2016-09-17

Companies talk up how important customer success is to their business. But they are rarely treated as first class citizens.

Amongst nontechnical roles, customer success is often seen as being below product or marketing, both by the organization itself and by applicants. As a litmus test, how many mba students have you seen gunning for customer success positions?

So if a company verbalizes that customer success is just as important as product or marketing, what I want to see is consistency. I want to see them compensated equally, and I want to see them get an equal say at the table. Talking up the team without actually going to bat for them is just demoralizing.

So given this backdrop, I was surprised to see a company publicly list equal pay for its customer experience lead and product marketer. If I were a customer success applicant, I now know that the company really gives a damn about my role.

Kudos to Seneca Systems for putting their money where their mouth is.


Same applies to satellite offices, Field Application Engineers, and the like
I have no affiliation with Seneca Systems.

2016-09-15

The housing debate that rages in the SF Bay Area and other coastal cities can be seen as a clash of cultures between one which considers housing as an investment, and the other which considers housing to be a fundamental societal building block.

When people are told that housing is an investment asset with an expectation of appreciation, they will psychologically prime themselves to treat housing primarily as a means to growing their wealth, discounting the other societal roles of housing.

Not all societies are like this. Japan for instance has a general expectation of value loss for their houses and condos. Berlin (from what I have heard), has taken a top-down approach to control rental costs for its residents, considering this to be a desirable feature of their society.

But once we have set this expectation of "housing as an investment", it will incentivize residents to protect their investment at almost any cost. This includes electing an anti-density city council, enacting anti-density rules, and other market manipulation including (in the past) racial segregation. Different cities will manipulate their market to varying degrees and varying ways, but all are incentivized to warp things in homeowners' favor.


Additionally, there are external forces pushing housing prices upwards:
- Banks provide cheap financing via mortgages, enabling people to lever up on the asset class.
- Federal government encourages leverage through mortgage tax deduction.
- Federal government encourages home ownership through property tax tax deduction.
- Federal government encourages upgrading homes to a more expensive one through a capital gains rollover.
- California government restricts supply by discouraging long time homeowners from selling their homes through Prop 13.
- Federal Reserve Bank's low interest rates have suppressed mortgage rates, facilitating the financing of higher home prices.

2016-08-03

I decided to write about startup stock option expiration dates, given the ongoing discussion around the topic.


We like to believe, and are told by founders and hiring managers that we're being given a block of options to purchase shares in the company. We evaluate this grant, given the commonly presented "key terms" of strike price, company valuation, ownership %, etc., to have some value $X [1].

But what we're not explained is that we're actually given a block of options with expiration date of D (where D is most commonly length of tenure + 90 days). What I hadn't realized before is that this D really makes a difference in the value of an option.

Ask any trader about the value of an option, and they'll explain to you that short dated options are the cheapest, and option contracts (ex: puts, calls) become more expensive as the expiration dates become longer. Longer expiration dates directly translate to a higher intrinsic value of those options.

So going back to the option grant given to the startup employee, we can see that the expiration date clause on those options is actually a "key term" that is rarely, if ever, a point of contention. People negotiate for a larger number of options all the time (often trading salary for more options), but when's the last time someone tried to negotiate and trade the number of options for a longer expiration? That would actually be trading some amount of value for another amount of value, but it's never done.

But this is something you could do if you wanted to open a position on say, $AAPL, using options. You'd intently consider both the strike and the expiration date for an $AAPL option, and look at how much each would cost. A longer expiration contract with the same strike price will always cost more. Some hedge fund managers have very long dated (3+ years), out of money (ex: the strike price is higher than the current price) call options on Oil. Those contracts would be much cheaper if they'd expire in 3 months, not 3+ years.

So when we say "we've earned those options" (and thus they shouldn't be taken away by the 90 day exercise window), it's not entirely accurate. We've actually "earned those options with expiration D" (and other terms). Holding strike price constant, option grants with "equivalent value" with different expiration dates would mean that the longer the expiration date, the fewer options you should get.

Of course, figuring out the value of a longer expiration date would be incredibly difficult. I certainly have no idea how to price this, especially given that the value of the underlying asset (the company) is already a bit of a black box in the first place. But this is something worth being aware of, so that we can understand that there is real value at stake in the ongoing expiration date discussion.

