How to Evaluate Startup Offers(faingezicht.com)
faingezicht.com
How to Evaluate Startup Offers
https://faingezicht.com/articles/2021/09/20/evaluating-startup-offers/
140 comments
A bunch of early engineers i knew made less than 100k when their company got acquired for $320m cash.
Down rounds and preferential stocks are not fun
Down rounds and preferential stocks are not fun
I made $10k on a $138m sale and $50k on a $125m sale. I am that early Engineer you speak of.
I lost $8K on a $40M sale. Lost another $10K when a company "extinguished" prior shares (they are now worth $7B).
This is basically legalized gambling with a house that's allowed to have a rigged table. If you want to do well, become a senior engineer at a FAANG.
This is basically legalized gambling with a house that's allowed to have a rigged table. If you want to do well, become a senior engineer at a FAANG.
But was this a surprise to you? Did you expect to make more money from the sale of the company, and if so, why?
Because most of the shiny things in SF were paid for with equity. And there are plenty of shiny things in SF. I am not saying you should work for equity, but I think you should realize why the real estate is as expensive in SF as it is. There are plenty of times when people got screwed over, and there are also - fewer, but enough to move the market - people who didn't. So when you ask the question "how could you have been so incredibly stupid to believe that equity is not worth $0," you just have to look around yourself and ask "how come that zillow lists so many properties for over $10m?" You shouldn't count on your equity returning anything, but you also shouldn't listen to people who take an overly unhealthy view at the potential upside.
I’m willing to bet good money that the real estate in the SFBA is driven much more heavily by FAANG stock than startup stock…
Startups mint multi-millionaires. FAANG does it at scale day in and day out.
Startups mint multi-millionaires. FAANG does it at scale day in and day out.
Even at FAANG, not enough people have the seniority for their base salary to turn them into buyers of $10m homes. I appreciate your point that RSUs are different from options, but I still think it's indicative that cash rarely comprises the majority of the wealthy people's income.
Oh, fully agreed that cash rarely comprises the majority of wealthy people's income - but my point is that most of the tech wealthy in the SFBA comes from FAANG equity wealth, not startup equity wealth.
Startups exits sometimes make a handful of people mega-rich, but as this thread has revealed, making ordinary employees rich is quite rare. Not so rare are the people who hang out at FAANGs, collecting large amounts of equity, and riding the industry up. And yeah, the wealth in this case is typically not of the level to buy $10M homes, but $2M homes?
Once in a while you have a founder who strikes it rich, but that effect is overwhelmed by the more numerous folks just riding $GOOG, $AAPL, $FB, etc. to multi/deci-millionaire status.
Startups exits sometimes make a handful of people mega-rich, but as this thread has revealed, making ordinary employees rich is quite rare. Not so rare are the people who hang out at FAANGs, collecting large amounts of equity, and riding the industry up. And yeah, the wealth in this case is typically not of the level to buy $10M homes, but $2M homes?
Once in a while you have a founder who strikes it rich, but that effect is overwhelmed by the more numerous folks just riding $GOOG, $AAPL, $FB, etc. to multi/deci-millionaire status.
Sorry, I wasn't suggesting anyone was stupid for believing the hype that founders use to punt their stocks. What I was trying to get at was whether you had an idea of the valuation of the stock relative to your exercise price. If so, and that looked good, what happened to your company for it to sell at a low price?
Gotcha, I misunderstood.
Were you given a signing bonus to stay on after the acquisition?
Did you know the cap tables at those companies?
I don't think anybody knew the cap table for those companies. To be more precise: one of them didn't even have a cap table, the other was a secret between the lead investor and the original owner (an incubator). Needless to say nothing was disclosed to engineers, or any one of them for that matter. Even in this state, both companies raised a shitton of money.
This is what had been surprising to me in my experiences... first few startups the cap table was shared info but no specifics (investor pool 33%, employee pool 7%, etc) so at least you knew the rough outlay.
Then one recent startup was championing transparent salaries but wouldnt share anything about the cap table which seemed odd to me.
My current company the CEO answers questions about the stock outlay but not specifics but also doesnt claim to be transparent.
I just assumed from my earliest experiences most small companies were happy to explain the cap table and walk folks through dilution events.
Then one recent startup was championing transparent salaries but wouldnt share anything about the cap table which seemed odd to me.
My current company the CEO answers questions about the stock outlay but not specifics but also doesnt claim to be transparent.
I just assumed from my earliest experiences most small companies were happy to explain the cap table and walk folks through dilution events.
Cap tables can change very quickly too. Even if you know at the beginning, you’re not privy to any changes later on.
Sure. More the reason to have a rough representation that is public in a transparent company.
Cant make good decisions without full information.
Cant make good decisions without full information.
> To be more precise: one of them didn't even have a cap table
A cap table is a representation of ownership. Saying a company doesn’t have one is like saying I don’t have a height.
A cap table is a representation of ownership. Saying a company doesn’t have one is like saying I don’t have a height.
So you’re infinitely short? Joking.
What I meant is that the cap table was not disclosed and changed so often that nobody really knew what it was at a given moment in time.
What I meant is that the cap table was not disclosed and changed so often that nobody really knew what it was at a given moment in time.
i know an early engineer who worked for a well known founder 10 or so years ago.
The company was sold to a large tech company for like 350mil but what happened first is the VCs/founders created a new company and sold the IP from old company to new company and sold the new company for the 350mil leaving the employees with a worthless company.
So also trusting the founders and the VCs they choose are in my opinion more important then any equity grant offer
The company was sold to a large tech company for like 350mil but what happened first is the VCs/founders created a new company and sold the IP from old company to new company and sold the new company for the 350mil leaving the employees with a worthless company.
So also trusting the founders and the VCs they choose are in my opinion more important then any equity grant offer
Jesus, name and shame. That kind of behavior should follow those founders like a sign hanging from their neck saying "don't work for me."
That would be a fairly straightforward lawsuit as a company cannot intentionally defraud its own shareholders.
If the employees had options they weren’t shareholders (yet)
That's a straw man argument. If you had an interest of any kind in a company, and someone screwed you, you can sue. In today's environment, companies will settle even if they have a good case, let alone if they are likely to lose. Plenty of lawyers will take such a case and get paid in a contingent fee arrangement.
Hey, my old cofounder just did this to me!
[deleted]
Made 15k on a 100m+ sale, was at the startup for years.
I’ll stick to RSUs.
Saying you helped exit a company seems to go over well in interviews though.
I’ll stick to RSUs.
Saying you helped exit a company seems to go over well in interviews though.
Why is an RSU better than other types of shares, and how does it avoid this kind of dilution/backstabbing by founders? Honest question!
RSUs are actual stock that can be sold on the market. Options are the ability to buy a share in the future at a given price. One is real money now and the other is maybe money later.
Isn't this just a way of saying "work exclusively for public companies if you value equity"? You will not be able to sell private company shares on the market.
But I think you’re ignoring the liquidation preference discussed at the top of this thread: surely RSUs have the same junior rights as the shares from options if the company is acquired. One difference is that people are generally required to exercise options (and pay taxes on that) before they leave the company. But you also talk about selling RSUs on public markets so maybe you are thinking of something else?
Private companies sometimes give out RSUs. For instance, Uber did pre-IPO.
