two years, and essentially earn what you would earn at Google or Facebook, maybe slightly more.

To give you one example, I knew someone that made about a million (vested over 4 years) in options by joining an already-successful startup as engineer ~70, that he believed would IPO within 4 years. On top of his market rate salary.

It should be valued at 0 unless the company takes active steps to encourage you not to, which would include answering dozens of questions about vesting and dilution that they won't.

This makes no sense. Any vesting details will be detailed right in your contract. Dilution depends on the company's fundraising in the future, you are essentially asking them to bring out a crystal ball and tell you exactly what their IPO/fundraising plans are. It's up to you to estimate how much you think you will get diluted, based on the type of company and how much they've raised so far.

I think one of the points Adam repeatedly mentions in the article is that a contract in itself isn't really transparent. I get exactly what you are saying, it makes logical sense from the perspective of someone who knows what's going on, but in all of these discussions my thoughts are on the young naive person signing up for a deal they don't fully understand.

I think stock options should be valued at zero. In an a-will employment state you, and with a typical contract, you can get fired at any random day and if you don't have enough money to exercise your vested options within 90 days, they're gone. I don't consider that reliable.

In regards to the parent comment of yours, I think if it was stated as "proactively answer" vs "answer" it'd be less arguable.

None of that justifies valuing them at zero. Even if those reasons were valid, those reasons would maybe justify taking the official private valuation and cutting it by 75%.

I've been in the room where the CEO said, in not so many words, "fuck the former employees who exercised their options. They aren't here."

No one gives a shit. Sometimes it works out well.

You also won't be told when they take on a funding round with priority, even though all their prior rounds were funding with no priority. Personally experienced that one.

If the industry wants employees to value their options above zero, give the employees legal protection that would enable them to do so. Otherwise it's VC firms getting butthurt that people aren't accepting their scrip as real money.

You won't be told about funding rounds if your contract doesn't mention it. Like I said, any details you desire should go in the contract.

Yes, the standard contract is completely opaque to the employee, and they don't have the specialized knowledge required to understand it. And the company sure isn't going to help you. So value the funny-money at 0.

If the industry wants to change this perception, then there should be a widespread standardization on a contract that is fair to the employees and it should be easy for employees to understand any diffs from that standard.

If a contract is opaque to you, you get a lawyer to look it over. End of story. If you sign a contract that is opaque to you, without talking to a lawyer or at least someone knowledgeable (e.g. personal friends that are senior engineers that have talked to lawyers), you only have yourself to blame, not Silicon Valley.

It goes without saying that I've rarely found the contracts I've signed to be opaque.

I find this sort of burden-shifting abhorrent.

It's the company who will spend thousand or tens of thousands of dollars having the contract made. It's the company who gets to amortize the costs of a complicated contract over many hiring interactions. It's the company who has the advantage of a strong information and experience asymmetry.

In short, the company has a lot more power. If somebody with power screws somebody without, I save most of my blame for the people who set things up.

Sure. But none of your perfectly valid comment changes the fact that if you are clueless about a contract, you should either talk to a lawyer (or otherwise someone knowledgeable) or decline to sign it.

It goes without saying that employment contracts all use the same language, I have never personally run into a clause I found opaque or confusing.

You are making the argument that whatever the company does is legal. That's fine and I don't disagree with it.

It's not just a matter of not understanding the entire legal contract. Someone could understand every single thing, but not realize, like you said above, "you won't be told about funding rounds if your contract doesn't mention it." They wouldn't even think about that because they aren't experts in that field.

I've negotiated plenty of employment and IP agreements. I've found 100% willingness to, at the least, discuss them. But employee options grants must often be the same for everybody. And for a normal employee (as opposed to some C-level executive hire), once you start negotiating "in case I leave early I want more rights" you are signaling bad things.

Really, all I'm telling people is "if you don't understand something fully, assume it's worthless." Your reaction is that, for some reason, employees should jump into the deep end of the pool and try to outsmart the VCs at the game they play every single day of their lives. And for what purpose? The vast majority of the time the options are going to end up at $0 anyway.

I say no. Assume legalese is written in order to screw you over. Smile and accept the options because you might get lucky, but never ever stay late at the office imagining how they will make you rich.

Yes, 100% agreed. When I'm giving people options, I want them to treat them as valuable. So I work hard to make them valuable, and for people to understand what they're getting.

