This is an improvement in some areas. However it allows companies to terminate employees for cause and take back the shares they have already vested.
In my opinion, if equity is presented as an important part of compensation, it shouldn't be something that can be taken back any more easily than past salary could be. Looking at what happened at Skype, Zynga and other companies is enough that I would mostly discount any equity offered under such an agreement.
Don't have time to go through the docs just yet, but great to see mentions of cashless exercise included. A more generous post-termination exercise window would have been a nicer default, but I get that's still the norm in many YC companies.
Over time I suspect that will change as more and more people learn the questions they should ask when evaluating an offer, i.e., as they transition from naive price takers to more sophisticated price setters. This link was circulated on HN a few weeks(?) ago, but it's worth reposting: https://github.com/jlevy/og-equity-compensation.
And here are some companies that offer >90 days: https://github.com/holman/extended-exercise-windows (e.g., Coinbase and Pinterest with 7 years, Quora and Asana with 10 years, etc.). Interesting to see two companies in the list founded by early Facebook employees -- well, cofounder and CTO -- do longer periods. Wonder if people got burned there by the standard period?
Cashless exercise is one of those things that costs the company very little, but is incredibly advantageous for the employee.
However, companies don't always love it, because it removes a lot of the "golden handcuffs" that serve as a shady way to retain employees as valuation climbs.
Ah, thanks for pointing that out - we didn't intend to make a normative statement with respect to the defaults. We'll update with examples of longer post-termination exercise windows (we've set up these forms so that it's easy for companies to customize this part).
It seems like a good way to fix problems of early employees being under-incentivized to take on startup-level risk, and to stay with the company once later high-level employees have been hired above them. Have any YC companies tried it out? Any plans to incorporate this into Clerky documents?
We're always excited to see this stuff evolve - a lot of the popular practices were established decades ago and haven't changed much since then.
I can't say that we've come across companies (YC or otherwise) asking for this specific plan though, unfortunately. In general, we try to keep the default forms on Clerky tied to what we're seeing in the market - so if we see more companies moving toward this, we'd definitely update things accordingly.
Seems like a solid plan to address issues with disparity in compensation / upside between different tiers of employees. It spreads the reward but still allows the founders to maintain larger ownership chunks, which is the important part. Since equity is such a critical part of compensation [1], I’d love to see this implemented more, but I have a feeling it will mostly get lip service with people hiding behind “this is the standard.” Founders shouldn’t accept the “it’s standard” argument from VCs when negotiating terms, and employees shouldn’t accept the same argument from founders. You can’t have your circular logic and eat it too. Standards change and just because something is a standard doesn’t justify it’s existence. Slavery was pretty standard for awhile and I’m glad we got rid of that one.
How difficult would it be for a startup to create two stock classes, where one has outsized voting rights? Then the monetary value could be spread more evenly to non-founders (i.e., not a 50-to-1 ratio between founders and employee #1), while the founder and investors maintain voting power.
I believe it’s very possible, just not standard. A number of companies have adopted such measures to great effect for the founders to maintain power over investors [1], but not many have used similar legal tools in reverse to help spread the upside with earlier employees as suggested in the first comment. Perhaps the standard should be for founders to get ‘super-voting’ shares and use some of the power to distribute better upside distribution. Sell it in both directions, longer term stability and more employee alignment.
I liked the progressive equity plan a lot. I'm not sure it really solves the problem unless you take it further than Detour does, but it says a lot to say "Once people get filthy rich, they won't get filthier unless others get brought along for the ride too."
In a theoretical world, I would make the tax progressively larger after "financial independence" has been reached - either via step functions (every 1x over financial independence, 50% of the remainder is taxed) or some kind of parabola.
This may be too hard to explain clearly (even progressive commission plans are hard to understand!) so perhaps I would just settle for a higher tax rate.
My thought is if the founders want to make multi-millionaires out of the later engineers, a 50% tax will only do this in the extreme (10+ billion exit) cases. And in those cases, the founders will be billionaires themselves.
I'm assuming that Financial Independence is a large number (somewhere between 10 and 50 million) and that afterwards, the founders are in it "to build something great" rather than to keep score. Otherwise, you wouldn't consider the plan.
This isn't meant to diminish Detour. It's kind of like making fun of the first company to give equity just because equity can go down in value - I'm just making suggestions on a groundbreaking idea.
Thanks for taking the time to answer! One of my goals in life is to create a successful small business where all employees have meaningful ownership, and a genuine say in how the business is run. A lot of that is about getting incentives right, preferably at the start. So I appreciate hearing your thoughts.
I've reviewed the stock agreements of three YC companies (one fairly recent) and they're close but not nearly identical to these documents. In particular, none of the plans I reviewed had triggers (but perhaps those are saved for C-levels).
The agreements don't leave room for non-uniform vesting (e.g. 10/20/30/40, which takes many lines to write), which is nice. In my experience, the only employees who appreciate those grants create as little value as the execs who think it incentivizing to award them.
Is Zenefits still a good recommendation, with all the fuss around their (possibly illegal?) practices, and the negative comments from HN users that seem to come up every time the company is mentioned?
Startups that scale that quickly are bound to make mistakes. Breaking the law is not okay, and there was some bad judgement there. But you'll find a lot of negative comments about the competition, too. Nobody is perfect. But Zenefits is free.
I've had almost all positive experiences and they've saved me an immense amount of headaches. Did I mention they're free?
Stock value is essentially worthless in a private company until they allow selling of shares to investors or an exit occurs. Since such a small percentage of companies actually do either of those things I think it's not bad advice to treat them as worthless.
Having the optional clauses laid out is really nice for founders... And I like the table that spells out all of the parameters of the grants—very employee friendly.
In my opinion, if equity is presented as an important part of compensation, it shouldn't be something that can be taken back any more easily than past salary could be. Looking at what happened at Skype, Zynga and other companies is enough that I would mostly discount any equity offered under such an agreement.