6 ms·

What is the solution? Ask for all of your compensation to be in cash, Netflix-style?

jartelt 9y ago
That could be a solution, but many startups will balk at your ask for full cash compensation and say you need some equity to "have skin in the game and to show you believe in the company."
- BadassFractal 9y ago
  Which from their perspective makes sense, since they want a lock-in. I guess if you have a strong negotiating position you can potentially push things around. Maybe instead of options you get on some kind of a cash clawback plan for the first few years?
- goialoq 9y ago
  The more directly balk at the prospect of paying cash they simply don't have.
bogomipz 9y ago
I think this is a good solution. Almost any start up is going to have a one year cliff before your first vesting period begins. And to be fully vested often means remaining at the company for 4 years. So now you are that 5 year mark and if the company doesn't IPO by then and you want to leave you have to buy all of those options. So if you don't foresee being at the company for at least 5 year or foresee having the money to purchase the options you have accrued after the 1+ years then you are better off asking for cash. Companies of course don't like this because it costs them nothing if they pay part of your comp in options that you then leave on the table when you leave the company. This is calculated, the companies know this. How many startups can you expect to work in your career where you stay for 5 years? Lets say you work for which would be 20 years of your career. How many of those 5 are going to actually IPO? The math suggests you leaving a lot of money on the table. If you take the comp in cash you can put that money to work for you in other ways.
- nostrademons 9y ago
  Like most things in economics, it's a risk/reward tradeoff. Taking everything in cash means you're way farther ahead if every startup you work for fails. If a couple succeed (= profitability or small acquihire), it's probably a wash. If even one IPOs, you would've done way better with stock. Personally I've made way more from stock options than I have from wages. Google stock has appreciated 7x since I joined in 2009, so you can do out the math for various fractions of equity compensation. And this was for a company where I valued that equity at zero, because it already had 20,000 employees, it was in the middle of the financial crisis, its stock was dropping like a rock, and 89% of employees were underwater in their stock options. You could argue that if you take cash compensation, you could then invest that in public market stocks (like GOOG etc.), and there's a pretty good argument for diversification and not holding your net worth in your paycheck. OTOH, when it's your company stock, you also have an information advantage: for example, the press was very down on Google for most of 2009, thinking that they'd tapped out on growth and the web was basically over, and after the initial post-crisis bump it basically traded sideways until mid-2012. Having seen the energy there, the products under development, and the query growth rate numbers, I knew this wasn't true, but if you'd worked for cash in another company and then tried to invest in the public markets you would've had a very distorted picture of reality.
  - bogomipz 9y ago
    >"If even one IPOs, you would've done way better with stock." Not necessarily, it depends on what your strike price is. >"Google stock has appreciated 7x since I joined in 2009" The context was startups and IPO'ing. Google is neither a startup nor were you a pre-IPO employee.
    - nostrademons 9y ago
      Well, true, and the meta-point that I hope is coming across through my comment is that you should evaluate each opportunity according to the specific terms in front of you and your assessment of how likely the organization is to succeed in your future. Nobody on an Internet forum can do that for you: we have much less information about a specific job offer and specific company than the prospective employee does. But the point I wanted to make, bringing up the Google example, is that I didn't expect Google stock to have much upside in 2009. Most people didn't expect Google stock to have much upside in 2009. Google stock still had much upside. The excitement was all in Web 2.0 startups (like zillions of other people, I founded one), but most of them had little success. We're talking about Dropbox now, but Dropbox was a desktop app startup, perhaps the one thing less cool than a big tech company in 2008. Similarly, the common wisdom now is that startups are a losing bet and you should go ask for cash at an established company that can pay you well. Usually, in markets, when something becomes common wisdom it ceases to be true. So I will happily take the opposite side of that trade - I'm back to founding a startup, I work for equity, and if people want cash, I'll pay them in cash. I realize that I'm making a risk/reward tradeoff here and there's a fairly decent chance my equity will be worthless, but I choose to make it anyway, because I believe that at this point in time, the startup career path is undervalued.

