Every time one of these is written, it comes off as if the 90-day window is something startups came up with to try and screw employees.
A reminder that the 90-day window is a requirement by law in order for options to qualify as Incentive Stock Options, and receive favorable tax treatment for employees [1].
If you want to do 10-yr exercise, that's fine, but until the law is changed those will be NSOs and not receive that special tax treatment and will be taxed on exercise instead of on sale.
An increasing number of startups issue their grants such that they qualify as ISOs if exercised within the 90-day window but automatically convert to NSOs 90 days after departure (with the actual exercise deadline dependent on employee tenure), so that the employee and their tax advisors at time of departure get to decide how to handle the tradeoff of more time for reflection vs better tax treatment.
What's more, if an employee gets more than $100k of exercisable options in a year - very possible especially in cases where early exercise is allowed - only $100k of those are treated as ISOs. There's no way in which the tax law privileges a short post-termination exercise period for the excess above $100k.
Last, some companies use the same options plan both inside the US and outside, including my two most recent employers. Most employees working outside the US, with some exceptions like US citizens and green card holders, wouldn't have to care about this US tax law nuance.
Yea I looked into this when we were forming our options plan after I read Sam Altman's article arguing for it. It's not as common as you might think yet.
We have one of the big name corporate law firms that most VC-backed startups use, and when I asked about this kind of setup they hadn't heard of it before. Path of least resistance was to just do a regular ISO, especially since early team members are usually experienced startup people like us that are used to ISOs anyways.
Would love to revisit it in the future and see if we can enact this sort of plan, although in our case since we're in the web3 space, the equity might not matter as much as the tokens (which don't get favorable treatment either way atm).
I agree it isn't the most common, but I did just work for a company that put this policy into place last year I think, so it's growing. It's certainly not something where a startup which wants to do it needs to break new ground, at any rate.
There was a talk that's been shared on here from Ben Horowitz where he explicitly pitches the 90-day window as a way to screw employees. That's probably where the perception comes from:
> The second way to handle it - no companies do this, which is why I actually really like this post that he wrote - is you can say up front, " Look you are guaranteed to get your salary but for your stock to be meaningful, these are the things that have to happened. You have to have vested. Two, you have to stay until we get to an exit. Untile the company makes it. You've got other money." Finally, the company actually has to be worth something. Because 10 percent of nothing is nothing. The reason we set the policy this way is we really value people who stay. So don't join this company if you are going to join another one in 18 months because you're going to get screwed. Our policy guarantees you're going to get screwed.
At this point, I'm surprised when other people are surprised that founders and investors work together to screw employees. "Work", in the corporate sense, is the same sort of exploitative, morally vacuous, might-makes-right dominance hierarchy that humans have been forming for thousands of years. We haven't evolved beyond that garbage yet.
No, a16z is very explicit about their views. This is not from Ben but from the current managing partner:
> A 10-year exercise window is really a direct wealth transfer from the employees who choose to remain at the company and build future shareholder value, to former employees who are no longer contributing to building the business/ its ultimate value.
I hate that article. It's not a direct wealth transfer. Using that logic you could argue _anything_ is a direct wealth transfer. Why not claw back bonuses and even salaries too while you're at it?
I'm a founder. If someone works with me for three years then has to move on, they've earned their equity. I want them to keep it and root for us from the sidelines. It's sweat equity, not "stay until a liquidity event" equity. Especially with founders themselves starting to more aggressively take money off the table using secondaries (which aren't always offered to their employees).
Also, if you're a founder, note that your lawyers will almost certainly towards 90-day windows (and your investors might too). It might take some work to get something more employee-favorable.
I read that as you're supposed to loyal right up to the point the company decides to lay you off and you better not think that you have any freedom once you sign on because we will retroactively screw you. The percentages in the typical option pool are not going to move the needle anyway and those employees that served the company early on took far greater risks than those that did so later and probably were paid much less too. So as far as I'm concerned they are well entitled to their stock.
Totally. It’s really fantastic that a16z is transparent about their values. It’s safe to assume other VCs share these beliefs but choose not to disclose them.
What will never cease to amaze me is that the likes of a16z while reaping billions on hardly any work at all will go to extreme ends to deny others what they simply earned through usually very hard work.
When we were raising our series C, a potential investor (which we did not go with) wanted a requirement to cancel/claw back all _vested_ and _early exercised_ options that employees who had worked for us had and to put in place a buy-back-at-exercise-cost-or-cancel for current employees.
That is absolutely ridiculous. I'd love to know which investor that was so I can avoid working with them, if you could let me know I'd be very grateful (mail in profile). If not, I understand. Kudos for making the right call anyway, and that VC deserves to lose each and every deal they look at.
Out of curiosity, what did the cap table look like when they suggested that? Was there a good chunk of equity floating around your current/former employees?
I know some VCs have dilution/ownership thresholds and they might have been trying to find a way to get in on your raise without bending their own rules. But it is really offensive to your employees, I know if my company did that I would walk.
