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As always the main rule you need to live by is value the equity at zero and you'll be (maybe) happy. Short of being a founder (and thus not really being offered

As always the main rule you need to live by is value the equity at zero and you'll be (maybe) happy. Short of being a founder (and thus not really being offered equity) I have never treated these things as anything beyond a minor on paper "bonus". Given you'd be lucky to get anything more than 1% even as a first employee I find them next to worthless as early stage motivators. Which is how everyone seems to play it - "we're all in this together" - mmm. As long as the salary is market rate I ignore equity altogether.

romanovcode 10y ago
Exactly what everyone should do. If someone is obsessed with these kind of topics I think he should start his own startup and be a founder/co-founder.
- khazhou 10y ago
  So if you want to make big money at a startup, you have to found your own or gtfo?
  - romanovcode 10y ago
    I think the point is that if you believe you have a decent chance to make a lot of money out of your 1% shares you are naive and a bit stupid.
econner 10y ago
This advice is often given but it's easier said than done. Let's say you work at a unicorn for 3 years and in that time it goes up 10x in VC fantasy land valuation. On paper you have a lot of money and the company reasonably might go public a couple years after you leave. Let's say you're granted about a year's salary in shares when you first join so you've vested $100K for a round number. When you leave that equity is worth $1 million. Now, you have to come to the table with the $100K to exercise and probably another $200K to pay the tax man. If the company goes belly up, you lose $100K outright and are stuck with a $200K tax credit that you get back in $3K per year deductions for the rest of your life. Or, you could have exercised the shares as you vested and paid a bit less in tax with the lower 409A valuation..but you're still maybe looking at a $100K total tax bill. Do you take the risk or not? Or do you end up locked in for a few more years of handcuffs while waiting it out? It'd be really hard for me at least to walk away from this situation with nothing..so then I have to value the equity as something. And if I want to treat it as 0 it'd be really tempting to wait a few years and see..which again means the equity is worth something to me.
- zzalpha 10y ago
  It's much worse in late stage startups where expiration means use em or lose em. It comes down to a gamble. With your numbers, a big one. But until that choice is forced on you, I say wait. There's no reason for an early exercise. Even with slight tax advantages I'd rather call that the cost of minimizing my risk.
- BatFastard 10y ago
  Don't take the risk. Treat is as a lottery ticket. A good friend joined a late startup company in 1999, and in 2000 he was worth 40 million, of which he managed to cash out 10 million before the stock crashed. But that was in the days of IPOs, now the investors prefer to keep the rise in equity to themselves. So you chances of winning the lottery are much less.
  - AJ007 10y ago
    I wonder how many commonly utilized tools in startups actually reduce the overall chance of the companies success? Not sure high stress and wacky work environments are very productive outside of sales. I'll leave it at that.
  - logicallee 10y ago
    You basically just said, totally straight-faced: "Don't do it man, it's not worth it! My friend thought he was worth $40 million but was never able to cash more than $10 million out." That is literally the structure of your comment. You said, don't do it, you mentioned your friend as for why not, and the punchline to his sad story is he only cashed out 25%, or $10 million, of what he thought he had. By positioning this as your example of a loss, I don't think you could have made a stronger argument for doing it if you had tried. Anyone who has $10M is set for life and independently very wealthy: they're rich. They could fly every two weeks for thirty years, for example (780 trips) staying at a four star hotel every day of that entire time (100 euros * 365 * 30 years still gets to only $1M). I mention these because they're luxuries. He's loaded.
    - pbkhrv 10y ago
anton_tarasenko 10y ago
That would work for most employees. Founders know much more about their company and don't offer equity if things go well. Equity is a good bargain right before the next funding round — when cash balance is low and founders pay with shares. In this case, the question is how much the stake is worth now. Ask founders the share price of the last funding round. That's the closest market valuation you can get. Exit conditions (exercise window, sale restrictions) are a must-know, but secondary. An employee can borrow to exercise options and then sell the shares. His company would love to buy shares/options back because they'll have to consolidate equity upon IPO/sellout anyway. In general, companies go through so much dilution and uncertainty that worthwhile equity stakes start at 5-10% for early-stage startups.
