12 ms·

It's not about what's equitable, or fair, or "reasonable." It's about what the market will bear. Individuals with a realistic worldview, a little background i

by hapless 11y ago

It's not about what's equitable, or fair, or "reasonable." It's about what the market will bear. Individuals with a realistic worldview, a little background information, and the ability to do simple math will conclude that startup equity offers are typically worthless. The fractions of the company are too small, the protections given to founders and investors too large. Startups are not getting the best talent with these compensation packages. And the people doing the hiring don't care. They clearly do not want any better than what they're getting. If there were unsatisfied demand for better staff, we would see more compelling offers. Hiring irrational optimists, the math-impaired, and folks who fail to do basic research on the field seems to be working out OK.

ditonal 11y ago
I still meet a ton of engineers, who while being surprisingly analytical in other aspects of their life, think their worthless equity packages are worth something. Some people don't even know what percentage their shares represent. They definitely don't give enough thought to dilution, liquidation preference, lack of voting rights. I'll say it over and over again - if you're asked to take a total compensation cut i.e. turn down public stock or salary from an established company to take options at a startup you are an investor. In fact a bigger portion of your net worth and income is invested then the typical VC's portfolio. And yet you don't get voting rights, you get screwed by liquidation preference etc, and the standard response is "well, you're not an investor, so you don't get preferred shares." Engineers are often hilariously bad at finance and even worse at negotiation.
- rjbwork 11y ago
  I asked about the value of my shares. They're subject to dilution, and the company won't tell me what % of the company they represent, nor the board-evaluated value of the company. Thus I have to consider them entirely worthless until proven otherwise.
  - potatolicious 11y ago
    I think sama had something good to say about this: https://twitter.com/sama/status/628713105824964608 https://twitter.com/sama/status/628713105824964608 I would walk away from that situation. Any startup that's unwilling to do everything Sam outlined above is IMO not worth my time. Hell, refusing to answer something as simple as "what percentage are these shares worth"?! I'd run, not walk, away from that one. If you want to encourage workers by making them investors in the company, then treat them like it.
    - rjbwork 11y ago
      Meh. I generally enjoy what I'm getting to do here, and the options were unexpected when I accepted the offer, so I'm not really upset at it, per se.
      - potatolicious 11y ago
        If the work is interesting and such, sure, but my take is that beyond simply being unable to value your own equity, behavior like this suggests lack of maturity in the founders and implies amateur-ishness. Having been around the startup block a few times now, there are some tells that are definitely warning signs for me. The most ridiculous are things like demanding a NDA to even discuss the company. If a founder asks for a NDA just to have coffee, I am out - in my experience it's a 100% indicator of someone who has no idea what the fuck they're doing. Secrecy around valuation, options pool, etc, are less damning but still very much a yellow flag when it comes to how they treat employees and how much experience the founders have. In general I find that inexperienced and immature founders tend to focus on secrecy in the wrong places (and conversely, lack of secrecy where it matters).
        dasil003 11y ago
        > If a founder asks for a NDA just to have coffee, I am out - in my experience it's a 100% indicator of someone who has no idea what the fuck they're doing. Indeed. I've seen this countless times, even occasionally in SV where people should know better. Starting a company is really really hard. It's fundamentally about deciding where to channel your energy when you have a completely green field but only enough resources to execute on 0.01% of your ideas. The focus must be pinpoint and relentless to even have a chance. The idea that the risk of someone stealing your idea is worth devoting any mental energy to indicates that you don't have your priorities straight. Hell, even in a worst case scenario where you have a great non-obvious idea, and someone steals it, if you want an NDA so you can sue them then you're essentially betting on their superior execution capability. Run don't walk from this kind of hot air balloon.
