PTEP – Extending Stock Option Exercise Periods

April 20, 2019 § Leave a comment

There is a fast growing movement underway in Silicon Valley changing an ancient stock option practice (ancient in Silicon Valley terms) which originally helped build VC backed startups but is now so outdated and misaligned with modern day private company times that Mgt teams/Boards across the Valley are mostly quietly changing the exercise periods of stock options board meeting by Board meeting.

The acronym is PTEP or Post Termination Exercise Period for Stock Option holders (primarily employees of private VC backed companies.

The issue is a forced 90 day exercise period once an employee decides to leave their company. If an employee can’t afford to pay the Stock Option exercise price + the taxes on any gains, the option which has been vested and earned by the employee is forfeited.

The crisis at hand is the unarguable facts that private companies are staying private much longer and valuations are soaring creating a huge economic disadvantage that greatly misaligns the original intentions of stock options as well as the meritocracy value systems that most leaders espouse.

In essence, we have a situation where the wealthy who can afford to exercise these options after 90 days have the opportunity to get more wealthy and vice versa.

I’ve been personally involved in much of this discussion from Board rooms to Panel Talks to private COO and CFO web/email groups.

I’ve recently posted my views to a few of these groups and have received such overwhelming agreement from peer CEOs, COOs, CFOs that it’s time to publish here as well to ensure the strong chorus is amplified.

Bottom Line: Stock Option times are a changing and it’s time to change with the times and be part of the leadership of creating a healthier economic reality for employees.

Here’s my post to those other groups that I’m sharing more publicly here:

Headline:

The private markets are catching up to ancient and outdated stock option practices.  Huge misalignment of fair compensation practices with regards to stock options.

Providing stock options to employees is a 30+ yr practice in which the underlying terms and practices have never changed/been updated.   4 yr cliff vesting, 10 yr option expiration, 90 days to exercise, only the 1st $100K of ISO’s can be exercised in any given year.  Only cliff vesting has been addressed in 30 yrs (it used to be annual cliffs)

The Problems in these stale practices are clear.   The Avg Private company is now staying private for 12 yrs (latest data).  30 years ago, the average was 4 yrs.   $100K ISO Exercise Limit has not changed with Inflation….should be in the $300-$400K range in today’s dollars.    Stock Option exercise prices used to be pennies or tens of cents.

Finally, the topic here, 90 days to exercise is so MISALIGNED, it remains the only form of compensation that can effectively be TAKEN BACK by those in power and with much deeper pockets.

We are dealing with a severe conflict of interest and “compensation strategy misalignment” and “fair dealings with total compensation” every time I hear a VC or a Board proclaim a “disadvantage to the company or to other shareholders” and the argument of having to expand the cap table because of the underlying Option Pool,

To set the facts straight, when the discussion is about extending the stock option exercise period, we are dealing ONLY with Vested Stock Options.     Stepping back and asking “What’s the Right Thing To Do Here?”, there is generally a failure to recognize that Vested Stock Options are “Earned Compensation”.    The employee worked “Sweat Equity” and typically took lower cash pay as part of their overall comp package.

And yet, how can it be that “Earned Compensation” can be swiftly taken back within 90 Days?   The party with the power says there’s a catch!    You are required to pay me a large % of the value of what you’ve earned (30-50% taxes) before I pay you your earnings?  You don’t have the cash to pay me before I pay you?    Too bad, I get to put those earnings back into my pocket?

Can anyone imaging treating other forms of earned compensation this way?  Your annual bonus?  Your annual commission?  Imagine being forced to pay the taxes on your annual bonus or commission upfront before the company pays you the actual bonus cash?  To add insult, imagine a company or board saying “If you can’t pay the taxes, you lose your bonus” and that gives us the opportunity to pay higher bonuses to others?  As ridiculous as that sounds, it’s exactly the practice that’s going on with stock options.

When framed this way, people should be up in arms about this practice especially with the complete lack of changes in the private marketplace now that companies are staying private longer, stock option prices (409a valuations) are the competition for attracting and retaining talent has never been higher.

So, in classic market condition corrections, there are now nearly 100 brand name private VC backed companies that have been proactive and have changed these ancient practices.  

