Let employees sell their equity(kevin.burke.dev)
kevin.burke.dev
Let employees sell their equity
https://kevin.burke.dev/kevin/let-employees-sell-equity/
287 comments
> It’s specifically a high risk, high reward form of compensation.
This really only applies to the first few employees, or maybe the first few hundred if you happen to be at the next Google (so the company has to 1,000x).
After that, it's very unlikely you'd come out ahead even if the company 20x'ed compared to joining FAANG. And the other thing to consider is that FAANG stocks aren't stationary. I know people whose relatively modest AMZN stock offerings have made them millionaires.
The fact of the matter is you don't join a startup to get rich (unless you're an idiot). You join a startup because of the many other benefits it provides - having a bigger impact, working on a smaller team, less bureaucracy, etc.
This really only applies to the first few employees, or maybe the first few hundred if you happen to be at the next Google (so the company has to 1,000x).
After that, it's very unlikely you'd come out ahead even if the company 20x'ed compared to joining FAANG. And the other thing to consider is that FAANG stocks aren't stationary. I know people whose relatively modest AMZN stock offerings have made them millionaires.
The fact of the matter is you don't join a startup to get rich (unless you're an idiot). You join a startup because of the many other benefits it provides - having a bigger impact, working on a smaller team, less bureaucracy, etc.
> You join a startup because of the many other benefits it provides
This. So much this. The exit is the lottery ticket. It'll likely fail.
But the real lure is getting to wear a ton of hats and fly by the seat of your pants. Any engineer in a < 20 person eng team is going to have a ton of exposure to how the business works, to making real-time decisions, and just generally being impactful. _THAT's_ why you go.
(And, that said, it's definitely not for everyone)
This. So much this. The exit is the lottery ticket. It'll likely fail.
But the real lure is getting to wear a ton of hats and fly by the seat of your pants. Any engineer in a < 20 person eng team is going to have a ton of exposure to how the business works, to making real-time decisions, and just generally being impactful. _THAT's_ why you go.
(And, that said, it's definitely not for everyone)
If you value having exposure to how business works, making real-time decisions, and being impactful at > $100k a year you’re a much better employee/coworker than I’ve ever been.
The reality of the situations is working at a startup is a great opportunity to prove oneself and have stories to tell when it comes time for interviews (or drinks with colleagues).
For most employees it gives those of us without the “perfect” education/gpa/etc an opportunity to work ourselves into positions to be making significant income at larger companies either through exit, acquisition or being hired somewhere else.
The reality of the situations is working at a startup is a great opportunity to prove oneself and have stories to tell when it comes time for interviews (or drinks with colleagues).
For most employees it gives those of us without the “perfect” education/gpa/etc an opportunity to work ourselves into positions to be making significant income at larger companies either through exit, acquisition or being hired somewhere else.
I think the deal has changed quite a bit in terms of how long it takes to figure that out.
It used to be that a company's fate was pretty clear within a few years. You joined a startup and it either IPOed in a few years or you guessed your stock was worthless (and that was usually right).
Today some of these "pre-IPO" companies are being kept alive on private capital life support for a decade-plus. Palantir is finally going public after 17 years. 17! Waiting a generation for a liquidity event is ridiculous.
It used to be that a company's fate was pretty clear within a few years. You joined a startup and it either IPOed in a few years or you guessed your stock was worthless (and that was usually right).
Today some of these "pre-IPO" companies are being kept alive on private capital life support for a decade-plus. Palantir is finally going public after 17 years. 17! Waiting a generation for a liquidity event is ridiculous.
Except it's not. It's high risk, low reward for most rank-and-file employees. Unless the company has an insane exit, you'll end up with new car money at best.
It’s not high risk high reward, it’s high risk low reward
Exactly. 8-20x is a massively unlikely outcome so there’s huge risk. What do you get for taking a bet on that risk? Mere parity with annualized first year compensation elsewhere. That is a very low reward for such dramatic risk.
Some people might think "10-20x growth sounds likely for a startup, no?". Frequently, at "Series A" a startup is valued at $20-40M. Getting a 10-20x multiple on that means it should get to $200M-$1B range. Only 5% of all YCombinator companies hit that milestone (~100 companies from ~2,000 deals). Odds for a startups not backed by YC & co, would be lower. So no, not that likely, even if you're as early as day 1 of Series A.
You're comparing seed funding (Y Combinator) and series A funding - most YC companies have yet to raise a series A. The other thing is that most YC companies are young and still have time to grow.
I think you're comparing apples to oranges and trying to make a quantitative conclusion.
I think you're comparing apples to oranges and trying to make a quantitative conclusion.
It's fair to point out that if a company gets to Series A, it is substantially de-risked. IIRC, ~30% of YC startups get to Series A, so this milestone is material.
If a yc co from 5 years ago still hasn’t raised a series A, it’s probably dead. (I would push this to “1 year ago,” but yc invests in long term projects now like biotech.)
Is "risk" even the right thing to call a too-low-to-expect probability of a desirable event? Is playing the lottery a "risk"?
I would saying playing the lottery is most certainly a risk (of the money you spent on tickets).
[deleted]
As the other poster said, this explicitly high risk low reward, at the expected required to break even. Because the range of those options is everything between and include 0x
In order for it to be high risk high reward, the option's paper value should closer to competing packages from public companies. Because in order to take advantage of options, you have to exercise them, and in order to exercise them, you need to do it before they expire, with real cash out of your own pocket.
Given the rate of startup failure, it's a good thing to allow earlier liquidity to those employees, so they don't get trapped into either staying for the 10 yrs till a real liquidity event, or bite the bullet and drop cash (forgoing other investment opportunities) when they decide to leave after some time (like a typical employee). In the end, the equity that group controls is very tiny.
In order for it to be high risk high reward, the option's paper value should closer to competing packages from public companies. Because in order to take advantage of options, you have to exercise them, and in order to exercise them, you need to do it before they expire, with real cash out of your own pocket.
Given the rate of startup failure, it's a good thing to allow earlier liquidity to those employees, so they don't get trapped into either staying for the 10 yrs till a real liquidity event, or bite the bullet and drop cash (forgoing other investment opportunities) when they decide to leave after some time (like a typical employee). In the end, the equity that group controls is very tiny.
> For most of the offers I received, the company valuation would need to increase by 8-20x for the yearly compensation to achieve parity with the first-year offer from a public SF-based company, let alone to exceed it.
Damn, what a terrible deal, particularly for Series-C. As one data point, my company's stock has 5x from my initial grant value, and that has been enough to push my compensation above an equivalent position in Google Sydney, which is probably the highest paying public tech company in the country. That is _if I can sell my equity though_. So yes, please let employees sell their equity. I don't want to have to wait for the dream IPO.
Edit: Actually, given Google's very strong YTD stock gains, maybe it's borderline whether I come out ahead.
Damn, what a terrible deal, particularly for Series-C. As one data point, my company's stock has 5x from my initial grant value, and that has been enough to push my compensation above an equivalent position in Google Sydney, which is probably the highest paying public tech company in the country. That is _if I can sell my equity though_. So yes, please let employees sell their equity. I don't want to have to wait for the dream IPO.
Edit: Actually, given Google's very strong YTD stock gains, maybe it's borderline whether I come out ahead.
There's a time value of money question here as well. At FNG you'd earn the equity over n years. You can use this equity to buy a home, pay for college/debts, or build a diversified portfolio.
Unfortunately this has ultimately led me to conclude that, purely from a monetary standpoint, it is just not worth joining a startup unless you're joining as a C-level employee or director and receiving several % of equity (which again, is going to be rare outside of that level). Otherwise the risk/reward makes little sense.
There are other reasons to join a startup of course-- more autonomy, you believe in the product, etc... but they come at a cost (lower TC and usually much worse WLB).
There are other reasons to join a startup of course-- more autonomy, you believe in the product, etc... but they come at a cost (lower TC and usually much worse WLB).
I think this is true in many ways but lately I've realized there is a sweetspot of career (pre or just barely L5 at FAANG) and startup (founder previously successful, raised well from top funds, early traction) where it can make sense. Just as an example maybe your TC is currently $250k and you get an offer for a startup at $165k salary and 0.3% over 4 years of a series A company valued at $40m. That's a TC of $195k but your salary is still pretty good and if you think the startup is promising, it's basically a way to "invest" your time in it.
The math starts breaking down if your opportunity cost gets high. However out of the people I've known who have worked at startups, a decent chunk of them made much more money than they would have at FAANG (and yes, for some of them, lifechanging amounts as just low/mid level engineers). So it makes sense to treat the equity/options as $0 for financial planning/budgeting purposes for sure, but from an expected value standpoint, I don't think it does.
The math starts breaking down if your opportunity cost gets high. However out of the people I've known who have worked at startups, a decent chunk of them made much more money than they would have at FAANG (and yes, for some of them, lifechanging amounts as just low/mid level engineers). So it makes sense to treat the equity/options as $0 for financial planning/budgeting purposes for sure, but from an expected value standpoint, I don't think it does.
Yeah, I agree that there's definitely a time when it can make sense. From what I can tell it's either at the very beginning or much later in your career though.
In the beginning of your career, a startup that has solid senior eng talent means you get a good mentor and a big playground where you can really "get your feet wet" and learn a lot, fast. Frankly, in a way that I think is really difficult to do at most FAANGs nowadays where a large number of things are abstracted away.
L5 (and equivalents) are terminal levels at most FAANGs and most engineers don't make staff or above. I think it's pretty common for engineers that get the vibe their current team isn't going to let them reach L6+ to bounce to a startup. This is where typical startup offers (even for "staff" level eng) aren't going to include enough equity for it to be worthwhile. Here, the "non-monetary" factors really need to be huge for it to really make sense as a career move.
So I'm really not convinced as your "run of the mill" L5 engineer that going to a startup is ever going to monetarily be the rational choice. You really have to value something else.
Again, the math here is totally different when you're talking L6+ (or effectively performing/hireable at that level)
In the beginning of your career, a startup that has solid senior eng talent means you get a good mentor and a big playground where you can really "get your feet wet" and learn a lot, fast. Frankly, in a way that I think is really difficult to do at most FAANGs nowadays where a large number of things are abstracted away.
L5 (and equivalents) are terminal levels at most FAANGs and most engineers don't make staff or above. I think it's pretty common for engineers that get the vibe their current team isn't going to let them reach L6+ to bounce to a startup. This is where typical startup offers (even for "staff" level eng) aren't going to include enough equity for it to be worthwhile. Here, the "non-monetary" factors really need to be huge for it to really make sense as a career move.
So I'm really not convinced as your "run of the mill" L5 engineer that going to a startup is ever going to monetarily be the rational choice. You really have to value something else.
Again, the math here is totally different when you're talking L6+ (or effectively performing/hireable at that level)
I worked in early stage (seed, pre-seed, and series A mostly) startups for 10+ years before finally realizing that the math isn't even close. Now I work at a FAANG. In your example, $250k is actually pretty low. An engineer at that level can expect to make $350-$400k, and the RSUs are almost as good as cash.
But where it really bites you is, as you mentioned, the opportunity cost. If you're getting 0.3%, you're a fairly early employee. A profitable (for you) acquisition or IPO is 5-10 years away, and that $165k salary is not going to dramatically increase in the meantime. In opportunity cost, you (and I'm being very general here) end up paying $2-5m for the chance of that equity being worth something (consider that your compensation will grow as you become more senior at the Big Tech Company, and that you can invest that money). If you are lucky and have good health, you can make that bet perhaps 4 or 5 times in your life, plus some false starts that fail or become obvious zombies within 3-5 years.
To come out on top, you need one of those companies to really knock it out of the park. 1 in 5 startups do not knock it out of the park. And when they do, it's mostly unrelated to the work you're doing - it has a lot more to do with strategy, market conditions, and luck.
I like the suggestion someone else referenced. You can angel invest your FAANG cash and get a pretty similar risk/reward to being an early engineer, but without leaving all that money on the table and without the added hours and stress of being an early startup engineer.
But where it really bites you is, as you mentioned, the opportunity cost. If you're getting 0.3%, you're a fairly early employee. A profitable (for you) acquisition or IPO is 5-10 years away, and that $165k salary is not going to dramatically increase in the meantime. In opportunity cost, you (and I'm being very general here) end up paying $2-5m for the chance of that equity being worth something (consider that your compensation will grow as you become more senior at the Big Tech Company, and that you can invest that money). If you are lucky and have good health, you can make that bet perhaps 4 or 5 times in your life, plus some false starts that fail or become obvious zombies within 3-5 years.
To come out on top, you need one of those companies to really knock it out of the park. 1 in 5 startups do not knock it out of the park. And when they do, it's mostly unrelated to the work you're doing - it has a lot more to do with strategy, market conditions, and luck.
I like the suggestion someone else referenced. You can angel invest your FAANG cash and get a pretty similar risk/reward to being an early engineer, but without leaving all that money on the table and without the added hours and stress of being an early startup engineer.
I also work at a FAANG, $250k was just my fake number example of L4 averaged across FB/G (where that would be low) and Amazon/Apple (where it would be average-high). Didn’t expect people to get so fixated on that, heh
If you're L5 at FAANG you're going to be making more like $400k, so the math starts to break down pretty quickly.
Yes, that's what I meant by "pre or just barely L5 at FAANG".
Only certain roles. Not everyone is getting that at L5.
That's pretty low for software L5 at FB/GOOG/NFLX. Probably not AMZN.
If you’re going to do that, why not just co-found something? Your position will likely be higher percentage than the amount of de-risking that’s happened in the company you’ll join. “First [non-founder] employee” is a very poor position to take on from an expected-value perspective.
The derisking value is greater than you estimate, imo. Getting from zero to that stage is very difficult for even the most capable and experienced people.
(Also you save several years of getting the company to that stage, which means you'll get many more rolls of the dice for the same number of years)
(Also you save several years of getting the company to that stage, which means you'll get many more rolls of the dice for the same number of years)
Way higher risk and totally different "day to day". You have to really want it, have a good idea and good team lined up, and be ready to sacrifice a lot.
Founder is a very different skills set and risk profile than executive/director/etc. Some people like that and others don't.
I can't speak for the FAANG side, but I imagine based on resources like https://staffeng.com/guides that it can be a huge social/political effort to ascend to staff/principal levels within a FAANG. By comparison, if you're an early employee at a startup, if you're smart and put in the work, if the startup has significant growth, and if you stick around for several years, growing into this sort of role is practically automatic. (I realize that was a lot of "if"s for "automatic".)
By that point, you can go several ways. You may see an exit on the horizon and decide to stick it out. The startup could recognize the market for your skills and give you a salary that's in the ballpark of FAANG, or they can provide other compensating benefits more tailored to your personal desires. You could have experience and network connections to create your own startup. Or you could "exit yourself" to a high-level FAANG role for a huge pay raise, while still holding onto that early startup equity.
Again, I'm talking about joining a startup at early stages here, like first half dozen engineers, first couple dozen employees overall. Of course, there's a lot more risk in that approach, but there are also unique benefits. You'll have a huge hand in helping to shape the culture to be the sort of place you like to work.
That's the real selling point of startups; they'll never compete with FAANGs on a monetary basis, even in rather successful exits. A "generous" 0.5% equity slice of even $1B is $5MM, and it will likely take at least 10 years to get there. Add that to maybe another $2MM in salary and bonuses earned over that time, and you're looking at $7MM in total compensation for 10 years at a successful startup.
If you start at about $250K in total comp at FAANG and progress roughly linearly to $800K by year 10, you're looking at $5.25MM in total comp, without having to bet on a startup having a $1B exit. But then again, it's not guaranteed that you'll climb to those lofty $800K positions at FAANG.
By that point, you can go several ways. You may see an exit on the horizon and decide to stick it out. The startup could recognize the market for your skills and give you a salary that's in the ballpark of FAANG, or they can provide other compensating benefits more tailored to your personal desires. You could have experience and network connections to create your own startup. Or you could "exit yourself" to a high-level FAANG role for a huge pay raise, while still holding onto that early startup equity.
Again, I'm talking about joining a startup at early stages here, like first half dozen engineers, first couple dozen employees overall. Of course, there's a lot more risk in that approach, but there are also unique benefits. You'll have a huge hand in helping to shape the culture to be the sort of place you like to work.
That's the real selling point of startups; they'll never compete with FAANGs on a monetary basis, even in rather successful exits. A "generous" 0.5% equity slice of even $1B is $5MM, and it will likely take at least 10 years to get there. Add that to maybe another $2MM in salary and bonuses earned over that time, and you're looking at $7MM in total compensation for 10 years at a successful startup.
If you start at about $250K in total comp at FAANG and progress roughly linearly to $800K by year 10, you're looking at $5.25MM in total comp, without having to bet on a startup having a $1B exit. But then again, it's not guaranteed that you'll climb to those lofty $800K positions at FAANG.
The real question being is there any way to change this?
Ultimately it comes down to how competitive a startup can be right now.
Venture Capital isn't prepared to stretch valuations further in lower rounds so that they can compensate better in cash.
Sure everyone could also give out better percentages of equity, and VCs can have lower liquidity preferences.
But it really comes down to the tax treatment of common stock options, versus publicly traded common stock restricted units, and ability to compensate employees.
Ultimately it comes down to how competitive a startup can be right now.
Venture Capital isn't prepared to stretch valuations further in lower rounds so that they can compensate better in cash.
Sure everyone could also give out better percentages of equity, and VCs can have lower liquidity preferences.
But it really comes down to the tax treatment of common stock options, versus publicly traded common stock restricted units, and ability to compensate employees.
You don't need a public market to sell your shares. The company itself could buy back the shares, or an other employee could buy them from you.
Actually, I think most C level officers in a startup would be quite happy to buy lower level employees shares.
Of course this would have to be possible considering the shareholder agreement, but I don't see any reason it would not.
Actually, I think most C level officers in a startup would be quite happy to buy lower level employees shares.
Of course this would have to be possible considering the shareholder agreement, but I don't see any reason it would not.
> I think most C level officers in a startup would be quite happy to buy lower level employees shares.
When I left my last job at a series d startup, it was small enough that the CEO had a meeting with people leaving and thanked them for their work, so the CEO knew me by name. I later emailed the CEO about connecting me with buyers. Silence.
I also talked to a few companies who lend you money to buy your shares, and one of the private markets. They at least said there wasn't interest. The company was doing ok and wasn't a sinking ship, but with zero interest from anyone, my options were effectively underwater, and I let them expire.
If you're thinking about exercising, reach out to some of those companies who either lend you money or run a marketplace. They're better at due diligence than you, and if there's no interest, you can assume the options are worthless. Even better, talk to one of these companies before signing at a startup. Tell them you're thinking about signing with X, I might want to sell some shares in a few years, but what's the interest look like now?
