Startup stock options often get a bad rap, and with good reason. Employees who've given years to a company can end up with nothing — or have to fork over huge amounts of money and suffer a large tax liability. Quite honestly this sucks!
To be fair, the system we have in place isn't necessarily the fault of companies as much as it is the tax system, and the incentives it creates. However I think it's also fair to say startups use the golden handcuffs placed on their employees to their advantage.
Employees simply can't afford to exercise their options, and so they're stuck waiting around for an exit. This isn't ideal for anyone, and indeed backfires on companies who end up with a vast class of disenfranchised employees whose main incentive is to do just enough to stick around and not rock the boat.
Sam Altman has a good blog post on the subject, but essentially the issues boil down to:
- Employees usually don't get enough stock.
- Employees usually don't have enough information about the stock or options.
- If an employee leaves the company, he or she often can’t afford to exercise and pay taxes on their options.
- Employee options sometimes get unfavorable tax treatment.
The first two issues are easily solvable if you're treating people decently . With a little imagination, so are the latter two issues. What's lacking though, is the incentive for a lot of founders to change this.
So here's my pledge to anyone who joins Clearbit: we will ensure that the option to exercise your stock will always be available. If the company does well, you will do well. If you've committed time and energy to the company, you will own a part in our success regardless of whether you're still working at the company.
At our stage and valuation, the simplest way of implementing this is to allow everyone to pre-purchase their options (and file a 83b). This will cost a few hundred dollars at most, and means people can leave at any point (we will buy back any unvested shares). Once our valuation rises and the cost becomes prohibitive, we'll move to an extended exercise period model instead, where you will have 10 years to purchase your options. By that time we'll either have had an exit (in which case you can do a cashless exercise), or we will have arranged some other form of liquidity.
To the startup founders out there my message is this: put your employees first. Your investors have invested capital and reputation into your company, but your team has invested a portion of their lives. Reward them for it. And don't create perverse incentives for them to stay. People should stay because they want to, not because they have to.
Alex MacCaw - CEO Clearbit
 - I've written a bit more about the thorny subject of stock options here.