The rest of the Private markets will follow sooner or later once they realize this is actually both a new retention tool and an alignment of interests tool.

github.com/holman/extended-exercise-windows

Extending exercise periods once a valuable employee hits 2 or 3 yrs and then extends a year for every year of service thereafter up to say 7 years is another retention tool not much different than “Refresh Grants”.

In the end, company’s, Boards, VC’s should never argue that they are “giving something” to these employees.  These employees EARNED this value by providing their valuable services to the company.   An employee shouldn’t have to be wealthy to acquire the value they’ve earned and certainly shouldn’t have this value taken away due to lack of affordability.

“The principle we’re operating under is one of fairness,” explains Pinterest co-founder Evan Sharp. “If you’ve made an important contribution to Pinterest, you should be able to keep that value. And that shouldn’t just be for people with enough cash to satisfy their tax liability.”

More Good Reading Here:

Forbes: top compensation attorney = author

https://www.forbes.com/sites/edwardzimmerman/2017/08/27/stock-options-vc-backed-startups-extend-post-termination-exercise-period-ptep/#630a895f5568

https://www.forbes.com/sites/edwardzimmerman/2016/08/23/how-startup-founder-stock-often-triggers-unnecessary-personal-tax-hits/#33150dfe562a

Quora

www.quora.com/Why-d…-Trieu

Pinterest in 2015:

www.foundersworkbench.com/start…years/

Steve Blank

steveblank.com/2019/04/10/startup-stock-options-why-a-good-deal-has-gone-bad/

NEXT STEPS: For those involved in a position to change your companies practices here, so your homework.

1) Read these links and others.

2) Talk to your legal counsel

3) Draft and propose the proper changes for your company to your Board.

This is long overdue…..it’s time to show leadership again in this very important compensation area.

Best of Mozilla

June 30, 2018 § 1 Comment

As I depart Mozilla in 2018, I arrive at yet another inflection point in Mozilla’s history.

Mozilla is an incredible success story. From $0 in revenue and cash 15 years ago to $500M in both revenue and assets in the latest published annual report(s). From Mitchell’s Vision and Manifesto in the early 2000’s to the launch of Firefox 1.0 in November, 2004,  Firefox and everything Mozilla stands for has made an impact on the world.

We “Took Back the Web” in 2005 with only a few thousand square feet of space and now have multiple international Mozilla offices with over 1,100 employed Mozillians and thousands of additional open source contributors.

It’s been a privilege to have played a part in scaling Mozilla from this 18 person startup to the multi-national, top brand organization we are today. We made an impact on the industry and we continue to be a powerful voice for the web, the technology industry, and operating as a developer community.

Mozilla is one of those rare special places where you simultaneously seek to change the world and, by doing so, Mozilla changes you.

Mozilla taught me the true meaning of “Open” and how to lead powerfully with both Trust and Transparency. I’ve done my very best to coach/teach other Mozillians these key learning’s and to continuously design these key principles into Mozilla’s “internal operating systems”.

There are too many friends and teammates and Mozillians worldwide to thank who won’t see me as often in the offices but who I’ll still be hanging out with on the web and social media sites.

In the end, the only thing that matters is we connected with each other, learned from each other, and we made a difference. We learned to trust each other by operating transparently and in turn we learned how a small army of awesome Mozillians could leverage and compete with tech giants.

There are so too many stories and so many memories with so many people. The best I can do to convey my experience is to offer a sampling of my “Best Of” in the form of  what everyone loves these days “Videos on the Web”!

In no particular order and with 100% certainty I’ve missed some important “moments in time”, I offer you my take on “Mozilla’s Best of Vdieos” along with some historical and important blogposts from Mozilla leaders in an attempt to capture and share Mozilla’s amazing history over the last 10+ yrs.

There’s a lot below and it may all be tl;dr (too long; didn’t read) for you.  If that’s you, then at least BOOKMARK these links in Firefox or for bonus points SAVE the links to Pocket and Share!
Thank you Mozilla and all Mozillians!
Jim

MOZILLA’s BEST OF (Greatest Hits)

History of Mozilla

Chris Beard’s Mozilla Firefox Brand Manifesto:  We Answer To No One But You!: 

Quick Mozilla Firefox Videos:

I AM A MOZILLIAN!