When I left my last job at a series d startup, it was small enough that the CEO had a meeting with people leaving and thanked them for their work, so the CEO knew me by name. I later emailed the CEO about connecting me with buyers. Silence.
I also talked to a few companies who lend you money to buy your shares, and one of the private markets. They at least said there wasn't interest. The company was doing ok and wasn't a sinking ship, but with zero interest from anyone, my options were effectively underwater, and I let them expire.
If you're thinking about exercising, reach out to some of those companies who either lend you money or run a marketplace. They're better at due diligence than you, and if there's no interest, you can assume the options are worthless. Even better, talk to one of these companies before signing at a startup. Tell them you're thinking about signing with X, I might want to sell some shares in a few years, but what's the interest look like now?
> CEO about connecting me with buyers. Silence.
Why would the CEO introduce more supply to the market when that would undermine their ability to generate more runway? Every $ an investor spends on existing shares is $ less they can spend on newly crafted ones for raises...
Why would the CEO introduce more supply to the market when that would undermine their ability to generate more runway? Every $ an investor spends on existing shares is $ less they can spend on newly crafted ones for raises...
You're technically right, but there's something to be said for doing right by your employees, and word gets around.
That’s wonderful advice because it alleviates some of the knowledge asymmetry you’re at the pointy end of in that situation.
Stack Overflow prohibited employees from selling shares privately, while also setting an expiry date on the options that has forced some of the company's longest-serving employees to choose between surrendering their equity, or paying a ton to exercise options that they may never be able to sell.
Startup options have been like this forever. Maybe you could theoretically sell, but no one did, and marketplaces like Forge and Equityzen didn't exist.
Startups used to IPO or fail much faster
Yeah, that’s literally where the 4 year cliff came from. If you joined on day 1 and stayed the whole 4 years, you could expect to make something off the equity. Alternatively, the company would go under before year 4, and you’d be free to move on.
The time from founding to IPO is a stat that is widely misrepresented by well-educated people who may not have had the time to check the numbers.
See for instance the graph Company Age (Years) shared by Meritech. There are 8 companies in the cohort that are 20+ years, only 1 (Salesforce) that IPOed with less than 10 years. In fact, from the entire comps (20+ public SaaS), only Salesforce IPOed at year 5.
https://www.meritechcapital.com/public-comparables/enterpris...
See for instance the graph Company Age (Years) shared by Meritech. There are 8 companies in the cohort that are 20+ years, only 1 (Salesforce) that IPOed with less than 10 years. In fact, from the entire comps (20+ public SaaS), only Salesforce IPOed at year 5.
https://www.meritechcapital.com/public-comparables/enterpris...
Looked at the graph you're referring to.
This looks like it's a very narrow set of companies. We should be looking back farther, and wider. Recall that, for example, Netscape IPO'ed after 18 months and Amazon IPO'ed after 3 years. For better or for worse, 90's companies generally IPO'ed much quicker than the SaaS cohorts mentioned in the data you linked to. Back then, 10+ year timespans until IPO were rare.
This looks like it's a very narrow set of companies. We should be looking back farther, and wider. Recall that, for example, Netscape IPO'ed after 18 months and Amazon IPO'ed after 3 years. For better or for worse, 90's companies generally IPO'ed much quicker than the SaaS cohorts mentioned in the data you linked to. Back then, 10+ year timespans until IPO were rare.
The graph shows 50 companies (they don't do a good job at scaling the site, but the data is there).
Netscale and Amazon are only anecdotes and pure exceptions of the dot.com era. The set of companies that went burst during this period because of bad management is composed of at least 15 publicly traded companies. If your compensation included shares of any of these quick IPOs (AOL, Yahoo, pets.com, Global Crossing, etc.) your shares would have ultimately be zero as well (compounding interest is what makes you wealthy with these long-term horizon packages and you wouldn't have sold all your shares at ipo).
Netscale and Amazon are only anecdotes and pure exceptions of the dot.com era. The set of companies that went burst during this period because of bad management is composed of at least 15 publicly traded companies. If your compensation included shares of any of these quick IPOs (AOL, Yahoo, pets.com, Global Crossing, etc.) your shares would have ultimately be zero as well (compounding interest is what makes you wealthy with these long-term horizon packages and you wouldn't have sold all your shares at ipo).
Yes those 50 companies are very recent in SV history. Hence we need to look back farther to see the change, because our standards were set many decades ago.
And whether a company goes bust post IPO isn't really the issue here since liquidity is what we're discussing.
And whether a company goes bust post IPO isn't really the issue here since liquidity is what we're discussing.
Well, that's the point. 2020 is not 1990-2000. Time to IPO has increased dramatically.
Can confirm. Exercised some with a large tax hit, based on some hand wavy assertions about liquidity in the future. Now I'm stuck with it, with no liquidity in sight. And I'm sure it's been significantly diluted by this point.
Live and learn I guess.
Live and learn I guess.
SO also pays pretty shit so that sounds like a super bitter pill to swallow.
If I were a C-level in a startup, I’d shy away from buying lower level employee shares as I wouldn’t want the frustration, jealousy, or other negative feelings if the company achieves a strong IPO or other exit.
If the company fails to achieve a good exit, I don’t need any more exposure. It’s almost a lose-lose.
If the company fails to achieve a good exit, I don’t need any more exposure. It’s almost a lose-lose.
Honestly that's a red flag for the company itself if senior management is not willing to buy more shares whenever possible.
Reducing your exposure in the company is an employee mindset, not an entrepreneur one.
One of the very first question potential clients ask us, is "how much is the management committed?", and by that they mean, how much of their own money did they have invested in the company.
Reducing your exposure in the company is an employee mindset, not an entrepreneur one.
One of the very first question potential clients ask us, is "how much is the management committed?", and by that they mean, how much of their own money did they have invested in the company.
This seems like a really odd take to me. Senior management at a startup with illiquid shares is going to buy those employees' options with what? Do you imagine the CEO digging into the ol' pocket for $200k to cover an early employee's appreciated equity?
Much more of a red flag if the CEO has that kind of cash sitting around from taking something off the table early.
Much more of a red flag if the CEO has that kind of cash sitting around from taking something off the table early.
Senior Management may not have the liquidity.
The institutionals passing on their ROFR would smell bad, but may still happen due to their Capital constraints.
The institutionals passing on their ROFR would smell bad, but may still happen due to their Capital constraints.
A lot of companies want employees to own a part of the pie so they'll feel personally engaged in the future of the company. I don't think it's a red flag at all.
Most companies will set away 5-10% of their stock value to be owned by employees. The only reason they'd buy it back from you is to give it to others.
Most companies will set away 5-10% of their stock value to be owned by employees. The only reason they'd buy it back from you is to give it to others.
On another side of this - I've seen places where employees were essentially locked in - unable to leave, because they couldn't sell any stock, and exercising cost too much, or, more likely, would be a taxable event (and again, they couldn't cover taxes by selling so it's a huge cash hit to buy the paper)
I get at one level a company might like this - it's a "good" way to keep people from leaving. In reality, this means you have people that really want to leave and can't - which does not make for a happy, good employee.
Let them sell at least a portion of the stock back to the company. Or sell some during a funding round, at least enough to cover their taxes so they can take their stock and go.
I get at one level a company might like this - it's a "good" way to keep people from leaving. In reality, this means you have people that really want to leave and can't - which does not make for a happy, good employee.
Let them sell at least a portion of the stock back to the company. Or sell some during a funding round, at least enough to cover their taxes so they can take their stock and go.
Screw equity, pay me in cash and 401k matching.
I’d love to find a company that actually goes above and beyond on 401k and uses it as a piece of salary rather than just a paltry little matching contribution. A company can legally contribute so much more money than an individual can, the overall limit is $57,000 but my individual limit is less than half that.
I’d love to find a company that actually goes above and beyond on 401k and uses it as a piece of salary rather than just a paltry little matching contribution. A company can legally contribute so much more money than an individual can, the overall limit is $57,000 but my individual limit is less than half that.
See if your company permits after-tax contributions and in-service rollovers to Roth 401(k).
https://www.nerdwallet.com/blog/investing/mega-backdoor-roth...
I think you should expect income taxes to go up (likely substantially) over the next 40 years, making Roth attractive to those who will retire with substantial income streams in retirement.
https://www.nerdwallet.com/blog/investing/mega-backdoor-roth...
I think you should expect income taxes to go up (likely substantially) over the next 40 years, making Roth attractive to those who will retire with substantial income streams in retirement.
Yes, seriously!
The IRS rules for 401k plans allow for the employer to put in twice as much as the employee - that's the only way to hit the maximum. But employers didn't seem to get the memo.
My current employer advertised a 2-to-1 401k match, which was a big selling point until I learned that it was capped at $4800/year. And then even that went away because of COVID :(
I've considered going back to consulting a couple of times just to be able to give myself a proper 401k match.
The IRS rules for 401k plans allow for the employer to put in twice as much as the employee - that's the only way to hit the maximum. But employers didn't seem to get the memo.
My current employer advertised a 2-to-1 401k match, which was a big selling point until I learned that it was capped at $4800/year. And then even that went away because of COVID :(
I've considered going back to consulting a couple of times just to be able to give myself a proper 401k match.
What, and eat into the revenue???
Sad truth that kinda hit home a little: the part about not being able to have more than a one percent impact unless you are a c-level.
I think it depends on company stage and size, though. If you're a part of a 5-person shop, then you'd better be able to increase the value of the company by way more than 1%, or the company made a really bad hire.
Even through 50 and maybe even 100 employees, I'd think it's possible to have a meaningful impact on the company without having to destroy your work-life balance. But of course as the company grows, your influence gets smaller and smaller unless you become an executive.
Even through 50 and maybe even 100 employees, I'd think it's possible to have a meaningful impact on the company without having to destroy your work-life balance. But of course as the company grows, your influence gets smaller and smaller unless you become an executive.
It also depends on what you do in the company.
On my last startup, we were about 100 people, and I lead the Data Science team (doing Machine learning models for risk evaluation of loans). One of my more Jr. data scientists (a guy who had came out of the Uni, constructed a variable for one the models that improved the separation a lot. IIRC He single-handedly decrease our default from 20% to something like 17% (with the same acceptance %). That was huge.
On my last startup, we were about 100 people, and I lead the Data Science team (doing Machine learning models for risk evaluation of loans). One of my more Jr. data scientists (a guy who had came out of the Uni, constructed a variable for one the models that improved the separation a lot. IIRC He single-handedly decrease our default from 20% to something like 17% (with the same acceptance %). That was huge.
Tangentially related: I often get super pissed when my employer, or a friend's employer internally announces that employees should suggest ways to improve the bottomline of the company, think outside the box, be proactive etc, etc.
Like, I just work here. I know jacksh-t about how _you_ are running the company, how many stupid internal decisions _you_ are making everyday that's screwing all of us over like slow poison, what financial info _you_ have access to about the company that you would never share with me in a million years.
And then you want me to magically solve your problems, and I'm the one who's not thinking outside the box?
Like, I just work here. I know jacksh-t about how _you_ are running the company, how many stupid internal decisions _you_ are making everyday that's screwing all of us over like slow poison, what financial info _you_ have access to about the company that you would never share with me in a million years.
And then you want me to magically solve your problems, and I'm the one who's not thinking outside the box?
I value my equity grant (in my privately held company) at $0. If it turns out to be worth something someday, great. But until then, I just don't consider it a part of my compensation.
My company has a policy (that HR has made very, very clear can be changed at any time) where for RSUs that are vesting, the company will pay the income taxes for the employee in exchange for withholding/essentially buying back a portion of the vested shares (the exact mechanism by which this is done isn't something I really looked into).
This policy opens up a backdoor way of essentially liquidating my vesting shares: I can simply file a new withholding form just before the vesting date, claim way fewer tax exemptions, and the company will withhold a higher portion of the vesting shares/remit more cash to the tax authorities. Upon filing my tax returns at the end of the year, I can receive the excess cash remitted as a refund.
My company has a policy (that HR has made very, very clear can be changed at any time) where for RSUs that are vesting, the company will pay the income taxes for the employee in exchange for withholding/essentially buying back a portion of the vested shares (the exact mechanism by which this is done isn't something I really looked into).
This policy opens up a backdoor way of essentially liquidating my vesting shares: I can simply file a new withholding form just before the vesting date, claim way fewer tax exemptions, and the company will withhold a higher portion of the vesting shares/remit more cash to the tax authorities. Upon filing my tax returns at the end of the year, I can receive the excess cash remitted as a refund.
I get this trope of valuing equity at $0 because a lot of people have been burned, but it’s bad advice.
The fastest way to wealth is through equity.
Yes, it’s hard to value but that value is not zero. Spending effort trying to value it is worth it, and picking companies where you think the equity will be valuable is worth it.
Also worth considering the character of the founder and the other directors. There’s a lot of ways to get screwed out of equity, working with good people is important.
The fastest way to wealth is through equity.
Yes, it’s hard to value but that value is not zero. Spending effort trying to value it is worth it, and picking companies where you think the equity will be valuable is worth it.
Also worth considering the character of the founder and the other directors. There’s a lot of ways to get screwed out of equity, working with good people is important.
If you can determine company value and future with any reliability, you may as well just take those skills to the public markets and use your extra cash compensation to buy stocks/options.
Far more information is available about those companies than any privately held ones.
Far more information is available about those companies than any privately held ones.
The lack of public information about startups means that the value is uncertain, and that’s a reason for a candidate with no special insight to discount the stock heavily. On the other hand, in the job seeking/networking process you may be able to find out important nonpublic information, which could provide an opportunity to legally “insider trade” by joining a company with a lot of upside that hasn’t yet been reflected in the valuation.
Yeah I do do that, but you have to risk more and I disagree about it being easier to value from the outside.
Public markets for non-dividend paying stocks are also betting more on what other people think the stock price will be rather than the company value itself - it’s a bit of a different game.
Public markets for non-dividend paying stocks are also betting more on what other people think the stock price will be rather than the company value itself - it’s a bit of a different game.
> Yeah I do do that, but you have to risk more and I disagree about it being easier to value from the outside.
I don't know. To me, wasting my time (AKA - my life) seems more risky than anything. On top of that - when you do exercise your options that you earn, you have to pay $$$ for them anyway. (Along with paying AMT - yay!) I'm pissing away a third of my net income on my options + tax right now. Who knows if I'll get jack shit. At least with the stock market I can usually get SOME of my money back unless you're doing something super risky like playing with options.
IMO - playing the market is less risky than playing the startup game. Especially if you're joining early startups or ones that haven't just been straight up rockets.
I don't know. To me, wasting my time (AKA - my life) seems more risky than anything. On top of that - when you do exercise your options that you earn, you have to pay $$$ for them anyway. (Along with paying AMT - yay!) I'm pissing away a third of my net income on my options + tax right now. Who knows if I'll get jack shit. At least with the stock market I can usually get SOME of my money back unless you're doing something super risky like playing with options.
IMO - playing the market is less risky than playing the startup game. Especially if you're joining early startups or ones that haven't just been straight up rockets.
Have you seen the bloodshed in the NASDAQ lately? It's wiped out quite a bit of wealth... although it was fairly overheated and tech was due for a major correction, but damn watching those gains come down was painful. :/
Still not close to the very common experience of having equity you worked years for cash out to nothing!
Or less than nothing: I paid to exercise my options when I left my first start up, and they were eventually worth much less than I'd paid.
We have similar experiences. I might disagree with advice to college grads to not pursue a startup though. It can be more fun, and if you are going to be tempted by it it's good to take the hit in your 20's when (probably) it doesn't matter too much.
> We have similar experiences. I might disagree with advice to college grads to not pursue a startup though. It can be more fun, and if you are going to be tempted by it it's good to take the hit in your 20's when (probably) it doesn't matter too much.
I'd take FAANG over most any startup and would've if they had given me an offer. I speak as someone who has been in 3 startups before they were 30 (seed stage to unicorn). I think startups (startups that have high chance of no exit - <$500 mil valuation, less than 100 employees, <50 engineers) are better suited for people who have significant experience. If you join a startup - it is frequently filled full to the brim of FAANG rejects, young people who don't realize what FAANG offers, and people from different industries trying to break into tech... which means it's almost always the blind leading the blind. You will not learn best practices, you will inevitably find it very hard to switch into a big company, and your resume will look like shit (meaning you will always get subpar offers/interviews) until that startup either becomes a rocket ship OR you join a big co.
Risking your 20's in hopes you get ultra rich is a fools errand when you could reliably get $350K+/yr by 30 when joining FAANG when you're in your early 20's. No startup is going to give you an offer that will even be good anyway! There's no way you're going to join a startup as a entry level engineer and get an option package that will be worth anything.
I'd take FAANG over most any startup and would've if they had given me an offer. I speak as someone who has been in 3 startups before they were 30 (seed stage to unicorn). I think startups (startups that have high chance of no exit - <$500 mil valuation, less than 100 employees, <50 engineers) are better suited for people who have significant experience. If you join a startup - it is frequently filled full to the brim of FAANG rejects, young people who don't realize what FAANG offers, and people from different industries trying to break into tech... which means it's almost always the blind leading the blind. You will not learn best practices, you will inevitably find it very hard to switch into a big company, and your resume will look like shit (meaning you will always get subpar offers/interviews) until that startup either becomes a rocket ship OR you join a big co.
Risking your 20's in hopes you get ultra rich is a fools errand when you could reliably get $350K+/yr by 30 when joining FAANG when you're in your early 20's. No startup is going to give you an offer that will even be good anyway! There's no way you're going to join a startup as a entry level engineer and get an option package that will be worth anything.
Well yeah don’t waste your life, equity should be one consideration among many when choosing a place to work.
I think the advice of valuing it as $0 in most cases makes sense, except if you happen to board the likes of Stripe, Spotify at a time point when they have fairly matured.
Only few companies make it to the much vaunted IPO/acquisition stage. Even in acquisitions, esop holders can end up getting a raw deal.
It is very hard for one to gauge companies which are going to succeed, I joined a newly Series B startup, a leader in its space with huge market opportunity with a very good product that went nowhere. While I love my initial days building stuff there, I do rue the missed opportunity of not just minting FAANG stocks.
Also, even public company equity appreciates. Among the already big FAANG, equity price has increased between 3-6x in the last five years; that is very good considering the amount of equity you get.
Only few companies make it to the much vaunted IPO/acquisition stage. Even in acquisitions, esop holders can end up getting a raw deal.
It is very hard for one to gauge companies which are going to succeed, I joined a newly Series B startup, a leader in its space with huge market opportunity with a very good product that went nowhere. While I love my initial days building stuff there, I do rue the missed opportunity of not just minting FAANG stocks.
Also, even public company equity appreciates. Among the already big FAANG, equity price has increased between 3-6x in the last five years; that is very good considering the amount of equity you get.