If your RSUs vest when your company is still private, you’ll owe taxes but not be able to sell the shares for the money you’ll need to pay the taxes. That sounds way worse than options.
The most common way to issue them is so-called "double trigger" vesting where you have both a) a service requirement (the time) and b) an event required (like IPO or sale). Since you have risk of forfeiture if IPO/sale does not happen, IRS does not deem vested (and thus taxable) until both triggers are satisfied.
I didn't say it was better! I was just pointing out that "RSU, therefore liquid" can't be relied on.
Solid
Qualtrics gave engineers RSUs in 2015 when they were still private.
I take RSU to mean “RSUs in a publicly traded company” - i.e., the value of the shares is well known and the sort of “sell the IP and fuck the employees” shenanigans is much harder to pull off.
You can get RSUs in private startups which doesn’t mitigate the risks being discussed here. That said there are still benefits to having RSUs over options (i.e., 90 day exercise window).
You can get RSUs in private startups which doesn’t mitigate the risks being discussed here. That said there are still benefits to having RSUs over options (i.e., 90 day exercise window).
I also take it to mean RSUs in a public company. I wouldn’t want RSUs in a private startup because I couldn’t sell them, but I’d still take the tax hit as they vest.
The availability of double trigger RSUs help mitigate that
RSUs (restricted stock) can be granted to employees if the startup is very very early because the par value of each share rounds down to $0.
If you join a company that just had a seed or Series A, the par value would be much higher, and if you were granted RSUs, you would need to buy the shares at whatever they’re valued at, which can be a lot if you’re buying 1% of a $10mm company (compared with a stock option which is simply the option to buy stock at a later date).
RSUs have voting rights and is usually the same stock founders have.
That’s said, an investor (or a founder for that matter) can come in at any time and rework the whole ownership structure by simply increasing the authorized share pool in a company from (let’s say) 10 million shares to 100 million shares, and then grant all of the newly created shares to other entities, thereby cutting the value of all other shares by 1/10.
A lot of it comes down to what investors force startups to do when they accept VC money, and also how ethically and morally the founders act from the perspective of employees with stock interest.
I’m a CEO and when I hire people, I’m very generous with stock options, but I tell people upfront they’re just lottery tickets. That’s really what they are.
If you join a company that just had a seed or Series A, the par value would be much higher, and if you were granted RSUs, you would need to buy the shares at whatever they’re valued at, which can be a lot if you’re buying 1% of a $10mm company (compared with a stock option which is simply the option to buy stock at a later date).
RSUs have voting rights and is usually the same stock founders have.
That’s said, an investor (or a founder for that matter) can come in at any time and rework the whole ownership structure by simply increasing the authorized share pool in a company from (let’s say) 10 million shares to 100 million shares, and then grant all of the newly created shares to other entities, thereby cutting the value of all other shares by 1/10.
A lot of it comes down to what investors force startups to do when they accept VC money, and also how ethically and morally the founders act from the perspective of employees with stock interest.
I’m a CEO and when I hire people, I’m very generous with stock options, but I tell people upfront they’re just lottery tickets. That’s really what they are.
IANAL, but there are two "problems" with this claim.
One is that "just create a bunch of shares and only give them to the founder" is true, but has tax consequences. (In your example, you just gave ~90% of the company to the founder at valuation $XM. Whether as options or as Restricted Stock, there's going to be a tax consequence to that either at grant or during vesting). A dishonest founder might do that, but they'd have to believe it was going to work out in their favor beyond just "I already have 40%, let's increase the value of the company".
Second though is that the Founders, usually as CEO and Board Directors, have a fiduciary duty to their shareholders. Even if you have full control of the voting rights, reallocating all the equity is a violation of that fiduciary responsibility. The injured parties have to sue you for it, and that might make the company equity worthless, but just because a company is private doesn't mean "anything goes".
One is that "just create a bunch of shares and only give them to the founder" is true, but has tax consequences. (In your example, you just gave ~90% of the company to the founder at valuation $XM. Whether as options or as Restricted Stock, there's going to be a tax consequence to that either at grant or during vesting). A dishonest founder might do that, but they'd have to believe it was going to work out in their favor beyond just "I already have 40%, let's increase the value of the company".
Second though is that the Founders, usually as CEO and Board Directors, have a fiduciary duty to their shareholders. Even if you have full control of the voting rights, reallocating all the equity is a violation of that fiduciary responsibility. The injured parties have to sue you for it, and that might make the company equity worthless, but just because a company is private doesn't mean "anything goes".
Is there any kind of clause or legal structure that would prevent the kind of alteration to ownership structure you describe above? It seems like you’re saying anyone can do anything at any time. That’s scary and I feel like we need laws against that, or a different structure for representation of workers.
> anyone can do anything at any time.
This is largely true at any smaller seed maturity or even Series A maturity.
As a sibling commenter mentioned, companies do have a fiduciary duty. But realistically, if the shareholders are composed of relatively unsophisticated investors/employees, you can do anything without being sued.
I obviously don’t subscribe to this kind of behavior at my own company, but being in the position it has opened my eyes the extent to which one could go if you were very greedy.
This is largely true at any smaller seed maturity or even Series A maturity.
As a sibling commenter mentioned, companies do have a fiduciary duty. But realistically, if the shareholders are composed of relatively unsophisticated investors/employees, you can do anything without being sued.
I obviously don’t subscribe to this kind of behavior at my own company, but being in the position it has opened my eyes the extent to which one could go if you were very greedy.
I have learned my lesson. Been at large company with fat RSUs for 5 years now.
I was a late joiner at a near-IPO startup, and did better than I’ve ever done at an early stage one. Even then, I’ve done way better with post-IPO RSU refreshers than with the pre-IPO options. It took years for our publicly traded price to hit what management delusionally (or dishonestly) messaged us as our options’ worth pre-IPO.
I remember a conversation when we got new ISO grants, that they might be worth $X, based on blah-blah-blah, but they’ll be worth at least $2X soon because we’re growing, so really you’re getting $2X! Which doesn’t even make sense to me if we’re going to view today’s price as a discounted future cashflow. Anyways, we’re finally trading at $X today, years and years after IPO.
Moral of the story is that the people budgeting how much to pay you will engage with incredibly wishful thinking when deciding how much to pay you if they can. “Sure, Z shares seems super generous, right? We’re a rocket ship!” But when the market decides how much a share is really worth, they can’t screw you by pretending they’re paying out more.
I’m only working for public companies from here out. And none of those 1 year grants that seem to be popping up.
I remember a conversation when we got new ISO grants, that they might be worth $X, based on blah-blah-blah, but they’ll be worth at least $2X soon because we’re growing, so really you’re getting $2X! Which doesn’t even make sense to me if we’re going to view today’s price as a discounted future cashflow. Anyways, we’re finally trading at $X today, years and years after IPO.
Moral of the story is that the people budgeting how much to pay you will engage with incredibly wishful thinking when deciding how much to pay you if they can. “Sure, Z shares seems super generous, right? We’re a rocket ship!” But when the market decides how much a share is really worth, they can’t screw you by pretending they’re paying out more.
I’m only working for public companies from here out. And none of those 1 year grants that seem to be popping up.
