"If you look at companies that have made a lot of people rich, like Microsoft, Google, and Facebook, almost none of the employees who became rich had an instrumental role in the company’s success. "
The next sentence in the article does a better job at illustrating his point: "Conversely, the vast majority of startup option packages end up being worth little to nothing, but nearly none of the employees whose options end up being worthless were instrumental in causing their options to become worthless."
I interpret the point as being: the monetary outcome of a startup for the employee is a function of their individual contribution (which is what I think the author means by being "instrumental"), plus the contribution of the founders and other employees, plus luck. The magnitude of the individual contribution is small relative to the other factors, so it's difficult to say that a successful startup employee "deserves" a windfall and an unsuccessful one doesn't. The lower the correlation between individual contribution and monetary outcome, the less options should matter for motivating early employees.
This article[0] from almost 10 years ago estimated that the Google IPO resulted in 1,000 people having more than $5 million worth of Google shares.
So I guess it hinges on how you define "instrumental" and "almost none". It's a tautology to say that "instrumental" means "they contributed to the effort", so I would say "instrumental" means "it seems like no one else could have done it" and "almost none" means less than 5%. If you had to take a wild guess about Google, what percentage of that 1,000 would you estimate were instrumental? Furthermore, presumably there are more Google millionaires now, 10 years later. I wonder what percentage of those were also instrumental in Google's success?
I am not sure "it seems like no one else could have done it" applies to Nobel Prize type discoveries or Moon Landing like feats of engineering, much less to software companies.
Don't get me wrong, I don't mean to say that many employees at companies like Google are not brilliant or not extremely effective in their work, but "no one else could have done it" is a useless test that relies on mythologizing people. The way I figure out, the people getting rich (as employees) are those that: a) took the risk to get in early enough, b) performed their jobs competently enough to stay long term and to give the company a chance to succeed, c) got lucky enough in that all the imponderable external factors also resulted in that particular company succeeding. That doesn't mean they weren't "instrumental", in the sense of being the people who actually happened to get the work done. But that's different from "irreplaceable".
Yeah this claim I don't understand in an otherwise very good article.
At the startup I worked at, a bunch of people made some money based on equity, and while it wasn't necessarily a perfect correlation between equity and contributions (and how could it be?), roughly speaking, equity and "having instrumental roles in the success" were certainly highly correlated.
I'm not even sure what the idea is here. Are early employees generally considered undeserving of the success of their companies? Who is deserving? The founders? Later employees?
Yup. I came here to write this. You don't know about how those people helped because they're not the public face of the company; but often they started the seed of something that grew into something big (like you!) or solved some critical technical problem blocking scale, or helped land a key deal, or any of a hundred factors that, if they weren't done, would have severely hit the growth of the company, and couldn't have been easily done by someone else walking in off the street with a nice CV - things that required history with the company, its codebase or market or customers etc.
I started off once thinking "yay, X% means I get X% of the company!" and then I found out the shares can be diluted. Then I learned "non-dillutable".
Then I learned about vesting periods, windows for exercising options, and a whole slew of financial terms and devices; each one seemed to come with its own unique "gotcha" that, if you didn't know about, would cost you nearly everything.
Everyone I talk to about these always says "well, don't do that one thing, or if you do that one thing be sure you do it in this way and you're set". The cumulative knowledge you need becomes pretty high pretty quickly though, and the chances of me doing the right legal and financial incantation at the right moment becomes lower.
Nowadays I go with cash. I don't get 'golden handcuffs' that hold me to a job I don't like because it might pay off later. I can calculate the expected value and risks with cash without tons of research. I know my legal recourses if I get screwed out of cash.
Let's not forget the "asset only" acquisition where the company sells it's IP and employees but doesn't sell any shares. Been through one of these and this is what happened, screwing over former employees who had bought options and investors. I think the only people who profited were the bankers.
I've been on the other side of two of these and the explicit alternative in each case was bankruptcy. Also asset transfers are more expensive to the acquirer because you have to explicitly delineate the assets you're buying and what you're not buying. This makes for more lawyer time and pushes the transaction costs up significantly. The real reason to do it is because the team there at the time is more valuable as a group than they would each be on the open market individually. Anyone _not_ there doesn't add that kind of value to the deal.
You may want to argue that IP is also part of these deals and past employees created part of that. This is probably true for some deals, but it has been minimally true for the deals I've seen directly. Sample size of two isn't great, but keep in mind the value of startups is largely believed to be in execution, not ideas. A startup on the verge of bankruptcy probably doesn't have immensely valuable IP because it's 1) not producing present value obviously and 2) isn't obviously worth a lot in the future, otherwise someone would be willing to give you discounted cash today for an ownership percentage of its future value (aka an investment).
