13 ms·

Some thoughts on equity compensation

116 points by mcgin 9y ago

3pt14159 9y ago
I wrote this very thing to an investor once. Norms aside, due to information asymmetry the only companies worth getting equity from are the ones not including equity in an offer. For every one Shopify there are a hundred weasels or failures. You get much better people by just offering higher cash and they can buy into your round if they really, really want to.
- krallja 9y ago
  > and they can buy into your round That’s a good way to ensure you’re only hiring millionaires. Accredited investors must have a million dollars in net assets, or income over $200,000 ($300,000 married) per year.
  - 3pt14159 9y ago
    Not if they're personal connections. I've never seen it as a problem.
    - krallja 9y ago
      I think you can't have it both ways. Either you hire only accredited investors (and personal connections), or the job candidates have no legal way to acquire equity.
IronKettle 9y ago
Ehhh. A few interesting thoughts though not necessarily original, the "your equity is worth 0" mantra has been repeated enough that it's not ground-breaking. It maybe makes sense for huge, publicly traded companies like Apple (who could easily afford to just pay their employees enough to offset the equity loss and then some), but of course there's the whole idea that equity compensation aligns incentives for employees and the business. > “You people in tech are crazy. I pay my employees handsomely in cash and I keep all of the equity for myself.” This would be catastrophic for the startup industry: * Why would I ever work for a company that has huge downsides (chance of failure, lack of resources, etc.) when I don't get to enjoy any of the potential upside * How many startups can afford to pay their employees "handsomely" (relative to what they could be earning elsewhere)? The only way I imagine a 0-equity world working is one where VCs cough up a ton more money to compensate startup employees handsomely. And to be fair to Fred, maybe that's what he's suggesting (spending more money now to retain more equity later). But I didn't see that stated anywhere.
- sunir 9y ago
  I don't understand one point you raised. What downside risk is there to the employee if a company fails? The only risk is the cost of finding a new job which is offset by latitude in experience gained. Why would you work for money instead of equity at a high risk venture? Because paying in equity pushes the risk onto the employee. Paying in cash takes the risk out. You are paid in full up front for your work. You'd take the job because it is paying you. Startups pay in equity because they don't have cash. Since then the lottery ticket aspect had taken grip with the labor market. However those people who view options as lottery tickets I find are subpar. Trend followers mostly. Those chasing Klondike gold.
  - IronKettle 9y ago
    > What downside risk is there to the employee if a company fails? Sorry to be snippy, but: Come on man, do I really need to explain this one? Sudden loss of employment is incredibly disruptive at best, and for many it's a significant financial hardship. > You'd take the job because it is paying you. So is Amazon. And they're offering Amazon equity, which is killing it recently. So, again, why would I take a job at a high risk venture if there's no potential lottery ticket? > Startups pay in equity because they don't have cash. Yeah, exactly. Startups can't afford to compete with Amazon on salary. > Those chasing Klondike gold. Come on, as opposed to most startup founders? Anyone who has taken even a seed round is chasing klondike gold as well.
    - ghaff 9y ago
      >Sudden loss of employment is incredibly disruptive at best, and for many it's a significant financial hardship. It's a standard meme here that if you quit/are fired/company shuts down, you send a few emails and walk into a new job the following Monday. Good for you but that's just not the norm for most people in most roles.
    - mrgriscom 9y ago
      > Sorry to be snippy, but: Come on man, do I really need to explain this one? Sudden loss of employment is incredibly disruptive at best, and for many it's a significant financial hardship. If you're getting paid handsomely in cash, you should be able to weather that interruption. > So is Amazon. And they're offering Amazon equity, which is killing it recently. So, again, why would I take a job at a high risk venture if there's no potential lottery ticket? Amazon equity is publicly traded; you can buy as much of it as you want with any salary.
nwenzel 9y ago
When people talk about startups and equity, they often talk about the “risk” of joining a startup. For me, as a founder, the equity portion of a comp package isn’t about the risk. I’m curious to know what HNers (often with very passionate thoughts on the topic) think of my theory. There is risk at companies of all sizes. Also, the idea of a single career in your lifetime isn’t a reality, so the “risk” of a losing a job is really the risk of losing it without notice. Compensation for that risk would be something like one month of pay, not illiquid certificates that might or might not become cash someday. Employees can also change jobs voluntarily. But the idea that their employer should get a percent of their future earnings as compensation for that risk would be ridiculous. I believe equity comp is because employees have two jobs: 1) execute on their day job, 2) build the systems, processes, culture, and institutional norms of the company. Basically, the equity component is added to the cash component because building a company takes long-term thinking and because it’s a ton of work. I’m curious to know if others think about equity comp having a purpose other than to offset risk. Thanks!
- auxym 9y ago
  I understand that the risk, in many cases, is the salary difference between a startup and a more established company that can pay higher wages.
- saas_co_de 9y ago
  From an economic perspective I don't think equity can be a very strong motivation for individuals. As an individual your work may be totally optimal and yet the equity may be worthless for a thousand reasons that have nothing to do with your work. Consequently, a rational person will not see equity as being much of an incentive. If you take that a step further you are giving up equity in your company but all of the smart people are valuing it at zero when they are assessing your comp offers so you are giving it away for nothing in return. Since this employee equity didn't create any value for the company it is only rational that if your company becomes successful you make sure the employees don't really get anything out of it, which is usually what happens.
- avip 9y ago
  My boring POV as an employee: My incentives are "aligned with the company" regardless of options. I want what I do to succeed, I want the people around me to succeed. I treat options as another piece in my overall "compensation". I assign it a value of 0$. If there's the option to swap options for cash in a contract I take it with three hands.
keeptrying 9y ago
In India, startups pay a much higher salary than corporate jobs along with some equity. Given the minisicule number of startups that make it, I think this is a much more sensible option for engineers. Especially ones who want to start their own companies - as they save much more in the process.
jasode 9y ago
>And yet we treat it like something that is non negotiable, Sometimes, it's non-negotiable because there's no money to pay Google-style $300k salaries + benefits. Fred doesn't make it clear whether he's talking about young startups with very little money in the bank or a mature 8-year old "startup" like Uber that raised $22 billion from investors with $6 billion in revenue. If it's a young 2-person startup that just got a modest $120k investment from YCombinator, a "3rd employee" will not be able to get a $300k salary. The only monetary recruitment tool left is equity. Fred is also leaving out the game theory aspects of the equity as a deliberate filtering mechanism to attract employees aligned with the founder's vision. Yes, many workers are definitely cynical of startups' self-aggrandizing "we're going to change the world" so they only see one (and only one) way to compensate employees: pure 100% cash and fuck off with your options. An employee certainly has every right to stay rigid to that point of view. However, it still doesn't change the psychology of founders wanting to filter out the candidates with a "mercenary" mindset. They often have no money to pay the mercenaries anyway so they have no choice.
- rhizome 9y ago
