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stock option practice (ancient in Silicon Valley terms) which originally helped build VC backed startups but is now so outdated and misaligned with modern day private company times that Mgt teams/Boards across the Valley are mostly quietly changing the exercise periods of stock options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The private markets are catching up to ancient and outdated stock option practices.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.

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!

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.

Lights-Innovation-Kids…Changing the World

March 1, 2014 § Leave a comment

For anyone who missed this inspiring story of the week.  Has all the elements of a great story:  A Canadian girl hacker/inventor who took 1st Prize at the annual Google Science Fair.   Inspiration for us all…especially our kids.

Last May I posted this of a similar boy in Africa

The Mozument and our Mozilla San Francisco office

February 4, 2014 § Leave a comment

We held a celebration of all things Mozilla and in particular our new sign for our San Francisco office…our @Mozument.  In preparation, we wrote a little blurb describing our San Francisco office for the press in attendance.   Don’t miss the pics at the bottom!
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Mozilla’s office design embodies our approach to software – open source and collaborative, with a large portion of the office dedicated to serving our larger Mozilla  community  of volunteers.  Snacks and comfortable seating are abundant and our flexible spaces lend themselves to a variety of activities including hackathons, design labs, brownbags, and industry talks each integral to our world class leadership in software development.

One shining example of Mozilla’s open source approach is our newly installed Mozilla Sign (Monument) at the corner of the Embarcadero and Harrison street.  More than a sign, it represents our world community in both symbol and structure with its combination of glass (transparency) and steel (strength).  Looking closer, you’ll find the etchings of nearly 5,000 contributor names (Mozillians) who help make us…well, “Mozilla”.  Ultimately, we hope it serves as a beacon not just for the city of San Francisco but for the current and future participation of our worldwide open source community.

Inside the office, the company recognizes the evolving flexible working environment required by today’s knowledge workers.  Collaboration zones are designed to connect  flexible teams and their projects.  All desks are actually push-button, height-adjustable surfaces, allowing people to work at their own “height number”.  There are no executive offices. In their place, there are dozens of conference rooms each outfitted with whiteboards, presentation, and video conferencing capability.  Our goal with these spaces is to connect  our global Mozillian workforce whether they work from their homes or in one of the dozen Mozilla spaces located across four different continents.  Amidst all this collaboration space, we maintain a focus of ensuring privacy (when desired) and noise reduction while maintaining the open office plan.  Whether it’s our Buzzi-felt sound absorbing walls and ceilings or private phone booths, we aim to respect each individual’s preferences.

Perhaps the most stunning feature of our famed San Francisco office is our 7th floor roof deck nestled directly underneath the historic Hills Brothers sign with its famous nightly red neon glow.  With sweeping views of the Ferry Building, the Oakland bay bridge, Alcatraz, and the Embarcadero walking paths, you’ll often find Mozillian’s camped out on the decks outdoor couches Wi-Fi’ing away in classic California outdoor working style.  On other days and weekends, this deck provides the perfect hot spot for Blue Angels, Fireworks, or events like the Americas Cup.  Mozilla’s offices are definitely on the short list of San Francisco’s must-visit office spaces.

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MKThink_MozillaSF_Aug03165571_01

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Mozilla_4631

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The Making Of….

https://air.mozilla.org/monument/

<iframe src=”https://air.mozilla.org/monument/video/&#8221; width=”640″ height=”380″ frameborder=”0″ allowfullscreen>

Leave Your Legacy

August 25, 2013 § 1 Comment

Leave Your Legacy:  Pissed Off For Greatness

Wins and Losses – they are a dime a dozen

But EFFORT?
Nobody can judge effort
Effort is between YOU and YOU!

NOW…you have to show that you are a different creature than you were 5 minutes ago….

It means you are pissed off for greatness
Because if you aren’t pissed off for greatness
Then that means you are ok with being mediocre

SO, LET’S DO WHAT WE DO!

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