>"yay, X% means I get X% of the company!" and then I found out the shares can be diluted.
There seems to be a common misunderstanding about dilution.
Dilution is not really the issue. In fact, dilution is a positive sign. It means more investors value the company and want to buy into the ownership.
How do current owners who collectively own 100% of the shares "sell" more shares to future owners?!? By way of dilution. That means everybody gets diluted including the founders, the angels, the VCs, and yes the employees too.
More important than dilution is the shares multiplied by price.
I hear this argument a lot. Mostly from people trying to sell the idea of a highly dilutive funding round.
Sure, further rounds are a sign the company is doing well. The important word being "sign," they don't actually make the company more valuable (what the company does with the money they raise does).
If you own a lot of stock, you probably already know if the company is doing well or not. In that respect, the round just puts a number on what you already know.
The math is simple. All things being equal, owning more % of a company == more money. To try to spin dilution in any other way is stretching the truth pretty far, and is rather manipulative IMHO.
Price alone will not tell you everything. Let's not forget about different classes of stock: preferred vs common. There are often other rights associated with preferred / investor shares: liquidation preferences, warrants, etc. Rarely can the average employee get these details.
> Dilution is not really the issue. In fact, dilution is a positive sign. It means more investors value the company and want to buy into the ownership.
This doesn't just apply to company shares (a topic which causes people to not think rationally, for some reason).
It applies to a market. Sun's CEO MacNeilly famously said that he liked open systems (in the case of BSD Unix) because "it increases the pie. Our slice gets smaller but all these participants grow the overall pie faster, so our revenues go up."
What fascinated me at the time was how the business press was puzzled by his statement -- they had a more zero sum view of markets in the late 80s/early 90s. Nowadays people understand that the existence of Lyft helps Uber, and vice versa.
And the same is true with people who want to buy your shares.
> More important than dilution is the shares multiplied by price.
But even with an "up round", where ownership percentage is diluted but your n-shares * price goes up, liquidation preferences can reduce or eliminate your value.*
As the GP said, there's always that "one more thing" that can wipe out your value.
Sometimes. But if this were simply a case of ignorance-correction, certain preferred investors would never ask for pro-rata, or everyone would be offered pro-rata.
Just looking through the replies to your comment makes me throw up my hands in confusion and frustration. You say one thing, the next person argues against one point, then someone counter-argues, and so on. It's all a confusing mess. It's like you need a financial rep to be with you at job interviews to understand all this stuff.
Just say no to options, and demand market level salary. I interviewed at an early stage start up in the mid west. The CEO lamented "People here just don't understand stock options" and as the first technical employee I'd be "by far the highest paid person in the company". I said "People do understand stock options, they're a gamble" and declined the offer. I don't want to be the highest paid person at any company.
Only one data point, but my experience at several companies has been that annual follow-on/refresher grants more than make up for dilution from new rounds. A company which only gives you a single grant upon start of employment and then lets it coast for 4 years is doing it wrong.
Do you know of a good resource that could bring a lay IT person up to speed on these kinds of nuanced details? To me it just seems lots of us just dont know about this stuff. I count myself lucky to have a paralegal SO who does it everyday and walks me through it, but most people don't have that.
While I agree generally w/ this advice, in my experience, companies try to make that impossible or very difficult for employees. For example, most hiring offers are exploding: I've been given exploding offers over a weekend, over holidays: try getting a lawyer when you're not at home. Further, again in my experience, getting a lawyer is actually significantly challenging to someone who hasn't done it: you need a lawyer in the relevant area of law, and you need to know their price, and these two critical pieces of information seem generally to be the things left off the website.
You can argue that an employee should try to negotiate for adequate time, and maybe they should, but not all will. Those too timid to do so are effectively being taken advantage of; thus I find most companies' positions morally reprehensible.
Working at a startup as an employee with the expectation your gonna get rich is a fools game.
Negotiate for the best deal on options you can get (I.e quantity, terms like early excercise etc) but treat them as a lottery ticket.
A startup is a good way to learn rapidly so focus more on the quality of the people you will be working with, technologies used, what your role will be, vcs backing it etc.
In the long run the network and experience you build from doing this will probably have a greater impact on your networth. Especially if you yourself want to start a startup.
I'm a founder at a high-growth startup in Mountain View. I always tell potential hires, "options are worth nothing until they're worth something. And, they may never be worth anything."
I think that's the opposite of the unrealistic optimism job candidates get. But I think it also helps set the stage for a culture of transparency and honesty very early. Even before that person becomes an employee.
I'm curios to know what HN'ers think of that explanation vs hearing only the optimistic case. Does it make you second guess the company prospects?
It strikes me as an honest statement and if you were pitching me I would give you honesty points :-)
But the problem you are dealing with is the problem in many questions here: these are complex financial instruments and most people don't understand them. Some people will hold false beliefs about these things. Some people will be afraid of the unknowns.
