Are expiry windows on employee stock options fair?
Last week, we talked a little about employee stock options. Context: I’m spearheading a community of remote workers interested in roles at early-stage startups that offer equity.
Since then, I’ve spent time thinking about what doesn’t work with stock options. This piece from 2014 by Sam Altman was a good jumping off point. What stood out to me is expiry windows on exercising options. Why do they exist? What legitimate function do they serve that isn’t predatory? There seems to be no good reason for why, in most cases, employees have 90 days after vesting to exercise their options. It seems like an attempt to clawback equity from employees that can’t afford to exercise the options the moment it vests. Considering expiry windows, and the undue burden they place on employees, Altman concludes: “This doesn’t seem fair.”
That’s why I was happy to find this Medium post by David Hariri, co-founder and Head of Product Design at Ada Support, which covers stock options in Canada, but also how the company moved away from short-term expiry windows. From the post:
At Ada, we felt uncomfortable about a 30-day or even a 90-day expiry. The expiries on our options are set at 5 years. We think this constitutes “real ownership” and allows our team time to plan for the cost of exercising the options they earn.
Of note here, I think, is the word uncomfortable.
I haven’t fully fleshed out my thoughts here but I’m heartened to see companies like Ada move away from the expiry window on options.
On a related note, things could be worse. You could not even be offered the stock options in the first place. According to Index Ventures’ ‘Introducing our guide to stock options for European entrepreneurs’, on the whole, it’s worse in Europe.
What we discovered was striking. In Europe, startups aren't sufficiently rewarding the risk people take by joining them. On the whole, they’re not offering enough people a meaningful stake in the business. As a result, Europe is currently failing to attract and retain the talent it needs to produce the next global tech giant.
The function of equity is to reward risk. If companies aren’t offering it, they won’t attract the talent they need. So, to address the problem, Index Ventures, in conjunction with founders from some of Europe’s top startups, launched the Not Optional initiative, with the goal of getting European entrepreneurs, investors, and legislators focused and motivated enough to remove pre-existing regional barriers to offering stock options across Europe.
This isn’t just a perk on top of a salary: universally, stock options reward employees for taking the risk of joining a young, unproven business, and give them a real stake in their company’s future success. Stock options are one of the main levers that startups use to recruit the talent they need; these companies simply can’t afford to pay the higher wages of more established businesses.
This is a great initiative and I’ve reached out to the Not Optional initiative about partnering or garnering support for a community of workers interested in receiving stock options.
The impetus behind the Not Optional initiative is fuelled by a venture capital firm’s desire to generate returns (nothing wrong with that). But, I think the notion of offering stock options to employees isn’t just about creating the next unicorn in Paris or Lisbon or Berlin. Offering real ownership is about fairness.
Recent Startup Funding Announcements 💰
Trint, a London and Toronto-based automated transcription and editing platform, recently raised a $4.5M round. After the round, all of the company’s shares remain common, despite raising over $9M to date (Crunchbase had the figure at $7.6M), according to Jeff Kofman, CEO and founder. The company has strategically opted not to raise money from a traditional VC and does not have one on its cap table. “It gives us a little more freedom to navigate the company without being told what to do by outsiders.” Trint did speak with a number of prospective VC investors for the round but politely decided to walk away – despite being in diligence with 2 firms – around November when it became clear the company was going to hit its fundraising mark. The company does have a board member who sits on a very large VC firm, whose early stage fund, Horizon Labs, has put money in, Kofman noted.
Valuation after the round is in the “tens of millions of pounds.” Trint has strong revenue. The company is not cash positive but does have a lower burn rate than expected for a company with close to 50 employees and two offices. One of the company’s strategic investors in this round, TechNexus, reached out after Trint raised its pre-Series A round, around May 2017.
State of the space
(note: the comments below were transcribed with Trint’s software)
So I call the space we're in the voice economy. It is an emerging sector of A.I. that really was only kind of-- it was just a small player probably an even a decade ago. It was something that maybe people imagined. There'd been a couple of legacy companies, like Nuance, around much longer. Nuance is, by the way, not a competitor. It's in a completely different space. It's in the transcription of one person's voice, mostly in the medical field for, say, a doctor giving notes on a medical checkup. That product isn't designed to work for conversations like ours is. But the voice economy itself, that aside, is, really, a new and emerging huge, huge, multi-billion dollar sector. And there are, gosh I don't know. But there are certainly thousands of companies in the U.S., Europe, Israel and elsewhere who are working on voice in some form.
I think like any emerging sector you will see one of three things happen to a lot of these small companies. One, they'll be bought by a bigger company. Two, they will merge into what's sometimes called a roll-up where you see a bunch of small companies merge into a larger company that has more power, more dimension more depth, more breadth. Or three, some of them don't survive. And I think that we're very much at an early stage in the emergence of the voice economy. So I think all three of those things will be happening in the next six to 36 months.
