Do founders with a16z funding agree with Scott Kupor’s post on employee options?

Question (Orig. on Quora):

Do founders with a16z funding agree with Scott Kupor’s post on employee options?

The Lack of Options for (Startup Employees’) Options

Answer (by Dan Walter):

Scott’s answer is a great start to a discussion that has been needed for a long time. The lock step approach to equity compensation that is followed by most startups is not founded in any science, so it is right to question things.

But, extending the post termination exercise period to the full life of the grant is not sustainable. Most of the equity at startups is given the the first 20 (maybe 50) employees. This doesn’t leave much for any else to begin with. Without having the ability to recycle stock options (and other forms of equity compensation) companies would quickly end up with nothing to grant at all.

The accounting rules and lack of cash make it difficult, but not impossible, for the company to provide cash at the time someone leaves. It is also counterintuitive to give leavers money when those who stay cannot get money.

More successful (read profitable or very well funded) companies are looking at creating some type of market for employees and ex-employees to get out from under some of their equity. As these techniques mature I think we will see more companies extend the post termination exercise period to a length long enough to allow people to participate in the next private round of liquidity. This would probably be more fair and reduce the overhang that is a problem for any long-term pre-IPO company. It is a big problem even when the only people holding equity are employees.

I think you may also see growing use of options that have lives much shorter than ten years. These may be linked to cash incentive programs that are designed to drive exercise and hold transaction, once again reducing the burden on lower paid staff members.

Also, options were never meant to be a guarantee or direct replacement for cash. They were intended to be a reward for the commitment to the long-term success, while remaining a fairly inexpensive tool for companies. They were also designed to inspire long-term holding (hence the periods associated with Incentive Stock Options).

If a company plans to be successful with a relatively small number employees (let’s say less than 250) then long-term post-termination periods may be viable. If they company requires a larger staff, or a significant number of senior players, the “10 year exercise period” is likely to drive as many or more problems as the current vanilla solutions.

The key is this: Equity compensation is both very flexible and very complex. Companies tend to follow the leader because 1) Their lawyers like to follow plans that have already been tested in court, 2) Investors like to use plans that fit easily into their pre-made financial models, 3) Consultants often choose the easiest path to approval rather than the best path to success, 4) Companies can get a vanilla plan created much cheaper than a more “bespoke” plan that may work better, 5) Internal HR, Compensation and other related professionals seldom have deep expertise in the design elements of these programs and must therefore simply trust that those giving advice actually know what they’re talking about. There are, of course, additional reasons to follow the leader, but, like building a company, following the leader is seldom the best path to success.

LinkedIn, Microsoft and “Stock-based Compensation”

I just had someone send me an article titled “REASON BEHIND THE MICROSOFT-LINKEDIN DEAL”. The premise behind that article is that stock-based compensation (the accounting term for this piece of the compensation pie) was a major driver behind LinkedIn’s decision to be acquired by Microsoft. LinkedIn did use stock-based compensation more heavily than many companies, but that alone would not be a good reason to desire an acquisition at a value significantly less than the 52 week high. Stock-based compensation includes virtually any type of pay where the individual gets ownership in the company at some discount to the value and it is eventually owned in full by them. In order for stock-based compensation to factor into the decision at all, there would need to be Continue reading

How Will The New Overtime Rules Affect You?

34899216_l (2)Is your mind already racing about how the new overtime regulations will affect your company? The media is buzzing about today’s release of the U.S. Department of Labor’s new rules regarding overtime pay.  The recent DOL publication highlights the following changes: Continue reading

What happens to employee unvested stock options upon acquisition?

Question (Orig. on Quora):

Let say I’ve received 1% over 4 years. At the end of the second year we get acquired. Now I have 0.5% in my hands. What’s happens next, assuming I continue working at the acquiring company?

Do I still get stock options of the ‘old’ company for the next two year?
Does the old company even have stocks of it’s own now that it’s been acquired?
Do I switch to getting options of the new company?
How will the value of the options I get be determined?

