To his point about finding undiscovered talent, VCs are obsessed with finding people they can underpay via selling them on their “vision” and “impact”. They claim they can’t compete with Google and Facebook on comp, but the truth is they don’t even try to do so by offering fair equity deals. Instead they use rigged instruments like common ISOs with liquidation preference and 90 day exercise windows to intentionally screw early employees over. If they offered fair terms, many talented people would love to be involved in small companies over FAANG, but these types insist on screwing people over and paying them with speeches about “visions.” The vision of these VCs is always enriching themselves.
It’s also absolutely hilarious that his example of finding undiscovered talent at PayPal was by looking at Stanford students. He’s trying to make a point that you should do out of the box thinking on recruiting and his best example is recruiting from the most prestigious university in Silicon Valley. It’s almost difficult to distinguish from satire.
There was a very good talk (which I can't find right now) by Ben Horowitz about why companies have to use certain instruments for equity-based compensation. There are a number of legal and 'fairness' (HR and morale) issues which limit what companies can and should do.
Not to mention ISOs are far better for employees than NSOs. Moving to RSUs actually reduces the risk and reward for employees as switching over, startups usually cut the grant size substantially (as they are issuing instruments that have intrinsic value at issue rather than no intrinsic value at issue).
tl;dr: Founder shares >>> ISO > NSO >> RSU in terms of risk and reward.
> Instead they use rigged instruments like common ISOs with liquidation preference and 90 day exercise windows to intentionally screw early employees over.
I'm so tired of this being repeated as if founders choose ISOs to screw over employees, it's flat wrong. ISOs offer the best tax advantages for employees. The 90-day exercise window is a government-imposed thing. If you want it changed, go talk to them.
I'd much rather give an employee an instrument in which they don't have to worry about any taxes at all until they actually want to exercise than have them sign a document they almost certainly don't understand and receive stock they get immediately taxed for and be confused why the IRS taxed them for stock they can't sell and that might end up being worthless.
There's absolutely no reason companies can't issue options that automatically convert from ISOs to NSOs after the 90-day period, and leave the NSOs on the table for ten years. There is no downside to the employee or, really, to the company – other than that the options, which were pitched to employees as part of comp, aren't clawed back to the company's pool as quickly.
I've observed many startup founders who are disdainful of employees who leave, ever, for any reason, and definitely don't want them to receive proceeds from any of the company's future successes.
Not gonna sugarcoat it - this is weak. Companies don’t offer this solution that’s better because it’s “complex”.
This is like when engineers say something is going to take a long time because “there’s a lot of moving parts”.
The reality, IMO, is that employees do not have a seat at the table when it comes to negotiating ownership shares. And, predictably, they end up with the worst part of the deal.
Pinterest began this trend back in 2014-ish, with a 7 year exercise window post-departure. A few companies followed suit, but many more established startups switched to RSUs -- and earlier-stage startups stuck to their 90 day exercise window because it's the 'beaten path' and they didn't want to waste their capital paying lawyers to draft bespoke options agreements.
You're basically saying hat the VC's have too much comp, and are not handing enough to the FAANGers.
Also - the weird tone about VC's 'enriching themselves' ... when that is 99% of the objective of most employees? People would not work at FAANGS for 1/4 the salary. The money is a 'big deal'.
The power imbalance is probably not the issue. VC's are comped somewhere in the ballpark of 'correct'.
There are zillions of new VC firms every year, capital is cheap - and most of them fail. It is actually competitive.
If there's a systematic bias, it's the immense power of the FAANGS and their ability to hold on to top talent and not always putting them to very good use.
> VCs are obsessed with finding people they can underpay via selling them on their “vision” and “impact”. They claim they can’t compete with Google and Facebook on comp, but the truth is they don’t even try to do so by offering fair equity deals
It’s not the VCs, it’s the founders making these calls.
Most VCs have no problems with their companies paying market rate for top talent. It’s usually the founders who think they can extend their runway and minimize their own equity solution by minimizing compensation.
Its often the founders, not the VCs, who try to negotiate for smaller employee equity pools.
50X the risk is a tough one, often founders aren't paid, and opportunity cost is just so high today.
If a 30-year old engineer is looking to make a jump, a senior IC role at $BIGCO pays $500-750K/yr starting, with significant refreshers each year, cash bonuses and promotion path to even more. The average time to liquidity for a successful startup is 7 years. Assuming the founders take small or negligible salary for the first 4-5 years then take market salaries, their opportunity cost is easily $5M.
So considering a $5M opportunity cost, and the fact the company wouldn't exist without them, they literally can't just up and quit whenever they want, and are working 100 hour weeks for years on end... yeah, I'd say that's fair.
tl;dr: $5M opportunity cost of guaranteed payout vs $100M maybe sometime in the future doesn't seem insane.
So, is this the same guy who was shouting homophobic slurs at an instructor while studying at Stanford in the 1990s and who was later accused by a male employee of sexual harrassment at Square and fired?
I love taking advice from people like Keith Rabois because you know (unlike 99% of other VCs) he actually has experience building mega-unicorns himself.
I read it differently. It reminds me of some advice on pitching:
“Don’t waste you’re time trying to convince hesitant investors you have a good idea. Find the investors who already know it’s a good idea, and then convince them you’re the team whose going to do it.”
I find that longer content works better for me when trying to understand important concepts. I generally need repetition and context (why is this a valuable concept? how'd you get here?). While it's quicker to digest bite sized audio, I tend to forget the takeaway easily.
Have found these links to be helpful in understanding the concepts here:
It’s also absolutely hilarious that his example of finding undiscovered talent at PayPal was by looking at Stanford students. He’s trying to make a point that you should do out of the box thinking on recruiting and his best example is recruiting from the most prestigious university in Silicon Valley. It’s almost difficult to distinguish from satire.