14 ms·

Big IPO, Tiny Payout for Many Startup Workers (2015)

155 points by patmcguire 10y ago

lostboys67 10y ago
To put this in perspective some one who was in last years 5 Year share save at British telecom made about half that tax free. And this is the share options scheme for every one even the lowliest call centre worker and not a senior role.
- neffy 10y ago
  Even more perspective. Let's say hypothetically the salary difference came down to being able to afford to buy a starter home in London versus renting for that period. The tax free property appreciation would dwarf the return on the options.
  - lostboys67 10y ago
    Don't think £200 a month would make that much of a difference
deleted 10y ago
[deleted]
anthay 10y ago
I was one of the first employees in a UK tech startup. I was given share options that I calculated represented about 0.5% of the value of the company. When the company was sold about 10 years later, making the founders multi-millionaires, I got about £30K. I was clueless and didn't realise the shares could and would be diluted many times.
- walkingolof 10y ago
  Yea, and dilution is just one issue, its almost impossible to know as a employee what the stock options represent, you have no insight in to the corporate structure and what entity the stock options are given for. Its just all a lottery ticket...
  - new299 10y ago
    It is possible to know. In the UK it's easier to know than in other countries, private companies still have to disclose share ownership and file public accounts (which you can download from companies house). It's just that this information is often not provided or explained. Why companies think it's ok to say "you'll get X shares" when X is a meaningless number without more information, is beyond me.
    - arethuza 10y ago
      There can be all manner of agreements in place that mean that the mapping from the share ownership structure pre-IPO/acquisition might not be straightforward. e.g. When the company I co-founded went public there was a ratchet agreement in place (amusingly, which we'd tried to get removed at the time of the first round of VC investment) that gave us large amounts of new share options that was much larger than the employee share option scheme. Things like liquidation preferences also can also have a huge impact and as an employee your are probably not going to get visibility of all of these and I'm pretty sure none of this will be in Companies House!
- aedron 10y ago
  But the dilution happened because your company had to sell out a lot more of its equity in order to succeed. You were not cheated. You could argue that you should have been offered to buy into the additional financing rounds in order to retain your share, but in all honesty, would you have taken them up on such an offer?
  - cmdrfred 10y ago
    I think the issue is they probably offered lower than market pay and "half a percent of the company" but what he ended up with was lower pay and .00025% of the company. Sure it's all legal and his fault for not understanding the fine print but I understand why he would feel cheated.
    - aedron 10y ago
      The company could have shut down, and he would have gotten nothing. Would he have felt cheated then? Instead they sold a part of the company (out of everybody's share) and with the money that brought in, they eventually succeeded. I don't see anything unfair in it.
      - wastedhours 10y ago
        But also, the company succeeded due to the people who worked there working for less than market rate. Obviously dilution and all of the (fairly numerous) ways your share can be reduced are a risk factor and need to be taken into account, but still valid to feel hard-done by. Just because it's fair doesn't mean it's an easy pill to swallow.
      - cmdrfred 10y ago
        I think the moral of the story is rate equity like that as worthless and refuse to work at a discount for it. These contracts are complicated and as a programmer you likely won't completely understand them unless you get a lawyer involved.
        10y ago
- adrianN 10y ago
  You did not specify "multi" further, but 30k * 1/0.5% is around 6 million. So your assessment seems at least in the right ballpark?
  - anthay 10y ago
    It was a private sale to a US company. I believe it was for an amount many times that figure.
    - kurthr 10y ago
      Indeed... it's likely that the board issued themselves new stock to prevent their dilution, but not yours. As an extreme example, I watched a startup in a private sale issue new stock to those on the board such that all of the other early (0.1-0.5% stock ownership) employees were diluted to $0.01. The total valuation was in the $100M range. It was a good way to make a few enemies and retire at 30. In the end the acquiring company ended up having to hire some of those employees back for consulting... I believe several of them received >$1k/hr. Most of those employees suspect that the acquiring company tacitly signed off on the issuance of new stock.
      - shostack 10y ago
        You bring up a good point though which is that if you stand to make millions and retire early, and it comes at the expense of your employees making a comparable amount, is it worth it to screw them over? Unfortunately in this messed up world and rollercoaster economy the answer is often yes, it is better to put yourself first. Not that I would, but I can see how those who do justify it.
- neffy 10y ago
  Ten years ago it was much harder to find information on all of this - and even if you went in knowing it, there was little or nothing you could do about it. I knew enough then to discount options to 0, but I'm permanently jaundiced in retrospect by just how many outright lies I was told at interviews, and saw being told to my colleagues.
- st3v3r 10y ago
  Diluting shares should be straight out illegal. There is no reason for it other than fucking over employees. You know, the people who have actually worked to make the company a success.
  - danielweber 10y ago
    Dilution is way too easy to abuse, but there's a lot more to it than just "fucking over employees."
    - st3v3r 10y ago
      Really? Give me one example where it doesn't fuck over the employees? And don't say "they get to keep their jobs", cause if that's all that's needed for benefit, we might as well devalue the options to 1 cent, cause after all, they still got to keep their job.
      - danielweber 10y ago