- JonFish85 10y ago
  >> Equity is a good bargain right before the next funding round — when cash balance is low and founders pay with shares. I don't think that's true in general. If it's right before the next funding round, that's when terms can change to wipe you out (whether it's a down round or multipliers). I guess on-paper it can look good ("oh the valuation just increased 5x overnight!"), but it can do some pretty nasty things to your options' "value".
hibikir 10y ago
The article is not about early stage companies though: If a company has 20 employees, yes, chances are that the value is zero. But imagine you are joining one of those companies that aren't public, and have a large paper valuation: hundreds, if not thousands of employees, plenty of brand recognition and all that. Chances are that you are still paid in a way that resembles what Google or Facebook do, except instead of RSUs for a company that is publicly traded, you will probably get options, instead of a 100K+ salary premium over working at Google. So that's the question you have to think about: Is it really sane to think that, say, two million bucks of Palantir options are worth exactly as much as what you get by joining a tiny 10 person startup that a very uncertain future and a far lower ceiling? Would RSUs with a dual trigger also be worth zero? If this is really the case, everyone joining one of those companies is certifiably insane, because life is not that different from a bigger tech company, the hiring bar is not any lower, and in a publicly traded tech company, stock compensation is often quite large and very real. If that's not the case, then we need to understand those options a lot better than we do in tiny companies, and understand what happens if our stay is just a few years, while the company will remain private for longer, precisely because we expect the company to IPO at some point, making the options be worth something.
stanfordkid 10y ago
This would be true ... but only because people don't understand how to leverage and negotiate using their power. Engineers have historically been unable to organize large movements and work together. The size of most of these unicorns is still under 2000 people, with less than 4-500 engineers. This means that if you really want to you can "lead a revolt" Think about it -- any engineer at these companies can easily leave... but imagine if half the engineers left. The company would go down in flames. People need to work together to have companies pass policies that allow them to have longer periods to exercise. BTW anyone that understands corporate law needs to understand that the fact that you "must" exercise your options by exorbitant amounts is simply a (very dirty) retention tactic. The company can choose not to buy back your unexercised options at par-value for as long as it wants. The fact that it is "policy" to buy un-exercised options is complete bullshit.
- maxxxxx 10y ago
  Pretty much every "policy" you are told about by a company is bullshit.
- matthewmcg 10y ago
  "The company can choose not to buy back your unexercised options at par-value for as long as it wants." That's usually not right for incentive options. Check your option agreement. Most will say that the stock option automatically expires or converts to a non-qualified option if not exercised within 90 days of termination without the company having to decide to do anything. What you are describing is more commonly associated with restricted stock, where the employee "owns" the shares, subject to the company's right to buy them back at par in certain situations.
  - stanfordkid 10y ago
    It is a legal rule that the company decided to impose in it's corporate charter, they can amend it to be whatever they want. It's arbitrary and not a fundamental part of US/State corporate law (like say race discrimination or workers comp). If they wanted to put a law in that you need to spin in circles and tap dance or else your stock automatically gets reclaimed they could create a clause in their charter for that too. This is what people need to understand: Rules change because people wake up and push for them to be changed. Lawyers have created all sorts of bullshit to protect the employer and that has become engrained as "best practice"
maverick_iceman 10y ago
Assuming equity is worthless the base salary has to be north of 200K to match the market rate (for low level software engineers) for public tech companies. In most Unicorns that's definitely not the case. In fact when I interviewed for Uber they explicitly said that their base salary is low compared to Google/FB but they make it up in equity.
- damnfinecoffee 10y ago
  By "low level software engineers" do you mean low level in the sense of relatively low experience or low level in the sense of working on embedded systems etc?
  - delecti 10y ago
