Hold on, if we get this wrong we may be lowering the value of everyone's options and hurting startups. Are there any added protections here against high turnover in infancy-stage startups?<p>For 30(?) years since the invention of stock options there has also been a de facto added protection against high turnover in infancy-stage startups, where having to rehire and retrain employees is extremely costly. Pre-IPO you basically had to pick a team and take it to that level of maturity before you could leave. You couldn't hop around seed-level startups without giving up your options, usually.<p>What's changed now is startups are staying private longer, leading to unfair scenarios. E.g. you're at a >$1B company with >100 employees for 6 years and you still lose your options. Traditionally a company would have gone public by that time, but now it's not, so we need a fix.<p>But if you overcorrect and now eliminate that added protections for younger startups, you risk creating an incentive to leave companies just for the sake of options portfolio diversification. Why bet on one team when you can bet on three, since even 1/3rd of a unicorn that makes it is worth more than 100% of the one that doesn't. And that individual decision leads to higher turnover which can kill infant startups.<p>Bottom line this fix should be more carefully targeted at what has <i>changed</i> to exacerbate unfair situations, namely startups that have reached "should be public" levels of maturity, yet are still staying private.
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.<p>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: <a href="https://triplebyte.com/ycombinator-startups/extended-options" rel="nofollow">https://triplebyte.com/ycombinator-startups/extended-options</a>
While this would be great, I'd personally like to see the tax code change - being taxed on the "value" of something you can't realize, and my NEVER realize, is crazy.<p>Most of the time I've been at a startup as a founder/early employee, the strike price was low enough that I'd be willing to take a roll of the dice and just exercise, if I was going to leave. It's usually 10's of thousands of dollars.<p>By the time I started vesting a fair amount, the <i>TAX</i> on that was non-trivial - 100's of thousands if not more. Something I personally can't really do.
Sorry but this doesn't fix it, it just delays the inevitable.<p>The main problem is that startups are offering options instead of restricted commmon stock. That means the new hire is paying for stock as an <i>investment</i>. That's not a benefit at all.<p>I have talked at length elsewhere on HN [1] about the system we use to give employees actual common shares, at current strike price, and delay any taxes until exercise so they have zero out of pocket expenses until they have to pay taxes (usually only capital gains).<p>[1] <a href="https://news.ycombinator.com/item?id=10818573" rel="nofollow">https://news.ycombinator.com/item?id=10818573</a>
Does anybody know of a startup where common stock is issued right away (or let's say after a probation period), and then the employee issues options back to the startup, which expire at fixed intervals corresponding to the vesting schedule?<p>For an early startup, this would mean when there is a liquidity event, almost all of the gain would be capital gains.<p>In Canada, it would be even better: people can defer taxes on stock and option grants until disposition (sale/bankruptcy). And the stock could be placed in a registered (i.e. tax-sheltered) account.
Great stuff.<p>I've personally had to deal with these decisions and know many friends who struggled with figuring out how they could possibly pay for exercising their vested shares, in some cases after they were laid off and had no choice in the timing.<p>If I were getting a job, I'd only consider offers with extended exercise windows. If they combined it with a more back-loaded vesting schedule [1], I wouldn't mind and would evaluate that. But dealing with the 90 day exercise window is black and white: it isn't worth all the potential trouble and risk you can be forced to take on.<p>1: 20%/20%/30%/30% instead of 25%/25%/25%/25%, or 6 years instead of 4 years
As much noise as I hear about this, it's not really that simple. In my estimation, lengthening the exercise window just ensures that dilution will happen faster. If you have 5% of a company locked up by people who no longer work there, you have to find a way to reward current employees. Sure, cash is one way, but it might be easier to issue more stock, most likely of a different class. It might sound good on paper, but ultimately I really don't think this (edited: "this" = extending the window) will have any real positive impact for employees leaving the company.
Next up (and the harder problem imo) is for companies to feel like they have enough leverage vs investors (mainly institutional VC) that they can be "nonstandard" in their option contracts (particularly during seed and A rounds). It's no coincidence that the companies that have taken the lead on this front are the startup darlings and/or repeat founders who have considerable leverage against funders (including YC companies, since their cred boost makes being nonstandard much easier than those without the brand).<p>We've made huge progress in that direction over the last 5 years as ZIRP made money cheap (and since the main leverage investors have against companies is the scarcity of funding, their leverage has decreased dramatically since the 80's). But as the funding mania crescendo of 2015 has passed, ZIRP is being wound down, and as private and public market valuations of small young tech companies plummet, I am not sure if that trend will continue into the future.<p>If there is one cohort that can band together to change the status quo, right now, that would be the YC companies. I am hopeful that enough momentum can be built over the next small handful of years by these companies so that "what is normal" can change permanently.