Ok, I will say this: this was a former entrepreneur at a very high profile perceived-brand-as-tier-1 guy running the independent capital investment arm of a very high profile company.
As some sibling comments: We are raising, and I would be interested in knowing who that investor was so as to avoid them. Please email me/dm me if you feel comfortable (see profile). Regardless, I am glad you did not go with them.
Yes if there was a clawback clause that could be triggered for some excuse, and presumably there was. For instance: you left the company. Depending on the clause you could be forced to sell back to the company at the issuing price or the fair market price on the day that you left.
It was NOT in our boilerplate. The discussion around this was his “secret sauce” concept. It was ridiculous and we turned it down.
They were big investors in a few very high flying super flops in the 2010s. It has always made me wonder if the employees at those companies would have been screwed had the companies been everything the tech press ckaimed they were.
(I know you're not arguing for this view, but) I just don't understand this perspective. The whole point about compensation is that it is explicitly a transfer of wealth, and through any transfer some people are going to "lose" money (on gross, but perhaps not lose money on net).
That is, can't I make the same argument about being paid at all above the legal minimum? "Taking a higher-than-minimum salary is really a direct wealth transfer from the employees who choose to remain at the company to former employees who are no longer contributing to building the business/its ultimate value."
The logic being that if a current employee takes a higher salary, then that reduces the valuation of the current (and future) company, which is a wealth transfer from future employees (who own some small share) to the current employee who may leave? From this argument a16z's position seems absurd...
Except those employees have already earned those options.
So it's a direct wealth transfer from people who have earned something, to institutional shareholders, most of whom are investors.
It's odd because Ben seems like a nice guy.
This reminds me of a kind of Thiel/Musk/Bezos ego thing, where otherwise rational and reasonable people do these couple of things where they delude themselves into the rationality of their decisions. But that 'character flaw' is actually a competitive advantage for an otherwise reasonable person.
Yeah, because fuck those workers who try to make a free market work for them once in a while. Don't they realize that market talk is only a way for their social class superiors to justify doing whatever they want, and that it isn't for them?
That's what always seemed like bullshit to me. If you want to have a 4 year cliff to discourage job hopping, then give people a 4 year cliff. Why try to weasel them into it?
I see no reason to screw employees who job hop. It seems like if 1/10 as much effort was put into making your workplace pleasant, you'd have fewer people leave.
I always permit early exercise, which is specially good at the earliest stages when the common options are worth little, even less than a cent pre funding
That is, you can exercise your options whenever you want, even your first day at your job. What happens is the company can buy them back when you leave, but that ability goes away by the same amount as the regular vesting schedule. So if you leave the company after two years the company buys back half your stock, but there’s no tax impact (and by then you’re in the LTCG regime). Big win, easy to do, so why doesn’t everybody do this?
Is there some nuance as to how this is set up? The company buying back the stock when you leave seems particularly interesting: if the valuation has changed in between when you start and when you leave, the company either buys the stock back at the new, higher price (in which case you make some cash on unvested stock) or the company buys it back at the original price, and from a tax perspective you are selling it to them priced under fair market value and the company owes taxes on that I think? Is there something I’m missing?
I've been part of such an approach in the past. The way it worked there (and I imagine would everywhere) is that you exercise your full options, thus turning them into RSUs. You then give the company options on your RSUs at current valuation and the percentage of your RSUs that are covered by the options reduces on the vesting schedule.
Nothing so complicated. Not turning them into RSUs, simply exercising the options to buy ordinary common stock with the company's right to repurchase expiring every month (or whatever the option vesting schedule would be). Repurchase is at the purchase price paid by the employee so nobody owes any taxes.
The point is that whenever you leave you have the same number of shares either way, but this way you pay for them at par (and with 83(b) owe no tax until you sell) and get the LTCG clock started right away. If you pay when you leave you have to pay tax on the delta
This is much friendlier to the the employee, at least when the purchase price is quite low. And why wouldn't I want that for my team?
I've done this with half a dozen companies at least; I don't know why everyone doesn't. The change to the option plan is quite standard and the law firms all know it.
There is nuance, though - adversarial shareholders can bring a company down. It happens often enough with bona fide investors; but when you have a disgruntled employee (or one who quits to go work for a direct competitor), who has the same information rights as any other shareholder, but basically no skin in the game (if they exercise one share), things can get really nasty.
There are many reasonable ways to deal with it, including “right of first refusal”, some kind of custodian/escrow, FMV+x% forced sale that can be called by the company, allowing only substantial sale to 3rd party (or an employee with 2000 shares could sell one share each to 2000 different people, and all of a sudden you get regulated as a public company) etc.
I am all in favor of sharing ownership with those who shared the risk and the burden, but the governing laws weren’t written weren’t written for this, so it needs to be taken account in the specific agreements.
This is one of the most minor concern I can imagine for a startup.
>I am all in favor of sharing ownership with those who shared the risk and the burden, but the governing laws weren’t written weren’t written for this, so it needs to be taken account in the specific agreements.