That could be a solution, but many startups will balk at your ask for full cash compensation and say you need some equity to "have skin in the game and to show you believe in the company."

BadassFractal 9y ago
Which from their perspective makes sense, since they want a lock-in. I guess if you have a strong negotiating position you can potentially push things around. Maybe instead of options you get on some kind of a cash clawback plan for the first few years?
goialoq 9y ago
The more directly balk at the prospect of paying cash they simply don't have.

bogomipz 9y ago

I think this is a good solution. Almost any start up is going to have a one year cliff before your first vesting period begins. And to be fully vested often means remaining at the company for 4 years. So now you are that 5 year mark and if the company doesn't IPO by then and you want to leave you have to buy all of those options. So if you don't foresee being at the company for at least 5 year or foresee having the money to purchase the options you have accrued after the 1+ years then you are better off asking for cash. Companies of course don't like this because it costs them nothing if they pay part of your comp in options that you then leave on the table when you leave the company. This is calculated, the companies know this. How many startups can you expect to work in your career where you stay for 5 years? Lets say you work for which would be 20 years of your career. How many of those 5 are going to actually IPO? The math suggests you leaving a lot of money on the table. If you take the comp in cash you can put that money to work for you in other ways.

nostrademons 9y ago
Like most things in economics, it's a risk/reward tradeoff. Taking everything in cash means you're way farther ahead if every startup you work for fails. If a couple succeed (= profitability or small acquihire), it's probably a wash. If even one IPOs, you would've done way better with stock. Personally I've made way more from stock options than I have from wages. Google stock has appreciated 7x since I joined in 2009, so you can do out the math for various fractions of equity compensation. And this was for a company where I valued that equity at zero, because it already had 20,000 employees, it was in the middle of the financial crisis, its stock was dropping like a rock, and 89% of employees were underwater in their stock options. You could argue that if you take cash compensation, you could then invest that in public market stocks (like GOOG etc.), and there's a pretty good argument for diversification and not holding your net worth in your paycheck. OTOH, when it's your company stock, you also have an information advantage: for example, the press was very down on Google for most of 2009, thinking that they'd tapped out on growth and the web was basically over, and after the initial post-crisis bump it basically traded sideways until mid-2012. Having seen the energy there, the products under development, and the query growth rate numbers, I knew this wasn't true, but if you'd worked for cash in another company and then tried to invest in the public markets you would've had a very distorted picture of reality.
- bogomipz 9y ago
  >"If even one IPOs, you would've done way better with stock." Not necessarily, it depends on what your strike price is. >"Google stock has appreciated 7x since I joined in 2009" The context was startups and IPO'ing. Google is neither a startup nor were you a pre-IPO employee.
  - nostrademons 9y ago
    Well, true, and the meta-point that I hope is coming across through my comment is that you should evaluate each opportunity according to the specific terms in front of you and your assessment of how likely the organization is to succeed in your future. Nobody on an Internet forum can do that for you: we have much less information about a specific job offer and specific company than the prospective employee does. But the point I wanted to make, bringing up the Google example, is that I didn't expect Google stock to have much upside in 2009. Most people didn't expect Google stock to have much upside in 2009. Google stock still had much upside. The excitement was all in Web 2.0 startups (like zillions of other people, I founded one), but most of them had little success. We're talking about Dropbox now, but Dropbox was a desktop app startup, perhaps the one thing less cool than a big tech company in 2008. Similarly, the common wisdom now is that startups are a losing bet and you should go ask for cash at an established company that can pay you well. Usually, in markets, when something becomes common wisdom it ceases to be true. So I will happily take the opposite side of that trade - I'm back to founding a startup, I work for equity, and if people want cash, I'll pay them in cash. I realize that I'm making a risk/reward tradeoff here and there's a fairly decent chance my equity will be worthless, but I choose to make it anyway, because I believe that at this point in time, the startup career path is undervalued.