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This is why I always recommend to individuals that when a startup offers equity in lieu of cash compensation to ask every financial/equity question imaginable.

by mbesto 9y ago

This is why I always recommend to individuals that when a startup offers equity in lieu of cash compensation to ask every financial/equity question imaginable. (what are you valued at today? how much investment have you taken? what's been diluted? etc etc) People don't like to have that conversation because they think it's inappropriate. However, it's more inappropriate for a founder to tell you that you're getting equity in lieu of compensation and explain nothing about the value of that equity and potential future value of that equity based on the current state and future state assumptions.

GuiA 9y ago
90% of my engineer/designer friends have no clue what every financial/equity question imaginable even look like, and even if they had a list of them, they'd have no clue about how to interpret any of the results, or how to tell if the company is feeding you BS. I mean, I was the first employee at a startup, involved with fund raising, and then founder at a startup, and even I would have a hard time with that. Not to mention that even if you have a very solid understanding of what things are like when you get hired, it can all change dramatically in subsequent fundraising. This is just one of many instances where the employee/employer relationship is heavily biased against the employee. And unless clear disclosure requirements understandable by the average worker are put in place, it'll stay that way. As an employee, your options are inscrutable lottery tickets which value can be redefined in many ways at many points in time, and there's not much you can do against that.
- mbesto 9y ago
  > 90% of my engineer/designer friends have no clue what every financial/equity question imaginable even look like Totally - I've been thinking about actually putting on a "equity master class for engineers looking to join startups" type seminar in the bay area if people are interested.
  - dpeck 9y ago
    Not bay area (though there fairly often) but if you do it please have it recorded and posted somewhere. Would be a great resource.
  - mbesto 9y ago
    Seems like there's some interest for this. If people legitimately want to know more, please let me know here: https://goo.gl/forms/j70V7ew5Dds7AoOt1 https://goo.gl/forms/j70V7ew5Dds7AoOt1 If there's enough interest I'll put something on. PS - By way of background, I work in tech M&A and regularly see cap tables, equity packages, salaries etc. both in and out of SV.
- ykler 9y ago
  You mean biased agains the employee? Anyway, I guess the obvious thought is that situations of information asymmetry like this are not really biased against anyone but just lead to worse outcomes for everyone. Startups would prefer to compensate in equity, but the value of their equity is depressed because potential employees can't tell how much it is worth. I suspect the obvious thought is right although maybe it could be bad for employees if they systematically tend to overvalue equity. (And then it would work against even the rare employee who can tell how much it is worth because he or she will have to compete against a bunch of suckers.)
  - GuiA 9y ago
    > You mean biased agains the employee? Yes, thanks for spotting the typo. Fixed.
- pascalxus 9y ago
  I completely agree. An employee should be optimizing for maximum salary, the equity should just be considered a token reward. If founders and investors really want to align their goals with employees, then start handing out rev share, otherwise, the employee is just deluding themselves.
ThrustVectoring 9y ago
I just don't accept equity in lieu of compensation. There's far too many ways to screw you over. The only thing I would value is participation in a trust designed to make it as difficult as possible for the founder to receive cash from their ownership stake without paying out to all minor participants. "If he's worth $1B, I'm worth $1M" is something I can value.
- gt2 9y ago
  Are trusts like this commonly setup? Enforceable?
  - ThrustVectoring 9y ago
    Commonly set up? Depends on what you mean by "like this" - for this exact purpose, probably not at all. Enforceable? Absolutely. The entire point of a trust is to give out flows of cash to beneficiaries while restricting certain rights you may not want those beneficiaries to have. Usually this is more along the lines of "can't use the assets to pay down debts" than ensuring that the wealth generated from founding a start-up gets distributed fairly.
praneshp 9y ago
The last time I was interviewing was my first experience at evaluating non-public company offers. My recruiter at Docker setup a 30+ minute phone call just to explain what each of the terms meant, and helped me research and understand the offer much better.
berdon 9y ago
I remember one time negotiating an offer with StartupXYZ and they claimed a bunch of things about their stock options (company valuation, overall stock package value, etc). When I asked them various questions about the options, in particular the total amount of shares available, about class, etc, they told me "we can't share that information". You've heard of this company.

