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It's less snake oil as it is an inheritance from a long, lost relation. Stock isn't something you can bank on, unless the company is knocking on the door of an

It's less snake oil as it is an inheritance from a long, lost relation. Stock isn't something you can bank on, unless the company is knocking on the door of an IPO and then you are probably looking at RSUs anyway. I'm gonna do some math that probably doesn't apply to a new grad, but certainly could apply to an experienced SE/SWE/etc. Look at it this way, if you are making $175k, with a 15% bonus and $55k of vesting stock at Google ("Alphabet"). Let's just assume the stock doesn't fluctuate over the course of the year. We'll call your total comp $255k real money (forgoing 401k and other benefits for simplicity). Now, you join a well-funded seed startup. They pay you $150 (even in these crazy times this is a high startup figure). Congratulations! You just became an investor. I'll save you the spiel about paying for a better environment, accelerated learning, purpose, etc...You have invested 105k a year, in exchange for .1-.25 percent of the company, if it's still a pretty small startup. Oh yeah, and year one's money gets paid mostly towards your stock cliff; you paid to accrue the first years stock until the end of the year (if you make it to the end of the year). If you leave in month 11 you get nothing. However, at month 12 you get the stock from year one, then each month you earn 1/48 of your total equity stake. A few more simplifying assumptions. Let's say your annual adjustments at BigCo and your annual adjustments at startup are equal, which they won't be. Also, there's no opportunity cost. Next year you pay that $105k again. Then, the company raises a few rounds of capital, over the next 5 years. All in all you've been at the company for 7 years and paid $735k for (let's call it) .1% of a company that was worth $5 million post at the time. But, you've been diluted 30%, 20%, 15% and 7% in subsequent rounds, and then maybe re-upped a little along the way. You have 3 times your initial grant worth of stock, because you were really good at your job, so now you own .000189 % of the company. If the company has a $500 million dollar exit, with no preferences, you get $94,500. But, with all the rounds you raised, $500 million is probably gonna trigger a liquidation preferences. Let's say it took $150 million VC money to get your exit. Well, you get $66,150. Damnit... Well, that doesn't seem worth it. How big does the company have to get to make it worth it? Well, I haven't heard of any $10,000,000,000 acquisitions. So, let's say you IPO and after your lockup period, you leave the company and sell all your stock. You'll have a tax advantageous $1.89 million. Off all the startups you hear about, and many you don't, how many $10,000,000,000 exits have you heard about? And what is that risk factor worth? Now, why do people do startups? Well, let's say your startup is Facebook. After your lockup period, you had a market cap of ~$100,000,000,000. Your .1% is now worth $18.9 million. Or if you had an original .25%, $47.25. I hope you get the point.

koide 11y ago
Thus, it's not snake oil, but a lottery with really lousy odds.
alain94040 11y ago
I think your math is a bit off. The dilution computation gives me 0.044% (before assuming you get any extra stock). With no extra stock, that gives you an exit at $150K. With the extra stock, you probably are in the $200K-$400K range. Which you do want to compare to your "investment" of $750K... So your post is very good advice to everyone. I encourage you to apply similar math. Of course, the hard part to evaluate is the variation: maybe the exit is 10X better. Or maybe it's 10X worse. How valuable is a high-risk/high-reward payoff? At least, by doing this math, you put hard numbers on just how high the payoff can be. If it turns out to be no so high, that's a great help to your decision.
- p4wnc6 11y ago
  I think this advice is OK as long we make a heavy emphasis on the need for some probability distribution over possible exit values. Such a distribution has to account for growth of the company, ability to succeed against competitors, potential acceptance of outside funding along with restrictions like liquidity preference, and so on. No one is good at articulating these distributions, and many people who influence you during the hiring process with either be overtly nefarious in their attempts to get you to believe what their rosy-colored prior looks like, or they will be suffering from different biases (especially the earliest-stage employees). For a young engineer who may or may not have a great command over this sort of probabilistic reasoning, and may or may not know any techniques to mitigate the biases that might creep in, it can be extremely risky to advise them to determine their own personal assessment of whether the exit will be 10X better and so on. Almost always they would be better off simply saying that they can't put a useful probability distribution on it, and therefore they cannot come up with a useful model of what the equity portion would be worth. It sounds nice to teach these types of candidates about how to value the equity in terms of knowing about liquidity preference, asking about the composition of the board of directors, asking detailed questions about comparable companies and their exit numbers, and so forth. But in truth it's a bit like handing someone a loaded gun, pointing it at their foot, and saying, "you're welcome for the advice."

koide 11y ago

Thus, it's not snake oil, but a lottery with really lousy odds.

alain94040 11y ago

I think your math is a bit off. The dilution computation gives me 0.044% (before assuming you get any extra stock). With no extra stock, that gives you an exit at $150K. With the extra stock, you probably are in the $200K-$400K range. Which you do want to compare to your "investment" of $750K... So your post is very good advice to everyone. I encourage you to apply similar math. Of course, the hard part to evaluate is the variation: maybe the exit is 10X better. Or maybe it's 10X worse. How valuable is a high-risk/high-reward payoff? At least, by doing this math, you put hard numbers on just how high the payoff can be. If it turns out to be no so high, that's a great help to your decision.

p4wnc6 11y ago
I think this advice is OK as long we make a heavy emphasis on the need for some probability distribution over possible exit values. Such a distribution has to account for growth of the company, ability to succeed against competitors, potential acceptance of outside funding along with restrictions like liquidity preference, and so on. No one is good at articulating these distributions, and many people who influence you during the hiring process with either be overtly nefarious in their attempts to get you to believe what their rosy-colored prior looks like, or they will be suffering from different biases (especially the earliest-stage employees). For a young engineer who may or may not have a great command over this sort of probabilistic reasoning, and may or may not know any techniques to mitigate the biases that might creep in, it can be extremely risky to advise them to determine their own personal assessment of whether the exit will be 10X better and so on. Almost always they would be better off simply saying that they can't put a useful probability distribution on it, and therefore they cannot come up with a useful model of what the equity portion would be worth. It sounds nice to teach these types of candidates about how to value the equity in terms of knowing about liquidity preference, asking about the composition of the board of directors, asking detailed questions about comparable companies and their exit numbers, and so forth. But in truth it's a bit like handing someone a loaded gun, pointing it at their foot, and saying, "you're welcome for the advice."