        Shares need to come from someplace. Other people selling shares to the VC doesn't put any money into the company. The company needs to sell shares, and create shares if it doesn't have any left. It's often abused, and easy to abuse, but you are making the story too pat by saying it exists only to screw over employees.
  - mywittyname 10y ago
    In egregious cases, you could probably sue the board and win. Another user here discussed an example where employees were diluted to a literal penny right before a sale. If the employees didn't win in that case, then there's some fundamental, structural flaw in American laws.
katzgrau 10y ago
If you're in it for the big windfall, consider bootstrapping your own company. It's hard, it's depressing, it's exciting, it's terrifying, and it's rewarding. Learn to set goals and execute, sell a product, deal with happy and angry customers, build partnerships, market, price, negotiate, and more. You'll get much more out of it than working for someone else. When you work for someone else, someone else's dreams are the priority.
- brianwawok 10y ago
  This. Don't expect your startup to make you rich.
  - hackits 10y ago
    Being the devil advocate, sometimes startups are the only place you can land that they're experimenting with a technology that interest you and you can use them to pay for your education. Adamant the pay is less than your peers, but you're trading it for career advancement. After you get the required skills and knowledge jump ship and re-market yourself and get pay rise.
    - ithinkinstereo 10y ago
      You make a valid point. Don't undervalue learning on someone else's dime. Start your career in bigco, then when your growth stalls, jumpstart it at a startup. Depending on the startup, you'll learn 10x what you would at a bigco. In this sense, the lower pay is fair. You gain in other ways.
      - hackits 10y ago
        I kind of did it in reverse order. Started with a start-up learnt a lot of customer support, full product stack development, web-tier systems, linux/windows, encryption, and POS systems. This went on for two to three years about 50% bellow my peers wages. Moved into web development after a fall-out with the boss about relocation. After the fallout did a couple of interview with my peers and tippled my wages over-night in the new job. Just saying if you're going into the startup field do a lot of hard thinking about it before you go in. Make a battle plan, and dear god have a clear idea what you're aiming for and level of professionalism you want to reach. Would I do it again?! Maybe, just a word of advice don't court the bosses wife.
lordnacho 10y ago
Clearly there needs to be some sort of transparency about how many shares are outstanding, what terms are for new investors, etc. If people are misjudging their packets by 10x it would suggest they are being underpaid, because they think they're negotiating for a lot more than they are. As someone who worked in options I can tell you there's a lot of depth to how to price an option. If you don't know how Black-Scholes works along with more esoteric subjects under option theory, you should heavily discount whatever you're being told. The exception is firms which have already gone public, where you can just look up what the market thinks your shares/options are worth.
- elmar 10y ago
  You can't use Black-Scholes on private company options.
  - lordnacho 10y ago
    But you can use some of the considerations that BS theory talks about. People don't use BS theory for any other options either.
    - dx034 10y ago
      Yes they do. There's enough option pricing that is at least partly based on BS.
      - lordnacho 10y ago
        Yes, partly based on, using the lessons from, slight modifications of, and so on. But I've never seen anyone try to claim that the BS formula was enough to give you the right price. And I've traded on more than one derivs desk.
        sedachv 10y ago
        According to what I remember reading in https://mitpress.mit.edu/books/engine-not-camera https://mitpress.mit.edu/books/engine-not-camera before the Black-Scholes formula started being applied by traders, the market prices did not correspond to the prices predicted by the model, because there was no other mathematical model to price options, most of the trading was done based on heuristics, and the market was highly inefficient. For at least the first few years when the Black-Scholes formula first started being used by traders the market converged on the predicted prices. As speculation and arbitrage opportunities were identified, the prices of options diverged from the result of the Black-Scholes formula, and other models were developed, based on the Black-Scholes equation.
preetish 10y ago
Took the following from https://medium.com/positiveslope/dont-get-trampled-the-puzzle-for-unicorn-employees-8f00f33c784f#.trvm56ujn https://medium.com/positiveslope/dont-get-trampled-the-puzzl... "Another interesting idea to reduce complexity for employees came from Brian Neider at Lead Edge Capital, who suggested a single question for employees to ask management: “Can you please let me know how much money I’d make from my options if the company were to sell or IPO for $100m, 200m, 300m, 400m, etc?” Of course, the answers will inevitably have some disclaimers and dependencies, but the answers will expose the potential impact of terms from late-stage financings."
- zeroer 10y ago
  As others have pointed out, this is impossible to determine without knowing the dilution between today and the sell date.
  - edraferi 10y ago
    True, but this should be a straightforward calculation every time the cap table updates. It can be very difficult to work out the implications of preferences, ratchets, etc, but it's still just a math problem. This should be a standard report off of cap table management software. Every time the cap table changes, all current equity holders get a report showing their stake and expected payout for various liquidity events.
    - rlucas 10y ago
      Well, except it's not straightforward, almost ever. New investment rounds dilute the common share equivalent ownership, but also add preferences and sometimes other economic rights. Also, banker fees, earnouts, etc etc. I don't disagree that it would be helpful and is a step in the right direction. But it would have to come with tons of disclaimers. And, even the best cap table management software is rather poor, and its calcs get duplicated or discarded in favor of spreadsheets done by lawyers.
wowdidntreal 10y ago
