Stock options are super-complicated, there are many gotchas, and there can be serious tax implications. Like having to pay taxes on "profits" from exercising options before having the revenue from selling them, which may prevent options from being exercised. I think all these drawbacks often make stock options have near zero value in the eyes of employees. Which makes it not that fit for purpose, which is supposedly to motivate your employees and align their interests with those of the company.
Is there a better way? If you run a startup and you want to achieve the same ends of providing a form of compensation that's tied to the future success of the company, but doesn't involve immediate outlay of funds, how would you structure it? It should be as simple and straightforward as possible with a minimum of gotchas, and avoid tax implications as much as possible. I'm kind of surprised YCombinator hasn't innovated anything in this space, like they did with "the Safe"[1].
What about something along the lines of making a pool of X% of the gross revenue of the company each year, and dividing that among all the creative employees fairly, and adjusted by how many months of the year the employee was at the company. Then just paying that out every year as the end of year bonus.
It's better for a growth business to use profits to grow, not as compensation. Plans like you describe are what typical profit-sharing bonuses look like in more mature companies (or ones that aren't planning to ever exit).
The easiest fix is to set the expiry after you leave the company to ~10 years rather than 90 days. In that case, you have your entire tenure + 10 years for the company to have some kind of exit.
If that were the case, you could simply exercise at the point when the stock was liquid and you would never have to pay tax before then. There would still be reasons to early-exercise (to get the clock ticking on capital gains), but that's something that incurs risk -- you never need to do it if you don't want to (and you don't lose the options if you don't)
Well, one could simply modify it to giving points to the employees and delaying the payouts until the company can afford it, then doing it by points so that those who've been at the company longer get more.
Anyway the details can be anything allowable by law, the question is can we do better than stock options. I feel the answer to that must be yes.
Many companies are never profitable before exit. Stock is already this point system where we call the payouts dividends. Growth companies don't pay dividends and they wouldn't want to pay point-payouts either.
If you want this, you can have it by joining a company with a profit-sharing plan. It's fairly common.
Typically movie stars negotiate a tiny % of gross revenue in their contract. They used to negotiate for % of profit, but studios got very good at fiddling with the numbers for the film until a successful movie had nearly no profit.
I don't see why that can't be done for software engineers. That is essentially dividends though, and it's obvious why growth companies don't want to do that. But it's also not clear that stock options have the intended motivating effect (it's not even clear that increases in salary or some kind of profit sharing would have the intended effect either[1])
I think it's clear that stock options are sub-optimal for the intended purpose, but it's not obvious to me how to fix that.
Altman has called for a change in legal barriers that would allow such an instrument to exist (currently not possible by law).
You can issue RSUs to your early employees if you're in the seed stage and incur minimal tax implications (on the order of several hundred dollars) and help your early team members through the 83b process.
Is there a better way? If you run a startup and you want to achieve the same ends of providing a form of compensation that's tied to the future success of the company, but doesn't involve immediate outlay of funds, how would you structure it? It should be as simple and straightforward as possible with a minimum of gotchas, and avoid tax implications as much as possible. I'm kind of surprised YCombinator hasn't innovated anything in this space, like they did with "the Safe"[1].
What about something along the lines of making a pool of X% of the gross revenue of the company each year, and dividing that among all the creative employees fairly, and adjusted by how many months of the year the employee was at the company. Then just paying that out every year as the end of year bonus.
[1] https://blog.ycombinator.com/announcing-the-safe-a-replaceme...