Golden Handcuffs

Daniel Olshansky asked me this question on Twitter:

I don’t believe I have ever addressed this issue here on AVC but I certainly have seen it inside of our highly valued portfolio companies.

Here is the issue. Employees join a high growth company, are issued options which become valuable as the company’s equity appreciates, and if they leave they have to exercise the vested part (and pay taxes) and walk away from the unvested part. So they stay even though they may not be happy at work. Maybe they are not in a challenging role or maybe they find themselves in a problematic management situation. This leads to “resting and vesting.”

Here are some thoughts:

1/ A four year option grant is not a gift. It has to be earned via performance over time, not just time. If there is no performance, then the employee should understand the vesting is at risk. Companies should be very clear about this when they issue the options and on an ongoing basis. This is a cultural issue and needs to be treated as such.

2/ Companies need to have performance oriented cultures where there are frequent checkins between managers and team members, with feedback going both ways, and where non-performance results in changes. These changes could be restructuring of teams, changes in management, or departures of employees. Companies that do not actively manage performance are likely to have lower morale and toxic issues like resting and vesting.

3/ Managers and company leadership must do their part to take ownership of these issues. Employees will adapt to the environment they find themselves in. If you have a rest and vest culture in your company, look in the mirror to see the problem.

4/ I would like to see a market emerge for financing of option exercises. There are companies actively working on this. I believe that departing employees ought to be able to borrow against their valuable equity at no recourse to them, so that they can exercise and pay the taxes. This would solve part of the problem, where employees can’t leave because they can’t afford the taxes (and, in some cases, the exercise price).

5/ I do not believe that the option programs are the problem here. I do think the taxation at exercise is bad public policy and I wish the US government would move taxation to a liquidity event, but I also think we can use the capital markets to address this problem.

6/ I think in the vast majority of cases, the golden handcuff problem is a result of poor management and a leadership team that is unwilling to address this issue head on and make unpopular and difficult decisions about people.

So there you have it Daniel. That’s what I think about this issue. Thank you for asking me about it.


Comments (Archived):

  1. JaredMermey

    Any thoughts on Post Termination Exercise periods?

  2. gline

    It does seem to me there are two separate issues – “coasting in order to vest” is a performance management issue and should be dealt with as such. Unvested equity is unearned compensation, and it should be earned or sacrificed.Sticking around because you have vested equity but can’t afford to exercise it for tax or liquidity reasons strikes me as a separate, solvable mechanical problem.NQSOs can easily be structured with longer post-termination exercise periods (such as for the full life of the grant or until 180 days after an IPO or liquidity event), and this can even potentially be managed with ISOs by having any unexercised portion convert to an NQSO after the 3 month window has elapsed, for example.

    1. Chad Wittman

      Have you seen NQSOs structured in this way and how investors react to having them as part of the company’s compensation structure?

      1. gline

        Yes, in fact I think it’s not so uncommon and isn’t an investor problem from what I can tell.There are other solutions too – two-trigger RSUs that have a time trigger and then a liquidity event trigger, for example, which are obviously increasingly common instruments at larger late stage startups.

  3. kidmercury

    are there are examples of companies that have not had meaningful problems with rest and vest? it seems to me that even companies lauded with strong cultures — facebook, google — have that problem. i’ve seen it at various companies i’ve worked at as well. to me the core issue is that equity is sacred and should be reserved for those who are truly committed. beyond 150 employees, that kind of commitment is exceedingly rare, but compensation policies designed to make compensation structured and logical at scale involve giving equity grants to employees who do not possess the kind of commitment equity necessitates.i think in today’s world the mentality is more akin to free agency than of “company man/woman”. i think compensation policies would be better off reflecting this trend. the warriors dont give kevin durant equity, they give him tens of millions in salary (which he will take and then go to the knicks when the contract is up 😀 ). perhaps tech companies should think in similar terms.

  4. Oren Barzilai

    Love this post! Regarding #4 – that’s exactly what we are doing at EquityBee. We help startup employees to get the money they need to exercise their stock options before they expire.

