I was thumbing through Twitter messages on my Blackberry on Monday (I use Twitter as a “mobile first, web second” product) when I saw the following Tweet (see graphic).
I resisted the temptation to jump in with a response because I knew it was too complicated of a topic to discuss on Twitter. But I thought I should do a quick post on the topic.
1. Options are gravy — I lived through the first dot com era where we used stock options as a recruiting tool. I freely admit this (along with nearly everything between 1999-2000) was a mistake. We set our sites on our IPO price and then worked back to our current valuation and showed potential employees what we thought they could earn (with all legal caveats) if the company was successful.
The stupid thing is we sort of believed it ourselves. If Ventro was worth $8 billion on $2 million of sales surely a paltry $1 billion would suffice. Goldman Sachs was an investor and the assured us an IPO would happen and riches would be had by all. I think they believed it, too.
We obviously attracted the wrong people for the wrong reasons and this led to a lot of disappointment. We had a lot of re-setting of expectations to do.
Options are obviously a very important economic motivator for your first 3-5 employees and your most senior management team. But unless you become Facebook or Zynga they likely aren’t going to pay off big for everybody else.
So I developed this standard line that I used for all employees. I’ve said versions of it on this blog before so I hope it’s not too repetitive. But it’s critical to get this right:
“Join our company if you think you’ll learn from being here. I think you will.
Join if you think your career will progress because you’ll be given more responsibilities than elsewhere and if you’re good at what you do you can move up quickly. We’re a meritocracy.
Join because you know you’ll be earning less than you could elsewhere at some meaningless job cranking out non-core code, producing Powerpoint slides or shuffling paper. You can always earn more. But join here if you want to grow.
Join because you like the culture. You think you’ll have fun. You’ll consider your colleagues close friends.
Join because in three year’s time when you look at this job and this company on your CV you’ll feel proud and it will be part of how you got where you were going.
Join because as we grow our ability to reward you will grow and your income will grow with our success that you contributed to.
We give out stock options. I hope they’re worth money to you some day. But let them be “icing on the cake.” If they pay off handsomely that’s great. But don’t count on it. Don’t let it be your motivator or your driving decision.
Not because we don’t want them to be valuable, but because we don’t want to create an “options culture” around here. Option cultures are corrosive, create the wrong incentives and attract the wrong sort of people.”
I’ve said similar hundreds of times. And I believe it. If you find out one day that company you went to work for was Facebook then consider it the lottery. And that would be nice.
But if you’re the CEO who is spinning up a story about how the options for non-founders, non-VPs is going to be worth a lot some day then you’re probably doing some young entrepreneur a disservice at your expense.** And when they figure it out some day they’re not likely to be very loyal moving forward. Do the harder work and convince them to join anyways – without the stock option bravado.
** Unless you really are Mark Pincus, Mark Zuckerberg, Ev Williams or similar. Then go ahead
2. The best policy is transparency – The stream on Twitter, as best as I can tell, started with Chris Dixon sending the following Tweet (see graphic)
My interpretation of this Tweet was harmless enough. I thought Chris basically meant that investors know what most deals (not just their own) get done at so they have a pretty good sense how to price seed, A, B, etc. rounds and still be competitive. This is mostly true. I don’t know whether I fully agree that they keep them secret for “informational advantage” but maybe.
I tend to keep valuations secret because I’m usually told by a trusted source and feel it isn’t my place to reveal confidential information. I wouldn’t be a VC for very long if I did. I see people’s private information for a living.
Anyhow, on the above Tweet Andrew Weissman (a VC) disagreed with the premise – I’ll assume Andrew read it how I did followed by Nate Westheimer who wrote the Tweet that Henry Blodget retweeted (opening image) about companies wanting to keep their valuations from stock-holding employees.
• I think Nate’s response slightly veered off topic. There’s a difference between companies wanting to
hide valuations and investors doing so.
• I think Chris’s initial comment was about investors
• Investors generally are not the people to reveal valuations to anybody – it is the business of the
company and the CEO should manage this information.
Whatever the intent of the dialog let me encourage all management teams to be transparent with their employees. My personal preference is to tell people the amount of stock options they are receiving (total number), the value of those stock options (say $100,000), the value of the company (e.g. $10 million post money) and therefore if we sold for $100 million dollars one day your gain would be approximately $1 million).
“If you perform extremely well in this role there is always a possibility of further allocations although that is clearly not guaranteed or promised.”
3. That said, don’t complicate the topic – If you’re the founder of a company you likely know a lot about things like Liquidation Preferences and how they affect value allocations when the company is sold. You also understand that there are future financing rounds and in tough times this can change the value equation of stocks.
Some founders err on the side of telling employees absolutely everything. I prefer not to. It’s not that I don’t want transparency – it’s just that some issues are technical complications that aren’t material to the employees understanding of the issue. I know some people will take issue with this approach and that’s fine. But here’s my rationale:
I see way too many employees trying to understand all of the complexities and spending way too much time trying to calculate how much their options are worth through each fund raising round. This really conflicts with my view that options are to be put in the top drawer of your study at home and treated like upside gravy.
The most complexity the more angst the more options end up working against your intent if you think about them the way I do.
Obviously I’m not talking about your most senior 3-5 employees who hopefully own meaningful stakes, are making salary sacrifices and have the experience in understanding stock option nuances. Much experience tells me that most people don’t.
It kind of reminds me of sales employee bonus plans. If you make them easy people spend their time selling. If you make them complex to maximise every possible way to incentivise behaviour sales people end up spending 10% of their sales time calculating how much their bonus would be if they structured their deal this way or that way. Ah, the law of unintended consequences.
4. Valuation or percentages – it’s up to you. I think either strategy is OK. I prefer percentages (e.g. you’re getting 1.5%) for the top employees (in addition to the method I described above) and staying away from percentages for everybody else.
If you’re transparent about the value of the number of their stock options, the value of their stock options and the market cap of the company then they can do the calculation themselves (98% won’t know how, but they have all the information they need).
Why do I feel this way? It’s really meaningless to say to somebody that you own 0.18% of the company. It doesn’t make somebody feel better. And by telling them the value they have all they need to assess whether or not it was a good deal. Sometimes a percentage can be equally meaningless.
But I can buy both arguments. I choose my way. Either way, make sure not to over sell. And I would opt for transparency. There is nothing worse than an employee who wakes up one day feeling duped or a sense of mismatched expectations. Then everybody loses.
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