These issues almost never happen and the process for giving employees equity interest is well developed. The standard SPAs always have ROFO clauses and such. There's no need to innovate -- any Vally law firm's standard docs have everything needed.
In the US shareholders of private companies have pretty limited inspection rights: basically public filings and board minutes etc (usually the latter say things like "the CEO presented the last quarter's performance and a discussion ensued"). Preferred investors negotiate more detailed inspection rights.
In 30+ years of running startups in the Bay Area I have never seen any of the things you describe happen (not just my own companies -- never seen them happen). OTOH, at the second company sold (first one I founded) the front desk receptionist made enough to pay off her mortgage and fully fund her retirement. That's the way things should work.
It was not in the US - it was in a country where shareholders in private companies actually have rights - and I was contracting for a company where this was actually used for good: founders tried to screw early employees (already vested and exercised) out of some rights through a restructuring (that was essential for business reasons) - and the employees managed to level the playing field using such an approach. It was good for everyone.
But it could also have been used by a single vengeful employee to effectively stop or delay that restructuring, which would have been bad for everyone.
All I said was that there was nuance. A good lawyer in the relevant jurisdiction would know what it is.
Just a guess, the directors of the company might prefer, from a fiduciary point of view, to invest the cash in capex or sales, rather than re-acquiring options for the option pool.
Although, if you're acquiring at cost of exercise, the stock is probably more valuable than the cash you're paying for it. I could argue it either way, curious how you've valued the opportunity cost?
If your company doesn't have a significant sales+marketing department that can always seem to justify soaking up excess capital in exchange for marginal growth, your technique seems like a no-brainer! Smart idea.
RSUs are pretty awful since you don't have access to the 83(b) exemption and tax is paid at ordinary income rate rather than long term cap gains rate, so RSUs can't offer the same opportunity to build long term wealth.
RSUs seem to make sense to public companies which don't meaningfully have access to all the kinds of compensation available to private companies.
IANAL but RSUs seem like a ripoff for a private company to use them even if the common price is high compared to a standard ISO SOP.
RSUs are terrible for a private company that aspires to go public, because the moment they trigger -- usually IPO + enough volume traded -- the company owes half of them in taxes (regular income taxes). This places a considerable pressure on the stock and causes a crash on the price usually -- as everyone from peon to executive have to sell half of their multi-year "vestments." So instead of the company raising slowly money via the market and the employees getting a good check when they decide to slowly sell, Uncle Sam gets some taxes up front... (And usually due to the likely crash, less than they would.)
Taxes. If you give RSUs, the value of them might get really high in later years, along with the tax burden. And because the RSUs are liquid you can’t sell them to cover tax.
The tax games are dumb no matter if you have ISOs or Non-quals or whatever options.
The standard should be 83(b) elections supported with the company covering cash to exercise (or at least some portion). That makes the equity closer to RSUs, which is more aligned with the desired incentive. VCs / investors should be putting more money into companies to make this work; the employee pool is only typically 10% so it’s a tiny haircut to them.
If I understand it, an 83(b) election allows me to buy stock in the company at the (say) day of employment, and recognise that as income on the same day (ie I buy the stock as I join). Then there is some restriction on me selling it during my employment (not quite vesting but similar).
Which sounds sensible - but I may have misunderstood.
Overall it seems either people are trying to make a simple situation seem complex, or the (US?) tax code is set up badly.
You are exercising options that haven’t vested yet. But because strike and FMV are the same you have no tax liability. So when they beat they become stock and long term capital gains if they become liquid one day.
Here’s the best part - if the company is worth < 50m at the time then you are granted and exercise them, when you sell those stocks one day, you will owe 0 income tax as it’s a “qualified small business stock” - on your first 10m of profit. Wowza’s!
Indeed and I should clarify - it’s not if the company is “worth < 50m” it’s if the company has less than 50m in assets generally. So you could have raised 30m at a 200m valuation and qualify.
That’s essentially a signing bonus. Remember that you will owe income tax on that. So if they paid the option price and 83b’d you then you would be on the hook for taxes (the money they used to exercise) on an asset that could be worth 0 one day.
The company could however pay for exercising and pay the income tax on that cost. Then it would be interesting.
If the VCs put in more cash for this, it’s just going to dilute the existing stockholders (including the employees). The cash is not immaterial. And as another response said, the cash to cover the exercise is taxable income so this idea is really not tax efficient.
Then the startup should explain it. They prefer to say nothing on the topic. So, they typically care a lot about the UX of product users but not about the UX of their employees. Seems shortsighted.
As an anecdote, the company I work for has a 90-day window, but when we were bought out the options were taxed as regular income (it was on our W2) -- there was no favorable tax treatment.
A reminder that the 90-day window is a requirement by law in order for options to qualify as Incentive Stock Options, and receive favorable tax treatment for employees [1].
If you want to do 10-yr exercise, that's fine, but until the law is changed those will be NSOs and not receive that special tax treatment and will be taxed on exercise instead of on sale.
[1] https://www.cooleygo.com/isos-v-nsos-whats-the-difference/