    They mentioned Uber/FB/Google, none of whom are really in the embedded systems game (Google maybe to a lesser extent).
  - maverick_iceman 10y ago
    As in entry level.
    - damnfinecoffee 10y ago
      Where are you living where entry level software engineer salaries are north of 200k? I'm in the bay area and base salaries for software engineering with a bachelor's degree range from 90-115k from what I've seen (generally with some stock options and bonus potential added on top but I've never met anyone who's come even close to 200k starting out)
      - stale2002 10y ago
        He's talking about Google and Uber. Those definitely pay around that much.
        10y ago
khazhou 10y ago
I'm always amused how employees are encouraged to think of their stock as zero-value, which founders and investors keep 85% of this "zero value" for themselves.
- in_cahoots 10y ago
  Founders and investors have favorable terms -- they can take money off the table in the former case, and have liquidation preferences in the latter. So their stock has non-zero value, though it may not be as much as the paper valuation suggests.
  - khazhou 10y ago
    Great perspective. It's not that equity itself is zero value. Otherwise, how would founders be able to afford MacLarens? It's employee equity that should be thought of as very low (or zero) value.
- imsofuture 10y ago
  In fairness, employees are encouraged to think of it as zero value specifically when considering it in lieu of alternative compensation.
  - mwpmaybe 10y ago
    Right. It's quite the opposite of GP's sarcastic remark: founders want their employees to value their equity highly so they don't have to pay them as much. The advice in this thread is contrary to this. But yes, I've seen founders be stingy with equity during negotiation using this type of "logic," so the GP's point still stands.
- imh 10y ago
  Those are three totally different things. The kinds of stock/options and decision making power for an employee, a founder, and an investor are completely different.
- st3v3r 10y ago
nwellinghoff 10y ago
It would behoove everyone to learn the basics of the terms you are getting stock. I have been through it and know. It will take you a couple afternoons of casual reading to nail it down. But to save you some time let me give you a template for the type of stock option deal you want and you don't want. Don’t want 1) 409A valuation price is already in the multiple dollar range. a. Why : You can’t afford to exercise do to tax burden 2) No acceleration – e.g. in the event of sale or IPO your unvested shares DON’T fully vest. a. Why: You should be rewarded for taking the risk position. Negotiate acceleration or what is known as ratcheting if you are a very early employee. 3) Stock buyback rights – The company has the right to buy back all your shares if you leave the company before a liquidity event a. Why: This is a prison sentence and a total gamble as you really own nothing until an event. 4) The company is past its 3nd round of funding. In all but rare cases your percentage ownership will be so low at this point it is not worth it. WANT 1) 409A valuation price is in cents and the stock option plan has an early exercise option. a. Why: You can file an 83b election with the IRS and pre exercise all your stock for a few hundred dollars. Because the strike price is the same as the value you will owe 0 tax. In addition you start the clock on long term capital gains as soon as the stock does vest according to the vesting schedule. This is how all the big boys make their money. As they vest you actually own them and are free to leave the company at any time with what has vested. 2) Acceleration or ratcheting – In situations like the company gets bought, IPO or management wants you gone and you have unvested shares they must accelerate your vesting schedule. You own them and can go anywhere you want. 3) The company is in seed or series A and you own at least 0.5%+ of the company. a. The company’s founders do not want to take series C unless they absolutely have to. Ask them! In short, you will only be rewarded by taking the risk of wasting your TIME in an early stage that has potential with a good founding team. And never forget the freaking 83b election!
- ISV_Damocles 10y ago
  This is what should have been in the article. The only other thing I wish I knew was that I could early exercise 6 months before the 1 year vesting cliff at my company (it was in the stock agreement, but I didn't comprehend what it meant due to how it was worded). Would've gotten it with zero tax, by 1 year there was a valuation event that made it non-zero.
_yosefk 10y ago
"Treat as zero" is bad advice. "Treat as 10x or 50x cheaper than they say it is" - that's good advice. The difference is that 10x more equity solves a lot of problems with equity, and it's not what you'll be gunning for if you think its value is zero.
- Twirrim 10y ago
  Given how few startup companies actually make it, treating it as zero is the only sane and rational thing to do.
  - _yosefk 10y ago
