Employee Equity
Longtime readers will know this is a topic near and dear to my heart. I did a whole MBA Mondays series on this topic and I followed that up with a Skillshare class on the topic.
So I was excited to see that First Round Capital featured a blog post by Andy Rachleff on this topic yesterday. Andy was a founding partner at Benchmark and knows his way around a startup cap table. Andy included this slide deck in his post and I will reblog it here.
You will notice that Andy's plan differs a bit from my plan. But not by much. The important similarities are that Andy and I both encourage companies to not only grant equity at the start date but also on an ongoing basis so that employees' equity ownership grows as their tenure and contributions grow. This is critical.
Where Andy and I differ a bit is how to calculate how much equity should be granted. Andy suggests using market comps. I don't like doing that because 0.1% of one company can be worth a lot more or less than 0.1% of another company. I prefer to issue equity based on a multiple of current cash comp divided by the current valuation of the business. I lay that all out in my Skillshare class.
While I don't call out promotion and performance bonuses specifically in my Skillshare class, I am a big fan of both.
It is so great that folks like Andy are taking the time to lay out an approach and model to this issue. It is something literally every startup we work with struggles with. Getting it right is hard, but worth it.
Comments (Archived):
I liked this quote from Andy’s post. “Investors and employees make much more money by increasing the size of the pie rather than their share of the pie.”I prefer your method. It’s simpler and straightforward, and easier to explain to the employee.In addition to performance bonuses, you can implement an ad-hoc bonuses. Often startup employees go way beyond expectations & giving an unexpected bonus is a good thing and a boost to morale & loyalty.
If you were a person looking for a job at a startup, how would you ask the company about their runway and how equity is paid?
“How much runway do you have?””What percentage equity were you thinking of for this position?”
Market knowledge of these terms and understanding has increased dramatically over the last 3-5 years. Once it was arcane, now seems part of common vernacular.
Hell yeah. First startup in 1997 offerred me XX,000 shares. I was like, “that sounds like a lot!”. Who knew?
You and me both!The more I could demand the smarter I became in understanding what to negotiate for.
Posted it to a private group on Facebook. An economist said that this plan works great for startups-but once the firm starts to get larger they should move away from this system. (He is an expert on compensation/business culture)
Once you get above the $15M in revenue mark, profitable or not, the game in every was changes.One of the reasons that I don’t like the word startup as a catchall. For me looses the distinctions that happen in growth stages as you move up the revenue steps towards a $100M. In my experience, the dynamics change as the steps get steeper.
Does he write? If so, what’s his name? I wonder if you mean the relationship between compensation and culture because that is a very interesting topic.
Wrote a book, Personnel Economics in Practice. It’s a textbook on Amazon-so it’s really expensive. College textbooks are crazy in cost.
textbooks being expensive = stupidit kills me this still happens in this day and age
captive audience, professor can pick book and students have to take it.
Blogging ftw
Yup and you are tip to this change. A thank you is warranted!
Ha!
Exactly how you asked it
Nice approach. Agree 100% on there being no cliff for grants after the initial one. The cliff is like the probation period, so grants issued later are well after the employee (and the company) have established themselves as valued contributors.
Yuppppp
I think your method of correlating it to cash comp works well for later stage. At the outset, I’m not so sure. I think the risk is higher, so the reward should be too. Especially when early stage companies tend to not pay market cash comp.I’ve also been burned when this method uses base salary only, and not variable comp (commission/bonus). Sales people might earn only half their cash comp in base salary and are incentivized to double that or more. So why should their equity position be tied to only base comp?
The early stage valuation should take care of that jim. If you join when the valuation is $3mm and you are offered $300k of equity thats 10% of the company
You were always better than me at math. 😉
But how do you compensate employees 1-5?What do you grant people coming on post launch (or post the bulk of the work of getting there) but pre-funding and pre-revenue? How do you rationalize it so that both parties feel solid in knowing that they’re getting a good deal? These people are not co-founders, but are coming on so early that they want to feel as such (and should). How do you accomplish that in a reasonable way?Opinions on actual % numbers would be great. Too many folks want to beat around that bush.P.S. Brad Feld had some good posts on this. My eternal gratitude to whoever remembers what they were called and can post links.