  5. Matt Thomass

    Good post and all true; however, this is primarily from the perspective of the employer and not the employee. I think it’s important for companies to be much more proactive in making sure employees understand the true worth and risks associated with their options. Too many employees are afraid to leave (not quite resting and vesting, which is more intentional) because the are uninformed and ascribe far too much value to options…and therefore have a hard time understanding their true opportunity cost. Even worse, some companies go out of their way to prevent this information from being readily accessible and understand…compounding the issue. Better systems to communicate value and options for employees would get closer to the root of allowing employees to make more informed decisions vs having companies make the decision for them down the line.

  6. gwin scott

    Solid post. Friends here in Memphis and CA started ESO Fund 6 yrs ago which would help address the financing of options/taxes. Ive had great experiences with them!

    1. Chris Lu

      Hi Gwin,Thanks for the great recommendation! I’m happy to chat with anyone who has questions about how our model works and the benefits to the employees!Disclosure: I work at the ESO Fund

      1. gwin scott

        Hey Chris—lets do catch up. Paul Y has kept me in the loop, but Id like to connect up ‘generally’ on everything else. gwindotscottatgmail…

  7. Tommaso Trionfi

    @fredwilson you mentioned you need to pay taxes when you exercise your options, I thought that was the case if you sell them. If you exercise and keep them and have no liquidity event, what taxes do you need to pay? Based on what trigger? Thank you

    1. Chad Wittman

      I’m no expert, but I believe when you exercise the options they convert into shares which are then considered a newly acquired stock asset… that you then must pay taxes on against their estimated value.

      1. Tommaso Trionfi

        Thank you Chad, I guess then at the latest valuation, but high risk of course, hence why people tend to avoid this. One thing is owning shares the other if to pay taxes on potential gains possibly well in advance of a liquidity event.

    2. Richard Leavitt

      Not as simple as that. You can’t ignore holding rules for ISOs. Plus, when exercised, ISOs are subject to AMT on the difference between grant price and the FMV of the shares when you exercise. Carta does a good job explaining this:

      1. Tommaso Trionfi

        thank you Richard. Super clear!

      2. Jeffrey Wolfe

        Do most employees of private companies who exercise ISOs before a sale really owe taxes? I wouldn’t expect AMT to apply to most of the employees of private companies (at least ones that aren’t massively valued relative to exercise price).Carta says “The main tax benefit of having ISO options is startup employees do not have to pay tax on the day they exercise their equity (unless you owe AMT). In order to receive that benefit, however, you need to meet certain holding periods.”The holding rules don’t seem to be a big issue for a for a private company unless a sale is pending, and if that’s the case, the employee/former employee would be getting cash anyway. So is the holding period a big issue for tax purposes?Carta seems to be saying that in most cases, employees that exercise vested ISO options (eg when terminated/voluntarily leave and have 90 days to exercise), do not pay any taxes. What am I missing from what Carta wrote?

  8. Guy Lepage

    Such a HUGE issue in startups. I suspect this kills a lot of startups. I’ve seen it kill quite a few friend’s post Series A startups. If I were a VC I would rally the VC industry to solve this problem. I have a sneaking hunch the amount of startup failures would reduce.

  9. Pete Griffiths

    There is a tricky issue that arises with performance related penalties. It can be abused by the company to strip options from people without real cause and thereby ‘cheat’ them out of upside they may well have made sacrifices to earn. There are unscrupulous people and sadly this has happened in the real world. 🙂 Careful out there.

  10. Tom Labus

    #4, please. A market would help cover a lot issues.

    1. Chris Lu

      Hey Tom!The company I work for started in 2012 to address this exact issue! You can read more about how it works at!

  11. jason wright

    A Bird in a Golden CageThe ballroom was filled with fashion’s throng,It shone with a thousand lights,And there was a woman who passed along,The fairest of all the sights,A girl to her lover then softly sighed,There’s riches at her command;But she married for wealth, not for love, he cried,Though she lives in a mansion grand.She’s only a bird in a gilded cage,A beautiful sight to see,You may think she’s happy and free from care,She’s not, though she seems to be,’Tis sad when you think of her wasted life,For youth cannot mate with age,And her beauty was sold,For an old man’s gold,She’s a bird in a gilded cage.I stood in a churchyard just at eve’,When sunset adorned the west,And looked at the people who’d come to grieveFor loved ones now laid at rest,A tall marble monument marked the grave,Of one who’d been fashion’s queen,And I thought she is happier here at rest,Than to have people say when seen.