Also the problem is compounded because the word option has different meanings and if you wrongly believe that these employee stock options on private equity are the same thing as listed equity options you're in for a big surprise.
Generally when analyzing a compensation package if you have to do extensive scenario analysis to evaluate the package I think it is worse for most people than a simple package.
Also, the number of scenarios where the founder or investors can make decisions that render the option package worthless is fairly large. This creates a dynamic where if the employee takes an options heavy package they either were foolish / duped, or they are pledging their utmost trust and loyalty in the management team. It's a lot to ask.
> Does it make you second guess the company prospects?
Far from it, honest is one of the absolutely critical metrics I use to evaluate any prospective employer. Bravo.
I don't mind someone stating why they believe their start up will have a better chance of success than the average: it is a positive to believe in the product. But don't sell it as a sure thing.
I work in the DevOps/sys admin field, so I'm use to always looking at what could go wrong. I think this is a toss up depending on the persons experience with startups. I've been in mostly small sub 20 person startups for 15 years now so I've seen almost all of it.
You have the people who are new to startups, who think its a ticket to financial freedom in 4 years when they have fully vested and the company sells for 1+ billion. Those people might be scared away.
You have the people who have been through a few startups and have worked at a failed company or a company that the investors took all the money and left the common stock holders with nothing or little to nothing. I'm in this group and that would be a breath of fresh air to hear that. During interviews, if I hear only great things and nothing is wrong then that is a red flag to me.
I agree with the other folks commenting on your reply. I'd view it in a positive light. I'm always suspicious of founders that oversell startup equity.
The younger naive folks who walk away because you were too real will probably remember your candor in a positively Later on once they have some more life experience.
Personally, I would appreciate that level of candor (and that's how I view my options anyway). I've heard far too many pitches from desperate recruiters about how an options package is worth $$$$$$.
Working at a startup as an employee with the expectation your gonna get rich is the game.
Think about the percentage of their investments that VCs expect will pay off. You could work for 15+ years at startups and never be at the successful one.
Startups say that but I think in many cases applicants go to startups because they can't get a job at a bigco that will pay them more. This especially true for new grads who didn't go to a shiny
University.
Now this isn't a bad thing as one of the best reasons to go to a startup is to sharpen or learn new skills to become more employable. It's basically what I did till I could swap to a bigco.
I disagree. I've been part of multiple startups; Only with the first two did I actually expect to make more money than I would at BigCo. Not because the later startups were worse, but because I was less naive.
The reason that I joined those other startups -- and the reason that I more often work for startups than big companies -- is not about money. It's about pace of career development.
Everything on my resume that is interesting or exciting was done at a startup. Every big jump in skill and in compensation has been a result of that startup mentality. Who's fixing this? Me, I'm the only one here. Who's going to deal with the fallout of my poor architecture? Me, I'm the only one here. Who learned a hard lesson? Me.
I can only speak to the cogs side of the house (I'm devops or whatever they're calling us this week).
> Negotiate for the best deal on options you can get (I.e quantity, terms like early excercise etc) but treat them as a lottery ticket.
Sure, you can ask for a 100% non-dilutable share, but you're not going to get it. In order to negotiate meaningfully, you need to have a valuation of the things you're negotiating on, so you can decide what tradeoffs are good and which are bad.
This is what I don't understand... Why can't developers get non-dilutable shares?
If someone helps you invent something, and they are willing to put their own skin in the game in exchange for an ownership stake, then shouldn't they become wealthy along with you if it is successful?
This whole notion that developers are expendable and disposable and that it is acceptable to give them dilutable stock options is fundamentally immoral and needs to go away.
It's entirely possible to negotiate option excercise dates. Asking for 5-10 years to decide if you want to buy is within the realms of possibility for software engineers at early stage startups (pre b round).
I know 100+ people from a dozen companies who've made $1mm+ on equity. None of my friends would write a post like this.
That said, valuing equity is complicated:
- most offers include a healthy mix of cash and equity and benefits. Evaluate the whole package.
- unless you can pre-exercise via 83(b), I generally avoid options. RSUs are fine and many companies are offering them. Clever hack: counter the offer with a demand that the company pay 2% of the cost of exercising for each month you're employed, grossed up for taxes.
- watch out for illiquidity: whales often delay IPO which locks up employees. This compounds the exercise issue. Clever hack: counter the offer with a requirement that the company offer to buy back the equity at the most recent preferred share price, if the company accepts investment at a valuation exceeding $100mm.
If you are "good" and do well in reviews, a company like Microsoft or Apple (from direct experience), or Facebook/Google/Adobe (I'm assuming, with a little data from people who have gone to these places) will do well by you, to the tune of millions.