It’s not equity though. The investors get to revalue your common stock whenever they feel like it. They have equity. You have a good selection of table scraps.
Except for a very small number of people who essentially exist to make the rest of us think that could be us soon.
Except for a very small number of people who essentially exist to make the rest of us think that could be us soon.
> The fastest way to wealth is through equity.
The fastest way to wealth is actually through winning the lottery. Equity is kind of a lottery, but with you having an influence in the odds.
It's important and could definitely make you rich, but it shouldn't be counted on.
The fastest way to wealth is actually through winning the lottery. Equity is kind of a lottery, but with you having an influence in the odds.
It's important and could definitely make you rich, but it shouldn't be counted on.
Counted on no, but you should try to value it and try to pick winners if you can.
Just pretending it’s $0 is a mistake.
I live in Palo Alto and I’ve seen many people get rich through equity, people who just read HN outside of startups don’t think it’s possible, but it is.
I didn’t realize how possible until I moved out here. FAANG salaries have tempered that a bit since you can just get rich on that income, but even a lot of that comp is equity too (and most of the people I know got most of their wealth from that equity).
I’m just telling people reading this in college to take equity value seriously and not dismiss it as worthless because people on HN say to do that all the time.
Just pretending it’s $0 is a mistake.
I live in Palo Alto and I’ve seen many people get rich through equity, people who just read HN outside of startups don’t think it’s possible, but it is.
I didn’t realize how possible until I moved out here. FAANG salaries have tempered that a bit since you can just get rich on that income, but even a lot of that comp is equity too (and most of the people I know got most of their wealth from that equity).
I’m just telling people reading this in college to take equity value seriously and not dismiss it as worthless because people on HN say to do that all the time.
> I’m just telling people reading this in college to take equity value seriously and not dismiss it as worthless because people on HN say to do that all the time.
The vast majority of those people who you are giving that advice to will be played for suckers. It is good advice only for a tiny fraction that have the capacity, the opportunity, and the resources to negotiate a non-exploitative equity package. It is terrible advice for all the rest.
The vast majority of those people who you are giving that advice to will be played for suckers. It is good advice only for a tiny fraction that have the capacity, the opportunity, and the resources to negotiate a non-exploitative equity package. It is terrible advice for all the rest.
Maybe he only talks to people going to Stanford - he lives in Palo Alto after all. The people going to Stanford tend to have such incredible privilege that they might just be the right people for his advice.
I mean it might be rude to say "if you're able to get hired at top startups of a certain kind the equity might be nonzero" but for the people that applies to, it's not terrible advice. Like, high school kids in general should not assume they can count on a career in the NBA, but if you're a 7' tall human male you have a >10% chance of playing in the NBA in your lifetime, so for them knowing that they have greater odds of success could be valuable information.
> for the people that applies to, it's not terrible advice.
The advice being dispensed is superficially applicable to everybody who gets offered an equity package, and it is terrible advice for most of those people.
It's like giving high school basketball players advice which assumes they'll make it to the NBA.
The advice being dispensed is superficially applicable to everybody who gets offered an equity package, and it is terrible advice for most of those people.
It's like giving high school basketball players advice which assumes they'll make it to the NBA.
This is kind of true. I went to a not-quite Stanford college and knew a good number of people who went to work at startups while I worked at big companies. Some of the smartest people I knew were going to startups. Those people by and large did better than me financially, although there were exceptions. I used to believe that they were making a statistically worse decision but from the data points I have now, I am beginning to doubt it.
I think a lot of it just depends on intangible, hard to define things like how good of a candidate you are (are you going to a startup that competes with top tech companies for talent, or one that isn't) and what type of companies you want to work for (for example, a boring ecommerce or enterprise SAAS company with revenue very early on is probably more likely to pan out than a self driving car startup or anything long-time-prerevenue). So while it might be true that in general startup equity and options are going to end up being worth little to nothing, it might be the case that for you and the companies you're trying to work at, you have much better odds.
I think a lot of it just depends on intangible, hard to define things like how good of a candidate you are (are you going to a startup that competes with top tech companies for talent, or one that isn't) and what type of companies you want to work for (for example, a boring ecommerce or enterprise SAAS company with revenue very early on is probably more likely to pan out than a self driving car startup or anything long-time-prerevenue). So while it might be true that in general startup equity and options are going to end up being worth little to nothing, it might be the case that for you and the companies you're trying to work at, you have much better odds.
Public companies are completely different from private companies though (by definition). In public companies, employees can liquidate vested shares immediately to cover any tax liability.
With RSUs in public companies, it's essentially (if not entirely) impossible to lose money. With RSUs in private companies, it's very much possible to be worse off than if you didn't have those RSUs to start with. Namely, if you pay the taxes out of pocket and the shares end up being worth less than what you paid in taxes (or are even completely worthless).
Options make the math even more complex regarding taxes/potential upside or downside.
With RSUs in public companies, it's essentially (if not entirely) impossible to lose money. With RSUs in private companies, it's very much possible to be worse off than if you didn't have those RSUs to start with. Namely, if you pay the taxes out of pocket and the shares end up being worth less than what you paid in taxes (or are even completely worthless).
Options make the math even more complex regarding taxes/potential upside or downside.
FAANG equity - like RSUs at any other stable public company - is almost as reliable as getting paid in cash. There is some risk, as with all market-based compensation, but the risk of $FB or $APPL going down by a few percent in a bad year is nothing like the risk of a startup being worthless, or the risk that strange fine print or tax trreatment makes your private equity end up literally worthless (or worse) even if the company succeeds.
The most important thing is that, with public equity, you can tell when it's happening. If you work for a public company and the stock price goes down, that's public information, and you can readjust your valuation of your future compensation and react accordingly. If you're getting paid in funny-money private options, that doesn't work for two reasons. First, the value of your future compensation can change without your knowledge (e.g., with the introduction of preferred investor classes). Second, the value of past compensation can effectively change post-facto if you're forced to hold options for a significant amount of time.
The most important thing is that, with public equity, you can tell when it's happening. If you work for a public company and the stock price goes down, that's public information, and you can readjust your valuation of your future compensation and react accordingly. If you're getting paid in funny-money private options, that doesn't work for two reasons. First, the value of your future compensation can change without your knowledge (e.g., with the introduction of preferred investor classes). Second, the value of past compensation can effectively change post-facto if you're forced to hold options for a significant amount of time.
Most companies don't have a liquidity event therefore most equity isn't really worth anything. Yes, in the Valley many companies have IPOd or been bought out but many more haven't and never will.
I think there's a difference between thinking options are worth zero, and not buying them or going to companies you expect to be worthless.
I doubt most people go to a company they expect will literally have no value. If you're going to a private company it's either because you think it will be valuable, you think the work is interesting which could possibly make it valuable, you get an insane salary offer or because you can't find another job.
In basically every case, you understand the company has possible value, which could translate into increased wealth.
The idea is simply that its not worth anything until it is. Once you're in the company and can feel out the actual trajectory and faith in the business, you can decide if you want to buy the shares.
Nearly everyone I've worked with across multiple companies have purchased up most or all their shares, even when they expressed how little faith they had in the company. If you're doing that, what does it matter if you sat down and crunched the numbers? You still got the lottery ticket.
I doubt most people go to a company they expect will literally have no value. If you're going to a private company it's either because you think it will be valuable, you think the work is interesting which could possibly make it valuable, you get an insane salary offer or because you can't find another job.
In basically every case, you understand the company has possible value, which could translate into increased wealth.
The idea is simply that its not worth anything until it is. Once you're in the company and can feel out the actual trajectory and faith in the business, you can decide if you want to buy the shares.
Nearly everyone I've worked with across multiple companies have purchased up most or all their shares, even when they expressed how little faith they had in the company. If you're doing that, what does it matter if you sat down and crunched the numbers? You still got the lottery ticket.
FAANG income certainly isn't "rich". Maybe you recognize this and I'm just picking semantics, but I've noticed this annoying trend of FAANG engineers who crack $1m at 29 acting like they are a member of the rich when their just a person with a great job. To get rich comes from investments over time, or an impressive startup exit, or starting a business, or getting lucky. Nobody gets rich on the standard FAANG salary until they've been there for 20 years.
You and I have very different perspectives on what rich is. If you're 29 years old with >$1M in personal wealth, you're rich. That net worth would put you firmly in the top 1% of net worth at that age.
https://dqydj.com/net-worth-by-age-calculator-united-states/
https://dqydj.com/net-worth-by-age-calculator-united-states/
Apparently so. I don't disagree that you'd be well-off, but you couldn't never work again without a very frugal life, you couldn't vacation every month, you're entire subsistence is still tied to your job you must work to survive, and so on. Certainly in a great position, but being rich is very different
It sounds like your definition of "rich" is actually "independently wealthy". To me those are different. You can still have a job (and need a job to sustain your lifestyle) and still be rich.
Living in a 5000 sq ft luxury apartment in Manhattan makes you rich whether you rent it, own it and regardless if you need to work to afford it.
Living in a 5000 sq ft luxury apartment in Manhattan makes you rich whether you rent it, own it and regardless if you need to work to afford it.
What the flying fuck. I've never had more than $10k in my life, and that's a recent accomplishment -- most of my life was a single missed-paycheck away from financial insolvency, and for a brief period, I was actually homeless.
For 14 months I lived on a $2,250/mo salary in downtown Boulder, CO. That meant trying to scrounge free meals from meetups or wherever else would feed me.
The idea of having a million dollars, or even making 200-300k a year is so insane to me. If that isn't rich maybe I missed a memo somewhere.
For 14 months I lived on a $2,250/mo salary in downtown Boulder, CO. That meant trying to scrounge free meals from meetups or wherever else would feed me.
The idea of having a million dollars, or even making 200-300k a year is so insane to me. If that isn't rich maybe I missed a memo somewhere.
virtually no one feels rich. for the simple fact that you achieving it also normalizes it in your own brain. and the more wealthy you are the more wealthy(-er than you) people you tend to know, so your position relative to your peer group stays largely the same.
i'm not arguing these people aren't rich. just trying to help illuminate why they never feel rich (and therefore don't seem to acknowledge that very obvious fact about themselves).
i'm not arguing these people aren't rich. just trying to help illuminate why they never feel rich (and therefore don't seem to acknowledge that very obvious fact about themselves).
It's pretty obvious. If you don't know many people who are less wealthy than you then you have no frame of reference to consider yourself wealthy.
That's only a small part of it. Most of the people are the richest in their extended family, and tons of friends from HS, college, etc. so they do know people who are not in their income bracket.
I'd say it's more related to the imposter syndrome. IE if I got here and I'm just ok, clearly this wasn't too hard a level to reach.
That and "well I used to work with so-and-so, and we're about equal, but they're making $800k while I'm stuck making $400k, so I'm clearly failing". Or even $2M vs $10M, etc.
Again, it's crazy, because both people are clearly actually "rich", I'm just trying to explain the mechanics of why so few actually feel that way.
I'd say it's more related to the imposter syndrome. IE if I got here and I'm just ok, clearly this wasn't too hard a level to reach.
That and "well I used to work with so-and-so, and we're about equal, but they're making $800k while I'm stuck making $400k, so I'm clearly failing". Or even $2M vs $10M, etc.
Again, it's crazy, because both people are clearly actually "rich", I'm just trying to explain the mechanics of why so few actually feel that way.
Since it's so similar in expected behavior to a lottery ticket, I'd value it like a lottery ticket. Mega Millions costs $2 per ticket, so I'd value an equity package at a startup at $2 instead of $0.
The actual fastest way to wealth is to be born into it, though really that's just a different kind of lottery.
Really that's just another kind of material determinism? I don't see the lottery aspect in your family line. In your individual makeup of genes maybe.
If you weren't born to one set of parents, you don't randomly start in a different set of parents, as far as I can see.
So the fastest way to wealth is to be the result of a long family tree spanning back to the prototypical creatures?
If you weren't born to one set of parents, you don't randomly start in a different set of parents, as far as I can see.
So the fastest way to wealth is to be the result of a long family tree spanning back to the prototypical creatures?
in other words, just another part of your ultra-high risk investment portfolio.
or as I call it my only investment portfolio...
or as I call it my only investment portfolio...
I agree and on a related note, I often see startup employees valuing their equity at either $0 or #retirementmoney. In reality the expected value is pretty much always in between those two, and really warrants critical attention.
There's a takeaway for hiring managers in this as well – you need to do a lot of education and trust-building to hire well if equity is a meaningful part of the compensation story (and you need to really show integrity in the long run because people talk).
There's a takeaway for hiring managers in this as well – you need to do a lot of education and trust-building to hire well if equity is a meaningful part of the compensation story (and you need to really show integrity in the long run because people talk).
> The fastest way to wealth is through equity.
That's a reason to value illiquid "equity" at $0.
Because with a higher cash salary one can invest in "diversified" liquid equity that has a much higher future value than the uncertainties in many startups.
That's a reason to value illiquid "equity" at $0.
Because with a higher cash salary one can invest in "diversified" liquid equity that has a much higher future value than the uncertainties in many startups.
Yeah that’s some risk to price but it isn’t worth $0.
Your $100k in diversified market returns (at best) won’t be much compared to a couple million in illiquid equity that becomes valuable.
Your $100k in diversified market returns (at best) won’t be much compared to a couple million in illiquid equity that becomes valuable.
Who are you assuming is getting multi million dollar equity packages? To get that you either need to join really early stage or be relatively senior, the first is a lottery ticket, and the second is making your second million, which is much, much easier.
The growth is what makes it worth millions.
If you were at Amazon, Facebook, or Google for part of the last ten years and held your equity comp you probably did very well even though the grants at the time were “only” 100-150k or something.
I started working in 2012, people I know that joined snap chat around then and the next year or so after made seven figures (some eight) easily in that IPO.
If you were at Amazon, Facebook, or Google for part of the last ten years and held your equity comp you probably did very well even though the grants at the time were “only” 100-150k or something.
I started working in 2012, people I know that joined snap chat around then and the next year or so after made seven figures (some eight) easily in that IPO.
I can't tell what your point is. A Google new grad employee who joined Google in 2012 would also have a decent chance of being a liquid millionare in 2017, and it was never illiquid).
And snapchat is an extreme outlier. Even among unicorns it had a high valuation. There are currently 3 us software companies with similar pre ipo valuations: stripe, airbnb and palantir.
Which is to say, if your company is the next snapchat, you're break even. Anything less, and a large tech company is a better investment. Betting that your company is the next snapchat, even if it's already a unicorn, is probably a losing proposition, and it's almost certainly losing of you're not already a unicorn.
And snapchat is an extreme outlier. Even among unicorns it had a high valuation. There are currently 3 us software companies with similar pre ipo valuations: stripe, airbnb and palantir.
Which is to say, if your company is the next snapchat, you're break even. Anything less, and a large tech company is a better investment. Betting that your company is the next snapchat, even if it's already a unicorn, is probably a losing proposition, and it's almost certainly losing of you're not already a unicorn.
I’m not really drawing a big distinction between public and private equity.
My entire point is that equity should be valued at something above $0 even though it’s hard to do so, it’s worth the effort.
Stripe, Airbnb, Snap - if you’re in the bay it’s obvious what the successful companies are and you meet people working for them.
I’m just pushing back on the “treat all equity as $0” advice.
Private company equity has risks, but huge reward and that payoff is real and it happens.
My entire point is that equity should be valued at something above $0 even though it’s hard to do so, it’s worth the effort.
Stripe, Airbnb, Snap - if you’re in the bay it’s obvious what the successful companies are and you meet people working for them.
I’m just pushing back on the “treat all equity as $0” advice.
Private company equity has risks, but huge reward and that payoff is real and it happens.
Keep in mind that if you joined airbnb, or palantir in 2012, instead of snap (and both were hot companies) you'd be stuck at the company even now, since if you leave you'd forfeit your options unless you were independently wealthy.
That's 8 years forced to stay at the same employer or your options are worth nothing.
And again, those companies were already unicorns. And the stock will still be worth $0 to many. Now imagine a non-unicorn where you don't even know if you'll go public eventually.
That's 8 years forced to stay at the same employer or your options are worth nothing.
And again, those companies were already unicorns. And the stock will still be worth $0 to many. Now imagine a non-unicorn where you don't even know if you'll go public eventually.
You can save money and exercise your options.
There are also companies that will help you exercise your options for a cut (you don't need to be independently wealthy).
I don't disagree though - this is part of the risk to factor into the price. I'm not saying it's easy I'm saying it's worth thinking about and not reflexively assigning a value of $0.
It should be a non-zero factor in evaluating a comp package and evaluating the company.
There are also companies that will help you exercise your options for a cut (you don't need to be independently wealthy).
I don't disagree though - this is part of the risk to factor into the price. I'm not saying it's easy I'm saying it's worth thinking about and not reflexively assigning a value of $0.
It should be a non-zero factor in evaluating a comp package and evaluating the company.
> You can save money and exercise your options.
Can you though? Your thesis has been that the majority of your income will be due to equity + appreciation. If you are able to save half your after tax income, which is feasible but requires some frugality, you can't actually afford to exercise + taxes on a stock grant whose EV is equal to your base salary.
Many people complain about how difficult affording a house is in the bay. The tax cost on an equity event is larger than the down payment on an equivalently valued house, and you're casually suggesting to save for it, on a much lower income (since you can't use your equity).
> There are also companies that will help you exercise your options for a cut
As far as I can tell, the terms of these deals mean that unless the price of the stock increases well beyond the strike price when you exercise, you'll get nothing, and even then you're going to end up losing 50%+ of the returns.
I'm not saying that you can't ever come out ahead, obviously some people do. But if you sample startups at random, the median stock value is zero. If you sample private unicorns, the median payout is mich worse than amazon or microsoft.
Can you though? Your thesis has been that the majority of your income will be due to equity + appreciation. If you are able to save half your after tax income, which is feasible but requires some frugality, you can't actually afford to exercise + taxes on a stock grant whose EV is equal to your base salary.
Many people complain about how difficult affording a house is in the bay. The tax cost on an equity event is larger than the down payment on an equivalently valued house, and you're casually suggesting to save for it, on a much lower income (since you can't use your equity).
> There are also companies that will help you exercise your options for a cut
As far as I can tell, the terms of these deals mean that unless the price of the stock increases well beyond the strike price when you exercise, you'll get nothing, and even then you're going to end up losing 50%+ of the returns.
I'm not saying that you can't ever come out ahead, obviously some people do. But if you sample startups at random, the median stock value is zero. If you sample private unicorns, the median payout is mich worse than amazon or microsoft.
Startup incomes are still 100-180k in the bay area, this is enough to save up (if you're single out of college, no dependents).
> Many people complain about how difficult affording a house is in the bay.
