Even though I stepped back from my role at Spark, I still spend time with founders and the people who work for them. This post comes from those conversations and from what I keep seeing in my social feeds. It’s a pattern, not a single encounter.
Here’s my take. The tech industry loves to say the team is everything. Founders say it in board meetings. VCs say it in pitch decks. Everyone says it in all hands meetings. I believe it too. But too often our industry doesn’t act like it.
Here are a few things on my mind re employee stock options (i have a future post banging around in my mind about recruiting, retention, sourcing candidates, dei, but that is for another time).
When you offer an employee 10,000 stock options, that number is meaningless without context. Tell them how many shares are outstanding. Tell them what that grant represents as a percentage of the company. Explain the current 409A valuation and what it means. Walk them through the preference stack so they understand what happens in different exit scenarios.
Some founders worry this level of transparency will scare candidates off. I think the opposite is true. Smart people figure it out eventually. Being upfront builds trust.
While you’re at it, explain how dilution works. Fred Wilson wrote a clear and useful post on the subject years ago that still holds up. Send it to every new hire.
I’ve seen chatter recently that vesting schedules should extend to six years because companies take longer to reach liquidity. I disagree.
Four year vesting has stood the test of time. And this idea that companies used to go public quickly is a myth. Microsoft took 10 years to IPO. HP took 10 years. Oracle took 8. Even in those eras, vesting was four years. The schedule was never pegged to the timeline of an exit. It gives people a reason to stick around and build, and then lets them choose to stay. That choice matters. People who feel locked in become disengaged. Four years gives someone enough skin in the game and then they re up because they want to be there, not because they’re trapped.
Extending vesting to six years doesn’t solve a liquidity problem. It just moves that problem onto employees.
I wrote about founder liquidity back in 2011. My position hasn’t changed much. When done thoughtfully, allowing founders to sell some shares before an IPO can be healthy. It lets them take risk off the table and stay focused on building.
But if founders get that opportunity, employees should too. The employee who joined at Series A and stayed for five years took a real bet on the company. Telling the team they’re essential to the mission and then excluding them from a secondary sale sends a terrible message.
Now for the possibly controversial one. The standard practice says when you leave a company, you have 90 days to exercise your vested options or you lose them. I know the arguments for why this exists. Companies don’t want a sprawling cap table full of former employees. There are administrative costs. I get it.
But think about what this means in practice. Someone works at a startup for four, five, hell even ten years. They get laid off or find a new opportunity. Suddenly they have three months to come up with the cash to buy their shares. On top of the exercise cost, there’s often a significant tax consequence since you may owe taxes on the spread between the strike price and the current fair market value.
Most people don’t have that kind of money sitting around. So they walk away from equity they earned over years of work. That has never sat right with me. Founders should consider extended exercise windows or some other structure that rewards people for staying and doesn’t punish them for eventually moving on. A few companies have already done this and the world didn’t end.
I wrote about shrinking employee equity a few years ago and the trend has only continued. As seed and Series A valuations soar, three things happen: VCs own less, founders own more, and employee option pools shrink. Some of this is a healthy correction from the days when Series A investors required 15 to 20 percent post money option pools. But the pendulum can swing too far.
Founders should think carefully about the size of the initial pool and about refresh grants for the people who stick around and build the company. The early hires who helped you get to product market fit deserve to be rewarded as the company grows. Not just once. Over time.
If you tell your investors, your board, and your team that people are the most important thing, then your equity practices should reflect that. I don’t think any of this is radical. It’s just acting like we mean it.