Great question.Earned over time with cliffs, with change of control clauses is what I’ve been offered and used as well.Question is the % to give especially in a pre funding stage.
Yes, I’m looking for examples of actual percentages. Everyone likes to beat around the bush. I’m looking for some hard core numbers!I edited the comment to drive towards that.BTW, Brad Feld once had some good posts on the topic that I can’t seem to find. It was when he made up a fake startup and walked through the stages to explain certain elements. It was a good series, but I have no clue what it was called and can’t relocate it.
This series?http://www.feld.com/wp/arch…
Yes! Thank you! You have no clue how long I’ve been looking for this. 🙂
I don’t have rule of thumb to share on this on the %. It’s been really variable in my experience especially at a pre funding stage.
You have to stop thinking in % and start thinking in dollar values. Thats the whole point of my approach.
But how do you think in dollar values before you have a valuation?I could do like @samedaydr:disqus said and assign a valuation based on what I believe the company to be worth in 5 years. No doubt a good exercise in general, but if I walked into your office and pitched you with such a number, and told you to invest based on that valuation, you’d laugh me out. And so would a potential founding partner. “My company is going to be worth $1 billion, so here’s stock equivalent to a tenth of a percent… it’ll be worth $1 million!” Ha.I’m all about your formula. But what’s the employee 1-5, pre-valuation version?
A good rule of thumb is to discount the valuation at year 5 by (1+(1-survival rate)). And the use Fred’s approach to back out the percentage. In your case the survival rate is about 20%. Be realistic about the valuation, use the laws of total probabity for the likely scenarios.
I’m sure this will be a good tip once you explain to me what “discount the valuation at year 5 by (1+(1-survival rate))” means.I’m clearly not very well versed here. 🙂
At the end of the day, if Fred laughs at your valuation so should your employees.
I’d have disagree with that statement. Fred and others can only give you so much time to hear what you’re doing until you get X number of meetings or you’ve had enough time to sell them on the non-obvious or a market they have no idea about. A lot of early valuations are based on gut feeling and knowing what it takes to build the foundation for a company.I believe Fred’s said in the past that most companies aren’t worth more than $5 million pre-revenue – and perhaps this is true – but looking at it another way, getting 10% of equity would cost Fred in this case $500,000; And in reality, for USV, that would end up being worth more than 10% as I believe they require that equity % to be non-dilutable the first round.You can use people’s responses to get an understanding of how other people feel about the valuation you’re setting, and adapt accordingly – though just too many factors to narrow it down to believing what one person says.
Let’s crowd source the valuation. : )
Right … because the crowd would be able to much better determine Twitter being able to become worth X billion better than an investment firm who’s dedicated to investing in large networks of engaged users – although Twitter isn’t the best example as nothing like it really has existed before, though the needle would point towards a high reward if the system became mainstream. Twitter’s case is more where you’re taking an estimated bet and supplying the needed minimum resources to build product further – though I’m unsure how much, if any, traction existed before USV’s investment.
Estimize.com; doing better than Wall Street analysts. Crowd better than individuals.
Not enough data. From the few examples I looked at, Estimize people were just more optimistic than Wall Streeters, though the trends still were still in the same direction for both Wall St and Estimizers.The stocks picked too seem like fairly straight-forward businesses, and all of them are obviously post-revenue and have revenue and business cycles already at play in a large scale. Apples and oranges for coming up with a valuation for a pre-revenue tech startup.Neat site though.
Mine?You know, I just may be open to such an experiment in a couple months. Share my numbers / situation, let others chime in on what they think its worth, weight input in an intelligent way, and “assign” a value.I’m not sure how much stake if any could be put in such a valuation. But I’d probably feel solid enough to publicly share details and let folks take some swings.