But at the end of the day, they could well be worthless, and they will never mean as much to an employee as they do to me. I had to just accept that people would value them at zero. For those interactions, I just had to think of the options as something we were doing so that in case we won big, we'd all feel good about the outcome.

Yes, people signing contracts should get good advice before signing. Also, they should study hard and floss every day.

My critique is not of generic, anodyne advice. It's of your assigning of blame to the weaker party.

Would you estimate the percentage of Web 2.0 Silicon Valley engineers that have been able to cash out anything significant (let's say > 1 year market salary) at greater than .1%?

Yes. I'd say easily 3-5%.

Quite honestly that would shock me, but I wouldn't know where to get data about this. I always believed that only a microscopic fraction of tech workers actually made off with more than a year or so of salary from options (but those who did likely made out extraordinarily well). I would not expect a very flat distribution.

I think it's more the opposite. Lots of employees just pulling a salary and another chunk on the side from periodic grant refreshes (you often hear folks talk here of, say, $50k of grants per year as part of comp).. versus a very small handful of millionaires.

The Googles and Apples and Facebooks of the Valley employ a lot of people vs the (granted, numerous) small moonshot startups.

Every time any tech company goes IPO or gets acquired for a large number (~>$50M), that's on average 1,000+ engineers who probably made some amount of money from options.

These numbers don't make sense to me.

You're saying an average tech company that exits has over 1000 engineers alone? Certainly a $50M company can't support 1000 engineers. Or a $100M one.

(And, just for fun, if a co exited at $1B with 1000 engineers... Let's use round numbers to sketch it out. Let's say the engineers alone get 10% of that value (which seems generous). That's $100M. Divided amongst 1000. So $100K. Not that much if you've given up income for years! Even if that amount is split across 100 engineers, $1M's not necessarily a super-duper return on investment if you're taking a bit pay hit.)

I'm saying the average number of engineers is pretty high (because it's an average, it's skewed up).

Regardless, quibbling over this doesn't really detract from my broader point which is that every time you see a company go public, that's hundreds, if not thousands, of engineers that made some money off their options. Some got rich. Most probably just ended up with an above-market salary. Others (those who just joined) get a tiny amount. The same applies for acquisitions, though obviously you'll need to scale the number up or down depending on the $$.

Yes, because you are ignoring the fact that most engineers that make money off stock options are doing so at well-established startups that haven't gone IPO yet. Companies like Airbnb, etc. 4 years ago, everyone knew Airbnb, Pinterest, etc., would be successful.

Kind of like how everyone knew Evernote would be successful four years ago? Or Gilt? Or Dropbox? Or Fab? Or Foursquare?

The only companies whose options are worth 0 (zero) in your example are Gilt and Fab.

Evernote and Foursquare are still around - your options are worth less than their private valuations if you joined 4 years ago, but they are not worth 0, even after dilution. Foursquare is still a $650M company. And only in some twisted world is Dropbox not a success. They're a friggin multi-billion dollar company even if they aren't a 50 billion dollar company (the horror).

I also didn't say you're going to have a 100% stock option hit rate for companies that are pre-IPO. You are still taking on risk. But your hit rate is going to be a lot higher.

It's also rather telling that these are among the worst examples of pre-IPO tech companies you can think of.

> It's also rather telling that these are among the worst examples of pre-IPO tech companies you can think of.

Nah, just the first ones that came to mind. Theranos is another good one I should've mentioned.

Theranos was never in the category of going-to-IPO-soon.

Arguably, neither were any of the others; none of them ever published an S-1.

I think a 10 year exercise window makes them much more valuable. Now instead of being faced with a decision of whether or not to spend thousands of dollars when leaving a company that I'll very likely never see again I can now defer that decision. Right now my options are to not exercise and risk kicking myself in the future if the company makes it, or exercising knowing that I'm very likely throwing my money away.

Longer exercise window would be very valuable, especially for employees not having big cash pile laying around somewhere. That would raise the value of options a lot. The other suggestion though - longer vesting period - would have the reverse effect.

4 years vesting options in startup are "extremely risky investment that with much luck and hard work may pay off". 8 years vesting options in a startup means "I guess Las Vegas gambling is too boring and way to little risk for you? How would you like to gamble with 10 years of your life?"

4 years vesting options in an established company is "we'll pay you if you agree to suffer us and drag yourself to work long after it stopped being fun for you". 8 years vesting options in an established company is "for how much would you agree to sell us your immortal soul?"

In short, long period vesting for options may make total sense for company issuing it. It would have very low value for employee, and even long exercise period would not compensate for that.

