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Comment by terravion | Hacker News Reader

This is a really tough policy to get right because there is a continuum of cases. At one end, someone has vested shares and is pushed out for being harmful to the company. At the other you have a valued loyal employee that is going to business school for two years and hopefully coming back. It is a no-brainer that the employee going to school should get the exercise period extended--but if the toxic employee doesn't want to risk cash, why should the staying employees take dilution on what was probably unhelpful service?

It is really hard to make a contract that fully reflects what's fair.

I think the thing that gets missed a lot in these discussions is that just because default docs are super company favorable (i.e. assuming the former rather than the latter), in the opposite case one can make an exception.

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> It is a no-brainer that the employee going to school should get the exercise period extended--but if the toxic employee doesn't want to risk cash, why should the staying employees take dilution on what was probably unhelpful service?

Because in both cases, they earned their options. You can't take back their salary compensation, why should you be able to take back their options?

> It is really hard to make a contract that fully reflects what's fair.

No, it isn't. If you've earned your compensation, you have earned it. Unless you mean its difficult to write a contract where a company can weasel out of their obligations when its suits their purposes; I would agree with that.

> they earned their options

Yes, and that option expires in 3 months after departing... In the same way that publicly traded stock options (ie calls) typically have expiration dates.

Part of the conflict here is that "options" aren't "shares" -- the option, including all terms (such as execution windows) are what is earned. Everything is known upfront. If you wanted comp to be around shares, then just issue shares via RSPA and deal with the cap table consequences and extra legal wrangling.

This entire "problem" is caused by tax code: you owe the IRS on gains from option conversion, even though the underlying asset is entirely illiquid and frequently non-transferrable. Sounds like a "real" solution is to lobby for tax code changes.

EDIT: to be clear... I'm not saying I agree with short expirations after departure. But there needs to be a clear distinction between shares, options, and 'intent'. Clearly the existing two ways of comp are lacking since there are either tax consequences (options) or out of pocket employee expenses to purchase (shares).

> Everything is known upfront.

No, the whole point of this uproar is that the standard terms are opaque around the tax consequences of the 90-day window. It is not generally well-understood upfront by recruits that they may lose vested options on exit.

You don't need to change the tax code to fix it. You can simply extend the exercise window.

There are legal limitations on exercise windows for ISOs that complicate matters (trickiness involving NQO conversion) that must be accounted for even in your "simple" solution (ask your attorney). It's a shitty situation for companies that want to do right too. No one wants to innovate on corporate structure (time, cost, and headache) when you're already trying to solve major product market fit problems...

Y Combinator has made this the standard for their companies and even provides boilerplate documents.[1] So not much of a distraction from product-market fit, and considerably simpler than altering the tax code.

[1] http://blog.triplebyte.com/extending-stock-option-exercise-w...

I haven't seen YC incorporation docs since 2013... But either way, these are Triplebyte's docs, not YC standard's (though I'm open to evidence that proves otherwise).

But thanks for pointer... Was informative.

Ah, I was confused by this ambiguous statement from harj.[1] I thought he was speaking for YC but I guess at this point he had moved on to triplebyte. Anyway, point is they've made it easier to adopt these terms and many are.

[1] https://news.ycombinator.com/item?id=11198991

And there really isn't any free lunch. Extended exercise periods have a real cost to everyone that stays (the people who are increasing the value of the option) at no cost to the departed person.

Most employees will leave their employer at some point. It's not as though there are employees here that are paying the cost but not receiving the benefit.

Right but the person who left was their earlier, during a riskier time, then probability of failure was greater. So they jumped in when others might have thought twice (remember most startups fail). Aren't those options a reward for that?

What? No they don't.

So nobody here is advocating for taking away anything granted by contract. What you're asking for though, is the ability to sit on an option to see if it keeps going up in value, while not taking any risk or adding any value. The point of the 90 day exercise period is that since the departed employee is no longer adding value to the company, they need to take the risk on the gain to lock it in. The employees and founders that stay are putting in more than just money. If exercise periods were unlimited, you could make it more attractive to walk around collecting lottery tickets than picking a boat and rowing in it, which is what equity grants are supposed to incentivize.

> So nobody here is advocating for taking away anything granted by contract.

You can't really say that when the contract is opaque. Most recruits do not understand that the tax consequences of the 90 day window supersede the vesting schedule, to the point where vesting is effectively meaningless.

You're concerned that if employees can actually keep their options that they will be more mercenary and diversify their startup portfolio. Ok, that's not an unreasonable concern. Diversification is a smart investment strategy with high-risk assets.

But the issue here is firstly one of transparency. The reasoning you laid out is opaque. What does it mean to require employees to buy their options "to take the risk on the gain" when in most cases they can't afford to buy them? Furthermore, haven't they already risked their time and effort? Why would "no longer adding value to the company" justify the loss of previously vested options?

Look, if what you're aiming for is a disincentive for mercenary employees, that's totally fine. But make it transparent. Make it a backloaded vesting schedule. Make it a cliff. Make it a cliff all they way out to the IPO if you want. But that's how you need to present it to recruits: clearly and transparently. Otherwise you are simply misleading recruits into thinking they will keep more than they really can.

"The point of the 90 day exercise period is that since the departed employee is no longer adding value to the company"

So all of the work they've done until then disappears? It's gone? It's no longer helping the company?

If companies don't want people to leave once their options are vested, then maybe they should concentrate on being a better place to work. Not by handcuffing someone by threatening a crazy short expiry date on their hard earned options.

I thought the reason for giving options instead of RSU is tax reason, why not let all employees exercise on day 1?

Vesting still makes sure you stay long term.

"but if the toxic employee doesn't want to risk cash, why should the staying employees take dilution on what was probably unhelpful service?"

Why don't you make them pay back their salary during that period while you're at it?

It really does not matter what kind of employee they were. The agreement was Salary + Stock for work done. Saying they shouldn't get the stock is just crazy.

Your mindset is very scary to me because a lot of others think like you. If someone earns options over one, two, two and a half year period and then is deemed "toxic" to the company, why should they not receive similar compensation to someone who lasts 3 years in this system? 3 month exercise windows are strictly for investor class and thus founder class.

Employees aren't facing dilution problems from their fellow employees who get to exercise their options while exiting, they face dilution from the investor class trying to own as much of the company as they can.

I thought the point of the one year cliff is to weed out toxic employees. If you're around more than a year, why shouldn't you get to keep your vested options, even if issues emerge later? What's the point of a vesting schedule then?

Look, if you think the company should have the right to determine how much equity employees get to keep when they leave, that's fine. But if you're an honest company then you have to be transparent about it. It is not "tough" to be transparent if you are proud about what you are saying. You can simply say, "Look, vesting doesn't really mean anything until we have a liquidity event. Before that, you aren't guaranteed anything, but we can make exceptions."

So, will you start saying it that way to your recruits?

Somewhat of a nit - in many cases the remaining employees don't pay via dilution for a fired employee keeping his/her stock.

The option pool is set up beforehand and if the company sells or goes public and there is still equity left in the pool, there are a lot of things that can happen such as the founders or investors getting the chance to buy it out. Only if the company ends up expanding the options pool by allocating more shares would the employees (as well as founders) get diluted. And if the company is public they might do a buyback to expand the employee equity pool so nobody gets diluted.

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