ZH

The New 10-Year Vesting Schedule

While employees have been busy building things, founders and VCs have flipped the industry on its head and aggressively sought to prevent employees from making money from their stock options.

Traditionally, early employees would receive a option grant of a four year vesting schedule with a one year cliff. In other words, your stock would slowly “vest” — become available for you to purchase — over the course of four years, with the first options vesting one year after your hire date, and (usually) monthly after that.

The promise of this is to keep employees at the company for a number of years, since they don’t receive the full weight of their stock until they’ve been there four years.

Companies still hire with a four year vesting schedule, but the whole damn thing is a lie — in practice, people are going to be stuck at a company for much longer than four years if they want to retain the stock they’ve earned.

This stems from two new developments in recent years: companies are staying private longer (the average age of a recently-IPOed tech company is now 11 years old), and companies clamping down on private sales of employee stock after Facebook’s IPO. The impact is best summed up by the recent Handcuffed to Uber article, which effectively means employees can’t leave Uber without either forfeiting a fortune in unexercised stock, or paying a massive tax bill on imaginary, illiquid stock.

An industry run by people who haven’t been an employee in years

The leaders in the industry don’t really face any of the problems that employees face. They don’t even sugarcoat it: it’s pretty remarkable how plainspoken CEOs and VCs are when it comes to going public:

“I’m going to make sure it happens as late as possible,” said Kalanick to CNBC Monday. He added that he had no idea if Uber would go public in the next three to five years.

Don’t Expect an Uber IPO Any Time Soon

and:

“I’m committed to Palantir for the long term, and I’ve advised the company to remain private for as long as it can,” said Mr. Thiel, a billionaire.

Palantir and Investors Spar Over How to Cash In

This is a much harder pill to swallow for those at Palantir, who tends to pay their engineers far below market rate. All this coming from CEO Alex Karp, who attempted to make the case that companies should simultaneously pay their employees less, give them more equity, but don’t allow them to cash that equity out.

Top venture capitalists agree as well:

This is a top VC and luminary advocating for the position that people who end up wanting to make some money on the stock that they’ve worked hard to vest are disloyal. Nothing I’ve read in the last few weeks has made me more furious. We’re now in a position where the four year vesting schedule isn’t enough for these people. They want the four year vesting schedule, and then they want to control your life for the subsequent 4-8 years while they fuck around in the private market.

If you just had a kid and need some additional liquidity, you’re disloyal. If you’d like to pay off your student debt, forget it, we’re not going to incentivize you to do that. If your partner is going back to school and you have to move across the country, tough luck, please turn in your stock options on the way out. If you’ve been busting your ass on a below market-rate salary for years and now you want a bit of what you’ve worked hard to vest, fuck you, go back to work.

Mechanisms of control

There’s obvious things that can be done to help fix this: one of which is getting rid of the 90-day exercise window, which many companies have started to do.

Another is internal stock buybacks, but these are usually low-key and restrictive. Usually you’ll get capped, either on a personal level (you can’t sell back more than x% of your shares) or on a company-wide level (the maximum that this group of employees can sell is xxx,xxx shares).

Or, sometimes these buybacks are limited by tenure: either it’s only for current employees, or you need to be at a company for x years to be able to participate. That’s somewhat reasonable on the surface, but on the other hand it’s en vogue now for unicorns to staff up and add two thousand people in the last three years you’ve worked there. You might end up managing dozens or hundreds of people in the meantime and have a massive impact on the organization, but still can’t sell some stock to avoid all your eggs in one basket, since only people who have been there four years or more can sell.

Another really dicey thing I’ve heard of happening is the following timeline:

  • Company hires a bunch of people
  • Two years pass
  • Company realizes the stock compensation they’re paying these employees is an order of magnitude lower than market average
  • Company gives new grants to employees to, in effect, “make up” for the difference
  • Company grants at a new four year vesting schedule

And that, ladies and gentlemen, is how you sneak a ton of your employees into a de facto six year vesting schedule. A few companies I’ve heard this happening at will give that refresh grant at maybe 10x their initial grant (given how far below market rate their initial grant was), so the employee is effectively stuck for the whole six year ride if they want to retain what they earn. They’ll virtually all go ahead and stick it out, particularly if they weren’t told that this is a catch-up grant — hey, I must be doing really great here, look at how big this second grant is!

Founders of VC-backed companies are insulated from these problems. Once you’ve reached a certain level of success — say, a $100M valuation or unicorn status or some such milestone — it’s expected that your investors will strongly encourage you to take some money off the table between financing rounds so you don’t have to deal with the stress of running a high-growth business while trying to make ends meet.

No one’s yet explained to me, though, why that reasoning works for founders but not for the first employee.

I get wanting to retain people, but strictly using financial levers to do that feels skeezy, and besides, monetary rewards might not be what ultimately motivates people, past a certain point. If you really want to retain your good people, stop building fucking horrible company cultures. You already got your four year vest out of these tenured employees; you can’t move the levers retroactively just because you’re grumpy it’s five years later and you’re not worth a trillion dollars yet.

Public Enemy

There are some people who have been pushing for solutions to these problems.

Mark Cuban’s been pushing the SEC to make a number of changes to make going public easier, and that “it’s worth the hassle to go public”. Mark Zuckerberg’s been pushing that angle as well. And, of course, Fred Wilson had his truly lovely message to Travis Kalanick:

You can’t just say fuck you. Take the goddamn company public.

There are a lot of possible ways to address these problems: taking companies public earlier, being progressive when it comes to exercise windows, doing internal buybacks more often and more permissively, adjusting the tax laws to treat illiquid options differently, and so on. I just don’t know if anyone’s really going to fix it while the people in charge aren’t experiencing the pain.