Yeah bay area housing is stupid, most of us live with a few roommates in a shared house and rent. Most of us are not buying housing here.
> if you sample startups at random, the median stock value is zero. If you sample private unicorns, the median payout is mich worse than amazon or microsoft.
Sure, I was including Amazon/Microsoft in equity comp considerations and if you have a strong offer from them it's harder choice to make. In most cases FAANG (FAANMG?) is the safer option, but you're still valuing the equity it's just a lot lower risk than private company equity.
The initial point was that equity should be considered worthless. All I'm saying is that it's more complicated than that. I don't know why this is such a controversial position?
Is there risk? Yes. Does that mean you should simplify this to $0 equity value? No.
We should accept the complexity and factor that into the decision.
> Many people complain about how difficult affording a house is in the bay.
Yeah bay area housing is stupid, most of us live with a few roommates in a shared house and rent. Most of us are not buying housing here.
> if you sample startups at random, the median stock value is zero. If you sample private unicorns, the median payout is mich worse than amazon or microsoft.
Sure, I was including Amazon/Microsoft in equity comp considerations and if you have a strong offer from them it's harder choice to make. In most cases FAANG (FAANMG?) is the safer option, but you're still valuing the equity it's just a lot lower risk than private company equity.
The initial point was that equity should be considered worthless. All I'm saying is that it's more complicated than that. I don't know why this is such a controversial position?
Is there risk? Yes. Does that mean you should simplify this to $0 equity value? No.
We should accept the complexity and factor that into the decision.
And if you worked at Apple or Amazon in 2012 and still are working there today & holding that stock, your stock went up almost 20x - an original $100k grant would be worth about $2m, and that's not even counting any of the follow on refresh stock grants.
Even having joined a company like Snap then would've been a raw deal compared to working for the tech giants.
Even having joined a company like Snap then would've been a raw deal compared to working for the tech giants.
Diversity dilutes your return as it regresses to the mean
Even amongst a bunch of technical people. It’s hard to get them to make sensible financial decisions.
At my previous company I made a mint from the shares awarded as part of compensation. By selling and reinvesting. But some people actually lost money.
At my previous company I made a mint from the shares awarded as part of compensation. By selling and reinvesting. But some people actually lost money.
> The fastest way to wealth is through equity.
The fastest way to wealth might be through equity.
Also equity in a startup is a far different proposition compared with equity in a profitable company.
The fastest way to wealth might be through equity.
Also equity in a startup is a far different proposition compared with equity in a profitable company.
"The fastest way to wealth is through equity."
"The fastest way to wealth is a lottery ticket"
It's reasonable to indicate big wealth only comes with the leverage of equity, but it has to be put in the context of the risks involved, and especially the opportunity cost of forgoing a lower salary otherwise.
"The fastest way to wealth is a lottery ticket"
It's reasonable to indicate big wealth only comes with the leverage of equity, but it has to be put in the context of the risks involved, and especially the opportunity cost of forgoing a lower salary otherwise.
Thank you. I hate that trope because, yeah technically it's the right advice for most people, since it applies to 99% of companies. But there's that 1% that raised seed or series A from a16z or Founders Fund where your equity has a relatively high chance of a decent payout
> I hate that trope because, yeah technically it's the right advice for most people, since it applies to 99% of companies. But there's that 1% that raised seed or series A from a16z or Founders Fund where your equity has a relatively high chance of a decent payout
Then it's _excellent_ advice.
In Canada we have endless amounts of kids who bust their butts to get themselves into the NHL, and only a fraction of a fraction make it, and only a fraction of _those_ get a jaw-dropping contract. From your own admission, and from what seems to be generally accepted, this is also the case for winning the equity lottery in Tech Startups.
For those trying to make a living, buy a house, and have a family then valuing your equity at $0 is the only rational option.
Then it's _excellent_ advice.
In Canada we have endless amounts of kids who bust their butts to get themselves into the NHL, and only a fraction of a fraction make it, and only a fraction of _those_ get a jaw-dropping contract. From your own admission, and from what seems to be generally accepted, this is also the case for winning the equity lottery in Tech Startups.
For those trying to make a living, buy a house, and have a family then valuing your equity at $0 is the only rational option.
Canada taxes capital gains at 50% anyway so it’s probably not a great idea to value it as much there.
That said, if you’re comparing FAANG and startups you’re already pretty selected which is not true of all the kids trying for NHL.
That said, if you’re comparing FAANG and startups you’re already pretty selected which is not true of all the kids trying for NHL.
>>Canada taxes capital gains at 50% anyway so it’s probably not a great idea to value it as much there.
Can you elaborate on this a bit more? I thought that Canada only taxes half of the capital gains which is then added to your taxable income.[1] So the amount of tax paid on the capital gains might be 50% or more but only if your taxable income for that year places you in the highest tax bracket.
In the US, you're generally on the hook to pay tax on 100% of any capital gains, compared to Canada where you're only paying tax on half of any capital gains.
[1] https://turbotax.intuit.ca/tips/capital-gains-tax-in-ontario...
Can you elaborate on this a bit more? I thought that Canada only taxes half of the capital gains which is then added to your taxable income.[1] So the amount of tax paid on the capital gains might be 50% or more but only if your taxable income for that year places you in the highest tax bracket.
In the US, you're generally on the hook to pay tax on 100% of any capital gains, compared to Canada where you're only paying tax on half of any capital gains.
[1] https://turbotax.intuit.ca/tips/capital-gains-tax-in-ontario...
Ah interesting - I’m not Canadian so don’t know much about their tax law.
You’re probably right and I had a confused misunderstanding. I only looked briefly to see what it’d be like if the election goes south and things get worse in the US.
US long term capital gains is only 15% up to 400k and 20% after that which is really good.
[Edit] Reading that turbo tax article it seems like only 50% of the gain is taxed at all and of that gain the maximum tax is under 15%? Is this just Ontario tax and there’s more federal or something else?
That seems really good?
You’re probably right and I had a confused misunderstanding. I only looked briefly to see what it’d be like if the election goes south and things get worse in the US.
US long term capital gains is only 15% up to 400k and 20% after that which is really good.
[Edit] Reading that turbo tax article it seems like only 50% of the gain is taxed at all and of that gain the maximum tax is under 15%? Is this just Ontario tax and there’s more federal or something else?
That seems really good?
Looks like that's in addition to federal income tax: https://www.canada.ca/en/revenue-agency/services/tax/individ...
So I think most of the time it's probably a lot worse than the long term gains tax in the US.
So I think most of the time it's probably a lot worse than the long term gains tax in the US.
I'm pretty sure you misunderstood. I believe canada taxes half your capital gains as regular income. Frankly, seeing the number of wealthy folks in the US paying lower tax rates than the plumber that fixes their toilet, maybe it's a better system.
Yep I was wrong (and this is good to know!).
It looks like it's a lot better than I thought, but probably still worse compared to US long term capital gains tax in most cases.
Thanks for pointing this out.
(I think tax incentives for growth are good for society, but that's somewhat of a tangential discussion).
It looks like it's a lot better than I thought, but probably still worse compared to US long term capital gains tax in most cases.
Thanks for pointing this out.
(I think tax incentives for growth are good for society, but that's somewhat of a tangential discussion).
Well, no. Most of those companies have special terms which end up screwing most employees out of any upside. That goes anything from shares people can't exercise without a 10-year commitment to tiers of options, to simply offering 0.0000001% of the company, to many others.
Equity is worth $0 unless the company is fully transparent on this stuff. I've never run into one which was.
Equity is worth $0 unless the company is fully transparent on this stuff. I've never run into one which was.
Even that 'relatively high chance' is really low. Even companies funded by the top VCs only have a success rate of about 7.5% (success means generating ANY positive return).
This is according to Marc Andreessen himself: https://youtu.be/JYYsXzt1VDc
This is according to Marc Andreessen himself: https://youtu.be/JYYsXzt1VDc
To add to that, even companies that "make it" like Skype can still royally screw their employees upon being acquired.
[deleted]
I’ve been working for 25 years. I could wallpaper my home office with all my worthless options. I’ve never seen a penny and I never will.
It’s just not going to happen.
It’s just not going to happen.
Absolutely agree. It’s a numbers game but the first 9 may not hit but the 10th makes you wealthy. So if you’re on your 6th then you will feel the equity value is worth $0
> This policy opens up a backdoor way of essentially liquidating my vesting shares: I can simply file a new withholding form just before the vesting date, claim way fewer tax exemptions, and the company will withhold a higher portion of the vesting shares/remit more cash to the tax authorities.
Does that actually work? (As in, have you tried it?) My understanding (and how my company does it) is that they withhold the statutory minimums and don't take into account my personal tax situation at all. I didn't think that there was wiggle room for companies to do it differently, but perhaps I'm wrong about that.
(Then again, my company is public, and the RSUs sold for tax withholding are sold on the open market, so I guess it is indeed a different situation, as it sounds like your company is private and the company itself buys the tax-withholding RSUs back?)
Does that actually work? (As in, have you tried it?) My understanding (and how my company does it) is that they withhold the statutory minimums and don't take into account my personal tax situation at all. I didn't think that there was wiggle room for companies to do it differently, but perhaps I'm wrong about that.
(Then again, my company is public, and the RSUs sold for tax withholding are sold on the open market, so I guess it is indeed a different situation, as it sounds like your company is private and the company itself buys the tax-withholding RSUs back?)
Equity is a much better proposition than $0 if you’re willing to walk away from bad opportunities (i.e. anything flatter than a rocketship).
More information here: https://www.benkuhn.net/optopt/
More information here: https://www.benkuhn.net/optopt/
So, when your RSUs vest, you have realized wage income in the amount of the vest. As a result, the company needs to send withholding in to whatever jurisdictions tax your income. There's two questions then: how much, and where do they get the money.
For US federal income tax, withholding from equity is generally treated with the supplemental (bonus) withholding rates; there's an easy way and a hard way, the easy way is 22% for the first $1 million in supplemental wages per calendar year, and 37% after that. The hard way is mush it in with your regular payroll withholdings (until you reach $1M of supplemental wages, and then 37%).
For california, the employer can do the easy way and supplimental wages from equity are fixed at 10.23% or they can do the hard way like in federal.
Chances are, payroll is going to use the easy way, and your withholding changes aren't going to matter for supplimental wages.
Part two is that they have to get the money to pay the withholding from somewhere. Most companies will do net share withholding, so you just get about 2/3rds of the shares (assuming california), cause the other 1/3rd was bought by the company. But, if there's a market, they could do an automatic sale for withholding. Or they could ask you to pay the withholding, or they could give you a cash bonus, and take it for withholding (but they have to gross-up that bonus, because it also needs to have withholding paid).
For US federal income tax, withholding from equity is generally treated with the supplemental (bonus) withholding rates; there's an easy way and a hard way, the easy way is 22% for the first $1 million in supplemental wages per calendar year, and 37% after that. The hard way is mush it in with your regular payroll withholdings (until you reach $1M of supplemental wages, and then 37%).
For california, the employer can do the easy way and supplimental wages from equity are fixed at 10.23% or they can do the hard way like in federal.
Chances are, payroll is going to use the easy way, and your withholding changes aren't going to matter for supplimental wages.
Part two is that they have to get the money to pay the withholding from somewhere. Most companies will do net share withholding, so you just get about 2/3rds of the shares (assuming california), cause the other 1/3rd was bought by the company. But, if there's a market, they could do an automatic sale for withholding. Or they could ask you to pay the withholding, or they could give you a cash bonus, and take it for withholding (but they have to gross-up that bonus, because it also needs to have withholding paid).
> If it turns out to be worth something someday, great. But until then, I just don't consider it a part of my compensation.
Because it's not compensation, per se, it's the promise of potential future compensation.
More than likely between now and then there will be numerous financial events that reduce its value further and eventual deplete it to as minimal a possible compensation it could be in any realistic trigger event.
Equity is worth $0 until it's not. It is never worth more than $0 until someone is willing to hand you more than $0 for it.
Because it's not compensation, per se, it's the promise of potential future compensation.
More than likely between now and then there will be numerous financial events that reduce its value further and eventual deplete it to as minimal a possible compensation it could be in any realistic trigger event.
Equity is worth $0 until it's not. It is never worth more than $0 until someone is willing to hand you more than $0 for it.
Equity at a startup is essentially worthless. Exercise prices, taxes, 90 day max exercise windows, asymetric price information, preference stacks, all contribute to a lack of clarity.
Of course eveyone thinks their company will be worth a cool billion but thats rarely the case. Plus founders and investors are incentivized for your options to expire; they go back into the pool.
Startup compensation needs a refactor pretty badly.
Of course eveyone thinks their company will be worth a cool billion but thats rarely the case. Plus founders and investors are incentivized for your options to expire; they go back into the pool.
Startup compensation needs a refactor pretty badly.
You forgot venture debt, warrants, & management carve-outs during M&A.
As an individual negotiating compensation with a company, you are at a structural disadvantage: the company does this all the time, and (lacking a union to negotiate on your behalf) you do this rarely.
Unless you are an elite negotiator (and if you can hire a lawyer you are elite already), the complexity of any compensation package works in the company's favor.
For almost all of us, equity is a vehicle to get screwed over. Articles like this one only to serve to perpetuate startup mythology and inflate false hopes.
Theoretically, a startup that actually wants to compete on compensation by sharing in good fortune could craft an equity package which is simple and standardized enough to be comprehensible by ordinary humans. But so long as employees keep snapping at the vaporous bait of deceptive equity packages, there's not much incentive to do so.
Unless you are an elite negotiator (and if you can hire a lawyer you are elite already), the complexity of any compensation package works in the company's favor.
For almost all of us, equity is a vehicle to get screwed over. Articles like this one only to serve to perpetuate startup mythology and inflate false hopes.
Theoretically, a startup that actually wants to compete on compensation by sharing in good fortune could craft an equity package which is simple and standardized enough to be comprehensible by ordinary humans. But so long as employees keep snapping at the vaporous bait of deceptive equity packages, there's not much incentive to do so.
"Theoretically, a startup that actually wants to compete on compensation by sharing in good fortune could craft an equity package which is simple and standardized enough to be comprehensible by ordinary humans."
One time, I received an offer from a small, struggling startup. But because it's equity structure was so simple (struggling has a way of simplifying things), I counter-proposed taking less salary for more equity, and they agreed.
With the typical equity opacity removed, I viewed the trade-off as more of a bet on myself: the impact that I could make and if I assessed the company correctly.
The payoff when we were acquired was just the equivalent of a nice extra bonus. The real satisfaction was having more skin in the game, having the expected impact, being correct on the assessment, etc.
But it wouldn't have happened if I felt lost in the complex equity structure and confidentiality barriers that seem to be present in many startups.
One time, I received an offer from a small, struggling startup. But because it's equity structure was so simple (struggling has a way of simplifying things), I counter-proposed taking less salary for more equity, and they agreed.
With the typical equity opacity removed, I viewed the trade-off as more of a bet on myself: the impact that I could make and if I assessed the company correctly.
The payoff when we were acquired was just the equivalent of a nice extra bonus. The real satisfaction was having more skin in the game, having the expected impact, being correct on the assessment, etc.
But it wouldn't have happened if I felt lost in the complex equity structure and confidentiality barriers that seem to be present in many startups.
What made the offer simple compared to typical modern SV startup offers?
Just one class of common shares for all the investor groups. New money didn't appear to be coming in. We were either going to go poof, or we were going to get sold.
I'm a sucker for turnaround plays because a lot of BS gets beaten out of the organization, and they're more receptive to change.
I'm a sucker for turnaround plays because a lot of BS gets beaten out of the organization, and they're more receptive to change.
Having done this also, one point of care to take: Make sure your salary is right-sized post-acquisition. The buying company will likely have operating capital requirements based on existing PNL. Assuming you stay on, which key employees will likely have to, your low-salary position could be directly imported into the new position at the new company.
It sounds like you actually didn't care about the money or risk/reward, yes? Don't you think it's a lot easier to meet your own expectations under such conditions, as compared to the calculus of startup-joiners hoping for a healthy financial outcome?
> an equity package which is simple and standardized enough to be comprehensible by ordinary humans
> deceptive equity packages
What do you mean by "deceptive"? The standard for pre-IPO seems to me to be N number of options, at a particular strike price, 10-year expiration (or 90 days if you leave the company). That doesn't seem all that complicated to me, or deceptive.
What can get deceptive is if the company is trying to lowball you on salary and tell you that your equity will become worth millions some day as if it was a sure thing, which is of course a scummy practice. And the whole expiration after 90 days thing is garbage. But deceptive? Complicated? I don't think it is.
I really don't see what's not simple or standardized about what I described above. Granted, the last time I joined a startup (which is not a startup anymore) was 9 years ago, but I haven't read anything to suggest that this has changed drastically.
> deceptive equity packages
What do you mean by "deceptive"? The standard for pre-IPO seems to me to be N number of options, at a particular strike price, 10-year expiration (or 90 days if you leave the company). That doesn't seem all that complicated to me, or deceptive.
What can get deceptive is if the company is trying to lowball you on salary and tell you that your equity will become worth millions some day as if it was a sure thing, which is of course a scummy practice. And the whole expiration after 90 days thing is garbage. But deceptive? Complicated? I don't think it is.
I really don't see what's not simple or standardized about what I described above. Granted, the last time I joined a startup (which is not a startup anymore) was 9 years ago, but I haven't read anything to suggest that this has changed drastically.
Your answer illustrates what he's talking about
You are not even realizing what he's actually saying
HE's not talking about lowballing on salary
He is talking about what percentage of the company you are going to get, how soon you will get it, and other details
*
Most people won't get this. I will still try
A) What percentage of the company are you getting?
B) What dilution is going to happen?
C) When can you sell your stake in the company?
D) How soon and in what manner does it vest
* People fixate on things like 1,000 options without considering what it really means
Please consider what you wrote:
The standard for pre-IPO seems to me to be N number of options, at a particular strike price, 10-year expiration (or 90 days if you leave the company). That doesn't seem all that complicated to me, or deceptive.
NOWHERE in that is
What value do I bring the company
IN RETURN what percentage of the company am I getting
AT WHAT RATE will I be given that share of the company
You are not even realizing what he's actually saying
HE's not talking about lowballing on salary
He is talking about what percentage of the company you are going to get, how soon you will get it, and other details
*
Most people won't get this. I will still try
A) What percentage of the company are you getting?
B) What dilution is going to happen?
C) When can you sell your stake in the company?
D) How soon and in what manner does it vest
* People fixate on things like 1,000 options without considering what it really means
Please consider what you wrote:
The standard for pre-IPO seems to me to be N number of options, at a particular strike price, 10-year expiration (or 90 days if you leave the company). That doesn't seem all that complicated to me, or deceptive.