- geebee 11y ago
  Perhaps so, but this may reflect a lack of power rather than a lack of awareness. I was in a startup once where a new CEO talked about allocation of shares - he referred to the number of shares with no extra context. I asked, in the meeting, how we could calculate our ownership under the exit scenario he described, and clearly there was an uncomfortable vibe in the room after I did that. The disinclination to ask about this may reflect a lack of power rather than cluelessness. Also, it does need to be stated, many of the employees were H1B workers with green card sponsorship. I'd say that they were behaving rationally by sticking with the company, especially since a couple of them were close to completing the process. This and many other experiences have convinced me that while I generally look on immigration positively, I believe that workers need to be free and full agents in a labor market (this includes there right to change fields entirely, not just jobs, and it also includes the right to go without a job for a while). I'm convinced that a great part of the appeal of the H1B is that it creates a class of engineers who lack this freedom. Truth is, you don't need all your workers to lack freedom of movement, as long as the percentage is high enough to set a standard.
rlucas 11y ago
You hit it on the head with "irrational [sic] optimists" even though you whiffed it with "typically worthless." There are at least two very much rational psychological pieces at work here. The first is that people who are inclined to be optimistic about a tiny stake are qualitatively different. The second is that the stake's expected value (EV; probability * outcome) is not a sufficient metric upon which to estimate its utility to actual humans. 1. People who are, relative to a theoretically precise EV, optimistic about a tiny stake act qualitatively differently toward the organization than those who are neutral or pessimistic / jaded. For example, a good friend of mine in school used to argue, "why vote? one vote can't ever move the needle." And he was, after a fashion, right: the expected value of your single vote in terms of affecting the outcome is nil. But if you were looking to build an organization of people to achieve some political or social outcome, you would ceteris paribus want those who DO vote despite that expectation; voting here is a proxy for caring, motivation, social cohesion, deontological orientation, etc., not as the jaded comments here might suggest by analogy, mere innumeracy. Similarly, and I want to take care to say that I hold this position only toward the case of creating high-growth uncertain ventures (startups) and not as a general prescription for society or the economy, those who eagerly accept and seek even a small ownership stake in the enterprise are going to be qualitatively different. And you may very much want that, just as they want to be part of something they have some ownership in. 2. Convexity and utility functions. Get over the idea that a dollar is worth a dollar. The first dollar to the guy who needs that dollar for a bus ride home in the rain is worth more than the 1001st dollar to a similarly situated guy -- an easy proof of non-constant marginal utility. But if you look into things like indivisibility and status tournaments, there's lots of good research that points out that playing the lottery can be rational even with a negative expectation under certain utility functions. In other words, a 5% cash raise, to a comfortable software dev whose needs and retirement at a middle-class level are nearly certain, may be less desirable than a smaller EV shot at a life-changing sum. It may well be worth $10k to buy a "lottery ticket" at a one-in-two-thousand chance of a $10 M outcome ($5k EV).
- hapless 11y ago
