Employee Stock Options on Ethereum (2017)(blog.neufund.org)
blog.neufund.org
Employee Stock Options on Ethereum (2017)
https://blog.neufund.org/tokenizing-startup-equity-part-1-employee-incentive-options-plan-esop-on-ethereum-blockchain-dce2416f4505
33 comments
I actually thought this was talking about the Ethereum Foundation paying its employees in ETH at first.
I'd rather not...
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If something like this was ever part of a hire offer, it would be an instant "nope" right there for me.
You could just do the same as with normal equity benefits and value them at 0 (which for most startups is true).
Also makes me wonder if many stock option schemes make sense at all, if employees think they are worth zero.
They usually are worth zero, but they also cost the company zero, right?
How is the cost for the company zero? If you issue employee options/stocks, you devalue existing shares. Often investors have invested to the company and have paid cash for the shares.
From company shareholders perspective the cost of issuing shares to employees is definitely not zero.
From company shareholders perspective the cost of issuing shares to employees is definitely not zero.
Not 100% sure, but dependant on how the ESOP equity pool is structured, it can be quite limiting in terms of fundraising options if not done well.
But unlike regular worthless stock, an offer of cryptotokens in lieu of shares signals that one of the following is true:
a) Somebody high up at the company is drinking the cryptocurrency/blockchain kool-aid.
b) The higher ups at the company are gullible enough that somebody was able to sell them this Neufund thing.
Like the parent comment, I would consider it a strong disincentive to accepting an offer.
a) Somebody high up at the company is drinking the cryptocurrency/blockchain kool-aid.
b) The higher ups at the company are gullible enough that somebody was able to sell them this Neufund thing.
Like the parent comment, I would consider it a strong disincentive to accepting an offer.
why?
The majority of the article is about how illiquid the stock options are. But that’s the deal. If people wanted to provide liquidity, employees would be given non-vesting shares.
The article also doesn’t address very common clauses in stock option contracts. What about tag-along and drag-along rights?
The article also doesn’t address very common clauses in stock option contracts. What about tag-along and drag-along rights?
you can always have a negative view of something. why don't you see the big picture and what this can evolve too?
Really liquid stocks/options/etc can really destroy an early-stage startup. The focus of the stakeholders goes too easily from building the business towards speculating with the stock.
Also see: ICO-tokens (shittokens), where there are countless of cool business ideas, lots of trading and speculation but no actual businesses built.
Also see: ICO-tokens (shittokens), where there are countless of cool business ideas, lots of trading and speculation but no actual businesses built.
Really liquid stock options are likely the only reason why one should value said options above $0 and (potentially) take a lower salary. It seems to be beneficial to be able to sell your options to an established investor.
If the stock/option is liquid, then why not just take hard cash instead? Also shouldn't be a problem for the company, they could just sell directly to the investor and compensate the employees with cash.
"No actual businesses built" is completely not the case. At least not for all ICOs. Take PundiX, for example – they have a fully-functional product with a growing base of B2B customers which are starting to use the device in the wild.
While nothing has come from many (probably most) ICOs, there are certainly some great examples of "cool business ideas" which are being realised thanks to the ICO.
While nothing has come from many (probably most) ICOs, there are certainly some great examples of "cool business ideas" which are being realised thanks to the ICO.
> "No actual businesses built" is completely not the case. At least not for all ICOs. Take PundiX, for example – they have a fully-functional product with a growing base of B2B customers which are starting to use the device in the wild.
Also lots of ICO's present false claims when it comes to adoption of their products. Do you have any factual figures how widely this certain product is deployed and in which state the development is? For example on Pundixes web page their payment terminal is just a 3D model.
The more I hear about ICO products and their businesses, the more sceptical I grow that this funding model is able to actually grow viable businesses.
Also lots of ICO's present false claims when it comes to adoption of their products. Do you have any factual figures how widely this certain product is deployed and in which state the development is? For example on Pundixes web page their payment terminal is just a 3D model.
The more I hear about ICO products and their businesses, the more sceptical I grow that this funding model is able to actually grow viable businesses.
