{"items": [{"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912089318572", "anchor": "fb-912089318572", "service": "fb", "text": "When you get paid in the form of options, the options vest as you keep working for the company, meaning that the company is actually paying you in the form of a \"meta-option\" on whether to trade your labor for options later. This makes the option package much more valuable than the naive calculation suggests. https://www.benkuhn.net/optopt", "timestamp": "1511450425"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912089318572&reply_comment_id=912089647912", "anchor": "fb-912089318572_912089647912", "service": "fb", "text": "→ You might ask why the company doesn't just do a meta-option trade with VCs instead. I'd have to think about that more (though the obvious answer of \"it's prima facie silly and sends bad signals\" is my first candidate)", "timestamp": "1511450489"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912089932342", "anchor": "fb-912089932342", "service": "fb", "text": "Also relevant (and saying basically the same thing as you iirc): https://danluu.com/startup-options/", "timestamp": "1511450676"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912089932342&reply_comment_id=912091898402", "anchor": "fb-912089932342_912091898402", "service": "fb", "text": "→ Thanks! That looks like a much more thorough version.", "timestamp": "1511451885"}, {"author": "Michael", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912089932342&reply_comment_id=912100675812", "anchor": "fb-912089932342_912100675812", "service": "fb", "text": "→ That's a very good writeup, and I believe all of it. But there is one additional point which it does not address. If a prospective employee really wants to work for a particular startup, but their partner or parent or close friend points out that the compensation is below par, they like to have the argument \"but I get stock options, so the total package is really good\". And even if they don't even believe that themselves, they can use it as an argument, so that they can go ahead and do what they really want to do, instead of getting a higher-paying (and potentially boring) job elsewhere.", "timestamp": "1511455542"}, {"author": "Randy", "source_link": "https://plus.google.com/102251509192760989541", "anchor": "gp-1511451511880", "service": "gp", "text": "Your question isn't fully specified--I think you want to know why employees would go along with this model, but the question is sorta asked why employers would offer and employees would accept (at least that's the only reason why I can see the comparison between VCs and employees being relevant), so I'll touch on both.\n
\n
\nOn the employer side, I think you gesture at this in your last paragraph, but I think this model serves to get employees much more heavily invested in the success of the company. That's both valuable over time (they focus more and put more energy in) and as a selection criteria at the beginning (people who go \"Maybe?\" at the concept are more likely to walk away). \n
\n
\nIn terms of why the employees would choose it, isn't that dependent on what the expectation value of the stock options if the company succeeds/fails? I think the perception is that if the company succeeds the employee will be rich Rich RICH, and thus that averaged out over possible outcomes the stock options for lower salary trade is enough of a win to make up for the extra risk. I question (pretty severely) whether or not that evaluation is accurate; my understanding is that stock in startups these days is much more heavily weighted towards VCs than employees in ways that aren't obvious if you're not a company structure lawyer. And just evaluating the likely payoff (after several rounds of funding) without those games is hard. But I think it's the common evaluation. ", "timestamp": 1511451511}, {"author": "Andrew", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912092646902", "anchor": "fb-912092646902", "service": "fb", "text": "I imagine that the stock options are used to give the employee an incentive to add value to the company while at the same time tying their psychology into the gamble of company success, which makes them more likely to stay with the company longer than they might otherwise.", "timestamp": "1511452224"}, {"author": "Andrew", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912092646902&reply_comment_id=912095136912", "anchor": "fb-912092646902_912095136912", "service": "fb", "text": "→ Seems like lots of pros to the company if they use stock incentives in lieu of market pay. The employee definately seems to get the short end of the stick since they have less freedom as they become invested in the company financially and mentally when they could be doing better for their career elsewhere. The Gambler's mentality can really suck people in even though payoff is unlikely.", "timestamp": "1511452890"}, {"author": "Jim", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912095306572", "anchor": "fb-912095306572", "service": "fb", "text": "Options are frequently a way to defer compensation in the future, and make it conditional on continuing to work at the same company for some duration. This increases employee retention in the short term and decreases it in the long term; since loss of key personnel can kill a mid-stage startup but is relatively easy for a larger company to deal with, this is exactly what they need.", "timestamp": "1511453090"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912095306572&reply_comment_id=912096369442", "anchor": "fb-912095306572_912096369442", "service": "fb", "text": "→ You can vest anything, doesn't need to be something hard to value.", "timestamp": "1511453683"}, {"author": "Alice", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912095306572&reply_comment_id=912173025822", "anchor": "fb-912095306572_912173025822", "service": "fb", "text": "→ Jeff Kaufman yeah, at my last job the employee retirement contribution had 3-year vesting to encourage retention", "timestamp": "1511467634"}, {"author": "Michael", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912096409362", "anchor": "fb-912096409362", "service": "fb", "text": "The bigger issue is that for an early startup, the stock simply isn't worth much, because the company may not work out. In many cases, they may not be able to raise enough cash to pay those employees market rate.