NOWHERE in that is
What value do I bring the company
IN RETURN what percentage of the company am I getting
AT WHAT RATE will I be given that share of the company
You should absolutely ask about A) and be very suspicious if they refuse to tell you. No one can answer B) with any real confidence because they don’t have a crystal ball. C) is almost always going to be at IPO or when the company sells, though maybe if you’re extremely important they’ll let you negotiate to sell some at a later round, though given this complicates things in most cases they’ll likely not want to bother with it unless you have a ton of leverage. D) is almost always going to be one year cliff, then rest monthly over four years. That should also be extremely easy information to get.
Regarding C, usually you need to wait a bit post IPO until the investors had opportunity to sell their stock. Only THEN it's your turn. It's called lock-up period and lasts usually 180 days (half a year). Just keep that in mind.
Also during sale, investors might choose to execute their liquidation preferences, which means that your shares might become worthless. Employees who paid hundreds of thousands of USD annually in opportunity cost have no such clauses to get their money back.
Also during sale, investors might choose to execute their liquidation preferences, which means that your shares might become worthless. Employees who paid hundreds of thousands of USD annually in opportunity cost have no such clauses to get their money back.
Investors have the same lockup period post-IPO as do employees and founders.
Huh, TIL. Investopedia only says "may also include early investors" [0]. I've checked the S-1's of some companies.
Cloudflare's S-1 has a 180 day lockup for "Our executive officers, directors, and the holders of substantially all of our capital stock"
In One Medical's S-1 "We, our directors, executive officers and the holders of substantially all of our equity securities, have agreed" to 180 day lockup.
In the Unity S-1 they have "certain holders of our common stock": "All of our directors and executive officers and certain holders of our common stock and securities exercisable for or convertible into our common stock, are subject to lock-up agreements that restrict their ability to transfer such securities for a period of 180 days after the date of this prospectus", and apparently they allow selling of 30% of the stock within the first two days of trading. Couldn't find any reference on who those certain holders are.
[0]: https://www.investopedia.com/terms/i/ipolockup.asp
Cloudflare's S-1 has a 180 day lockup for "Our executive officers, directors, and the holders of substantially all of our capital stock"
In One Medical's S-1 "We, our directors, executive officers and the holders of substantially all of our equity securities, have agreed" to 180 day lockup.
In the Unity S-1 they have "certain holders of our common stock": "All of our directors and executive officers and certain holders of our common stock and securities exercisable for or convertible into our common stock, are subject to lock-up agreements that restrict their ability to transfer such securities for a period of 180 days after the date of this prospectus", and apparently they allow selling of 30% of the stock within the first two days of trading. Couldn't find any reference on who those certain holders are.
[0]: https://www.investopedia.com/terms/i/ipolockup.asp
I suspect it may be the IPO underwriters, the big financial institutions that most companies going public will work with to make their shares available to the public. In short, the company and these institutions negotiate the initial price of the shares beforehand, and on the day of the IPO, those institutions purchase those shares from the company at that price (thus funding the company) and then immediately flip them (hopefully for a profit) to the masses.
What is a reasonable range for an answer to (A)? I know it's going to depend on what stage the company is at, and I figure 1% is probably going to be the upper bound, but I don't know what the lower bound should be.
A is one area for which there seems to be some very rough standards, if you visit Angel List you might see job offers with % equity listed, and it's usually in % terms not number of options.
1% would be quite a lot for an employee. Once the team is past the founders plus a few more, the only people getting more than 1% would be key executives.
1% would be quite a lot for an employee. Once the team is past the founders plus a few more, the only people getting more than 1% would be key executives.
Just look at the fair market value vs. the valuation at last fund raise. Percentages are meaningless without the valuations...
Regarding (A) I know they might tell you unofficially but they won't put it in writing necessarily. Would you know why?
Probably because if you’re joining an early stage company you’re inevitably going to get diluted if there are any later rounds. By how much will depend on how the company is performing so they won’t be able to know exactly what this will look like ahead of time. Perhaps putting the percentage in writing opens up some liability down the line as a result.
You should be able to get the number of outstanding shares at the time you join in writing though and then the percentage is trivial to calculate (though as other commenters pointed out you might not be able to get information on any existing liquidation presences investors might have that make it hard to really know what you would get if the company were to sell for x amount...
You should be able to get the number of outstanding shares at the time you join in writing though and then the percentage is trivial to calculate (though as other commenters pointed out you might not be able to get information on any existing liquidation presences investors might have that make it hard to really know what you would get if the company were to sell for x amount...
B) is trivial to answer: Either the shares are going to dilute and the company may fuck you over making them worthless, or they are not going to dilute.
And investors have so many tricks to grab all the value on smaller buyouts. Convertible debt for instance, which is convertible from say a 10X payback to some large number of stock shares. If its a unicorn, they choose the stock direction (no skin off your back). If its a modest buyout they chose to convert, taking say $10M for every $1M they invested, which can be 'all of it' and you get precisely nothing for your shares as an employee.
Founders can have a different stock category, so they get something, otherwise they'd not agree to the buyout.
So often, as an employee, you are given what are essentially 'sucker shares' that will likely never amount to anything. By design.
Founders can have a different stock category, so they get something, otherwise they'd not agree to the buyout.
So often, as an employee, you are given what are essentially 'sucker shares' that will likely never amount to anything. By design.
You are missing one of the larger points of opacity as well, which is liquidation preference. Even if your company has only taken a small amount of investment money you may not see a dime of it unless it gets acquired for over $20m, as VCs are able to claim that first $20m. Every round the liquidation preference goes up and it does not take long for a $100m liquidation preference to come into effect.
Thank you for pointing this out. This is the main reason why so many engineers I know got basically nothing when their company was acquired after slaving away for years.
If you join a startup, you should either do it for the experience (lots of responsibility, wearing many hats), or as a founder. Anything less is a recipe for disappointment.
If you join a startup, you should either do it for the experience (lots of responsibility, wearing many hats), or as a founder. Anything less is a recipe for disappointment.
This even washes out earlier investors. I've had situations where I invested and the company got acquired, but there wasn't enough money to get back to my preference shares. Obviously common was wiped out.
In particular, when companies seem like they might go bust new money insists on healthy (2X/3X) liq prefs. As in many situations, the golden rule applies. He who has the gold makes the rules!
I've been part of two startups that were acquired, even with options for about 3% of non-Founder shares for one of them. Total value of all of those was $0.
What was valuable was the experience I gained, and rising to VP in one of them. I got a nice package from the (>$100B, SF-based, public) acquiring company. That was an instant 200% raise, and the experience I got has really helped find future higher paying jobs.
What was valuable was the experience I gained, and rising to VP in one of them. I got a nice package from the (>$100B, SF-based, public) acquiring company. That was an instant 200% raise, and the experience I got has really helped find future higher paying jobs.
That's only scratching the surface.
There are any number of terms that other investors and financiers can have that fundamentally change your own.
Participating preferences, option deals (i.e. if xyz happens, they get abc options in which case, they are not allocated yet, but are in a way 'pending'), option pools for other employees are often not counted in the % ownership, convertible debt, special cases, ratchet/anti-dilution clauses.
Effectively - you have to see every single contract the company has with other investors, financiers and executives to actually calculate the real value and risk.
There are any number of terms that other investors and financiers can have that fundamentally change your own.
Participating preferences, option deals (i.e. if xyz happens, they get abc options in which case, they are not allocated yet, but are in a way 'pending'), option pools for other employees are often not counted in the % ownership, convertible debt, special cases, ratchet/anti-dilution clauses.
Effectively - you have to see every single contract the company has with other investors, financiers and executives to actually calculate the real value and risk.
> A) What percentage of the company are you getting?
Usually you are getting something minuscule initially, well below any founder or board member's share. The logic is that, if there is going to be money made, the company will need lots of headcount and that headcount all needs to think they own something significant in the entity, which they don't because of vesting, dilution, new CEOs, etc.
> B) What dilution is going to happen?
Unknown, and depends on the performance of the management and board, if they even bother to perform later when all the money is gone (because the company is actually not profitable, shocker) and they have to suck up to someone else who wants a higher dilution so they can get a good percent of the company. Don't forget the employees will be "the problem" if the company runs out (which means RIFs or worse). Unless it's going gang busters, in which cases that minuscule amount stays the same. Oh, don't forget preferred stock.
> C) When can you sell your stake in the company?
Probably never, or maybe when it sells, if you are lucky. Besides, calling it a "stake" is really a fantasy given the stake's value is tied to whatever the investors thought it was worth, which in their mind is always more than any sane person would agree to spend on the company to make it their own company's problem. If the company is even slightly profitable (unlikely) then everyone would lose their minds thinking it's worth half a billion or something. Think two 20 something year old founders thinking their company is worth 1B+ and refusing to take an offer from Facebook for half that while today they are gone and it's not worth diddly.
> D) How soon and in what manner does it vest
Usually to the advantage of the company. Most people never vest their full amount of shares because the company doesn't sell and over 4 years (typical vest scheduling) the chances are the company will re-up its coiffures, which means dilution and besides which you can't stand working for these idiots for more than 2 and a half years, tops.
Usually you are getting something minuscule initially, well below any founder or board member's share. The logic is that, if there is going to be money made, the company will need lots of headcount and that headcount all needs to think they own something significant in the entity, which they don't because of vesting, dilution, new CEOs, etc.
> B) What dilution is going to happen?
Unknown, and depends on the performance of the management and board, if they even bother to perform later when all the money is gone (because the company is actually not profitable, shocker) and they have to suck up to someone else who wants a higher dilution so they can get a good percent of the company. Don't forget the employees will be "the problem" if the company runs out (which means RIFs or worse). Unless it's going gang busters, in which cases that minuscule amount stays the same. Oh, don't forget preferred stock.
> C) When can you sell your stake in the company?
Probably never, or maybe when it sells, if you are lucky. Besides, calling it a "stake" is really a fantasy given the stake's value is tied to whatever the investors thought it was worth, which in their mind is always more than any sane person would agree to spend on the company to make it their own company's problem. If the company is even slightly profitable (unlikely) then everyone would lose their minds thinking it's worth half a billion or something. Think two 20 something year old founders thinking their company is worth 1B+ and refusing to take an offer from Facebook for half that while today they are gone and it's not worth diddly.
> D) How soon and in what manner does it vest
Usually to the advantage of the company. Most people never vest their full amount of shares because the company doesn't sell and over 4 years (typical vest scheduling) the chances are the company will re-up its coiffures, which means dilution and besides which you can't stand working for these idiots for more than 2 and a half years, tops.
Does A) matter? In terms of evaluating the value I would care about the number of shares and their likely value (now and in the future). If that is 2% of the company or 1% why does that matter?
B) is going to have a bigger impact on evaluating how valuable the offer is but as another poster said, it's almost impossible to know.
B) is going to have a bigger impact on evaluating how valuable the offer is but as another poster said, it's almost impossible to know.
(A) is the only thing that matters. How will you know a unit share value without knowing the company valuation?
Excuse me, but you also don't get it. All the questions you are posing are knowable. (They will tell you.) It's not deceptive at all, it's just inexperienced if you don't find out all this information and use it in your decision making. OK, B is not knowable but it's estimable and you need to do that yourself.
What's not knowable, generally, (ie, they won't tell you) is the waterfall, the pref stack, pro-rata rights, how much convertible debt there is (money already in, that you are essentially pre-diluted by but just don't know it yet) future unknowns like a carve-out and total other debt.
IMHO, yes it's deceptive, but no, it doesn't matter. If the company has a successful exit, you will do well enough. I'm talking about Series A or pre-Series A hires. In the 90% of cases where the company has a fire sale or just bombs out, you won't get anything, no matter the answers to the above.
What's not knowable, generally, (ie, they won't tell you) is the waterfall, the pref stack, pro-rata rights, how much convertible debt there is (money already in, that you are essentially pre-diluted by but just don't know it yet) future unknowns like a carve-out and total other debt.
IMHO, yes it's deceptive, but no, it doesn't matter. If the company has a successful exit, you will do well enough. I'm talking about Series A or pre-Series A hires. In the 90% of cases where the company has a fire sale or just bombs out, you won't get anything, no matter the answers to the above.
What can get deceptive is if the company is trying to lowball you on salary and tell you that your equity will become worth millions some day as if it was a sure thing, which is of course a scummy practice. And the whole expiration after 90 days thing is garbage. But deceptive? Complicated? I don't think it is.
For people fresh out of school or people who have spent many years in public companies and haven't had to think about how much the options are actually worth, there's likely to be a disconnect between what is written on paper and what is perceived.
The equity clauses in the typical employment contract, for example, won't tell you about AMT taxes, liquidation preferences, how hard it actually is to decide to exercise 90 days after you leave (you'll mostly likely leave before the cash-out), or how unlikely that equity is to be worth much. Those things aren't said or written but are important to understand. The recruiter won't tell you that either because they want you to join.
That last item is entirely about your ability to accurately assess the value of the company, which is usually a crapshoot even when you have complete information, which you don't. Plenty of people I know/knew, including a younger version of myself, think about it subjectively and don't have a cynical enough view on the chances of cashing out.
It might not be deceptive, but it certainly is complex, and you're probably not being told the most important parts of the deal. The saying "caveat emptor" comes to mind, which is definitely about surprises showing up after you commit.
For people fresh out of school or people who have spent many years in public companies and haven't had to think about how much the options are actually worth, there's likely to be a disconnect between what is written on paper and what is perceived.
The equity clauses in the typical employment contract, for example, won't tell you about AMT taxes, liquidation preferences, how hard it actually is to decide to exercise 90 days after you leave (you'll mostly likely leave before the cash-out), or how unlikely that equity is to be worth much. Those things aren't said or written but are important to understand. The recruiter won't tell you that either because they want you to join.
That last item is entirely about your ability to accurately assess the value of the company, which is usually a crapshoot even when you have complete information, which you don't. Plenty of people I know/knew, including a younger version of myself, think about it subjectively and don't have a cynical enough view on the chances of cashing out.
It might not be deceptive, but it certainly is complex, and you're probably not being told the most important parts of the deal. The saying "caveat emptor" comes to mind, which is definitely about surprises showing up after you commit.
> What do you mean by "deceptive"?
A package which appears to the novice to be worth N dollars, but where statistically speaking many employees end up in the hole because they mishandle the tax implications, or where statistically speaking many employees end up in difficulty attempting to sell their shares because they miss some deadline or fail to meet some other condition, etc.
There is a need for simplification and standardization because the average employee offered options today does not have the qualifications to assess the value of an equity package — it's not like direct monetary compensation which is easy to understand.
Or at least there's such a need for reform from the perspective of the employee. From the perspective of an employer, if statistically speaking many employees mishandle their complex options packages, then the company ends up money ahead, having driven down labor costs by offloading hidden risk onto their employees.
A package which appears to the novice to be worth N dollars, but where statistically speaking many employees end up in the hole because they mishandle the tax implications, or where statistically speaking many employees end up in difficulty attempting to sell their shares because they miss some deadline or fail to meet some other condition, etc.
There is a need for simplification and standardization because the average employee offered options today does not have the qualifications to assess the value of an equity package — it's not like direct monetary compensation which is easy to understand.
Or at least there's such a need for reform from the perspective of the employee. From the perspective of an employer, if statistically speaking many employees mishandle their complex options packages, then the company ends up money ahead, having driven down labor costs by offloading hidden risk onto their employees.
I think dilution is something that makes the package deceptively complex. Subsequent rounds of funding diminish a previously healthy looking equity package.
How should you factor that into your expectations for the future of your equity package? I think that's complicated.
Does anyone ask for or receive a re-calculated salary based on the change in equity that results from dilution?
How should you factor that into your expectations for the future of your equity package? I think that's complicated.
Does anyone ask for or receive a re-calculated salary based on the change in equity that results from dilution?
Assuming an up round, dilution causes you to own less of a company on a percentage basis, but the actual dollar values of your shares will be worth more. If things are going well (which is admittedly rare, and the lightning you’re trying to bottle) dilution just makes your piece of the pie grow somewhat sub-linearly to the overall equity value creation, but certainly isn’t making it negative.
I find it much easier to reason about equity comp on a per share basis rather than a percentage ownership basis (and frankly don’t understand the constant advice to try and think about it on a percentage basis - though will always happily share that with job candidates).
Additional equity grants are what can make up for dilution, not additional cash comp. I also believe that cash and equity are fundamentally different types of compensation, given for different reasons, and are not particularly fungible. I always try to make equity as comprehensible as possible, but the reality is that it IS complicated - and worth spending time to actually understand because, while there are ways to get misled, it’s also the path to wealth creation.
I find it much easier to reason about equity comp on a per share basis rather than a percentage ownership basis (and frankly don’t understand the constant advice to try and think about it on a percentage basis - though will always happily share that with job candidates).
Additional equity grants are what can make up for dilution, not additional cash comp. I also believe that cash and equity are fundamentally different types of compensation, given for different reasons, and are not particularly fungible. I always try to make equity as comprehensible as possible, but the reality is that it IS complicated - and worth spending time to actually understand because, while there are ways to get misled, it’s also the path to wealth creation.
> reason about equity comp on a per share basis
The one reason I find this highly skeptical, is that this is in some sense a made-up figure. In Options, It's an estimate of a per share once the company goes public. In other cases, it's something the founders have estimated based on market potential and other things.
> Assuming an up round, dilution causes you to own less of a company on a percentage basis, but the actual dollar values of your shares will be worth more.
If you're at a $10M company and you're thinking "I will own 0.1%, so in a few years I can look forward to a payday of $10,000" then you're right: getting diluted 10x to own 0.01% of a $100M company is the same value.
But if your thinking is "I will own 0.1%, and if I owned that much of WhatsApp when it sold to Facebook I'd have made $16M" then a 10x dilution would reduce that to $1.6M
Now, you might argue the second line of thinking is wrong and a fantasy valuation, but we all know no-one's getting hired away from FAANG by the promise of an uncertain, one-off $10k in a few years.
If you're at a $10M company and you're thinking "I will own 0.1%, so in a few years I can look forward to a payday of $10,000" then you're right: getting diluted 10x to own 0.01% of a $100M company is the same value.
But if your thinking is "I will own 0.1%, and if I owned that much of WhatsApp when it sold to Facebook I'd have made $16M" then a 10x dilution would reduce that to $1.6M
Now, you might argue the second line of thinking is wrong and a fantasy valuation, but we all know no-one's getting hired away from FAANG by the promise of an uncertain, one-off $10k in a few years.
How often is the strike price the fair market value of the employee equity pool? Most VCs carry preference stacks to either 1x or 2x of the current valuation, Leaving the options structurally underwater unless the company increases in value by 3x. To take home the strike price equivalent per option could require up to a 6x increase in valuation.
This is a non-obvious way that employees are often screwed on options.