You can't pay rent or save for a mortgage downpayment with illiquid stock options.

It takes something like $200-400K to get on the housing ladder in the Bay Area so the idea of putting it off for 8-10 years with no guarantee of success is already unattractive.

To shackle yourself to a single company for the duration? Nuts. When did you last work anywhere for 8 years?

I've written several times in the past that only companies with substantial negotiating leverage against the gatekeepers of capital can afford to buck what is considered standard.

Hence we've only seen the hottest companies achieve 7-10 year exercise terms. https://github.com/holman/extended-exercise-windows

I've argued that as a cohort, YC is the best candidate to make a large push against VCs and make 7-10 years vesting terms an industry standard. Learning that this is now the case is incredibly exciting. https://news.ycombinator.com/item?id=11198991

harj 119 days ago | parent | on: Fixing the Inequity of Startup Equity

We're excited to make 10 years the new standard option exercise window for startup employees. Each of us have personally experienced someone close to us dealing with the stress of trying to exercise their options within 90 days and it sucks. We'd like to see more companies making this change, we'll be keeping the public list of YC companies who have either implemented or pledged to implement an extended window, updated here: https://triplebyte.com/ycombinator-startups/extended-options

> There is no concern for how many shares we granted in the past to other employees or whether or not they are still holding them; the only concern is the current market... it would be irrational not to increase the option pool if that’s what was needed to be able to hire someone.

This is the part of this post that I can't believe is true. At the end of the day a company only has so much equity. How can the amount you've given out be of no concern in issuing stock to new employees? Isn't that tantamount to saying equity isn't scarce? When does the amount you've given out become of concern and in what context? If the answer really is that the amount of equity you've already given out never becomes a concern to any aspect of your company then why would you ever limit the amount of equity you give to employees?

The employee pool is typically small compared to the entire pot.

Everyone has a burn out point, a point when the company and the culture and just your life stages mean you want to move on. Being handcuffed to one is bad for everyone.

I would worry about the value of employees who basically wanted to leave the company four years ago but are only hanging in because their shares are worth a million. Surely it would be better to get those people paid and then out the door rather than keeping your senior influential ranks full of people who stopped caring years ago.

Surely there is a better way?

Stock options are some kind of payment - so why not treat it as a pro rata accrument. You are the first hire - you get 2% of the company if you stay ten years. Leaving after five to get married and move country? Fine here is 1%, just sign here, and we all are happy.

No matter how nice your arresting officer is, everyone resents handcuffs.

Thank you for this Adam, as an early-stage startup guy who still hasn't made his FU money, this really nails all the salient points for me. Scott Kupor tries to decorate his article with references to employees' interests and considerations, but it's clear the guy has spent his career on the on the management/finance side where he doesn't really understand what it means to be a ground-level early-stage contributor to a young startup. Consider Kupor's "solution":

> But, a way to truly compete for the very best and long-term oriented employees would be to offer even greater amounts of employee options grants. For example, why not offer stock option grants that are 50% more than the nearest competitor’s — but with the provision that a departing employee cannot exercise his or her stock options unless there has been a liquidity event? If you stay, you’re a serious owner, but if you don’t want to be part of the company for any reason you won’t be an owner. This solves all of the issues: cash rich vs. poor; competitive offers; and the bad incentive problem (e.g., encouraging employees to quit to build their own diversified stock portfolios).

I don't even know where to begin with this. First of all, unless you are a VC, you don't have visibility into the market for options. Even if you did, startups are not commodities, you can't compare shares of early stage companies directly to each, particularly when you are a single-digit employee, you are going to be shaping the actual future of the company. Not only should the offer you receive reflect the value that your particular skills and expertise will bring the company, but you also have to gauge the potential of the company itself. 1% of a $1B company is worth a lot more than 2% of a $100M company, and of course how much funding will you need to get there?

Obviously these things aren't predictable, but as a prospective employee you have to try. After all, unlike investing, you only have one working lifetime to spend as employee. That puts a different perspective on these things from the VC really is building a portfolio and playing the odds. Since the VC is not directly pulling the levers, startups are effectively fungible to them.

But the part that really burns me up about his "solution" and it's purported comprehensiveness, is the idea that early stage employees who leave before a liquidity event don't deserve any equity at all. I'm sorry Scott, but that is absolute horse shit, and frankly it really will make me think twice about taking any investment from A16Z in the future. The early stage employees who take a huge pay cut in order to build something from scratch which will most likely fail completely, are making a huge investment in the company. They will literally pave the way for all the later employees to even have a company to work for.