You definitely have to have a sane way to value the company’s worth as of today.What I was referring to as a laughing matter is any number for what a pre-funding company will be worth in 5 years. That’s completely arbitrary, and no one is going to make any decisions based on that magical number. Every startup person is going to say “$1 billion plus, otherwise I wouldn’t be seeking your institutional investment!” You can’t ask Fred to invest $X for Y% based on that, nor can you ask someone to join your team for equity based on that. While you make a decision on what you believe the company could be worth in the future, you put investment dollars and equity on the table based on the valuation you can explain with some reason today.
Before puling out that 1 billion dollar number read @bfelds thoughts that he posted on 1/23/2012. Unless you are creating a brand new category, that is NOT your number.
I’m in e-commerce. Numbers are all over the place depending on how you define it and who you ask but, currently, e-comm sales are $250+ billion annually, growing 10 – 20% per year. This is because retail is still mostly offline (70 – 90%, again depending on how you define and who you ask).http://pandodaily.com/2013/…There is room for many billion dollar players in the category, without any need of creating a new one.I’m not saying I’m looking at building a billion dollar company (not saying I’m not, either). Just sharing the facts.I’m sure Brad Feld is mostly right with this point, but I’m also sure there are more examples of where its wrong. Financial services and companies like Square and Dwolla come to mind, as does any company like AirBnb in hospitality and Uber in transportation that’s not creating a new category, just working differently within one.
Fred’s Billion Dollar Valuation Hackpad says a lot about fact and fiction of the unicorn.
Some more nice commentary on the arbitrary nature of predicting where an early stage company is going to end up financially in the future: http://hunterwalk.com/2013/…
I could be naive here…but I think it’s pretty simple to think in dollar values…If you intend to raise money any time soon, figure out the amount you are planning to raise, and what you plan to give up for that…and work the numbers from that valuation (ie. 500k for 20% would be 2.5million valuation as you starting point).If you don’t intend to raise money any time soon…awesome…figuring out your dollar value can be directly based on revenues (times three if you want to get fancy)….that’s the ‘standard’ you would likely sell for in the market (if you were trying to sell).Don’t intend to raise and don’t have revenues to base valuation on…that’s easy too…your dollar amount is currently zero. Base your talks on the dreams, hopes, and strategy (this is where the noise of the startup world is generated from; and were most of us are attempting to fight our way out of)…and good luck! 😉
I found it really grounding to think of it this way. Brings the conversation down to “how many X your current salary” will you be getting – which feels much more tangible.Then it comes down to agree on value of company, and if “push comes to shove,” then hopefully within a grey area – the person’s passion for the project/environment and excitement of the future will make it overall a moot point.
The discount rate spread of a seed vs pre-seed would should be 30-40%?
Why not work backwards? Ask yourself what is the expected value of the company in 5 years assuming you hit your targets? For some it may be 5 million, for others 5 billion. Next, back out the percentages, based on the total compensation you feel is commensurate with the risk of not hitting your target.
This gives me a migraine honestly.Who the hell knows with any wild guess of accuracy the value of the company i five years?I’m not smart enough for this approach.
Lots of methods, Comps, Sales, Growth, Earnings. Do all of them and take an average. Use simulations. In the end you might just realize that this is not the startup you thought it was.
No shortage of methodologies for everything. Five years to me is just spreadsheet dreaming.Done it enough to know that it doesn’t matter. For me.
If you are in the beverage business, you can come up with a number that is at least in the ballpark and then just discount it for the risk of failure, call it 90%.
math is easy.exercise is all this is.
Yep, this is why startups are as much about the love of the game as the reward of the game. Remember, no one loves your child as much as you do.
And as the line that Bill Murray used in Lost in Translation that ‘the amazing thing about having a child is that once born, they become the most interesting person in the world to you.’
To me all of this number stuff and focus on it is mumble jumble.To me the sun rises and sets with the product or service and execution, as well as the little details.The details are what builds companies or breaks them.I hate any situation where people try to manage by numbers before it matters what those numbers are. It’s totally distonic to me.
