Monday, September 08, 2014

Why an exploding offer can blow up in your face

Today Y Combinator had a great post called "Exploding Offers Suck".  The key take-away is in the first line:
Exploding offers suck.  Founders should be able to choose the investor they want to work with, not have to make a decision based on time pressure.
I think this is a smart move on YC's part.  They are positioning themselves as being founder friendly, further strengthening the desire of good founders to be with them.  They then get the best founders and the positive cycle continues.  It's also smart for them to be very public about this because they want the perception of YC to extend their reach even ahead of anyone's actual experiences with their policies.

Exploding offers are pretty bad.  This can be common even beyond the accelerator stage.  VCs can and do provide term sheets with short fuses.  One very real reason for this is that the VC does not want to be used as a stalking horse.  If a VC is willing to put their neck on the line by making an offer, they don't want that simply to be used to get a higher offer somewhere else.  This is a completely fair position. 

On the other hand, decisions made by time pressure can backfire.  Back when I was finishing up at business school, a major car company that some of my classmates were interviewing with came up with the following strategy.  They took eight students from top business schools (two from MIT, two from Stanford, two from Harvard, etc) and brought them all together for interviews on the same day.  And the end of the day they announced to the group that they were happy with everyone and that they had two job offers, which would be made to everyone.  The first two people to accept would get the job.  Brilliant idea, right?  What a great way to implement competitive tension and ensure that they would be able to fill the positions!

Wrong.  Out of disgust (for being put in the position, for feeling like this is how they are valued, for feeling interchangeable with everyone else in the group) NO ONE agreed.  It is my understanding that the positions remained vacant for several months.

None of this, of course, addresses the obvious issue of how loyalty will be affected down the road by starting the deal this way.

So, the best approach is to build a strong relationship with someone (as an investor, accelerator, employer, what have you) and make someone WANT to be with you.  Be the VC firm of first choice, independent of valuation.  Make your new employees loyal and excited before they even sign for your company.  Foster a sense of transparency and openness, and that will pay dividends that overcome the stalking-horse problem.

Sunday, April 20, 2014

Tax treatment of early-employee options

There is a great post from Sam Altman on Employee Equity.  I think it reflects many things that I've agreed with for quite some time.  The paragraph that I think is particularly salient is as follows:

With regard to tax treatment of options:

I think there are a lot of ways to fix this.  The easiest would be if the IRS would agree to not tax illiquid private stock until it gets sold, and then tax the gain from the basis as long-term capital gains and the original value as ordinary income.

Another might be to create a new class of employee stock.  Today, in an early-stage company, common shares are usually worth much less than preferred shares.  It might be possible to create a class of shares with less rights than common and thus worth even less.  The idea would be to convert these shares into common on an acquisition or IPO, but before that, they would be non-transferable and have no value.  If it were possible to create a class of stock that the IRS agreed had next to zero value, it might be possible to grant employees this sort of stock, have them owe a tiny bit of tax on it now, and then have normal long-term capital gains treatment years later when the startup goes public.

What about it IRS?  I think that it is high-time to fix the tax treatment for early employees of companies.  Right now, there is a huge divide between those employees wealthy enough to hang on to their options, and those that cannot.  This needs to be changed.