    Right, because it's better to be paid $X/year and have 0 stock options than it is to be paid $X/year and have Y stock options, and no sane person would prefer the latter or negotiate for a Y large enough to be worth something even if the startup doesn't "make it" but is sold for 5x less than they tell you the IPO is going to be. And a company that has already got $200M invested into it is just as likely to fail to grow in value as a 1-person startup operating from a dorm room - it's always a 1 in a million lottery ticket. Only after IPO do RSUs suddenly gain value from 0 to something.
    - Anderkent 10y ago
      Given loss aversion and human talent for rationalising their sunk cost, do you really think you'll be able to accurately value those options? Treating them as worth 0/ε is a good heuristic, it'll give you the right decision basically every time.
deleted 10y ago
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EGreg 10y ago
At the risk of sounding like I'm self-promoting, we developed a Compensation Model at Qbix that is arguably much better than equity for both the worker and the company. The model is simple and helps us compensate people for contributing to our products in a way that is consistent with our philosophy: People live lives. Companies build products. Platforms should be free for anyone to contribute. The core ideas are that you partner per project and you compensate people for their actual effect on your bottom line. All the incentives seem to line up correctly and we use it with our own developers. It is also a good model for anyone just starting out with an idea. You can find the details here: https://qbix.com/blog/index.php/2016/11/properly-valuing-contributions/ https://qbix.com/blog/index.php/2016/11/properly-valuing-con...
chx 10y ago
Exactly. I have participated in two of these, one of them were options, the company got purchased but in the 2008 aftermath they sold it for cheap. The next company issued "growth shares", was worthless. Both sites are gone. They paid a good salary though.
aaroninsf 10y ago
The frame reality however is that the mythology of the windfall is part of the sell and a motivator for many. People _want_ to believe. And secretly in their heart of hearts they do believe. Not in the reality, which they are likely smart enough to determine by reading their paperwork, and running the scenarios–even if they are treated properly, which seems increasingly rare... ...in the fantasy. The fantasy is part of the sell. It is part of the glamor (sic) of being able to present yourself to others as _working in a startup in the Bay Area_. IMO companies with integrity would _actively_ tell people up front what to expect (zero) and to explain why they offer equity anyway. Were I interviewing, the company that led with that kind of honesty would stand out, regardless of its size or prospects.
- acedinlowball 10y ago
  I have many friends who have become very wealthy taking options instead of salary working for Bay Area startups. It's not as uncommon as you think.
eecks 10y ago
I get a yearly cash bonus and I treat that with the value of zero. I don't budget and/or plan it before I get it because there's a chance it's lower/higher than last year or non-existant.
mattieuga 10y ago
Why should a company offer a market rate salary and equity if the equity is valued at 0? Should companies just not offer equity in that case? Seems like a waste if it is not valued at all.
- danielweber 10y ago
  Or the company could do the very hard and legally annoying work of convincing candidates that the equity won't be destroyed at a moment's notice.
logicallee 10y ago
And if you consider every day of a romantic relationship as just a one-night stand with them (by coincidence the same person as the night before but no matter, that's just a coincidence), then you'll never be hurt if they cheat on you or even outright leave you. You can never be hurt! To me, saying "always value the equity at zero" is exactly the same as that. Like, "always value the relationship at zero." It's not sane advice in my personal experience, especially at the tiniest company sizes.
dahart 10y ago
Same goes for standard bonuses, even yearly ones. Pretend you're not getting one until after the money is in your bank account. Expecting them will lead to unhappiness, I've seen it happen to too many people. It's crazy how sad & upset some people can get over huge checks of "free" money, when they expected more than what they got. And of course it's dangerous to spend it before you get it. Bonus plans can and do change after the profits are made, bonus pools can and do dilute and/or shrink unexpectedly, people who didn't help can and do figure out ways to jump into the pot after it gets big, management can and does change their minds and decide to invest or allocate profits. I've watched all of these things happen, and the only way to enjoy it all is to negotiate your compensation as if bonuses don't exist, wait to think about bonus money until it's in hand, and then consider yourself lucky when extra money arrives.