No doubt a good exercise. I’m just not sure a potential team member wants me basing their compensation on goals I’m sure to find to be solid and they’re sure to see as unproven potential.
I think the series you’re looking for from Brad is called Finance Fridays…try this http://www.feld.com/wp/?s=f… The first post is about equity.
check out http://gawk.it/search?searc…Or just search the term equity directly in gawk.it ( http://gawk.it/search?searc… ) — you’ll kill about a week reading it all, but…if I do say so myself…#AWESOME.
It the seed valuation is $3mm and you want to give someone $300k of equity then thats 10% of the company using my approachI think dollar value of equity divided by valuation should work at all stages of a company
Thnx…earned over time I presume?
Fairly sure he means vested, though this phrase “grant equity at the start date” is making me wonder if that means the initial equity granted is vested or not – it only makes sense to me to have it be vested..
I took this statement to mean “vesting” or some other over-time earn out: “grant equity at the start date but also on an ongoing basis”
Used to be one year cliff, then monthly for vesting as an average of lets say a 4 year vest.I believe in earned equity as a rule.
I’m not sure I can tell someone who’s taking a chance to work with me pre-funding that I’m granting them $300k that’ll vest over 4 years. $75k / year in equity + whatever pennies I can throw them = far less that what they’d make with a real job.And the whole point of taking a chance on an early stage startup is that the upside is much more than that.I just looked up your old post. It says that early hires are more art than science.I think this formula is a good base for a discussion. Everyone would hope that 10% would be worth a lot more than $300k in the long run. But I’m starting to think that convincing someone of that is going to be pure art.
The idea is though that that equity’s value would go up, just that it’s current value is $75k per year.The “harder” they (and the team) works, the more valuable it becomes, or should become.
Also, you’ll find people who will prefer to work on a new company – and it’s the environment, not the salary that matters as much.
I don’t hang in startup circles, nor am I super interested in hiring “startup people” or adopting any of that culture. So for me, these people you speak of are unicorns.I want people who are passionate about apparel, housewares, and the other items we sell. The people passionate about making shopping local less trend and more default.I don’t want people who ask me questions like, “so how is this going to be a billion dollar company?” because that the kind of bullshit I get when I talk to startup people. I, instead, want people asking me questions like, “What’s the plan to get 1000 small businesses up on the platform in next year?”Unfortunately, the people I want to work with are the ones most adverse to startups.
“…people who are passionate about apparel, housewares, and the other items we sell. The people passionate about making shopping local less trend and more default…Have you checked MomCorps?Also, there are tons of women on the sidelines who would welcome a way back in. If you have investors yet, they are sure to have women in their circles who may fit your profile. Talk to @pointsnfigures:disqus, his wife Lisa is doing some interesting things with mid-career women, and she may have some ideas for you.
@brandonburns, I might have some people for you. They will be Chicago people, but really sharp.
Bacon spice kit? Um… I’M buying!You know I always support my hometown. And I’m still not opposed to moving back (though making a case to leave NYC when working in this field is a hard one).Customer Acquisition and Merchandising are my two main holes to fill at the moment. I’d love an intro to anyone great at those two things, no matter where they live.
Ah, I didn’t know that you were in NYC now. Send me a job description, I’ll post it to my bschool alumnae Linked In group…
I knew it!
ain’t nothing wrong with midwesterners 🙂
I’m not into the startup culture either. I see these people in random pools, random places. It’s a matter of building relationship. People are looking for community. If your company looks like a good community to join, they’ll be interested. You being the leader of that community has a big determining factor in the success of the ecosystem.I wouldn’t want people to ask the “billion dollar” company question either. It’s more a matter of teaching people, saying logical things, and if they understand then good – if not – then hopefully a bit of a nuanced response that you can give them will help them understand. If they still can’t understand you, it’s not going to be a great marriage.
I am really looking forward to meeting you tomorrow (I hope you are still going to the event!) We have some similar attitudes.
