7 ms·

Sounds like the market is telling startups that early engineers are worth more than 0.1% of stock options.

by bla2 10y ago

thedevil 10y ago
I had more of a financial background before becoming a software engineer. I was shocked when I found out "equity" given to early engineers is so puny. Why would someone work long hours for low pay with higher risk for 0.1% of high-risk small business?
- falsedan 10y ago
  Because: they're fresh out of college and haven't met anyone burned by an IPO/bubble burst & realised how that could be them.
  - heurist 10y ago
    Because being underutilized in a large company is unfulfilling. Because being a staff engineer in a large company gets you no closer to running your own business. Because you want to learn technology that you cannot yet compete for. Because options outside of large companies are limited, especially if you are unable to take large immediate financial risks.
    - falsedan 10y ago
      Why not: work for a large company that can do both? Pay reasonably well with low-risk, and let you grow your technology skills + contacts? A: those companies aren't cool & won't make you a millionaire by 35 on stock options (whereas a startup might)
      - heurist 10y ago
        Personally, because I don't like being told what to do :) If I don't have a significant amount of control I shut down, become depressed, anxious that I'm wasting my life, etc. I'm also wary of being taken advantage of. If I'm going to spend half or more my waking hours working I want to be reaping the profits. I need freedom. I've been directing product at a seed stage startup to get my bearings in the small business world but now I'm feeling antsy because I am starting to think I could be doing better on my own while having more control over my time, the products I build, the money those products earn, etc.
        falsedan 10y ago
        Pitch to some VCs then.
    - st3v3r 10y ago
      False choice. One does not have to live off ramen at a startup to do those things.
- mbesto 10y ago
  It's because those same software engineers have 0 financial background. It's not different than a software engineer going into a financial firm and saying "I can't believe none of these guys know how their technology works". The most financial exposure these individuals have is reading the $Xmillion Series X funding, or $Xbillion exits that they see on TechCrunch on a daily basis. Their risk is assessed on those headlines.
- emcq 10y ago
  From my own experience, it was naivety and manipulation. I trusted the founder when he would make big promises for the future. He didn't bring up equity until the last moment once we already were ready to quit and join. In hindsight these are clearly common business tactics (get the person to accept before going into details), but as a young engineer I had more trust in older more experienced folks like the founder. Even when there were huge alarm bells ringing in my head, I said yes. It's hard to describe how a good salesman can have you saying yes to things you aren't comfortable with. In the end the company crashed and burned after losing all it's founding team who all work at top companies now.
  - thedevil 10y ago
    > It's hard to describe how a good salesman can have you saying yes to things you aren't comfortable with. I recommend a book that describes some of these tricks pretty well. It helps protect me from such manipulation (some of the time): https://www.amazon.com/Influence-Psychology-Persuasion-Robert-Cialdini/dp/006124189X https://www.amazon.com/Influence-Psychology-Persuasion-Rober...
jartelt 10y ago
Yep, I think people are starting to realize that unless you are (a) a founder with 20-30% equity or (b) an early employee at one of the few startups that successfully exits for >$1B without any down rounds, your equity most likely will not be worth more than $100k. If your equity is only a $100k bonus after 7 years, it doesn't make as much sense monetarily to take a pay cut to work at the startup.
- nicholasjarnold 10y ago
  My friends and I discuss this all the time. There are always people trying to get us (software engineers) to join various startups around town/country, but the comparatively low salaries coupled with the exceptionally low possibility that any offered/granted equity will be "worth it" some day leads almost all of us to follow more traditional routes with companies that can pay us today, not MAYBE tomorrow.
  - eldavido 10y ago
    Devs seem to be realizing this, at least the ones I know (new thing). Seems the endgame's going to be higher equity grants. If VCs won't fund something unproven at 350/head and devs won't work for peanuts, higher equity grants seem the only option. I think it'll be just like Hollywood, in that projects are evaluated as much for who they've managed to recruit (e.g. a movie with Brad Pitt is fundable) as on other business fundamentals. It's striking how much of business views "labor" as ancillary to success. That might be true if you're running a pizza joint but it couldn't be farther from the truth building a software company, or making a movie.
    - arcanus 10y ago
      > That might be true if you're running a pizza joint but it couldn't be farther from the truth building a software company, or making a movie. Or starting a medical practice Or starting a hedge fund Or starting a law firm It might be the most important thing for any new venture, across history. There is a good reason that the start of the story about Jason and the Golden Fleece describes assembling his crew of Argonauts.
mring33621 10y ago
Yes. I'm an older, successful dev in Chicago. I recently corresponded w/ a local startup CEO on linkedin. My skillset seemed to be a good fit for the role, but their stated top salary would be a 20K pay cut for me. So I ran a quick estimate, based on expected exit and expected dilution figures that I found on the internet (I know, grain of salt...), added a risk premium for myself, and found that I would want about 7% equity, in order to be interested. They said no, of course. My point is that (some) startups can't or won't pay for the technical skills they want. And that's their problem, not ours.
- alpha_squared 10y ago
  > ...found that I would want about 7% equity, in order to be interested. They said no, of course. You wanted 7% equity to make up for 20k? That seems a little excessive...
  - logfromblammo 10y ago
    How would you know what excessive might be without valuing the company? Seems reasonable for a company with estimated current valuation of around $300k.
    - alpha_squared 10y ago
      That's true, I don't have a complete picture. I, probably falsely, assumed that he was being brought in as an employee in a team of at least a few people.
  - mikestew 10y ago
    Or one might consider that after running the numbers, the company didn't seem to be worth all that much to begin with.
  - mring33621 10y ago
    I used a very simple model for my estimate: 5 years to exit * 20K yr opp cost = 100K total opp cost I think my payback should be twice my total opp cost, so I want 200K at exit 1% chance of exit at 600M valuation after those 5 years I would expect my initial equity to be diluted to 50% of original value. Hence, I want 6.7% equity at the beginning of the 5 years. Note that, IMHO, I am being very conservative in calculating my opportunity cost for the lost salary.
ditonal 10y ago
O.1% of common shares with complicated tax options. Investors get preferred shares cause they invest money. But engineers get common shares even though they're asked to take paycuts. Startups insist this is "standard". Well I hope it's standard for them to fail until they actually value engineers. I don't see why engineers need to be a monastic underclass to subsidize founders and VCs.
- maerF0x0 10y ago
  Don't forget 90day expiry if you leave. Even though you already sacrificed the salary for them. Also very unclear legal ramifications if the company is sold. ie, do you get immediate vesting, do your options disappear, do they become some number of options in the new firm (how many, why that ratio?)... They can deny the sale to anyone until IPO. Its comp they can take away, block or otherwise control.
zer01 10y ago
This is absolutely it. I worked for 2 different start-ups and as an engineer it is damn near impossible to get tangible value out of equity options, yet they're being used as a mechanism not to pay market rate salaries with the notion that it'll be "worth it in the long run". Maybe it can be, but I haven't seen it, nor has anyone I know working in the valley.
rpmcmurphy 10y ago
My experience has been that options have negative value. I learned this the hard way when I exercised options from a firm that has since gone sideways. I ended up with a $40,000 tax bill on stock that is worthless. Nowadays I only look at companies that can offer RSUs. Until the re-write the tax code to stop taxing people on fictional gains, options are crap, especially with companies remaining private far longer than you are likely to remain working there.
- mateo411 10y ago
  Can you write off the $40,000 loss?
  - rpmcmurphy 10y ago
    I can apply it against future gains, but its complicated. Since I was never able to sell the stock, the gain is entirely fictional, which is why ISOs suck so badly.