  If it's a young 2-person startup that just got a modest $120k investment from YCombinator I didn't know it was a thing that anybody should be hired from YC seed. I thought it was just to support the existing team.
- pja 9y ago
  I think at least some of the cynicism comes from founders offering salaries that are 30-40% of the rate they might get from 'bigcorp of choice' and then offering derisory amounts of equity in compensation. If the equity you offer is just about enough to make up for the employees loss of income if you get both a minimum $100million+ exit and no future dilution, then your offer isn’t going to be very enticing to jaded potential employees who have been round this particular block once or twice before.
  - auxym 9y ago
    I inteviewed for a startup once (I don't live in a big startup hub). I was offered a 40% drop of my current salary, no benefits, no equity and no options. I was also sternly warned during the interview that they were looking for someone highly engaged in making the company grow. I cannot begin the understand the reasoning of the founders on that one.
dsugarman 9y ago
I agree that it is very difficult to understand equity comp and probably only moves the needle for high level execs when you are recruiting but it's not all about recruiting it's about performance and retention. I want employees to feel ownership and the only way to do that is to give it to them. I want them to understand that they have this asset that their hard work directly affects, I want them to be aligned with the company not just their own career path.
- qaq 9y ago
  The whole industry is pretty simple top VC firms make a fairly large number of carefully screened deals to make sure they capture as many Unicorns as possible since without Unicorns the VC game is a big money looser. Of those companies that do get funded by top VCs and do not become unicorns very few will have meaningfull exists for employees. To mask this simple fact there exists a fairly powerful PR machine that feeds Startup entrepreneurs which in turn feed the same regurgitated slogans to their employees. So translating "I want employees to feel ownership and the only way to do that is to give it to them. I want them to understand that they have this asset that their hard work directly affects" in reality translates to I want you to imagine that for some magical reason you can pick a Unicorn even though top tier VC firms stuffed by brilliant people doing it full time get it right at best about 1 in 100 times? So even if your hypothetical employee is as good at picking winners as a top VC the actual value of their option is in reality 1/100th of the imaginary value at your big exit given the odds (and this is only if they are as good at picking the company as a top VC).
jacknews 9y ago
“You people in tech are crazy. I pay my employees handsomely in cash and I keep all of the equity for myself.” Ha, yeah, I'll bet! It's certainly not easy or risk free to deal with equity, but to me, some kind of stake in the company is the only morally justifiable way - if people help to build the business, they should share in the success, and even generous salary will never reflect that - you'll never get rich on a salary.
- alien_at_work 9y ago
  > you'll never get rich on a salary. Actually, if you get a nice salary and live below it, you can take the extra money and invest in an index fund. That will get you rich much, much faster than chasing lotto tickets. Especially since startups usually have salaries so awful you can't possible do a start up and invest in sensible investments.
  - jacknews 9y ago
    In which case you're really getting rich off ownership of companies in the index.
    - alien_at_work 9y ago
      My point is more that investing in a company is a bad investment strategy. There are no fund managers with such a strategy. Any fundamentals strategy will rely on diversification. And a retail trader like us can't diversify cheaper than with an index fund/ETF. Having that single company investment also be the company you work for... and taking a lower salary to be able to make this awful bet... well, you deserve to lose big for behaving so financially irrational.
- sidlls 9y ago
  Depends on the salary and how it's invested.
- icedchai 9y ago
  You can get pretty rich on salary (say, 95th+ percentile net worth), it just requires: 1) a lot of time, like 20+ years, 2) living below your means, 3) investing consistently, based on savings from the previous, 4) don't screw up (much.) one bad investment decision or a nasty divorce can derail all of this. If everyone could do it, we'd have a lot more millionaire-next-door types.
jmull 9y ago
That’s fine, but then don’t expect your employees to act like they have a stake in your company’s future. Most will be doing what’s explicitly required of them but resist much more, whether you need it to be successful or not. When things get tough they’ll back off and start looking for a new job just when you need them to step up.
- s73ver_ 9y ago
  Which is also going to happen if you do give them equity. Most people these days know that equity trends toward being worthless anyway, either through the company going under or the equity being diluted to hell and back.
ealexhudson 9y ago
One thing worth thinking about: after a couple of years of issuing options, people start being able to vest, and their presence (or not) on the cap table is a pretty interesting signal about people's expectations of the business. Especially if you have a few people leaving, with their options lapsing: to me, that's a big red flag you wouldn't otherwise have. I think we're going to start seeing fewer (and worse) options schemes in tech, but I don't think it's going to be anything to do with how attractive or not they are to potential employees. It's going to be because founders and investors find them less attractive to give out (for reasons like the above).
seajosh 9y ago
Always always always take cash over equity. Equity is a lottery ticket and needs to be treated as such.
brndnmtthws 9y ago
Most VCs think about equity compensation like this: "How can we complicate the process, and use the most opaque language in order to screw the lower level employees and avoid diluting our holdings?"
barrkel 9y ago
What about ownership over value creation? If you're in a creative industry - and I consider software a creative industry - giving away your creations for a wage is psychically harmful. If you're genuinely creating something of value, you want to own some fraction of its value - its revenue-generating value, its future cash flow. The other thing is that options suck. Options have so many conditions, vesting schedules, cliffs, expiry dates, negative tax repercussions... options are not equity. Options don't feel like ownership. Options are lottery tickets that might pay out, maybe. If you agree to be a wage slave for long enough, to give away all the value you create, see the big sales land and the annual recurring revenue build up, you might, one day, own a small slice of that cash stream. Maybe.
- ProblemFactory 9y ago
  > If you're in a creative industry - and I consider software a creative industry - giving away your creations for a wage is psychically harmful. If you're genuinely creating something of value, you want to own some fraction of its value - its revenue-generating value, its future cash flow. If you work as a freelancer or partner in a small agency that does software development for non-technical clients, then keeping ownership and reselling your work is often possible. You can negotiate to sell the client a non-exclusive license. But it's not realistically possible for an individual contributor at a medium to large tech company. There are too many people involved with each project or product, and no part of it is individually useful. You can't resell a git patch that fixes a bug in an existing codebase.
  - barrkel 9y ago
    You can't resell a git patch that fixes a bug in an existing codebase. This isn't an act of creation, usually. I'm thinking more around creating UI components, or developing libraries that add whole new facets of functionality, or enable new ways of working with data. Things that could be reused elsewhere, or enable higher-level programming of application features. But it's not realistically possible for an individual contributor at a medium to large tech company I wouldn't agree to being an individual contributor on a wage-only basis, at this point, without major compensation. A possible exception would be something vocational: going back to working on developer tools, perhaps.
wastedhours 9y ago
