"Vesting over what period, you say?"
Over the past way-too-many years I’ve had occasion to interview north of 250 individuals for dozens of positions at both startups and large companies on both sides of the border. Having spent my teething years (professionally) in the maelstrom of Silicon Valley I have come to be able to recognize many different character types and motivational fulcrums when it comes to tech industry employees in marketing, engineering, business development, and customer support.
Based on that experience I am rather unsurprised but still a little disheartened to hear thru the grapevine that Thursday’s $38M+ acquisition of Verrus by a UK-based company netted big wins for the company’s management team, but sweet bubkus for their employees. This is because Verrus did not widely incent their employees with stock options. Stock options may be the oxygen coursing through the bloodstream of Silicon Valley. But up here? They’re an afterthought.
Down South, when companies are successful and are acquired or achieve IPO (I still remember the nineties, yes) they very often create windfalls for their employees. As an example, when I worked at Cisco one of my co-workers, a Product Manager who had been with the company for about 10 years, was vesting stock at the rate of about ~$210,000.00 per month.
This is a gross exception to the rule, but is a fun example. He was a bit of a hockey nut, and once turned to me and asked whether I wanted to help him build a rink. I said “in your back yard?” and he replied “No, like a two-rink complex as a business.” These windfalls buy some degree of freedom, for sure, but more often than not are a few hundred thousand dollars in total. Don’t call the architect just yet.
But a good exit of a few hundred grand is enough to leverage that hard-working employee into a more senior role at another startup, as often happens; or for a talented coder it buys a few years of freedom to pursue their own startup idea without the pressure of drawing a salary. More often still the windfall buys the cushion so that employees can take riskier jobs with bigger upsides, cavalierly walk from companies that they are convinced will ultimately fail, or help smart folks make major life-changes and start small businesses in industries not reachable via the http protocol.
In many ways stock options, or rather the wealth they create, can be seen as antibodies to failure.
When I went to Cisco I failed to negotiate hard on my stock options (or rather, I did not negotiate at all). This is a shame because during 15 months of working at Cisco my initial stock option grant grew in value from $12 to $84. But I came by my ignorance honestly — I was after all from Vancouver, where I had barely heard of stock options, and where I knew not a single person who had materially benefited from them.
You can’t walk fifty feet in Palo Alto without tripping over someone who made a fortune on their PayPal stock options — in those days everyone from the caterer on up was granted them, and even commercial landlords took options on top of astronomical office rental fees. There is a culture that recognizes their risk and upside and there are plenty of examples of folks who’ve done well by them.
I have been frustrated in hiring folks in Silicon Valley by savvy employees who negotiated stubbornly against their stock option packages, fretted about terms within the option grant such as accelerated vesting and cliffs, and who actually in a few cases pushed for lower salaries or bonuses in favour of more options.
Conversely, I have not once had an interviewee in Vancouver haggle over stock options. In fact very few folks have an even remotely strong understanding of what they represent and how they work. In the past it’s occasionally even been difficult to lure people to full-time employee status versus working as a contractor.
Vancouverites in the tech industry and Canadians in general, in my experience, still have a fairly Neo-Marxist view of the employee – employer relationship: you sell me your labour for the negotiated price and, where surplus value is created, this is absorbed not by the company as a group but instead by its managers and investors. The labour is unsually neither ineffectual nor is it inspired, and the employee has no fundamental interest in the company’s success beyond remaining employed because the company continues to exist. If it fails nothing is lost by the employee, except for a few weeks of rest before they move on to sell their labour to the next buyer.
For a while when I started working with startups locally around 2004-2005 I used to offer equity (mostly as stock options) because I am a nice guy and because I understood how equity has always motivated me as a worker and as an entrepreneur. Almost universally I found that these options were unappreciated and indeed oftentimes misunderstood. More recently, recognizing that my prospective hires are more compelled by salary and flexibility (we all love the Vancouver lifestyle … many of us too much so) than by upside I have ceased to offer stock options at all.
After all, since those stock options are ultimately dilutive to my own benefit as a partial owner of the business in the event of a successful exit, I have grown much more stingy with them.  Why incur the paperwork hassle and decrement my own long-term financial benefit for someone who ascribes no real value to these options?
The mercenary culture of workers on the Vancouver tech scene — likely a product of some combination of the province’s dominant organized labour mentality, of the very fly-by-nite startups that emerged here in the mid-late-nineties, and of the relatively pithy (and thus very unstable) financing amounts received by practically every company in technology — is a real problem and an obstacle for success to these companies. Employees who are materially invested in a company’s growth are necessarily harder working, more committed, and more thoughtful employees. Those who aren’t are likely to flit away at the first whiff of trouble (and believe me, startups here and in general encounter plenty) or for dumb reasons like a few hundred more dollars in their pocket monthly from another job.
So, it may be a chicken and an egg thing. Employers do not have an obligation to offer stock options. Qualified candidates will benefit from understanding them and recognizing their true value. And if folks aren’t buying ferraris with their options, or pivoting into their own startups with lots of runway, we have few examples to point to as encouragement.