    1. sigmaalgebra

      When I saw that dilemma long ago, I concluded that Darwin had his way: First, she’s supposed to be a MOMMY and totally wound up in that. Second, if she’s not a mommy, then even money and a mansion won’t make her happy. So, she gets really unhappy and maybe even escapes the golden cage because for being a mommy, pleasing Darwin, she has nothing to lose and any change might be an improvement, i.e., have her become a mommy. I came to a similar conclusion here at AVC with an analogy of a Mexican jumping bean. With that model, that she’s hysterical, irrational, and self-destructive, e.g., AOC, has reproductive advantage because of the resulting dependency and improved chances of getting pregnant. AOC — all she’s doing is showing that she’s not all wound up being a MOMMY.It’s supposed to be about FAMILY FORMATION, and for happiness, especially for women, there is NO substitute. For family formation, the money is a crucial advantage.For the two ages, the rule I formulated was “She is already old enough, and he is still young enough, and that’s enough.”. Sure, being older, he will likely die before she does, so, then, she continues on helping with her grandchildren.It’s about FAMILY FORMATION and not female equality or much about girls who code or pursue STEM field careers, etc. With good family formation, for women, “equality” would be a really big step down.Somehow a lot of women have concluded that family formation is a bummer. Maybe a lot of that came from Betty Friedan. My guess is that some clever Russian found a way to sabotage and weaken the US, a way much more effective than war — just make all the women unhappy about being “just a stay at home mom”. It’s worked: We’re going extinct.But Darwin will win: We’re losing the weak, sick, dead limbs on the tree. We will soon rediscover that the hand that rocks the cradle rules the world, that family formation is Job #1 for individuals and a country, society, and civilization. Surprising that so many people were so easily talked out of that rock solid fact.How? Why? Because in the past, the babies “just came”, and people didn’t have to understand and actively plan.Just now I happen to have in my laptop’s DVD player Gentlemen Prefer Blonds all about gold digging — IIRC, “Don’t you understand, a girl being pretty is like a man being rich?” Okay, as long as we understand that family formation will be making good use of the money and going strong within a year or so of the wedding. When that movie was made, that was a good assumption — never even hinted at in the movie but at the time clear enough anyway. Did I mention family formation?

      1. jason wright

        allegorical in nature, and observable across the full social spectrum.

  12. Seth Godin

    Worth noting: there are some people (many?) who begin to hate a job precisely because there are options at stake.They feel on the hook and controlled in ways that are different than a day’s work for a day’s pay.And so, in a perverse example of Resistance, they chafe at the fact that they have to stay… whereas, if they hadn’t had to stay, they might actually fight to stay.Humans.

    1. Jeffrey Wolfe

      I’m a big fan of shocking the very best employees by giving them a grossed up bonus to exercise their vested options so the clock can start ticking on QSBS. Most of the cash comes right back into the company, so that’s good. And it’s such a great way to reward your best people and keep them invested in the long term outcome. Always a risk that they leave and now they’re on the cap table and might not have been, but I believe treating the team way better than they ever imagined will keep them, and is a risk worth taking.

    2. Matt A. Myers

      So paying a fair salary with benefits, and equity being a bonus and not compensation still feels like the best way to approach such decisions; and if there is confidence in what is being built, they naturally have passion for the work or project(s) they’re helping build, then the equity should be an afterthought and simply a nice-to-have – however not used for perhaps unrealistic signalling of an unreasonable amount of potential additional value earned over X years.

  13. Guy

    Fred,Thanks for this post. Can you also elaborate on your experience when these high growth companies get acquired and what typically happens to employees’ unvested options? Is it typical to accelerate, cancel or replace with equal value and vesting? This is a key element as people decide to work for these private, high growth companies that should be addressed before we get to the “rest and vest” problem. I’d argue it is also typically overlooked when employees considers their position and options compensation.