romanovcode 10y ago

Exactly what everyone should do. If someone is obsessed with these kind of topics I think he should start his own startup and be a founder/co-founder.

khazhou 10y ago
So if you want to make big money at a startup, you have to found your own or gtfo?
- romanovcode 10y ago
  I think the point is that if you believe you have a decent chance to make a lot of money out of your 1% shares you are naive and a bit stupid.

econner 10y ago

This advice is often given but it's easier said than done. Let's say you work at a unicorn for 3 years and in that time it goes up 10x in VC fantasy land valuation. On paper you have a lot of money and the company reasonably might go public a couple years after you leave. Let's say you're granted about a year's salary in shares when you first join so you've vested $100K for a round number. When you leave that equity is worth $1 million. Now, you have to come to the table with the $100K to exercise and probably another $200K to pay the tax man. If the company goes belly up, you lose $100K outright and are stuck with a $200K tax credit that you get back in $3K per year deductions for the rest of your life. Or, you could have exercised the shares as you vested and paid a bit less in tax with the lower 409A valuation..but you're still maybe looking at a $100K total tax bill. Do you take the risk or not? Or do you end up locked in for a few more years of handcuffs while waiting it out? It'd be really hard for me at least to walk away from this situation with nothing..so then I have to value the equity as something. And if I want to treat it as 0 it'd be really tempting to wait a few years and see..which again means the equity is worth something to me.

zzalpha 10y ago
It's much worse in late stage startups where expiration means use em or lose em. It comes down to a gamble. With your numbers, a big one. But until that choice is forced on you, I say wait. There's no reason for an early exercise. Even with slight tax advantages I'd rather call that the cost of minimizing my risk.
BatFastard 10y ago
Don't take the risk. Treat is as a lottery ticket. A good friend joined a late startup company in 1999, and in 2000 he was worth 40 million, of which he managed to cash out 10 million before the stock crashed. But that was in the days of IPOs, now the investors prefer to keep the rise in equity to themselves. So you chances of winning the lottery are much less.
- AJ007 10y ago
  I wonder how many commonly utilized tools in startups actually reduce the overall chance of the companies success? Not sure high stress and wacky work environments are very productive outside of sales. I'll leave it at that.
- logicallee 10y ago
  You basically just said, totally straight-faced: "Don't do it man, it's not worth it! My friend thought he was worth $40 million but was never able to cash more than $10 million out." That is literally the structure of your comment. You said, don't do it, you mentioned your friend as for why not, and the punchline to his sad story is he only cashed out 25%, or $10 million, of what he thought he had. By positioning this as your example of a loss, I don't think you could have made a stronger argument for doing it if you had tried. Anyone who has $10M is set for life and independently very wealthy: they're rich. They could fly every two weeks for thirty years, for example (780 trips) staying at a four star hotel every day of that entire time (100 euros * 365 * 30 years still gets to only $1M). I mention these because they're luxuries. He's loaded.
  - pbkhrv 10y ago

anton_tarasenko 10y ago

That would work for most employees. Founders know much more about their company and don't offer equity if things go well. Equity is a good bargain right before the next funding round — when cash balance is low and founders pay with shares. In this case, the question is how much the stake is worth now. Ask founders the share price of the last funding round. That's the closest market valuation you can get. Exit conditions (exercise window, sale restrictions) are a must-know, but secondary. An employee can borrow to exercise options and then sell the shares. His company would love to buy shares/options back because they'll have to consolidate equity upon IPO/sellout anyway. In general, companies go through so much dilution and uncertainty that worthwhile equity stakes start at 5-10% for early-stage startups.