Why give employees big payouts, when they'll work just as hard for mere unsubstantiated promises of such payouts? The article shows how most employees are too occupied counting their imaginary fortunes to seek the most basic grasp of how their options really work. The race for riches in early-stage startups has become a gold-rush, and now that we are clearly after the peak, most employees are chasing the dreams of yesterday's big-payoff exits, failing to look around and notice that these were rare even back in the day, and now they hardly ever happen at all. Investors got savvy about protecting their investment, while employees are just as clueless as ever, so even when big IPOs do rarely happen, the employees see very little profit. This works very well for the investors. The downside is the erosion of equity as an incentive, but even more so - any sense of working towards a common goal and shared success, which is what startups are supposed to be about. This will hurt the entire industry. On an individual level, if you accept substantially lower pay, for a tiny unprotected bit of equity and someone's unsubstantiated promises that it will be "one day" earn you millions, then you are a fool.
- ones_and_zeros 10y ago
  Nothing will change, the industry won't suffer. There is a new crop of fools every May.
  - simonebrunozzi 10y ago
    Do you say May in relation to the "eternal September" (+ 9 months to have a baby?)
    - franzen 10y ago
      https://en.wikipedia.org/wiki/Graduation https://en.wikipedia.org/wiki/Graduation
- maxxxxx 10y ago
  Sometimes I admire investment banks. They screw over anybody else who doesn't work at their company but within the company the pay seems really generous for everybody. Tech companies could easily pay much, much more and still make a lot of money for investors. Why are bankers so highly paid? Is it because they are asking for more money?
seattle_spring 10y ago
Not to detract from its message, but this article is from 2015. Anecdotally, the expectation I had for my shares at my last startup ended up being 10x (as the article stated) what they were worth after acquisition.
- Eridrus 10y ago
  Did you figure out the breakdown of what ate into your expectations? Mostly investor preferences or solution or an even mix of both?
  - seattle_spring 10y ago
    My expectations were based on forecasts given to me by the manager at the time of recruitment, and those forecasts were far higher than reality. I believed those forecasts mostly due to ignorance.
IMTDb 10y ago
Dude earns $750K in 4 years what must have been probably very long hours but with : No health risk. Not being confronted to violence in any way. No legal risk tied to his profession. Complains that he hoped he did enough work for a lifetime and that he could retire, but that he actually still has to work. This is not how this works. This is not how any of this works.
- aianus 10y ago
  Ironically $750k is more than enough to retire if you're willing to move outside the first world.
  - harryh 10y ago
    Lots of places in the first world too. At a 4% withdrawal rate (the rate many people believe is safe to do indefinitely) that's 30k a year which is about 40th percentile in the US. That's not living like a King, but it's totally doable.
- sjg007 10y ago
  Yeah, buy a house, work for 5 more years, sell house at 5x, then retire.
  - sjg007 10y ago
    I don't understand the down-votes.. property in the Bay area seems to be the magic ticket. The IPO gets you the down payment..
- mavelikara 10y ago
  $350K, not $750K > Let’s be clear: Sutton knows it worked out just fine. He made about $350,000 before taxes on his Box stock
  - aetherson 10y ago
    Plus his salary, which one assumes was at least $100k/year.
segmondy 10y ago
Don't do startup for the potential payout. If you are not going to be happy and content with the salary don't do it. Most won't have any exit. Any exit that leaves one with $350k windfall beats many that leaves people with $0 and jobless. Negotiate hard on the salary. Assume the shares are worthless.
- Analemma_ 10y ago
  The thing about this advice is, it basically reduces to "don't work for startups". Because paying below-market salaries in exchange for equity is pretty much universal. It's not even malice, most startups just don't have the cash on hand to pay competitive wages. > Negotiate hard on the salary. Recent CS grads (who are the most common startup workers) don't really have the leverage to the do this. And experienced (or, ugh, "10x") developers can probably always get a better deal at a big company. I feel like "working for a startup is almost never economically rational" is the elephant in the room that everyone is trying not to talk about. (As for me, I do take my own advice and deliberately work for BigCorp, but when I've tentatively brought this up to others I'm usually met with hostility so I don't do it in person anymore)
  - 654869435418647 10y ago
    I could understand the hostility if you approach the subject with unsubstantiated statements like "almost never economically rational". It would be easier to support the claim that most startup employees earn less over their career than those who only ever work for BigCorp.. Though I've never personally seen data suggesting that's necessarily true. You have to consider length of career, job and city mobility, career mobility, etc. "Economically rational" does not mean BigCorp > Startup career pay.. it means it's not rational to accept startup career pay. That's a much harder statement to defend (honestly, I don't think it's the case).
  - brilliantcode 10y ago
    OP and article's point is that startups are sort of like a crapshoot. You can have the best product, the best team, do everything you read on HN and elsewhere and still fail. That's the type of environment-high risk but not necessarily high reward. It's not like speculating on financial markets because startup costs a chunk of your life. I've toiled for years trying to be a startup and what I realized is, people are so focused on startup they forget that it's just a business at the end of the day with checks and balances to answer to. Early stage VC funding is fuelling this aggressive style which only works in the favor of VC's not necessarily the founders and their employees. You are just a naked call option for these VCs-unlimited upward potential, limited capital loss. It make sense for VC's to spray and pray to see what sticks. I don't want my life to be a fucking call option for somebody to fulfill their ephemeral desires for more wealth with diminishing returns and benefit to society.