This is a non-obvious way that employees are often screwed on options.
> How often is the strike price the fair market value of the employee equity pool?
Always. If by FMV you mean 409(A) valuation.
If you mean something else, the answer is 'never' because for privately held companies we don't know the "fair market value".
Your point about VCs seems irrelevant, because the valuation they hold shares at is not that of the "employee equity pool".
To take home a strike price equivalent per option requires only 2x (to cover taxes) increase over your strike price, and for the equity to be tradeable. This is not a simple calculation, as implied by your 3X/6X multiple.
If you only took home a strike price equivalent per option, you'd never, ever, ever take one of these jobs. Options are priced at 409(A) and for the type/stage of company we're talking about here, are typically 2%-10% of the preferred price. IOW, incredibly low-valued.
I don't think you're wrong. I think your comment is malformed.
Always. If by FMV you mean 409(A) valuation.
If you mean something else, the answer is 'never' because for privately held companies we don't know the "fair market value".
Your point about VCs seems irrelevant, because the valuation they hold shares at is not that of the "employee equity pool".
To take home a strike price equivalent per option requires only 2x (to cover taxes) increase over your strike price, and for the equity to be tradeable. This is not a simple calculation, as implied by your 3X/6X multiple.
If you only took home a strike price equivalent per option, you'd never, ever, ever take one of these jobs. Options are priced at 409(A) and for the type/stage of company we're talking about here, are typically 2%-10% of the preferred price. IOW, incredibly low-valued.
I don't think you're wrong. I think your comment is malformed.
That's completely fair. Does this math change depending on the exit though? e.g. When the company IPOs or is bought out, the preference pool and the employee pool has to be merged. The implication of your comment is that the slope of the employee gain once the preferenced shares have met their obligations will be substantially higher than in my math above. On the other hand, subsequent rounds increase the number of outstanding preference shares and your employee strike price could have been set at a time when all preferences would be satisfied, The math will then shift back to a 6x required gain (for a strike price equivalent).
On a 10-year liquidity horizon, the employee option pool can be pushed into the underwater state by subsequent issuance of preferenced shares.
In my Experience, this effect explains how startup employees who have stayed with a firm from 10 million dollar valuations to Billion+ valuations do not get anything better than a down payment for their trouble, and a 3x increase in a publicly traded companies stock can easily push an engineer's RSUs to 1.5x+ their salary per year.
On a 10-year liquidity horizon, the employee option pool can be pushed into the underwater state by subsequent issuance of preferenced shares.
In my Experience, this effect explains how startup employees who have stayed with a firm from 10 million dollar valuations to Billion+ valuations do not get anything better than a down payment for their trouble, and a 3x increase in a publicly traded companies stock can easily push an engineer's RSUs to 1.5x+ their salary per year.
Thanks for the followup, much more well formed. To a few specific points:
> the slope of the employee gain once the preferenced shares have met their obligations will be substantially higher than in my math above.
Yes. This is all but required by "the rules".
> subsequent rounds increase the number of outstanding preference shares
Yes, but by lesser and lesser amounts of dilution, and at higher and higher valuations. Ignoring down rounds, which are much more common than up rounds. But here I think we are talking about a "successful" exit, which as rare as they are, in the majority still leave option holders high and dry anyway.
> your employee strike price could have been set at a time when all preferences would be satisfied, The math will then shift back to a 6x required gain (for a strike price equivalent).
True, however in these cases almost everyone (actually everyone, AFAIK) receives RSUs, not options. RSUs have an actual, current value, and do not require any appreciation in price at all. In fact, a loss in price is still valuable to the holder. You can't go underwater with RSUs. (And you can't face uncertain taxes; be forced to make awful decisions; etc.)
> On a 10-year liquidity horizon,
This is the real problem with equity compensation today. We've outgrown the system under which options were a great incentive. Golden handcuffs, that most exceedingly often, turn into fool's gold. Honestly, it's time for YC to insist on 10 year termination-exercise rights. The appeal of ISOs is still there for early stage companies, but AIUI one can convert from ISOs to NQ's after the 90 day legal requirement, without penalty. win-win.
With a 10 year rights, companies are forced to offer sufficient refreshers to keep staff. This is completely fair and will push companies to earlier exits. On the employee side, people need to insist on it as well ...
I don't see it happening because it destroys the VC business model.
> the slope of the employee gain once the preferenced shares have met their obligations will be substantially higher than in my math above.
Yes. This is all but required by "the rules".
> subsequent rounds increase the number of outstanding preference shares
Yes, but by lesser and lesser amounts of dilution, and at higher and higher valuations. Ignoring down rounds, which are much more common than up rounds. But here I think we are talking about a "successful" exit, which as rare as they are, in the majority still leave option holders high and dry anyway.
> your employee strike price could have been set at a time when all preferences would be satisfied, The math will then shift back to a 6x required gain (for a strike price equivalent).
True, however in these cases almost everyone (actually everyone, AFAIK) receives RSUs, not options. RSUs have an actual, current value, and do not require any appreciation in price at all. In fact, a loss in price is still valuable to the holder. You can't go underwater with RSUs. (And you can't face uncertain taxes; be forced to make awful decisions; etc.)
> On a 10-year liquidity horizon,
This is the real problem with equity compensation today. We've outgrown the system under which options were a great incentive. Golden handcuffs, that most exceedingly often, turn into fool's gold. Honestly, it's time for YC to insist on 10 year termination-exercise rights. The appeal of ISOs is still there for early stage companies, but AIUI one can convert from ISOs to NQ's after the 90 day legal requirement, without penalty. win-win.
With a 10 year rights, companies are forced to offer sufficient refreshers to keep staff. This is completely fair and will push companies to earlier exits. On the employee side, people need to insist on it as well ...
I don't see it happening because it destroys the VC business model.
The “at a valuation of” numbers you see thrown around in funding rounds are preferred shares and have a higher cost than employee equity. As a result, companies can use that risk factor to push down on employee strike price, aka 409(a) valuation of common shares, to keep buy in costs low until a liquidity event that equalizes risk preferences (or, if it’s a crappy exit, doesn’t).
The company and employees have a common interest in keeping that price low.
The company and employees have a common interest in keeping that price low.
Unfortunately the only options I've seen in 2 private companies were post-preference with a strike price tied to the valuation of the common equity. At the end of the day the company is acquired for a fixed price which goes to the preferenced shares first, leaving little on the table. Straight IPOs have become rare, and the few times I've been a part of one my grants per year increased following IPO as the value was clear.
It's possible there was a mechanic at work that would have made the equity worth more at the ~6x valuation increase, however these companies were already worth ~200 million-1 billion. If the company wanted to incentivize extreme upside they should have increased the strike price, and increased the number of options granted. Spotify provides this option to employees where you can choose cash, RSUs, options, or "high-risk" options. You can get 8x options relative to RSUs with a strike price that's double the current stock price. If the company 4x'd in value over 4 years you'd make 4x on these compared to RSU's enabling a public company to offer "lottery" ticket equity packages.
Ultimately if a startup is trying to offer a lottery ticket to employees to lure them from top-tier companies, then they'll need to make real lottery tickets with real payouts at the end. That means that a startup with an expected 100 million dollar exit in 5 years will need to grant 2% of the company at exit to a top-tier engineer in the average case ( with appropriate vesting ).
It's possible there was a mechanic at work that would have made the equity worth more at the ~6x valuation increase, however these companies were already worth ~200 million-1 billion. If the company wanted to incentivize extreme upside they should have increased the strike price, and increased the number of options granted. Spotify provides this option to employees where you can choose cash, RSUs, options, or "high-risk" options. You can get 8x options relative to RSUs with a strike price that's double the current stock price. If the company 4x'd in value over 4 years you'd make 4x on these compared to RSU's enabling a public company to offer "lottery" ticket equity packages.
Ultimately if a startup is trying to offer a lottery ticket to employees to lure them from top-tier companies, then they'll need to make real lottery tickets with real payouts at the end. That means that a startup with an expected 100 million dollar exit in 5 years will need to grant 2% of the company at exit to a top-tier engineer in the average case ( with appropriate vesting ).
90 days if you leave is deceptive and will lock you to the company unless you're independently wealthy. A less deceptive thing is a 7-10 year window if you leave, because that isn't "you forfeit your equity when you leave if you aren't already wealthy."
Equity pricing is also nonsense for many private companies. I was offered 1 million dollars in equity in a company 4 years ago assuming a multi-billion dollar valuation. It's unclear if the company has even achieved that valuation now, four years on. And they're still private.
Equity pricing is also nonsense for many private companies. I was offered 1 million dollars in equity in a company 4 years ago assuming a multi-billion dollar valuation. It's unclear if the company has even achieved that valuation now, four years on. And they're still private.
90 days for ISOs is US law. They can be converted to NSOs to get a longer exercise term, but there are different tax implications too. Some companies are offering the conversion now.
A link going into further details: https://carta.com/blog/pte-90-day-window/
Yeah, agreed, I don't really think the core premise is that deceptive.
I will say though one trick I've seen (I should write about this) is multiplying your common stock through by the latest price of the preferred stock and presenting this as the "current value" of your equity offer. Your common stock is not worth as much as the preferred stock.
I will say though one trick I've seen (I should write about this) is multiplying your common stock through by the latest price of the preferred stock and presenting this as the "current value" of your equity offer. Your common stock is not worth as much as the preferred stock.
Any thoughts on the AMT trap, and the potential inability to exercise (or go bankrupt with AMT) when you leave? It's not exactly written in red warning letters on offer packages, right?
Solution is to get rid of the 90 day limit for ex-employees, which is also just the right thing to do in general.
Doesn't totally solve AMT, as there are other reasons to want to exercise other than "because your options are about to expire", but it does fix the worst common issue.
Doesn't totally solve AMT, as there are other reasons to want to exercise other than "because your options are about to expire", but it does fix the worst common issue.
AMT has changed a lot since Trump adjusted the tax rules. I suspect it isn't relevant any more.
> The number of households owing AMT rose from 200,000 in 1982 to 5.2 million in 2017, but was reduced back to 200,000 in 2018 https://en.wikipedia.org/wiki/Alternative_minimum_tax
> The number of households owing AMT rose from 200,000 in 1982 to 5.2 million in 2017, but was reduced back to 200,000 in 2018 https://en.wikipedia.org/wiki/Alternative_minimum_tax
Less relevant on the margins, but for the people who get hosed the worst (ie. owe the IRS millions when you never seen cash anywhere near that) the trap is very much still there.
If you have ISOs with a low strike price with a private company that is approaching IPO—especially considering the insanity in the stock market right now—you better take a long hard look at the numbers before exercising (or leaving your company and being forced to exercise)
If you have ISOs with a low strike price with a private company that is approaching IPO—especially considering the insanity in the stock market right now—you better take a long hard look at the numbers before exercising (or leaving your company and being forced to exercise)
If you’re hitting ATM you’re doing extremely well for yourself and are privileged.
You seem to be unfamiliar with the AMT trap? I would recommend Googling it. It impacts people who are not well-off prior to exercising their options by triggering AMT upon exercise.
Right, but why exercise the option without next selling it? If you’re quitting, that’s a risk. And AMT is applied on the gains. So your strike is $1, valuation currently at $100 and you pay tax on the $99 gain. Unless it’s Theranos that valuation wont go back to $1, so yes, you’re privileged.
In private companies, you often are unable to sell your shares because it requires board approval. The AMT trap, in oversimplified terms, is being wealthy enough on paper, due to shares, to trigger AMT but unable to sell shares to cover the taxes.
eanzenberg(1)
You need to read up on the issue. Links to get you started:
- https://www.holloway.com/g/equity-compensation/sections/the-...
- https://thestartuplawblog.com/immediately-exercisable-isos-t...
- https://www.holloway.com/g/equity-compensation/sections/the-...
- https://thestartuplawblog.com/immediately-exercisable-isos-t...
eanzenberg(1)
Because you literally can’t sell it. This is why we people get stuck at startups. You must immediately exercise upon leaving but cannot sell, incurring huge tax bills but zero cash in your wallet.
If you are rich you can afford it. If you aren’t, you are forced to take zero.
If you are rich you can afford it. If you aren’t, you are forced to take zero.
eanzenberg(1)
This entire subthread is about "people who are doing well" getting shafted.
It's usually deceptive all the way throughout:
1. Not disclosing the valuation details
2. Not disclosing who owns what and with what liquidation preference (this alone means you don't know what you're getting even in the unlikely event the startup succeeds)
3. Creating unrealistic expectations about the value of your "equity" package ("0.5% is a lot of money, man, we'll be a unicorn"). Quoted because if it's not equity if you can't sell it or can't get a dividend from it.
4. Requiring that you sell your _exercised_ shares back to the company at the price of board's choosing if you left voluntarily or otherwise. This is called the "clawback" clause.
5. Requiring that you forfeit your _vested_ but unexercised shares if you were terminated "for a cause", in addition to #4. A "cause" can easily be manufactured shortly before acquisition. There are precedents.
6. Abusive terms in case of acquisition
7. No acceleration in case of acquisition
8. Super short exercise window if you leave on your own volition.
With all of the above combined, you're at the complete mercy of the company in whether you get anything at all even if you work there for years.
Do I need to continue? I had all of these at one point or another and I only evaluated offers from 2 startups so far. My lawyer extensively redlined both of them. In one case the board agreed to the revised offer. In another it did not, so I did not join.
Such redlining only works if you're a very early employee and you're very senior. But regardless, I'd argue that if you're taking a pay cut, you should at least know what you're getting yourself into, and $500-700 for counsel is not too bad. If you don't like the underwater rocks your lawyer identified, demand more cash or walk away.
1. Not disclosing the valuation details
2. Not disclosing who owns what and with what liquidation preference (this alone means you don't know what you're getting even in the unlikely event the startup succeeds)
3. Creating unrealistic expectations about the value of your "equity" package ("0.5% is a lot of money, man, we'll be a unicorn"). Quoted because if it's not equity if you can't sell it or can't get a dividend from it.
4. Requiring that you sell your _exercised_ shares back to the company at the price of board's choosing if you left voluntarily or otherwise. This is called the "clawback" clause.
5. Requiring that you forfeit your _vested_ but unexercised shares if you were terminated "for a cause", in addition to #4. A "cause" can easily be manufactured shortly before acquisition. There are precedents.
6. Abusive terms in case of acquisition
7. No acceleration in case of acquisition
8. Super short exercise window if you leave on your own volition.
With all of the above combined, you're at the complete mercy of the company in whether you get anything at all even if you work there for years.
Do I need to continue? I had all of these at one point or another and I only evaluated offers from 2 startups so far. My lawyer extensively redlined both of them. In one case the board agreed to the revised offer. In another it did not, so I did not join.
Such redlining only works if you're a very early employee and you're very senior. But regardless, I'd argue that if you're taking a pay cut, you should at least know what you're getting yourself into, and $500-700 for counsel is not too bad. If you don't like the underwater rocks your lawyer identified, demand more cash or walk away.
how do you find a lawyer that does this sort of thing? how specific of a speciality should I be looking for if interested in finding one?
There is an easy fix: consider equity as some free lottery tickets, and don't accept a lower salary that you would want just because you have equity.
If you want to make money from a sale or an IPO, you need to be a co-founder or investor. As an employee of a startup your remuneration is your salary, and equity is a lottery ticket that maybe, if you're lucky, will end up in a nice one time bonus in the future.
Don't believe the stories of the employee raking in millions when the startup exits. It maybe happened for some employees at a few companies like Google but it's not happening to you.
If you want to make money from a sale or an IPO, you need to be a co-founder or investor. As an employee of a startup your remuneration is your salary, and equity is a lottery ticket that maybe, if you're lucky, will end up in a nice one time bonus in the future.
Don't believe the stories of the employee raking in millions when the startup exits. It maybe happened for some employees at a few companies like Google but it's not happening to you.
Honestly, I was freaked out by the ordering in the article (equity, benefits, salary, something else). That is completely opposite how I'd normally view an offer. Maybe I'm just not Silicon Valley enough but equity doesn't pay rent.
It doesn't matter if you have a 'great lawyer' - because any 'fine print' in other investors deals can very easily fundamentally change the value of the offer.
Major investors could have 3x 'participating' in which case they get 3x their investment back before anyone else gets anything.
There are debtors: if the company has big debt - money goes to them first. Sometimes the debt is convertible - which could mean major dilution.
The number of outstanding options, not actually stocks, obviously makes a big difference.
Major cash bonuses to execs, IP holders etc. upon sale.
And that's the 'relatively normal stuff'.
The contracts can literally say anything. Like 'Investor ABC who put in $1 gets first rights to the first $100M in valuation' or something insane like that. Now - that would be very bad actually for the company obviously, so it's not likely to happen ... but it could theoretically be there.
So there's an immense amount of trust that has to be in place, which is why you need a very 'clean' situation, a credible team - and then of course a 'hot enough' company for it to even make sense.
Equity is a legit form of comp. but everything just has to be 'just right' and often it's not.
If there is any 'odour' at all in the situation, I would assume shenanigans, in which case, any form of equity is considerably more risky, and then probably not worth it.
Major investors could have 3x 'participating' in which case they get 3x their investment back before anyone else gets anything.
There are debtors: if the company has big debt - money goes to them first. Sometimes the debt is convertible - which could mean major dilution.
The number of outstanding options, not actually stocks, obviously makes a big difference.
Major cash bonuses to execs, IP holders etc. upon sale.
And that's the 'relatively normal stuff'.
The contracts can literally say anything. Like 'Investor ABC who put in $1 gets first rights to the first $100M in valuation' or something insane like that. Now - that would be very bad actually for the company obviously, so it's not likely to happen ... but it could theoretically be there.
So there's an immense amount of trust that has to be in place, which is why you need a very 'clean' situation, a credible team - and then of course a 'hot enough' company for it to even make sense.
Equity is a legit form of comp. but everything just has to be 'just right' and often it's not.
If there is any 'odour' at all in the situation, I would assume shenanigans, in which case, any form of equity is considerably more risky, and then probably not worth it.
[deleted]
Indeed. Personally I just write equity offers off as zero-value advertising. I don't have enough spare time or mental willpower to deal with that crap. I don't have a degree in finance. I do the work you want done and you give me money. Just calculating the value of the benefits package is irritating enough by itself.