  I don't think many employees have a 1 in 2000 chance of a $10M outcome. I'm OK with the 0.005% odds on a multi-billion exit. Let's stick with that. The problem isn't the odds, it's the returns. As another article on HN pointed out, currently, 100% of billion dollar startups (every single "unicorn") have significant investor liquidation preferences. As a result, for a non-founder, a 1% early-stage stake, at the exit of a billion dollar "unicorn", is quite likely to come out as a nice annual bonus at a "normal" firm: $10k to $100k. The one-two punch of dilution and liquidation preference eats up employee equity. a %0.005 chance at $100k comes out to an expected value of $500. Even after we consider the odds, that $100k is four years in the future, with a one year cliff and a lot of individual risks involved, unconnected to the firm's fortunes. The present value is conceivably much lower than the expected value of $500. It's essentially nothing. -- As a postscript: There's nothing intrinsically wrong with offering equity stakes with a negligible present value. Clearly, startups still find talent that satisfies them. The system is working.
jabzd 11y ago
Absolutely. I'm a co-founder of an less than 10 employee company. I make sure to make it clear that our offered restricted stock grants (that are between 0.1 - 0.25% at this point) are not replacements for compensation. They are instead bonus/retention plans that act as a bite of the apple if the company were to sell and they are still employed by us. Otherwise, salaries are intended to be at or above market. In other words, I care more about getting good talent with those "realistic worldviews" than attempting to pull the wool over the eyes of those that get caught up in the type of thinking of planning purchases when they win the lotto because they bought a ticket once. If only more startups worked that way, instead of leveraging those types of individuals to get more hours at below-market pay because everyone is an "owner." It's almost criminal...
- 7Figures2Commas 11y ago
  > I make sure to make it clear that our offered restricted stock grants (that are between 0.1 - 0.25% at this point) are not replacements for compensation. They are instead bonus/retention plans that act as a bite of the apple if the company were to sell and they are still employed by us. Your stock grants are not a bonus/retention plan simply because you believe your cash compensation is at or above market. Pre-IPO stock grants are a lottery ticket. Period. Here's an exit scenario: your company sells for $50 million after four years[1]. Assuming no dilution and no liquidation preferences, an employee with 0.25% earns $125,000 pre-tax, the equivalent of a $31,250/year bonus that was never guaranteed and deferred for four years. Why would you think this to be a strong driver of retention for in-demand employees with "realistic worldviews"? In today's market, your best employees can probably get 50-100% of that hypothetical annual bonus in real cash just by switching jobs. [1] Your company isn't likely to have a liquidity event, but if it does exit, the value of the event is likely to be $50 million or under according to exit data in recent years.
  - potatolicious 11y ago
    Disagree and agree at the same time. It's a retention/bonus plan because there are means to liquidity via secondary markets even pre-IPO. Obviously the liquidity event is the ideal outcome, but there are still many ways for an employee to exit his/her position prior to that point, and the idea is that you ride the valuation curve up so that what is on paper a $20k annual "bonus" becomes a $60k annual bonus, for example. That being said, you're right - the problem here is that startups in general are only willing to pay "market" for base salary, ignoring that good engineers can get completely liquid equity at major companies worth as much as, if not more than, the level of equity being offered to startup employees. In your typical "$X base + $Y equity" startup offer, only $X is competitive. You can likely get $Y (or more) from an established post-IPO company where the comp is (almost) as good as cash. $Y in pre-IPO, illiquid, risky early-stage equity is not worth the same thing as $Y cash in hand.
deleted 11y ago
[deleted]

