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Hard Truths about Equity
- askafriend 11y agoI think startups will soon be at a crossroads once the flaws in the equity compensation system become more widely exposed. People will be dis-incentivized from working at startups.
- thetmkay 11y agoEquity can still be an incentive to work at a start-up - it's just not an incentive to take a pay-cut. Start-ups should lose its label as a cash cow - but it can still be: - a well-paying job - high impact - more freedom - good career capital - a lottery ticket
- gaius 11y agoWe knew all this in 2000 in the dotcom crash. But along comes a new generation of starry-eyed kids (who are "just smarter" and don't care about experience) and they are just more meat for the grinder.
- fit2rule 11y agoI think the cool kids are running startups where all the data is on the table - i.e. no secrets, but rather all staff have access to all data about the company. This seems to be a trend with European startups, anyway ..
- steven2012 11y agoThey've been saying that forever, just like they've been saying "Silicon Valley will suffer a brain drain because people will move away due to the high cost of living." In theory it makes sense, but it never happens in earnest. Working in a startup is much, much more fun that working at a big corporation. I took a paycut several times to go work at startups just because working at a big company where you work on a single API of one of their products gets boring really fast, regardless of the pay.
- xyzzy4 11y agoBut at a big company you can also spend 2/3 of your time day-dreaming or browsing the Internet. At a startup you need to be more engaged.
- michaelmurray 11y ago100% agree with "2/3 of your time day-dreaming or browsing the Internet"... however one can only take this for so long before going crazy!
- peterjancelis 11y agoDo your own thing on the side. Much better than a few stock options. But make sure to have your project excluded in your IP and non-compete contracts with your employer.
- thedufer 11y agoI get the draw of working at startups, but I didn't think it was worth it. The big companies here are offering 2-3x startup salaries (with real room for growth). Is the market here out of whack or is that really a trade people are making?
- askafriend 11y agoI guess the kicker here is "it depends on the startup" and "it depends on the big company".
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- rco8786 11y agoCV = SV?
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- kelukelugames 11y agoLove the article. Wish I read this before joining a startup. Minor nitpick, please remove the number from the title.
- harryh 11y ago#2 is wrong. I know it's fun to say it that way, but it's wrong. If you work at a startup try going to your boss and saying "I'll give up all my equity for a $100/year raise." They will say yes (modulo a conversation with you about how that's a really bad idea for you). It would be fair to say that a lot of people overestimate the value of equity a lot of the time. But that's not the same thing as what the author says.
- sokoloff 11y agoAgree. > suggest to trade the equity portion of the offer for the cash value of the options (in addition to the advertised salary). Good luck. I was explicitly given that choice (in three packages, high/med/low options count in exchange for offsetting increase in starting salary). Being "smart", I took the salary and low options and that was a poor choice in retrospect, given that we IPO'd 2.5 years later and my salary now would surely be the same regardless of the initial choice. I don't know how common it is, but it's absolutely doable and done. (I suppose you could argue whether the company I joined was early-stage or not.)
- geofft 11y agoYou can get a $100/year raise just for the asking. In tech, salaries are just not negotiated at the $100/year granularity. Imagine saying "I'm also considering an offer from this company, can you offer more" and the HR department coming back with "Sure, we can give you $100/year more." If you can get a $100/year raise just for the asking, and you can also get a $100/year raise in exchange for equity, then simple arithmetic indicates that the equity has zero value.
- HillaryBriss 11y ago"The probability of getting rich from employee equity is almost zero, while the chance of rain on the 1st and 15th is 100%."
- forgueam 11y ago"Thankfully, this is somewhat rare, though it does happen fairly often." Wait, what?
- rco8786 11y agoI had an issue with this as well. The author implies that startups "often" fire employees before they reach their 1 year cliff to avoid paying out equity. That's silly on so many levels.
- potatolicious 11y agoThe most infamous case of this was Zynga pre-IPO where certain employees were pulled into a room and given the "give up your unvested equity and keep your job, or lose both". I'm not sure if it's common, but it's definitely not unheard of. Anecdotally from conversations I've had with founders some are very, very keen on cycling options back into the pool as much as possible. More importantly I've heard some ideas on how to do this that made my skin crawl.