Moving upward a little: Several of my ex cow-orkers at MS are now partners, and will be able to retire early and never have to work again, and they're in their late 30s and early 40s. Nice gig if you can get it; it's not always a meritocracy, but getting better.
If you want to make a million dollars from stock over 5 years (in addition to a competitive salary) it's easier to do this at a big company than it is at a startup.
Unless you are a sought-after C-level executive, hardly any legitimate companies are going to even consider your "clever hacks."
The first one blows up 409a (requires optionholder to pay fair market value for the shares). As to the second, very, very few investors are going to allow "their" money to be used for a common stock repurchase (at the same per share price) instead of going toward's the company's operations/development/whatever.
Yes, but that's just another asymmetry in the market. Some (many, actually, as far as I can tell) of these "legitimate companies" care very deeply about lower status employees thinking highly of their "clever hacks" regarding equity as part of a compensation package.
$X salary plus y% options at a startup should almost always be viewed as a having a value of $X and no more than that, but these "legitimate companies" want employees to view it as $X + $Million(s) in a future (all but guaranteed!) windfall. There are exceptions, but these are rare.
I wouldn't take issue with these companies trying to pass their crappy "equity compensation" packages off as "legitimate" if there was more openness and honesty about its value and the status of the employees with respect to the company.
The only time anybody should value equity at > $0 is when it's part of a regular grant or purchase of shares with true, market recognized value (e.g. RSU grants, ESP plans in a public company).
> counter the offer with a requirement that the company offer to buy back the equity at the most recent preferred share price, if the company accepts investment at a valuation exceeding $100mm.
As a founder I wouldn't ever agree to that term as written. For starters, your options are common stock whereas investors have preferred. That just means you have to apply a discount though.
More importantly, I've seen first hand the change in team dynamics that happens when some "early" employees get a windfall. Not so much jealousy as this weird sense of complacency which permeates the entire co.
The truth is that at $100mm (heck, even at $1B valuation) the company hasn't "made" it yet. There is still tremendous risk on the table.
I think your idea is interesting, but I might add some step functions. At $100MM the co offers to buy back 1% of your shares, at $500MM up to 5% of your shares, at $1B up to 10% of your shares, and so on.
Realistically what happens is that in large, very late-stage rounds, the company gives employees the chance to sell some of their shares to the new investors at a discount (because of the common vs preferred situation).
The problem I see with this particular line is how disproportionate it is. If you had said 100+ people from 50+ companies, that might have been more convincing than 100+ people from a select 12 companies.
The problem here is that it's 12 companies, and not every company can be one of those 12. That's like me saying I know 20+ people from 2+ companies that made $1mm+ but those 2+ companies included FB/Twitter/etc.
Are you really going to be able to negotiate terms like that with a company that's at the stage where they are offering RSUs (I.e Airbnb)? I can imagine negotiating terms on options at earlyier stage companies.
Wouldn't you have to be going for a job in senior management to have a shot at doing something like this? Genuinely curious to hear if you have ever successfully done something like this?
Another option that I successfully negotiated for is purchasing shares outright at fair market value using a 51% recourse promissory note due in 10 years at the IRS minimum interest rate.
This avoids the exercise window and acquisition concerns, is pretty tax favorable, and largely aligns your treatment with the founders. It is a bit riskier even if the company agrees to offset the loan with bonuses over time, but at lower valuations I think it is worth considering.
In any case, it's worth it to have a good lawyer look over all your options paperwork to make sure you are getting a fair deal.
> I know 100+ people from a dozen companies who've made $1mm+ on equity. None of my friends would write a post like this.
This is addressed in the post:
> Another common objection is something like “I know lots of people who’ve made $1m from startups”. Me too, but I also know lots of people who’ve made much more than that working at public companies. This post is about the relative value of compensation packages, not the absolute value.
How different are startup salaries vs public company salaries? Is that $1m at Public Company the total salary over a certain period, or is it extra salary on top of the potential salary at Startup Company? The quote seems to say it is extra (relative).
If I am supposed to make $1m more at Public Company over -- say -- a 10 year period, then that means my salary at Public Company would have to be $100k more per year than at Startup Company. Is the difference between startup and public really that big?
The biggest difference may be the tax status of the way those two millions are earned. If you're earning $1m from a public company, you're likely finding yourself in a near-top tax bracket and running into AMT in most years. If you get that same $1m from options, you can be paying taxes like a rich person. If you've handled it right, you can mostly avoid AMT and pay the long-term cap gains rate.
Another difference could depend on the nature of the individual earning that money. If that individual is disciplined and reasonably good at investing their money, taking the corporate job, living frugally and investing everything that's left might make them come out ahead. But if they're like most people, earning more will make them spend more and they'll come out behind the start-up employee who will usually immediately invest most of the windfall (either in a home or the market).
