Exercise windows should be longer.
Fairer equity compensation, NY deserves better than grocery slopulism
I’m flying back from an ≈18 hour trip to SF, which is kind of brutal. But every time I go out of my way do business in person, I’m glad for it. Now I’m looking forward to being in NY all of August.
Short windows
The 90-day exercise window and the inability to do cashless exercise are hostile and undermine a lot of the promises - explicit and implicit - that companies make to talent.
First, this compensation scheme was based on outdated assumptions, namely that startups get liquidity reasonably quickly (four to seven years instead of 10 to 20) and cheaply (exit values in the tens and hundreds of millions instead of billions).
When the time frame is pretty short, it’s reasonable to expect that you’ll actually be there for the liquidity event vs exercising and holding forever.
And when the dollars are pretty small / the intermediate values are pretty low, exercising your options may not actually cost that much. That’s obviously not true today.
Second, the whole pitch of accepting less cash for equity only works if you actually get the equity. It’s premised on the idea that you share in the upside of the company and forgo some short-term guaranteed compensation in exchange. If you put in years of good work and service but are ultimately unable to hold on to the equity, you have basically just worked for discount rates with no upside.
This is not academic.
90-day exercise windows force people to make these super high-stakes decisions quickly and under a lot of pressure. The lack of cashless exercise means that they are often not receiving the equity that they earned but rather paying for it twice, both in the form of deferred/reduced cash compensation and in the actual strike price (three times with AMT).
It’s super common for someone to do years of good work at a company and ultimately walk away with little or none of their equity, usually because exercising was too expensive and the liquidity prospects too uncertain. They’ve already bet with their time/opportunity cost and should retain the option - that’s how they were paid! This is a failure of an outdated comp system compounded by long and overfunded private hold periods, not a clever strategy to minimize option pool outflows.
If someone is vesting equity instead of taking larger cash comp, it’s a fair deal. It is unfair to use legal maneuvering to effectively claw back the hard-earned compensation of ex-employees in good standing.
The beauty of things like vesting schedules and equity cliffs is that it makes it possible to take risks on talent. The challenge of exercise windows and cash-only exercise is that it makes it really hard for talent to take risks on companies (and benefit when they do).
Much like four-year vesting schedules (which are bad and should be longer), these are just conventions that nobody has any real incentive to go against or change up until they really have to. But it winds up being a big gift to the biggest, most late-stage companies that can offer their employees liquidity that everyone else doesn’t. Just lack liquidity, but rather effectively lack equity compensation at all/in many cases
An obviously better solution would be to move to either much longer exercise windows and/or net/cashless exercise for departing employees in good standing. You can reward loyalty by tying the length of the exercise window to the length/years of service at the company and/or gate the option for cashless based on years of service.
If there’s a “get” here it’s that you should be firing people faster if they’re not performing - giving out equity and letting it cliff/vest ~should~ be expensive and high consideration. And of course, the optimal compensation package is a long vesting schedule coupled with a long exercise window. Seems fair!
I was really happy to hear from a couple (Slow) companies that are experimenting with this:
Backplanes does tenure minus one year for exercise windows (so a 4 year employee has 3 years to exercise)
Craftwork has a straight up 10 year exercise window
I’d love to work with any founders on how to rethink the details of their equity compensation plans to make this better.
Grocery Slopulism
Good government should always experiment with ways to enrich the lives of the governed and extend a hand of compassion to those in need. The status quo is not optimal just for being the default.
But the discount grocery stores underway in NY (“Mamdani-Marts” if you want to get partisan and hacky) are not the right way and won’t work, at least not to the extent that their purpose is to help people efficiently. They do/will work great as politics.
Groceries are not expensive because of corporate greed. The gross margins across a bunch of big box grocers are ≈25% (profits are more like 2%). And these are the stores with the most efficient operations/economies of scale and pricing power. It’s inconceivable that a small, city-run grocery store can beat out their buying, supply chain, staffing, etc.
In real terms, food has gotten MUCH cheaper: in 1960 Americans spent 14% of income on groceries. That’s down to 5% today. That is true for all but the left-most tail of the distribution (the poorest people whose incomes have stagnated and spend 70% of income on food) but the stores won’t be targeted enough to do the most good - there is no means testing.
And to the extent that grocery prices are expensive/growing in real terms at all, it’s because of upstream factors like rising labor costs and production disruptions/supply shocks that are scarily becoming more common (Trumprhea, Avian flu, Brazilian coffee drought, etc). That usually spikes prices in a particular category, not across the whole basket.
The municipal grocery stores will focus on staples (bread, milk, pantry items, etc). These are already the lowest margin (sometimes negative margin!) items a grocery store sells. Grocers know you pick based on staples so they drive traffic with staples and drive margins with things like fresh departments, hot food, and snacks (40-60% gross margins) which these stores mostly won’t carry.
So the city is going into a low gross margin business, focusing on ONLY the lowest margin products, and believing it (or its contractors) can operate more efficiently with no pricing power or economies of scale relative to incumbents. The proposed 30% discount is more than the entire gross margin of a normal grocery store before even accounting for taking out the high margin items.
The only way to make the city-back groceries work is to heavily subsidize it and try to cover that up with accounting tricks like stripping out the costs of free rent and tax breaks. The city-backed grocery stores will lose a bunch of money on every sale.
But this is fine! Governments don’t exist to make money. They are not businesses, even when we pay them for services. The post office (USPS) serves a civil purpose (delivering mail to every American); it is not UPS or fedex (making money by delivering packages).
So if we’re comfortable “losing money” to feed the needy (I am!) why would city owned grocers be the right way to do it? Opening a grocery store is not some magic hack to solve poverty or food insecurity; it is just one (bad) option of many (better ones) to invest in social programs and help people.
That being the case, shouldn’t we weigh this against other opportunities to invest the city’s finite resources on the basis of efficacy and outcomes, not just aesthetics and ideology? Why is a grocery store which needs to built and staffed (and lobbied for - expending political capital as well as dollars) the best delivery mechanism to subsidize low income New Yorkers?
It isn’t.
If the goal is to help the most people most efficiently there is no good argument for this leaky pipe when we could just increase food subsidies through existing channels like EBT supplements. Experiments, however bold, need to be honestly and rigorously conducted.
But it’s great politics and good theater to lay every problem at the feet of an omnicause. And giving people money is too invisible and boring to be a signature policy. So this is what we’re getting.
New York shouldn’t descend into slopulism.
I made a financial model
I made a financial model for a portfolio company. Unremarkable on its own. But the “how” was fun and cool, at least to me. Rather than going right into it, I wrote an 800+ word prompt with detailed instructions on the goals, style notes, tab by tab architecture, etc., along with some open questions to home in on before building. All told I got a fairly sophisticated build pretty quickly and with far fewer turns of revisions than it would otherwise take (and yes I spot checked it). Tokenminning!
It felt like the closest I’ll come to experiencing what a good engineer does with AI: working within a domain of excellence (or at least competence) and using AI to operate at a high level with my architecture and “design” choices rather than playacting as more sophisticated than I really am (what it looks like when I “code”).
Annoyingly Claude can’t really do XLookup and instead relies on IndexMatch which is not my preferred formula... C’est la vie.
Elsewhere
General Catalyst is lucky to have Reggie... very sophisticated thinker about media right now.
I just finished Avery Trufelman’s gear podcast, which is ostensibly about the history of the outdoor industry but winds up turning into a history of military dress and culture (as you’ll see - deeply intertwined!). I like Avery and am excited for what she’s working on with Derek Guy. Thanks Zoë for turning me onto this pod.