- pc86 11y ago> More importantly I've heard some ideas on how to do this that made my skin crawl. I would be interested in hearing these, as I'm sure many others would be as well.
- potatolicious 11y agoThe most egregious and common one I hear is back-loading options vesting (e.g., vest 5% in 1st year, 10% next year, etc) - note that Amazon already does this, though standard is still linear. Dragging out the frequency of vesting is also common to try and create as many unvested options as possible when an employee chooses to leave the company. One big takeaway I've had from these conversations is how many founders do not see equity as compensation earned, but as some sort of gift to be granted to the virtuous and loyal. It's a little depressing that the frank answer to "why not vest quarterly" has been "because if they leave we don't get as many options back". It's interesting that we never think about cash compensation that way but do for equity compensation.
- steven2012 11y agoThe point about only founders getting rich is one that is in stark difference to the way Silicon Valley was pre-bust. The first company I worked for went IPO a year or two before I joined. The very first admin of that company got so rich from stock options that she bought a vineyard and retired in 1999. Lots of people bought houses with the money they made, including the first engineer who bought a house in prime PA. I joined another startup just a few years ago, and they were extremely stingy with options. "Less-important" people (ie. anyone non-engineers, or non-management) were getting a few hundred or maybe a few thousand options, which I thought was a bummer. I think everyone contributes to the success of the company, and everyone should get a chance to do well if the company does well. But I've seen this case several times where the founders keep everything for themselves. I'm not sure what changed, but it's probably reflective of how greedy and self-centered SV is getting. It feels like it's more like Wall Street and less about classic Silicon Valley, which is a shame. Go watch "Triumph of the Nerds", the classic tv special during the dotcom boom and see if you can reconcile the difference of those companies and the ones today.
- akkartik 11y agoI suspect the cause is the shift in how startups are viewed in Silicon Valley. Even though there've been startups here for a long time, they were always considered risky, marginal and low-status. So the supply of potential employees was low and the early payouts you're thinking of were paying people for taking a risk. Today startups are considered to be glamorous. They have access to a lot more investment and potential employees. The whole country seems to be making a beeline to pony up for the high rents because the salaries more than compensate for it. There's no longer much risk of lost earnings. Is it any surprise that the equity has gone lower? Arguably the valley as a whole has taken the deal suggested in OP: more salary, less equity.
- pc86 11y ago> The whole country seems to be making a beeline to pony up for the high rents because the salaries more than compensate for it. Only if you're at the top of the income bracket (for engineers in SF specifically, not overall for the industry or area). The average SF developer would be better off with an average salary in an area with reasonable real estate prices and state income taxes.
- aantix 11y agoAnd.... When the dealin' is done, you start to see that unless you're a founder or a really close friend of the founder, you have no one to advocate for you when the chips are divvied up, and you pretty much get to take or leave the deal. 4 or 5 years, slaving away at a startup, weekends, nights. And at the end of the party, you basically have zero say. Congratulations, hope you're best friends with the CTO.
- gjmulhol 11y agoNumber 1 rule of working at a startup: really trust the founders and everyone you work with. Look out for yourself, but at the end of the day, if you are working with someone scummy, they can change the rules at basically any time. So work with people committed to transparency and honest dealing. Also, while it is nice to think of your particular startup succeeding, it probably won't. And even if it "does" it will likely not be worth >$1b. One of my proudest moments was hearing from one of my early employees that even if the company tanked tomorrow that she would not regret it for a moment. I hope that for every person I work with, because while I cannot guarantee that the world won't collapse or something unforeseen to happen, I can work really hard to make sure that as we grow and succeed, our culture is one of making sure that everyone is learning and growing and going to excel in their careers and lives no matter what happens to this company. Side note: I am also committed to making sure that people here are compensated well when we succeed, if for some reason our initial compensation structure, which I think has been generous, has holes.
- k__ 11y agoSo true. I didn't start working for a startup because of equity. I started working for one, because it lets me work remote and I learn new things. Even if the company goes down, I still have >1 year remote work experience...