Vesting is a fantastic idea for you or anyone. Dead equity on a balance sheet is worse than dead capital
My model works just as well at employee 1 as 100Albert also recently talked about this. I am in the subway so can’t share a link but ddg “albert Wenger startup recruiting ziggeo” and you will find it
Found it. I will for sure view this video today.Link: http://www.youtube.com/watc…
Thanks for finding and sharing. Going through exact same issue this week!
i love that you found it and posted it. thanks!!!!
First find people who are passionate and who can understand the future value of what you’re creating, and believe in your ability to execute – which will be coming from a number of factors – and believe in what you’re trying to accomplish. In some scenarios I could see this passion just not existing, and where it’s just a money game or someone’s joining it out of boredom (I don’t really define a lack of passion as boredom though).A freelancer I had hired years ago, who was awesome and I had even offered equity because of such had told me in no specific terms, that there’s no point in asking for or having equity when company value is $0. At that point it just didn’t have enough of a compelling value. Unfortunately, even offering an amount I wouldn’t be offering anyone today, he wanted to maintain his flexibility and his own gig/schedule, so he kept on his current path.Equity is only valuable and compelling if it’s on a proven upward curve, and people who don’t understand this will require or want probably an unreasonable amount of equity; Sure, they helped build the company – and if they did it pay-free then they of course should be at the founding partner level – though I am assuming you’re talking about paid employees early on.You could take the approach where a lowered salary is offset by “higher equity” but I think that puts pressures in the wrong places.Determining %s will really determine on how big of a scope, market, and how successful you plan / project yourself to be – and of course if you can share that execution plan with team members and them being excited about it; % equity then just becomes more of a moot point and a bonus, assuming they’re paid a fair salary and love what they’re doing, enjoy the environmentIt may take longer to find these people, though if done well I could see it leading to an environment with much less friction overall – and really a great environment overall. And if you keep more equity early on then there’s more to give out later, so the best long-term employees can continue to increase their gains – further bonuses in a way from all their previous years of experience.
I’m 100% with you. But either I’m just a crappy recruiter, or these magical people don’t really exist. It’s probably somewhere in the middle.I’m extremely happy with my tech team. They’re all very familiar with startups, so they have a good base on top of which we can talk about these things. Deals are being made, and it’s all coming together fine.However, I want two more strong partners, one focused on customer acquisition and another focused on merchandising. Coming from the advertising . marketing world, and having a lot of friends in retail / fashion, my supply of these contacts isn’t in the least bit short. However, these people, who’ve all had great careers and would be dreams on anyone’s team, are not “startup people.” They don’t have any base knowledge on top of which to have a convo and, more importantly, they need salaries. And the ones who don’t want unreasonable amounts of alternative compensation because they simply don’t know how to think about it any other way.Dilemma.
I doubt you are a crappy recruiter Brandon. The difficulty you are facing is one all start ups face. The people that you are talking would not be dreams because they are not start up people. You either need to find and convince the customer acquisition and merchandising people to become co founders or you employ at the next level or two down.Personally I think in a start up , if you can its better to employ people with potential than the ones who are already fulfilling their potential and earning amazing salaries, the baggage, salary and equity expectation of that type of rockstar is typically over the top in my opinion.
“if you can its better to employ people with potential than the ones who are already fulfilling their potential”Yep. And such a person just started as an intern yesterday. We’ll see where that goes.
that type of rockstarThe other thing people fail to realize about any “star” is the rest of the band.I’m always amazed at how people put some up on a pedestal without realizing what they are able to do is also depending on the others that they work with (and I won’t even get into luck). How do you know how the same person will perform without the same situation and same support? (Ron Johnson leaving Apple for JCP is perhaps an example of this.)