No, the union would only insure you obtain what is contractually spelled out by the agreement they have with the employer for your job classification. there is no negotiating here. the good from this is you know you won't be cheated of anything but the bad is your progression will not be the same in a company not bound to strict rules of progression. So you choose, there is no negative to entering into such an environment but realize the employer's hands are tied too
to be honest, if the pay and rewards of such value you really should pay for a few hours of a lawyers advice to review the contracts offered you. if the prospective employer does not permit that then that should be a signal as clear as day what to do.
only you can state what level of compensation is worth the money spend on a lawyer to read it over for you and you should weigh the time you spend doing the research against someone who knows contract law.
to be honest, if the pay and rewards of such value you really should pay for a few hours of a lawyers advice to review the contracts offered you. if the prospective employer does not permit that then that should be a signal as clear as day what to do.
only you can state what level of compensation is worth the money spend on a lawyer to read it over for you and you should weigh the time you spend doing the research against someone who knows contract law.
> As an individual negotiating compensation with a company, you are at a structural disadvantage
I may be worlds worst negotiator; I'm not very good at representing myself and I tend to nod and smile a lot. I think my salary has tended between 1.2 and 1.5 times the male full-time median over my career.
So sure, there is a structural disadvantage there. If I were a great negotiator maybe I could be working with 1.4 to 1.7x. But that structural advantage is all about fiddling at the margins, and a union won't change that. Neither unions or companies can resist the underlying market that sets the bounds on what is possible. I'm much more worried about that, and I don't think a union would help. If anything, it is likely to hinder. If times get tough, I want a low-paid job, not no job.
Conversationally, I don't want my peers telling me what to do, it is bad enough when the boss does. If people want to share salaries that sounds helpful.
I may be worlds worst negotiator; I'm not very good at representing myself and I tend to nod and smile a lot. I think my salary has tended between 1.2 and 1.5 times the male full-time median over my career.
So sure, there is a structural disadvantage there. If I were a great negotiator maybe I could be working with 1.4 to 1.7x. But that structural advantage is all about fiddling at the margins, and a union won't change that. Neither unions or companies can resist the underlying market that sets the bounds on what is possible. I'm much more worried about that, and I don't think a union would help. If anything, it is likely to hinder. If times get tough, I want a low-paid job, not no job.
Conversationally, I don't want my peers telling me what to do, it is bad enough when the boss does. If people want to share salaries that sounds helpful.
Unions don't tell you what to do, they tell you what not to do. Like hey, your job description doesn't include moving furniture, or you're not required to get coffee for everyone at a meeting.
> As an individual negotiating compensation with a company, you are at a structural disadvantage: the company does this all the time, and (lacking a union to negotiate on your behalf) you do this rarely.
This is exactly why a common advice on compensation negotiation is: don't stop interviewing once you get a job.
This is exactly why a common advice on compensation negotiation is: don't stop interviewing once you get a job.
Isn't an overly complex equity package just lesser compensation? If someone feels like they're disadvantaged by the company right off the bat, they shouldn't take the job. Or they should negotiate a higher salary to make up for the (unusable?) equity compensation.
> For almost all of us, equity is a vehicle to get screwed over.
It's really not all that difficult, but it just needs to get drummed into people's head that equity is not compensation! At best, it's like a free gym membership that you'll never use.
It's really not all that difficult, but it just needs to get drummed into people's head that equity is not compensation! At best, it's like a free gym membership that you'll never use.
There is a structural disadvantage but it isn't that. It is a company hires people, whose job it is to make the company more efficient and profitable, and to do so, you need to set things up so no employee can be in a powerful position. For example tech choices so "Use Java and X Framework we can easily hire people", and such like. Keep it plug an play.
To the point where it is seen as immoral to do things 'for job security', whilst the company itself might do this to it's customers. I think this affects things more than negotiation.
To the point where it is seen as immoral to do things 'for job security', whilst the company itself might do this to it's customers. I think this affects things more than negotiation.
You are too pessimistic.
Negotiations ain't so hard. It's mostly down to BATNA, ie best alternative to negotiated agreement. Why would you want a union?
Do your homework to figure out how much your skills are worth on the market; get multiple companies into the offer stage; then more or less just let them know your demands and let them know that you are more than prepared to walk away if they don't agree.
That's it.
If they decide to call your bluff, then you really just walk away. That's why you want to have multiple companies in the offer stage at the same time, and also want to start interviewing before your old job becomes unbearable.
Negotiations ain't so hard. It's mostly down to BATNA, ie best alternative to negotiated agreement. Why would you want a union?
Do your homework to figure out how much your skills are worth on the market; get multiple companies into the offer stage; then more or less just let them know your demands and let them know that you are more than prepared to walk away if they don't agree.
That's it.
If they decide to call your bluff, then you really just walk away. That's why you want to have multiple companies in the offer stage at the same time, and also want to start interviewing before your old job becomes unbearable.
This is the best answer I’ve read. Cold hard cash beats pie-in-the-sky stocks.
Oh, whether you want cash or stocks is up to you.
For comparison, I usually convert everything into a common metric. So eg I might say that 3 dollars of sign-on bonus are worth as much as 1 dollar of base salary to me. Or that I value the stock options at X dollars each (taking into account that they are risky and not liquid).
But that's independent of the technique I outlined in the other comment.
For comparison, I usually convert everything into a common metric. So eg I might say that 3 dollars of sign-on bonus are worth as much as 1 dollar of base salary to me. Or that I value the stock options at X dollars each (taking into account that they are risky and not liquid).
But that's independent of the technique I outlined in the other comment.
>Why would you want a union?
Same reason anyone wants a union: to reduce structural asymmetry. In this case, the asymmetry in question is information. Think of the hypothetical union as you and your coworkers all pitching in to get a really good lawyer to review your employment contracts and vesting terms.
>figure out how much your skills are worth on the market
The problem is that there isn't a public orderline for compensation. Observing even a single bid takes significant effort, so figuring out where the fair price is with any degree of precision is hard. And it's fundamentally harder for workers than it is for employers.
More importantly, because of the issues with equity, even those scarce observations are fuzzy. Comparing two equity packages from non-public companies is hard, and it's ridiculous (or, depending on your interpretation, cunningly malicious) to put that burden on every single employee individually. You're paid to be an expert in software engineering and a partial domain expert in whatever the company does; having to also be an expert in finance and obscure tax law to even know how much you're getting paid is unreasonable.
Same reason anyone wants a union: to reduce structural asymmetry. In this case, the asymmetry in question is information. Think of the hypothetical union as you and your coworkers all pitching in to get a really good lawyer to review your employment contracts and vesting terms.
>figure out how much your skills are worth on the market
The problem is that there isn't a public orderline for compensation. Observing even a single bid takes significant effort, so figuring out where the fair price is with any degree of precision is hard. And it's fundamentally harder for workers than it is for employers.
More importantly, because of the issues with equity, even those scarce observations are fuzzy. Comparing two equity packages from non-public companies is hard, and it's ridiculous (or, depending on your interpretation, cunningly malicious) to put that burden on every single employee individually. You're paid to be an expert in software engineering and a partial domain expert in whatever the company does; having to also be an expert in finance and obscure tax law to even know how much you're getting paid is unreasonable.
> Same reason anyone wants a union: to reduce structural asymmetry. In this case, the asymmetry in question is information. Think of the hypothetical union as you and your coworkers all pitching in to get a really good lawyer to review your employment contracts and vesting terms.
That's fine for those other people. And a common fund for a lawyerly review might be an interesting idea. In general, I don't want to pool my negotiations with other people, though.
> More importantly, because of the issues with equity, even those scarce observations are fuzzy. Comparing two equity packages from non-public companies is hard, and it's ridiculous (or, depending on your interpretation, cunningly malicious) to put that burden on every single employee individually. You're paid to be an expert in software engineering and a partial domain expert in whatever the company does; having to also be an expert in finance and obscure tax law to even know how much you're getting paid is unreasonable.
I resolve that difficulty by valuing all equity (or options etc) of non-public companies at a huge discount when comparing offers.
I don't treat exactly as if they were worth zero, but pretty close.
Slightly more specialised: in tech it seems to be common to grant employees at-the-money call options. The put-call-parity is your friend here (https://en.wikipedia.org/wiki/Put%E2%80%93call_parity).
A special case for that parity equation is:
put option + equity = call option + cash (at current price of equity)
In our case with both put and call having a strike at the current price of the equity.
More or less it says that a call option is exactly as useful as the insurance against the company going bust, ie the put option.
There are basically two ways for the call option to be worth more than peanuts:
- Either, the founders were idiots and sold the last round of equity too cheap (ie the strike of the call option is too low)
- Or, the share price is fair, but the company has a very high risk of going belly up (ie the put is worth a lot)
That's fine for those other people. And a common fund for a lawyerly review might be an interesting idea. In general, I don't want to pool my negotiations with other people, though.
> More importantly, because of the issues with equity, even those scarce observations are fuzzy. Comparing two equity packages from non-public companies is hard, and it's ridiculous (or, depending on your interpretation, cunningly malicious) to put that burden on every single employee individually. You're paid to be an expert in software engineering and a partial domain expert in whatever the company does; having to also be an expert in finance and obscure tax law to even know how much you're getting paid is unreasonable.
I resolve that difficulty by valuing all equity (or options etc) of non-public companies at a huge discount when comparing offers.
I don't treat exactly as if they were worth zero, but pretty close.
Slightly more specialised: in tech it seems to be common to grant employees at-the-money call options. The put-call-parity is your friend here (https://en.wikipedia.org/wiki/Put%E2%80%93call_parity).
A special case for that parity equation is:
put option + equity = call option + cash (at current price of equity)
In our case with both put and call having a strike at the current price of the equity.
More or less it says that a call option is exactly as useful as the insurance against the company going bust, ie the put option.
There are basically two ways for the call option to be worth more than peanuts:
- Either, the founders were idiots and sold the last round of equity too cheap (ie the strike of the call option is too low)
- Or, the share price is fair, but the company has a very high risk of going belly up (ie the put is worth a lot)
> In general, I don't want to pool my negotiations with other people, though.
Do you not believe that a hundred people can do more work than one person? That a hundred people have more buying power than one person? That a hundred processors can do more work than one?
“I have as much bargaining power as N people combined, no matter how big N is” is like believing that P=NP.
Do you not believe that a hundred people can do more work than one person? That a hundred people have more buying power than one person? That a hundred processors can do more work than one?
“I have as much bargaining power as N people combined, no matter how big N is” is like believing that P=NP.
Donald Knuth believes P=NP. So I would be in rather exalted company. I don't see how it's relevant to the discussion at hand?
> Do you not believe that a hundred people can do more work than one person?
In total, yes. Per person, no.
> That a hundred people have more buying power than one person?
What do you mean by buying power? Googling for the term suggests that it's a synonym for amount of money available to buy stuff ('purchasing power'). But I don't think that's what you mean?
> That a hundred processors can do more work than one?
In total, yes. Per processor, no.
Basically, when I am negotiating as part of a large group a few things happen, amongst them:
(1) The negotiating won't be about anything that makes me special compared to those other people.
(2) The company needs to be much more careful about overpaying. Granting a single high compensation to an outstanding candidate is much easier to get through the bureaucracy than a single high salary.
> Do you not believe that a hundred people can do more work than one person?
In total, yes. Per person, no.
> That a hundred people have more buying power than one person?
What do you mean by buying power? Googling for the term suggests that it's a synonym for amount of money available to buy stuff ('purchasing power'). But I don't think that's what you mean?
> That a hundred processors can do more work than one?
In total, yes. Per processor, no.
Basically, when I am negotiating as part of a large group a few things happen, amongst them:
(1) The negotiating won't be about anything that makes me special compared to those other people.
(2) The company needs to be much more careful about overpaying. Granting a single high compensation to an outstanding candidate is much easier to get through the bureaucracy than a single high salary.
What’s an elite negotiator ? All you need to be elite is to credibly be able to walk away from the deal.
Alternate: stocks are gambling; startup stocks are gambling with money you don't have; startups are so prevalent that the incentive to gamble money you don't have is harmful to a larger set of people than would accept the gambling risk under normal circumstances.
From what I remember (and I may be wrong) companies can't actually stop you from selling your shares to someone else right? That is why so many private secondary markets exist?
Sure they can. Nearly all standard pre-IPO equity comp contracts state that any sales may only be done with board approval. And pretty much no board ever approves that sort of thing.
One potential option is that you could enter into a contract with a third party to sell your shares to them after a liquidity event, but they'll give you cash right now. There's a risk to the buyer that the shares might end up being worthless (but that's the price you pay for a speculative play), and a risk to the seller that the shares might be worth quite a bit more at IPO/acquisition (but that's the price you pay for early liquidity).
Not sure if any equity comp contracts stipulate that you can't do that, but presumably they could prohibit you from doing that as well.
One potential option is that you could enter into a contract with a third party to sell your shares to them after a liquidity event, but they'll give you cash right now. There's a risk to the buyer that the shares might end up being worthless (but that's the price you pay for a speculative play), and a risk to the seller that the shares might be worth quite a bit more at IPO/acquisition (but that's the price you pay for early liquidity).
Not sure if any equity comp contracts stipulate that you can't do that, but presumably they could prohibit you from doing that as well.
I've had a number of chats with Dan Luu about this. If you want the high risk, high reward of a startup, while earning the total comp of a FAANG, you can work for FAANG and angel invest on the side. If out of college, you work for FAANG for ~5 years, you'll be able to meet the requirement for an accredited investor by making over $200k a year. At that point, you can invest any disposable income into early stage startups.
In addition to getting the benefits of both working at a startup and working at FAANG, you also get the benefits of an investor! You are able to diversify your portfolio across several different startups and you are able to get liquidation preference in any startup you invest in.
In addition to getting the benefits of both working at a startup and working at FAANG, you also get the benefits of an investor! You are able to diversify your portfolio across several different startups and you are able to get liquidation preference in any startup you invest in.
If you want the 'high risk, high reward' yes, but just to remind everyone, you could also shovel your savings into the S&P 500 and get low risk, medium reward, and be set to retire in a decade. I've done it. I highly recommend it!
A decade is very optimistic unless you plan to retire single in a LCOL area.
Which, fortunately, counts for 95% of the cities in the United States! You don't have to be in SF, NYC, or LA to live near museums, good food, and the outdoors. And if you're retired, you don't even need to be near the high-paying fin/tech companies either!
Yeah this is really the way to go, when you're young you have a principal problem anyways. I think part of what is maybe appealing about larger equity offers is that you're in with no skin, and you have no skin to give so the math seems to work. FAANG (or any public company) is going to solve this problem for you with incentive stock plans and even employee stock purchase plans. If you're going to be smart you're going to need capital before you start going into illiquid and volatile investments anyways, let a big company solve that problem and enjoy youth.
W2 taxes will create significant friction here - more so the higher you get over $200k.
It's the other way around. FICA tops out at $135k. Past that your wages are taxed at only 1.45% (for medicare) more than any other non-capital-gains income.
You are forgetting the Additional Medicare Tax of 0.9% that kicks in at $200,000 (single) or $250,000 (married joint).
There is also the Net Investment Income Tax of 0.9% that applies to all unearned income when you hit those same thresholds, including but not limited to income that qualifies as long-term capital gains.
There is also the Net Investment Income Tax of 0.9% that applies to all unearned income when you hit those same thresholds, including but not limited to income that qualifies as long-term capital gains.
Uhhh... are you ignoring the normal state and federal income taxes?
> you work for FAANG for ~5 years...meet the requirement for an accredited investor...you can invest any disposable income into early stage startups.
if you worked for $300k a year (total compensation) for 5 years, you would have accumulated $1.5m dollars. But you would have an outflow due to cost of living. Let's say it's 50% of your income goes to cost of living. Then you would have only $750k left to invest after the end of your 5 year tenure.
Even if you managed to keep your stock based compensation (rather than selling it), or you picked some other stocks to purchase during your tenure, it's unlikely to have more than a 100% gain. Let's say you did, and end up with a $1.5m pot at the end due to lucky picks.
> You are able to diversify your portfolio across several different startups
A $1.5m is barely enough to invest in one early stage startup these days. And not to mention it's such a small amount that a private equity investment firms/VC firms would likely consider it not really worth the trouble to court you over. So it's likely you have to DIY everything yourself - from finding the startup, to hiring the lawyers and bankers to deal with, as well as learn the domain (which you may or may not already be an expert). Or you will have to take a much more unfavourable term with the PE/VC firms as a small client (you have no influence over the conditions of your investment).
if you worked for $300k a year (total compensation) for 5 years, you would have accumulated $1.5m dollars. But you would have an outflow due to cost of living. Let's say it's 50% of your income goes to cost of living. Then you would have only $750k left to invest after the end of your 5 year tenure.
Even if you managed to keep your stock based compensation (rather than selling it), or you picked some other stocks to purchase during your tenure, it's unlikely to have more than a 100% gain. Let's say you did, and end up with a $1.5m pot at the end due to lucky picks.
> You are able to diversify your portfolio across several different startups
A $1.5m is barely enough to invest in one early stage startup these days. And not to mention it's such a small amount that a private equity investment firms/VC firms would likely consider it not really worth the trouble to court you over. So it's likely you have to DIY everything yourself - from finding the startup, to hiring the lawyers and bankers to deal with, as well as learn the domain (which you may or may not already be an expert). Or you will have to take a much more unfavourable term with the PE/VC firms as a small client (you have no influence over the conditions of your investment).
> A $1.5m is barely enough to invest in one early stage startup these days.
I just raised a $1.5m seed round for my startup and can tell you this isn't true. We've published all the numbers on our raise so you can take a look for yourself[0]. The average check an angel wrote was $22k and we even had a check as low as $5k. In fact, the largest check in our round was only $200k.
[0] https://www.freshpaint.io/blog/anatomy-of-a-seed-round-durin...
I just raised a $1.5m seed round for my startup and can tell you this isn't true. We've published all the numbers on our raise so you can take a look for yourself[0]. The average check an angel wrote was $22k and we even had a check as low as $5k. In fact, the largest check in our round was only $200k.
[0] https://www.freshpaint.io/blog/anatomy-of-a-seed-round-durin...
I rarely downvote. I downvoted this because it’s factually incorrect. I see deals with angels placing $50k every week, up and down the west coast.
I’ve never done the FAANG -> Angel thing, but I see nothing about it that isn’t viable for even a generally friendly and interested FAANG employee on the west coast.
I’ve never done the FAANG -> Angel thing, but I see nothing about it that isn’t viable for even a generally friendly and interested FAANG employee on the west coast.
I’ve invested in a few startups. The entire seed round is maybe 1-3 million and you don’t source that from 1 angel. Not only is that on the high end of an angel investment (probably approaching VC), you’d be stupid to only have 1 investor. You want a few to be able to leverage their expertise, advice, and social network.
Also your math is way off as you seem to have forgot about taxes. At 300 total comp, your take home is 150-200 for that and then you have cost of living expenses. You also don’t start at 300 AFAIK - probably closer to 100-200k these days for a CS undergrad.
Also your math is way off as you seem to have forgot about taxes. At 300 total comp, your take home is 150-200 for that and then you have cost of living expenses. You also don’t start at 300 AFAIK - probably closer to 100-200k these days for a CS undergrad.