Can you imagine if VCs made the analogous argument that angel investors should not be entitled to their returns unless they matched the later VC investments? "That would be preposterous! Obviously those angels took a big financial risk and deserve their returns!" Financiers would never be this short-sighted, but somehow Scott thinks that someone putting their blood, sweat and tears into startup for a below-market salary are only as valuable as their latest month of work. I respect the role of capital in startup creation, I really respect it because I don't have it, but even so, money is nothing without execution, and A16Z would be nothing without talented founders and employees who are willing to sacrifice a lot more than them to bring a successful company into this world.

Even if you are a complete sociopath who is interested solely in the short-term benefits to the company, you still wouldn't want to take this tack because (as Adam very aptly pointed out) then you end up with a lot of dead-weight in the company that's just hanging around to cash in their options.

Startups are not fungible, employees are not fungible. Treating employees like humans is not only the right thing to do, it's how you cultivate reputation with "cash-poor" top performers. The danger for VCs like Scott Kupor is there will always be an army of sycophants and yes-men ready to consecrate his every word just to get a piece of that juicy VC fund, but they are in real danger of having their lunch eaten by the expanding reach of angels that actually worked their way up out of the trenches themselves and understand the tech employee mindset.

I completely agree with your assessment. I couldn't believe what I was reading and how A16Z even allowed such foolish article to be published on their website.

I would recommend everybody I know to stay away from Scott and may be, even A16Z.

I agree with all of this. a16z and other VC's are pretty clearly on the side of capital, and don't really believe that labor provides any value. Employee's taking lower salaries and investing years of their lives don't provide any lasting value according to a16z. I just cannot believe that he would try to justify taking back fairly given compensation because an employee did not want to continue doubling down and investing more and more money and labor into a startup.

When did the labor-capital debate shift from truck drivers to PhD-caliber computer scientists? Serious question, I think I missed the clear split. Has it always been there and I didn't realize it? Is there a clear historical event?

> Can you imagine if VCs made the analogous argument that angel investors should not be entitled to their returns unless they matched the later VC investments?

VCs can and do make that argument.

This is a well thought out answer, and frankly embarrasses the response from the VC. Of course the VC wants to protect his own interests, he's just obfuscating it by pretending he's talking about "wealth transfer" and "fairness". What a bunch of BS, and I'll never work for a company that he is "advising". Who knows what sort of dirty tricks he'll play against the employees.

>"He suggests paying 50% above market in stock, but including a clause that all employees must remain at the company until a liquidity event or else they cannot keep any stock at all (even if they could come up with the exercise cost)."

Curious to what feelings this invokes for startup employees (nonfounders, investors) on HN.

In my case, wild laughter.

Why doesn't everyone just exercise as soon as they join a company? At least at earlier stage startups, it seems that the amount of salary offered as compansation is at least an order of magnitude more than the amount of options. Given this ratio, it seems like most employees should have enough in liquid savings after even a few years to avoid taxes on the appreciation between stock grant and vest times.

Of course, there's the possibility that a startup will tank, but even in that case, losing out on having bought stock seems much smaller than the opportunity cost of not having worked at a sure-bet tech giant.

Vesting. You can't exercise unvested options - the company needs to have set up an early exercise option as a part of it's stock plan for this to work.

But whether they offer an early exercise program is a very good question to ask any early-stage company you're planning to join.

The answer is clear – not easy, but clear; refuse to work with people who act in ways you find unethical.

If Scott Kupor's position is a company's position, and the total package value (including salary, benefits, etc), isn't acceptable to you when valuing options at zero – and given you don't control the company, and they can fire you at any time, you have to – then they're on the list. Refuse to work with them and tell your friends.

If you disapprove of his or A16Z's attitude, just don't accept investment from him. Let the market tell them they're wrong.

I understand where the 10 year exercise period came from and I can understand the arguments against it.

A solution I haven't seen put forward is a compromise between the common 90 day window and the 10 year window, which is to have an exercise period equal to the amount of time you were an employee. This discourages people from bouncing around jobs collecting equity but gives a reasonable timeframe in which to exercise if you do want to leave after putting 5 years into growing the company.

> This discourages people from bouncing around jobs collecting equity

Vesting periods solve this problem.

How does vesting solve that? Which would you rather have (giving a simple example of 1% options vested over 4 years) - 0.25% in 4 different companies or 1% in 1?