Remembering the Intent

BUT -- we shouldn't forget that if the founders' intent truly is to "give Z% of the company to an employee in a tax efficient manner" (like they say in all their conversations), and if "the value of the option grant as computed by the value of the underlying option contract" is not a concern, then the founders will not actually be "giving up" any value by lengthening option expiration since that value was inadvertently created and was never intended to be claimed by the founders/company in the first place.

In this case, a founder who wishes to be consistent with herself and her own narrative should adopt a long expiration option contract to make the reality of the situation as close to the narrative as possible, given the legal limitations. If the narrative's purpose was marketing spin to subtly over promise something to make the sale, then carry on. If the founder just wasn't aware of what's at stake and why this matters, I hope that the recent flurry of articles has made them aware of the need to become educated on the subject.


[1] I tell friends to consider their option grant as $X == $0 to simplify things and protect themselves from being mislead, but all options do have some nonzero value.


2015-08-07

ISO 101 - Introduction to Incentive Stock Options

An Ask HN thread prompted me to explain some Incentive Stock Option basics. I have copied my answers below:

I get that if I leave my startup today I have 90 days to exercise my options.

The number of days to exercise depends on your contract. The typical number is 45 days. Pinterest's number for employees that have more than 2 years of service is 7 years. This number is not set by law, and can be set to anything the founders/investors agree to.

The 90 day number you are thinking of is the law stating that ISOs become non-qualified options when not exercised after 90 days after termination of employment.

I get that I'll have to pay the agreed 'strike price'

You pay the "strike price" * "number of options you wish to exercise".

Note that you do not have to exercise all your vested options.

Would I be paying tax as if I'd made capital gains in the amount of the delta between the strike price and the stock's value today? Would the stock's value today be based on the company's valuation at the most recent round of funding?

Assuming you were awarded ISOs, you do not owe capital gains tax under "regular income tax" upon exercise. You only owe taxes upon sale of your stock that you have attained through exercise, at some future date.

However, depending on your amount of gains, other income, and your effective tax rate, you may owe tax under AMT. Consult a CPA with experience in this. It should be simple for them. (I believe you get some tax credits for this AMT payment when you end up selling your shares in the future)

The company's stock's value is set by the BoD meetings (the company's 409A valuation). This may or may not be the same as the previous round of funding.

If the company goes on to raise more VC funding, would I be liable in future years for the 'capital gains' on this stock?

You are only liable for "capital gains" when you sell the stock.

If the company went on to fail, would I be entitled to tax breaks for loss of stock?

Yes, you would be able to claim a capital loss equal to the amount of money you paid to acquire your stock. That is your "cost basis", and the "sale proceeds" would be zero. You can claim the difference as a capital loss.


Further Reading


2015-07-23

Part 1: Misinformation in Startup Equity Compensation

The pattern I see repeatedly in online articles regarding startup equity compensation is 80% accurate, 20% wrong. Because the information tends to be almost correct, it's easy to overlook the ways in which it is inaccurate. Here's one example:

Experienced shareholders (and Venture Hacks readers) focus on the current value of their shares and the company's prospects. Investors in public companies with wacky capital structures don't fancy that they own 0.0003% of a company that is worth $1B. Instead, they multiply today's share price by the quantity of their shares to determine their share value. They track percentage ownership and valuation, but they focus on share price.

Focus on your share price, not your valuation -- Venture Hacks

The article is very useful overall. But if you take it for what it is, you miss something that many startup employees forget about, especially in the heat of the moment of negotiating a job offer. I made this mistake once too.

You own call options, not equity.

Let's say you just got a job offer at Rocketship Startup Z that gives you a $120,000 base salary and $240,000 in options vesting over 4 years. It's easy to think that your annual compensation is $180,000/year with equity upside.

But recall that your $240,000 option package is in options, not equity. The $240,000 by itself is actually just a price tag for how much you'll have to pony up if you leave the company before it goes public. What it gives you is the right to buy $240,000 worth of the company's stock (at the current price).

This number does not represent the monetary value you can expect to gain. I think we are psychologically wired to overlook this.

In the most simplistic terms [1], the value of your option package is

value = (strike price) * (# of options) * (expected % increase in the company's valuation)

If Rocketship Startup Z is currently valued at $10 billion and your options' strike price is equal to the current value of the company's common stock, then the company must double its valuation for your option package to actually net you $240,000.

So when you are an employee with options, share value (like the article says) is less important than how much the valuation will grow in the future. In the extreme case that the company's valuation remains flat, your $240,000 option package is worth $0.



[1] For the sake of simplicity, I have overlooked things like liquidity preference or later round dilution.