ARE YOU A MOZILLIAN?

THE WEB WE WANT:  An Open Letter

Seniors React to Firefox Data Privacy

FIREFOX FLICKS: (2012)

UNBOXING FIREFOX:

WHAT DOES THE FOX SAY?

Johnathan Nightingale on Firefox (2013)

BONUS CUT:  Making Espresso at Mozilla:

Creating the Firefox Monument: 2014

New Firefox Quantum:  (2017)


BLOGPOSTS:

Mitchell Baker’s Blog: 

John Lilly: 

Denelle Dixon: Online Privacy  

Harvey Anderson: Health of the Web: 

Mark Surman:

Deb Cohen:

Laura Thomson:

https://air.mozilla.org/minimum-viable-bureaucracy/

https://air.mozilla.org/go-faster/


OTHER KEY LINKS

Annual Report – State of Mozilla 2016:https://www.mozilla.org/en-US/foundation/annualreport/2016/

IRL:  Internet in Real Life Podcast: 

https://irlpodcast.org/

Break the Pattern – Focus Your Vision

May 29, 2018 § Leave a comment

“Break the Pattern:  Everything is Always In Question…Even When It’s Going Well”

“The Flaw the Japanese Pottery Master Leaves In”

“Perfection Means Wholeness, Completeness…Not Flawlessness..the Flaws Stay In”

“Why Do We Do It This Way?”   “How Can We Do It Better?”

“Get A Clear Lock On What You Are Trying To Do and Why”

 

More Dewitt Jones:  Similar but different stories and insights:

 

StoryTelling: Change Your Lens – Change Your Life

May 1, 2018 § Leave a comment

“Our Vision Controls Our Perception.  Our Perception Becomes Our Reality”

“There’s More Than One Right Answer”

“There’s Far More Right With the World Than What’s Wrong With It”

“Extraordinary Visions Release Passion”

“I Saw An Angel In The Stone and Carved To Set It Free” – MichelAngelo

Dewitt Jones is great.   A great storyteller with a great message and great photos!

 

p.s. – Don’t forget to bring your “juice camera”!

GRATITUDE: A Good Day

April 22, 2018 § Leave a comment

When you are 92 and you have life experiences like Brother David Steindl-Rast, I always listen.

A simple and wonderful message on a Sunday.

* “It is not happiness that makes us grateful…….it’s gratefulness that makes you happy”

* Stop, Look, Listen, GO!

If you liked that 2007 video, he updated it in 2017.

Same message but worth watching again!

Connection is the New Currency

March 30, 2018 § Leave a comment

In this post, the focus is on Trust, Transparency, Leadership, Storytelling, and how all these concepts interlink:

Trust and Permission

“We seek out people who tell us stories that resonate, we listen to those stories, and we engage with those people or businesses that delight or reassure or surprise in a positive way. And all of those behaviors are the acts of people, not machines. We embrace the humanity in those around us, particularly as the rest of the world appears to become less human and more cold.

Leadership

“Management is almost diametrically opposed to leadership

Leadership, though, is a whole other game. Leadership puts the leader on the line. No manual, no rule book, no überleader to point the finger at when things go wrong. If you ask someone for the rule  book on how to lead, you’re secretly wishing to be a manager.

Leaders are vulnerable, not controlling, and they are racing to the top, taking us to a new place, not to the place of cheap, fast, compliant safety.”

StoryTelling

“After trust is earned and your work is seen, only a fraction of it is magical enough to be worth spreading. Again, this magic is the work of the human artist, not the corporate machine. We’re no longer interested in average stuff for average people.”

Humanity

“the people you seek to lead, the people who are helping to define the next thing and the interesting frontier, these people want your humanity..”

This was all taken from the following:  I thought

A Long Article – Worth the Read

Code Poets – “Good People Working Together Create Big Things”

March 9, 2018 § Leave a comment

Ran across a remarkable video (Tedx talk) by Jim Zemlin – CEO of the Linux Foundation

For anyone wondering what Mozilla has been like over the years, this video explains a ton.   Very similar companies. Very similar cultures.

For anyone inside of Mozilla, this video will resonate strongly.
Enjoy!