I don't buy the argument that it somehow makes employees work harder, though.", "timestamp": "1511453714"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912096409362&reply_comment_id=912096978222", "anchor": "fb-912096409362_912096978222", "service": "fb", "text": "→ I think options make sense at very early (~5 people) levels, but even companies as large as AirBnB are still giving options. Most startups that IPO keep giving options right up until then.", "timestamp": "1511454061"}, {"author": "Michael", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912096409362&reply_comment_id=912099732702", "anchor": "fb-912096409362_912099732702", "service": "fb", "text": "→ At that stage, you're right.", "timestamp": "1511455093"}, {"author": "Alice", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912096668842", "anchor": "fb-912096668842", "service": "fb", "text": "George was arguing that giving employees stock discourages unionization. Unions transfer profit towards employees, which hurt the stock price, giving employees an immediate financial disincentive to unionize.", "timestamp": "1511453933"}, {"author": "David Chudzicki", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912096668842&reply_comment_id=912165091722", "anchor": "fb-912096668842_912165091722", "service": "fb", "text": "→ Hmm, but does any company employing eg mostly programmers (many of which don't give stock, I think?) see unionizing? So I would guess that unionizing isn't a major risk anyway.", "timestamp": "1511466585"}, {"author": "George", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912096668842&reply_comment_id=912187212392", "anchor": "fb-912096668842_912187212392", "service": "fb", "text": "→ I was making this argument about publicly traded large tech companies.", "timestamp": "1511469689"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912096668842&reply_comment_id=912228868912", "anchor": "fb-912096668842_912228868912", "service": "fb", "text": "→ Is that much different than \"if you give them more of the profits there's less reason for them to unionize\"?", "timestamp": "1511473489"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912096668842&reply_comment_id=912229223202", "anchor": "fb-912096668842_912229223202", "service": "fb", "text": "→ There are also companies like Netflix that do only cash, no stock, and I don't think they're anywhere likely to unionize.", "timestamp": "1511473541"}, {"author": "George", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912096668842&reply_comment_id=912260470582", "anchor": "fb-912096668842_912260470582", "service": "fb", "text": "→ I think it is a bit different. Because a nascent union will have to bargain just to get compensation back to where people started before the union.", "timestamp": "1511477817"}, {"author": "opted out", "source_link": "#", "anchor": "unknown", "service": "unknown", "text": "→ this user has requested that their comments not be shown here", "timestamp": "1511541946"}, {"author": "David Chudzicki", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912096668842&reply_comment_id=912378618812", "anchor": "fb-912096668842_912378618812", "service": "fb", "text": "→ why is unionizing so hard?", "timestamp": "1511542444"}, {"author": "opted out", "source_link": "#", "anchor": "unknown", "service": "unknown", "text": "→ this user has requested that their comments not be shown here", "timestamp": "1511544173"}, {"author": "David Chudzicki", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912096668842&reply_comment_id=912390035932", "anchor": "fb-912096668842_912390035932", "service": "fb", "text": "→ Another aside... (no problem if you don't feel like educating me further, but I might as well state the question):

I wonder why collective negotiation doesn't happen without following these particular legal steps to form a legally recognized \"union\".

Is it illegal to collectively negotiate outside of that framework? Or just impractical? Or maybe it actually does happen?", "timestamp": "1511544617"}, {"author": "opted out", "source_link": "#", "anchor": "unknown", "service": "unknown", "text": "→ this user has requested that their comments not be shown here", "timestamp": "1511551641"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912096668842&reply_comment_id=912432620592", "anchor": "fb-912096668842_912432620592", "service": "fb", "text": "→ If say, all the engineers of a startup went on strike, management would have to negotiate or close shop. A technical cofounder alone wouldn't be able to keep the business up.", "timestamp": "1511551738"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912096668842&reply_comment_id=912432825182", "anchor": "fb-912096668842_912432825182", "service": "fb", "text": "→ It takes too long to spin people up.", "timestamp": "1511551747"}, {"author": "David Chudzicki", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912096668842&reply_comment_id=912434397032", "anchor": "fb-912096668842_912434397032", "service": "fb", "text": "→ Hmm. Compelling them to talk to you doesn't actually compel them to give anything up. So that makes it seem like the union has some other bargaining power, either legally mandated or just what naturally comes from a bunch of people threatening to stop working.

If the latter, then it seems like a non-official union should have that too.", "timestamp": "1511551803"}, {"author": "opted out", "source_link": "#", "anchor": "unknown", "service": "unknown", "text": "→ this user has requested that their comments not be shown here", "timestamp": "1511552103"}, {"author": "George", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912096668842&reply_comment_id=912561437442", "anchor": "fb-912096668842_912561437442", "service": "fb", "text": "→ Silicon valley is uniquely hostile to unionization, even in America. It isn't easy to collectively negotiate, although in some cases it can be possible. Ironically, the solution some people in tech have is to form a \"startup\" and use that as a means to do collective bargaining.