But either I’m just a crappy recruiter, or these magical people don’t really exist. II see it this way with you Brandon. You’re not a crappy recruiter. You just don’t talk a big enough game. You are competing with people that are able to stretch the potential and the truth of what they are doing with appropriately placed “to be sure nothing is guaranteed” that everyone doesn’t hear because they are mesmerized by the pitch.This is my psychoanalysis of you in this respect. Culled strictly from your comments here on AVC as we have not met and have never spoken (or even traded emails).You are not a bullshitter. You are realistic. Sometimes in order to get people on board you not only have to narcissistic-ally believe in your dream (think Jobs selling Scully at Apple) but you have to also be willing to stretch the truth and be a good bullshitter as well. And not care what happens to the person if your dream doesn’t work out.So the bottom line is: Tell a better story on the upside while mentioning the downside. But most likely this will be hard for you to do. But it can be done. You just have to feel comfortable lying to people a bit. [1]more importantly, they need salaries.In general in life “all the good merchandise” is taken already. When I was hiring in a past old school business one of the first things I learned was all we ever got to interview were the dregs. All the good people already had jobs. So it took years and years until we got a crew together that was good enough to keep things humming.Same with dating. Good merchandise gets snapped up. Merchandise not snapped up has some drawback. Pounce immediately when you see something that for some reason becomes available. The reason I only wanted to date divorced women who got married when they were young-er or had been in long term relationships. They got snapped up. (After of course passing the other 900 point checklist.)And the reason I’m going to LL Bean to buy some stuff now. I’m not waiting to the sales when all the good merchandise will already be picked though. I want to pay full price and get the best selection and color and patterns. I don’t want the dregs.[1] For the record I’m not the type that feels comfortable doing this either so I definitely know it when I see it.
You’re right. I’m not a bullshitter. But I do talk a big game. Its just that I prefer, instead of relying on hype, to have a game thats legitimately big and speaks for itself.I’d rather show you than tell you. And I prefer working with people who are attracted to showing vs. telling.I built my agency career on showing: doing the research / designs / legwork to prove that I had solid ideas and ways to execute them. I moved up by building a track record of performance. That was how I got people on board when I needed them, and how I was recruited to open the Beijing office of the world’s most award winning ad agency (BBDO) as Creative Director. At age 26.I think that’s quite a big game. Even through my understatement. It’s also all told with objective facts, sans subjective hype.Demonstrating proof of my skills was also how I got quality vendors to sign on to Wander & Trade before it even existed, and got 2 bad ass tech guys who can work on whatever they want for tons of money to work with me for a fraction of their rates.But I have deep developer contacts, and already knew these guys and that they’re amazing. I have yet to meet their Customer Acquisition and Merchandising equivalents. When I do, they will figure out how to get them to come on board just like everyone else. It will be because I show them that they’re joining something with a bright future. They will not have to rely on hype.
There might be no opinion because the opinions on the subject are very variable
You’re probably right. I’m probably asking an endlessly debatable rhetorical question.
meh. I get no joy in my answer…
you answer was probably the least fussy and the most accurate. 🙂
This is a super important question to get “right”, where a solution is “right” if it at least demonstrates some logic on how you arrived at the number. In my last start-up experience, I was employee #4 (including the two co-founders).I joined the team on a handshake and after 6 months of exciting and inspiring work and a successful launch of our alpha product (where I thought I provided valuable contributions/insights), it finally came time to properly form the company (clearly late). I was offered 0.5%. The cap table was effectively 45%, 45%, 5%, 0.5%. My mind was blown. As the team “numbers guy”, I explained how equity positions (especially in light of pre-revenue, pre-fundraising conditions) normally work as I walked out the door.One of my more disappointing professional experiences, though a valuable learning opportunity.
eek. that blows. so sorry.
Yes, a lesson you only want to learn once for sure!I will never again work under those conditions because it only ends up in a lose-lose. I did a few weeks of work, partly to demonstrate that I had the necessary skills but also to try to have something demo-able to increase chances of getting funding.But the “founder” was more like a used-car salesman, and would never clarify anything, so I stopped working. Cue a series of ever more angry emails and texts from him expecting me to continue to work for free (even though I had given 30 days notice that I was not going to proceed unless everything was put down in writing ….)That lesson is firmly learned !
