There has been a lot of blogging on the new realities of venture capital industry (Fred Wilson’s “Is the “Traditional” VC Model Broken?” is probably the best). Venture capitalists, journalists and experienced founders of technology companies have begun to internalize that the go-go late nineties were a blip and that we’ve entered a new model of making money (or not making money) from startups. However, there is another group of professionals impacted by this new technology/funding landscape, and that is the option-granted employees of technology startups. Has the world come to grips with the new reality of stock options for employees of technology startups?
The new reality of stock options
The financial upside of stock options is not as rosy as it once was. Fred Wilson talks a little bit about the new exit landscape in the post I link to above; $100 to $250 million exits for VC backed companies have somewhat replaced the $1+ billion exits we saw during the dotcom boom. (I’m going to ignore the whole expensing of stock options, even though it is something that I hate. While I enjoy picking on the accountants as much as anyone at the NVCA, these rules are only part of what has made technology options not as valuable…)
A $100 million exit, for a company that have conservatively raised VC, can result in a good outcome for the founder. Not amazing, but getting a few million dollars taxed at a capital gains rate is nothing to scoff at. However… the sad but true fact is that most employees of technology startups will not become stinking rich off of their stock options if the trend of $100 millionish exits persists. In fact, that employee might be able to buy a nice Subaru or something. In other words - it’s not jet money.
Is the answer for startup founders and VCs to give up a greater % of the companies to other employees? I don’t know; in order to make someone rich at a $100 million exit they really need to own a ton of stock. Also, as valuations come down in the general market I don’t see VCs reacting in the opposite way, giving more of the company to the founders/employees (i.e. having VCs increase the valuation at which they make their investments so the employees own more.)
Maybe faster velocity of exits would make up for this, so that techies and early employees could have more spins at the roulette wheel? Except that the time to exit has increased recently, not decreased…
I think this may be partially why we’ve seen a real increase in salaries at technology startups. (I would also hope that a techie at a startup is there for more than just the money.)
All this being said, there are game changing technologies out there. Some $1+ billion exits will be created out of that technology. I truly believe that I’ve recently met with some of the founders of these next great technology companies. They are not starting something incremental or adjacent - this stuff is really game changing. And working with one of these entrepreneurs will be worth something, regardless of the value of the options at the end of the day. The chance to change the way an industry works, the opportunity to disrupt and improve the way business is currently done, that brief moment in time when a new paradigm is born - it exists and it could be awesome.