Many companies may sell for tens of millions and be worth close to nothing after a few months, be dissolved by the acquirer etc. I’m wondering how may my unvested stock option keep their value.

Answer (by Dan Walter):

Generally the basic for how this is handled will be described in your Plan document and your award agreement.  Here are three things to look for.

  1. Unvested portion will be assumed. – This means the acquiring company will “convert” your old grant into a new grant of roughly the same value (taking the intrinsic value of your old awards and converting them into shares at the new company’s price) and at least the same terms. You will receive updated information. Your exercise price may change. Your vesting will likely be the same, or earlier.
  2. Unvested portion will be cashed out. – This means that the company does not want to carry your equity, or may not be able to carry it (legal issues, etc…).  They will cash out any unvested equity compensation at the then current value (*Be aware that this may be $0.00). You will have income and associated taxes at the time of payment.
  3. Unvested portion will be cancelled/forfeited. – While it isn’t common, some companies set up plans so that unvested amounts simply “go away” at the time of CIC. The company is not required to provide a replacement or payment (although many do provide something)

It is critical that you read and understand your agreement paperwork.  There are many moving parts.  There are many things that may seem logical or even possible.  This area of compensation is still somewhat of the Wild West, so you need to do your homework.   This is especially true in environments where IPOs are less likely that corporate transactions like mergers and acquisitions.

What are current (2016) best practices for employee stock option programs for US pre-IPO startups?

Question: (org. on Quora)

Answer (by Dan Walter)

Hi Alex.  Thanks for the A2a.  And thanks to Shriram Bhashyam for also recommending me.
The first thing to clarify is the difference between “best practices” and most common practices. In the realm of equity compensation the most common practices are seldom the best. I will try and cover a bit of both.
“Early Stage” has also become a term of art in many cases. In this case I will write from the perspective of a company who may have up to a medium sized B Round. Your company may certainly fall into a different category.
Lastly, before I get into details, please realize that essential ANY equity compensation data is wrong at some fundamental level. Since you are unlikely to know how another company has designed their plan, what their investors expectations are, what the releasing timeline and potential value at the time of liquidity and whether the liquidity event is focused on IPO or acquisition (*and a series of other potential factors), you may be comparing apples to hotdogs, or plastic cups. (A list of the 11 reasons your equity compensation data is wrong)
The most common practices in the Silicon Valley (another assumption I am making, since these rules may not apply to you if you are located elsewhere) have been generally boxed in by VCs over the past couple of decades. The VC sway on startups is so strong that many companies (and many VCs) don’t realize that there may be other ways.  In summary:

Continue reading

Sam Reeve to Cover 4 topics at BLR Thrive 2016!

Performensation is pleased to announce that Sam Reeve, Performensation’s Executive Vice President of Consulting Services, will be presenting on four topics at the BLR Thrive 2016 annual conference, May 12-13, 2016 in Las Vegas!

Sam is a well-regarded compensation leader with broad and deep experience across many industries and virtually every size of company. Come to Las Vegas and spend a little one on one time learning more from Sam.

Sam’s presentations will cover:

The Cutting Edge of Compensation: Critical Trends of 2016 and Beyond

Selling the C-Suite on Your Compensation Plan: Secrets to Securing Executive Buy-In

Total Rewards Tactics for Motivating the Multigenerational Workforce

Sales Compensation Strategies for Retaining Selling Stars

 

When will the new 2016 GPS Stock Options become available to view?

Question: (org. on Quora)

When will the new 2016 GPS Stock Options become available to view?