aetherson 10y ago
If you IPO at substantially lower prices than you thought you were valued at, or you IPO at a fine price and then shortly post-IPO, the stock value drops considerably, then it wasn't a big IPO. Not to dismiss issues of employees being at the "back of the line" for equity payout. That is certainly a thing. But this article lists a bunch of examples of employees getting somewhat disappointing payouts when the ultimate valuation of the company was somewhat disappointing, while presenting it as employees getting somewhat disappointing payouts from "big IPOs." A lot of people seem to have a problem with understanding that you can't just look at absolute numbers for a company's value. If your company raised a lot of money with the expectation that they would be a $4B company, and then they were a $750M company, well, $750M is a lot of money, but sorry, you had a disappointing IPO and preference is going to eat up a lot of the company's value -- maybe all of it.
- danielweber 10y ago
  Employees usually have no visibility into preference, even when explicitly asking about it.
  - aetherson 10y ago
    Sure. And I'm not saying that's not a problem, but here's the basic thing you need to know about preference: If your real valuation turns out to be lower than what you raised money at, preference will eat a bunch or all of your valuation. And this shouldn't really surprise anyone. It's like some people at HN heard the old joke "How do you make a million in publishing? Start with ten million," and thought: a. Yes, that seems valid. b. Where's my share of the resulting million?
    - danielweber 10y ago
      "You only lose to preference in case of a lowered valuation" is true only for 1x preferences. For 2x preferences, employees can lose out even if the valuation goes up, just by not as much as needed.
jartelt 10y ago
I like that this article places a portion of the blame on the founders or recruiters who try to hire new employees. In order to attract the best talent, it is easy for these people to say everything is going awesome and the options will be worth a million dollars. I think the blame for missed expectations and dilution is often placed on VCs. But in reality, it's the founders and the board who decide whether or not to take VC funding and who should communicate clearly and realistically with employees to keep expectations in check.
charlesdm 10y ago
Most people joining companies don't even get the entire capital structure disclosed to them. There is no way to know exactly how much your options are worth. You're trusting the company you're joining blindly, which can be a very dangerous thing.
geebee 10y ago
This has been linked to a few times on HN. http://danluu.com/startup-tradeoffs/ http://danluu.com/startup-tradeoffs/ A quick summary: pay has gone up enough at top bigcos that simply working and accumulating money can exceed even very good outcomes at startups.
- edoceo 10y ago
  10 years at MS will make you a millionaire - in liquid assets 3 years at my startup now I have a million - on paper. Hopefully in the next three there is an event I can cash out on. One path is 99% chance One path is a 1% chance I'm having more fun at the startup than I did at MS
  - gumby 10y ago
    > I'm having more fun at the startup than I did at MS And as long as you can make your nut (housing, food, savings, some vacations) I don't see a problem. (edoceo I know you weren't claiming a problem -- I just wanted to reinforce your point).
    - edoceo 10y ago
      This is a critical point I didn't address. If the startup business is profitable and employees and founders can take reasonable salary it is sweet. If no profits but you have outside funding for growth it's also pretty sweet. When it doesn't work, no profits, lagging growth it's terrible. Really terrible. Major stress, so much waste. And the sad fact is that's the likely outcome of startup world. You have to have two plans. One for the Best and one for the complete shit-storm of winding down a business.
  - beagle3 10y ago
    To be a millionaire after 10 years you need to save $100K/year - which means you need at least $150K post taxes (assuming you are without children and super frugal) - so ~$200K-$250K salary. Not impossible - but definitely far from common for MS employees unless I'm hopelessly misinformed.
caniszczyk 10y ago
financial literacy is a huge issue in society and especially startup land, many folks don't learn about the pros/cons of 83(b) elections and how to properly calculate the value of your options... also negotiation skills aren't really taught so many people don't negotiate for a better deal I found this repo on GitHub to be the best resource on startup equity, highly recommend it: https://github.com/jlevy/og-equity-compensation https://github.com/jlevy/og-equity-compensation
- danielweber 10y ago
  Hell, many years ago, before some of our HN readers were born, I co-founded a start-up that had trouble recruiting people because we only created 200,000 shares at founding, and other companies were giving away millions of options. How could we compete only offering hundreds of options? I don't know if the candidates were playing stupid, or really that dumb, or trying to angle for something better, or just didn't like the company and were trying to back out politely, but it got damn frustrating. Lots of people just want to be lied to. You know why employers spew bullshit to candidates? Because candidates eat it up.
  - user5994461 10y ago
    Adapt to your audience. If you want not idiots employees, or if you want to do training for real, you can explain it to them, then they're free to take a decision. Is an employee good enough if he can't listen for 3 minutes and perform a quick check on IPOverflow.com to confirm it's the other company that's a bad deal.
grzm 10y ago
(2015)
yueq 10y ago
Companies should be more transparent about options they give to employees. I was once offered with X shares of options from a well-funded startup. X seems like a relatively large number. But the company didn't want to disclose neither of the following to me but just selling me `this is a good offer`, 1. percentage offered 2. FMV per share 3. strike price The company is OK and the job is interesting. But this opaque destroyed trust between two parties. This is a completely a joke and I turned down the offer.