I took options in place of a jump in salary between jobs - took a 10% pay cut, was offered a few % in options, and I felt comfortable with that as the bargain. If you're contemplating a shift in salary that would change your lifestyle though, that seems like a bad deal. The cash, at the end of the day, is a tool - if the bargain you're going for is a step backward in your quality of life, that seems like a poor decision unless you truly are drinking the Kool-Aid. That being said, I left before any of mine vested, so I just had a pay cut and no real benefit from it other than the experience.
regularfry 9y ago
Some numbers (because who doesn't like numbers). Let's say (VERY F'ING HYPOTHETICALLY) that I could walk into a $300k Google job. You as a startup can offer me $150k+equity, and let's say there's a 4 year vesting period on those options. Straight out of the gate we can see that the bare minimum those options have to be worth to make that transaction worthwhile is $600k (ignoring tax, 'cos I'm not looking that up). Time value of money increases that to, let's say, $666k. So far, so good. Now, what are the odds of getting that payout? If you went round that cycle 10 times, how many times would it pay out? 1? 2? Let's be very, extremely, remarkably, and irrationally charitable and say that every other startup lasts 4 years and pays out, and the rest go pop. That means we need to double our baseline to $1.3M to compensate. For going into any of these deals to be rational, to balance the risk each one needs to be credibly offering to make you a millionaire.
- isolli 9y ago
  You're not even taking risk aversion into account. You simply suppose that expected values have to match. But you'd normally want a higher expected value in the case where the payoff is uncertain. So the difference should even higher than you suggest.
- dwaltrip 9y ago
  Some people don't want to work for a big corp. This preference changes the analysis significantly.
  - regularfry 9y ago
    Sure. That's outside the realms of a discussion of whether equity is reasonable compensation for a lowered salary, though - "not working for bigcorp" is a separate part of the compensation package. I'm not saying that anyone's wrong for choosing to work for a startup. I'm just saying that it might not be rational. We're human, so that's fine. We're allowed to have non-economic value systems. But anyone walking into a job where options are part of the compensation ought to understand how the company views what it is offering.
j_m_b 9y ago
Equity in a startup for an employee is worthless. The only kind of equity that's worth anything are stock options for companies that are actually being traded on the stock market. However, those companies don't actually need to give you equity as part of a compensation package... they can pay you for your work. In that case, you can decide for yourself to purchase "equity" if you truly think it is that valuable.
- austenallred 9y ago
  I have a dozen friends that are extraordinarily rich because of this “worthless” equity.
  - alien_at_work 9y ago
    Assuming you're telling the truth, these are called "outliers". You know a dozen people who won a lottery ticket. So what. The math still holds: a lottery ticket is a negative investment and startup equity is worthless.
    - austenallred 9y ago
      Not the majority, but not an outlier either. If it were actually a lottery ticket it would be impossible for me to know multiple people that are rich as a result. I don’t think it’s as rare as you seem to think - a Facebook creates thousands of millionaires and a handful of billionaires. A lot of companies you’ve never heard of made all their employees rich. The odds aren’t good but it’s by no means a lottery, either. Startup equity is likely worth nothing, but there’s a small chance it’s worth an extraordinary amount. That’s not “worthless.”
      - pja 9y ago
        By definition, your friends are likely to be concentrated in specific sub-groups (that’s how friend networks work). So if you know one Facebook millionaire, the likelihood is that you know a bunch of them. By contrast, I don’t know any Facebook millionaires. Nor do lots & lots of other people, even within the Tech industry. You can't generalise from your personal experience to the "average" experience - 'Facebook millionaires' are not randomly distributed, but clustered together: social graphs are not randomised.
tptacek 9y ago
This is why we stopped giving employees equity pretty early on. We got to a pretty decent headcount before we sold (probably above the median for post-B-round YC companies). We just paid cash and bonus. I don't often like Fred Wilson's compensation writing, but here I think he has the problem basically nailed down: employees (rationally) don't prize equity, and giving it to every employee is in the long run extremely expensive. Two thoughts: You don't have to give shares to every employee to give it to some of them. The first shares I ever got that were worth much (Secure Networks, back in 1998) were shares I had to opt in to, at the cost of some salary. I had coworkers who chose not to do that. We were all generally happy with the outcome. People on this thread are making comparisons to 300k/yr Google salaries. For journeyman developers in SFBA, this is probably a reasonable comparison? (I mean, the median SFBA developer isn't making that, but you could argue that's because they're being underpriced in the market by the practice of issuing shares that will never be worth anything). But for employers, it's a pretty silly comparison. If you're a startup paying 300k/yr to someone who does work a CS graduate out of school can even theoretically do, you're doing it very wrong. You might have to adjust your hiring filters to get your cash compensation down to a reasonable numbers, but you should do that anyways, because filters that keep you stuck in the "competing with 300k/yr salaries" zone are, for almost every startup, a vanity.
- IronKettle 9y ago
  > shares I had to opt in to, at the cost of some salary. I think this is a fair way to approach the situation. > People on this thread are making comparisons to 300k/yr Google salaries. ... But for employers, it's a pretty silly comparison. Why though? You're competing with them, whether you like it or not. AmaGooFaceAppleSoft hired 45% (including those going on to grad school, etc) of my graduating class, and I didn't go to Stanford. No joke, it was really 45%. These companies are vacuuming up everyone, and some of them are shockingly easy to get an offer from. Sure, they didn't get paid 300k/yr to start. But with how much the equity has appreciated since then, it's probably not that far off. So that leaves you with the remaining 25% who didn't get hired/didn't want to work at at one of those companies/didn't go to grad school, and you're competing with every other startup for them - including the larger, more established ones who can reasonably say they won't disappear tomorrow (e.g. AirBnB).
sulam 9y ago
If Fred’s companies want to compensate me without equity, I’m happy to consider it. At this stage of my career my annual compensation is approaching 7 figures, balanced however you want between bonus (with reasonable targets), equity (properly risk-adjusted) and cash twice a month. I’d even be willing to consider deferred compensation properly escrowed with the time value of money factored in. Somehow, though, I don’t think Fred’s companies are going to be willing to pay me what I can demonstrate is my current income (via IRS filings if necessary) without equity being a component of the compensation, in fact without it being the majority of the overall package. I’m okay with that, because I only work for companies where I strongly believe in the product and the team. This may all sound fairly entitled, but if you’re as lucky in your career as I’ve been, your job has an opportunity cost that is measured in things like spending less time on my own projects, my family, and general self-improvement —- and this opportunity cost is pretty high.
- austenallred 9y ago
  I can’t imagine any scenario that makes sense for you to go work at an early stage startup. That said, it’s fair to say you’re not at the average level of compensation. Simply put, your opportunity cost is way too high for you to take risks.
  - sulam 9y ago
    Yeah, you’re probably right. I stay involved with the startup universe by advising CTOs. It’s fun and helps me appreciate my life. I _am_ considering startups for the future, but the options I’m thinking about will be things I need to see exist in the world. I’m direly concerned about climate change, and I’ve come to the conclusion that carbon capture is the only thing that is going to save us from species suicide. Current carbon capture technology doesn’t scale up very well, and with only one exception that I’ve found, only works when you put it in a power plant. I’m spending a lot of spare time right now investigating alternative approaches and what skills I need to pick up to do something meaningful here.
