Would CEOs of every startup firm like to fire employees just before their vesting period?

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JASON LEMKIN

Of course not.

Most CEOs, in most companies, see the four-year (or longer) vesting period of stock options as an incentive to stay. Firing someone just before their first year “cliff” doesn’t remotely accomplish that.

And Most CEOs are struggling to recruit enough great talent. The last thing you want to do is turn over your top performers in their first year — just as they are scaled up and know what they are doing.

However …

There is one thing that changes over time in a startup. In the early days, a stock option pool feels “fixed“. I.e., you reserve 20% of the shares for the employees, and carefully meter them out over time.

But as the years go on … it becomes more and more like constant dilution. You add another management team every few years, another 20 engineers, another 50 sales reps.

Public companies think about this constant dilution all the time. This is why the ones with strong cash flow are often buying back shares every year, many times at a similar rate to the options and RSUs they issue.

As time goes on, the option pool is less a fixed % of the company, and more something that tends to dilute you 6–8% a year. Every year.

So as time goes on, founders often start to think about equity differently.

Firing employees right before Day 365 is a terrible thing to do. But it probably stems at least in small part from the fact that the company that got a lot of press here has been around a long time.

As the years go by, many founders work to manage perpetual dilution from new grants. In the early days, usually, this is irrelevant and we don’t care. We worry more about managing the “pool”, the share budget.

…..

As a personal level, I’ve been “fired” as an advisor once to get unvested shares back, from a company I worked incredibly hard to get to a nine-figure exit, the night before the acquisition closed. It was horrible. It breaks the relationship forever. Make sure it’s worth it.

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Published on May 7, 2017
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