The cynical reason startups should grant employees more equity
Sam Altman's blog post on employee equity has started a much-needed conversation in the startup world. With a typical equity grant, most employees will not come out ahead given the lower salary of a startup over an established company. This presents considerable challenges for recruiting software engineers (especially experienced software engineers) to join startups. As Hacker News user marvin puts it:
Has anyone stopped to think what a massive failing of the startup part of the industry this is? Practically everything I read online indicates that if you consider your stock options to have any value at all even in a moderately successful company, you are a major sucker and about to get exploited.
Surely this must reduce the quality of the talent pool available to new startups, as the experienced developers conclude that other options are a better use of their time.
There's a cynical reason why startups should grant more equity: many employees do not receive the equity they were granted. Therefore the cost of granting equity to employees is lower than the face value.
There's three reasons for this.
First, the tenure at startups is typically shorter than the vesting period for the stock options. While equity is intended as a tool to retain employees, people still leave before they are fully vested. If a startup grants an employee 0.5% and they leave after two years, they will end up with only 0.25%. The unvested shares are returned to the option pool. Partially vested employees must make a calculation: now that they know more about the company, is it worth staying to vest the rest of their shares? This is one reason why Andy Rachleff's Wealthfront Equity Plan includes regular grants of significant amount of new stock options.
Second, when an employee leaves the company, they must decide whether the buy their options. The cash outlay for this can be significant. Even if the employee has the cash to buy the options, they may weigh the chances of the stock becoming liquid and decide not to purchase them. Worse, if they company has raised a round of funding since they have joined, the employee will have to pay taxes on the difference between their grant price and the current value (David Weekly's guide to stock options has a good explanation of the "AMT bear trap"). Again, the employee may decide that paying a big chunk of taxes now on stock that may have value later isn't worth it. If the employee doesn't buy their options, the options will be returned to the option pool.
Third, a reason that's less favorable for startups is that there's a very real chance that all the equity in the company is worthless. The company may completely fail, in which case the equity will be worth zero; or be acqui-hired, in which case the compensation will mostly be based on retention agreements, not equity in the original company.
Sometimes buying options is a no-brainer, but most of the time it is not clear-cut. Even a decent exit at $100M (a fairly rare occurrence) leaves most employees with little liquidity. In a typical startup, an employee must value the options based on not only the chance that the company will do well, but that they will still be with the company when it exits. Since startups grant options that are frequently unclaimed, they can afford to grant more. This would dilute founders somewhat more, and may complicate relationships with investors, but this dilution will only really be felt if the company is successful and it seems fair that that success be shared with the employees that helped make it possible.
Speaking at RailsConf
I'm happy to be presenting at RailsConf 2014 in Chicago this week. My talk is "Looking Backward: Ten Years on Rails":
In Edward Bellamy's utopian novel "Looking Backward", a man from the 1890s awakens after 100 years and sees the wonders of the new age. What would a programmer from 2004 think if they woke up in 2014's web development utopia?
When you work with Rails every day, it's easy to forget how much it changed web development. But the influence of Rails is still being felt today in the Ruby world and beyond. Let's rediscover the Rails revolution by looking backward at its impact on how we work now.
It will be at 3:20 on Tuesday. The other talks at that timeslot look great, so I will be honored if you come see my talk.
For want of a nail...
Today, I wanted to create a new page on this site for my RailsConf talk next week. This site is hosted on Google App Engine (seemed like a good idea at the time). I wrote the site in a microframework for App Engine called Tipfy (seemed like a good idea at the time) under Python 2.5.
A couple of years later, Tipfy is no longer maintained and Python 2.5 on App Engine is deprecated. The site still runs, but even adding new static pages is complicated because it's difficult to get the app running locally.
I tried that today, started making changes, remembered
old_dev_appserver.py, tried that, and still couldn't get it running. At that point I gave up and decided a quick port to Flask was in order.