Sounds like the market is telling startups that early engineers are worth more than 0.1% of stock options.

by bla2 10y ago

Sounds like the market is telling startups that early engineers are worth more than 0.1% of stock options.

I had more of a financial background before becoming a software engineer. I was shocked when I found out "equity" given to early engineers is so puny. Why would someone work long hours for low pay with higher risk for 0.1% of high-risk small business?

falsedan 10y ago
Because: they're fresh out of college and haven't met anyone burned by an IPO/bubble burst & realised how that could be them.
- heurist 10y ago
  Because being underutilized in a large company is unfulfilling. Because being a staff engineer in a large company gets you no closer to running your own business. Because you want to learn technology that you cannot yet compete for. Because options outside of large companies are limited, especially if you are unable to take large immediate financial risks.
  - falsedan 10y ago
    Why not: work for a large company that can do both? Pay reasonably well with low-risk, and let you grow your technology skills + contacts? A: those companies aren't cool & won't make you a millionaire by 35 on stock options (whereas a startup might)
    - heurist 10y ago
      Personally, because I don't like being told what to do :) If I don't have a significant amount of control I shut down, become depressed, anxious that I'm wasting my life, etc. I'm also wary of being taken advantage of. If I'm going to spend half or more my waking hours working I want to be reaping the profits. I need freedom. I've been directing product at a seed stage startup to get my bearings in the small business world but now I'm feeling antsy because I am starting to think I could be doing better on my own while having more control over my time, the products I build, the money those products earn, etc.
      - falsedan 10y ago
        Pitch to some VCs then.
  - st3v3r 10y ago
    False choice. One does not have to live off ramen at a startup to do those things.
mbesto 10y ago
It's because those same software engineers have 0 financial background. It's not different than a software engineer going into a financial firm and saying "I can't believe none of these guys know how their technology works". The most financial exposure these individuals have is reading the $Xmillion Series X funding, or $Xbillion exits that they see on TechCrunch on a daily basis. Their risk is assessed on those headlines.
emcq 10y ago
From my own experience, it was naivety and manipulation. I trusted the founder when he would make big promises for the future. He didn't bring up equity until the last moment once we already were ready to quit and join. In hindsight these are clearly common business tactics (get the person to accept before going into details), but as a young engineer I had more trust in older more experienced folks like the founder. Even when there were huge alarm bells ringing in my head, I said yes. It's hard to describe how a good salesman can have you saying yes to things you aren't comfortable with. In the end the company crashed and burned after losing all it's founding team who all work at top companies now.
- thedevil 10y ago
  > It's hard to describe how a good salesman can have you saying yes to things you aren't comfortable with. I recommend a book that describes some of these tricks pretty well. It helps protect me from such manipulation (some of the time): https://www.amazon.com/Influence-Psychology-Persuasion-Robert-Cialdini/dp/006124189X https://www.amazon.com/Influence-Psychology-Persuasion-Rober...

