Indeed it is. I particularly like the 'no longer contributing to the business' part, as if the work done by the original employees isn't what the current business was built on, at a discounted rate if their stock options are worthless. And as if the stock options were the only reason they're having trouble attracting quality talent.
Stock options seem attractive as a form of compensation, since the hope is that you're working for a unicorn and one day you'll be fabulously rich, but the cash equivalent is better more often than not. It's just a form of risk transfer from those who have plenty to those who hope to have plenty by dint of talent and hard work. Having been burnt, I won't do it again.
Indeed. Other people no longer contributing to the business include the VC's and angel investors by the same logic.
Either the former employees were paid full market rate salaries during their employment, in which case the company colossally fucked up by giving shares to them for literally no reason, or those former employees made a capital contribution just like any other investor.
Exactly. Plus the phrasing of the criticism is so odd: "no longer contributing to the business." Let's all accept that as true, so allowing original employees' to purchase for a longer time period simply preserves their ability to be rewarded for their work. That's a good thing, not a bad thing. Plus, the dilution argument is pretty weak: the employee pool is usually 10-20%. So investors get diluted by 10%. Whoopee.
I actually disagree with the 10yr time frame (although will admit it has its merits), but also agree with some of your logic. I just think that the 10yr "fix" solves some problems and creates others. I think this issue is that you should:
A) not rob former employees of accrued stock value
B) probably try to somewhat reduce incentives to leave if the company is going to continue to do well
There are a few problems I see here:
1) stock option grants are completely arbitrary and sometimes end up very wrong
2) it's hard to fix that in the future because you'll end up at a higher strike price
3) end up being expensive and tax inefficient to exercise
The closest I've seen to people who seem to get this and have sensible solutions are Andrew Mason at Detour (progressive equity) and Dustin Moskovitz at Asana (larger grants, but back loaded into years 4-6).
I have great respect for Adam D'Angelo at Quora for suggesting a solution to the problem, have known him in school he's certainly smarter than me on almost every axis of intelligence, but I think there are other potentially creative solutions that might be better (although I don't know tax compliance).
For example I think you could keep the status quo, but offer the option for employees to exchange their options for shares (white meat) at the time they can exercise. Example you have options for 100 shares at a strike price of $50, at the time you leave the shares are worth $100, instead of having to come up with $5000, you just get $50 shares free and clear. I think there's still a tax hit issue, but at least it's not doubled with paying for the shares.
All of these things should be taxed as ordinary income. Companies shouldn't be able to do an end-run around taxation by giving you valuable stuff instead of giving you money directly.
> And tying an individual's future (health insurance, retirement, immigration status) to an employer is a bad thing.
Retirement isn't really 'tied to an employer', in that you can still open an IRA without an employer[0], or use a non-tax-advantaged account for retirement savings (most people outside the military or government service use non-tax-advantaged accounts for at least a portion of their retirement, since the IRA and 401(k) contribution limits are too low for most people to survive on during retirement).
This might have been different 50 years ago, where employer-driven pensions were more common, but today, the only real way your employer impacts your retirement is the 401(k).
The purpose of both the IRA and the 401(k) is to provide people with an extra incentive to plan for retirement. Putting away $450/month towards your retirement[1] can be unpleasant, but if you're getting, say, $90 that back (in the form of lower tax withholdings/taxes due), it makes it a bit easier, because that's effectively only $360 out-of-pocket.
The incentives work similarly for the 401(k), except the tax savings work out for the employer as well, meaning that they are incentivized to give you some portion of your compensation in the form of 401(k) matching (ie, they have an extra incentive to nudge you towards saving more of your own money for retirement).
Personally, I do believe that, if you do not have access to a 401(k) through an employer, your IRA contribution limit should be raised by $17,000 (which is the 401(k) contribution limit for individual contributions). But without employer contributions, at most that's saving you less than $6,000 - and that's if you're already at the very top marginal tax brackets (even making $100K gross in NYC, the most heavily taxed jurisdiction in the country, won't be taxed at 35%).
[0] Well, you can't contribute more than your total annual income to an IRA, but if you're making less than $450/month and living in the US, retirement planning is not your most immediate problem.
[1] ie, enough to max out your IRA contribution limit
It's not giving shares, it's a share exchange. Again I'm not an expert, but I've seen these types of arrangements before and somehow they got reasonable tax treatment because they were spelled out as such in the original grant (so nothing had actually "changed" at the time).
Kupor's mentality stems from dealing with co-founders who leave right after they complete their 4 year vest, well before IPO/acquisition.[1] While they certainly laid a foundation for the company, there's a lot of work still to be done to get to a liquidity event. Is it fair for them to leave with a huge stake and let the other co-founder(s) and employees figure it out? This is where he gets to phrases like "no longer contributing" or "wealth transfer". Essentially he's saying the vesting schedule doesn't capture everything an option should incentivize.
Having said that, I think he's over-applied this mentality to regular employees with much smaller stakes. It is reasonable to expect a founder to stay 10 years with a company. Not most employees.
If that's the case, is it fair for founders and VCs to take such a huge stake, considering all of the actual work is done by the other people who work there?
Stock options seem attractive as a form of compensation, since the hope is that you're working for a unicorn and one day you'll be fabulously rich, but the cash equivalent is better more often than not. It's just a form of risk transfer from those who have plenty to those who hope to have plenty by dint of talent and hard work. Having been burnt, I won't do it again.