  14. William Mougayar

    No, it’s not that. These comments appear to have been deleted by the users themselves, but it is across the board, so it doesn’t make sense.There’s something going on we’re investigating. [If your comment appears to have been deleted, and you didn’t delete it yourself, please let us know]

    1. sigmaalgebra

      What about if a person’s comments were commonly deleted by teachers when the person was in grade school? What about for boys in the seventh grade whose comments were commonly deleted by the girls? Do you want to know about those, too, or was all that just SOP (standard operating procedure), shouldn’t expect anything else, for future nerds?Hints, even for nerd boys: In grades 8-10, try to find and meet girls in grades 6-7. If out of college a few years and have a late model sports car, try to find reasons to visit campus again and see what girls you can take to the campus snack bar for coffee, tea, or soda. Then comments have a better chance of not being deleted! The high end version is to show up in the summer at a North Shore Long Island party in your 100′ yacht and drive off the yacht to the pier in your, ah, stay modest, Corvette, for the shot hop to the party. If the party lasts, then invite a sweet, pretty one to your yacht to watch the sun come up in the east over Long Island sound. That comment might not get deleted!

  15. TedHoward

    I don’t understand the details, but I’d love to see a post from your on the compensation model @AMZN. My understanding is that relies upon the concept of paying low salary and high equity compensation to match under-market salary. As long as stock value is growing, that’s fine. When it’s negative, everyone’s salary is *far* below market.It seems like I’m missing some 3d-chess strategy from AMZN. Any insider insights?

    1. Salt Shaker

      Friends at AMZN say this is a prob. Many good quality engineers and other employees bail after 2 yrs of vesting when higher salary offers from other firms are provided. I wonder too if bailing on the LIC deal is inextricably linked to AMZN’s determination that labor costs there would be inconsistent (and significantly more expensive) relative to other markets. Of course, much depends on when an employee joined the company and h/her strike price relative to the company’s trading price.

      1. Sada Kshirsagar

        From what I have heard, a lot of those who quit usually do more because of work stress which relative to incremental equity isnt worth sticking especially when a new offer comes in that matches or increases your net with relatively lesser stress environment. Also is very highly dependent on the strike price of their RSUs

        1. Salt Shaker

          That is indeed true. I’ve also heard that it’s easy to predict who is going to make it and who is gonna wash out pretty early in the curve. The culture there is quite challenging.

        2. TedHoward

          The problem I allude to is not the 2 year vesting issue but the “total compensation” issue. My understanding is that if they want someone’s “total compensation” to be market rate at $100k then they might pay $80k and stock worth $20k vested over 2 years. If the stock grows then obviously things are good.The problem comes when the stock doesn’t grow. Even stagnant that “total compensation” quickly becomes below, sometimes far below, market rate. If the stock drops … AMZN is now paying you 20% below market rate.I’ve not heard of other companies that consider vesting stock to be part of an employee’s market rate compensation. Normally if market rate is $100k you are paid $100k and the stock is a bonus.Keep in mind that stock handed out to employees is basically free money. By including stock grants in compensation, AMZN is essentially paying a port of employees’ salary at no cost to AMZN.

  16. Matt Zagaja

    Fred, I just want to agree culture is the most important thing in any organization. I just listened to the “Without Fail” podcast about Sharon Price John turning around Build-a-Bear workshop and think its worth a listen: also want to caution sometimes the “performance” issue is not with the person management might think it is. Letting the wrong person go could be more of a gift to them than your org.

  17. Girish Mehta

    Unlikely. Like you I did not read the deleted comments but from the responses to the first one, guessing it might be JLM (at least the first thread).

    1. Salt Shaker

      They’re ALL JLM deleted comments, but deleted by whom is the Q?

  18. JulienNakache

    One simple way to avoid this is to give employees extensions to exercise their options once they leave their company. Pinterest made headlines when they started offering 7 year exercise windows but it has not become industry standard yet.It seems this benefits both companies and employees since it allows to delay taxation until there is a liquidity event. The only downsides for the company I can see is they are no longer as likely to get back un-exercised options. But I’m hoping that’s not the only motivation because these options were duly earned and vested.I would love to hear your thoughts on why these extensions are not more widely given?