Which is why it would be entirely reasonable for someone who is granted stock as part of compensation to do a full diligence on the company before accepting the terms. Companies deliberately offer options knowing most people simply won't and thats how they get away with it.
I joined a private company a couple of months back. They gave me Options, but they made it clear they were "monopoly money" and gave me no ability to evaluate the value of the options - I accepted the offer EXCLUSIVELY based on the salary
Friend was the founding engineer at startup that did quite well. Eventually sold for 100s of millions, and yeah, he didn't see a dime.
Always discount those options to 0, and make sure you're getting a good salary.
Always discount those options to 0, and make sure you're getting a good salary.
I’ve seen this term around lately. What exactly is a “founding engineer”?
Is it a euphemism to give early non-founder employees a title that sounds like founder but with minimal corresponding equity?
Is it a euphemism to give early non-founder employees a title that sounds like founder but with minimal corresponding equity?
It varies. Co-founder's are "supposed" (according to YC) to have a 10% or larger original stake in the company but people will throw the title around anyway. Likewise founding engineer could be an IC there from the begging with several % in stock or it could be a meaningless puff title.
To clarify: first engineer.
exactly
It is completely arbitrary. Arguably, all roles at seed stage or earlier are arbitrary.
Yes, and usually pretty bad salary. I haven't seen any comment mentioning it, but it's another way to get screwed when joining a very early stage startup.
The 1st engineers join pre-series A, get pretty low salary with the promise of making it big when the company goes public or is bought. Then more engineers come on board when the company has more resources after a few other rounds of funding and they get a salary much closer to the market.
The 1st engineers join pre-series A, get pretty low salary with the promise of making it big when the company goes public or is bought. Then more engineers come on board when the company has more resources after a few other rounds of funding and they get a salary much closer to the market.
A neat thing about the job is you probably get to exercise early and save taxes on your equity if it actually pays off.
But yes, it's not worth that much more than joining a startup later, and it'd be foolish to evaluate it differently. It's fun, but if you don't have real founder equity don't trick yourself into working longer hours than you would at a regular job.
But yes, it's not worth that much more than joining a startup later, and it'd be foolish to evaluate it differently. It's fun, but if you don't have real founder equity don't trick yourself into working longer hours than you would at a regular job.
It seems to me that investors have figured out other ways of zeroing out startup employee equity, too.
I think the days of people getting rich from working for a successful startup are over.
I think the days of people getting rich from working for a successful startup are over.
Some data to back up your argument would really help here. The VC market has never been more founder-friendly, and the amount of VC invested is at an almost all-time high. Additionally, last year was the 3rd highest in the last 20 years for the number of IPOs. So just because you found yourself in an overly negative HN thread shouldn't skew your view that the chances of doing well are higher now than ever before (which is not meant to imply that they are high on an absolute level, but certainly in comparison to prior years).
Why does “The VC market has never been more founder-friendly” contradict the statement above that the outcomes are not so good for employees (who aren’t founders)? Perhaps the VC market became founder-friendly by transferring upside from employees to founders. Or perhaps some other mix.
A founder-friendly term sheet is not necessarily an employee-friendly term sheet, but a founder-unfriendly term sheet is 100% of the time bad for employees as well (low valuations, liquidation preferences, etc). All things being equal, as an employee you want to be in the company where the founder is laughing all the way to the bank.
for starters, there's this for IPOs (or lack of IPOs)
https://steveblank.com/2019/04/10/startup-stock-options-why-...
also, anecdotal, I've seen it happen. I was at a recent startup that got bought. I was employee 15. Somehow, the ISOs got set to $0 worth but the founders made out like bandits with their preferred stock.
https://steveblank.com/2019/04/10/startup-stock-options-why-...
also, anecdotal, I've seen it happen. I was at a recent startup that got bought. I was employee 15. Somehow, the ISOs got set to $0 worth but the founders made out like bandits with their preferred stock.
It seems like there should be a law requiring this to be explained in plain terms at offer and each month to options holders. For example they should show you a graph with the x-axis as exit valuation and the y-axis as "your payout". Those are the numbers that really matter to most employees.
There's no law, but do not accept an offer at a startup where the founders / leadership are not willing to explain this to you whenever you ask.
Yes. There is a lot of confidentiality built into some of the financing terms. Befriend the CFO. A good one will say “If sell for X, you will own Y% of the company, which will be worth Z to you” and they can give another few scenarios too. “We need to clear A in valuation for employees to get anything, and at Y you get a little”
Other rough heuristics:
- Down rounds tend to punish employee shares.
- Pivots that require large equity tend to be bad for employee shares.
- Large rounds relative to valuation ($700mm for a post money valuation of a billion) make a much higher future hurdle to clear - bad for employee shares.
- PE rounds tend to be worse than VCs. (VCs tend to worry more about upside, while PE firms push for downside protection)
All of these general rules have many exceptions.
Other rough heuristics:
- Down rounds tend to punish employee shares.
- Pivots that require large equity tend to be bad for employee shares.
- Large rounds relative to valuation ($700mm for a post money valuation of a billion) make a much higher future hurdle to clear - bad for employee shares.
- PE rounds tend to be worse than VCs. (VCs tend to worry more about upside, while PE firms push for downside protection)
All of these general rules have many exceptions.
> Large rounds relative to valuation ($700mm for a post money valuation of a billion) make a much higher future hurdle to clear - bad for employee shares.
Is that a scenario where the company has a pre money valuation of $700m and accepts $300m in funding? Why is that a bad thing? Sorry if this is a naive question.
> PE rounds tend to be worse than VCs. (VCs tend to worry more about upside, while PE firms push for downside protection)
Is this a binary thing or do investors exist on a spectrum? I’ve also heard another label, “growth equity”, which sounded a lot like venture capital to me.
And are those rounds necessarily worse? Is it about the PE firm selecting deals to fit their risk appetite or is it more about them inserting clauses that are harmful to common share holders (not sure what the right term is but I mean regular employees).
Is that a scenario where the company has a pre money valuation of $700m and accepts $300m in funding? Why is that a bad thing? Sorry if this is a naive question.
> PE rounds tend to be worse than VCs. (VCs tend to worry more about upside, while PE firms push for downside protection)
Is this a binary thing or do investors exist on a spectrum? I’ve also heard another label, “growth equity”, which sounded a lot like venture capital to me.
And are those rounds necessarily worse? Is it about the PE firm selecting deals to fit their risk appetite or is it more about them inserting clauses that are harmful to common share holders (not sure what the right term is but I mean regular employees).
Good questions…
Scenario 1 is $300mm pre, $700mm in investment, $1bln post. If there’s are strong preference rights, you need a multi billion dollar exit for employees to get anything.
PE vs VC isn’t binary, it’s a spectrum. VC firms generally don’t care about so-so outcomes. So they give up downside protection for upside. (They give up preferences to get a higher share of the company, which reduces valuation)
On the flip side, PE firms are trying to make as return on every investment. So they’re ok with crazy high valuations as long as they get liquidity preferences. Which means in so-so exits they get most of the money.
Scenario 1 is $300mm pre, $700mm in investment, $1bln post. If there’s are strong preference rights, you need a multi billion dollar exit for employees to get anything.