Neither route is obviously better, but it's probably worthwhile to look at the post-tax, post-spending bank balances of both sets of employees to see who comes out ahead since it's not a simple as comparing $1m to $1m.
That last idea about how to deal with illiquidity is very interesting. Never seen that suggestion before. Will definitely keep that in mind moving forward (both as an offer taker and an offer maker). Thanks!
Oh look, the thing I should have read before joining a startup.
I left [large corporation], who had been paying me very well, to go try out the startup world. I found a cool local company doing something that sounded neat. I looked at the pay (better on a per-paycheck basis) and the options (better than the stock I was getting in the corporate world) and said "this is a great idea! If the startup succeeds, the options will be worth a lot!".
It's a great company with great people and I don't regret that, but the financial implications of the change are starting to sink in. I'm getting a bit more per paycheck, but on the whole I suspect my tax returns over the next few years will add up to less than I was making before, even if the startup succeeds.
> I'm getting a bit more per paycheck, but on the whole I suspect my tax returns over the next few years will add up to less than I was making before, even if the startup succeeds.
That sounds counter-intuitive -- why would that be? Did you have some expense you could claim at [large corporation] that you can no longer claim?
Most of the big post-IPO companies hand out stock on a regular basis as a bonus or a top-up to the actual pay.
The corp in question for me was Amazon. Around 1/3 of my pay (more some years) was in the form of AMZN stock that vested every six months. Stock, not Stock Options. No paying for it, no decisions, just boom, you now own X more stocks and how would you like to pay the income tax on that?
Possibly total comp. Statups are stingy with health insurance, while larger corps are more likely to pick up more of the tab (and occasionally, they'll pay your monthly premiums in full). This can easily add an additional $12k-24k to your total annual comp if you have a family.
The way I read it, his take-home pay is higher, but either he mis-valued his options as being worth more than his BigCo stock package, or (as is usually the case) the value of the options is virtual until there's a liquidity event ...
His old comp was paycheck + stock vesting (which doesn't appear in paychecks), his new comp is paycheck + (non-exerciseable options) = paycheck
"...compensation package has a higher expected value..."
Expected value is a good measure when you're summing over lots of instances, e.g. if you're a VC fund investing in lots of startups.
As an employee, where you're working for a single startup at a time, robust statistics[1] suggests that the median is a better measure of what you'll expect to make: you have a 50/50 chance of making more/less than the median.
More than half of startups either fail, or don't succeed wildly enough for options to be worth more than the equivalent salary.
(If you work for 5 startups in your career, the best measure might be "sample 5 startups and sum the options payout to produce a value; repeat that many times and take the median of the result." But that's a lot harder to intuit, and is no doubt closer to the median than the expected value.)
Why take the median? For me personally all I need is one year where I make a couple million bucks. What I really care about for my personal financial position is either the sum or mean, because that's what hits my bank account.
Some lotteries that accumulate when there are no winners have weeks with better-than-even odds. By this logic, you should wait until the odds are sufficiently in your favor and then dump your entire savings account into lotto tickets, for an immediate gain.
Of course, even if you can pick up a 20% gain in EV, that small chance you end up a billionaire won't save you from the 99.99..% of cases when you're eating cat food in retirement.
Nobody would ever advise you to take a large percentage of your income and buy options or even stock in a single company in the hopes that that company succeeds enough to make you rich. That's gambling.
Being an employee of the company in question doesn't suddenly make that a good idea. It's an even worse idea since your entire financial future is tied to the company's outcome.
They should pay you more to take that kind of risk.
It is indeed gambling. But it's an opportunity to buy a lottery ticket that has a much higher payout than one you could buy off the shelf. The odds may not be great, but if you happen to hit, the payoff can be very large.
This is an interesting way to flip the perspective, to ask why do startups think offers of options are enticing (as compared to just cash).
But for the potential employee, the advice remains the same; ignore the options when it comes to evaluating a compensation package (and only those who are informed enough to go "weeeeelll..." and have actual reasons for why in a ~particular~ instance they should do differently, should ever consider doing otherwise).
Readit News
100% false.
I interpret the point as being: the monetary outcome of a startup for the employee is a function of their individual contribution (which is what I think the author means by being "instrumental"), plus the contribution of the founders and other employees, plus luck. The magnitude of the individual contribution is small relative to the other factors, so it's difficult to say that a successful startup employee "deserves" a windfall and an unsuccessful one doesn't. The lower the correlation between individual contribution and monetary outcome, the less options should matter for motivating early employees.