by hapless 11y ago

ditonal 11y ago

I still meet a ton of engineers, who while being surprisingly analytical in other aspects of their life, think their worthless equity packages are worth something. Some people don't even know what percentage their shares represent. They definitely don't give enough thought to dilution, liquidation preference, lack of voting rights. I'll say it over and over again - if you're asked to take a total compensation cut i.e. turn down public stock or salary from an established company to take options at a startup you are an investor. In fact a bigger portion of your net worth and income is invested then the typical VC's portfolio. And yet you don't get voting rights, you get screwed by liquidation preference etc, and the standard response is "well, you're not an investor, so you don't get preferred shares." Engineers are often hilariously bad at finance and even worse at negotiation.

rjbwork 11y ago
I asked about the value of my shares. They're subject to dilution, and the company won't tell me what % of the company they represent, nor the board-evaluated value of the company. Thus I have to consider them entirely worthless until proven otherwise.
- potatolicious 11y ago
  I think sama had something good to say about this: https://twitter.com/sama/status/628713105824964608 https://twitter.com/sama/status/628713105824964608 I would walk away from that situation. Any startup that's unwilling to do everything Sam outlined above is IMO not worth my time. Hell, refusing to answer something as simple as "what percentage are these shares worth"?! I'd run, not walk, away from that one. If you want to encourage workers by making them investors in the company, then treat them like it.
  - rjbwork 11y ago
    Meh. I generally enjoy what I'm getting to do here, and the options were unexpected when I accepted the offer, so I'm not really upset at it, per se.
    - potatolicious 11y ago
      If the work is interesting and such, sure, but my take is that beyond simply being unable to value your own equity, behavior like this suggests lack of maturity in the founders and implies amateur-ishness. Having been around the startup block a few times now, there are some tells that are definitely warning signs for me. The most ridiculous are things like demanding a NDA to even discuss the company. If a founder asks for a NDA just to have coffee, I am out - in my experience it's a 100% indicator of someone who has no idea what the fuck they're doing. Secrecy around valuation, options pool, etc, are less damning but still very much a yellow flag when it comes to how they treat employees and how much experience the founders have. In general I find that inexperienced and immature founders tend to focus on secrecy in the wrong places (and conversely, lack of secrecy where it matters).
      - dasil003 11y ago
        > If a founder asks for a NDA just to have coffee, I am out - in my experience it's a 100% indicator of someone who has no idea what the fuck they're doing. Indeed. I've seen this countless times, even occasionally in SV where people should know better. Starting a company is really really hard. It's fundamentally about deciding where to channel your energy when you have a completely green field but only enough resources to execute on 0.01% of your ideas. The focus must be pinpoint and relentless to even have a chance. The idea that the risk of someone stealing your idea is worth devoting any mental energy to indicates that you don't have your priorities straight. Hell, even in a worst case scenario where you have a great non-obvious idea, and someone steals it, if you want an NDA so you can sue them then you're essentially betting on their superior execution capability. Run don't walk from this kind of hot air balloon.
geebee 11y ago
Perhaps so, but this may reflect a lack of power rather than a lack of awareness. I was in a startup once where a new CEO talked about allocation of shares - he referred to the number of shares with no extra context. I asked, in the meeting, how we could calculate our ownership under the exit scenario he described, and clearly there was an uncomfortable vibe in the room after I did that. The disinclination to ask about this may reflect a lack of power rather than cluelessness. Also, it does need to be stated, many of the employees were H1B workers with green card sponsorship. I'd say that they were behaving rationally by sticking with the company, especially since a couple of them were close to completing the process. This and many other experiences have convinced me that while I generally look on immigration positively, I believe that workers need to be free and full agents in a labor market (this includes there right to change fields entirely, not just jobs, and it also includes the right to go without a job for a while). I'm convinced that a great part of the appeal of the H1B is that it creates a class of engineers who lack this freedom. Truth is, you don't need all your workers to lack freedom of movement, as long as the percentage is high enough to set a standard.

rlucas 11y ago

You hit it on the head with "irrational [sic] optimists" even though you whiffed it with "typically worthless." There are at least two very much rational psychological pieces at work here. The first is that people who are inclined to be optimistic about a tiny stake are qualitatively different. The second is that the stake's expected value (EV; probability * outcome) is not a sufficient metric upon which to estimate its utility to actual humans. 1. People who are, relative to a theoretically precise EV, optimistic about a tiny stake act qualitatively differently toward the organization than those who are neutral or pessimistic / jaded. For example, a good friend of mine in school used to argue, "why vote? one vote can't ever move the needle." And he was, after a fashion, right: the expected value of your single vote in terms of affecting the outcome is nil. But if you were looking to build an organization of people to achieve some political or social outcome, you would ceteris paribus want those who DO vote despite that expectation; voting here is a proxy for caring, motivation, social cohesion, deontological orientation, etc., not as the jaded comments here might suggest by analogy, mere innumeracy. Similarly, and I want to take care to say that I hold this position only toward the case of creating high-growth uncertain ventures (startups) and not as a general prescription for society or the economy, those who eagerly accept and seek even a small ownership stake in the enterprise are going to be qualitatively different. And you may very much want that, just as they want to be part of something they have some ownership in. 2. Convexity and utility functions. Get over the idea that a dollar is worth a dollar. The first dollar to the guy who needs that dollar for a bus ride home in the rain is worth more than the 1001st dollar to a similarly situated guy -- an easy proof of non-constant marginal utility. But if you look into things like indivisibility and status tournaments, there's lots of good research that points out that playing the lottery can be rational even with a negative expectation under certain utility functions. In other words, a 5% cash raise, to a comfortable software dev whose needs and retirement at a middle-class level are nearly certain, may be less desirable than a smaller EV shot at a life-changing sum. It may well be worth $10k to buy a "lottery ticket" at a one-in-two-thousand chance of a $10 M outcome ($5k EV).