PE vs VC isn’t binary, it’s a spectrum. VC firms generally don’t care about so-so outcomes. So they give up downside protection for upside. (They give up preferences to get a higher share of the company, which reduces valuation)
On the flip side, PE firms are trying to make as return on every investment. So they’re ok with crazy high valuations as long as they get liquidity preferences. Which means in so-so exits they get most of the money.
This is an oversimplification and, as written, is not quite right. It doesn't matter whether the company is acquired outright or floated on a stock market. If the company has a well-structured employee options scheme, then either of those events should be classed as an 'exit' event and the employees' options should be automatically exercised and sold, giving them the net gain in cash on that day.
As for preference shares, most VCs try to get that. They can be negotiated away by the company management sometimes. If they remain, they come into play in situations where the company isn't successful - where the shares are sold at a lower value than they were bought for. The preference gives the VCs to get their money out first, and leave the scraps for the others. Usually the others includes the founders who are similarly shafted - but then again they evidently didn't build the value of their company very successfully and they signed the deals.
As for preference shares, most VCs try to get that. They can be negotiated away by the company management sometimes. If they remain, they come into play in situations where the company isn't successful - where the shares are sold at a lower value than they were bought for. The preference gives the VCs to get their money out first, and leave the scraps for the others. Usually the others includes the founders who are similarly shafted - but then again they evidently didn't build the value of their company very successfully and they signed the deals.
VCs often get shares with (e.g.) 3x liquidation preference meaning that they should leave with max(3x value invested, num_shares x sale_price / total_company_shares), or less if the company didn’t sell for enough money to pay out that tranche and the more senior shares. For VCs, the point is that in a failed company, they get 0. In a medium-success they get up to 3x their investment a bit like buying a bond for 33¢ on the dollar, and in a massive success they get equity-like payout.
The problem is that if a company has a lot of shares outstanding with a high liquidation preference then outcomes that look like success to employees or founders may not result in those employees making much money, and the employees generally don’t know the relationship between how much the company is sold for and how much they get paid because it is confidential to the senior executives or investors.
The problem is that if a company has a lot of shares outstanding with a high liquidation preference then outcomes that look like success to employees or founders may not result in those employees making much money, and the employees generally don’t know the relationship between how much the company is sold for and how much they get paid because it is confidential to the senior executives or investors.
Often? I agree that liquidation preferences are often overlooked by startup employees but I wouldn't say 3x is common or generally acceptable.
The National Venture Capital Association (NVCA) benchmarks[1] show that over 95% of term sheets across all funding rounds include a 1x liquidation preference.
[1]https://nvca.org/model-legal-documents/ (it's in the Enhanced Model Term Sheet v2.0)
The National Venture Capital Association (NVCA) benchmarks[1] show that over 95% of term sheets across all funding rounds include a 1x liquidation preference.
[1]https://nvca.org/model-legal-documents/ (it's in the Enhanced Model Term Sheet v2.0)
A 3x liquidation preference is anomalous. Pretty much every term sheet I see is an eminently reasonable non-participating 1x, which is a de facto standard term these days. If liquidation preferences are consistently higher across startups then it is a sign of an unhealthy investment market.
I think there are two problems here. The first is that what is “standard” is not very well known, so candidates considering startups are operating with little in terms of default assumptions and expectations. Is there any resource that describes what the default even is?
The second problem is that companies are never transparent about any of these things. If you ask, you get funny looks or continued evasiveness, and candidates are left with only part of the full picture anyways. From other comments here it seems that even if you run through a checklist of questions, the company’s structure could drastically change in a subsequent funding round of some such event. And if that’s the case, does knowing the current state of affairs matter at all?
The second problem is that companies are never transparent about any of these things. If you ask, you get funny looks or continued evasiveness, and candidates are left with only part of the full picture anyways. From other comments here it seems that even if you run through a checklist of questions, the company’s structure could drastically change in a subsequent funding round of some such event. And if that’s the case, does knowing the current state of affairs matter at all?
In my (UK) experience, a 1x liquidation pref seems requested. 3x seems unpalatable. Maybe things are different in the US west coast. (It's certainly easier to raise money there, so perhaps the terms are harder as a compromise.)
You're right that employees with options don't get enough information to understand the value and potential value and mechanisms of their options in private companies. That's what I was driving at (poorly) in a separate comment.
You're right that employees with options don't get enough information to understand the value and potential value and mechanisms of their options in private companies. That's what I was driving at (poorly) in a separate comment.
No, even in the US West Coast, 1x is what's typical. Anything more is non-standard.
3x would mean something is wrong with the company.
3x would mean something is wrong with the company.
Back around 2012, I made 10k cash + stock that would eventually net me around 30k on a ~50 million acquisition. I had been at the company for less than a year. I was employee #50 or something. This sounds like a much better deal than anything I've seen down thread, and it was actually serious money for me at the time.
Honestly, I think this just comes down to the moral character of the founder(s) in the company. If you have a good way of assessing that in the interview process, then maybe take it into account? Doesn't sound easy to do though.
Honestly, I think this just comes down to the moral character of the founder(s) in the company. If you have a good way of assessing that in the interview process, then maybe take it into account? Doesn't sound easy to do though.
You should do your due diligence on the business and financing to avoid this situation, and unless you have a ton of equity, you should hedge your bet on multiple companies if you’re trying to make high ROI and you aren’t feeling confident that’ll happen in your current gig.
“Start-up” is a bit of a disingenuous term when using to compare with FAANG, because one refers to a class of high performing public tech companies, and the other is a catch all for small businesses.
I know chronically broke start up folks, faang millionaires, and a group of people who seem to to know how to play the startup game and are extremely wealthy, so YMMV.
“Start-up” is a bit of a disingenuous term when using to compare with FAANG, because one refers to a class of high performing public tech companies, and the other is a catch all for small businesses.
I know chronically broke start up folks, faang millionaires, and a group of people who seem to to know how to play the startup game and are extremely wealthy, so YMMV.
I’ve received offers from a bunch of startups over the years. None of them would disclose their cap table. Most of them even refused to tell me the total number of shares outstanding.
Are people getting enough info for any kind of due diligence? Do people know how to play the game or did they get lucky?
Are people getting enough info for any kind of due diligence? Do people know how to play the game or did they get lucky?
Don't work for companies that offer equity as a significant component of their compensation and won't tell you shares outstanding. That used to be somewhat common, but I can't remember the last time a friend of mine got an offer where that was the case. It's a red flag.
Is there a list of these red flags to watch out for or ask about for startups?
For a privately held company the number of shares outstanding, on its own, isn’t enough and really doesn’t tell you much. Your shares are almost certainly not the same as other people’s shares and you need to know what those differences are. Other people likely hold shares that have terms like “I get paid 3X my investment before anyone else gets paid.” Or other terms that make the total number of shares not that informative in knowing where you really stand. If someone’s not sitting down with you and laying everything out on the table then it’s almost certain there are things they don’t want you to know that make your offer significantly less attractive than what it might appear in face value.
You can ask about liquidation preferences as well. Anything above 1X is above market and, again, a red flag.
I’m not agreeing one way or another about needing cap table in detail, but if the company isn’t giving you the information you need to evaluate an offer after you request it, then don’t work there.
As for luck, of course there’s some risk component there, otherwise the ROI wouldn’t be higher, but it’s not a dice roll unless you let it be.