  19. Chris Lu

    Hey JLM,Great analysis! I think this is one of the most detailed thoughts on this issue.As for number 4, my company recognized that the most under-served demographic are people with $10-100k worth of options. Even though there is more work, my firm made the decision to help people even if its a small $1k check. While the dollar amount is small in the grand scheme of things, these smaller amounts really matter to the employees and can be life changing for them!

  20. Salt Shaker

    Presume managing a “cash less exercise provision” on options requires a bit more stewardship, manpower and accountability by the employer? Could this approach also incentivize turnover vs. rest and vest, which, depending upon the situation, isn’t necessarily a bad thing. How commonplace are performance based vesting requirements? Lastly, is creating a hybrid options model (weighted by performance and time vested) possible too?

  21. sigmaalgebra

    Fantastic. At or near the top of the keepers list.Seems to go a long way, maybe usually plenty long enough, to solve the problem.As I was reading Fred’s post, I could think mostly just about the threat ofThe real issue here is performance appraisal. No company should have dead wood and would not if they had a good set of job descriptions, performance objectives, and a sound performance appraisal system.So here in the first sentence you state the darned threatening problem and in the rest solve it. Darned good stuff: In all my time as an employee, I never once had any serious, honest “performance appraisal” or anything like a clear job description. So, right away that’s a biggie problem well before issues of vesting.My personal conclusion was that being an employee is often just financially irresponsible and, instead, a person needs something much more solid, with what you outline sounding the best I’ve heard and maybe often good enough for an employee slot to be responsible.Definitely a keeper. Good shot at a big step forward for the US work force, productivity, and foundation for family formation.Here we “recognize the lion by his paw”.

  22. Jeffrey Wolfe

    Are most ISOs really taxable when exercised? Cooley and Carta both seem to say differently. AMT can cause a taxable event, but not sure how many employees are impacted by that. And the holding period issue seems to only come into play with a sale, so the employee will have the cash for taxes anyway. Not sure if I’m missing something.By the way, I’m also a huge fan of rewarding the best employees by giving them a grossed up bonus so they can exercise vested options and start the clock on QSBS. Risk is that they leave, but I’ve found if you shock employees with creative appreciation, they’ll stay and help realize the value of their stock.

  23. sigmaalgebra

    My liberal father in law had an opinion on that: If the employee was still there after 5, 10, more years, then that should be solid evidence that he did EARN and deserve options, job security, whatever.

  24. Richard

    One of the highlights of physical chemisty / physics, the Bernoulli Theorem. I know coders think they are Geeks but truth is – most are not. Is you haven’t studied physics – you are holywood geek.

  25. sigmaalgebra

    Yup, IIRC about Newton and his solution to the problem of the shape of a frictionless wire that would let a bead slide down in minimum time, the start of deterministic optimal control theory as in Athans and Falb, used in the Apollo program for minimum fuel space craft trajectories. Good, short, solid view of the core math in D. Luenberger, Optimization by Vector Space Methods (grand desert buffet of applied math).While at FedEx I met with Athans at MIT to discuss doing deterministic optimal control to find cheapest vertical flight plans, climb, cruise, and descent. I also visited the Division of Applied Mathematics at Brown, had an offer to go to grad school there, wanted to meet with Falb, but he was traveling, I did meet with Kushner (a different part of optimization and relevant to doing better on scheduling the fleet for FedEx), Grenander (statistics), Hale, Chair and big guy in “delay differential equations”, and more. I was honored to be accepted there, and also at Cornell and Princeton, but went to Hopkins because my wife was still in her Ph.D. program there, they were emphasizing more of what I wanted, I didn’t have to move, and I could stay were I had a good career going, applied math and computing for US national security.

  26. Jeffrey Wolfe

    Got it. Fred’s post seemed to be about taxes and ISOs (I guess he didn’t distinguish) and I haven’t seen the tax piece as an issue. Not sure why to give NQSOs if you’re able to give ISOs, but you may deal with much larger companies / more valuable grants where other factors come into play. If you’re bored, feel free to educate me. Love learning this stuff.