yomly 9y ago
Personally, I'm not interested in working for a company who doesn't pay out some form of equity. We live in a world which skews towards wealth - if you don't have wealth you're slowly falling behind those who do. So why the hell do I want to take my hard-earned skills to generate wealth for someone who doesn't want to share some of it? What if the company goes down and my equity is worth 0? Well that's life, at least I threw in my lot someone I chose to back. PS offering < 1% to a "senior" hire does not constitute sharing.
cletus 9y ago
This is an odd post because Fred closes saying: > I don’t have any specific recommendations to make on this topic except that Boards should be thinking way more deeply and creatively about this issue than we are. Equity compensation came about as a way of paying employees when cash was tight. It also tends to (arguably) align incentives between the company and the employee in the long term. Now equity compensation exists largely because the likes of FAAMG pay senior engineers $300k+ in total comp and, again, smaller startups just can't afford that kind of cash outlay. So what "creative" way is going to "solve" that problem (from a VC's perspective)? Consider if you had 50 engineers that you pay $100k + equity to and these are 60% of your costs. Your burn rate is just north of $8M/year. Now if those engineers were paid $300k/year instead and your other costs didn't change, your burn rate is now north of $18M/year. Equity compensation is your way of lowering expenses and reducing your burn rate. That extra $10M/year will mean you'll need bigger funding rounds more often and then you end up diluting your stock to investors rather than employees. Is this better? How? Another point: when it comes to mature companies (ie publicly listed), equity is a pretty tax effective way to pay someone. Say an engineer joins an FAAMG company for $170k base salary, target bonus of $30k and $400k in RSUs (4 year vest, 1 year cliff). That's notional total comp of $300k. More when you consider annual refresh grants. Assuming $100k refresh grants, total comp is pushing $400k by year 4. But there is risk attached to that, namely that the stock could go down in value. If that didn't interest you, that same engineer could go work for Netflix and just get a $300-350k salary with no equity (which is fine). But if that stock goes up 20% before the cliff, you've made an extra $80k over 4 years without doing anything. If you approach the problem from the other way, imagine you wanted to make a $400k investment in an FAAMG company. You have some options that include: 1. $400k in after-tax money invested 2. $150k after-tax plus $250k on margin 3. $400k in pre-tax money in a 401k (1) is expensive, (2) is less expensive but riskier (ie margin calls) and (3) is really putting a lot of eggs in one basket plus you'd need a substantial amount of retirement savings even to consider that option. I bring this up because in the all-cash case (eg Netflix), if you do want to invest in your employer's stock this way, it's really expensive to do. Those who say you can just take the cash and buy shares miss or gloss over the leverage you can obtain from an initial stock grant. If you plot even modest stock growth, you'll quickly find the $400k grant with $300k total comp will quickly outpace the guy whose earning $300k (or even $350k) per year as they have to pay taxes on that money then invest it.
philipodonnell 9y ago
Many of these comments seem to instinctively take the side of the VC. "I had to put in more money to avoid being diluted so why shouldn't everyone with shares have to do that in each round?" I mean, as long as the employees are there, they are getting paid the same amount they started with, which has some non-zero discount due to that initial equity grant, so they are technically 'paying' by continuing at the old salary. Why wouldn't an early employee compensation package include being issued shares in each round to maintain their undiluted amount, in return for continuing to work there at a discounted salary? Not everyone contributes with cash, and cash is not special these days.
htormey 9y ago
The big problem I have with startup equity compensation these days is the time it takes to get to get to liquidity. Going from founding to an IPO takes what, 8-10 years? Even assuming things go that well if your equity doesn’t have terms like early excercise or a long time to decide if you want to exercise it’s not a good deal. It’s easy to get locked into working with below market compensation in scenarios like that. Also very few companies allow for things like secondary markets. It’s going to be interesting to see how or rather if this gets addressed in the coming years.
- jdc0589 9y ago
  > Going from founding to an IPO takes what, 8-10 years? probably, but an IPO is not the only event that triggers an equity payout. Getting sold/acquired will also trigger an equity payout, and those are much more common events than an IPO.
  - s73ver_ 9y ago
    But in those situations, you usually don't get the value of the stock. You end up with equity in the acquiring company, and now you've got to vest for another year or two.
  - htormey 9y ago
    I think exit times are taking longer across the board, especially compared to earlier periods in SV history: http://www.angelblog.net/Venture_Capital_Exit_Times.html http://www.angelblog.net/Venture_Capital_Exit_Times.html
imsofuture 9y ago
Always be suspicious of someone telling you that something isn't worth very much, so they might as well just keep it for themselves. Sorry, but that's all this boils down to.
alexandercrohde 9y ago
Maybe the answer is more transparency on the market value of the options. For example, if I get X options (common stock), it'd be nice to know the market value of those options [as of last funding round]. I could then divide by 4 (vesting), and know this is an upper-cap on their worth (because preferred vs common, dilution, strike price, liquidation preferences, lockout period). So to repeat, if you consider it a problem that engineers don't value options, perhaps give them all the relevant information they need to value those shares.
- teej 9y ago
  If you are entertaining an offer at a company, they should give you these numbers without hesitation. If they don’t, refuse the offer. I have never had an issue getting details on equity, funding rounds, and valuation.
dawhizkid 9y ago
With crypto I think the math becomes even worse for startup options...would be interesting to see numbers around employees leaving because of crypto. Brightside is that if the trend continues then perhaps it will force the entire startup/VC ecosystem to rethink options and/or create more guarantees around liquidity that isn't so completely up in the air.
tomc1985 9y ago
Alternative Minimum Tax on exercise on ISOs is 100% grade-A bullshit. Special incentive stock options with tax benefits negated almost completely by AMT? And the only real way to deal with this tax is to either hold til a liquidation event or sell it to one of these equity collector firms for pennies on the dollar? The ONE good thing Trump & congress could have done this year was eliminate AMT, and they didn't. For the average Joe equity isn't much better than a lottery ticket. Equity is a LIE. Give me $$$$$$$
- teej 9y ago
  I agree with you that AMT for ISO exercise is bullshit but they did significantly change the rules. My AMT tax burden for exercising this year is half what it would have been under the old rules.
  - tomc1985 9y ago
    That's good to know. I need to find a good tax lawyer...
- rconti 9y ago
  Thankfully I was able to come in just DOLLARS under AMT on an early exercise/89b scenario on my first IPO (didn't have any major deductions at the time), and with the rise of the AMT cap it should save my butt 2nd time around. Every little bit helps. Especially when it is all the difference between a 15% tax rate and a 35% tax rate.
bitwize 9y ago
The analogy that I use is this: equity is Bison dollars. You could trade in your equity for a princely sum if the founders' world-domination plans go off without a hitch, but a) that's a big if; b) in the meantime, you can't eat those stocks, nor will your landlord accept them as rent. Which is why anyone who offers to pay me in equity instead of salary gets a polite fuck you, and I would only accept partial equity compensation if the salary part is sufficient to meet all my living expenses and then some.