I’m biased. I was part of lackluster exits, failed startups, and dead-end startups that will forever raise more money. I learned a lot of valuable lessons the hard way on how to evaluate companies, and have since been able to pick winners when I look to change jobs. The other thing that goes unmentioned is once you “win” once, your risk tolerance might change, or your patience to wait for the exact right next opportunity may increase significantly.
I think you can ask yourself if you’d invest 500k in this company (or whatever assets you have up to that), and if you value your time more than your money, that should tell you something.
As for luck, of course there’s some risk component there, otherwise the ROI wouldn’t be higher, but it’s not a dice roll unless you let it be.
I’m biased. I was part of lackluster exits, failed startups, and dead-end startups that will forever raise more money. I learned a lot of valuable lessons the hard way on how to evaluate companies, and have since been able to pick winners when I look to change jobs. The other thing that goes unmentioned is once you “win” once, your risk tolerance might change, or your patience to wait for the exact right next opportunity may increase significantly.
I think you can ask yourself if you’d invest 500k in this company (or whatever assets you have up to that), and if you value your time more than your money, that should tell you something.
Do you need the whole cap table? Presumably, common shares outstanding, preferred shares outstanding and the total dollars of the overhang of the preferred shares should be sufficient. Assuming that options are correctly accounted for in that number (that is, if people cash in ITM options)
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Some thoughts about small startups. If the company is not legally obligated to eventually give me what they are promising, I have a simple criteria. I don't even evaluate it.
For instance, a usual shady tactic to hire talented developers -that would otherwise be recruited by a larger company- is to claim that they are on their way to receive some substantial investment in the near future, which will improve your working conditions overnight. The CEO will then discuss your future salary by giving you some figures.
Beware that usually these claims are complete bollocks, and the company is not even close to entering a seed round. Startups are fun and a great learning opportunity, but make sure their promises are actually binding.
For instance, a usual shady tactic to hire talented developers -that would otherwise be recruited by a larger company- is to claim that they are on their way to receive some substantial investment in the near future, which will improve your working conditions overnight. The CEO will then discuss your future salary by giving you some figures.
Beware that usually these claims are complete bollocks, and the company is not even close to entering a seed round. Startups are fun and a great learning opportunity, but make sure their promises are actually binding.
Good point. I left my last startup for this reason. Kept telling the CEO "show me the money". After a half dozen times being told that the "funding is just around the corner" I left.
Two months later they cut more than half the staff and becoming an IP bundle looking for a buyer.
Two months later they cut more than half the staff and becoming an IP bundle looking for a buyer.
I’ve been using a discounted cash flow model to evaluate work opportunities for years and it’s great to see an article take that approach too.
What I’ve found in my own analysis and with friends looking to join a new place is we tend to undervalue the established, current company and overvalue the startup. It’s difficult to calculate the odds of success at a startup and everyone has a different current arrangement with their existing company but in many cases I’ve calculated that the startup would have to be valued at many billions 7 or 8 years down the road to break even in total compensation. Especially so if your current role is at a post-IPO success story (that will add a lot of value over the next 8 years) where the RSU’s are fully charged, have great benefits (yay for matching 401k’s!) and a very good salary.
It not getting there means fairly bad returns so you really need to be going for the “right reasons”. Seeing startup gold is not it.
Of course the other side of it is the startup is a huge success in 8 years and your cumulative ISO’s are worth a fortune. And that dream is so alluring to people. And so unlikely.
What I’ve found in my own analysis and with friends looking to join a new place is we tend to undervalue the established, current company and overvalue the startup. It’s difficult to calculate the odds of success at a startup and everyone has a different current arrangement with their existing company but in many cases I’ve calculated that the startup would have to be valued at many billions 7 or 8 years down the road to break even in total compensation. Especially so if your current role is at a post-IPO success story (that will add a lot of value over the next 8 years) where the RSU’s are fully charged, have great benefits (yay for matching 401k’s!) and a very good salary.
It not getting there means fairly bad returns so you really need to be going for the “right reasons”. Seeing startup gold is not it.
Of course the other side of it is the startup is a huge success in 8 years and your cumulative ISO’s are worth a fortune. And that dream is so alluring to people. And so unlikely.
> great benefits (yay for matching 401k’s!)
Indeed yay for matching 401(k)s, but that benefit is only a high-four figure sum per year for most people. In the scheme of SWE comp, that’s about a needle’s width on the gauge.
Indeed yay for matching 401(k)s, but that benefit is only a high-four figure sum per year for most people. In the scheme of SWE comp, that’s about a needle’s width on the gauge.
It’s a piece of the puzzle though. Consider you’ll be at the startup for 8 years before moving on, letting all your ISO’s vest after the IPO. In that time, the current company would have matched ~200k in funds when accounting for yearly appreciation of 8% in it. And of course the marginal tax savings you’ll have from a higher a salary over that time.
So you add that to the formula plus assumed salary differences in that time and whatever income you’ll receive from RSU’s and the increase in the current company’s market cap over the time. You may even consider what your current salary allows you to invest after taxes and how that will compound and if the startups lower salary will still allow that or if you’d have to pause that.
So add that all up and that is what you’re discounting. In essence the ISO’s from the startup need to at least equal that after 8 years (or however many you are assuming until exit. 8 is average) to break even. It’s possibly in the many millions for some people.
It’s a hard calculation with a lot of variables and assumptions. But it’s helpful to see how much of a risk you may really be taking.
So you add that to the formula plus assumed salary differences in that time and whatever income you’ll receive from RSU’s and the increase in the current company’s market cap over the time. You may even consider what your current salary allows you to invest after taxes and how that will compound and if the startups lower salary will still allow that or if you’d have to pause that.
So add that all up and that is what you’re discounting. In essence the ISO’s from the startup need to at least equal that after 8 years (or however many you are assuming until exit. 8 is average) to break even. It’s possibly in the many millions for some people.
It’s a hard calculation with a lot of variables and assumptions. But it’s helpful to see how much of a risk you may really be taking.
My experience is that, tech companies who start to succeed and scale end up starting 401(k)s that are competitive with the market along the way so, in the success case, you aren’t giving up 8 years of matching. (They more or less have to, or else they can’t compete for talent for whom they can no longer give meaningful upside via options.)
lots of Series A to B startups do 401k matching
Yeah I think it has become more common. Still I’d say the majority don’t but I don’t have data on that, just in my history of sneaking with them.
I’d say I’ve seen a trend towards better compensation at A and especially B startups in recent years VS the more traditional large equity grants to early rank and file. Maybe VC money has just gotten so easy and early deals so big that there’s the money for it?
I’d say I’ve seen a trend towards better compensation at A and especially B startups in recent years VS the more traditional large equity grants to early rank and file. Maybe VC money has just gotten so easy and early deals so big that there’s the money for it?
I don’t mean to be terribly cynical, but wouldn’t it be just as effective to simply ignore equity entirely when evaluating a startup offer?
An offer from an established company has a fairly clear value - a chunk of cash and some relatively-well understood stock. A startup offer amounts to a chunk of cash and a box of lottery tickets. Given the wide variety of possible outcomes, it’s essentially impossible to assign any value to them - so they might as well not exist for the purposes of evaluation.