This is great! I hope this becomes the new norm for all new startups. If a start-up doesn't want to follow this then it really shows the values founders believe in and the kind of company they want to build.<p>Is this kind of plan unpopular with VCs; shark and Gordon Gekko ilk?
Slightly off-topic: The title made me wonder if it was going to be about the vast difference in equity grants between founders and employees (oh well).<p>But back on topic, harj et al. what's your opinion of Restricted Stock for early employees? I believe the issue is just that granting Restricted Stock once the company / share valuation is high enough is a <i>definite</i> tax impact. But it seems like nearly every pre-Series-A company could give the early employees 100% Restricked Stock. Is there some reason I'm missing that this never seems to happen?<p>Edit: s/RSUs/Restricted Stock/ since that's what I actually mean (the weirdness of RSUs remains funny).
@Harjeet thanks for writing this up and putting the work into.<p>Imo our industry needs this. Atm there is very little incentive for experienced people to join early stage start-ups as non-founders vs starting their own thing. Tikhon summarized this quite well: <a href="https://medium.com/@tikhon/founders-it-s-not-1990-stop-treating-your-employees-like-it-is-523f48fe90cb" rel="nofollow">https://medium.com/@tikhon/founders-it-s-not-1990-stop-treat...</a><p>Making options more employee friendly by default in our industry is an important & good first step!
OK, that's the option exercise period. The next step is better antidilution terms. Employees should have the same antidilution protection as founders.
@harj - How do you feel about granting cash bonuses to employees at pre-determined intervals to cover the tax cost of exercising their options? It seems like that would solve a lot of these issues, but also give the employee the flexibility to keep a small amount of cash if they'd prefer that over the risk of owning stock.<p>An example: I join a $5,000,000 Series A startup with a 1% equity grant that vests evenly over four years. At the end of each year, I get a $5000 bonus for the purpose of paying taxes on exercised options. It's a bit more than the tax cost for the first year, and likely a bit less in the later years, but after 4 years I've been given $20,000 which should be enough to cover most of the tax burden. If I leave at the end, I still have a 90 day window to exercise them and the money in the bank to do so. I could just keep the cash, exercise them at the end, or exercise them for a cheaper cost each year.<p>That doesn't seem too unreasonable for post Series-A startups cost wise. An extra 5k a year is nothing compared to the cost of a developer overall.
How about this - the company agrees to purchase And give to the employee any options that are vested and un-exercised for two years and agrees to cooperate w a declared set of known secondary buyers. Employees are on their own for the taxes and can always decline.<p>* It extends the retention effect of equity since it starts kicking in at year 3 and extends smoothly forward.<p>* It has no cash impact on the company since its buying the shares from itself.<p>* In the early years the tax impact should be minimal. In later years there should be secondary buyers who can give employees enough cash to cover the tax liability at the cost of offering a discount.<p>* It discourages the pure lottery players since it requires the employee to either cover the tax burden or engage a secondary firm and deal w the discount they require.<p>* The downside for the company (aside from increased dilution vs the status quo) is that it establishes a clear market price for common equity which can be disadvantageous.
It scares me that this could be used to justify stock options as having a value other than $0, and could be used to drive down real actual cash money salaries. I'm fine with the current situation because I have no plan to act on the options anyways - I don't invest in lottery tickets either.
As I understand it the major problem is that engineers need a lot of cash to get even more cash if they exit the company and need it in 90 days. Possibly very naive question...couldn't you include a clause along the following line in your funding round(s): "Investor X guarantees that they will offer to cover the necessary cost to exercise all options in return for Y%".
So basically if engineer A leaves and could exercise options the investor must offer a "bridge loan" with guaranteed ROI (either cash or just keep the equivalent options).<p>Good investors shouldn't mind this clause that much (I'd think) as it takes away one major point of worry for engineers and lets them concentrate on their job from day 0.
"Many employees don’t have the money to exercise their options within such a short window and lose them."<p>Sounds like an excellent opportunity for a business. Providing short term loans, taking x% or the exercised options. Although I am not familiar with US laws that cover this area.
Does having a bunch of vested, 10-year-window options on the books of a startup affect its valuation? Would a potential buyer look at that and think "That's a liability!"?