116 points by mcgin 9y ago

I wrote this very thing to an investor once. Norms aside, due to information asymmetry the only companies worth getting equity from are the ones not including equity in an offer. For every one Shopify there are a hundred weasels or failures. You get much better people by just offering higher cash and they can buy into your round if they really, really want to.

krallja 9y ago
> and they can buy into your round That’s a good way to ensure you’re only hiring millionaires. Accredited investors must have a million dollars in net assets, or income over $200,000 ($300,000 married) per year.
- 3pt14159 9y ago
  Not if they're personal connections. I've never seen it as a problem.
  - krallja 9y ago
    I think you can't have it both ways. Either you hire only accredited investors (and personal connections), or the job candidates have no legal way to acquire equity.

IronKettle 9y ago

Ehhh. A few interesting thoughts though not necessarily original, the "your equity is worth 0" mantra has been repeated enough that it's not ground-breaking. It maybe makes sense for huge, publicly traded companies like Apple (who could easily afford to just pay their employees enough to offset the equity loss and then some), but of course there's the whole idea that equity compensation aligns incentives for employees and the business. > “You people in tech are crazy. I pay my employees handsomely in cash and I keep all of the equity for myself.” This would be catastrophic for the startup industry: * Why would I ever work for a company that has huge downsides (chance of failure, lack of resources, etc.) when I don't get to enjoy any of the potential upside * How many startups can afford to pay their employees "handsomely" (relative to what they could be earning elsewhere)? The only way I imagine a 0-equity world working is one where VCs cough up a ton more money to compensate startup employees handsomely. And to be fair to Fred, maybe that's what he's suggesting (spending more money now to retain more equity later). But I didn't see that stated anywhere.

sunir 9y ago
I don't understand one point you raised. What downside risk is there to the employee if a company fails? The only risk is the cost of finding a new job which is offset by latitude in experience gained. Why would you work for money instead of equity at a high risk venture? Because paying in equity pushes the risk onto the employee. Paying in cash takes the risk out. You are paid in full up front for your work. You'd take the job because it is paying you. Startups pay in equity because they don't have cash. Since then the lottery ticket aspect had taken grip with the labor market. However those people who view options as lottery tickets I find are subpar. Trend followers mostly. Those chasing Klondike gold.
- IronKettle 9y ago
  > What downside risk is there to the employee if a company fails? Sorry to be snippy, but: Come on man, do I really need to explain this one? Sudden loss of employment is incredibly disruptive at best, and for many it's a significant financial hardship. > You'd take the job because it is paying you. So is Amazon. And they're offering Amazon equity, which is killing it recently. So, again, why would I take a job at a high risk venture if there's no potential lottery ticket? > Startups pay in equity because they don't have cash. Yeah, exactly. Startups can't afford to compete with Amazon on salary. > Those chasing Klondike gold. Come on, as opposed to most startup founders? Anyone who has taken even a seed round is chasing klondike gold as well.
  - ghaff 9y ago
    >Sudden loss of employment is incredibly disruptive at best, and for many it's a significant financial hardship. It's a standard meme here that if you quit/are fired/company shuts down, you send a few emails and walk into a new job the following Monday. Good for you but that's just not the norm for most people in most roles.
  - mrgriscom 9y ago
    > Sorry to be snippy, but: Come on man, do I really need to explain this one? Sudden loss of employment is incredibly disruptive at best, and for many it's a significant financial hardship. If you're getting paid handsomely in cash, you should be able to weather that interruption. > So is Amazon. And they're offering Amazon equity, which is killing it recently. So, again, why would I take a job at a high risk venture if there's no potential lottery ticket? Amazon equity is publicly traded; you can buy as much of it as you want with any salary.

nwenzel 9y ago

When people talk about startups and equity, they often talk about the “risk” of joining a startup. For me, as a founder, the equity portion of a comp package isn’t about the risk. I’m curious to know what HNers (often with very passionate thoughts on the topic) think of my theory. There is risk at companies of all sizes. Also, the idea of a single career in your lifetime isn’t a reality, so the “risk” of a losing a job is really the risk of losing it without notice. Compensation for that risk would be something like one month of pay, not illiquid certificates that might or might not become cash someday. Employees can also change jobs voluntarily. But the idea that their employer should get a percent of their future earnings as compensation for that risk would be ridiculous. I believe equity comp is because employees have two jobs: 1) execute on their day job, 2) build the systems, processes, culture, and institutional norms of the company. Basically, the equity component is added to the cash component because building a company takes long-term thinking and because it’s a ton of work. I’m curious to know if others think about equity comp having a purpose other than to offset risk. Thanks!

auxym 9y ago
I understand that the risk, in many cases, is the salary difference between a startup and a more established company that can pay higher wages.
saas_co_de 9y ago
From an economic perspective I don't think equity can be a very strong motivation for individuals. As an individual your work may be totally optimal and yet the equity may be worthless for a thousand reasons that have nothing to do with your work. Consequently, a rational person will not see equity as being much of an incentive. If you take that a step further you are giving up equity in your company but all of the smart people are valuing it at zero when they are assessing your comp offers so you are giving it away for nothing in return. Since this employee equity didn't create any value for the company it is only rational that if your company becomes successful you make sure the employees don't really get anything out of it, which is usually what happens.
avip 9y ago
My boring POV as an employee: My incentives are "aligned with the company" regardless of options. I want what I do to succeed, I want the people around me to succeed. I treat options as another piece in my overall "compensation". I assign it a value of 0$. If there's the option to swap options for cash in a contract I take it with three hands.

keeptrying 9y ago

In India, startups pay a much higher salary than corporate jobs along with some equity. Given the minisicule number of startups that make it, I think this is a much more sensible option for engineers. Especially ones who want to start their own companies - as they save much more in the process.

jasode 9y ago

>And yet we treat it like something that is non negotiable, Sometimes, it's non-negotiable because there's no money to pay Google-style $300k salaries + benefits. Fred doesn't make it clear whether he's talking about young startups with very little money in the bank or a mature 8-year old "startup" like Uber that raised $22 billion from investors with $6 billion in revenue. If it's a young 2-person startup that just got a modest $120k investment from YCombinator, a "3rd employee" will not be able to get a $300k salary. The only monetary recruitment tool left is equity. Fred is also leaving out the game theory aspects of the equity as a deliberate filtering mechanism to attract employees aligned with the founder's vision. Yes, many workers are definitely cynical of startups' self-aggrandizing "we're going to change the world" so they only see one (and only one) way to compensate employees: pure 100% cash and fuck off with your options. An employee certainly has every right to stay rigid to that point of view. However, it still doesn't change the psychology of founders wanting to filter out the candidates with a "mercenary" mindset. They often have no money to pay the mercenaries anyway so they have no choice.

