On Stock Options

Ian Andrew Bell is a Techvibes Guest Contributor and this post was published on his blog earlier today.

Over the past way-too-many years I’ve had occasion to interview north of 250 individuals for dozens of positions at both startups and large companies on both sides of the border.  Having spent my teething years (professionally) in the maelstrom of Silicon Valley I have come to be able to recognize many different character types and motivational fulcrums when it comes to tech industry employees in marketing, engineering, business development, and customer support.

Based on that experience I am rather unsurprised but still a little disheartened to hear thru the grapevine that Thursday’s $38M+ acquisition of Verrus by a UK-based company netted big wins for the company’s management team, but sweet bubkus for their employees.  This is because Verrus did not widely incent their employees with stock options. Stock options may be the oxygen coursing through the bloodstream of Silicon Valley.  But up here?  They’re an afterthought.

Down South, when companies are successful and are acquired or achieve IPO (I still remember the nineties, yes) they very often create windfalls for their employees.  As an example, when I worked at Cisco one of my co-workers, a Product Manager who had been with the company for about 10 years, was vesting stock at the rate of about ~$210,000.00 per month.

This is a gross exception to the rule, but is a fun example.  He was a bit of a hockey nut, and once turned to me and asked whether I wanted to help him build a rink.  I said “in your back yard?” and he replied “No, like a two-rink complex as a business.”  These windfalls buy some degree of freedom, for sure, but more often than not are a few hundred thousand dollars in total.  Don’t call the architect just yet.

But a good exit of a few hundred grand is enough to leverage that hard-working employee into a more senior role at another startup, as often happens; or for a talented coder it buys a few years of freedom to pursue their own startup idea without the pressure of drawing a salary.  More often still the windfall buys the cushion so that employees can take riskier jobs with bigger upsides, cavalierly walk from companies that they are convinced will ultimately fail, or help smart folks make major life-changes and start small businesses in industries not reachable via the http protocol.

In many ways stock options, or rather the wealth they create, can be seen as antibodies to failure.

When I went to Cisco I failed to negotiate hard on my stock options (or rather, I did not negotiate at all).  This is a shame because during 15 months of working at Cisco my initial stock option grant grew in value from $12 to $84.  But I came by my ignorance honestly — I was after all from Vancouver, where I had barely heard of stock options, and where I knew not a single person who had materially benefited from them.

You can’t walk fifty feet in Palo Alto without tripping over someone who made a fortune on their PayPal stock options — in those days everyone from the caterer on up was granted them, and even commercial landlords took options on top of astronomical office rental fees.  There is a culture that recognizes their risk and upside and there are plenty of examples of folks who’ve done well by them.

I have been frustrated in hiring folks in Silicon Valley by savvy employees who negotiated stubbornly against their stock option packages, fretted about terms within the option grant such as accelerated vesting and cliffs, and who actually in a few cases pushed for lower salaries or bonuses in favour of more options.

Conversely, I have not once had an interviewee in Vancouver haggle over stock options.  In fact very few folks have an even remotely strong understanding of what they represent and how they work.  In the past it’s occasionally even been difficult to lure people to full-time employee status versus working as a contractor.

Vancouverites in the tech industry and Canadians in general, in my experience, still have a fairly Neo-Marxist view of the employee – employer relationship:  you sell me your labour for the negotiated price and, where surplus value is created, this is absorbed not by the company as a group but instead by its managers and investors.  The labour is unsually neither ineffectual nor is it inspired, and the employee has no fundamental interest in the company’s success beyond remaining employed because the company continues to exist.  If it fails nothing is lost by the employee, except for a few weeks of rest before they move on to sell their labour to the next buyer.

For a while when I started working with startups locally around 2004-2005 I used to offer equity (mostly as stock options) because I am a nice guy and because I understood how equity has always motivated me as a worker and as an entrepreneur.  Almost universally I found that these options were unappreciated and indeed oftentimes misunderstood.  More recently, recognizing that my prospective hires are more compelled by salary and flexibility (we all love the Vancouver lifestyle … many of us too much so) than by upside I have ceased to offer stock options at all.

After all, since those stock options are ultimately dilutive to my own benefit as a partial owner of the business in the event of a successful exit, I have grown much more stingy with them.   Why incur the paperwork hassle and decrement my own long-term financial benefit for someone who ascribes no real value to these options?

The mercenary culture of workers on the Vancouver tech scene — likely a product of some combination of the province’s dominant organized labour mentality, of the very fly-by-nite startups that emerged here in the mid-late-nineties, and of the relatively pithy (and thus very unstable) financing amounts received by practically every company in technology — is a real problem and an obstacle for success to these companies.  Employees who are materially invested in a company’s growth are necessarily harder working, more committed, and more thoughtful employees.  Those who aren’t are likely to flit away at the first whiff of trouble (and believe me, startups here and in general encounter plenty) or for dumb reasons like a few hundred more dollars in their pocket monthly from another job.

So, it may be a chicken and an egg thing.  Employers do not have an obligation to offer stock options.  Qualified candidates will benefit from understanding them and recognizing their true value.  And if folks aren’t buying ferraris with their options, or pivoting into their own startups with lots of runway, we have few examples to point to as encouragement.

I strongly believe that the long-term health of our technology community depends on more people benefiting from successful companies via stock option payouts; and that we need to talk more openly with employees and prospects about how they work and what they mean.  The community needs to see more rich guys slacking at coffee shops who were simply low-level workers at hugely successful companies.  Believe me… when you see gardeners living large on the stock options they earned for mowing the lawns at the corporate offices of flotsam.com, you’ll get religion too.

On the other hand, you’ll have to really impress me these days to convince me to hack off a few thousand pieces of paper from my dream business and give them to you.  I have learned through hard experience that, even after options having been granted to local workers, their value has little additional motivational effect on employees.  And these days, even my unabashed generosity has its limits.