Jan 2, 2019 · 32m · a16z
a16z Podcast | Beyond One Size Fits All for Startup Employee Options
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Ben Horowitz and Scott Kupor join Sonal Chokshi to analyze the historical flaws of traditional 90-day startup option exercise windows and present custom, innovative equity compensation models tailored to modern company lifecycles.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. The host holds 20.1% of the talking time here. How this is scored →
The host as informed peer 4.4 Guest teaching 5.0 Guest disagreement 2.0 The host pushing back 3.4
speaking balance: gold is the host, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 13:08 Embrace the Complexity
Ben directly dismisses Sonal's pushback against long tenure incentives, telling her that compensation is complex and she should embrace the complexity rather than railing against people who highlight it.
Hardest push from the host ▶ 10:45 Employee Mobility DefenseSonal firmly pushes back against back-loaded vesting models, contending that high-performing employees earn their equity and naturally desire career mobility without facing adverse selection.
Biggest teaching moment ▶ 1:55 Stock Option Scandal and Class DivideAfter Sonal explicitly admits not knowing about the 2000s stock option scandal, Ben explains the historical regulatory changes and how 90-day windows created a class disparity between rich and non-rich employees.
The host holds their own ▶ 29:40 Progressive Equity FrameworkSonal demonstrates strong industry knowledge by bringing up Andrew Mason's progressive equity framework to broaden the scope of compensation innovation.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | The host as informed peer | Guest teaching | Guest disagreement | The host pushing back | Why |
|---|---|---|---|---|---|---|
| Historical Origins and the 90-Day Option Exercise Window | 2 | 7 | 1 | 1 | Sonal admits ignorance regarding the 2000s stock option pricing scandal, prompting Ben to explain the historical accounting rules and how the 90-day exercise window created an inadvertent class divide between wealthy and non-wealthy employees. | |
| Unintended Consequences of 10-Year Extensions and Longer IPO Timelines | 2 | 6 | 1 | 1 | Scott and Ben educate the host on how longer IPO timelines distort traditional 4-year vesting models, leaving former employees with illiquid stock while diluting active employees. | |
| Equity Allocation Dynamics Between Early and Late Employees | 4 | 6 | 3 | 5 | Sonal asks whether the conversation is falsely pitting early vs late employees against each other, but Ben explicitly reframes her premise as incorrect while Scott explains 83(b) tax elections. | |
| Alternative Vesting and Grant Models: Snapchat and Tesla | 6 | 6 | 5 | 7 | Sonal strongly challenges the guests by arguing that tying equity strictly to long tenure creates adverse selection and penalizes mobile top talent. Ben counters her framing by advising her to embrace compensation complexity rather than simply railing against it. | |
| Cash vs. Equity Compensation Mechanics and RSUs | 5 | 6 | 4 | 6 | Sonal presses the guests on cash constraints and proposes RSUs as a middle-ground alternative. Ben and Scott walk through why RSUs are far less valuable than options for early-stage startup workers. | |
| Managing Retention Incentives and Avoiding Zombie Employees | 5 | 3 | 1 | 4 | Sonal introduces the concept of dead equity and zombie employees who stay solely due to golden handcuffs. Ben and Scott validate her point, agreeing that misaligned retention incentives generate unproductive employee behavior. | |
| Strategic Principles for Designing Custom Option Structures | 5 | 4 | 1 | 2 | Sonal summarizes the core discussion points and references the WhatsApp effect of extreme leverage per engineer, while Ben and Scott discuss matching vesting structures to liquidity events. | |
| VC Alignment, Employee Transparency, and Compensation Education | 5 | 3 | 1 | 3 | Sonal cites internal people operations expertise to stress employee transparency, leading Ben to share personal anecdotes about not understanding option terminology during his early career. | |
| Ben Horowitz's CEO Compensation Blueprint and Industry Experiments | 6 | 4 | 1 | 2 | Sonal prompts Ben for his personal CEO compensation blueprint and actively references alternative industry experiments such as Andrew Mason's progressive equity and Eric Ries's LTSE. |
Statements from this episode (23)
Horowitz: Pre-2000s accounting laws forced 90-day startup option windows
“And the then accounting laws basically said that if you gave an employee more than, you know, a very short window to exercise, you would potentially create a very large accounting charge, which would make it impossible for the company to ever go public or be a…”
Horowitz: Startups kept 90-day option windows even after accounting laws changed
“So they changed the law and the law, the new law kind of made it okay to have a longer exercise period, but nobody changed the practice.”