I tend to think of this kind of choice as one that you’d make based on the company and work environment, rather than the compensation - so long as the startup can pay enough cash to maintain a standard of living you want. Then it’s a case of deciding if the work environment, team, product, mission etc. are something in which you’re interested enough to give up the stability and income from an established company. If it does work out and you get rewarded through an exit, then that’s great! But if you’re going in to it with the expectation of becoming wealthy, you’re almost certainly going to be disappointed.
YMMV of course, I’m personally quite risk-averse!
An offer from an established company has a fairly clear value - a chunk of cash and some relatively-well understood stock. A startup offer amounts to a chunk of cash and a box of lottery tickets. Given the wide variety of possible outcomes, it’s essentially impossible to assign any value to them - so they might as well not exist for the purposes of evaluation.
I tend to think of this kind of choice as one that you’d make based on the company and work environment, rather than the compensation - so long as the startup can pay enough cash to maintain a standard of living you want. Then it’s a case of deciding if the work environment, team, product, mission etc. are something in which you’re interested enough to give up the stability and income from an established company. If it does work out and you get rewarded through an exit, then that’s great! But if you’re going in to it with the expectation of becoming wealthy, you’re almost certainly going to be disappointed.
YMMV of course, I’m personally quite risk-averse!
That’s what I’m doing. Previously worked at a stable mid size company and I wanted to try a startup. The comp and other benefits were already pretty far above my stable company, so if I get anything from the equity it’s a bonus.
I feel a little dumb for not digging harder but the offer was already a big improvement.
I feel a little dumb for not digging harder but the offer was already a big improvement.
Completely agree. I left Visa for an early stage startup and I didn't focus on the stock too much. Cash in hand matters more.
This is the right way to think about it because at the end of the day startup success is rare.
That doesn’t mean you shouldn’t due your due diligence and get all the info you can before joining a startup. IMHO the most important thing is the character and financial savvy of the founders, because it’s one thing to fail but it’s another thing to essentially succeed but then get screwed because of investor shenanigans. The founders are your only hope against this scenario.
That doesn’t mean you shouldn’t due your due diligence and get all the info you can before joining a startup. IMHO the most important thing is the character and financial savvy of the founders, because it’s one thing to fail but it’s another thing to essentially succeed but then get screwed because of investor shenanigans. The founders are your only hope against this scenario.
I agree, you should join a startup for the experience of it rather than the risky upside. If you're leaving another company with an equity component, though, it's a good idea to try and quantify your options. Ideally you are lucky enough to find a company that will both definitely give you the work environment you want, and probably make you wealthy.
For a small startup, I recommend asking the CEO tough questions about the viability of the business and planned exit strategy. If they get upset about it, walk away. If they don't get upset, that's good. At that point, ask them to get you in contact with an early investor to ask them questions. If they aren't willing to do that, then walk away. Once you do have an offer, do an analysis. Unless you think they are giving you an abundance, then do a round of negotiation. Negotiating can only help you. Keep it fair and reasonable, though. If it's your first job and you have no experience, for example, don't expect them to budge much if at all.
For a small startup, I recommend asking the CEO tough questions about the viability of the business and planned exit strategy. If they get upset about it, walk away. If they don't get upset, that's good. At that point, ask them to get you in contact with an early investor to ask them questions. If they aren't willing to do that, then walk away. Once you do have an offer, do an analysis. Unless you think they are giving you an abundance, then do a round of negotiation. Negotiating can only help you. Keep it fair and reasonable, though. If it's your first job and you have no experience, for example, don't expect them to budge much if at all.
Too many people don’t do their research and understand how preferred status on the cap table works, minimum payouts, and other things that are typically (sadly intentionally) withheld from employees receiving these offers. People hear about startups selling or being acquired for millions or even billions but too often nearly all that money is just paying back the original investors with some modest returns so they can move on. There can be little, or even nothing, for employees holding options. If the company is acquired you might get a nice stash package to welcome you onboard with a t-shirt.
Obviously there are other stories that see employees become fantastically wealthy, but that’s a rare exception not the norm. Equity comp at a publicly traded company (via RSUs) is very different than equity comp in a privately held venture. With RSUs you’re still at the mercy of the market but you know how much they’re worth literally second by second.
At a startup as an employee you should generally assume those shares are worth nothing and be OK making what you’ll be making then. Anything above that is a nice windfall bonus.
Obviously there are other stories that see employees become fantastically wealthy, but that’s a rare exception not the norm. Equity comp at a publicly traded company (via RSUs) is very different than equity comp in a privately held venture. With RSUs you’re still at the mercy of the market but you know how much they’re worth literally second by second.
At a startup as an employee you should generally assume those shares are worth nothing and be OK making what you’ll be making then. Anything above that is a nice windfall bonus.
If you had access to all the necessary information, what would the formula look like that you would have to track at funding rounds to give any early indication that as an employee you're not going to make anything.
This is something that I have been thinking about lately and I am just not well versed enough to know what inputs I need to build this.
I would like to be able to have a some sort of data driven risk assessment.
I would love some input here and would like model this and track when it's time to say goodbye.
This is something that I have been thinking about lately and I am just not well versed enough to know what inputs I need to build this.
I would like to be able to have a some sort of data driven risk assessment.
I would love some input here and would like model this and track when it's time to say goodbye.
Vast majority of startups will not disclose cap table, outstanding shares, liquidation preference, nothing. Try asking and see how it goes. The only one I've interviewed with that does disclose some of it was Stripe.
That’s because there are still enough willing pawns that accept these offers without knowing what they’re getting. That won’t change until the market wakes up and enough people stop subjecting themselves to such nonsense to the point that companies can’t hire. Until then, as the saying goes there’s a sucker born every minute. If you think I’m being syndical, ask a typical startup to see everything people have described in this tread and watch them squirm.
I agree. I think it would benefit all of us if we were more informed about the types of tricks startups use to lure people like this. If we were more informed, then they would have to start being more open about the actual value. I feel like this kind of thing could almost be taught to CS students in some kind of negotiation class!
With the caveat that you don't need the full cap table - a company not disclosing outstanding shares, last preferred price and 409a/strike price are giving you a signal to run away.
Agreed that liquidation preference would be helpful, too, but if at the time you're signing on you think the liquidation preference will come into play you shouldn't join them.
Agreed that liquidation preference would be helpful, too, but if at the time you're signing on you think the liquidation preference will come into play you shouldn't join them.
If you want someone to stop bothering you about working at their startup just ask for the cap table.
This is such good advice to filter out all the recruitment emails XD
Instead of responding “not interested”. I’m just gonna start saying “show me the cap table”. Love this idea
Instead of responding “not interested”. I’m just gonna start saying “show me the cap table”. Love this idea
Also watch out for a clause giving the buyer the right to buy back the employee shares, possibly at par value.
That means you could have executed those options 5 years ago (to prevent a windfall tax), and just get you money back at acquisition time. Zero interest five year loan. Thanks!
That means you could have executed those options 5 years ago (to prevent a windfall tax), and just get you money back at acquisition time. Zero interest five year loan. Thanks!
What the hell, is that a thing? Does it have a name?
Drag-along rights, with a waiver of appraisal rights?