JonFish85 10y ago
>> Equity is a good bargain right before the next funding round — when cash balance is low and founders pay with shares. I don't think that's true in general. If it's right before the next funding round, that's when terms can change to wipe you out (whether it's a down round or multipliers). I guess on-paper it can look good ("oh the valuation just increased 5x overnight!"), but it can do some pretty nasty things to your options' "value".

hibikir 10y ago

The article is not about early stage companies though: If a company has 20 employees, yes, chances are that the value is zero. But imagine you are joining one of those companies that aren't public, and have a large paper valuation: hundreds, if not thousands of employees, plenty of brand recognition and all that. Chances are that you are still paid in a way that resembles what Google or Facebook do, except instead of RSUs for a company that is publicly traded, you will probably get options, instead of a 100K+ salary premium over working at Google. So that's the question you have to think about: Is it really sane to think that, say, two million bucks of Palantir options are worth exactly as much as what you get by joining a tiny 10 person startup that a very uncertain future and a far lower ceiling? Would RSUs with a dual trigger also be worth zero? If this is really the case, everyone joining one of those companies is certifiably insane, because life is not that different from a bigger tech company, the hiring bar is not any lower, and in a publicly traded tech company, stock compensation is often quite large and very real. If that's not the case, then we need to understand those options a lot better than we do in tiny companies, and understand what happens if our stay is just a few years, while the company will remain private for longer, precisely because we expect the company to IPO at some point, making the options be worth something.

stanfordkid 10y ago

This would be true ... but only because people don't understand how to leverage and negotiate using their power. Engineers have historically been unable to organize large movements and work together. The size of most of these unicorns is still under 2000 people, with less than 4-500 engineers. This means that if you really want to you can "lead a revolt" Think about it -- any engineer at these companies can easily leave... but imagine if half the engineers left. The company would go down in flames. People need to work together to have companies pass policies that allow them to have longer periods to exercise. BTW anyone that understands corporate law needs to understand that the fact that you "must" exercise your options by exorbitant amounts is simply a (very dirty) retention tactic. The company can choose not to buy back your unexercised options at par-value for as long as it wants. The fact that it is "policy" to buy un-exercised options is complete bullshit.

maxxxxx 10y ago
Pretty much every "policy" you are told about by a company is bullshit.
matthewmcg 10y ago
"The company can choose not to buy back your unexercised options at par-value for as long as it wants." That's usually not right for incentive options. Check your option agreement. Most will say that the stock option automatically expires or converts to a non-qualified option if not exercised within 90 days of termination without the company having to decide to do anything. What you are describing is more commonly associated with restricted stock, where the employee "owns" the shares, subject to the company's right to buy them back at par in certain situations.
- stanfordkid 10y ago
  It is a legal rule that the company decided to impose in it's corporate charter, they can amend it to be whatever they want. It's arbitrary and not a fundamental part of US/State corporate law (like say race discrimination or workers comp). If they wanted to put a law in that you need to spin in circles and tap dance or else your stock automatically gets reclaimed they could create a clause in their charter for that too. This is what people need to understand: Rules change because people wake up and push for them to be changed. Lawyers have created all sorts of bullshit to protect the employer and that has become engrained as "best practice"

maverick_iceman 10y ago

Assuming equity is worthless the base salary has to be north of 200K to match the market rate (for low level software engineers) for public tech companies. In most Unicorns that's definitely not the case. In fact when I interviewed for Uber they explicitly said that their base salary is low compared to Google/FB but they make it up in equity.

damnfinecoffee 10y ago
By "low level software engineers" do you mean low level in the sense of relatively low experience or low level in the sense of working on embedded systems etc?
- delecti 10y ago
  They mentioned Uber/FB/Google, none of whom are really in the embedded systems game (Google maybe to a lesser extent).
- maverick_iceman 10y ago
  As in entry level.
  - damnfinecoffee 10y ago
    Where are you living where entry level software engineer salaries are north of 200k? I'm in the bay area and base salaries for software engineering with a bachelor's degree range from 90-115k from what I've seen (generally with some stock options and bonus potential added on top but I've never met anyone who's come even close to 200k starting out)
    - stale2002 10y ago
      He's talking about Google and Uber. Those definitely pay around that much.
      - 10y ago

khazhou 10y ago

I'm always amused how employees are encouraged to think of their stock as zero-value, which founders and investors keep 85% of this "zero value" for themselves.