rhizome 9y ago
If it's a young 2-person startup that just got a modest $120k investment from YCombinator I didn't know it was a thing that anybody should be hired from YC seed. I thought it was just to support the existing team.
pja 9y ago
I think at least some of the cynicism comes from founders offering salaries that are 30-40% of the rate they might get from 'bigcorp of choice' and then offering derisory amounts of equity in compensation. If the equity you offer is just about enough to make up for the employees loss of income if you get both a minimum $100million+ exit and no future dilution, then your offer isn’t going to be very enticing to jaded potential employees who have been round this particular block once or twice before.
- auxym 9y ago
  I inteviewed for a startup once (I don't live in a big startup hub). I was offered a 40% drop of my current salary, no benefits, no equity and no options. I was also sternly warned during the interview that they were looking for someone highly engaged in making the company grow. I cannot begin the understand the reasoning of the founders on that one.

dsugarman 9y ago

I agree that it is very difficult to understand equity comp and probably only moves the needle for high level execs when you are recruiting but it's not all about recruiting it's about performance and retention. I want employees to feel ownership and the only way to do that is to give it to them. I want them to understand that they have this asset that their hard work directly affects, I want them to be aligned with the company not just their own career path.

qaq 9y ago
The whole industry is pretty simple top VC firms make a fairly large number of carefully screened deals to make sure they capture as many Unicorns as possible since without Unicorns the VC game is a big money looser. Of those companies that do get funded by top VCs and do not become unicorns very few will have meaningfull exists for employees. To mask this simple fact there exists a fairly powerful PR machine that feeds Startup entrepreneurs which in turn feed the same regurgitated slogans to their employees. So translating "I want employees to feel ownership and the only way to do that is to give it to them. I want them to understand that they have this asset that their hard work directly affects" in reality translates to I want you to imagine that for some magical reason you can pick a Unicorn even though top tier VC firms stuffed by brilliant people doing it full time get it right at best about 1 in 100 times? So even if your hypothetical employee is as good at picking winners as a top VC the actual value of their option is in reality 1/100th of the imaginary value at your big exit given the odds (and this is only if they are as good at picking the company as a top VC).

jacknews 9y ago

“You people in tech are crazy. I pay my employees handsomely in cash and I keep all of the equity for myself.” Ha, yeah, I'll bet! It's certainly not easy or risk free to deal with equity, but to me, some kind of stake in the company is the only morally justifiable way - if people help to build the business, they should share in the success, and even generous salary will never reflect that - you'll never get rich on a salary.

alien_at_work 9y ago
> you'll never get rich on a salary. Actually, if you get a nice salary and live below it, you can take the extra money and invest in an index fund. That will get you rich much, much faster than chasing lotto tickets. Especially since startups usually have salaries so awful you can't possible do a start up and invest in sensible investments.
- jacknews 9y ago
  In which case you're really getting rich off ownership of companies in the index.
  - alien_at_work 9y ago
    My point is more that investing in a company is a bad investment strategy. There are no fund managers with such a strategy. Any fundamentals strategy will rely on diversification. And a retail trader like us can't diversify cheaper than with an index fund/ETF. Having that single company investment also be the company you work for... and taking a lower salary to be able to make this awful bet... well, you deserve to lose big for behaving so financially irrational.
sidlls 9y ago
Depends on the salary and how it's invested.
icedchai 9y ago
You can get pretty rich on salary (say, 95th+ percentile net worth), it just requires: 1) a lot of time, like 20+ years, 2) living below your means, 3) investing consistently, based on savings from the previous, 4) don't screw up (much.) one bad investment decision or a nasty divorce can derail all of this. If everyone could do it, we'd have a lot more millionaire-next-door types.

jmull 9y ago

That’s fine, but then don’t expect your employees to act like they have a stake in your company’s future. Most will be doing what’s explicitly required of them but resist much more, whether you need it to be successful or not. When things get tough they’ll back off and start looking for a new job just when you need them to step up.

s73ver_ 9y ago
Which is also going to happen if you do give them equity. Most people these days know that equity trends toward being worthless anyway, either through the company going under or the equity being diluted to hell and back.

ealexhudson 9y ago

One thing worth thinking about: after a couple of years of issuing options, people start being able to vest, and their presence (or not) on the cap table is a pretty interesting signal about people's expectations of the business. Especially if you have a few people leaving, with their options lapsing: to me, that's a big red flag you wouldn't otherwise have. I think we're going to start seeing fewer (and worse) options schemes in tech, but I don't think it's going to be anything to do with how attractive or not they are to potential employees. It's going to be because founders and investors find them less attractive to give out (for reasons like the above).

seajosh 9y ago

Always always always take cash over equity. Equity is a lottery ticket and needs to be treated as such.

brndnmtthws 9y ago

Most VCs think about equity compensation like this: "How can we complicate the process, and use the most opaque language in order to screw the lower level employees and avoid diluting our holdings?"

barrkel 9y ago

What about ownership over value creation? If you're in a creative industry - and I consider software a creative industry - giving away your creations for a wage is psychically harmful. If you're genuinely creating something of value, you want to own some fraction of its value - its revenue-generating value, its future cash flow. The other thing is that options suck. Options have so many conditions, vesting schedules, cliffs, expiry dates, negative tax repercussions... options are not equity. Options don't feel like ownership. Options are lottery tickets that might pay out, maybe. If you agree to be a wage slave for long enough, to give away all the value you create, see the big sales land and the annual recurring revenue build up, you might, one day, own a small slice of that cash stream. Maybe.

ProblemFactory 9y ago
> If you're in a creative industry - and I consider software a creative industry - giving away your creations for a wage is psychically harmful. If you're genuinely creating something of value, you want to own some fraction of its value - its revenue-generating value, its future cash flow. If you work as a freelancer or partner in a small agency that does software development for non-technical clients, then keeping ownership and reselling your work is often possible. You can negotiate to sell the client a non-exclusive license. But it's not realistically possible for an individual contributor at a medium to large tech company. There are too many people involved with each project or product, and no part of it is individually useful. You can't resell a git patch that fixes a bug in an existing codebase.
- barrkel 9y ago
  You can't resell a git patch that fixes a bug in an existing codebase. This isn't an act of creation, usually. I'm thinking more around creating UI components, or developing libraries that add whole new facets of functionality, or enable new ways of working with data. Things that could be reused elsewhere, or enable higher-level programming of application features. But it's not realistically possible for an individual contributor at a medium to large tech company I wouldn't agree to being an individual contributor on a wage-only basis, at this point, without major compensation. A possible exception would be something vocational: going back to working on developer tools, perhaps.

wastedhours 9y ago

I took options in place of a jump in salary between jobs - took a 10% pay cut, was offered a few % in options, and I felt comfortable with that as the bargain. If you're contemplating a shift in salary that would change your lifestyle though, that seems like a bad deal. The cash, at the end of the day, is a tool - if the bargain you're going for is a step backward in your quality of life, that seems like a poor decision unless you truly are drinking the Kool-Aid. That being said, I left before any of mine vested, so I just had a pay cut and no real benefit from it other than the experience.