- hitekker 11y ago> One of my proudest moments was hearing from one of my early employees that even if the company tanked tomorrow that she would not regret it for a moment. This as noble as you can get in business: truly something to be proud of.
- tedmiston 11y ago> Also, while it is nice to think of your particular startup succeeding, it probably won't. And even if it "does" it will likely not be worth >$1b. And even if it does succeed, and even if it does achieve a high valuation, you might not necessarily have a life-changing event. I know it's buzzword-y to talk about liquidation preferences right now, but there are plenty of way investors and founders can benefit from an acquisition that don't trickle down to even early employees.
- amykhar 11y agoI was lucky enough to once be employed by a company that didn't promise me any equity. They paid me a good salary and treated me well. The founder sold the company after I'd been there for about 10 months. I was called in to speak with him and given a nice check. (Still had my job too.) I'd much rather work for a guy like that.
- ChuckMcM 11y agoI've said it before but it is worth repeating, this article is spot on, and the take away should be never ever ever join a startup because you want to "get rich." There are only three solid reasons to join a startup: 1) You are passionate about the mission - nothing is more rewarding than engaging passionately in something you strongly believe in and endorse. Start ups have license to pursue ideas that established companies simply cannot. 2) It will improve your skill set - There is only so much you can learn at school or online, some skills have to be practiced to be learned. Start ups can give you a role you want, even if your resume isn't a match. Which will get you over the chicken and egg problem of you don't have experience in the job you want to do to be hired in the job you want to do. That can get you into a job elsewhere where the "entry level" position requires previous experience. 3) You will work with someone you respect - Start ups are small, visible, and stressful. Ask anyone to name 10 people they worked with a BigCo and 10 people they worked with at a startup, the latter is much easier. Stress, higher highs, lower lows, creates stronger bonds. Those friendships will follow you through out your life, they will help when you're looking for advice or a job, and support when you are trying to pull off something really hard to do. If you choose to join a startup for one of those three reasons it will always deliver.
- hkmurakami 11y agoSame here. People, mission, learning. Any other reasons are deluded, whether it be self imposed delusion or otherwise.
- autotune 11y agoMy thoughts on startups and equity is that you can't pay your current bills with equity. The only way equity would make a difference in whether I joined one startup or another would be if I received two offers with the same salary, benefits, and point or points you've mentioned above, I'd pick the one with more equity assuming it's preferred.
- sokoloff 11y agoI've never heard of employees vesting preferred shares as part of their compensation. Is that a thing?
- frik 11y agoReading the comments here, reading about "the good old days" before the dot-com bubble burst... do we see early signs of another bubble? I sincerely hope not.
- wbillingsley 11y agoIt looks like a different sort of bubble this time. If I recall, in 2000, not only had valuations gone ridiculous, but there were also a couple of big triggers for tech spending to drop -- phone networks globally (big spenders) had overbid on 3G licenses and wanted to keep their other capital spending down, and other businesses had just come through Y2K spending. And the public imagination had lost rationality (press talking about the new economy and price-to-earnings ratios not mattering, etc...) This time around there's a cultural bubble among engineers (everyone wants to do a start-up), some irrational unicorn-hunting, and a window where governments are weak to VC demands for the sake of an innovation agenda, (eg, Uber's making more headway on taxi regulations than would normally be the case). But little sign that tech spending globally is likely to drop any time soon. There is also a slightly sad split in that some of the biggest unicorns are technologically not very innovative (Uber, Slack) while innovation & high tech spinouts from research continue to be a less spectacular slog. But that seems a less worrying bubble for engineers (the number of engineering jobs should still continue to rise, as more and more of companies business models are defined by the tech they use, and so if they want to differentiate their business they need to differentiate their tech)
- blazespin 11y agoOverly cynical. The two times I worked for a startup more than 3 months I got paid out for my equity. 2 for 2. The problem is not equity, the problem is picking the right startup. Everyone I know that has got rich has done so via equity.