Two-sided coin... pardon the pun.
On one hand, liquidity means price volatility, employee-shareholder obsession with share price and erm... employee liquidity. IE employees aren't locked after vesting.
On the other hand, liquidity makes value real. Employees will trade salary for liquid options, even on 1-year vesting terms. For illiquid options, it's too risky for most employees to really treat options as salary alternative.
Also, share price obsession can sometimes worse in a no liquidity situation than it is in a liquid "price-ticker" scenario. Imagine being an early employee @ uber. You "own" 0.x% of $50bn, but no have other assets. If uber doesn't IPO, you don't get anything. You are way too invested in a very risky stock. Scary, especially in bad times.
A rising and falling price ticker would be bad for obsession. But, selling some shares would be good. You'd be less exposed.
On one hand, liquidity means price volatility, employee-shareholder obsession with share price and erm... employee liquidity. IE employees aren't locked after vesting.
On the other hand, liquidity makes value real. Employees will trade salary for liquid options, even on 1-year vesting terms. For illiquid options, it's too risky for most employees to really treat options as salary alternative.
Also, share price obsession can sometimes worse in a no liquidity situation than it is in a liquid "price-ticker" scenario. Imagine being an early employee @ uber. You "own" 0.x% of $50bn, but no have other assets. If uber doesn't IPO, you don't get anything. You are way too invested in a very risky stock. Scary, especially in bad times.
A rising and falling price ticker would be bad for obsession. But, selling some shares would be good. You'd be less exposed.
> Also, share price obsession can sometimes worse in a no liquidity situation than it is in a liquid "price-ticker" scenario. Imagine being an early employee @ uber. You "own" 0.x% of $50bn, but no have other assets. If uber doesn't IPO, you don't get anything. You are way too invested in a very risky stock. Scary, especially in bad times.
Usually employees get salary as main compensation, then after that some options or other incentives. I have never heard of a compensation scheme where there wouldn't be any salary at all (for normal employees).
I think it makes sense for employee to evaluate some valuation for the company stock, and decide for which valuation to accept the options/stocks as substitute for cash. Often the problem is that the employee lets the company do the valuation and takes that for granted. Very commonly employees are very risk-averse so it might make sense to valuate the options/stocks near zero. In that case it makes sense to just prefer salary and only take stock/options that would be granted in any case.
Usually employees get salary as main compensation, then after that some options or other incentives. I have never heard of a compensation scheme where there wouldn't be any salary at all (for normal employees).
I think it makes sense for employee to evaluate some valuation for the company stock, and decide for which valuation to accept the options/stocks as substitute for cash. Often the problem is that the employee lets the company do the valuation and takes that for granted. Very commonly employees are very risk-averse so it might make sense to valuate the options/stocks near zero. In that case it makes sense to just prefer salary and only take stock/options that would be granted in any case.
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How did this deal with theft? Usually you came still someone's stock options by stealing a key / password, and a judge can order certain people do, or do not, have options.
the stock options are secured by a key and additionally by a contractual agreement. so even if somebody would steal them they wouldn't be able legally enforceable.
In which case, what value is the digital tokens providing, when they can just be overruled anyway?
Hey think this is very smart low friction way in creating a secondary market in options
One question - how does this handle "bad leaver" clauses which are typical too - where the company revokes the grant ?
https://www.personneltoday.com/hr/how-to-get-the-most-out-of...
One question - how does this handle "bad leaver" clauses which are typical too - where the company revokes the grant ?
https://www.personneltoday.com/hr/how-to-get-the-most-out-of...
In the case of a bad leaver event it is up to the employer to decide. So in most cases the bad leaver wouldn't receive anything.
The developer seems to be confused about information asymmetry.
For one, cap tables are convoluted and not always available for inspection so it is impossible to translate given amount of options into percentage of equity owned. This cannot be solved using a smart contract. A convoluted, complex cap table doesn't automatically become easier to read because "smart contract". As even a junior developer will tell you, there are tons of ways to write a program which looks like one thing but does something else.