in_cahoots 10y ago
Founders and investors have favorable terms -- they can take money off the table in the former case, and have liquidation preferences in the latter. So their stock has non-zero value, though it may not be as much as the paper valuation suggests.
- khazhou 10y ago
  Great perspective. It's not that equity itself is zero value. Otherwise, how would founders be able to afford MacLarens? It's employee equity that should be thought of as very low (or zero) value.
imsofuture 10y ago
In fairness, employees are encouraged to think of it as zero value specifically when considering it in lieu of alternative compensation.
- mwpmaybe 10y ago
  Right. It's quite the opposite of GP's sarcastic remark: founders want their employees to value their equity highly so they don't have to pay them as much. The advice in this thread is contrary to this. But yes, I've seen founders be stingy with equity during negotiation using this type of "logic," so the GP's point still stands.
imh 10y ago
Those are three totally different things. The kinds of stock/options and decision making power for an employee, a founder, and an investor are completely different.
st3v3r 10y ago

nwellinghoff 10y ago

It would behoove everyone to learn the basics of the terms you are getting stock. I have been through it and know. It will take you a couple afternoons of casual reading to nail it down. But to save you some time let me give you a template for the type of stock option deal you want and you don't want. Don’t want 1) 409A valuation price is already in the multiple dollar range. a. Why : You can’t afford to exercise do to tax burden 2) No acceleration – e.g. in the event of sale or IPO your unvested shares DON’T fully vest. a. Why: You should be rewarded for taking the risk position. Negotiate acceleration or what is known as ratcheting if you are a very early employee. 3) Stock buyback rights – The company has the right to buy back all your shares if you leave the company before a liquidity event a. Why: This is a prison sentence and a total gamble as you really own nothing until an event. 4) The company is past its 3nd round of funding. In all but rare cases your percentage ownership will be so low at this point it is not worth it. WANT 1) 409A valuation price is in cents and the stock option plan has an early exercise option. a. Why: You can file an 83b election with the IRS and pre exercise all your stock for a few hundred dollars. Because the strike price is the same as the value you will owe 0 tax. In addition you start the clock on long term capital gains as soon as the stock does vest according to the vesting schedule. This is how all the big boys make their money. As they vest you actually own them and are free to leave the company at any time with what has vested. 2) Acceleration or ratcheting – In situations like the company gets bought, IPO or management wants you gone and you have unvested shares they must accelerate your vesting schedule. You own them and can go anywhere you want. 3) The company is in seed or series A and you own at least 0.5%+ of the company. a. The company’s founders do not want to take series C unless they absolutely have to. Ask them! In short, you will only be rewarded by taking the risk of wasting your TIME in an early stage that has potential with a good founding team. And never forget the freaking 83b election!

ISV_Damocles 10y ago
This is what should have been in the article. The only other thing I wish I knew was that I could early exercise 6 months before the 1 year vesting cliff at my company (it was in the stock agreement, but I didn't comprehend what it meant due to how it was worded). Would've gotten it with zero tax, by 1 year there was a valuation event that made it non-zero.

_yosefk 10y ago

"Treat as zero" is bad advice. "Treat as 10x or 50x cheaper than they say it is" - that's good advice. The difference is that 10x more equity solves a lot of problems with equity, and it's not what you'll be gunning for if you think its value is zero.