155 points by patmcguire 10y ago

To put this in perspective some one who was in last years 5 Year share save at British telecom made about half that tax free. And this is the share options scheme for every one even the lowliest call centre worker and not a senior role.

neffy 10y ago
Even more perspective. Let's say hypothetically the salary difference came down to being able to afford to buy a starter home in London versus renting for that period. The tax free property appreciation would dwarf the return on the options.
- lostboys67 10y ago
  Don't think £200 a month would make that much of a difference

deleted 10y ago

[deleted]

anthay 10y ago

I was one of the first employees in a UK tech startup. I was given share options that I calculated represented about 0.5% of the value of the company. When the company was sold about 10 years later, making the founders multi-millionaires, I got about £30K. I was clueless and didn't realise the shares could and would be diluted many times.

walkingolof 10y ago
Yea, and dilution is just one issue, its almost impossible to know as a employee what the stock options represent, you have no insight in to the corporate structure and what entity the stock options are given for. Its just all a lottery ticket...
- new299 10y ago
  It is possible to know. In the UK it's easier to know than in other countries, private companies still have to disclose share ownership and file public accounts (which you can download from companies house). It's just that this information is often not provided or explained. Why companies think it's ok to say "you'll get X shares" when X is a meaningless number without more information, is beyond me.
  - arethuza 10y ago
    There can be all manner of agreements in place that mean that the mapping from the share ownership structure pre-IPO/acquisition might not be straightforward. e.g. When the company I co-founded went public there was a ratchet agreement in place (amusingly, which we'd tried to get removed at the time of the first round of VC investment) that gave us large amounts of new share options that was much larger than the employee share option scheme. Things like liquidation preferences also can also have a huge impact and as an employee your are probably not going to get visibility of all of these and I'm pretty sure none of this will be in Companies House!
aedron 10y ago
But the dilution happened because your company had to sell out a lot more of its equity in order to succeed. You were not cheated. You could argue that you should have been offered to buy into the additional financing rounds in order to retain your share, but in all honesty, would you have taken them up on such an offer?
- cmdrfred 10y ago
  I think the issue is they probably offered lower than market pay and "half a percent of the company" but what he ended up with was lower pay and .00025% of the company. Sure it's all legal and his fault for not understanding the fine print but I understand why he would feel cheated.
  - aedron 10y ago
    The company could have shut down, and he would have gotten nothing. Would he have felt cheated then? Instead they sold a part of the company (out of everybody's share) and with the money that brought in, they eventually succeeded. I don't see anything unfair in it.
    - wastedhours 10y ago
      But also, the company succeeded due to the people who worked there working for less than market rate. Obviously dilution and all of the (fairly numerous) ways your share can be reduced are a risk factor and need to be taken into account, but still valid to feel hard-done by. Just because it's fair doesn't mean it's an easy pill to swallow.
    - cmdrfred 10y ago
      I think the moral of the story is rate equity like that as worthless and refuse to work at a discount for it. These contracts are complicated and as a programmer you likely won't completely understand them unless you get a lawyer involved.
      - 10y ago
adrianN 10y ago
You did not specify "multi" further, but 30k * 1/0.5% is around 6 million. So your assessment seems at least in the right ballpark?
- anthay 10y ago
  It was a private sale to a US company. I believe it was for an amount many times that figure.
  - kurthr 10y ago
    Indeed... it's likely that the board issued themselves new stock to prevent their dilution, but not yours. As an extreme example, I watched a startup in a private sale issue new stock to those on the board such that all of the other early (0.1-0.5% stock ownership) employees were diluted to $0.01. The total valuation was in the $100M range. It was a good way to make a few enemies and retire at 30. In the end the acquiring company ended up having to hire some of those employees back for consulting... I believe several of them received >$1k/hr. Most of those employees suspect that the acquiring company tacitly signed off on the issuance of new stock.
    - shostack 10y ago
      You bring up a good point though which is that if you stand to make millions and retire early, and it comes at the expense of your employees making a comparable amount, is it worth it to screw them over? Unfortunately in this messed up world and rollercoaster economy the answer is often yes, it is better to put yourself first. Not that I would, but I can see how those who do justify it.
neffy 10y ago
Ten years ago it was much harder to find information on all of this - and even if you went in knowing it, there was little or nothing you could do about it. I knew enough then to discount options to 0, but I'm permanently jaundiced in retrospect by just how many outright lies I was told at interviews, and saw being told to my colleagues.
st3v3r 10y ago
Diluting shares should be straight out illegal. There is no reason for it other than fucking over employees. You know, the people who have actually worked to make the company a success.
- danielweber 10y ago
  Dilution is way too easy to abuse, but there's a lot more to it than just "fucking over employees."
  - st3v3r 10y ago
    Really? Give me one example where it doesn't fuck over the employees? And don't say "they get to keep their jobs", cause if that's all that's needed for benefit, we might as well devalue the options to 1 cent, cause after all, they still got to keep their job.
    - danielweber 10y ago
      Shares need to come from someplace. Other people selling shares to the VC doesn't put any money into the company. The company needs to sell shares, and create shares if it doesn't have any left. It's often abused, and easy to abuse, but you are making the story too pat by saying it exists only to screw over employees.
- mywittyname 10y ago
  In egregious cases, you could probably sue the board and win. Another user here discussed an example where employees were diluted to a literal penny right before a sale. If the employees didn't win in that case, then there's some fundamental, structural flaw in American laws.

