Thursday, November 13, 2014

Sam Altman "Employee Equity" blog and Ben Horowitz critique

In my blog post Romanticizing the startup in San Francisco   I describe the darker side of the startups.
As you start or join an existing startup, you don't know yet what the future is, ... But as the failure rates in a startup are hovering around 80%, your chances are far  greater to join a "bad" startup. This is how you recognize one:
Many times the founders are mini-tyrants who sell themselves short. 
Tyrant boss photo from MAP
 The company offers “The vision thing”,  a pitch that is used to convince you to work for 50 percent of what you’d earn at a more established company, plus some laughable token equity offering. 
If you’re taking substantial financial risk to work at the company, you’re a Founder. Expect to be treated like one. Most startups refuse.

Sam Altman breakthrough blog 

There is a breakthrough blog from Sam Altman on a new way to treat employee equity. The blog was written April 18, 2014. It describes four major problems today

  1. Employees usually don’t get enough stock
  2. If an employee leaves the company, he or she often can’t afford to exercise and pay taxes on their options. 
  3. Employee options sometimes get unfavorable tax treatment.
  4. Employees usually don’t have enough information about the stock or options. 

and four suggested solutions.

  1. Startups should give employees more stock.  Value is created over many, many years. Founders certainly deserve a huge premium for starting the earliest, but probably not 100 or 200x what employee number 5 gets.
  2. Most employees only have 90 days after they leave a job to exercise their options.  Unfortunately, this requires money to cover the strike price and the tax bill due for the year of exercise.  This is often more cash than an employee has.
    The best solution Sam  has heard is from Adam D’Angelo at Quora. The idea is to grant options that are exercisable for 10 years from the grant date, which should cover nearly all cases (i.e. the company will probably either go public, get acquired, or die in that time frame, and so either the employee will have the liquidity to exercise or it won’t matter.)  ...I think this is a policy all startups should adopt.
  3. Tax optimization is a second-order issue, and for an immediate solution, I think extending exercise windows to 10 years is the most important thing to do.  But longer-term, we should figure out a way for employees to be taxed on their stock compensation the same way as founders... There are various ways to do this, see original blog for details
  4. At a minimum, any startup should tell a prospective employee what percentage of the company the equity grant represents (number of shares is meaningless).  Some startups are very hesitant to do this—they don’t want to disclose the number of shares outstanding.  Employees should demand to know what percentage of the fully-diluted shares their stock options represent, and be very suspect of any startup that won’t tell them.

Sam's article show a superior mind. Startups assume people and employees, particularly the early employees, are key to the success. Ideally a startup must radiate happiness and energize people to overcome tough beginnings. One way to do that is through a fair employee equity distribution.
Unbelievable that Sam Altman is only 29

Ben Horowitz lecture at Stanford, following Sam Altman invitation

Ben Horowitz book The Hard Thing about Hard Things I reviewed in a different entry to this blog. Actually, more that a review, it was the emotional impact of this book.

 In his lecture How To Manage at Stanford University,  the most important point is:
When you're making a critical decision, you have to understand how it's going to be interpreted from all points of view... It's a hard thing to do because at the point when you are making a decision, you're often under a great deal of pressure.
 He then takes four examples to illustrate How To Manage a company

  1. Demotions, which are very emotional
  2. Raises, which are also emotional
  3. Sam Altman's  Employee Equity blog (see below)
  4. The Story of François-Dominique Toussaint Louverture, Toussaint the founder of Haiti, who won a revolution by recruiting his bitterest enemies 
Ben describes in his book the "courage development process" Here are some samples sub-titles of chapters to see what Ben means by courage development process things like the right way to lay people off, preparing to fire an executive, demoting a loyal friend, how to deal with old people and so on.

I will talk here about the bullet #3.  Ben uses his own advise to analyse Sam's blog proposal of granting employee's options that are exercisable for 10 years from the grant date.

Here are his arguments. against. The 90 days vesting after being laid off has been around for 30 years. Why change? There was law, called APB Opinion Number 25;  if you gave somebody 10 years to exercise their options, you would never have been able to go public and you would never have been able to be acquired because you were taking an expense that was tied to your stock price. But this law has been abolished now, eight years ago. 

Ben counter-proposal is: " I would offer two Alternative Cultural Statements."

 One is, we treat employees with straight forwardness. We're going to be fair and therefore you get 10 years to exercise your stock. What we said we're going to give you, you’re going to get regardless of how rich or poor you are. That's just a done deal.
 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. Until 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.
How can Ben says he likes the Sam Altman  post when his body language obviously shows reservations?

My view

Metaphorical image of a new hire in "classic" start up with 90 days vesting


Russian Roulette 

  1. We can not divide the employees in those who stay or those who leave. Any employee without exception can be in both situations. All work in a company that has a long and short term risk, working with the 90 days vesting threat, or being laid off before 18 month.
  2. The insecurity of older employees, whose families will not benefit in case of death or illness. Ben's caution in hiring older people as a last resort (see chapter 6, page 176 of his book)
  3. A startup is not a Russian Roulette. Culture is not achieved only with a ping-pong table and free snacks

From Zero to One

Peter Thiel book talks about new startups doing what it was never done before. Silicon Valley will finance startups that no one elsewhere will do. It is not a question of risks. It is a question of culture. As we engineer new businesses, we need to modernize the start-up structure, equity sharing and democratize. 

 Sam Altman's exceptional, noble, altruistic, fresh blog from seven month ago anticipated the Zero to One era







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