So I guess it hinges on how you define "instrumental" and "almost none". It's a tautology to say that "instrumental" means "they contributed to the effort", so I would say "instrumental" means "it seems like no one else could have done it" and "almost none" means less than 5%. If you had to take a wild guess about Google, what percentage of that 1,000 would you estimate were instrumental? Furthermore, presumably there are more Google millionaires now, 10 years later. I wonder what percentage of those were also instrumental in Google's success?
[0] http://www.nytimes.com/2007/11/12/technology/12google.html
Don't get me wrong, I don't mean to say that many employees at companies like Google are not brilliant or not extremely effective in their work, but "no one else could have done it" is a useless test that relies on mythologizing people. The way I figure out, the people getting rich (as employees) are those that: a) took the risk to get in early enough, b) performed their jobs competently enough to stay long term and to give the company a chance to succeed, c) got lucky enough in that all the imponderable external factors also resulted in that particular company succeeding. That doesn't mean they weren't "instrumental", in the sense of being the people who actually happened to get the work done. But that's different from "irreplaceable".
At the startup I worked at, a bunch of people made some money based on equity, and while it wasn't necessarily a perfect correlation between equity and contributions (and how could it be?), roughly speaking, equity and "having instrumental roles in the success" were certainly highly correlated.
I'm not even sure what the idea is here. Are early employees generally considered undeserving of the success of their companies? Who is deserving? The founders? Later employees?
Then I learned about vesting periods, windows for exercising options, and a whole slew of financial terms and devices; each one seemed to come with its own unique "gotcha" that, if you didn't know about, would cost you nearly everything.
Everyone I talk to about these always says "well, don't do that one thing, or if you do that one thing be sure you do it in this way and you're set". The cumulative knowledge you need becomes pretty high pretty quickly though, and the chances of me doing the right legal and financial incantation at the right moment becomes lower.
Nowadays I go with cash. I don't get 'golden handcuffs' that hold me to a job I don't like because it might pay off later. I can calculate the expected value and risks with cash without tons of research. I know my legal recourses if I get screwed out of cash.
You may want to argue that IP is also part of these deals and past employees created part of that. This is probably true for some deals, but it has been minimally true for the deals I've seen directly. Sample size of two isn't great, but keep in mind the value of startups is largely believed to be in execution, not ideas. A startup on the verge of bankruptcy probably doesn't have immensely valuable IP because it's 1) not producing present value obviously and 2) isn't obviously worth a lot in the future, otherwise someone would be willing to give you discounted cash today for an ownership percentage of its future value (aka an investment).
There seems to be a common misunderstanding about dilution.
Dilution is not really the issue. In fact, dilution is a positive sign. It means more investors value the company and want to buy into the ownership.
How do current owners who collectively own 100% of the shares "sell" more shares to future owners?!? By way of dilution. That means everybody gets diluted including the founders, the angels, the VCs, and yes the employees too.
More important than dilution is the shares multiplied by price.
Sure, further rounds are a sign the company is doing well. The important word being "sign," they don't actually make the company more valuable (what the company does with the money they raise does). If you own a lot of stock, you probably already know if the company is doing well or not. In that respect, the round just puts a number on what you already know.
The math is simple. All things being equal, owning more % of a company == more money. To try to spin dilution in any other way is stretching the truth pretty far, and is rather manipulative IMHO.
This doesn't just apply to company shares (a topic which causes people to not think rationally, for some reason).
It applies to a market. Sun's CEO MacNeilly famously said that he liked open systems (in the case of BSD Unix) because "it increases the pie. Our slice gets smaller but all these participants grow the overall pie faster, so our revenues go up."
What fascinated me at the time was how the business press was puzzled by his statement -- they had a more zero sum view of markets in the late 80s/early 90s. Nowadays people understand that the existence of Lyft helps Uber, and vice versa.
And the same is true with people who want to buy your shares.
But even with an "up round", where ownership percentage is diluted but your n-shares * price goes up, liquidation preferences can reduce or eliminate your value.*
As the GP said, there's always that "one more thing" that can wipe out your value.
(*citation: personal experience)
Sometimes. But if this were simply a case of ignorance-correction, certain preferred investors would never ask for pro-rata, or everyone would be offered pro-rata.
founders, angels, and early round VCs can simply issue themselves more stock from the pool of unissued shares to counteract dilution.
You can argue that an employee should try to negotiate for adequate time, and maybe they should, but not all will. Those too timid to do so are effectively being taken advantage of; thus I find most companies' positions morally reprehensible.
Negotiate for the best deal on options you can get (I.e quantity, terms like early excercise etc) but treat them as a lottery ticket.
A startup is a good way to learn rapidly so focus more on the quality of the people you will be working with, technologies used, what your role will be, vcs backing it etc.
In the long run the network and experience you build from doing this will probably have a greater impact on your networth. Especially if you yourself want to start a startup.
