4 ms·

I think you are exactly right on equity and expose a problem of startups and recruiting that borders on disingenuous at the very least. VCs fund multiple start

by poof131 11y ago

I think you are exactly right on equity and expose a problem of startups and recruiting that borders on disingenuous at the very least. VCs fund multiple startups expecting many to fail. As I’ve seen first hand, a prototype can land a million dollar convertible note at a $10m cap. For the founders to then turn around and act like 1 percent of the stock is really worth $100k isn’t even close to reality. To account for realistic exits you probably need to cut that by 1/3. So to match a big company offer of $100k salary and $100k equity (of liquid stock), you need to match the salary and offer 3x equity for the compensation to be about equal. Yet most startups won’t match salary and then try to pretend that their equity is worth way more than it is. “We’ll pay you $70k but give you $150k in equity so the comp is more!” When the reality is the comp is actually significantly less if equity is more fairly valued. In this fictitious example, the $220k offered comp is really more like $130k, so about a 30% pay cut from the $200k offered by the big co. Startup equity isn’t worthless, but it needs to be valued at a significant discount which varies by the stage.

p4wnc6 11y ago
This is one of my favorite posts about valuing start-up options: < http://www.danshapiro.com/blog/2010/11/how-much-are-startup-options-worth/ http://www.danshapiro.com/blog/2010/11/how-much-are-startup-... >. But, funny enough, any time I have been in a negotiating position with a start-up, they act deeply offended that I would even ask about liquidity preference, makeup of the board, etc. Many of them refuse to answer these questions. It really flushes out a lot of insecurity and reveals toxic attitudes when founders won't talk frankly about this stuff. Basically, the start-up world is about providing lifestyle employment that subtly devalues and manipulates skilled workers who don't happen to know enough about employment, or haven't had much life experience with it yet. Sometimes this can be profitable for early stage employees, but most often it is only profitable for outright founders and investors. Holders of regular options rarely make money from them, and when they do it rarely is significant in their lives and usually doesn't compensate them for foregone wage they could have earned in other jobs. Unfortunately, there is a steady supply of people who value affiliation with a certain tech in-group, and lifestyle aspects of a job, like foosball tables, beer night, dog-friendly offices, etc., more than competitive wage. Usually these people don't realize they aren't being paid or that their options are not worth what they think they are worth, and later they become dissatisfied with the arrangement but have no negotiating power to change it. Another toxic side effect of this is that some start-ups can have wildly varying pay levels for employees of the same stature in the firm. If two different people are brought in as data scientists, say, but while one of them was completing a Ph.D. the other was working and experienced some of the poor compensation stuff, then when each is hired, one of them will do a better job at negotiating and have a better understanding of what is reasonable. The other may just be happy to have a job after grad school. Fast forward a few months and both of the data scientsts are each doing a great job and are each adding about the same amount of value to the firm, but one is paid more, and by being paid more is probably also viewed as a higher-status employee and may be closer in line for a promotion or an additional raise. Virtually never will the firm "do the right thing" and adjust the lower-paid person up to a matching salary, because there's no market force compelling them to (due to that employee's asymmetric lack of knowledge about the situation). Founders and investors often foolishly think of these information asymmetries as arbitrage opportunities, as one might in a financial market. But for extracting productivity from human workers, it usually doesn't work that way, and you're carrying a lot of risk that the whole company will become a toxic place that can't be saved even by vast amounts of "culture" engineering. Note that rarely is it the founders / investors who are behaving irrationally in these cases (at least not w.r.t. their hiring efforts). It's more often the entry level or bright-eyed engineer who doesn't want to think about unpleasant negotiation or fairness in salary levels, and accepts free lunches in place of 401(k) matching.
- poof131 11y ago
  Agree with all that you said and I have seen it first hand as I tend to be a poor negotiator and overly trust people. My main issue is the selling of the “mission” by investors and founders. Even in the first comment of the article you linked, Mark Suster talks about people obsessing about options. Certainly we should all be doing stuff for more than money, but if founders and investors weren’t concerned at all about the money why not make these companies non-profits. The reality is they use the information asymmetry for their benefit and then try to pretend it doesn’t matter and people should be about the mission. If you want a mission join the military or the peace corp. Your B2B app isn’t a “mission”.

by poof131 11y ago

p4wnc6 11y ago

This is one of my favorite posts about valuing start-up options: < http://www.danshapiro.com/blog/2010/11/how-much-are-startup-options-worth/ http://www.danshapiro.com/blog/2010/11/how-much-are-startup-... >. But, funny enough, any time I have been in a negotiating position with a start-up, they act deeply offended that I would even ask about liquidity preference, makeup of the board, etc. Many of them refuse to answer these questions. It really flushes out a lot of insecurity and reveals toxic attitudes when founders won't talk frankly about this stuff. Basically, the start-up world is about providing lifestyle employment that subtly devalues and manipulates skilled workers who don't happen to know enough about employment, or haven't had much life experience with it yet. Sometimes this can be profitable for early stage employees, but most often it is only profitable for outright founders and investors. Holders of regular options rarely make money from them, and when they do it rarely is significant in their lives and usually doesn't compensate them for foregone wage they could have earned in other jobs. Unfortunately, there is a steady supply of people who value affiliation with a certain tech in-group, and lifestyle aspects of a job, like foosball tables, beer night, dog-friendly offices, etc., more than competitive wage. Usually these people don't realize they aren't being paid or that their options are not worth what they think they are worth, and later they become dissatisfied with the arrangement but have no negotiating power to change it. Another toxic side effect of this is that some start-ups can have wildly varying pay levels for employees of the same stature in the firm. If two different people are brought in as data scientists, say, but while one of them was completing a Ph.D. the other was working and experienced some of the poor compensation stuff, then when each is hired, one of them will do a better job at negotiating and have a better understanding of what is reasonable. The other may just be happy to have a job after grad school. Fast forward a few months and both of the data scientsts are each doing a great job and are each adding about the same amount of value to the firm, but one is paid more, and by being paid more is probably also viewed as a higher-status employee and may be closer in line for a promotion or an additional raise. Virtually never will the firm "do the right thing" and adjust the lower-paid person up to a matching salary, because there's no market force compelling them to (due to that employee's asymmetric lack of knowledge about the situation). Founders and investors often foolishly think of these information asymmetries as arbitrage opportunities, as one might in a financial market. But for extracting productivity from human workers, it usually doesn't work that way, and you're carrying a lot of risk that the whole company will become a toxic place that can't be saved even by vast amounts of "culture" engineering. Note that rarely is it the founders / investors who are behaving irrationally in these cases (at least not w.r.t. their hiring efforts). It's more often the entry level or bright-eyed engineer who doesn't want to think about unpleasant negotiation or fairness in salary levels, and accepts free lunches in place of 401(k) matching.

poof131 11y ago
Agree with all that you said and I have seen it first hand as I tend to be a poor negotiator and overly trust people. My main issue is the selling of the “mission” by investors and founders. Even in the first comment of the article you linked, Mark Suster talks about people obsessing about options. Certainly we should all be doing stuff for more than money, but if founders and investors weren’t concerned at all about the money why not make these companies non-profits. The reality is they use the information asymmetry for their benefit and then try to pretend it doesn’t matter and people should be about the mission. If you want a mission join the military or the peace corp. Your B2B app isn’t a “mission”.