- TomBombadildoze 11y ago> Overly cynical. The two times I worked for a startup more than 3 months So how many have you actually worked for? "2 for 2 [out of the experiences I cherry-picked to rationalize my bias]" really doesn't support your claim that the author is overly cynical. > The problem is not equity, the problem is picking the right startup. If only we could predict the outcome of the lottery, we wouldn't even need startups.
- blazespin 11y agoIf you are thoughtful and careful and quit quickly at a startup that isn't going anywhere / lead by jerks you can usually pick the right startup. My point is that equity is great and it does everything it is supposed to do (align motivation / create a great team spirit / reward risk takers). The problem is people think that equity is magical and you don't have to worry about the people giving it to you. They are the weak link - not the equity itself.
- chetanahuja 11y agoMeta: Reading this thread is a refreshing change from the other ongoing thread about Good Inc which is full of bitter diatribes about how horrible startups are for everybody. I've been working in startups pretty much all my working life and now am a founder of one. Some were successful some were not. The successes added non-life changing but still non-trivial amount of cushion to my bank account that allowed me to leave my full time job and work on my own startup while taking minimal cash compensation from the company funds. The fact is, the time I spent in a non-startup was nowhere near as exciting and fun as the years I spent in various startups, even the failed ones. And the successful ones were lucrative enough for me (none of which I was even in the first 50 employees) to affect some life decisions. Just one person's anecdata here but I started my engineering career 15 years ago and I read the overly cynical, bitter postings with a sense of amazement. My experience doesn't support any of it.
- nostrademons 11y agoI think this article is missing a fundamental truth about life, and its conclusions are distorted because of that: You have to respect risk. And ideally research it, quantify it, and manage it. The one thing you cannot do is ignore it. Joining a startup is risky. Founding a startup is even more risky. Taking stock options instead of salary shifts more of that risk onto you, as an employee. You need to be aware of this risk, and in that regard, all of these articles about employee equity are performing a very valuable service. But you also have to view them in the context of the whole other portfolio of risks you are taking in your life. The article, for example, says that the chance of rain on the 1st and 15th is 100%. This is flatly untrue, as any former employee of DEC, Sun, IBM, HP, Yahoo, Tandem, Stratus, Symbolics, or other formerly-highflying tech companies can attest. It is a guarantee that you will get screwed over sometime in your working life, and the best response to that is to learn from it and minimize the chance of it happening in the future, or at least maximize the returns from when you don't get screwed over to buffer your total returns.
- jondubois 11y agoYou need to make sure that the founders are good people. Most of them are not. I can relate to the one year cliff and the economic incentive behind terminating employees - Thankfully, the founders I worked for in my last startup were fundamentally good people. I wouldn't hesitate to work with them again. As an employee, you are always at the mercy of the founders - So you'd better study them carefully. I think the best sign of a good founder is that they're usually easy to talk to - They're genuine people and they always talk to you on the same level as any two human beings would, not as a mere employee. Also, good founders are humble; I had no idea that the CEO of my previous startup could read and write code until about 6 months in - He never said so. I knew the founders were smart when I joined, but I didn't appreciate the full extent until about one year later.
- rdtsc 11y ago> Anything of value can be traded for or converted into something of equal value. Equity does not have this characteristic. You can’t spend it, you can’t liquidate it, you can’t even trade it. I like that quote. It really illustrates the problem well. Or the idea that you'd offer them to get the salary bump based on options value. At the end of the day it is a gamble, a promise that _if_ the company gets big, you _might_ get a big payout. The hope and dreams account for so much. People will spend sleepless nights, working for 50% reduced salaries for some hope. That is a nice opportunity for the founders -- sell a dream. Sell it to investors. Sell it to customers. Sell it to employees. Sell it to themselves. The last is key, you have to believe your own lies to start really be convincing to others.
- jibjabjib 11y agoI joined a startup very early (#12) 2.5 yrs ago that had previously successful and well-known founders. I took below market pay but ended up working out (now valued around $500m) and believe they will succeed long-term. I've since left but of course early employee equity was one of my top considerations. To join an early stage startup that you do not think will succeed and become "big" should rarely be worth your time.