Bracing for impact

July 28, 2014 § 1 Comment

http://sethgodin.typepad.com/seths_blog/2014/07/brace-for-impact.html

When you walk around bracing for impact, you’re dramatically decreasing your chances. Your chances to avoid the outcome you fear, your chances to make a difference, and your chances to breathe and connect.

Why the Structural Changes to the VC Industry Matter

July 27, 2014 § Leave a comment

A Ritual To Read To Each Other…..

April 4, 2014 § 2 Comments

A poem…begins as a lump in the throat, a sense of wrong, a homesickness, a lovesickness. It is a reaching-out toward expression; an effort to find fulfillment.

A complete poem is one where an emotion finds the thought and the thought finds the words.   Robert Frost letter to Louis Untermeyer (1916).

A Ritual To Read To Each Other

by William Stafford

If you don’t know the kind of person I am
and I don’t know the kind of person you are
a pattern that others made may prevail in the world
and following the wrong god home we may miss our star.

For there is many a small betrayal in the mind,
a shrug that lets the fragile sequence break
sending with shouts the horrible errors of childhood
storming out to play through the broken dyke.

And as elephants parade holding each elephant’s tail,
but if one wanders the circus won’t find the park,
I call it cruel and maybe the root of all cruelty
to know what occurs but not recognize the fact.

And so I appeal to a voice, to something shadowy,
a remote important region in all who talk:
though we could fool each other, we should consider–
lest the parade of our mutual life get lost in the dark.

For it is important that awake people be awake,
or a breaking line may discourage them back to sleep;
the signals we give–yes or no, or maybe–
should be clear: the darkness around us is deep.

Star Splitter

by Robert Frost
But the first thing next morning we reflected
If one by one we counted people out
For the least sin, it wouldn’t take us long
To get so we had no one left to live with.
For to be social is to be forgiving.

As we end this week, Mozilla arrives at yet another inflection point in our history.  Many have already offered their views and insights on our leadership changes recently.   Like Here:  Mozilla Is Human

The best I can offer is to try to help everyone remember Mozilla’s roots and to remind everyone that a company builds its culture everyday. Mozilla has always built our culture the way we build our software – open source and transparently (view source).

From John Liilly’s Poetry and Pragmatics and Glass House

to Deb Cohen’s Holding Space and Finding My Own

to Reid’s reminder today to “Let’s not waste a good crisis”.

Now is the time to double down on everything that’s great about Mozilla.
Now, more than ever, is the time to show the world WHO Mozilla is, WHY we exist, and HOW we operate. Now is the time to lean in hard.

As Churchill said,“If you are going through hell, keep going”.  Or you may prefer Robert Frost version “the best way out is always through”.

I’ll end with more of a list from the top of my head.  A running list of the values and behaviors that have created Mozilla’s culture over time:  (you can add your own in the comments)

“It’s the People”:  People create culture from a shared purpose, values and behaviors.  Mozilla creates space for people’s “best of”.   This environment in turn attracts more talent and the upward spiral of knowing more, doing more, and being better.

Operating Openly:  Minimum Requirements
Leading with Respect
Having an Opinion
Sharing It
Listening for the Best Idea
Being Accountable
Learning a lot
Teaching a little

“You’re Right” are 2 very powerful words
Let’s Fix It are 3 words that should follow

Behaviors Required?
Personal Authenticity…it’s ok to be vulnerable.  It’s ok to say you don’t know.  It’s important to say “we’ll figure it out together”
Modeling Accountability
Ferocious Integrity
Capacity and Willingness to Connect with Others Deeply.
Trust requires Transparency
Being an Empathetic Ambivert (as in ambidextrous to both extroverts and introverts)
Showing Up, Digging In, and Being Yourself.

On Leadership:
LEADERSHIP is not a title and it’s not management it’s a BEHAVIOR….anyone can exhibit it.
We model courage or cowardice and leadership everyday.
Every time we show up and/or FAIL to show up.
Every time we use our voice.

On Culture
I’m looking at the Culture when I’m looking at YOU (and your behaviors)
You Are the Culture (in the way you show up)
I am the Culture
We are the Culture

Please turn to the Mozillian next to you…and let’s begin again.