This is essentially the argument against 10 year exercise windows - it allows exactly the above scenario.

If your vesting cliff is 1 year, then people who job hop after 8 months get nothing. Thus discouraging people from bouncing around to collect equity because there is a minimum tenure needed to collect.

Just set the cliff to match your definition of "bouncing around jobs".

I felt dirty reading the a16z post. Really dirty. They tried to phrase screwing over the employees for the investors as somehow employee-friendly.

Have any companies implemented a sliding scale for the duration of the exercise period? 10 years makes sense for a super early stage startup, and 90 days is reasonable for public companies. I would think that some shorter windows can be implemented for companies at different growth stages -- perhaps by financing schedule, revenue size, expected time until exit, etc.

For public companies it doesn't matter because there is immediate liquidity to cover options. Their vesting periods are often even shorter at 6 months and they tend to not even bother with options and just give you stock units directly or have stock purchasing plans at below market rates.

Yes, exactly, this is my point. The exercise period length should be correlated to the expected time until potential liquidity.

Scott basically argues that there should be a 10-year cliff on vesting. That's what it means to price employees out of their equity comp if terminated early.

Scott's post genuinely makes me angry. It uses subtle language to imply that employees are inferior individuals who are lucky that the owners of capital deign to share anything with them.

In Scott's worldview, choosing to leave a company before it has exited is inherently disloyal. Even if they're paying you under market. Even if you could contribute more value elsewhere.

I wonder if he would accept similar terms:

1. Reduce his salary at a16z to something minimal. (<$100k)

2. He only gets his carry in a company if he invests in every subsequent round. If they ever decline to follow-on, it's clearly a sign of "disloyalty" and they should forfeit all equity.

I agree with Adam that it's at least nice to see the owners of capital so nakedly betraying their worldview (diversification is all well and good for them, but employees owe infinite loyalty).

I will think long and hard before ever working for a company where Scott is on the board.

This part is particularly troubling:

> One existing solution to the “dead equity” problem has been — and still can be — to make exceptions where appropriate for certain exiting employees.

It's essentially an argument for cronyism. The people who most need equity extensions are those unlikely to have the connections and political savvy to get them. I strongly suspect such systems would work to further disadvantaged already disadvantaged groups.

Couldn't agree more. If part of my compensation is equity, then I should get to keep it when I depart. If I don't, you're basically telling me I wasn't worth the compensation I was getting.

Taking back shares is akin to a temper tantrum, and Scott's post really, really shows no respect for the engineers that make his companies worth any money at all. It also hyper-values people who can flog a Power Point presentation, whether or not those people end up contributing the lion's share of the engineering.

It's a rather bald-faced admission of how employees are actually valued, and how distasteful compensating them is.

FYI, you should be wary about any A16Z company then. This sentiment is nearly identical to what Ben Horowitz talks about here: http://www.bhorowitz.com/one_management_concept_from_how_to_...

And Ben Horowitz has publicly supported Scott Kupor's blog post on Twitter.

Given that he and Marc Andreesen run the show there, we can reasonably extrapolate that this is the firm's preferred stance. In fact, if either of them was against Scott Kupor's position, then the blog post likely would not have seen the light of day in the first place.

And I will vote with my feet, as I'm sure a number of other potential employees will.

(Much as I will never knowingly work for a Kleiner company.)

What's the Kleiner rub?

Might be the whole Ellen Pao harassment suit.

The firm had a big shakeup and departure of staff preceding that as well.


(I feel like KPCB had another harassment suit before Pao but I can't seem to recall the details.)

10 years is the life of a VC fund, because that's the largest horizon that a wealthy investor is willing to part with his money even if it's not a large fraction of his wealth.

To ask almost the same (6-8 yr vesting period) to a worker that has a large fraction of his net worth in the startup seems utterly insane.

Firstly, while I think Scott is wrong, I don't see much that's disrespectful or implying disloyalty about his tone. Not even the stuff about "dead equity."

I'll extend some comments I made downthread:

a16z is a major investor (growth round resulting in a board seat for a16z) in many of the companies that have extended vesting periods, such as Coinbase, Pinterest, Asana, and Tilt (list here: https://github.com/holman/extended-exercise-windows). They also invested in CodeCombat and I'm sure some other startups on that list (I didn't check them all). So I seriously doubt they block companies from doing extended exercise windows.

