Startups and employee compensation

Over the last couple of weeks I’ve had several discussions about the technical talent pool in Iceland. Some of them led to discussions about compensation schemes.

One of the topics was employee stock option plans and whether they’re frequent or not. Personally, and anectdotally, I have a feeling that they’re not, but I don’t know.

A little background. Until recently, stock options in Iceland were taxed as income at the date of exercise. That means if an early employee decided to leave a startup and wanted to exercise her options, she would have to pay the tax on gains at the time of exercise. With innovation bill this changed, and Iceland is now one of the most lenient countries in the world when it comes to stock option taxation. Even Silicon Valley has people stuck in “handcuffs” because exercising their rights would create a huge tax charge.

But I have a feeling there is something else at work here as well. Because even though taxation like this could stop people from leaving the company, it doesn’t stop top-tier companies in handing out stock options, and employees expecting them, in Silicon Valley. As an example, Facebook – now one of the world’s most valuable companies – gave stock options to the guy who sprayed graffiti on the office wall.

My hunch is that the following mix is at play (caveat: wild guesses, the point is to start a discussion):

  • Owners / founders prefer not to give options because they don’t want to lose their stake. Icelandic exits are few, far apart, and often modest, which leads to the marginal utility of each percent to be higher. That is, if a company is sold at 100m ISK, each extra percent of ownership for the founder has more value to the founder than if it is sold at 10.000m ISK.
  • Employees aren’t used to options. Iceland is a heavily regulated labor market. Theoretically, people could go through their whole working lives without ever negotiating compensation. A labor union has done it for them at some point. Perks and benefits are often also pre-negotiated (like the May and December “bonuses”, vacation days, and random stuff like eyeglass- and fertilization grants). Basically: Employees don’t ask for options. Which leads to them not getting them.
  • VC’s not focused on this. In fundraising rounds, VC’s can affect the option pool available to employees both in nice and not-nice ways. Not blaming VC’s for anything (remember, I don’t have any real confirmation that this is an issue) but I’d guess that VC’s would want their companies’ employees to have a stake in the upside.
  • Maybe people are using other forms of bonus or compensation schemes tied to outcomes. The Icelandic gray market for startup stocks has probably not been very liquid, so stock options could often end up being just worthless paper. Some founders might be using bonuses or similar instead.

What do you think?

  • Are you a founder / executive? Do you offer options to your employees? Why / Why not?
  • Are you a startup employee? Do you have options? How do you feel about that?
  • Both: would you participate in a study / survey about compensation in startups?

As usual, just shoot me a message and tell me what you think!

Update: I got a lot of responses to the Memo when I initally sent it out, some of which I’ll feature in next week’s Memo – sign up here so you don’t miss it.

This post was originally sent out as part of The Northstack Memo – our weekly newsletter with commentary and updates on the Icelandic startup and tech scene. You can sign up here.