regularfry 9y ago

Some numbers (because who doesn't like numbers). Let's say (VERY F'ING HYPOTHETICALLY) that I could walk into a $300k Google job. You as a startup can offer me $150k+equity, and let's say there's a 4 year vesting period on those options. Straight out of the gate we can see that the bare minimum those options have to be worth to make that transaction worthwhile is $600k (ignoring tax, 'cos I'm not looking that up). Time value of money increases that to, let's say, $666k. So far, so good. Now, what are the odds of getting that payout? If you went round that cycle 10 times, how many times would it pay out? 1? 2? Let's be very, extremely, remarkably, and irrationally charitable and say that every other startup lasts 4 years and pays out, and the rest go pop. That means we need to double our baseline to $1.3M to compensate. For going into any of these deals to be rational, to balance the risk each one needs to be credibly offering to make you a millionaire.

isolli 9y ago
You're not even taking risk aversion into account. You simply suppose that expected values have to match. But you'd normally want a higher expected value in the case where the payoff is uncertain. So the difference should even higher than you suggest.
dwaltrip 9y ago
Some people don't want to work for a big corp. This preference changes the analysis significantly.
- regularfry 9y ago
  Sure. That's outside the realms of a discussion of whether equity is reasonable compensation for a lowered salary, though - "not working for bigcorp" is a separate part of the compensation package. I'm not saying that anyone's wrong for choosing to work for a startup. I'm just saying that it might not be rational. We're human, so that's fine. We're allowed to have non-economic value systems. But anyone walking into a job where options are part of the compensation ought to understand how the company views what it is offering.

j_m_b 9y ago

Equity in a startup for an employee is worthless. The only kind of equity that's worth anything are stock options for companies that are actually being traded on the stock market. However, those companies don't actually need to give you equity as part of a compensation package... they can pay you for your work. In that case, you can decide for yourself to purchase "equity" if you truly think it is that valuable.

austenallred 9y ago
I have a dozen friends that are extraordinarily rich because of this “worthless” equity.
- alien_at_work 9y ago
  Assuming you're telling the truth, these are called "outliers". You know a dozen people who won a lottery ticket. So what. The math still holds: a lottery ticket is a negative investment and startup equity is worthless.
  - austenallred 9y ago
    Not the majority, but not an outlier either. If it were actually a lottery ticket it would be impossible for me to know multiple people that are rich as a result. I don’t think it’s as rare as you seem to think - a Facebook creates thousands of millionaires and a handful of billionaires. A lot of companies you’ve never heard of made all their employees rich. The odds aren’t good but it’s by no means a lottery, either. Startup equity is likely worth nothing, but there’s a small chance it’s worth an extraordinary amount. That’s not “worthless.”
    - pja 9y ago
      By definition, your friends are likely to be concentrated in specific sub-groups (that’s how friend networks work). So if you know one Facebook millionaire, the likelihood is that you know a bunch of them. By contrast, I don’t know any Facebook millionaires. Nor do lots & lots of other people, even within the Tech industry. You can't generalise from your personal experience to the "average" experience - 'Facebook millionaires' are not randomly distributed, but clustered together: social graphs are not randomised.

tptacek 9y ago

This is why we stopped giving employees equity pretty early on. We got to a pretty decent headcount before we sold (probably above the median for post-B-round YC companies). We just paid cash and bonus. I don't often like Fred Wilson's compensation writing, but here I think he has the problem basically nailed down: employees (rationally) don't prize equity, and giving it to every employee is in the long run extremely expensive. Two thoughts: You don't have to give shares to every employee to give it to some of them. The first shares I ever got that were worth much (Secure Networks, back in 1998) were shares I had to opt in to, at the cost of some salary. I had coworkers who chose not to do that. We were all generally happy with the outcome. People on this thread are making comparisons to 300k/yr Google salaries. For journeyman developers in SFBA, this is probably a reasonable comparison? (I mean, the median SFBA developer isn't making that, but you could argue that's because they're being underpriced in the market by the practice of issuing shares that will never be worth anything). But for employers, it's a pretty silly comparison. If you're a startup paying 300k/yr to someone who does work a CS graduate out of school can even theoretically do, you're doing it very wrong. You might have to adjust your hiring filters to get your cash compensation down to a reasonable numbers, but you should do that anyways, because filters that keep you stuck in the "competing with 300k/yr salaries" zone are, for almost every startup, a vanity.

IronKettle 9y ago
> shares I had to opt in to, at the cost of some salary. I think this is a fair way to approach the situation. > People on this thread are making comparisons to 300k/yr Google salaries. ... But for employers, it's a pretty silly comparison. Why though? You're competing with them, whether you like it or not. AmaGooFaceAppleSoft hired 45% (including those going on to grad school, etc) of my graduating class, and I didn't go to Stanford. No joke, it was really 45%. These companies are vacuuming up everyone, and some of them are shockingly easy to get an offer from. Sure, they didn't get paid 300k/yr to start. But with how much the equity has appreciated since then, it's probably not that far off. So that leaves you with the remaining 25% who didn't get hired/didn't want to work at at one of those companies/didn't go to grad school, and you're competing with every other startup for them - including the larger, more established ones who can reasonably say they won't disappear tomorrow (e.g. AirBnB).

sulam 9y ago

If Fred’s companies want to compensate me without equity, I’m happy to consider it. At this stage of my career my annual compensation is approaching 7 figures, balanced however you want between bonus (with reasonable targets), equity (properly risk-adjusted) and cash twice a month. I’d even be willing to consider deferred compensation properly escrowed with the time value of money factored in. Somehow, though, I don’t think Fred’s companies are going to be willing to pay me what I can demonstrate is my current income (via IRS filings if necessary) without equity being a component of the compensation, in fact without it being the majority of the overall package. I’m okay with that, because I only work for companies where I strongly believe in the product and the team. This may all sound fairly entitled, but if you’re as lucky in your career as I’ve been, your job has an opportunity cost that is measured in things like spending less time on my own projects, my family, and general self-improvement —- and this opportunity cost is pretty high.

austenallred 9y ago
I can’t imagine any scenario that makes sense for you to go work at an early stage startup. That said, it’s fair to say you’re not at the average level of compensation. Simply put, your opportunity cost is way too high for you to take risks.
- sulam 9y ago
  Yeah, you’re probably right. I stay involved with the startup universe by advising CTOs. It’s fun and helps me appreciate my life. I _am_ considering startups for the future, but the options I’m thinking about will be things I need to see exist in the world. I’m direly concerned about climate change, and I’ve come to the conclusion that carbon capture is the only thing that is going to save us from species suicide. Current carbon capture technology doesn’t scale up very well, and with only one exception that I’ve found, only works when you put it in a power plant. I’m spending a lot of spare time right now investigating alternative approaches and what skills I need to pick up to do something meaningful here.