katzgrau 10y ago

If you're in it for the big windfall, consider bootstrapping your own company. It's hard, it's depressing, it's exciting, it's terrifying, and it's rewarding. Learn to set goals and execute, sell a product, deal with happy and angry customers, build partnerships, market, price, negotiate, and more. You'll get much more out of it than working for someone else. When you work for someone else, someone else's dreams are the priority.

brianwawok 10y ago
This. Don't expect your startup to make you rich.
- hackits 10y ago
  Being the devil advocate, sometimes startups are the only place you can land that they're experimenting with a technology that interest you and you can use them to pay for your education. Adamant the pay is less than your peers, but you're trading it for career advancement. After you get the required skills and knowledge jump ship and re-market yourself and get pay rise.
  - ithinkinstereo 10y ago
    You make a valid point. Don't undervalue learning on someone else's dime. Start your career in bigco, then when your growth stalls, jumpstart it at a startup. Depending on the startup, you'll learn 10x what you would at a bigco. In this sense, the lower pay is fair. You gain in other ways.
    - hackits 10y ago
      I kind of did it in reverse order. Started with a start-up learnt a lot of customer support, full product stack development, web-tier systems, linux/windows, encryption, and POS systems. This went on for two to three years about 50% bellow my peers wages. Moved into web development after a fall-out with the boss about relocation. After the fallout did a couple of interview with my peers and tippled my wages over-night in the new job. Just saying if you're going into the startup field do a lot of hard thinking about it before you go in. Make a battle plan, and dear god have a clear idea what you're aiming for and level of professionalism you want to reach. Would I do it again?! Maybe, just a word of advice don't court the bosses wife.

lordnacho 10y ago

Clearly there needs to be some sort of transparency about how many shares are outstanding, what terms are for new investors, etc. If people are misjudging their packets by 10x it would suggest they are being underpaid, because they think they're negotiating for a lot more than they are. As someone who worked in options I can tell you there's a lot of depth to how to price an option. If you don't know how Black-Scholes works along with more esoteric subjects under option theory, you should heavily discount whatever you're being told. The exception is firms which have already gone public, where you can just look up what the market thinks your shares/options are worth.

elmar 10y ago
You can't use Black-Scholes on private company options.
- lordnacho 10y ago
  But you can use some of the considerations that BS theory talks about. People don't use BS theory for any other options either.
  - dx034 10y ago
    Yes they do. There's enough option pricing that is at least partly based on BS.
    - lordnacho 10y ago
      Yes, partly based on, using the lessons from, slight modifications of, and so on. But I've never seen anyone try to claim that the BS formula was enough to give you the right price. And I've traded on more than one derivs desk.
      - sedachv 10y ago
        According to what I remember reading in https://mitpress.mit.edu/books/engine-not-camera https://mitpress.mit.edu/books/engine-not-camera before the Black-Scholes formula started being applied by traders, the market prices did not correspond to the prices predicted by the model, because there was no other mathematical model to price options, most of the trading was done based on heuristics, and the market was highly inefficient. For at least the first few years when the Black-Scholes formula first started being used by traders the market converged on the predicted prices. As speculation and arbitrage opportunities were identified, the prices of options diverged from the result of the Black-Scholes formula, and other models were developed, based on the Black-Scholes equation.

preetish 10y ago

Took the following from https://medium.com/positiveslope/dont-get-trampled-the-puzzle-for-unicorn-employees-8f00f33c784f#.trvm56ujn https://medium.com/positiveslope/dont-get-trampled-the-puzzl... "Another interesting idea to reduce complexity for employees came from Brian Neider at Lead Edge Capital, who suggested a single question for employees to ask management: “Can you please let me know how much money I’d make from my options if the company were to sell or IPO for $100m, 200m, 300m, 400m, etc?” Of course, the answers will inevitably have some disclaimers and dependencies, but the answers will expose the potential impact of terms from late-stage financings."

zeroer 10y ago
As others have pointed out, this is impossible to determine without knowing the dilution between today and the sell date.
- edraferi 10y ago
  True, but this should be a straightforward calculation every time the cap table updates. It can be very difficult to work out the implications of preferences, ratchets, etc, but it's still just a math problem. This should be a standard report off of cap table management software. Every time the cap table changes, all current equity holders get a report showing their stake and expected payout for various liquidity events.
  - rlucas 10y ago
    Well, except it's not straightforward, almost ever. New investment rounds dilute the common share equivalent ownership, but also add preferences and sometimes other economic rights. Also, banker fees, earnouts, etc etc. I don't disagree that it would be helpful and is a step in the right direction. But it would have to come with tons of disclaimers. And, even the best cap table management software is rather poor, and its calcs get duplicated or discarded in favor of spreadsheets done by lawyers.