hapless 11y ago
I don't think many employees have a 1 in 2000 chance of a $10M outcome. I'm OK with the 0.005% odds on a multi-billion exit. Let's stick with that. The problem isn't the odds, it's the returns. As another article on HN pointed out, currently, 100% of billion dollar startups (every single "unicorn") have significant investor liquidation preferences. As a result, for a non-founder, a 1% early-stage stake, at the exit of a billion dollar "unicorn", is quite likely to come out as a nice annual bonus at a "normal" firm: $10k to $100k. The one-two punch of dilution and liquidation preference eats up employee equity. a %0.005 chance at $100k comes out to an expected value of $500. Even after we consider the odds, that $100k is four years in the future, with a one year cliff and a lot of individual risks involved, unconnected to the firm's fortunes. The present value is conceivably much lower than the expected value of $500. It's essentially nothing. -- As a postscript: There's nothing intrinsically wrong with offering equity stakes with a negligible present value. Clearly, startups still find talent that satisfies them. The system is working.

jabzd 11y ago

Absolutely. I'm a co-founder of an less than 10 employee company. I make sure to make it clear that our offered restricted stock grants (that are between 0.1 - 0.25% at this point) are not replacements for compensation. They are instead bonus/retention plans that act as a bite of the apple if the company were to sell and they are still employed by us. Otherwise, salaries are intended to be at or above market. In other words, I care more about getting good talent with those "realistic worldviews" than attempting to pull the wool over the eyes of those that get caught up in the type of thinking of planning purchases when they win the lotto because they bought a ticket once. If only more startups worked that way, instead of leveraging those types of individuals to get more hours at below-market pay because everyone is an "owner." It's almost criminal...

7Figures2Commas 11y ago
> I make sure to make it clear that our offered restricted stock grants (that are between 0.1 - 0.25% at this point) are not replacements for compensation. They are instead bonus/retention plans that act as a bite of the apple if the company were to sell and they are still employed by us. Your stock grants are not a bonus/retention plan simply because you believe your cash compensation is at or above market. Pre-IPO stock grants are a lottery ticket. Period. Here's an exit scenario: your company sells for $50 million after four years[1]. Assuming no dilution and no liquidation preferences, an employee with 0.25% earns $125,000 pre-tax, the equivalent of a $31,250/year bonus that was never guaranteed and deferred for four years. Why would you think this to be a strong driver of retention for in-demand employees with "realistic worldviews"? In today's market, your best employees can probably get 50-100% of that hypothetical annual bonus in real cash just by switching jobs. [1] Your company isn't likely to have a liquidity event, but if it does exit, the value of the event is likely to be $50 million or under according to exit data in recent years.
- potatolicious 11y ago
  Disagree and agree at the same time. It's a retention/bonus plan because there are means to liquidity via secondary markets even pre-IPO. Obviously the liquidity event is the ideal outcome, but there are still many ways for an employee to exit his/her position prior to that point, and the idea is that you ride the valuation curve up so that what is on paper a $20k annual "bonus" becomes a $60k annual bonus, for example. That being said, you're right - the problem here is that startups in general are only willing to pay "market" for base salary, ignoring that good engineers can get completely liquid equity at major companies worth as much as, if not more than, the level of equity being offered to startup employees. In your typical "$X base + $Y equity" startup offer, only $X is competitive. You can likely get $Y (or more) from an established post-IPO company where the comp is (almost) as good as cash. $Y in pre-IPO, illiquid, risky early-stage equity is not worth the same thing as $Y cash in hand.

deleted 11y ago

[deleted]