jartelt 10y ago

Yep, I think people are starting to realize that unless you are (a) a founder with 20-30% equity or (b) an early employee at one of the few startups that successfully exits for >$1B without any down rounds, your equity most likely will not be worth more than $100k. If your equity is only a $100k bonus after 7 years, it doesn't make as much sense monetarily to take a pay cut to work at the startup.

nicholasjarnold 10y ago
My friends and I discuss this all the time. There are always people trying to get us (software engineers) to join various startups around town/country, but the comparatively low salaries coupled with the exceptionally low possibility that any offered/granted equity will be "worth it" some day leads almost all of us to follow more traditional routes with companies that can pay us today, not MAYBE tomorrow.
- eldavido 10y ago
  Devs seem to be realizing this, at least the ones I know (new thing). Seems the endgame's going to be higher equity grants. If VCs won't fund something unproven at 350/head and devs won't work for peanuts, higher equity grants seem the only option. I think it'll be just like Hollywood, in that projects are evaluated as much for who they've managed to recruit (e.g. a movie with Brad Pitt is fundable) as on other business fundamentals. It's striking how much of business views "labor" as ancillary to success. That might be true if you're running a pizza joint but it couldn't be farther from the truth building a software company, or making a movie.
  - arcanus 10y ago
    > That might be true if you're running a pizza joint but it couldn't be farther from the truth building a software company, or making a movie. Or starting a medical practice Or starting a hedge fund Or starting a law firm It might be the most important thing for any new venture, across history. There is a good reason that the start of the story about Jason and the Golden Fleece describes assembling his crew of Argonauts.

mring33621 10y ago

Yes. I'm an older, successful dev in Chicago. I recently corresponded w/ a local startup CEO on linkedin. My skillset seemed to be a good fit for the role, but their stated top salary would be a 20K pay cut for me. So I ran a quick estimate, based on expected exit and expected dilution figures that I found on the internet (I know, grain of salt...), added a risk premium for myself, and found that I would want about 7% equity, in order to be interested. They said no, of course. My point is that (some) startups can't or won't pay for the technical skills they want. And that's their problem, not ours.

alpha_squared 10y ago
> ...found that I would want about 7% equity, in order to be interested. They said no, of course. You wanted 7% equity to make up for 20k? That seems a little excessive...
- logfromblammo 10y ago
  How would you know what excessive might be without valuing the company? Seems reasonable for a company with estimated current valuation of around $300k.
  - alpha_squared 10y ago
    That's true, I don't have a complete picture. I, probably falsely, assumed that he was being brought in as an employee in a team of at least a few people.
- mikestew 10y ago
  Or one might consider that after running the numbers, the company didn't seem to be worth all that much to begin with.
- mring33621 10y ago
  I used a very simple model for my estimate: 5 years to exit * 20K yr opp cost = 100K total opp cost I think my payback should be twice my total opp cost, so I want 200K at exit 1% chance of exit at 600M valuation after those 5 years I would expect my initial equity to be diluted to 50% of original value. Hence, I want 6.7% equity at the beginning of the 5 years. Note that, IMHO, I am being very conservative in calculating my opportunity cost for the lost salary.

ditonal 10y ago

O.1% of common shares with complicated tax options. Investors get preferred shares cause they invest money. But engineers get common shares even though they're asked to take paycuts. Startups insist this is "standard". Well I hope it's standard for them to fail until they actually value engineers. I don't see why engineers need to be a monastic underclass to subsidize founders and VCs.

maerF0x0 10y ago
Don't forget 90day expiry if you leave. Even though you already sacrificed the salary for them. Also very unclear legal ramifications if the company is sold. ie, do you get immediate vesting, do your options disappear, do they become some number of options in the new firm (how many, why that ratio?)... They can deny the sale to anyone until IPO. Its comp they can take away, block or otherwise control.

zer01 10y ago

This is absolutely it. I worked for 2 different start-ups and as an engineer it is damn near impossible to get tangible value out of equity options, yet they're being used as a mechanism not to pay market rate salaries with the notion that it'll be "worth it in the long run". Maybe it can be, but I haven't seen it, nor has anyone I know working in the valley.

rpmcmurphy 10y ago

My experience has been that options have negative value. I learned this the hard way when I exercised options from a firm that has since gone sideways. I ended up with a $40,000 tax bill on stock that is worthless. Nowadays I only look at companies that can offer RSUs. Until the re-write the tax code to stop taxing people on fictional gains, options are crap, especially with companies remaining private far longer than you are likely to remain working there.

mateo411 10y ago
Can you write off the $40,000 loss?
- rpmcmurphy 10y ago
  I can apply it against future gains, but its complicated. Since I was never able to sell the stock, the gain is entirely fictional, which is why ISOs suck so badly.