And claiming that those companies were/are hot and therefore had leverage is a bit circular because hot companies are the kinds of companies a16z often funds in growth rounds (and often it is because a16z funded you that makes you hot).

> So I seriously doubt they block companies from doing extended exercise windows.

You're right that they don't veto companies from doing extended exercise windows.

That doesn't mean they don't oppose them and argue against them. This post makes their viewpoint quite clear, and it means that any founder wanting to do right by employees will have to argue strongly for that position.

Even beyond the specific issue, the tone of this article makes it very clear that they are not employee-friendly.

Contrast that with Sam and YC, who indicate both through the policies and their tone that they recognize that employees also make sacrifices to join companies and invest in their success even if they don't stay through IPO.

Yes, a founder giving some reasons for wanting to do something is not a high barrier to overcome.

And your argument degenerated to stupidity. Do you think there's no difference in effort it takes to do well for your employees when you have to argue with an employee unfriendly person on your board, rather than having employee neutral or employee friendly people on your board? What you said is not grounded in reality, and this topic is super important for people considering different employers.

Your argument is the one that has degenerated into name-calling. Mine hasn't.

Founders routinely ignore the advice of board members. In fact it's almost a meme in the startup community for founders to politely listen to, and then ignore, their VC's advice. This is no different.

Yes. We use options for equity comp b/c the grant is not a taxable event (if properly organized). It's not supposed to be a way to deprive terminated employees of their equity comp, which potentially is a large portion of the compensation of a venture-backed startup employee.

Don't hate the player hate the game :) The human genome is what's screwed up. Things well covered in recent years: Power increases hypocrisy and cognitive bias over-values our own contribution to our success (it is my capital and my idea that made all this wealth, not your work). Also capitalism is explicitly about extracting surplus value from employees. I think this type of behavior from people like Scott is, on the whole, to be expected. But... anyway our genetic predisposition towards fairness makes a rage reaction to this behaviour expected too so hate away. :)

I followed this link expecting to see a comment about some sort of "encoding" of the human body relating to long-but-not-indefinite period of physical exercise. Instead it's about stock options.

As the article offered no background, I'm lost as to what is being discussed. In the last 20 years I've never had the same employer for 10 years, so can someone ELI5 what is being discussed? Thanks in advance!

They're talking about the amount of time you have after leaving a company to exercise the stock options that you were granted, effectively purchasing them at par value. This has huge tax implications, and requires quite a bit of cash on the spot.

Traditionally, the period has been ~90 days, which makes it even harder to weigh your tax options and come up with the $$$$ to exercise the options. Since its expensive, and has a short window of execution, the practice has been viewed by many to be unfair. The Stock Options were a part of your compensation - part of the Risk vs Reward balance you choose when you worked for a startup, and now if you don't have thousands of dollars to spare on a gamble - you forfit those options back to the Company.

By extending the period to 10 years, you have the ability plan accordingly, see if the company will eventually exit, and exercise them when the time is right.

Great explanation.

Personally, I was hoping it was an article giving me an excuse to pursue 10 years of intense exercise and outdoor adventure.

If a company grants you stock options as part of your compensation, you need still need to pay to get the stock. That's called exercising the options.

If you leave the company, there is a limited window of time to exercise the option. If you don't exercise it, the stock gets returned back to the company.

This post is favoring that window being long and is responding to blog post favoring that window being short.

So the white-shoe Sand Hill Road crowd is averse to having a potentially large long term liability if things go awesome. This is some bold, 19th century robber baron stuff. Wow.

Same here. I read that as physical exercise.

Quora was definitely not the first startup to do 10 year exercise period, not by some margin. My Lime Wire stock options from 2000 had a 10 year exercise with a 6 year vesting schedule, no cliff and vesting every 3 months. Here's the proof: http://imgur.com/6eTUyui

Adam's on the right track though. I just had to write a 6 figure check today to exercise my vested options at my current employer because of the 90 day clause. It makes me angry because the company's official stance is that the board wants to use stock options as an employee retention tool. I was fortunate enough to have had the cash but a lot of other people are not and there is no secondary market. So if you get fired or have to quit during a bad market you are basically screwed.

Man Silicon Valley companies are living in a parallel dimension!

They collectively think they have the LUXURY to hire employees that are in love with their random idea

And they collectively think that the employees have the LUXURY to play russian roulette with the compensation terms

Let's address that, because these factors have are completely disjointed with the success of the company and the employees' INTEGRITY (instead of "aligned incentive") to deliver amazing products and code

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