wowdidntreal 10y ago

Why give employees big payouts, when they'll work just as hard for mere unsubstantiated promises of such payouts? The article shows how most employees are too occupied counting their imaginary fortunes to seek the most basic grasp of how their options really work. The race for riches in early-stage startups has become a gold-rush, and now that we are clearly after the peak, most employees are chasing the dreams of yesterday's big-payoff exits, failing to look around and notice that these were rare even back in the day, and now they hardly ever happen at all. Investors got savvy about protecting their investment, while employees are just as clueless as ever, so even when big IPOs do rarely happen, the employees see very little profit. This works very well for the investors. The downside is the erosion of equity as an incentive, but even more so - any sense of working towards a common goal and shared success, which is what startups are supposed to be about. This will hurt the entire industry. On an individual level, if you accept substantially lower pay, for a tiny unprotected bit of equity and someone's unsubstantiated promises that it will be "one day" earn you millions, then you are a fool.

ones_and_zeros 10y ago
Nothing will change, the industry won't suffer. There is a new crop of fools every May.
- simonebrunozzi 10y ago
  Do you say May in relation to the "eternal September" (+ 9 months to have a baby?)
  - franzen 10y ago
    https://en.wikipedia.org/wiki/Graduation https://en.wikipedia.org/wiki/Graduation
maxxxxx 10y ago
Sometimes I admire investment banks. They screw over anybody else who doesn't work at their company but within the company the pay seems really generous for everybody. Tech companies could easily pay much, much more and still make a lot of money for investors. Why are bankers so highly paid? Is it because they are asking for more money?

seattle_spring 10y ago

Not to detract from its message, but this article is from 2015. Anecdotally, the expectation I had for my shares at my last startup ended up being 10x (as the article stated) what they were worth after acquisition.

Eridrus 10y ago
Did you figure out the breakdown of what ate into your expectations? Mostly investor preferences or solution or an even mix of both?
- seattle_spring 10y ago
  My expectations were based on forecasts given to me by the manager at the time of recruitment, and those forecasts were far higher than reality. I believed those forecasts mostly due to ignorance.

IMTDb 10y ago

Dude earns $750K in 4 years what must have been probably very long hours but with : No health risk. Not being confronted to violence in any way. No legal risk tied to his profession. Complains that he hoped he did enough work for a lifetime and that he could retire, but that he actually still has to work. This is not how this works. This is not how any of this works.

aianus 10y ago
Ironically $750k is more than enough to retire if you're willing to move outside the first world.
- harryh 10y ago
  Lots of places in the first world too. At a 4% withdrawal rate (the rate many people believe is safe to do indefinitely) that's 30k a year which is about 40th percentile in the US. That's not living like a King, but it's totally doable.
sjg007 10y ago
Yeah, buy a house, work for 5 more years, sell house at 5x, then retire.
- sjg007 10y ago
  I don't understand the down-votes.. property in the Bay area seems to be the magic ticket. The IPO gets you the down payment..
mavelikara 10y ago
$350K, not $750K > Let’s be clear: Sutton knows it worked out just fine. He made about $350,000 before taxes on his Box stock
- aetherson 10y ago
  Plus his salary, which one assumes was at least $100k/year.

segmondy 10y ago

Don't do startup for the potential payout. If you are not going to be happy and content with the salary don't do it. Most won't have any exit. Any exit that leaves one with $350k windfall beats many that leaves people with $0 and jobless. Negotiate hard on the salary. Assume the shares are worthless.

Analemma_ 10y ago
The thing about this advice is, it basically reduces to "don't work for startups". Because paying below-market salaries in exchange for equity is pretty much universal. It's not even malice, most startups just don't have the cash on hand to pay competitive wages. > Negotiate hard on the salary. Recent CS grads (who are the most common startup workers) don't really have the leverage to the do this. And experienced (or, ugh, "10x") developers can probably always get a better deal at a big company. I feel like "working for a startup is almost never economically rational" is the elephant in the room that everyone is trying not to talk about. (As for me, I do take my own advice and deliberately work for BigCorp, but when I've tentatively brought this up to others I'm usually met with hostility so I don't do it in person anymore)
- 654869435418647 10y ago
  I could understand the hostility if you approach the subject with unsubstantiated statements like "almost never economically rational". It would be easier to support the claim that most startup employees earn less over their career than those who only ever work for BigCorp.. Though I've never personally seen data suggesting that's necessarily true. You have to consider length of career, job and city mobility, career mobility, etc. "Economically rational" does not mean BigCorp > Startup career pay.. it means it's not rational to accept startup career pay. That's a much harder statement to defend (honestly, I don't think it's the case).
- brilliantcode 10y ago
  OP and article's point is that startups are sort of like a crapshoot. You can have the best product, the best team, do everything you read on HN and elsewhere and still fail. That's the type of environment-high risk but not necessarily high reward. It's not like speculating on financial markets because startup costs a chunk of your life. I've toiled for years trying to be a startup and what I realized is, people are so focused on startup they forget that it's just a business at the end of the day with checks and balances to answer to. Early stage VC funding is fuelling this aggressive style which only works in the favor of VC's not necessarily the founders and their employees. You are just a naked call option for these VCs-unlimited upward potential, limited capital loss. It make sense for VC's to spray and pray to see what sticks. I don't want my life to be a fucking call option for somebody to fulfill their ephemeral desires for more wealth with diminishing returns and benefit to society.

