Fuck Your 90 Day Exercise Window
There are a lot of problems with the compensation we give early employees at startups. I don’t know how to fix all of them, but one obvious area to start directing our anger towards is something we can fix relatively quickly: the customary 90 day exercise window.
90 days and poof
Most startups give you a 90 day window to exercise your vested options once you leave the company — either through quitting or through termination — or all of your unexercised options vanish.
This creates a perverse incentive for employees not to grow the company too much.
For example: say you’re employee number one at A Very Cool Startup, and, through your cunning intellect and a lot of luck and a lot of help from your friends, you manage to help grow the company to the pixie fairy magic dragon unicorn stage: a billion dollar valuation. Cool! You’re totes gonna be mad rich.
Ultimately, you end up leaving the company. Maybe the company’s outgrown you, or you’re bored after four years, or your spouse got a new job across the country, or you’ve been fired, or maybe you die, or hey, none of your business I just want out dammit. The company’s not public, though, so everything becomes trickier. With a 90 day exercise window, you now have three months to raise the money to pay to exercise your options and the additional tax burdens associated with exercising, otherwise you get nothing. In our imaginary scenario, that could be tens or hundreds of thousands of dollars. And remember: you’re a startup worker, so there’s a good chance you’ve been living off a smaller salary all along!
So you’re probably stuck. Either you fork out enough dough yourself on a monumentally risky investment, sell them on the secondary market (which most companies disallow post-Facebook IPO), give up a portion of equity in some shady half-sale-loan thing to various third parties, or forfeit the options entirely.
I mean, you did what you were supposed to: you helped grow that fucking company. And now, in part because of your success, it’s too expensive to own what you had worked hard to vest? Ridiculous.
How we got here wasn’t necessarily malicious. These 90 day exercise windows can likely be tied back to ISOs terminating, by law, at 90 days. NSOs came along for the ride. This was less problematic when we had a somewhat more liquid marketplace for employee equity. With IPOs taking much longer to happen combined with companies restricting sale on the secondary market, these 90 days have completely stifled the tech worker’s ability to even hold the equity they’ve earned, much less profit from it.
There’s a relatively easy solution: convert vested ISOs to nonquals and extend the exercise window from 90 days to something longer. Pinterest is moving to seven years (in part by converting ISOs to nonquals). Sam Altman suggests ten years. In either case, those are both likely long enough timespans for other options to arise for you: the company could go public (in which case you can sell shares on the open market to handle the tax hit), the company could fail (in which case you’re not stuck getting fucked over paying hundreds of thousands of dollars for worthless stock, which can even happen in a “successful” acquisition), you could become independently wealthy some other way, or the company could get acquired and you gain even more outs.
Naturally, modifying the stock agreement is a solution that only companies can take. So what can you, the humble worker bee, do?
The new norm
We need to encourage companies to start taking steps towards correcting the problems we see today. I want to see more employees able to retain the compensation they earned. I want to see this become the norm.
My friend’s trying to adopt some employee-friendly terms in the incorporation of his third startup, and he mentioned this to me specifically:
You have no idea how hard it’s been to try something different. Even tried to get a three year vest for my employees, because I think four years is a bullshit norm, and lawyers mocked me for 15 minutes. Said it would make my company uninvestable.
The more companies we can get shifting to these employee-friendly terms, bit by bit, the easier it is for everyone else to accept these as the norm. Start the conversation with prospective employers. Write and tweet about your own experiences. Ask your leadership if they’ll switch over.
Clap for ‘em
One final, important part is to applaud the companies doing it right, and to promote them amongst the startup community.
I just created a repository at holman/extended-exercise-windows that lists out companies who have extended their exercise windows. If you’re interested in working for a company that takes a progressive, employee-friendly stance on this, give it a look. If you’re a company who’s switched to a longer exercise window, please contribute! And if you’re at a company that currently only does 90 day exercise windows, give them a friendly heads-up, and hopefully we can add them soon enough.
You have 90 days to do this, and then I’m deleting the repo.