While making it public sounds like a good thing, smart contracts and Ethereum EVM is new tech. So, not every employee especially from a non-tech background will be able to read it. So, this basically takes one complex thing and replaces it with other.
Secondly, pricing is not only dependent on cap tables. There are tons of things going on. How profitable is the company? Are they booking revenue front up to make things rosy? etc. and even publicly available information doesn't tell you what price should an ESOP be. Take an example of Uber and Softbank. Some of the stocks were thought to be worth more than others:
https://www.bloomberg.com/opinion/articles/2017-11-16/softba...
This information might not be public all the time.
For one, cap tables are convoluted and not always available for inspection so it is impossible to translate given amount of options into percentage of equity owned. This cannot be solved using a smart contract. A convoluted, complex cap table doesn't automatically become easier to read because "smart contract". As even a junior developer will tell you, there are tons of ways to write a program which looks like one thing but does something else.
While making it public sounds like a good thing, smart contracts and Ethereum EVM is new tech. So, not every employee especially from a non-tech background will be able to read it. So, this basically takes one complex thing and replaces it with other.
Secondly, pricing is not only dependent on cap tables. There are tons of things going on. How profitable is the company? Are they booking revenue front up to make things rosy? etc. and even publicly available information doesn't tell you what price should an ESOP be. Take an example of Uber and Softbank. Some of the stocks were thought to be worth more than others:
https://www.bloomberg.com/opinion/articles/2017-11-16/softba...
This information might not be public all the time.
I think you're right about the naivety. Taking the existing complexity and opaqueness and implementing it in Ethereum isn't really doable.
OTOH... I do think that private company equity/ESOP is due some changes. Companies are staying private a lot longer and there are some (like Uber) that now have >$bn ESOP schemes which could be managed in a better way.
It's hard. There are a lot of different interests at play, some competing. Purposeful obscurity and such.
You'd need to convince these companies to do things differently. In effect, any idea that "does ESOP on Ethereum" is an idea for a stock market of some sort.
Not a bad idea, but a big scary one with lots of hard problems (not technically hard) and risk. Naivety might raise your chances. The existence of blockchain is a tool for solving some of them, but Im not sure that it's a pivotal piece. Running centralised would be fine too. Ultimately, a single company originates all the contracts anyway.
If I were scheming such a scheme, I'd probably focus on things that aid fundraising.. that's really the purpose of a stock market, which is what a liquid ESOP system is.
TLDR: The problem isn't "ESOP needs to be Ethereum." The problem is "companies aren't using the regular stock market, find an alternative."
OTOH... I do think that private company equity/ESOP is due some changes. Companies are staying private a lot longer and there are some (like Uber) that now have >$bn ESOP schemes which could be managed in a better way.
It's hard. There are a lot of different interests at play, some competing. Purposeful obscurity and such.
You'd need to convince these companies to do things differently. In effect, any idea that "does ESOP on Ethereum" is an idea for a stock market of some sort.
Not a bad idea, but a big scary one with lots of hard problems (not technically hard) and risk. Naivety might raise your chances. The existence of blockchain is a tool for solving some of them, but Im not sure that it's a pivotal piece. Running centralised would be fine too. Ultimately, a single company originates all the contracts anyway.
If I were scheming such a scheme, I'd probably focus on things that aid fundraising.. that's really the purpose of a stock market, which is what a liquid ESOP system is.
TLDR: The problem isn't "ESOP needs to be Ethereum." The problem is "companies aren't using the regular stock market, find an alternative."
I think you have misunderstood what is happening now.
Companies are staying private lot longer not because there is some obscurity or different interests etc. They are staying private for the same reason public companies are buying back more and more shares.
And giving them another market is not going to help, naivety or not. What is going to help is tightening interest rates and rising yields. It should change the flow. But that's not going to happen in short term. And certainly not with naive blockchain options.
That said, a quick google search throws up tons of places to sell your private stakes. Example - EB Exchange (source: https://www.cnbc.com/2017/06/12/uber-insiders-are-eager-to-s...)
Companies are staying private lot longer not because there is some obscurity or different interests etc. They are staying private for the same reason public companies are buying back more and more shares.