Pixeom, a Silicon Valley-based edge computing platform, spoke to 5 investors for its recent $15M funding round, according to Sam Nagar, CEO and founder. All but 1 of the 5 moved to a term sheet. The round was led by Intel Capital and National Grid Partners and “others.” The company has had a relationship with the leads for about a year. To date, Pixeom has over a million installations of its software by dozens of Fortune 500 companies.
As the edge computing market becomes more well-defined, we will see enterprises architecting their workloads to leverage both the edge and cloud in different ways. Today we hear more about doing things like training ML models in the cloud and then performing inference on the edge. The future however, will be ubiquitous, tiered infrastructure, and Pixeom has been intentionally architected to offer consistent infrastructure from cloud to edge, while offering the advanced capabilities for building out the tiers.
SurveySparrow, a Palo Alto and Kochi, India-based SaaS customer experience platform, spoke with roughly 3-4 investors and received 2 term sheets for its recent $1.4M seed round, according to Shihab Muhammed, CEO and co-founder. Over the next 6-12 months, the company aims to grow customers to 20,000 from 8,000.
Two macro trends, namely, that customer experience is emerging to be the key differentiator in the market, and second, that people are favouring a conversational experience today. Our product was born with a vision to rise these two waves.
By 2020, it is expected that customer experience will override price and product as the key to why people choose a particular product/service. Customer experience is the new marketing. And we are building SurveySparrow as a continuous improvement platform that would help to better the customer experience of a company by closing the feedback loop and resolving issues.
Brightback, a San Francisco-based customer retention automation software for subscription businesses, spoke with 4 VC firms for its recently announced $11M Series A, according to Guy Marion, CEO and co-founder. The company raised the round in 6 weeks and has known the lead investor, Index Ventures, for 3 years.
Now that cloud and the subscription-based business models are the new norm, in and out of the tech industry, customer retention has become the new acquisition. The blockbuster IPOs of 2019 have rewarded those who are profitable and efficient, while the world has become cynical of those who perpetually lose money and customers.
The mantra for the past decade, at least in SaaS and subscription companies, has been acquire, grow, acquire some more. As an industry, we invest millions acquiring and converting customers, but we don’t make an equal investment in retaining those same customers. Losing users is so common, most leaders don’t even know when their last customer canceled—let alone why. When a customer stops purchasing from you, it’s not just one transaction that’s lost , but the customer’s total expected future sales. It’s a gargantuan problem.
The reality is 15-30% of customers cancel for the wrong reasons. They indicate preventable issues like not onboarding correctly, not seeing value (but still need it) or not having the time to find the features and functionality they need.
If companies don’t know why their subscribers are canceling, they can’t improve the customer experience, and the cycle of churn repeats itself.
This is at the heart of what Brightback is helping SaaS companies solve. We’ve found that a systematic retention strategy increases MRR in a sustainable way. We’re providing a growth lever that CROs and success and product growth leaders can use to hit their churn targets and get closer to their customers. With Brightback, companies meet customers at the right place, at the right time with the right offer for the right reason, and they’re reducing churn by 10% - 20%.
Perceivant, an Indianapolis, IN-based education technology company that replaces traditional textbooks with interactive and data-driven learning experiences, raised its recent $590k round at a valuation between $10M-$20M, according to Brian Rowe (CEO and founder) and Jason Konesco (president). To date, Perceivant has raised a total of $3.75M.
Accessibility. The term “accessibility” is associated with the action of placing course materials on the web to better serve those with hearing or visual impairments. However, many students outside the traditional sense can benefit from these measures. By ensuring content and web software is compliant with all learning styles, classrooms and educators are able to more easily customize learning experiences and styles for each student. And as personalized learning continues to take different forms in the classrooms, it will become vital for education to optimize new levels of accessibility in the classroom. Perceivant’s digital courseware and guided learning tools meet this need.
Data. Today, only 41 percent of colleges and universities leverage data and predictive analytics, with the majority of the efforts focused on operations, fundraising and recruiting efforts. But students and educators can reap the most benefits of predictive analytics in the classroom when it is combined with guided learning and instruction. As this idea continues to go mainstream, data will more aggressively serve as a powerful risk assessment tool while becoming more sophisticated in the overall development of at-risk students by monitoring their learning journey. It will also further be leveraged to identify effective learning materials and level of engagements in real-time to ensure the efficacy of courseware. Perceivant provides predictive analytics, risk assessment tools and guided learning in our platform. This allows educators to ensure students are engaged, retaining information and gather feedback, so they can intervene at higher impact to ensure success for their students.
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