yomly 9y ago

Personally, I'm not interested in working for a company who doesn't pay out some form of equity. We live in a world which skews towards wealth - if you don't have wealth you're slowly falling behind those who do. So why the hell do I want to take my hard-earned skills to generate wealth for someone who doesn't want to share some of it? What if the company goes down and my equity is worth 0? Well that's life, at least I threw in my lot someone I chose to back. PS offering < 1% to a "senior" hire does not constitute sharing.

cletus 9y ago

This is an odd post because Fred closes saying: > I don’t have any specific recommendations to make on this topic except that Boards should be thinking way more deeply and creatively about this issue than we are. Equity compensation came about as a way of paying employees when cash was tight. It also tends to (arguably) align incentives between the company and the employee in the long term. Now equity compensation exists largely because the likes of FAAMG pay senior engineers $300k+ in total comp and, again, smaller startups just can't afford that kind of cash outlay. So what "creative" way is going to "solve" that problem (from a VC's perspective)? Consider if you had 50 engineers that you pay $100k + equity to and these are 60% of your costs. Your burn rate is just north of $8M/year. Now if those engineers were paid $300k/year instead and your other costs didn't change, your burn rate is now north of $18M/year. Equity compensation is your way of lowering expenses and reducing your burn rate. That extra $10M/year will mean you'll need bigger funding rounds more often and then you end up diluting your stock to investors rather than employees. Is this better? How? Another point: when it comes to mature companies (ie publicly listed), equity is a pretty tax effective way to pay someone. Say an engineer joins an FAAMG company for $170k base salary, target bonus of $30k and $400k in RSUs (4 year vest, 1 year cliff). That's notional total comp of $300k. More when you consider annual refresh grants. Assuming $100k refresh grants, total comp is pushing $400k by year 4. But there is risk attached to that, namely that the stock could go down in value. If that didn't interest you, that same engineer could go work for Netflix and just get a $300-350k salary with no equity (which is fine). But if that stock goes up 20% before the cliff, you've made an extra $80k over 4 years without doing anything. If you approach the problem from the other way, imagine you wanted to make a $400k investment in an FAAMG company. You have some options that include: 1. $400k in after-tax money invested 2. $150k after-tax plus $250k on margin 3. $400k in pre-tax money in a 401k (1) is expensive, (2) is less expensive but riskier (ie margin calls) and (3) is really putting a lot of eggs in one basket plus you'd need a substantial amount of retirement savings even to consider that option. I bring this up because in the all-cash case (eg Netflix), if you do want to invest in your employer's stock this way, it's really expensive to do. Those who say you can just take the cash and buy shares miss or gloss over the leverage you can obtain from an initial stock grant. If you plot even modest stock growth, you'll quickly find the $400k grant with $300k total comp will quickly outpace the guy whose earning $300k (or even $350k) per year as they have to pay taxes on that money then invest it.

philipodonnell 9y ago

Many of these comments seem to instinctively take the side of the VC. "I had to put in more money to avoid being diluted so why shouldn't everyone with shares have to do that in each round?" I mean, as long as the employees are there, they are getting paid the same amount they started with, which has some non-zero discount due to that initial equity grant, so they are technically 'paying' by continuing at the old salary. Why wouldn't an early employee compensation package include being issued shares in each round to maintain their undiluted amount, in return for continuing to work there at a discounted salary? Not everyone contributes with cash, and cash is not special these days.

htormey 9y ago

The big problem I have with startup equity compensation these days is the time it takes to get to get to liquidity. Going from founding to an IPO takes what, 8-10 years? Even assuming things go that well if your equity doesn’t have terms like early excercise or a long time to decide if you want to exercise it’s not a good deal. It’s easy to get locked into working with below market compensation in scenarios like that. Also very few companies allow for things like secondary markets. It’s going to be interesting to see how or rather if this gets addressed in the coming years.

jdc0589 9y ago
> Going from founding to an IPO takes what, 8-10 years? probably, but an IPO is not the only event that triggers an equity payout. Getting sold/acquired will also trigger an equity payout, and those are much more common events than an IPO.
- s73ver_ 9y ago
  But in those situations, you usually don't get the value of the stock. You end up with equity in the acquiring company, and now you've got to vest for another year or two.
- htormey 9y ago
  I think exit times are taking longer across the board, especially compared to earlier periods in SV history: http://www.angelblog.net/Venture_Capital_Exit_Times.html http://www.angelblog.net/Venture_Capital_Exit_Times.html

imsofuture 9y ago

Always be suspicious of someone telling you that something isn't worth very much, so they might as well just keep it for themselves. Sorry, but that's all this boils down to.

alexandercrohde 9y ago

Maybe the answer is more transparency on the market value of the options. For example, if I get X options (common stock), it'd be nice to know the market value of those options [as of last funding round]. I could then divide by 4 (vesting), and know this is an upper-cap on their worth (because preferred vs common, dilution, strike price, liquidation preferences, lockout period). So to repeat, if you consider it a problem that engineers don't value options, perhaps give them all the relevant information they need to value those shares.

teej 9y ago
If you are entertaining an offer at a company, they should give you these numbers without hesitation. If they don’t, refuse the offer. I have never had an issue getting details on equity, funding rounds, and valuation.

dawhizkid 9y ago

With crypto I think the math becomes even worse for startup options...would be interesting to see numbers around employees leaving because of crypto. Brightside is that if the trend continues then perhaps it will force the entire startup/VC ecosystem to rethink options and/or create more guarantees around liquidity that isn't so completely up in the air.

tomc1985 9y ago

Alternative Minimum Tax on exercise on ISOs is 100% grade-A bullshit. Special incentive stock options with tax benefits negated almost completely by AMT? And the only real way to deal with this tax is to either hold til a liquidation event or sell it to one of these equity collector firms for pennies on the dollar? The ONE good thing Trump & congress could have done this year was eliminate AMT, and they didn't. For the average Joe equity isn't much better than a lottery ticket. Equity is a LIE. Give me $$$$$$$

teej 9y ago
I agree with you that AMT for ISO exercise is bullshit but they did significantly change the rules. My AMT tax burden for exercising this year is half what it would have been under the old rules.
- tomc1985 9y ago
  That's good to know. I need to find a good tax lawyer...
rconti 9y ago
Thankfully I was able to come in just DOLLARS under AMT on an early exercise/89b scenario on my first IPO (didn't have any major deductions at the time), and with the rise of the AMT cap it should save my butt 2nd time around. Every little bit helps. Especially when it is all the difference between a 15% tax rate and a 35% tax rate.

bitwize 9y ago

The analogy that I use is this: equity is Bison dollars. You could trade in your equity for a princely sum if the founders' world-domination plans go off without a hitch, but a) that's a big if; b) in the meantime, you can't eat those stocks, nor will your landlord accept them as rent. Which is why anyone who offers to pay me in equity instead of salary gets a polite fuck you, and I would only accept partial equity compensation if the salary part is sufficient to meet all my living expenses and then some.