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The way startups run today and the way compensation is often structured just makes startups a bad deal economically in the best of times. Imagine for a second

by hibikir 10y ago

The way startups run today and the way compensation is often structured just makes startups a bad deal economically in the best of times. Imagine for a second that you become employee 10 in a new startup that you believe in. You dedicate it 15 hours a day for 5 years, everything went awesome, and now the company is worth 5B. Your stock options would be worth millions in case of a liquidity event. Great, right? The thing is, it's 5 years later the company is probably 300-800 people now, and therefore is a very different company than the one you joined, and if it's still growing, it's be a different company still next year. But there's no liquidity event: You cant exercise your options because you can't pay the taxes. If you want to exercise anything, the company has to go public, and you sure don't control that. So you either wait in a job that probably doesn't fit you anymore, or your stock compensation was worth nothing. Therefore, whether the startup does great or not, you have to apply the 'I might want to quit' discount. If I am assuming 8 years to IPO, which is not insane that discount is going to be huge by itself. I'd not rate my chances of staying in a job for 8 years as 1/10. And that's without considering that, career wise, you'll be learning more changing jobs every couple of years or so. Let's compare this to a public company: Their stock compensation has none of that complexity, especially now that RSUs are the way to go. You can sell them for cash immediately at the stock price that day. The downside is minimal, and chances are your first block of shares comes after one year, so if you hate your job, you sit there a year, sell your shares and quit. Given how much stock the bigger companies are awarding developers, you have to completely ignore compensation to go to a tiny startup: You kind of have to bet in the world around you changing to make exercising options early to be more or less free, along with believing that the startup will go the distance. Those are odds I'd not take

benmathes 10y ago
Yes. Nobody who understands the risk-adjusted rewards of startups does it for the money. Best odds of getting rich? Go work at Google and bank your check/bonus. At best, startups are a faster way of getting experience. [1] Employees don't even know they are making that bet, though! Most don't even know the details of what they are getting, let alone how to evaluate it. I've been working with AngelList to help fix this, much more coming very soon. [1]: http://startupljackson.com/post/135800367395/how-to-get-rich-in-tech-guaranteed http://startupljackson.com/post/135800367395/how-to-get-rich...
- jarjoura 10y ago
  That's not completely fair. Startups want and need more experienced employees and cannot afford to bring in new grads at the scale bigger corporations can. Facebook, for example, has an entire org that focuses just on internships and new grads. They are offered space and time to learn and grow. Some may still fall through the cracks, but far less so than at a startup that doesn't have the resources to hand hold. At a big company you can learn how to be a team player and specialize in areas that are interesting to you. At a small company you learn how to become a jack of all trades and must cover your bases.
  - benmathes 10y ago
    yeah, hence "at best". There are bigco's where you'll stagnate. There are startups where you'll only learn how to make CRUD apps in rails.
- deleted 10y ago
  [deleted]
pj_mukh 10y ago
Some solutions: http://blog.samaltman.com/employee-equity http://blog.samaltman.com/employee-equity
lafay 10y ago
If you're joining as employee 10, you should negotiate for the opportunity to early exercise all of your shares and avoid any tough tax choices later on. Perhaps even a starting bonus to cover the cost of exercise. This also puts you in a position to exclude your entire gain from federal capital gains tax if the liquidity event is at least 5 years out: https://blog.wealthfront.com/qualified-small-business-stock-2016/ https://blog.wealthfront.com/qualified-small-business-stock-...
- benmathes 10y ago
  True, but startup employees shouldn't be effectively penalized for inexperience in arcane startup securities and tax law.
- toomuchtodo 10y ago
  I would really like to see YC incorporate this into their options boilerplate.
- asabjorn 10y ago
  With large early rounds exercising your stock might set you back 50k or more, making you an investor as well as an employee. With the odds of startup success it is advisable to diversify more than that unless you are already wealthy.
  - Terr_ 10y ago
    The example that always pops to mind for me is Enron, where many employees owned stock in the company, and the company did a lot of contributions in stock. [0] So when it imploded, not only did they lose their jobs, but their investments. [0] http://www.nytimes.com/2001/11/22/business/employees-retirement-plan-is-a-victim-as-enron-tumbles.html http://www.nytimes.com/2001/11/22/business/employees-retirem...
dkarapetyan 10y ago
> And that's without considering that, career wise, you'll be learning more changing jobs every couple of years or so. This isn't true. You should switch because you want a raise and don't like the people. The raise situation can be fixed most of the time staying where you are so really you should only switch because the people situation has changed and you no longer like it. Switching because you think you will learn anything new is the wrong reason to do it. Programming hasn't changed since the 70s. You are not gonna learn anything new building the next CRUD app powered by mysql instead of postgres.
- jdbernard 10y ago
  You are not gonna learn anything new building the next CRUD app powered by mysql instead of postgres. No, but you will if you switch to embedded development, mobile development, devops, etc. Programming has radically changed and expanded in scope since I've been doing it, and I wasn't even alive in the 70's.
  - dkarapetyan 10y ago
    Sure but how many web developers are switching to embedded development when they switch jobs?
    - clifanatic 10y ago
      0
    - jdbernard 10y ago
      The point was that there are more subdomains in "programming" than a person could learn in a lifetime. Just get out of your niche. As an example, I personally have worked on: cryptography & secured systems, iOS apps, industrial automation (code controlling manufacturing machines), configuration management, payment processing systems, smart card programming, language design and implementation, devops, and of course full stack web development. I'm not old, just turned 31, and this is only the small sliver of "programming" I've gotten to learn about professionally. Switching jobs to learn something new is a totally valid reason. Thinking that web development represents all that there is to learn as a developer is like being a "Java programmer" or ".NET programmer." There is a whole world of other things out there.
figers 10y ago
Don't necessary need to be IPO, could be bought out...