I strongly believe that the long-term health of our technology community depends on more people benefiting from successful companies via stock option payouts; and that we need to talk more openly with employees and prospects about how they work and what they mean. The community needs to see more rich guys slacking at coffee shops who were simply low-level workers at hugely successful companies. Believe me… when you see gardeners living large on the stock options they earned for mowing the lawns at the corporate offices of flotsam.com, you’ll get religion too.
On the other hand, you’ll have to really impress me these days to convince me to hack off a few thousand pieces of paper from my dream business and give them to you. I have learned through hard experience that, even after options having been granted to local workers, their value has little additional motivational effect on employees. And these days, even my unabashed generosity has its limits.
I could easily write an entire post about how much I hate options. Other than a few people I knew in ottawa in 2001, very few friends of mine have ever benefitted from stock options. While they may have made sense during the 2000-2002 market, the reality is the upsides aren’t just what they used to be.
The last company I worked for had given me 600,000 options over 5 years. Unfortunately they never made me a dime, despite the hours I worked or my contributions. Had I simply demanded what I was worth, I probably would have been $100k ahead over
that same time.
There are lots if scenarios where management can
benefit from a material event (such as a merger) but very few employees can. To exercise my options I had to obtain approval from our share officer who would have probably not let me exercise them except when in a blackout period (which was like 9 months out of
the year)
Stock options are basically worthless, and I’d never recommend and employee take
them in exchange for proper compensation. In a public company an employee could be
given preferred shares (which are real equity, options aren’t), which would
be better. But stock options can be nullified by a lot of poison pills, and shares in a private company are essentially pointless if you don’t have any abililty to sell them.
One other funny local story: When I returned from Ireland, I interviewed with a large number of local companies. The HR person from one of the companies, ActiveState, tried to justify the overly low salary to me by explaining that I’d have 40K stock options.
There was just one problem: she couldn’t tell me the size of the option pool, or the number of outstanding shares in the company! So, essentially, I was supposed to take their word that it was an equitable amount, without any context. Of course, I turned down the job.
Stock options have a dirty history in Vancouver. It’s a junior finance market, and one that’s always been dominated by penny mining stocks and the hysterical financiers who can huckster such paper to the moon and back in the time it takes you to open and close your wallet.
Back when the Ventures exchange was still the VSE, the cheap fast and dirty way for a tech company to become publicly listed was to engineer a reverse-takeover of a dormant, publicly listed mining company. They’d quickly issue several classes of shares, reserving a “special†class for employees and anybody else gullible enough to accept them. The stocks were worthless, and if by accident they actually turned out to hold some value, they could easily be diluted. Many of these companies would gladly pay for any product, service or employee with 50% of the sticker price in stocks or options. I personally knew several sad cases who worked for 100% shares – sleeping in the office and showering at the gym – all in the hope of getting more paper under their belt. In the end, all they were left with was a bad taste in their mouth.
Privately held corporations, being even less transparent than their public brethren, have seen even worse excesses. As skeptical as I’ve been, I’ve taken up several companies offers of stock options, and seen little but trouble for the effort. I’ve seen first-round employees diluted to the point of financial incontinence, and buy-out technicians who’d engineer a stacking of the board so that hostile motions could be carried out. It’s how it’s always been done here – Vancouver didn’t pick up the name “Terminal City†without a sense of irony.
Now, occasionally things do work out, and not all juniors are polluted by hucksters. The reality is, but for a few spectacular exceptions (onvia, creo), most tech firms in Vancouver tend to opt for an early stage buyout, where there’s simply not much sloshing around for anybody but early employees to even get their hands wet.
I’m not suggesting that stock options aren’t important – I bargain hard for options, and nothing makes me happier than to see the company principals feel a smidgen of pain. It’s the ones who smile and say “fine, whatever you need†that you really have to watch out for.
Ian,
Very interesting article. I posted a summary of it, and link on the Equity Compensation Experts, networking groupsite.
I have specialized in the area of equity compensation for more than 15 years. I also remember the Cisco and Google fortunes and have seen the fortunes created by PayPal and others. These, however, are the extraordinary stories. They do not, and have not,represented the facts of “normal” equity compensation packages. Most people do not get rich, even when their companies are incredibly successful.
Options were designed to fill a hole in the amount of pay a company could afford directly. As they became popular and pre-IPO money poured into companies (mostly in the late 1990’s), salaries equalized and then larger public companies started trying to compete with options. This distorted the market and has left everyone with a feeling that it was the “norm”, when in fact it was a 3-5 year blip in history.
The key is providing “equitable” equity compensation. This is a difficult task and requires significant planning and management. I think we will continue to see a growth in vesting based-on hitting performance criteria, rather than just time-oriented hurdles. This has the possibility of opening up equity compensation to more individuals, but limiting the payouts to a selected few.