Whomever you hire to bring customers in the door is worth 5-8% of the equity, provided they are still with the company 5 years from now.Nobody else has equity that is worth a hill of beans without that lead sales dog.Tranche the equity on time in not results, b/c results are reliant on too many variables at this point. Doing it based on results does not require trust, but it leaves you open to unfairness / pissed off people.Doing it based on time in the job requires trust but it also requires one of you to actively screw the other.
.The entire discussion of compensation has to be balanced among:1. Salary;2. Benefits;3. Short term incentive compensation;4. Long term incentive compensation; and,5. Something special.The use of equity incentives should be primarily for long term incentive compensation which results in employee retention and rewards which are based on the long term value of the enterprise — remember that is the ultimate goal of the company’s existence in the first place, to create long term value.Be very careful about vesting provisions as they are ultimately the “golden handcuffs” which get folks through the difficult periods. Employers should feel perfectly entitled to use the golden handcuffs as a retention tool.I do not embrace the notion of using equity as a proxy for short term incentive compensation though there is absolutely nothing wrong with, in essence, using short term incentive comp value to “purchase” equity in the form of appropriately valued options.Short term incentive compensation and long term incentive compensation are often confused — disastrously so. They are entirely different beasties.As to the modicum of exchange, options are the knee jerk coin of the realm but restricted or phantom stock (options) are perhaps a bit more compelling.Fred is absolutely correct in devolving everything to “value” rather than nominal options particularly in the early days of any endeavor. This is not true, obviously, of founders.JLM.
Under your version, would SnapChat employees be gaining equity based on a potential value of $3 billion? Or is that just a massive edge case?
Seems obvious that valuation has to be taken into account if we are talking equity grants. But if he means option grants does his approach make much more sense?
Jay Adelson has an interesting take on employee equity that he’s trying with his latest startup: http://gigaom.com/2013/11/1…. In a nutshell he’s advocating for a large pool of shares for early employees that vest only in a liquidity event to engender more long-term thinking and loyalty. Although this is in addition to a traditional options grant, presumably that grant can’t be nearly as substantial as it otherwise would be in a traditional scheme, so I have some concerns with it given the nature of early employees and how long it could take for such events to occur .. But I like that he’s experimenting and innovating a bit here.
.There is much merit in looking at employee stock options (restricted stock, phantom stock) as a pool rather than as an individual grant.The liquidity event sharing approach is particularly attractive and appealing. When anyone goes to the pay window, everyone goes to the pay window.The pool approach can also be used to reward folks who stay — direct longevity grants and the ability to avail themselves of the “lost” options of those who depart precipitously.The pool approach is clean from a dilution perspective as it resists “creep” and other problems that develop when granted individually.Much of the history of individual stock options is based on favorable tax treatment which has eroded with the passage of time.One other aspect of a pool is the ability to allow employees who have exercised stock options (or who want to) to take advantage of a “cashless exercise” or a sale through some of the emerging secondary markets for privately held high tech stock.I have never done one but I would give it serious consideration.JLM.
i thought that was a super smart plan. Overdoing it for early hires that leave isn’t really fair for everyone else
Thanks for posting it. I see many startups ignore creating the employee option pool from the beginning. Pointing them to either this blogpost or your earlier ones would be helpful. Thank you so much :).
First time entrepreneurs usually don’t learn about employee equity until its too late and the pies already divvied up. Great post as usual.
Fred–tangent, half baked idea.Might be fun to create an avc community holiday marketplace listing.Curious if/how many community members are making goods and selling them. Bunch of marketplaces here, products I bet that are focused on the holidays that could use some attention.I’m planning on buying as much locally as I can. I’d be glad to buy from community members as well.