by hibikir 10y ago

benmathes 10y ago

Yes. Nobody who understands the risk-adjusted rewards of startups does it for the money. Best odds of getting rich? Go work at Google and bank your check/bonus. At best, startups are a faster way of getting experience. [1] Employees don't even know they are making that bet, though! Most don't even know the details of what they are getting, let alone how to evaluate it. I've been working with AngelList to help fix this, much more coming very soon. [1]: http://startupljackson.com/post/135800367395/how-to-get-rich-in-tech-guaranteed http://startupljackson.com/post/135800367395/how-to-get-rich...

jarjoura 10y ago
That's not completely fair. Startups want and need more experienced employees and cannot afford to bring in new grads at the scale bigger corporations can. Facebook, for example, has an entire org that focuses just on internships and new grads. They are offered space and time to learn and grow. Some may still fall through the cracks, but far less so than at a startup that doesn't have the resources to hand hold. At a big company you can learn how to be a team player and specialize in areas that are interesting to you. At a small company you learn how to become a jack of all trades and must cover your bases.
- benmathes 10y ago
  yeah, hence "at best". There are bigco's where you'll stagnate. There are startups where you'll only learn how to make CRUD apps in rails.
deleted 10y ago
[deleted]

pj_mukh 10y ago

Some solutions: http://blog.samaltman.com/employee-equity http://blog.samaltman.com/employee-equity

lafay 10y ago

If you're joining as employee 10, you should negotiate for the opportunity to early exercise all of your shares and avoid any tough tax choices later on. Perhaps even a starting bonus to cover the cost of exercise. This also puts you in a position to exclude your entire gain from federal capital gains tax if the liquidity event is at least 5 years out: https://blog.wealthfront.com/qualified-small-business-stock-2016/ https://blog.wealthfront.com/qualified-small-business-stock-...

benmathes 10y ago
True, but startup employees shouldn't be effectively penalized for inexperience in arcane startup securities and tax law.
toomuchtodo 10y ago
I would really like to see YC incorporate this into their options boilerplate.
asabjorn 10y ago
With large early rounds exercising your stock might set you back 50k or more, making you an investor as well as an employee. With the odds of startup success it is advisable to diversify more than that unless you are already wealthy.
- Terr_ 10y ago
  The example that always pops to mind for me is Enron, where many employees owned stock in the company, and the company did a lot of contributions in stock. [0] So when it imploded, not only did they lose their jobs, but their investments. [0] http://www.nytimes.com/2001/11/22/business/employees-retirement-plan-is-a-victim-as-enron-tumbles.html http://www.nytimes.com/2001/11/22/business/employees-retirem...

dkarapetyan 10y ago

> And that's without considering that, career wise, you'll be learning more changing jobs every couple of years or so. This isn't true. You should switch because you want a raise and don't like the people. The raise situation can be fixed most of the time staying where you are so really you should only switch because the people situation has changed and you no longer like it. Switching because you think you will learn anything new is the wrong reason to do it. Programming hasn't changed since the 70s. You are not gonna learn anything new building the next CRUD app powered by mysql instead of postgres.

jdbernard 10y ago
You are not gonna learn anything new building the next CRUD app powered by mysql instead of postgres. No, but you will if you switch to embedded development, mobile development, devops, etc. Programming has radically changed and expanded in scope since I've been doing it, and I wasn't even alive in the 70's.
- dkarapetyan 10y ago
  Sure but how many web developers are switching to embedded development when they switch jobs?
  - clifanatic 10y ago
    0
  - jdbernard 10y ago
    The point was that there are more subdomains in "programming" than a person could learn in a lifetime. Just get out of your niche. As an example, I personally have worked on: cryptography & secured systems, iOS apps, industrial automation (code controlling manufacturing machines), configuration management, payment processing systems, smart card programming, language design and implementation, devops, and of course full stack web development. I'm not old, just turned 31, and this is only the small sliver of "programming" I've gotten to learn about professionally. Switching jobs to learn something new is a totally valid reason. Thinking that web development represents all that there is to learn as a developer is like being a "Java programmer" or ".NET programmer." There is a whole world of other things out there.

figers 10y ago

Don't necessary need to be IPO, could be bought out...