I would agree that in general Canadians employees and Canadian employers have a generally apathetic view of stock options. I have worked for several small start-up type companies and found almost no interest when discussing stock options. Another dimension of this issue might also be the way government’s taxes stock option earnings with fairly high capital gains tax. I agree though that if we started embracing these philosophies we would have a much better chance of creating the start-up ecosystem Canada needs to go forward today.
I enjoyed the article Ian, thanks!
I would like to add to Ben’s inquiry regarding amount and vesting period a question about “sweat equity.”
Are there rules of thumb for the trade of salary for options?
For example, although a startup may have already received private funding at $xyz per share, it shouldn’t reasonably be expected that employees sacrifice salary at the same rate per share… Or should it?
In short, when negotiating for equity, knowing the price per share of private investment, how can this knowledge inform how to negotiate the balance of options vs salary.
Thanks,
Peter
I think another facet of this issue is that in Vancouver, founders’ sights aren’t as set as high as they are in Silicon Valley. The culture and lifestyle here begets “lifestyle companies” where the founders are more aiming at a sustainable company with 20 employees rather than a $100 million sale or an IPO.
Given that, stock options aren’t as valuable to potential employees. What is 2.5% of a company that does moderately well but never sells worth?
I think you suffer from a bit of sampling bias, Ian. You’ve already won the lottery. So naturally you’re going to advocate people playing lottery. Especially now that you’re in the lottery business, to complete the analogy. I haven’t. In my experience — getting screwed out of options not once but twice — I find them a positive gesture in an offer and at least a revealing cultural signifier of those who offer them. I don’t look down on them: they mean something. Just less than you do.
In fact you make us wage slaves seem like ungrateful slobs. Since I don’t hold out much hope of cashing in on any lotteries, you might consider that perhaps the journey is more important than the destination to me. Will I feel good about making you rich? I mean are you someone that deserves my devotion? In the time that we have, we want to be loved, we want to love and we want to matter. Is that so hard for you to get? Because in the end the destination is the same for all of us, bud.
I’ve lost the lottery much more often than I’ve won it, however 100% of the options I’ve been granted in Silicon Valley have increased in value (still waiting on an exit for one of them), and 0% of the options I’ve been granted in Vancouver have increased in value or seen successful outcomes.
So there’s a definite chicken-egg scenario at play here as others have pointed out. Vancouver companies do tend to aim low and their VCs like to fund them aenemically forcing down-rounds and low valuations, rendering options granted at early stages essentially worthless.
Great stuff Ian. The long term value to employer and employee via stock options just can’t be argued. It should be priority number one for anyone joining a young-ish tech company, because the strategy underlying that stage of a tech endeavor is to amplify value quickly. Settling for a paycheck is naive to the fundamentals you’re subscribing to. The contractor mentality is simply shortchanging work you’d do for a company like that…if you’re going to sell your time you should sell it to older established companies, not startups.
I don’t blame you for holding onto your equity if it’s not being demanded by hires. In the US you’d be hard pressed to find anyone doesn’t want a stake in the company’s future.
I think there’s another dimension to the lack of perceived value of stock options in Vancouver: no one has seen anyone locally get rich off them. Perhaps this is in part due to the culture of modesty, and part due to the fact that there haven’t been any truly huge exits.
A friend of my wife left her job at PayPal to work for YouTube as a copywriter. When they were bought, her options were worth $2M. Not bad. However, that required one of the largest exits for that amount of money to trickle down to her level.
For options to matter to the average employee, they have to believe they’re going to get rich off them. In Vancouver, I don’t believe employees believe that is a possible outcome, and hence they don’t value options. Once again, culture is the culprit.
Great post.
Back in Toronto, stock options were always a big part of any kind of compensation package. The biggest issue is educating employees so that they understand what a stock option plan really means, and offering enough stock for it to be effective. In Toronto I had options in companies which have sold for a few hundred million, but only 10% of the technical staff at that company ever understood what the hell options were, or what the potential payout was. A lot of people back east have made money from stock options, but all too frequently it just becomes some kind of pithy “bonus”. It is these stories which circulate and encourage an unfair comparison between equity and straight cash.
I was hoping you’ll talk a bit more about approaching negotiating on options regarding:
* fair amount to request
* a good / standard / desirable vesting period
* options vs a better salary, tips on choosing the right balance
I kind of only got how people in Vancouver don’t appreciate options and how as a business owner you don’t want to share in the business.
I was talking to a tech recruiter a couple of months back that visited bootup. He said that out East they are likely to switch jobs vs Vancouverites over a few bucks.
I think that, as a founder you will eventually get what you pay for. The best techs in Vancouver are always employed, no matter how bad the economy. To retain those people you got to offer better compensation than your competitors, either through salary or equity.
The trick is to getting the mix right. Everybody is greedy. If you’re a rich founder you have the liberty of paying with cash. If you’re not, then you gotta pay with equity. Either way it’ll cost you something. How expensive it will be will depend.
As the employee, working for a start up you need to be able to figure out if you can change your lifestyle to delay gratification with hopes of a bigger pay out later.