And giving them another market is not going to help, naivety or not. What is going to help is tightening interest rates and rising yields. It should change the flow. But that's not going to happen in short term. And certainly not with naive blockchain options.
That said, a quick google search throws up tons of places to sell your private stakes. Example - EB Exchange (source: https://www.cnbc.com/2017/06/12/uber-insiders-are-eager-to-s...)
I think we might be misunderstanding eachother. :)
I have no opinion on why companies are staying private. But, since they are.. there are big, private ESOP schemes that exist. These lack liquidity.
Google will return all sorts of brokers who "arrange liquidity discreetly." But, this is pretty limited, difficult to access, and comes with massive transaction costs.
There's a big difference between a sanctioned and efficient way to buy and sell equity & brokers who can make a market for anything.
I have no opinion on why companies are staying private. But, since they are.. there are big, private ESOP schemes that exist. These lack liquidity.
Google will return all sorts of brokers who "arrange liquidity discreetly." But, this is pretty limited, difficult to access, and comes with massive transaction costs.
There's a big difference between a sanctioned and efficient way to buy and sell equity & brokers who can make a market for anything.
Smart contract is exactly how you solve convoluted captables. Currently shareholding is such a mess that for any bigger company you do not even know how many shares are there - rarely they sum to 100%. at least when shares are represented as the tokens you know how many are there and who owns them - at all time. that's already a huge step forward
pricing of privately held companies is set by last funding round so you can say it's taken out of the thin air ;> you can also have market valuation if you try to tokenize shares and trade them. does not seem wise for early stage company though
also smart contracts do not solve malicious intentions of programmers and business owners, they are just tools and you can write fair self executing options plan or perfect decentralized scam
also Ethereum VM is much simpler to learn than commercial law which you (probably) also do not know
pricing of privately held companies is set by last funding round so you can say it's taken out of the thin air ;> you can also have market valuation if you try to tokenize shares and trade them. does not seem wise for early stage company though
also smart contracts do not solve malicious intentions of programmers and business owners, they are just tools and you can write fair self executing options plan or perfect decentralized scam
also Ethereum VM is much simpler to learn than commercial law which you (probably) also do not know
> for any bigger company you do not even know how many shares are there
Companies know exactly how many shares are at any given moment. The concept you are looking for is called "outstanding shares".
> pricing of privately held companies is set by last funding round so you can say it's taken out of the thin air ;>
Read the Uber and Softbank example. It is a good one why funding round doesn't tell you the price.
And, funding is not a simple - I gave you $X because the company should be worth $Y. Things can get complicated quickly. Deal can be worth $X because the investor got "preferential shares" which means non-preferred shares are worth less than what you think. This cannot be coded into a smart contract and will still cause information asymmetry.
> also Ethereum VM is much simpler to learn than commercial law which you (probably) also do not know
That is your opinion. Ask someone who works in finance and they will tell you that learning law is simpler than the VM.
In any case,
> also smart contracts do not solve malicious intentions of programmers and business owners
To put it another way, if people knowingly want a complicated cap table, they can write a complex decentralized contract?
So, what is the point of this again?
Companies know exactly how many shares are at any given moment. The concept you are looking for is called "outstanding shares".
> pricing of privately held companies is set by last funding round so you can say it's taken out of the thin air ;>
Read the Uber and Softbank example. It is a good one why funding round doesn't tell you the price.
And, funding is not a simple - I gave you $X because the company should be worth $Y. Things can get complicated quickly. Deal can be worth $X because the investor got "preferential shares" which means non-preferred shares are worth less than what you think. This cannot be coded into a smart contract and will still cause information asymmetry.
> also Ethereum VM is much simpler to learn than commercial law which you (probably) also do not know
That is your opinion. Ask someone who works in finance and they will tell you that learning law is simpler than the VM.
In any case,
> also smart contracts do not solve malicious intentions of programmers and business owners
To put it another way, if people knowingly want a complicated cap table, they can write a complex decentralized contract?
So, what is the point of this again?
And when the blockchain forks, you get double the stock options!