Twirrim 10y ago
Given how few startup companies actually make it, treating it as zero is the only sane and rational thing to do.
- _yosefk 10y ago
  Right, because it's better to be paid $X/year and have 0 stock options than it is to be paid $X/year and have Y stock options, and no sane person would prefer the latter or negotiate for a Y large enough to be worth something even if the startup doesn't "make it" but is sold for 5x less than they tell you the IPO is going to be. And a company that has already got $200M invested into it is just as likely to fail to grow in value as a 1-person startup operating from a dorm room - it's always a 1 in a million lottery ticket. Only after IPO do RSUs suddenly gain value from 0 to something.
  - Anderkent 10y ago
    Given loss aversion and human talent for rationalising their sunk cost, do you really think you'll be able to accurately value those options? Treating them as worth 0/ε is a good heuristic, it'll give you the right decision basically every time.

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EGreg 10y ago

At the risk of sounding like I'm self-promoting, we developed a Compensation Model at Qbix that is arguably much better than equity for both the worker and the company. The model is simple and helps us compensate people for contributing to our products in a way that is consistent with our philosophy: People live lives. Companies build products. Platforms should be free for anyone to contribute. The core ideas are that you partner per project and you compensate people for their actual effect on your bottom line. All the incentives seem to line up correctly and we use it with our own developers. It is also a good model for anyone just starting out with an idea. You can find the details here: https://qbix.com/blog/index.php/2016/11/properly-valuing-contributions/ https://qbix.com/blog/index.php/2016/11/properly-valuing-con...

chx 10y ago

Exactly. I have participated in two of these, one of them were options, the company got purchased but in the 2008 aftermath they sold it for cheap. The next company issued "growth shares", was worthless. Both sites are gone. They paid a good salary though.

aaroninsf 10y ago

The frame reality however is that the mythology of the windfall is part of the sell and a motivator for many. People _want_ to believe. And secretly in their heart of hearts they do believe. Not in the reality, which they are likely smart enough to determine by reading their paperwork, and running the scenarios–even if they are treated properly, which seems increasingly rare... ...in the fantasy. The fantasy is part of the sell. It is part of the glamor (sic) of being able to present yourself to others as _working in a startup in the Bay Area_. IMO companies with integrity would _actively_ tell people up front what to expect (zero) and to explain why they offer equity anyway. Were I interviewing, the company that led with that kind of honesty would stand out, regardless of its size or prospects.

acedinlowball 10y ago
I have many friends who have become very wealthy taking options instead of salary working for Bay Area startups. It's not as uncommon as you think.

eecks 10y ago

I get a yearly cash bonus and I treat that with the value of zero. I don't budget and/or plan it before I get it because there's a chance it's lower/higher than last year or non-existant.

mattieuga 10y ago

Why should a company offer a market rate salary and equity if the equity is valued at 0? Should companies just not offer equity in that case? Seems like a waste if it is not valued at all.

danielweber 10y ago
Or the company could do the very hard and legally annoying work of convincing candidates that the equity won't be destroyed at a moment's notice.

logicallee 10y ago

And if you consider every day of a romantic relationship as just a one-night stand with them (by coincidence the same person as the night before but no matter, that's just a coincidence), then you'll never be hurt if they cheat on you or even outright leave you. You can never be hurt! To me, saying "always value the equity at zero" is exactly the same as that. Like, "always value the relationship at zero." It's not sane advice in my personal experience, especially at the tiniest company sizes.

dahart 10y ago

Same goes for standard bonuses, even yearly ones. Pretend you're not getting one until after the money is in your bank account. Expecting them will lead to unhappiness, I've seen it happen to too many people. It's crazy how sad & upset some people can get over huge checks of "free" money, when they expected more than what they got. And of course it's dangerous to spend it before you get it. Bonus plans can and do change after the profits are made, bonus pools can and do dilute and/or shrink unexpectedly, people who didn't help can and do figure out ways to jump into the pot after it gets big, management can and does change their minds and decide to invest or allocate profits. I've watched all of these things happen, and the only way to enjoy it all is to negotiate your compensation as if bonuses don't exist, wait to think about bonus money until it's in hand, and then consider yourself lucky when extra money arrives.