One of my friends was fired for trying to unionize.", "timestamp": "1511582535"}, {"author": "Bob", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912098580012", "anchor": "fb-912098580012", "service": "fb", "text": "you're right, you're missing something: the presumption that potential employees will believe more in the company's prospects than a VC or random stockholders via an IPO. that may or may not be true, or may be wishful thinking, but it Should be true in ideal circumstances.", "timestamp": "1511454491"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912099957252", "anchor": "fb-912099957252", "service": "fb", "text": "What are the tax implications? If I promise to give you some cash 4 years from now contingent on you still working for me, wouldn't you have to pay taxes on it now? (As opposed to in 4 years like you would with options)", "timestamp": "1511455214"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912099957252&reply_comment_id=912100002162", "anchor": "fb-912099957252_912100002162", "service": "fb", "text": "→ Also, I assume it would be ordinary income instead of a capital gain", "timestamp": "1511455243"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912099957252&reply_comment_id=912106813512", "anchor": "fb-912099957252_912106813512", "service": "fb", "text": "→ I'm not sure what the tax would be on that case. I think it depends on whether the IRS thinks the gains are yours yet?

Yes, it would be ordinary income, though making stock options be ordinary income is tricky (plus the AMT).", "timestamp": "1511457860"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912099957252&reply_comment_id=912107706722", "anchor": "fb-912099957252_912107706722", "service": "fb", "text": "→ If the income is contingent, I can't imagine it would be taxed when the contingent benefit is granted rather than when you actually own the money. That's very different from when how most benefits are taxed. For instance, liquid RSUs are taxed at vesting time, not grant time; prepaid income is taxed when income is paid, not when services are rendered (unless you're an accrual basis corporation).", "timestamp": "1511458533"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912099957252&reply_comment_id=912108699732", "anchor": "fb-912099957252_912108699732", "service": "fb", "text": "→ Ben Jeff Kaufman Yeah, good point. I think the legal requirement is that you pay taxes when there is no longer a \"substantial risk of forfeiture\", and presumably you could argue that there is a \"substantial risk\" you would quit before the security vests.", "timestamp": "1511458838"}, {"author": "David Chudzicki", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912099957252&reply_comment_id=912166184532", "anchor": "fb-912099957252_912166184532", "service": "fb", "text": "→ It does seem plausible that tax implications are part of the story.", "timestamp": "1511466734"}, {"author": "Accalia", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912099957252&reply_comment_id=912783821782", "anchor": "fb-912099957252_912783821782", "service": "fb", "text": "→ I've had it claimed to me that the entire options thing is because it's a very tax-efficient alternative to paying salaries. No idea if that's correct.", "timestamp": "1511699926"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912099957252&reply_comment_id=912789520362", "anchor": "fb-912099957252_912789520362", "service": "fb", "text": "→ The tax efficiency argument is that it's taxed at the long term capital gains rate instead of the ordinary income rate, right? If you sold as you went you'd probably be in the 28% bracket, while long term capital gains would probably be 15% if you sold at a reasonable rate. I'd expect shares to be worth more than 13% more to VCs than individuals, so I don't think tax efficiency is enough to account for it.

(If everyone were planning to donate appreciated stock then it would be a 28% tax advantage, plus generally being risk neutral. But the employee is still in a much worse position for evaluating the value of their offer, which I would expect to be worse than 28%.)", "timestamp": "1511704243"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912099957252&reply_comment_id=912797439492", "anchor": "fb-912099957252_912797439492", "service": "fb", "text": "→ Keep in mind that when compensated in stock, most of the expected value comes from scenarios where it goes up a lot, in which case it might be impractical to stay at the 15% marginal rate for LTCG. (On the other hand, I think most software engineers would wind up in at least the 33% ordinary income bracket if compensated with the cash equivalent of the EV of their stock options.)

If everyone were planning to donate then they could just donate the year of the grant and it would be a 0% tax advantage (unless you were imagining that everyone would already be at the 50% cap?)", "timestamp": "1511707912"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912107601932", "anchor": "fb-912107601932", "service": "fb", "text": "The usual explanation for giving someone equity instead of cash is adverse selection: the sort of person who wants equity is different than the sort of person who wants cash, and the former is more valuable as an employee.

At first when I read this I thought you had a good point and maybe there was some way to remove the lack of clarity around options while still having the upsides of equity, but after trying to brainstorm how I could do something like this for my employees I'm not sure.

Suppose I want my employees incentives to be aligned with mine (in the sense that we both want to maximize the enterprise value at some future liquidity event). Is there a way that I can do this without options?