> As I was considering the switch, multiple people told me I was making a big mistake, losing out on both job stability and compensation. Those people had no idea what they were talking about.
Maybe they had “some” idea? I guess time will tell and hope this sentence does not simply serve to cast one’s own fears about having made the wrong choice.
Maybe they had “some” idea? I guess time will tell and hope this sentence does not simply serve to cast one’s own fears about having made the wrong choice.
Author intends to present a rational, quantitative view of compensation yet begins by emotionally dismissing any advice contrary to his beliefs. Kind of defeats the purpose here.
My interpretation is that he’s saying they’re right if the only priority is money, but otherwise they miss the point. He didn’t go to the new job for money. However, money isn’t totally irrelevant, so he wrote this article detailing what he knows about the process of assessing offers.
Author here, that's exactly the case :)
Left FAANG knowing that money would be better there. My new opportunity is (so far) a lot more fun, a I'm learning a lot more about the things I want to learn.
Left FAANG knowing that money would be better there. My new opportunity is (so far) a lot more fun, a I'm learning a lot more about the things I want to learn.
I’m glad I wasn’t way off the mark.
I’m right in the middle of assessing opportunities so what you wrote is very timely and helpful. Thanks for taking the time to put this out in the world.
I’m right in the middle of assessing opportunities so what you wrote is very timely and helpful. Thanks for taking the time to put this out in the world.
The whole point of the article is that while the money may not be everything, it is important to understand. He says right in there that FAANG money is probably going to be the best, if that's your priority.
What's emotional about it?
As I was considering dumping my savings into a video poker machine, multiple people told me I was making a big mistake, losing out both on a safe retirement and interest.
World A: And they were wrong! I was able to turn those $100k into $5M.
World B: And they were wrong! I may have lost all my savings but I still would have gotten a massive ROI if I had played my hand better.
World A: And they were wrong! I was able to turn those $100k into $5M.
World B: And they were wrong! I may have lost all my savings but I still would have gotten a massive ROI if I had played my hand better.
That is an awkward wording, but the author explains exactly what he means in the next sentence, agreeing that switching FAANG for a startup for financial reasons is stupid. If you switch, do it for other reasons.
One huge risk is people higher up change more often in startups in my experience, especially early ones, what usually follows is a domino restructuring and basically a different company.
This happens a lot when a VC in a big round decides things are going too well, better put one of his own in charge to make sure its under his complete control going forward.
Not looking to get into a Cryptocurrency debate here, but one good thing about startups in that area is the share offering tends to be liquid from day 1 and the valuations can get very high. It feels a lot more likely to result in a payout than waiting for an acquisition or IPO.
I like the structure of the article and it's a good procedure for evaluation compensation, but my nitpick would be it could be more helpful if it included more realistic numbers.
Do 5% of startups actually reach 1B valuation in 4 years? No. Uber took 10 years to IPO. I don't know the average, but I would imagine based on a cursory search that it's closer to 7 or 8 years for highly valued companies in the past decade. And 5% seems extremely high for billion dollar IPOs.
Also, only 2 startups are compared in the NPV calculation. What about joining a BigCo / FAANG? That would really put it into context.
On the other hand, the math gets slightly better if you assume you leave after some amount of vesting. I thought danluu had a post about this, but can't find it. Staying in a startup until the bitter end is almost never the optimal choice, especially if you have inside knowledge of its progress.
https://tldroptions.io/ - This was posted a few years back, and while it doesn't give tell you the likelihood of a particular size of exit, it does help give an idea of the type of dilution and final equity value (with no discounting though).
Do 5% of startups actually reach 1B valuation in 4 years? No. Uber took 10 years to IPO. I don't know the average, but I would imagine based on a cursory search that it's closer to 7 or 8 years for highly valued companies in the past decade. And 5% seems extremely high for billion dollar IPOs.
Also, only 2 startups are compared in the NPV calculation. What about joining a BigCo / FAANG? That would really put it into context.
On the other hand, the math gets slightly better if you assume you leave after some amount of vesting. I thought danluu had a post about this, but can't find it. Staying in a startup until the bitter end is almost never the optimal choice, especially if you have inside knowledge of its progress.
https://tldroptions.io/ - This was posted a few years back, and while it doesn't give tell you the likelihood of a particular size of exit, it does help give an idea of the type of dilution and final equity value (with no discounting though).
Author here, thanks for the thoughts!
> could be more helpful if it included more realistic numbers.
Any ideas on where to find these? While there's a lot of info out there on valuations most datasets have the problem of hindsight bias, especially missing data at the pre-A round.
> only 2 startups are compared in the NPV calculation. What about joining a BigCo / FAANG?
My original model was actually a FAANG vs two startup model (I left Apple) but it gets too complex to try to explain it in a post that's aimed at the stock options 101 crowd.
> the math gets slightly better if you assume you leave after some amount of vesting.
100%, although that's tough to model without just adding an arbitrary cutoff.
> https://tldroptions.io/
Thanks, I did not know about this tool!
> could be more helpful if it included more realistic numbers.
Any ideas on where to find these? While there's a lot of info out there on valuations most datasets have the problem of hindsight bias, especially missing data at the pre-A round.
> only 2 startups are compared in the NPV calculation. What about joining a BigCo / FAANG?
My original model was actually a FAANG vs two startup model (I left Apple) but it gets too complex to try to explain it in a post that's aimed at the stock options 101 crowd.
> the math gets slightly better if you assume you leave after some amount of vesting.
100%, although that's tough to model without just adding an arbitrary cutoff.
> https://tldroptions.io/
Thanks, I did not know about this tool!
Thanks for the reply! Sorry I don't have any great sources off the top of my head. It makes sense that you'd want to restrict the scope of the article to make it more understandable.
I've only been part of one startup, and it went nowhere, but it's very common (ubiquitous?) for prospective employees to be sold the "if we IPO for $1xB" line when that likelihood is laughably small; hence my suggestion to lower the expectations with some lower numbers.
But props for getting this all down!
I've only been part of one startup, and it went nowhere, but it's very common (ubiquitous?) for prospective employees to be sold the "if we IPO for $1xB" line when that likelihood is laughably small; hence my suggestion to lower the expectations with some lower numbers.
But props for getting this all down!
As someone with experience as a startup employee and founder, having negotiated startup offers from both sides of the table and seen several unfavorable and favorable liquidity scenarios play out, here is the advice I give people:
Treat stock options in an early stage startup as if they are worthless. Don't make salary/equity tradeoffs and instead, negotiate for both the "high salary" and "high equity".
Stock options have a number of "gotchas" that may not be immediately obvious:
1. Exercise price and exercise window. It takes a lot longer for a startup to exit than than most people would like to think (if it exits at all). 10+ years is my experience. You're probably not going to stay with the company that long, so when you leave the company and want to keep your shares, you only have so much time to exercise them (this is the exercise window - typically 3 months). It could cost you many $thousands to exercise and there is no guarantee your stock will be worth anything. You are essentially now an investor in the company and you are afforded none of the protections that the company's venture investors received.
2. Liquidation preference. In a liquidity event, the company's venture investors get paid back some multiple of their original investment (typically 1-2x) before any common shareholders get paid (which includes options holders). If the company is not valued above a certain threshold at liquidity, then common shareholders get nothing. As the company takes on new investors, this liquidation preference starts to add up, and as an employee you are not going to be told what this amounts to. You could exercise your shares, pay the company money, have the company exit for an apparently attractive amount, and then get nothing because the liquidation preference threshold wasn't met. The company exits, and you lose money.
