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One and done: Why stock vesting periods are getting smaller

Coinbase and others are doling out one-year stock grants instead of locking in employees for four years.

One and done: Why stock vesting periods are getting smaller

In May, Coinbase announced an overhaul to its compensation strategy, getting rid of salary negotiations and moving to annual stock grants.

Photo: Steven Ferdman/Getty Images

Golden handcuffs have long been part of the ethos of Silicon Valley, incentivizing tech workers to stay at companies for four years in exchange for lucrative stock awards. But now some companies and startups are experimenting with unlocking the golden handcuffs and switching to a one-year grant model instead.

In recent months, companies like Lyft and Stripe have both moved to issuing one-year grants, according to The Information, which first reported the switch. In May, Coinbase followed suit, announcing an overhaul to its compensation strategy, getting rid of salary negotiations and moving to annual grants.

"In a more traditional model, you're giving a large sum grant to people, but you honestly haven't seen their performance in [the] role yet," said L.J. Brock, Coinbase's head of people. "In our model, what we're trying to do is still attract the same talent, but then alter the deployment of the equity to a point after we've seen their impact and we can differentiate based on observed performance."

Normally, tech workers negotiate big salary packages when they join a company, including stock awards that typically vest over a four-year period. For example, $100,000 awarded in shares (in theory, $25,000 a year) would be worth $300,000 if a startup tripled its value in four years — the delta being the upside for taking the risk and building value for the company. By switching to annual grants, employers dole out smaller awards at a time that vest in a year and can keep tighter control of their equity to pay for performance.

Critics argue that the yearly equity awards could mean employees theoretically lose out on reaping a lot of the upside of joining a tech company if the stock price goes up. (This post has a good explainer of the math behind it.)

Coinbase's Brock argues that it's not about limiting an employee's upside, but instead shifting the compensation model so that it reflects an employee's actual impact. Stock compensation is typically tied to historical job experience; employees negotiate with HR for their compensation package based on the work they did at previous companies. Then companies will dole out stock refreshers to strengthen the golden handcuffs for those who are high-performing. But Coinbase's policy wants to flip that on its head, and instead reward employees for their contributions to the company on a yearly basis rather than base the award on the work they did elsewhere.

Companies have an added incentive to switch, too, because they can more closely control their stock-based compensation costs if they're doling it out yearly instead of allocating a four-year grant. For Coinbase, though, Brock said limiting the use of equity wasn't the goal.

"We're not trying to give people less equity, we're just trying to give equity in a way that correlates directly to impact, but still actually uses a very similar total percentage of equity over a period of time," he said.

The annual grants also unlock the golden handcuffs so that people don't feel pressured to stay in a job. Coinbase's move is meant to "purposely challenge the norm that someone might stay in a job for a period longer than they would be engaged, or at their highest productivity," Brock said.

The shake-up in the model hasn't won over everyone as a result. On the anonymous workplace forum Blind, several tech workers have called for a boycott against Stripe, Lyft and Coinbase over the policies, believing they could lower salaries. Lyft and Coinbase are now both publicly-traded companies, while Stripe is so late-stage it almost operates at a quasi-public level. Still, they often compete for a similar talent pool, with tech workers deciding between working at big tech companies versus startups.

"Early-stage startups should not follow their lead," said Sheel Mohnot, founder of Better Tomorrow Ventures. "The advantage of a four-year grant is it keeps people. It gives them equity but also keeps them motivated to work and stay at their company, which is what you want, and as your company becomes more valuable, they have stronger golden handcuffs."

Union Square Ventures partner Fred Wilson agreed it won't work for early-stage companies, in part because of the mechanics of the types of shares most early-stage companies issue. But a Coinbase board member wrote on his blog, AVC, that he thinks the talent market should be allowed to operate freely instead of the golden handcuffs trapping employees who are too afraid to leave money on the table.

"I've never loved that concept," he wrote. "It feels like staying in a bad marriage for the kids."

For Coinbase, the purpose was twofold. Not only did it want to align pay to performance, it also wanted to equalize the prices, given that the volatility of crypto could also wildly fluctuate Coinbase's stock price. As part of the transition, all of the grants will be based on the same day's price so someone isn't getting an award the day of a Bitcoin crash while another employee gets their award a day after blockbuster earnings.

"In a world where you're giving a large lump sum grant that could be a four-year grant, that small change in macro environmental things that we don't really control can really have an outsized impact over a long period of time," Brock said. "In the way we're doing it, we get to normalize everyone to an annual period and hopefully manage that out a little bit more."

The shift also brings up the question of whether golden handcuffs really exist in Silicon Valley at all. Given the competitive market for talent, lots of startup employees are already exiting after a year or two in order to join the next rocket ship and take whatever stock had vested until that point. Coinbase is also going a step further and having vesting start immediately instead of the typical one-year cliff.

"I'm a little bit dubious that there's actually been as much handcuffs on people over a period of time as we thought there were," Brock said. "When you talk to a lot of talent, they were running their own personal ETF strategy, moving from unicorn to unicorn anyway."

General Catalyst talent partner Katie Hughes doesn't think the one-year grants will tremendously shift the hiring landscape in Silicon Valley. Instead, she sees it as more of a validation point that a lot of the late-stage startups are operating more like public companies in switching to a pay-for-performance model.

She thinks it could be "healthy" for companies to take the one-year approach as long as expectations and communications are done well. "I think in many ways it's more healthy, but you have to make sure there's trust [in the] leadership in the organization that this could be done fairly, because if folks feel like it's favoritism or bias or a lack of clear expectations, that's where that can become toxic for your culture," she said.

In Coinbase's world, those employees are free to roam if it's not a fit. It wants to keep the people who want to be there and reward the ones who are doing the best job.

"I hope that they're here for longer than four years, but more importantly that they're here for the right amount of time where the relationship is really working out well, whether that's two years or eight years," Brock said.

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