aetherson 10y ago

If you IPO at substantially lower prices than you thought you were valued at, or you IPO at a fine price and then shortly post-IPO, the stock value drops considerably, then it wasn't a big IPO. Not to dismiss issues of employees being at the "back of the line" for equity payout. That is certainly a thing. But this article lists a bunch of examples of employees getting somewhat disappointing payouts when the ultimate valuation of the company was somewhat disappointing, while presenting it as employees getting somewhat disappointing payouts from "big IPOs." A lot of people seem to have a problem with understanding that you can't just look at absolute numbers for a company's value. If your company raised a lot of money with the expectation that they would be a $4B company, and then they were a $750M company, well, $750M is a lot of money, but sorry, you had a disappointing IPO and preference is going to eat up a lot of the company's value -- maybe all of it.

danielweber 10y ago
Employees usually have no visibility into preference, even when explicitly asking about it.
- aetherson 10y ago
  Sure. And I'm not saying that's not a problem, but here's the basic thing you need to know about preference: If your real valuation turns out to be lower than what you raised money at, preference will eat a bunch or all of your valuation. And this shouldn't really surprise anyone. It's like some people at HN heard the old joke "How do you make a million in publishing? Start with ten million," and thought: a. Yes, that seems valid. b. Where's my share of the resulting million?
  - danielweber 10y ago
    "You only lose to preference in case of a lowered valuation" is true only for 1x preferences. For 2x preferences, employees can lose out even if the valuation goes up, just by not as much as needed.

jartelt 10y ago

I like that this article places a portion of the blame on the founders or recruiters who try to hire new employees. In order to attract the best talent, it is easy for these people to say everything is going awesome and the options will be worth a million dollars. I think the blame for missed expectations and dilution is often placed on VCs. But in reality, it's the founders and the board who decide whether or not to take VC funding and who should communicate clearly and realistically with employees to keep expectations in check.

charlesdm 10y ago

Most people joining companies don't even get the entire capital structure disclosed to them. There is no way to know exactly how much your options are worth. You're trusting the company you're joining blindly, which can be a very dangerous thing.

geebee 10y ago

This has been linked to a few times on HN. http://danluu.com/startup-tradeoffs/ http://danluu.com/startup-tradeoffs/ A quick summary: pay has gone up enough at top bigcos that simply working and accumulating money can exceed even very good outcomes at startups.

edoceo 10y ago
10 years at MS will make you a millionaire - in liquid assets 3 years at my startup now I have a million - on paper. Hopefully in the next three there is an event I can cash out on. One path is 99% chance One path is a 1% chance I'm having more fun at the startup than I did at MS
- gumby 10y ago
  > I'm having more fun at the startup than I did at MS And as long as you can make your nut (housing, food, savings, some vacations) I don't see a problem. (edoceo I know you weren't claiming a problem -- I just wanted to reinforce your point).
  - edoceo 10y ago
    This is a critical point I didn't address. If the startup business is profitable and employees and founders can take reasonable salary it is sweet. If no profits but you have outside funding for growth it's also pretty sweet. When it doesn't work, no profits, lagging growth it's terrible. Really terrible. Major stress, so much waste. And the sad fact is that's the likely outcome of startup world. You have to have two plans. One for the Best and one for the complete shit-storm of winding down a business.
- beagle3 10y ago
  To be a millionaire after 10 years you need to save $100K/year - which means you need at least $150K post taxes (assuming you are without children and super frugal) - so ~$200K-$250K salary. Not impossible - but definitely far from common for MS employees unless I'm hopelessly misinformed.

caniszczyk 10y ago

financial literacy is a huge issue in society and especially startup land, many folks don't learn about the pros/cons of 83(b) elections and how to properly calculate the value of your options... also negotiation skills aren't really taught so many people don't negotiate for a better deal I found this repo on GitHub to be the best resource on startup equity, highly recommend it: https://github.com/jlevy/og-equity-compensation https://github.com/jlevy/og-equity-compensation

danielweber 10y ago
Hell, many years ago, before some of our HN readers were born, I co-founded a start-up that had trouble recruiting people because we only created 200,000 shares at founding, and other companies were giving away millions of options. How could we compete only offering hundreds of options? I don't know if the candidates were playing stupid, or really that dumb, or trying to angle for something better, or just didn't like the company and were trying to back out politely, but it got damn frustrating. Lots of people just want to be lied to. You know why employers spew bullshit to candidates? Because candidates eat it up.
- user5994461 10y ago
  Adapt to your audience. If you want not idiots employees, or if you want to do training for real, you can explain it to them, then they're free to take a decision. Is an employee good enough if he can't listen for 3 minutes and perform a quick check on IPOverflow.com to confirm it's the other company that's a bad deal.

grzm 10y ago

(2015)

yueq 10y ago

Companies should be more transparent about options they give to employees. I was once offered with X shares of options from a well-funded startup. X seems like a relatively large number. But the company didn't want to disclose neither of the following to me but just selling me `this is a good offer`, 1. percentage offered 2. FMV per share 3. strike price The company is OK and the job is interesting. But this opaque destroyed trust between two parties. This is a completely a joke and I turned down the offer.