Everything I can come up with is some security that pays off as a function of enterprise value at the liquidity event, which\u2026 is basically just an option.", "timestamp": "1511458449"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912107601932&reply_comment_id=912110356412", "anchor": "fb-912107601932_912110356412", "service": "fb", "text": "→ What about having a good bonus and compensation system where you explicitly reward people for good work? This aligns their incentives with yours much more than stock options do.", "timestamp": "1511459670"}, {"author": "Michael", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912107601932&reply_comment_id=912110531062", "anchor": "fb-912107601932_912110531062", "service": "fb", "text": "→ So I realize this is going to sound pretty harsh here, but when you write \"more valuable as an employee\", I read \"gullible enough to work for lottery tickets\".

I feel like this kind of thing is much like, say, the tradition of tipped wages: a way to pay people less and pretend it's to everyone's benefit, when you're really just hurting the workers.", "timestamp": "1511459801"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912107601932&reply_comment_id=912117312472", "anchor": "fb-912107601932_912117312472", "service": "fb", "text": "→ I think tipped wages (or sales commissions) are much more of an example of that than stock options. Offering flat wages instead of tips/commissions means you're selecting in large part for people who expect to earn more under a flat system. On average, these will be people who you'd less prefer to hire.", "timestamp": "1511460819"}, {"author": "Michael", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912107601932&reply_comment_id=912118829432", "anchor": "fb-912107601932_912118829432", "service": "fb", "text": "→ Is there actually any evidence of this? It sounds nice, but I've never seen any empirical evidence to support it.", "timestamp": "1511461012"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912107601932&reply_comment_id=912119782522", "anchor": "fb-912107601932_912119782522", "service": "fb", "text": "→ Ben: Like, if someone gets you $10k then if they have 1% stock (high!) that's just $100. And it's an eventual $100. Whereas you could directly give them $1k, and do it relatively promptly.

(Big companies have to do this; very small companies can avoid it by the approximation of people owning a relatively large chunk of the company and having a strong \"we're all in this together\" feeling and culture.)", "timestamp": "1511461151"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912107601932&reply_comment_id=912120017052", "anchor": "fb-912107601932_912120017052", "service": "fb", "text": "→ Michael: I suspect there's good evidence for salespeople and commissions. I'll go look.", "timestamp": "1511461186"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912107601932&reply_comment_id=912122856362", "anchor": "fb-912107601932_912122856362", "service": "fb", "text": "→ Michael: on my laptop now, and starting to look for studies on sales compensation. Found this article, which isn't what you're asking for, but lays out the argument for commission-based payment better than I did above:

\"Imagine that you are a great sales person who knows you can sell $10M worth of product in a year. Company A pays commissions and, if you do what you know you can do, you will earn $1M/year. Company B refuses to pay commissions for \u201ccultural reasons\u201d and offers $200K/year. Which job would you take? Now imagine that you are a horrible sales person who would be lucky to sell anything and will get fired in a performance-based commission culture, but may survive in a low-pressure, non-commission culture.\"

-- https://a16z.com/2017/09/11/sales-commissions/", "timestamp": "1511461581"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912107601932&reply_comment_id=912133480072", "anchor": "fb-912107601932_912133480072", "service": "fb", "text": "→ Michael: None of the empirical studies I've been able to find look at the effect on who you're able to hire.

(Relevant search terms look like \"sales force compensation\" and \"pay for performance\" in general. Almost everything seems to be theoretical, and the empirical stuff I'm able to find is all like \"Subjects are told that they will be participating in a marketing simulation and will earn rewards in proportion to their individual profits in the simulation.\")", "timestamp": "1511463075"}, {"author": "opted out", "source_link": "#", "anchor": "unknown", "service": "unknown", "text": "→ this user has requested that their comments not be shown here", "timestamp": "1511466701"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912107601932&reply_comment_id=912181718402", "anchor": "fb-912107601932_912181718402", "service": "fb", "text": "→ Elliot: to confirm, by \"that\" you mean \"giving something that pays in proportion to the IPO price\" no?", "timestamp": "1511468884"}, {"author": "Michael", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912107601932&reply_comment_id=912243868852", "anchor": "fb-912107601932_912243868852", "service": "fb", "text": "→ What I'm looking for is not just that linking pay to company performance selects for a particular type of worker, but that the worker is a more productive one. Or that the incentive makes them more productive.", "timestamp": "1511475545"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912107601932&reply_comment_id=912280650142", "anchor": "fb-912107601932_912280650142", "service": "fb", "text": "→ Jeff Kaufman We do have a much higher fraction of our compensation in performance bonuses than most places, but this isn't all sunshine. For example, I'm not aware of a lot of the work my coworkers do which makes the organization better (and frankly I don't want to micromanage that much anyway).