First I think it’s a good idea. I would definitely buy from other community members.But oddly enough I almost never try to sell what I do locally or to people that I know. First I have to give a discount. Because our base price is higher than our competitors, if I don’t discount I am compared to the much lower priced alternatives. Even though I know more than everyone else out there that anyone will ever deal with for the same product. (Note I didn’t say “probably” either). Problem is until you’ve gotten a bad outcome you can’t appreciate that. And you can give people tons of free advice on the phone and they will still say “Hey can you sell it to me for 1/3 of $x that is what your competitor charges?”. (Note: We all pay the same price for the product. 1/3 of $x mean you make about a $1 gross margin. What is your time worth?)Second if I know the party it means it will take my time personally if there are any issues. And I have to be available literally all the time. So if my wife meets someone or if I meet someone I rarely tell them what I do. [1] [2] I don’t even carry business cards. Times when my father has given out my name I end up spending time on the phone for a small sale which to me is a killer. Or giving tons of free advice. And being the internet help department. In other words people buy their wine elsewhere but they call you up to ask what wine to buy and for your opinion. And you operate a wine store which they pass by everyday.[1] That is for the small ticket stuff. The big ticket stuff that I do is big dollars so for that personal contact is an avenue that I pursue. 24×7 availability is standard.[2] That said if anyone at AVC wanted to buy my product I do have a friends and family rate of 1/2 $x. Mainly because I like dealing with smart educated people who have a clue. So my payback is the friendship and ability to interact with like minded people, not money. The people are either aren’t smart, educated, or distinguished in some way I have no patience for.
I was thinking about the that we stuff in the Channukah stocking actually ;)But, and I need to say this, everyone is selling something all the time of course.A third of my clients currently have connected to me through this community.
I know you were for sure. (As a side note people can and do buy my product as a gift.)But it actually makes sense to have this be more than for the holiday period. Might as well be 365.
If there is an LE action figure, put me down for six with a 15% avc discount please.
With six you get spring roll.
Your point (Fred’s) about adding equity from the start date is a great one and I like that one as much as I like Brad Feld’s idea that at an early stage funding round you should build a board, so that you are operating like you would at a series A. If I understand that correctly… Makes sense.
I have God’s exclusive designation as His temple. Reality is clusterfucked, but I win.
Not all founders have the same net worth before joining a startup and in my view, this will affect their bargaining power.A founder with high net worth will usually join a startup company for a high cash pay. Otherwise, this individual is better off by waiting for the next opportunity.At the other end of the spectrum, if a founder or initial employee needs to make a living even during the bootstrap period, he or she is likely to accept a lower cash pay in order to join a company with high growth prospects.From this perspective, is cash pay a suitable metric?
@fredwilson:disqus Thank you for the video and for all of your comments below. Can you share some thoughts on how and when to transition from % to $ with sophisticated new hires? Ultimately, these candidates will keep coming back to % which they feel is the market metric. They will leverage tools like Wealthfront’s comp tool during the hiring process to assess their market value.
Here is a question. When employees with vested options leave the company, is it better to allow them the luxury of having a long exercise window, or is it better to keep the window short and force them to pay up or give up? In China, employees typically don’t like to pay for something which they don’t know for sure will be worth more in the future. So if the window is short, they most likely will give up the options, which allows the company to plow back the options back into the pool (e.g. less future dilution). Another related question would be if the ESOP terms don’t have much impact on recruiting, is it a good idea to put in place a long cliff to “lock in” the employees for a longer period of time (say, four year cliff with one full vesting)?
Question for you.In every single instance, buying earned equity after leaving a company for me was 90 days. In one case it was two years.I loved the latter.Is there any legal side to this that you know of?
I think that startups tend to be intentionally deceptive on your point #2. It’s a real black mark on the industry how poorly this topic is generally handled.
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.Every option ever granted has to be granted subject to an approved Option Plan.When options linger after employee departure, they complicate the dilution calculations for EPS, etc.When special deals are granted, options can go from being “qualified” to being “non qualified” which really complicates things.JLM.
Thanks!
.Agree with you more than you agree with yourself.However, that is universally not the practice. The accounting treatment for a public company is a disaster. Thank you, Congress.Every plan I have ever seen is 30 days to exercise vested options from the date of departure and forfeiture of all unvested options.JLM.
.The accounting treatment is identical but things like public reporting of EPS, et al, are not as critical.At the end of the day, one can do whatever one wants as long as the disclosure, accounting and tax treatment is appropriately embraced.JLM.
See above.