Things are broken in startup compensation. FAANG (and other large bay area tech companies) pay mid six figures for senior engineers. A startup will offer you equity that in the 95% outcome nets you that much, and only after 10+ years (with a large chance that's it's worth zero). Oh, and you have a to take a huge financial risk when you leave due to the 90 day exercise window, potentially paying hundreds of thousands in tax on an illiquid (and potentially worthless) asset.
This used to work when companies IPO'd within a few years, but now that 10-15 years is common the system has broken down. As a personal example, neither of the two startups I've worked for (14 years and 9 years old) are anywhere close to an exit.
Letting employees sell their equity would definitely help, but typically the equity packages are too small for this to make them directly competitive. An offer at a $20M series A company might be 0.5% equity over 4 years, but a FAANG offer will be 10x that with little of the risk.
Removing the 90 day exercise window or granting employees money to early-exercise would help reduce this risk somewhat, but doesn't help with the limited upside.
Eventually, statups are going to have to realize that if they want to attract good employees they're going to have to either massively increase cash compensation (which means raising more) or give dramatically more equity (which limits how much they can grow pre-exit).
Personally, I think it's gotten so bad that the only way I would join a startup again is as a founder.
This used to work when companies IPO'd within a few years, but now that 10-15 years is common the system has broken down. As a personal example, neither of the two startups I've worked for (14 years and 9 years old) are anywhere close to an exit.
Letting employees sell their equity would definitely help, but typically the equity packages are too small for this to make them directly competitive. An offer at a $20M series A company might be 0.5% equity over 4 years, but a FAANG offer will be 10x that with little of the risk.
Removing the 90 day exercise window or granting employees money to early-exercise would help reduce this risk somewhat, but doesn't help with the limited upside.
Eventually, statups are going to have to realize that if they want to attract good employees they're going to have to either massively increase cash compensation (which means raising more) or give dramatically more equity (which limits how much they can grow pre-exit).
Personally, I think it's gotten so bad that the only way I would join a startup again is as a founder.
I've come to the same conclusion about startups vs. FAANG - I finally buckled 3 years ago and joined one, my initial grant 3x'd and my refresh grants 2x'd...that's a lot of wealth that startups weren't giving me, not even going into performance bonuses.
Startups can be a good deal for a founder though since VCs seem to be getting them in on the payout train too, but it just doesn't seem worthwhile enough for me otherwise to give up the gravy train for something that will likely pay less and be guaranteed to grind me to the bone.
Startups can be a good deal for a founder though since VCs seem to be getting them in on the payout train too, but it just doesn't seem worthwhile enough for me otherwise to give up the gravy train for something that will likely pay less and be guaranteed to grind me to the bone.
>FAANG (and other large bay area tech companies) pay mid six figures for senior engineers.
FAANG (and every other similarly paying company) accounts for at most 5-10% of the engineering talent in the US. Using them as a benchmark for how all companies should compensate engineers seems silly. A startup that needs at best an 80th percentile engineer has no need to meet FAANG compensation to get one hired.
FAANG (and every other similarly paying company) accounts for at most 5-10% of the engineering talent in the US. Using them as a benchmark for how all companies should compensate engineers seems silly. A startup that needs at best an 80th percentile engineer has no need to meet FAANG compensation to get one hired.
This is pretty specific to the bay area market (should apply as well to Seattle and New York, but I'm not familiar enough with the hiring markets in other areas to comment). But I think for the average engineer getting a job at FAANG/equivalent is not very hard if you're willing to prepare for the interviews.
If the average engineer could get a job at FAANG then they presumably would since their total comp would go up 2x. In my experience most engineers can't get one of those jobs despite trying. So they circle around non-tech companies and startups for lower compensations. I've observed this both in the Bay Area and New York. People who are in the FAANG bubble don't notice this in my experience (or the difficulty of FAANG interviews for many engineers) as they don't interact with that part of the engineer population.
> If the average engineer could get a job at FAANG then they presumably would since their total comp would go up 2x.
A lot of them don't actually know that.
Every time someone posts one of those developer salary articles here, from levels.fyi or similar sites, there a long line of naysayers who just can't believe the numbers are real -- but they are real.
A lot of them don't actually know that.
Every time someone posts one of those developer salary articles here, from levels.fyi or similar sites, there a long line of naysayers who just can't believe the numbers are real -- but they are real.
nah . I dont want to work there. Money still matters, but less after a certain point, and it sounds like a lot of bullshit.
Also, not everyone wants to work in SV, SEA or NYC. If I did that, I'd be able to see my family maybe once a year.
The question really flips when you ask yourself, how much could someone pay me to only visit my family only once a year?
The question really flips when you ask yourself, how much could someone pay me to only visit my family only once a year?
Thanks to the government's complete mishandling of the pandemic, you can work at a lot of these big tech companies and live anywhere you'd like now.
Which means to hire you a company doesn't need to compete with FAANG on salary. This doesn't refute my original point that startups don't really need to compete with FAANG salaries for talent.
> But I think for the average engineer getting a job at FAANG/equivalent is not very hard if you're willing to prepare for the interviews.
I agree that getting a job there is not very hard. Getting a senior role (which is what you originally mentioned) is. Anyone who is more than a few years out of school either needs to be really good or accept taking a significant step backwards in career progression (and probably a lowballed comp package).
I agree that getting a job there is not very hard. Getting a senior role (which is what you originally mentioned) is. Anyone who is more than a few years out of school either needs to be really good or accept taking a significant step backwards in career progression (and probably a lowballed comp package).
Being a senior at FB/Google/Apple is more equivalent to staff at Amazon and principal almost everywhere else to my understanding.
FWIW, before I joined my company (a FAANG), I was an engineering manager/tech lead hybrid. I ended up as a high mid-level in pay band, but being paid at just below the average of the next band up from numbers I've seen around, and currently grew it to more than most at the senior level. I may have taken two steps back on the career ladder, but I've almost tripled my compensation (in large part due to stock performance) from my startup job 3 years ago (which was already pretty high for the market for my background), and I have even more freedom in most aspects with what I get to work on & a very strong management team that supports me.
FWIW, before I joined my company (a FAANG), I was an engineering manager/tech lead hybrid. I ended up as a high mid-level in pay band, but being paid at just below the average of the next band up from numbers I've seen around, and currently grew it to more than most at the senior level. I may have taken two steps back on the career ladder, but I've almost tripled my compensation (in large part due to stock performance) from my startup job 3 years ago (which was already pretty high for the market for my background), and I have even more freedom in most aspects with what I get to work on & a very strong management team that supports me.
This presumes that you get an interview at all, which for an average engineer is not guaranteed.
FAANG isn't hiring nor retaining all the best.
My point is that few startups actually need the best and they have no reason to pay twice as much for the best in competition with FAANG. And as you point out, the few that do want the best can get the ones that didn't choose or get chosen by FAANG.
^^this. at my startup i focused on hiring smart but very junior/inexperienced programmers. our needs weren't that complicated, i could optimize our stack for their skill, they were happy to be entering in the exciting field of programming, i was open about "i hope you outgrow this job in 2-3 years and i will help you prep for the next step up even if it's not with us", and we got a ton of value out of them.
I think the goal of startups hiring overqualified people is to prevent those awkward growing pains as you transition from a small startup to a company that has recurring customers. That's right in the middle of their growth phase, so they want to avoid the instability associated with paying down tech debt then.
Whether that's enough to justify paying such high salaries at an early phase, I don't know. If you aren't planning on some kind of hyper growth phase, it's probably not. Even if you are, you might do alright without. Reddit survived its stability issues (although I do think they pay fairly well, though not FAANG).
Whether that's enough to justify paying such high salaries at an early phase, I don't know. If you aren't planning on some kind of hyper growth phase, it's probably not. Even if you are, you might do alright without. Reddit survived its stability issues (although I do think they pay fairly well, though not FAANG).
at least one of them seems to just he hiring every reasonably talented fresh grad they can indoctrinate before they get any morals, ethics or know-better. :X
[deleted]
It's not much better with RSUs, I've had both the experiences where a company's RSUs declined (so total comp fell) and they said "That's the risk we all take to have skin in the game". And I've had the experience where my RSUs have done well, and so they said "no raises or refreshers for you because your total comp is very high" ... So basically my risk if they decline and their gain if they rise...
It's frustrating because it was my capital risk of additional salary to take those RSUs (which only pay infrequently, not like salary)... Taxed at same high rates as salary...
It's frustrating because it was my capital risk of additional salary to take those RSUs (which only pay infrequently, not like salary)... Taxed at same high rates as salary...
I think the most compelling reason for a company to go public now is that it means they can off recruits liquid equity.
I wouldn’t be surprised if the recent wave of filings was partially driven by a sense that star employees were being poached by FAANGS that could effectively pay double, mostly on account of being public.
I wouldn’t be surprised if the recent wave of filings was partially driven by a sense that star employees were being poached by FAANGS that could effectively pay double, mostly on account of being public.
Having seen exit packages for director/ executive level individuals at a successful startup even, there’s a lot that doesn’t make sense. Early employees work really hard and are rarely promoted to important positions internally.
I’ve seen equity turn out well. It obviously can. And being open to those opportunities that might change your life can be valuable. But most likely it won’t - be an investor, do due diligence and make sure it’s really a rocket
I’ve seen equity turn out well. It obviously can. And being open to those opportunities that might change your life can be valuable. But most likely it won’t - be an investor, do due diligence and make sure it’s really a rocket
can you offer more detail on director/exec startup comp please? not something we get to see often. even a range would be nice
$20 million for 2 years of being with the company as cto
$3m for the earliest employees that had been there 6 years.
for all the other engineers, a down payment on a nice house ~$300-500k for 4 years.
thats a nice payday for the CTO. not sure its fair for the earliest employees. thanks for the datapoints anyway!
The trap is in the title. "Let employees". As long as you're just an employee you're at the mercy of these absurd mechanics. Opt out.
The primary investors should care about this as it can give great insight into how the rank and file feel about the long term prospects of their company.
I've perhaps been very lucky and fortunate enough to be picky, but when negotiating for a new job, I've always just made a spreadsheet with a bunch of expected value calculations and then used that to counter as appropriate. For both my current job and the new offer, I'll calculate total expected compensation after 3 years from now assuming bad performance, realistic performance and best performance. Those numbers alone can be very enlightening. If the offer's realistic projection is less than the current realistic projection, I politely let the negotiator know that their offer will need tweaking to have parity with my current situation. Either way, I'll suggest a counter offer that puts the realistic compensation at least 1.2x current if it isn't already, then play it by ear from there. The composition of salary vs. equity really just depends on my current risk tolerance. The more equity, the higher the best case upside.
This all happens after the company is serious about hiring me and I'm serious about joining them. It's nice to have a spreadsheet because it avoids appeals to emotion. I wouldn't share the formulas or numbers, but rather only the high level methodology and the conclusions you've drawn from it. It's your tool and confidential info, not theirs. If you feel like you've made a strategic error and asked for too much, you can easily backtrack and laugh it off with the negotiator by saying you had a typo somewhere. More likely, the negotiator will consult their own spreadsheets or board, and they will tell them that your counter offer is acceptable.
One time I simply mentioned to a recruiter that I might need to take out a loan to leave my current job due to AMT (since the options were actually worth something), but I was still trying to find a tax consultant to crunch the numbers. She came back right away with a pre-offer for a larger starting bonus pending approval. I later told her that the AMT worked out okay without it, but she still got me the starting bonus since it got approved. It never hurts to ask politely for something!
This all happens after the company is serious about hiring me and I'm serious about joining them. It's nice to have a spreadsheet because it avoids appeals to emotion. I wouldn't share the formulas or numbers, but rather only the high level methodology and the conclusions you've drawn from it. It's your tool and confidential info, not theirs. If you feel like you've made a strategic error and asked for too much, you can easily backtrack and laugh it off with the negotiator by saying you had a typo somewhere. More likely, the negotiator will consult their own spreadsheets or board, and they will tell them that your counter offer is acceptable.
One time I simply mentioned to a recruiter that I might need to take out a loan to leave my current job due to AMT (since the options were actually worth something), but I was still trying to find a tax consultant to crunch the numbers. She came back right away with a pre-offer for a larger starting bonus pending approval. I later told her that the AMT worked out okay without it, but she still got me the starting bonus since it got approved. It never hurts to ask politely for something!
Very interesting point of view ! I'm a French engineer owning "BSPCE" (stock option equivalent for french startups), I wonder if I can exercise those and sell the stock privately (obviously, the company is not IPO'd). If any other french HNer is reading this and has experience with this subject, I'd be interested to talk about it !
One roadblock, I think, is that the IRS requires 409(a) valuations every year to set a value for common stocks and thus the strike price for options. During those valuations, most startups strive to paint their value as being very low: “Seriously, folks, the market could dry up and leave common shareholders with nothing.” The resulting common share value is often pegged at 1/10 to 1/3 of the preferred share value implied by the most frequent fundraising round. Lower strike prices make it easier for employees to exercise their options and provide more upside.
My understanding is that a sufficient volume of equity sales can force new 409(a) valuations. These would require more payments to an external accounting firm, and 4x the work to do it quarterly, work that often consumes leadership cycles. Moreover, these valuations would likely have the effect of narrowing the gap between common and preferred share values, elevating the strike price and squeezing potential profits out of employee equity.
It’s probably different once a company is large enough that it’s granting RSUs. For companies at the ISO stage, I’m not sure the upsides outweigh the downsides.
My understanding is that a sufficient volume of equity sales can force new 409(a) valuations. These would require more payments to an external accounting firm, and 4x the work to do it quarterly, work that often consumes leadership cycles. Moreover, these valuations would likely have the effect of narrowing the gap between common and preferred share values, elevating the strike price and squeezing potential profits out of employee equity.
It’s probably different once a company is large enough that it’s granting RSUs. For companies at the ISO stage, I’m not sure the upsides outweigh the downsides.
At Secfi we 100% agree. Employees should: (a) have the knowledge to fairly assess their equity, and (b) have the option to cash out before an exit. We're working hard to fix this information asymmetry, and try to offer a way out of the equity-golden-handcuffs with a win-win structure to as many people as possible. Our financing product is not cheap, but it's a great option for a lot of startup employees that aren't able to sell their stock today. Sadly, that's still the reality at the moment, and as other commenters remarked it's likely to stay that way because individual employees are at such a negotiation disadvantage.
With all that said, there's still heaps to be done to fix this issue and we'd love to get feedback from the community on some of our material:
1. Stock option starter guide: https://www.secfi.com/academy/stock-option-guide
2. Exercise guide: https://www.secfi.com/academy/exercise-guide
3. Exercise tax calculator: https://www.secfi.com/products/exercise-tax-calculator
With all that said, there's still heaps to be done to fix this issue and we'd love to get feedback from the community on some of our material:
1. Stock option starter guide: https://www.secfi.com/academy/stock-option-guide
2. Exercise guide: https://www.secfi.com/academy/exercise-guide
3. Exercise tax calculator: https://www.secfi.com/products/exercise-tax-calculator
as a holder of some employee stock now actually worth six figures (bc company raised a round and is offering to buy back my shares) I have been confronted w the opposite question: do I want to sell it? I did not. reason being that I didn't need it right this second and it wasn't a life changing amount yet and it could be. I think the illiquidity helps in that I'm not tempted to reevaluate this decision every trading day and likely make a bad decision at the first negative data point.
at some point a company is clearly on the "will probably exit for non zero amount" track and the standard "its probably worth 0" advice does not apply. I'm not sure HN agrees with this.
at some point a company is clearly on the "will probably exit for non zero amount" track and the standard "its probably worth 0" advice does not apply. I'm not sure HN agrees with this.
I was recently in the same or similar position (partial buy-back) and opted to sell.
Tax concerns aside, your essentially betting that the stock will do better than an alternative investment. That might be the case, but taking the money and then reinvesting it is also a valid “I don’t need this money right now” option.
There’s also the factor that you’re more “eggs in one basket” if you keep the stock.
I personally pulled mine out to donate it, as it is potentially life-changing money in other people’s hands.
Tax concerns aside, your essentially betting that the stock will do better than an alternative investment. That might be the case, but taking the money and then reinvesting it is also a valid “I don’t need this money right now” option.
There’s also the factor that you’re more “eggs in one basket” if you keep the stock.
I personally pulled mine out to donate it, as it is potentially life-changing money in other people’s hands.
very noble of you, great option.
yes, i do think this stock has potential to at least 2-4x in 2 years from where it is today, and if things go south will at least be acquired for current valuation. so its probably better than any alternative investment i can do.
yes, i do think this stock has potential to at least 2-4x in 2 years from where it is today, and if things go south will at least be acquired for current valuation. so its probably better than any alternative investment i can do.
One thing I really liked about Tanium was the way they handled employee equity.
First starters, they granted RSU's instead of ISOs, so when you leave the company you just get to keep whatever stock you've earned without needing to write a big check and pay a bunch of taxes all at once.
Secondly, they did something like what the article suggested and every time the company raised fumding (about once a year), they allowed employees to participate and sell stock (with some restrictions.) In fact, the company has been profitable for a while, so I think allowing employees to sell stock is the primary reason they still do regular funding rounds.
I ended up leaving for other reasons, but I always felt like they treated me well in that regard.
First starters, they granted RSU's instead of ISOs, so when you leave the company you just get to keep whatever stock you've earned without needing to write a big check and pay a bunch of taxes all at once.
Secondly, they did something like what the article suggested and every time the company raised fumding (about once a year), they allowed employees to participate and sell stock (with some restrictions.) In fact, the company has been profitable for a while, so I think allowing employees to sell stock is the primary reason they still do regular funding rounds.
I ended up leaving for other reasons, but I always felt like they treated me well in that regard.
I was at a company that issued me an generous RSU package each year. Roughly $60k/year equivalent.
When my department was made redundant and we were laid off, turns out I didn't actually have any stock. The account reverted to $0.
Though, true, I never needed to write a big check or pay a bunch of taxes.
When my department was made redundant and we were laid off, turns out I didn't actually have any stock. The account reverted to $0.
Though, true, I never needed to write a big check or pay a bunch of taxes.
Ouch. I think Tanium's was initially like that, ("double trigger") requiring both vesting time and a liquidity event (acquisition, IPO, etc.) But they changed it to just vesting time ("single trigger") while I was there.
Or written other way "go public". To have liquidity for a company you need to be listed at some marketplace and be interesting enough so that people will trade tour stock.
[deleted]
How do you covert equity to passive income?
[deleted]
That’s what early stage startup equity is though. It’s specifically a high risk, high reward form of compensation.
It’s rarely going to double in worth. Either it’s worth a lot more or it is worth zero. And it’s almost always worth zero.