Equity has the nice property that, if you makes the company more valuable, you are better off regardless of whether your HR department values your contribution.", "timestamp": "1511487018"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912107601932&reply_comment_id=912281054332", "anchor": "fb-912107601932_912281054332", "service": "fb", "text": "→ Michael The 2016 nobel prize in economics was awarded for what Jeff and myself are talking about. The Nobel committee has descriptions of various lengths about the theoretical and empirical evidence you can check out, depending on your level of interest: https://www.nobelprize.org/.../laureates/2016/press.html", "timestamp": "1511487255"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912107601932&reply_comment_id=912281119202", "anchor": "fb-912107601932_912281119202", "service": "fb", "text": "→ Elliot I think the argument you are making is more complex than you're giving it credit for, e.g. because expectations are linear.

I do agree that equity works best when you sincerely believe that the person you are granting it to has the ability to change the trajectory of the company though.", "timestamp": "1511487390"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912107601932&reply_comment_id=912282701032", "anchor": "fb-912107601932_912282701032", "service": "fb", "text": "→ Jeff Kaufman I think may be you are pointing out that equity is a sort of public goods game, and, at least at large company sizes, the optimal strategy is to defect and do no work.

I agree with that, but it seems like equity can still be valuable at \"small\" companies, and (I think) you are arguing that equity should not be used even there. (Although may be we just disagree about what \"small\" means?)", "timestamp": "1511487807"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912107601932&reply_comment_id=912284702022", "anchor": "fb-912107601932_912284702022", "service": "fb", "text": "→ Ben: yes, it's a public goods sort of thing. The best situation for equity is one where the company is small enough that the \"all in it together\" feeling works well. Then everyone does their best, and everyone shares in the benefits in proportion to their equity. But I'm not sure many companies can manage this above maybe 40 employees?

Hiring newer people who have much less equity than earlier people probably contributes to this breakdown, but is pretty hard to avoid.", "timestamp": "1511489111"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912107601932&reply_comment_id=912343643902", "anchor": "fb-912107601932_912343643902", "service": "fb", "text": "→ Jeff Kaufman Cool, that makes sense to me. I don't have a great explanation for why \"large companies with illiquid stock\" give options. I'm interested to see if other people do though!", "timestamp": "1511528590"}, {"author": "opted out", "source_link": "#", "anchor": "unknown", "service": "unknown", "text": "→ this user has requested that their comments not be shown here", "timestamp": "1511542269"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912107601932&reply_comment_id=912403863222", "anchor": "fb-912107601932_912403863222", "service": "fb", "text": "→ Elliot Maybe I misunderstood what you're saying, because I didn't get that it had anything to do with public goods. The factors you listed were \"did this business model make sense in the first place\" and \"is a large established company going to clone our product without buying us\"; this seems to imply that you are thinking the payoff is something like E[work_effort + luck] = E[work_effort] + E[luck]. (This equality is what I meant by \"linearity\".)

EG if you are choosing between work_hard and work_easy your payoff is
E[work_hard + luck] - E[work_easy + luck]
= E[work_hard - work_easy]
I.e. the luck factor is just ignored, no matter how big it is.

Could you elaborate on why having luck be a large factor causes a public goods problem? My understanding is that the issue arises because each participant's contribution is diluted, but I definitely could be wrong!

[Note: I agree that my example above is very simplistic, and if, for example, you have a nonlinear utility function things get tricky. I don't think this is what you are saying though?]", "timestamp": "1511546947"}, {"author": "opted out", "source_link": "#", "anchor": "unknown", "service": "unknown", "text": "→ this user has requested that their comments not be shown here", "timestamp": "1511549147"}, {"author": "David Chudzicki", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912107601932&reply_comment_id=912423808252", "anchor": "fb-912107601932_912423808252", "service": "fb", "text": "→ Isn't it true by definition that most employees' contributions are small relative to total variability? Since other employees' contributions are part of that variability...", "timestamp": "1511550351"}, {"author": "opted out", "source_link": "#", "anchor": "unknown", "service": "unknown", "text": "→ this user has requested that their comments not be shown here", "timestamp": "1511551562"}, {"author": "David Chudzicki", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912107601932&reply_comment_id=912430175492", "anchor": "fb-912107601932_912430175492", "service": "fb", "text": "→ Maybe \"by definition\" is a silly phrase. I meant something like \"necessarily true given the meaning of these words; not an empirical claim.\"", "timestamp": "1511551644"}, {"author": "opted out", "source_link": "#", "anchor": "unknown", "service": "unknown", "text": "→ this user has requested that their comments not be shown here", "timestamp": "1511552022"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912107601932&reply_comment_id=912437825162", "anchor": "fb-912107601932_912437825162", "service": "fb", "text": "→ Elliot Cool, I disagree that \"senior executives\" are the only ones who can significantly influence the trajectory of a company, but I agree with (what I think is) your basic point: The less influence in individual has on the stock price, the less good stock options are as a motivator.", "timestamp": "1511552132"}, {"author": "opted out", "source_link": "#", "anchor": "unknown", "service": "unknown", "text": "→ this user has requested that their comments not be shown here", "timestamp": "1511552356"}, {"author": "opted out", "source_link": "#", "anchor": "unknown", "service": "unknown", "text": "→ this user has requested that their comments not be shown here", "timestamp": "1511552450"}, {"author": "David Chudzicki", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912107601932&reply_comment_id=912438793222", "anchor": "fb-912107601932_912438793222", "service": "fb", "text": "→ Yeah. We should give a company's competitors an incentive for that company to do well. #indexfunds", "timestamp": "1511552518"}, {"author": "David Chudzicki", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912107601932&reply_comment_id=912438903002", "anchor": "fb-912107601932_912438903002", "service": "fb", "text": "→ (my distraction/joke is about this: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2427345)", "timestamp": "1511552596"}, {"author": "Garrison", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912275176112", "anchor": "fb-912275176112", "service": "fb", "text": "\"Employees want risk more than VCs do. Since VCs can diversify and employees can't this doesn't seem likely.\"