3. Tax treatment. Assuming the company exits while you are still an employee (i.e. you have not exercised your shares) or the company has an attractive exercise window (10 years is not uncommon nowadays), and the valuation is high enough not to trigger liquidation preference, then you will make some money. Unfortunately, the amount you earn will get taxed as income, not capital gains, and the difference is significant. To be taxed as capital gains, you have to exercise your options and hold on to the shares for at least a year before selling them. Some companies offer early exercise benefits, but if you do this then you could potentially lose money as I described above.
RSU's on the other hand (essentially just plain stock like founders get) do not have to be exercised and are taxed as income on their value the moment they are vested (or on the value of the entire grant on the data of issue, assuming you file an 83(b) election with the IRS). These have value, and I would be comfortable with a salary/equity tradeoff for them. This is something you should ask about during negotiation. If RSUs are off the table, then you can try asking the company to pay the [early] exercise price for you as a signing bonus.
Treat stock options in an early stage startup as if they are worthless. Don't make salary/equity tradeoffs and instead, negotiate for both the "high salary" and "high equity".
Stock options have a number of "gotchas" that may not be immediately obvious:
1. Exercise price and exercise window. It takes a lot longer for a startup to exit than than most people would like to think (if it exits at all). 10+ years is my experience. You're probably not going to stay with the company that long, so when you leave the company and want to keep your shares, you only have so much time to exercise them (this is the exercise window - typically 3 months). It could cost you many $thousands to exercise and there is no guarantee your stock will be worth anything. You are essentially now an investor in the company and you are afforded none of the protections that the company's venture investors received.
2. Liquidation preference. In a liquidity event, the company's venture investors get paid back some multiple of their original investment (typically 1-2x) before any common shareholders get paid (which includes options holders). If the company is not valued above a certain threshold at liquidity, then common shareholders get nothing. As the company takes on new investors, this liquidation preference starts to add up, and as an employee you are not going to be told what this amounts to. You could exercise your shares, pay the company money, have the company exit for an apparently attractive amount, and then get nothing because the liquidation preference threshold wasn't met. The company exits, and you lose money.
3. Tax treatment. Assuming the company exits while you are still an employee (i.e. you have not exercised your shares) or the company has an attractive exercise window (10 years is not uncommon nowadays), and the valuation is high enough not to trigger liquidation preference, then you will make some money. Unfortunately, the amount you earn will get taxed as income, not capital gains, and the difference is significant. To be taxed as capital gains, you have to exercise your options and hold on to the shares for at least a year before selling them. Some companies offer early exercise benefits, but if you do this then you could potentially lose money as I described above.
RSU's on the other hand (essentially just plain stock like founders get) do not have to be exercised and are taxed as income on their value the moment they are vested (or on the value of the entire grant on the data of issue, assuming you file an 83(b) election with the IRS). These have value, and I would be comfortable with a salary/equity tradeoff for them. This is something you should ask about during negotiation. If RSUs are off the table, then you can try asking the company to pay the [early] exercise price for you as a signing bonus.
“If RSUs are off the table, then you can try asking the company to pay the [early] exercise price for you as a signing bonus.”
This is excellent advice, especially given the risk you described in (2).
This is excellent advice, especially given the risk you described in (2).
It’s really amazing to view the comments section of Hacker News. Really finding a way to to find the problem about any situation.
And when it comes to the idea of working at a startup that might be able to actually fix some of those said problems, instead of just taking money from big tech and chilling.…the comments flood in with negativity here as well.
Gotta give the community credit, because the one thing they are is consistent.
And when it comes to the idea of working at a startup that might be able to actually fix some of those said problems, instead of just taking money from big tech and chilling.…the comments flood in with negativity here as well.
Gotta give the community credit, because the one thing they are is consistent.
So, reading here what I understand is that startup stocks/options/whatever are worth nothing because this is a private company, an opaque box with many tools to screw you. Anyone with a different experience? If you had a positive experience/return, what was the cause, your negotiation or the founders/investors behaviour?
This is a great article! I would add to the general discussion here that some big tech companies will surprise you in terms of culture.
I joined a small but rapidly growing team at Amazon and it feels very different from my previous corporate job. I’m wearing many hats, learning lots of different technologies, and in many cases driving initiatives in a way I didn’t expect.
I was expecting a lot more red tape, meetings, silos and bureaucracy and thankfully that has not yet been the case.
Even still, I’m not suggesting that the feeling of accomplishment would compare to building your own company. This article was informative to me should I ever go that route.
I joined a small but rapidly growing team at Amazon and it feels very different from my previous corporate job. I’m wearing many hats, learning lots of different technologies, and in many cases driving initiatives in a way I didn’t expect.
I was expecting a lot more red tape, meetings, silos and bureaucracy and thankfully that has not yet been the case.
Even still, I’m not suggesting that the feeling of accomplishment would compare to building your own company. This article was informative to me should I ever go that route.
Author here - happy to answer any questions!
I'm planning to write a more advanced version of this article in a few months, discussing tax implications, the "should I exercise my options" question, etc.
I'm planning to write a more advanced version of this article in a few months, discussing tax implications, the "should I exercise my options" question, etc.
Omitting AMT's effect on exercising in a post about equity is pretty much blogging malpractice.
Other than that, very good post.
Other than that, very good post.
Lol screw this stuff. Bootstrap a profitable company, grow it and either sell it or keep it forever. Zero bullshit.
In addition to these things, make sure the company who's hiring you, if you're located in another country knows how to do so, before wasting too much of your energy with them. I was recently burned by this after receiving a good offer.
Even cofounder position cannot guarantee successful exit.
It is all about the small font things in contracts, understanding of the reality of the situation and not taking anything at face value.
It is not impossible outside the "luck factor", but in this point in time things are refined and well executed and this "get lucky" is usually propagandist in his nature.
I am on different spectrum. I live in 'qualified personal' territory. Everything that I fight for is measured in Hourly Wage. Nothing more, nothing less.
It is not impossible outside the "luck factor", but in this point in time things are refined and well executed and this "get lucky" is usually propagandist in his nature.
I am on different spectrum. I live in 'qualified personal' territory. Everything that I fight for is measured in Hourly Wage. Nothing more, nothing less.
No one can guarantee a successful exit, but if it does happen a cofounder typically makes out very well, while engineers with options usually end up with a token amount.
Young engineers need to grow up and learn from previous generations of professionals. The generational divide is funded by corporate and VC interests under HR classifications as "cultural fit".
In reality we all are "just a cogs" in a somebody "value extraction" plan. And as such we must demand fair wages and clear career paths.
P.S. Downvotes don't remove the reality of my statement.
In reality we all are "just a cogs" in a somebody "value extraction" plan. And as such we must demand fair wages and clear career paths.
P.S. Downvotes don't remove the reality of my statement.
I have been through one of these scenarios and it's incredibly taxing and stressful: all that work, company selling for a boatload, and all I got was a lousy T-shirt.
https://marker.medium.com/my-company-sold-for-100-million-an...