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.
February 11th, 2009 at 4:16 pm
A couple of things: First, as you point out, lowered valuations is at the heart of a lot of issues in the VC/entrepreneurial community and will be for years to come. If new technologies are less valuable than they used to be, people will not pursue them or they will find ways to pursue them without (or with much lower levels of) professional investment. This situation will lead to slower economic growth, lower employment and a lower quality of life over the next decade. All of this has been well described by others.
Second, however, with respect to options themselves, even if employees wont get rich from options, they can make a lot of money, but the devil is in the details. This is a topic that I, and others, write on from time to time. The value of option grants can depend a lot on what exactly it is granted, when it is granted, and when/how the liquidity event occurs. A lot of recipients end up with less than they could because of planning failures. Consider, for example, the different treatment of options and restricted stock.
February 11th, 2009 at 6:47 pm
Great post. You've raised a real issue these days. I myself have been guilty of old school thinking and wondering why options aren't motivating people more. As a CFO of course, I have way more options than a developer. So my view of their worth is tainted. You're right that salaries are going up. I think we'll see polarity in the exit landscape: Lots of small deals – way south of $100M and some big game changers. Even on the small ones, if the founder doles out some equity people can make money. And these deals will happen faster. Still, we need the big deals as the whole funding ecosystem revolves around them.
Thus endeth my stream of consciousness….
February 12th, 2009 at 5:43 am
[...] guess I’ve just been thinking a lot about this after my recent post on the new realities of stock options. addthis_url = [...]
February 15th, 2009 at 2:29 pm
You indeed raise an important issue. It's clear that the "option" word does not make people dream as it did before and that people tend to like cash more. In my startup, we pay market salaries with options being seen by employees as a carrot and a cherry on the cake.