Similarly, VCs buy far more lottery tickets than ordinary people do, since VCs can diversify and ordinary people can't really.

EDIT: Removed reference to Gambler's Fallacy, I was thinking about one thing and saying another. See my responses to this for explanation.", "timestamp": "1511485475"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912275176112&reply_comment_id=912284766892", "anchor": "fb-912275176112_912284766892", "service": "fb", "text": "→ Huh? I don't see how the Gambler's Fallacy applies here.

(I'm saying that I don't think the explanation is employees wanting more risk than VCs).", "timestamp": "1511489195"}, {"author": "Garrison", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912275176112&reply_comment_id=912284956512", "anchor": "fb-912275176112_912284956512", "service": "fb", "text": "→ What I'm thinking is that employees, as irrational beings, like having equity in a company because it provides enjoyment - the thrill of thinking \"what if the company goes big and I become rich?\" This is just like when people buy lottery tickets because they think \"what if this is the winning ticket and I become rich?\" A VC, or at least the VC's firm, doesn't get this kind of thrill from investing in a company and thus wouldn't get as much out of investing in it.", "timestamp": "1511489383"}, {"author": "Garrison", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912275176112&reply_comment_id=912285285852", "anchor": "fb-912275176112_912285285852", "service": "fb", "text": "→ Hmm, I was also entirely wrong in calling this the Gambler's Fallacy. For some reason I was thinking that the Gambler's Fallacy was the reason for people buying lottery tickets even though it doesn't make economic sense.", "timestamp": "1511489463"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912275176112&reply_comment_id=912285490442", "anchor": "fb-912275176112_912285490442", "service": "fb", "text": "→ I don't think lottery ticket-style thrill at potential gain is a large part of stock option compensation. Companies give away a significant portion of their overall equity to employees, but if it were mostly for excitement value they wouldn't need to give away much at all.", "timestamp": "1511489550"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912275176112&reply_comment_id=912285550322", "anchor": "fb-912275176112_912285550322", "service": "fb", "text": "→ (It's also very much not how anyone I know has considered the equity portion of a startup offer when figuring out whether to take the job.)", "timestamp": "1511489585"}, {"author": "Garrison", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912275176112&reply_comment_id=912286727962", "anchor": "fb-912275176112_912286727962", "service": "fb", "text": "→ Maybe my mental model of people seeking jobs at startups is wrong, but I imagine that people really value the possibility of become ultra-rich, in the hundreds of million dollar ranges. They perceive that - other than by investing in something like cryptocurrencies or a lottery - the only way they can do this is by investing in a startup. They're enticed by stories of early employees at places like Amazon or Google or Facebook that are now megamillionaires and think \"but what if this is the startup that makes it big? It could be worth it.\" If the company just gave them a little bit of equity, then it might be able to make them a million dollars, maybe even a few million, but it wouldn't make them ultra-rich.

As for why non-VCs don't invest at the early stages of a startup, the answer is that they just can't legally. I've certainly seen people online complaining about how they would invest in early-stage startups but US law blocks them from it.", "timestamp": "1511490337"}, {"author": "Bill", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912534456512", "anchor": "fb-912534456512", "service": "fb", "text": "I think one of the issues is that it would be prohibitively cumbersome to raise new cash whenever a new employee came onboard. So what you're really advocating for is that the company issue a lot more stock in its initial funding rounds, and then keep a significant amount of it around to pay employee salaries. Right off the bat, I see several problems: (1) cash is very expensive early in a venture, meaning the current owners will be giving up a very large part of their company so they can have this large amount of cash sitting around (2) VC firms would HATE this, since its a bunch of cash going out the window. They're already sensitive to this, because one thing they really want to avoid is management using their funds to pay themselves and employees off, instead of grow the business (3) consider that options actually puts cash into the business, as you pay to purchase the stock when you exercise the option. Overall, raising cash is really difficult for start-ups, issuing stock is very cheap", "timestamp": "1511572030"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912534456512&reply_comment_id=912549995372", "anchor": "fb-912534456512_912549995372", "service": "fb", "text": "→ \"(1) cash is very expensive early in a venture, the current owners will be giving up a very large part of their company so they can have this large amount of cash sitting around\"

Is this really any different than stock? If you're giving say 0.4% to an employee over four years (0.1%/y), or you're giving them the amount of money that you would get if you sold that 0.1% to VCs every year and passed the money on to the employee.