by mbesto 9y ago

GuiA 9y ago

90% of my engineer/designer friends have no clue what every financial/equity question imaginable even look like, and even if they had a list of them, they'd have no clue about how to interpret any of the results, or how to tell if the company is feeding you BS. I mean, I was the first employee at a startup, involved with fund raising, and then founder at a startup, and even I would have a hard time with that. Not to mention that even if you have a very solid understanding of what things are like when you get hired, it can all change dramatically in subsequent fundraising. This is just one of many instances where the employee/employer relationship is heavily biased against the employee. And unless clear disclosure requirements understandable by the average worker are put in place, it'll stay that way. As an employee, your options are inscrutable lottery tickets which value can be redefined in many ways at many points in time, and there's not much you can do against that.

mbesto 9y ago
> 90% of my engineer/designer friends have no clue what every financial/equity question imaginable even look like Totally - I've been thinking about actually putting on a "equity master class for engineers looking to join startups" type seminar in the bay area if people are interested.
- dpeck 9y ago
  Not bay area (though there fairly often) but if you do it please have it recorded and posted somewhere. Would be a great resource.
- mbesto 9y ago
  Seems like there's some interest for this. If people legitimately want to know more, please let me know here: https://goo.gl/forms/j70V7ew5Dds7AoOt1 https://goo.gl/forms/j70V7ew5Dds7AoOt1 If there's enough interest I'll put something on. PS - By way of background, I work in tech M&A and regularly see cap tables, equity packages, salaries etc. both in and out of SV.
ykler 9y ago
You mean biased agains the employee? Anyway, I guess the obvious thought is that situations of information asymmetry like this are not really biased against anyone but just lead to worse outcomes for everyone. Startups would prefer to compensate in equity, but the value of their equity is depressed because potential employees can't tell how much it is worth. I suspect the obvious thought is right although maybe it could be bad for employees if they systematically tend to overvalue equity. (And then it would work against even the rare employee who can tell how much it is worth because he or she will have to compete against a bunch of suckers.)
- GuiA 9y ago
  > You mean biased agains the employee? Yes, thanks for spotting the typo. Fixed.
pascalxus 9y ago
I completely agree. An employee should be optimizing for maximum salary, the equity should just be considered a token reward. If founders and investors really want to align their goals with employees, then start handing out rev share, otherwise, the employee is just deluding themselves.

ThrustVectoring 9y ago

I just don't accept equity in lieu of compensation. There's far too many ways to screw you over. The only thing I would value is participation in a trust designed to make it as difficult as possible for the founder to receive cash from their ownership stake without paying out to all minor participants. "If he's worth $1B, I'm worth $1M" is something I can value.

gt2 9y ago
Are trusts like this commonly setup? Enforceable?
- ThrustVectoring 9y ago
  Commonly set up? Depends on what you mean by "like this" - for this exact purpose, probably not at all. Enforceable? Absolutely. The entire point of a trust is to give out flows of cash to beneficiaries while restricting certain rights you may not want those beneficiaries to have. Usually this is more along the lines of "can't use the assets to pay down debts" than ensuring that the wealth generated from founding a start-up gets distributed fairly.

praneshp 9y ago

The last time I was interviewing was my first experience at evaluating non-public company offers. My recruiter at Docker setup a 30+ minute phone call just to explain what each of the terms meant, and helped me research and understand the offer much better.

berdon 9y ago

I remember one time negotiating an offer with StartupXYZ and they claimed a bunch of things about their stock options (company valuation, overall stock package value, etc). When I asked them various questions about the options, in particular the total amount of shares available, about class, etc, they told me "we can't share that information". You've heard of this company.