Unfortunately, I had problems getting Flask installed, because pip wouldn't install packages into the lib directory. I got the error
error: must supply either home or prefix/exec-prefix -- not both which I think might be related to the fact that I'm using homebrew installed Python, but couldn't find any information about.
I was able to work around that by installing the packages without a destination directory and then I copying them into my lib directory manually. Once Flask was installed, I could begin the port, which fortunately went quickly because both Flask and Tipfy are based on Jinja2 and Werkzeug.
So I spent all afternoon rewriting my blog engine. And now I need to make that page for RailsConf...
My hat is off to Kim-Mai Cutler for writing the most comprehensive and even-handed article I've seen about the San Francisco housing crisis.
She dives deep into the issue, beyond the usual activist versus developers/gentrifiers narrative, to look at the root causes. She makes the connections between Proposition 13 and rent control, between San Francisco's baroque permitting process and high construction costs, and discusses how the larger region's NIMBY tendencies concentrate the issue.
This is long, but well-worth your time to read.
Any time you hear "this time it's different", you should probably run for the hills, but I think Anshu Sharma makes an interesting point in his comment on Chris Dixon's post about "full stack startups":
This is also why "this time its different" is true. For the first time (as far as I can tell) in the life of silicon valley we are no longer competing with each other for the same $1 Trillion Dollar IT budget - Microsoft vs Oracle vs IBM vs Juniper vs AppDynamics vs Hadoop vs New Relic vs whatever. We are competing with Starwood Group vs AirBnB, Uber vs Yellow Cab, etc. In the past, only ecommerce companies did that. This expands the [total accessible market] for Silicon Valley (or "tech" whatever that means) from $1Trillion to N Trillion.
It's interesting to consider that many of today's prominent startups don't compete with each other at all -- except for employees. Uber and Square are in totally different markets.
How I make coffee
This is how I fight off coffee addiction. To make coffee, I use a Zassenhaus hand grinder and a French press. The grinder belonged to my father. It's an antique with some wear and tear, but it still grinds up coffee beans perfectly well. Making coffee this way is a manual process, but I like it. It becomes a special ritual, something I don't do every day.
Yet more proof that the UK is one of the best countries in the world:
The Chief Mouser to the Cabinet Office is the title of the official resident cat of the Prime Minister of the United Kingdom at 10 Downing Street. Only two cats, Humphrey and Larry, have been given the title officially; other cats were given this title affectionately, usually by the British press. There has been a resident Treasury or Downing Street cat employed as a mouser and pet since the reign of Henry VIII, when Cardinal Wolsey placed his cat by his side while acting in his judicial capacity as Lord Chancellor, an office he assumed in 1515.
But even if TextMate 2 drops from the sky fully-formed and marveled at by all, Emacs will still be there, waiting. It will be there when the icecaps melt and the cities drown, when humanity destroys itself in fire and zombies, when the roaches finally achieve sentience, take over, and begin using computers themselves - at which point its various Ctrl-Meta key-chords will seem not merely satisfyingly ergonomic for the typical arthropod, but also direct evidence for the universe's Intelligent Design by some six-legged, multi-jointed God.
Randomly generated from the text of the King James Bible and the Structure and Interpretation of Computer Programs. This one is my favorite:
The integral procedure at the end of the garbage-collection phase the useful data will have been moved and scanned, at which point we start over from the root of the trees: every tree therefore which bringeth not forth good fruit is hewn down
In the most dramatic Russian literary killing since a dispute over Kant turned deadly last year, a man allegedly stabbed an acquaintance for preferring prose to poetry. RIA Novosti has this report: "A former teacher was detained in Russia's Urals after being accused of stabbing an acquaintance to death in a dispute about literary genres, investigators said Wednesday. The 67-year-old victim insisted that 'the only real literature is prose,' the Sverdlovsk Region's branch of the Investigative Committee said. The victim's assertion outraged the 53-year-old suspect, who favored poetry, and the dispute ended with the ex-teacher stabbing his friend to death, investigators said."