\"(2) VC firms would HATE this, since its a bunch of cash going out the window. They're already sensitive to this, because one thing they really want to avoid is management using their funds to pay themselves and employees off, instead of grow the business\"

I don't see why this is worse from a VC perspective. They get to own more of the company, and the money is going towards growing the business via attracting employees.

\"(3) consider that options actually puts cash into the business, as you pay to purchase the stock when you exercise the option.\"

Does this amount of cash actually matter? With modern options that last ten years after you leave the company [1] people don't exercise the options until it's clear they're worth something, at which point the strike price is probably pretty small compared to the size of the business.

[1] https://triplebyte.com/.../extending-stock-option...", "timestamp": "1511578700"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912534456512&reply_comment_id=912649021922", "anchor": "fb-912534456512_912649021922", "service": "fb", "text": "→ (1) Yes. Suppose your company is worth $1m when you raise funds, and then it's worth $2m when you hire an employee. To pay them 1% of your valuation in cash ($20k), you'd have needed to sell 2% of the company in your last funding round.

(2) One of the worst things that can happen to a company is being forced to raise money because the alternative is dying. If this happens to you, the people you raise money from will know they have immense leverage over you and they will use that to reallocate lots of value from existing shareholders to themselves. The higher your fixed payroll expenses are, the more likely you are to get into this state.

(Further reading on VCs hating this: http://www.paulgraham.com/aord.html, http://www.paulgraham.com/pinch.html )", "timestamp": "1511620761"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912534456512&reply_comment_id=912660633652", "anchor": "fb-912534456512_912660633652", "service": "fb", "text": "→ Ben: since stock vesting is currently backwards looking, to get similar timing and amounts you don't have to have raised extra before, you can raise more when you next raise and give bonuses then.", "timestamp": "1511626423"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912534456512&reply_comment_id=912661611692", "anchor": "fb-912534456512_912661611692", "service": "fb", "text": "→ (Figuring exactly how to set it up in order to mostly avoid raising when you wouldn't like to is hard but I think possible?)", "timestamp": "1511627007"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912534456512&reply_comment_id=912662784342", "anchor": "fb-912534456512_912662784342", "service": "fb", "text": "→ In that case you have 2 options:
- peg the bonus amount to whatever you next raise at. In this case you're putting valuation risk back on the employee which is exactly what you're trying to avoid (though less risk than straight up equity).
- commit to a bonus amount when you hire them. In this case, you're putting default risk onto the employee, if you can't raise enough money to meet the bonus obligation. (I have a feeling this would lead to messy acrimony and exacerbate mass exodus problems in down rounds.) You're also incurring a debt-like obligation for yourself, which is bad because it gives VCs more leverage during fundraising.", "timestamp": "1511627293"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912534456512&reply_comment_id=912676516822", "anchor": "fb-912534456512_912676516822", "service": "fb", "text": "→ My basic model of startup financing is that startups really, really, really don't want to have an \"inverted balance sheet\" (obligations where the payoff becomes more onerous if they're doing worse) because they're too vulnerable to death spirals.
- The most inverted type of obligation is debt, where the payoff is constant regardless of your net worth.
- Salary obligations are somewhat less bad than debt, because you can reduce them by firing people. But firing people is still really bad and likely to trigger a death spiral.
- Selling equity is neutral--the cost is proportional to your net worth.
- Giving your employees vesting stock options is actually *positive* (i.e. anti-inverted, or hedged) on this axis because of the meta-optionality I mentioned above. If you do badly, your employees are more likely to quit, or not to exercise the options because they're underwater. So if your net worth goes down, the net present cost of the option package goes down more than proportionally.", "timestamp": "1511634004"}, {"author": "Bill", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912534456512&reply_comment_id=912677135582", "anchor": "fb-912534456512_912677135582", "service": "fb", "text": "→ One other way to think about it is to look at the relative strength and weakness of start-ups vis a vis competing employers (i.e. established companies). When it comes to ability to access cash, established companies will easily be able to outcompete start-ups, as they can access cash via cheap debt whereas start-ups can only get cash through the laborious and expensive process of funding rounds. So if a start up is trying to compete for employees on a cash only basis, it simply is going to lose out to established competitors. The advantage of start up is the upside potential of their equity. So using options instead of cash plays to their strengths rather than their weaknesses.", "timestamp": "1511634515"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912534456512&reply_comment_id=912678707432", "anchor": "fb-912534456512_912678707432", "service": "fb", "text": "→ Maybe the problem is the \"laborious and expensive process of funding rounds\"? I wonder if funding could be done better? As it is, we have random people essentially funding startups without doing (and not being in a position to do) very much investigation.", "timestamp": "1511635813"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912534456512&reply_comment_id=912742664262", "anchor": "fb-912534456512_912742664262", "service": "fb", "text": "→ Actually, I think letting (and expecting) employees to resell their options as they vest would pretty much do what I want. I don't know how much this is restricted right now by laws vs the companies themselves?", "timestamp": "1511664755"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912534456512&reply_comment_id=912743008572", "anchor": "fb-912534456512_912743008572", "service": "fb", "text": "→ They won't qualify as incentive stock options if they're transferable, which means they will get much worse tax treatment:

> The ISO agreement must specifically state that ISO cannot be transferred by the option holder other than by will or by the laws of descent and that the option cannot be exercised by anyone other than the option holder.

- https://en.wikipedia.org/wiki/Incentive_stock_option", "timestamp": "1511664886"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912534456512&reply_comment_id=912743113362", "anchor": "fb-912534456512_912743113362", "service": "fb", "text": "→ Being allowed to resell the stock would be almost as good.", "timestamp": "1511664949"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912534456512&reply_comment_id=912743203182", "anchor": "fb-912534456512_912743203182", "service": "fb", "text": "→ In general, if you compensate employees via transferable instruments, they will probably be taxed at the time of vesting. If your company's equity is not so liquid, it can end up being very hard to pay the tax bill.", "timestamp": "1511664981"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912534456512&reply_comment_id=912743293002", "anchor": "fb-912534456512_912743293002", "service": "fb", "text": "→ So you give the employees ISOs, which they may choose to turn into stock and resell as it vests? They can wait to exercise until they've got the sale committed to, so no risk of a bad tax bill.", "timestamp": "1511665090"}, {"author": "Bill", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912534456512&reply_comment_id=912744191202", "anchor": "fb-912534456512_912744191202", "service": "fb", "text": "→ Securities laws are also at play here (in terms of reselling the equity) and I believe that those laws are pretty restrictive for non-public companies. I wouldn't be surprised if most of the times your only real options of cashing out are (1) selling back to the company (if they have the cash/are willing to buy your stock), or (2) waiting until another funding round. It's not like you can just sell it to anyone, as that would be a public offering and probably a violation of securities laws.", "timestamp": "1511665527"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912534456512&reply_comment_id=912744605372", "anchor": "fb-912534456512_912744605372", "service": "fb", "text": "→ Seems like at least being able to sell to existing investors should be allowed.", "timestamp": "1511665653"}, {"author": "Bill", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912534456512&reply_comment_id=912748936692", "anchor": "fb-912534456512_912748936692", "service": "fb", "text": "→ Even if you could, who are your existing investors? VCs, founders, and other employees. VCs probably aren't too interested in buying small percentages of employees equity if its not part of a larger transaction and founders tend to be cash strapped (having invested their spare cash into the business). You could probably exercise option -> cash out in next funding round, but I assume this is what happens already. Based on your premise, it seems like the follow up question is why can't we get VC to buy out employee stock (that they got via options) faster given the premise that VC is more willing to take the risk of equity than the employee. I think the answer is that it's not worth the headache for the VC to do small buys of employee equity along the way.", "timestamp": "1511666640"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912534456512&reply_comment_id=912781276882", "anchor": "fb-912534456512_912781276882", "service": "fb", "text": "→ \"I assume this is what happens already\"

My impression is this is actually very rare, and most employees can't sell until acquisition/IPO.", "timestamp": "1511696963"}, {"author": "David Chudzicki", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912534456512&reply_comment_id=913381339352", "anchor": "fb-912534456512_913381339352", "service": "fb", "text": "→ \"Being allowed to resell the stock would be almost as good.\"

You can only resell the stock for a gain if it's gone up from the option strike price, which must be the 409a \"fair market value\".

So this doesn't remove risk from the employee like you want.", "timestamp": "1511986260"}, {"author": "Chris", "source_link": "https://plus.google.com/112938759017605010116", "anchor": "gp-1511738193017", "service": "gp", "text": "@Dan\n made the same point recently:\n
\n
\nhttps://danluu.com/startup-options/", "timestamp": 1511738193}, {"author": "George", "source_link": "https://www.facebook.com/jefftk/posts/912088704802?comment_id=912869599882", "anchor": "fb-912869599882", "service": "fb", "text": "Employees do actually carry far more risk than VCs. VCs can guarantee that their investment is paid out at a certain level /before/ employee stock options are (as I learned the hard way, a few years ago).", "timestamp": "1511742363"}]}