I think that's the opposite of the unrealistic optimism job candidates get. But I think it also helps set the stage for a culture of transparency and honesty very early. Even before that person becomes an employee.
I'm curios to know what HN'ers think of that explanation vs hearing only the optimistic case. Does it make you second guess the company prospects?
But the problem you are dealing with is the problem in many questions here: these are complex financial instruments and most people don't understand them. Some people will hold false beliefs about these things. Some people will be afraid of the unknowns.
Also the problem is compounded because the word option has different meanings and if you wrongly believe that these employee stock options on private equity are the same thing as listed equity options you're in for a big surprise.
Generally when analyzing a compensation package if you have to do extensive scenario analysis to evaluate the package I think it is worse for most people than a simple package.
Also, the number of scenarios where the founder or investors can make decisions that render the option package worthless is fairly large. This creates a dynamic where if the employee takes an options heavy package they either were foolish / duped, or they are pledging their utmost trust and loyalty in the management team. It's a lot to ask.
Far from it, honest is one of the absolutely critical metrics I use to evaluate any prospective employer. Bravo.
I don't mind someone stating why they believe their start up will have a better chance of success than the average: it is a positive to believe in the product. But don't sell it as a sure thing.
You have the people who are new to startups, who think its a ticket to financial freedom in 4 years when they have fully vested and the company sells for 1+ billion. Those people might be scared away.
You have the people who have been through a few startups and have worked at a failed company or a company that the investors took all the money and left the common stock holders with nothing or little to nothing. I'm in this group and that would be a breath of fresh air to hear that. During interviews, if I hear only great things and nothing is wrong then that is a red flag to me.
The younger naive folks who walk away because you were too real will probably remember your candor in a positively Later on once they have some more life experience.
Think about the percentage of their investments that VCs expect will pay off. You could work for 15+ years at startups and never be at the successful one.
Now this isn't a bad thing as one of the best reasons to go to a startup is to sharpen or learn new skills to become more employable. It's basically what I did till I could swap to a bigco.
The reason that I joined those other startups -- and the reason that I more often work for startups than big companies -- is not about money. It's about pace of career development.
Everything on my resume that is interesting or exciting was done at a startup. Every big jump in skill and in compensation has been a result of that startup mentality. Who's fixing this? Me, I'm the only one here. Who's going to deal with the fallout of my poor architecture? Me, I'm the only one here. Who learned a hard lesson? Me.
I can only speak to the cogs side of the house (I'm devops or whatever they're calling us this week).
Sure, you can ask for a 100% non-dilutable share, but you're not going to get it. In order to negotiate meaningfully, you need to have a valuation of the things you're negotiating on, so you can decide what tradeoffs are good and which are bad.
If someone helps you invent something, and they are willing to put their own skin in the game in exchange for an ownership stake, then shouldn't they become wealthy along with you if it is successful?
This whole notion that developers are expendable and disposable and that it is acceptable to give them dilutable stock options is fundamentally immoral and needs to go away.
It's nothing more than greed and exploitation.
Same with early excercise.
That said, valuing equity is complicated:
- most offers include a healthy mix of cash and equity and benefits. Evaluate the whole package.
- unless you can pre-exercise via 83(b), I generally avoid options. RSUs are fine and many companies are offering them. Clever hack: counter the offer with a demand that the company pay 2% of the cost of exercising for each month you're employed, grossed up for taxes.
- watch out for illiquidity: whales often delay IPO which locks up employees. This compounds the exercise issue. Clever hack: counter the offer with a requirement that the company offer to buy back the equity at the most recent preferred share price, if the company accepts investment at a valuation exceeding $100mm.
Stay positive!
Moving upward a little: Several of my ex cow-orkers at MS are now partners, and will be able to retire early and never have to work again, and they're in their late 30s and early 40s. Nice gig if you can get it; it's not always a meritocracy, but getting better.
If you want to make a million dollars from stock over 5 years (in addition to a competitive salary) it's easier to do this at a big company than it is at a startup.
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The first one blows up 409a (requires optionholder to pay fair market value for the shares). As to the second, very, very few investors are going to allow "their" money to be used for a common stock repurchase (at the same per share price) instead of going toward's the company's operations/development/whatever.
$X salary plus y% options at a startup should almost always be viewed as a having a value of $X and no more than that, but these "legitimate companies" want employees to view it as $X + $Million(s) in a future (all but guaranteed!) windfall. There are exceptions, but these are rare.
I wouldn't take issue with these companies trying to pass their crappy "equity compensation" packages off as "legitimate" if there was more openness and honesty about its value and the status of the employees with respect to the company.
The only time anybody should value equity at > $0 is when it's part of a regular grant or purchase of shares with true, market recognized value (e.g. RSU grants, ESP plans in a public company).