Horowitz: 90-day option windows create a wealth disparity for startup employees
“If you're rich and you have 90 days to exercise, that's fine because you can buy your stock options. But if you're not rich, then you can't. And so now we've created this class thing.”
Horowitz: Adam D'Angelo invented the 10-year option exercise window
“Adam D'Angelo solved that rich-poor dichotomy by introducing the ten-year vest.”
Horowitz: Ten-year exercise windows significantly increase stock option value
“You've made compensation packages far more valuable in that a ten-year option is much more valuable than having to buy the stock in 90 days, no matter who you are.”
Horowitz: Employees actually retain less net equity under 10-year exercise windows
“Employees who got, say.one percent of the company were actually, actually get less of the company in a ten-year exercise scheme than in a ninety-day exercise scheme.”
Cooper: Startups historically went public within four to six years on average
“We used to have, you know, four-year options with this ninety-day, you know, option to exercise in a period where companies used to go public in four or six years on average.”
Cooper: Early employees bypass the 90-day exercise issue via Section 83(b)
“The other thing that the early employees typically have available to them is what's called 83 B, which allows them to essentially early exercise their options when the strike price is still very low and therefore the cash out of pocket required to do so is rel…”
Horowitz: Snapchat innovated by back-loading employee equity vesting into year four
“Snapchat, I think is doing a very interesting innovation by having most of the vesting occur later in the fourth year, as opposed to in the first year.”
Horowitz: An employee's fourth year is more valuable than their first
“And that's just a way of saying, look, if you're here, that fourth year is just more valuable to us. And I think objectively it is, but that's not reflected either in the current compensation scheme.”
Cooper: Tesla grants smaller initial equity, favoring larger performance refreshers later
“And one of the things that Tesla does is, instead of the typical practice, which is most people get a very significant grant, you know, the day they join the company, and then over time, they might get some refresher grants, but those refresher grants are ofte…”
Horowitz: Employee tenure compensation rewards accumulated institutional knowledge, not single-point output
“One of the things that you're trying to value with tenure is knowledge and not actually kind of the value of the work in a single point in time.”
Horowitz: Initial startup equity reflects past reputation rather than actual performance
“Your stock option package that you got before you put that two years in where you did 10 X what everybody else did was set on work you did before you even got there.”
Horowitz: Startups consistently allocate more equity to new hires than performance grants
“There's no company that I know of that allocates More money to performance grants than new hire grants.”
Horowitz: Startup failure is usually the founder's fault, not the employee's
“If we're just talking pure compensation, then I think cash is actually a better vehicle than stock, because one, like, stock is variant, and you may not get paid not because you can't invest, but because the thing goes to zero. And is that really your fault as…”
Horowitz: 10-year option exercise windows incentivize employees to leave startups
“If you have a 10 year exercise, there is potentially an incentive for people to leave in the sense that I can walk out with my stock that I have, and I can get a brand new offer from a new company.”
Horowitz: The tech industry needs four or five standard equity compensation models
“So, you know, it really probably needs to not be one size fits all. I think that if every company had a different scheme, You do get into a weird thing for potential employees and recruiting, so I think we might do a disservice to the industry by doing that, b…”
Horowitz: Tesla and WhatsApp require fundamentally different employee option plans
“Tesla's option plan cannot be the same as WhatsApp's, or it probably should not be.”
Cooper: Startups should offer larger equity grants over longer vesting periods
“Maybe an answer is to think about, gee, people should get more options, you know, even more options they do today, but with the understanding that they vest over a longer period such that it ties more closely to when you think the liquidity happens.”
Horowitz: I lost my own startup options due to the 90-day rule
“Look, I have been an employee at a startup. I've lost options. Over the 90 day exercise window that I can afford, you know, like, you know, really can afford it. I got, you know, three kids and 26 years old and all that kind of thing. So I understand the issue…”
Horowitz: The biggest sin of 90-day options was lack of employee understanding
“Yeah, I think that was probably the biggest sin Of the ninety-day exercise era is that a tiny number of employees actually understood that that was the case.”
Horowitz: Back-loaded vesting enables larger overall equity option packages
“What I'm saying is because the vesting is back and loaded and the stock is going to go disproportionately to the people who stay longer that I can then afford to give out bigger packages because of the people who leave after a year are not going to walk away w…”
Horowitz: Andrew Mason capped founder and executive equity gains at $50 million
“In Andrew's model, he basically puts a kind of cap on what the CEO, the founders and executives can make, you know, and it's a dollar cap. And once they hit their dollar cap, which is whatever their kind of financial independence threshold is, and I think it w…”