Answer (by Dan Walter)

The updated 2016 version of the GPS Stock Options document was released yesterday, January 27, 2016, in draft format (GPS options DRAFT.pdf), and is currently available for Public Comment through February 17, 2016. The final publication, which will include public comment, is expected to be available towards the end of March 2016. Please take a look and provide your feedback. Additional details can be found at:  https://www.scu.edu/business/cepi/gpsproject/public-comment/

Our Nearsighted Friends and Us

12022015 6a00d83451df4569e201b7c7f4012c970b-200wiI have a brother with 20:15 vision. For those of you normal humans, this means he can see things clearly in the distance that the rest of us see as only a blur (if at all). I have a sister with, to be kind, worse vision. Like many people, her vision imperceptivity worsened over decades. She began to think it was normal to see street signs only as she came close to them. It did not seem odd that she depended on her experience rather than her senses. And, simultaneously, most of her friends were also slowly losing their ability to see into the distance so they didn’t notice anything changing.

Perhaps the world of executive compensation and all of our friends have slowly become nearsighted.

A recent New York Times Continue reading

How does HR contribute to an organization’s success?

Question: (org. on Quora)

Answer (by Dan Walter)

Whether you have an HR professional or not Human Resources is likely the single greatest contributor to your organizations success.

First. Unless your company is really large, HR controls more of your revenue than any other department.  At small and mid-sized company as much as 65-75% of revenue is used to pay staff and provide their benefits. This means that even small improvements in HR can result in material budget increases for other departments. Improvements in this area are often simply viewed as controlling pay or limiting staff. But, even better improvements may be gained by improving the perception of pay or creating a work environment where people actually do their best, instead of operating at three quarters of their potential.

Second. The best strategy and tactical planning in the world cannot be well executed by incompetent, uninterested or unmotivated people. Human Resources first goal is making sure you have the right people. Without them you will fail, 100% of the time.

Third. They protect you from the problems that come from the mercury poisoning of disgruntled employees and lawsuits that come (mostly) from disgruntled ex-employees. Whether it is mediating disputes, motivating personal and professional growth or simply documenting and enforcing policies that keep people from becoming injured, a good HR department has your back, by being out in front of things.

Fourth. Great HR build your company culture and communicate your company strategy. (poor HR departments may not do either.) Your company culture or personality drives employee (and often investor) perceptions. Perceptions are reality for most people. Every company’s strategy is clear to its founders. But communicating this strategy and how it will become reality requires a broader vision and understanding of human dynamics. The task of communication usually falls to HR. So your HR department is in charge of how your employees define reality and how you make it better.

This most could stretch many pages. It should also be noted that failure in each of the above items can directly lead to your company’s failure or stagnation.

What is the normal RSU policy for private companies? I recently got an offer from such company and they say that if I work for x years and I leave, I would get x more years to sell the RSUs otherwise they would expire. So if I leave after 1 year and no IPO in the next 2 years, I don’t get anything.

Question: (org. on Quora)

Answer (by Dan Walter)

The most common company policy for RSUs follows the basic structure below:

1) Award of RSUs, generally to be settled in stock when they vest (some companies convert the RSUs to cash)
2) Vesting schedule of 3 years (annually increments or cliff vested) (this period can vary widely).  Vesting is may also be restricted to ONLY occur after a period of time AND a liquidity event like and IPO or Change in Control. — this is becoming far more common.
3) When RSUs vest they are “converted” to real stock and delivered to the participant (or held in electronic book entry).
4) When the individual leaves the company the unvested RSUs are forfeited back to the company. The vested RSUs are now shares (usually of common stock) and the individual is therefore a shareholder.
5) Most companies let people who hold shares keep the shares.  They also usually restricted any transactions so the shareholders have little or no liquidity until a major event.
6) It is uncommon, but not unheard of, for companies to take back vested and delivered shares.  When they do they usually pay the individual the current market price.

NOTE:  There are a ton of exceptions to every single statement above.  The statements above may not represent the best strategy for every (or any) company. Equity compensation is Variable, Variable, Variable, Variable (and up to three more variables) compensation. The type of equity, the number of shares/units/options/etc., the price at the time granted, the price when vested, the currency at the start and end, the vesting schedule and several other components can all be variable within a single award. “Normal” is often not synonymous with “best”.