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As a founder I wouldn't ever agree to that term as written. For starters, your options are common stock whereas investors have preferred. That just means you have to apply a discount though.
More importantly, I've seen first hand the change in team dynamics that happens when some "early" employees get a windfall. Not so much jealousy as this weird sense of complacency which permeates the entire co.
The truth is that at $100mm (heck, even at $1B valuation) the company hasn't "made" it yet. There is still tremendous risk on the table.
I think your idea is interesting, but I might add some step functions. At $100MM the co offers to buy back 1% of your shares, at $500MM up to 5% of your shares, at $1B up to 10% of your shares, and so on.
Realistically what happens is that in large, very late-stage rounds, the company gives employees the chance to sell some of their shares to the new investors at a discount (because of the common vs preferred situation).
The problem I see with this particular line is how disproportionate it is. If you had said 100+ people from 50+ companies, that might have been more convincing than 100+ people from a select 12 companies.
The problem here is that it's 12 companies, and not every company can be one of those 12. That's like me saying I know 20+ people from 2+ companies that made $1mm+ but those 2+ companies included FB/Twitter/etc.
Wouldn't you have to be going for a job in senior management to have a shot at doing something like this? Genuinely curious to hear if you have ever successfully done something like this?
This avoids the exercise window and acquisition concerns, is pretty tax favorable, and largely aligns your treatment with the founders. It is a bit riskier even if the company agrees to offset the loan with bonuses over time, but at lower valuations I think it is worth considering.
In any case, it's worth it to have a good lawyer look over all your options paperwork to make sure you are getting a fair deal.
This is addressed in the post:
> Another common objection is something like “I know lots of people who’ve made $1m from startups”. Me too, but I also know lots of people who’ve made much more than that working at public companies. This post is about the relative value of compensation packages, not the absolute value.
If I am supposed to make $1m more at Public Company over -- say -- a 10 year period, then that means my salary at Public Company would have to be $100k more per year than at Startup Company. Is the difference between startup and public really that big?
Another difference could depend on the nature of the individual earning that money. If that individual is disciplined and reasonably good at investing their money, taking the corporate job, living frugally and investing everything that's left might make them come out ahead. But if they're like most people, earning more will make them spend more and they'll come out behind the start-up employee who will usually immediately invest most of the windfall (either in a home or the market).
Neither route is obviously better, but it's probably worthwhile to look at the post-tax, post-spending bank balances of both sets of employees to see who comes out ahead since it's not a simple as comparing $1m to $1m.
I left [large corporation], who had been paying me very well, to go try out the startup world. I found a cool local company doing something that sounded neat. I looked at the pay (better on a per-paycheck basis) and the options (better than the stock I was getting in the corporate world) and said "this is a great idea! If the startup succeeds, the options will be worth a lot!".
It's a great company with great people and I don't regret that, but the financial implications of the change are starting to sink in. I'm getting a bit more per paycheck, but on the whole I suspect my tax returns over the next few years will add up to less than I was making before, even if the startup succeeds.
That sounds counter-intuitive -- why would that be? Did you have some expense you could claim at [large corporation] that you can no longer claim?
The corp in question for me was Amazon. Around 1/3 of my pay (more some years) was in the form of AMZN stock that vested every six months. Stock, not Stock Options. No paying for it, no decisions, just boom, you now own X more stocks and how would you like to pay the income tax on that?
Edit: US centric advice
His old comp was paycheck + stock vesting (which doesn't appear in paychecks), his new comp is paycheck + (non-exerciseable options) = paycheck
Expected value is a good measure when you're summing over lots of instances, e.g. if you're a VC fund investing in lots of startups.
As an employee, where you're working for a single startup at a time, robust statistics[1] suggests that the median is a better measure of what you'll expect to make: you have a 50/50 chance of making more/less than the median.
More than half of startups either fail, or don't succeed wildly enough for options to be worth more than the equivalent salary.
(If you work for 5 startups in your career, the best measure might be "sample 5 startups and sum the options payout to produce a value; repeat that many times and take the median of the result." But that's a lot harder to intuit, and is no doubt closer to the median than the expected value.)
[1] https://en.wikipedia.org/wiki/Robust_statistics
Of course, even if you can pick up a 20% gain in EV, that small chance you end up a billionaire won't save you from the 99.99..% of cases when you're eating cat food in retirement.
Being an employee of the company in question doesn't suddenly make that a good idea. It's an even worse idea since your entire financial future is tied to the company's outcome.
They should pay you more to take that kind of risk.
But for the potential employee, the advice remains the same; ignore the options when it comes to evaluating a compensation package (and only those who are informed enough to go "weeeeelll..." and have actual reasons for why in a ~particular~ instance they should do differently, should ever consider doing otherwise).