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Think about Equity

• codingdave 8y ago
  > A lot of people who get rich these days do it via equity, not salary. Yes, true.... but many more take pay cuts for equity that ends up being worthless. Equity is the way to get stinkin' rich, if you are lucky. But a salary, alongside proper savings and investments, still gets you rich enough to not have to worry too much about money later in life.
• nightski 8y ago
  It has been drilled into me that the #1 rule of investing is proper diversification. If that is true, startup equity kind of goes against that grain? It's asking to place all the eggs (your productive time) into one basket. That's not much different than a salary except much higher risk without diversification. Even ycombinator does not fall for that, they invest in thousands of companies and they have a lot less to lose than many employees.
  • connoredel 8y ago
    Here's the way I look at it. Once your 401k or other retirement savings are on track to give you a comfortable retirement, that's like an option -- you are effectively guaranteed a minimum lifestyle. Within this bucket, you should certainly be balancing the expected value and risk "by the book" (diversifying, etc.). How do you increase the value of an option? Increase the volatility. Continuing to minimize risk is not going to meaningfully change your lifestyle. Your call option already protects you on the downside, so you should try to blow it out on the upside, and take a risk. You can also view your experience and skills (and the minimum salary it allows you to command in the market) as the same thing. After a certain point, try for something that will meaningfully change your lifestyle. Worst case, you can fall back to that floor salary.
    • closeparen 8y ago
      This is an argument to invest the value of your equity in a bold bet. It doesn’t say why that bet ought to be on your employer.
  • montrose 8y ago
    An employee can get diversification in the sense that they can work for multiple companies. It's not at all unusual for someone in SV to get equity in 5 different companies in their career. E.g. one friend of mine first got equity in General Magic, but didn't really hit it big till Nest, decades later. (He did ultimately hit it quite big though.) There is even a kind of natural balancing mechanism here, in the sense that the earlier you join a company, the more likely it will die quickly and free you to take another shot. So the riskier the equity you opt for, the more rolls of the dice you'll get.
  • stanleydrew 8y ago
    Diversification is the #1 rule of passive investing. When you're working at a company you'll have access to all sorts of insider information, which you could use to make some informed large bets. Also note that at a startup "equity" usually really means "options on equity" (unless you're a founder), so you actually can work somewhere for a bit before deciding to take a position that might not be optimal from a diversification perspective.
• geoffreyy 8y ago
  I think more and more people know about equity. We should focus on making that said equity more liquid for private companies. So many founders get rich early by selling their stocks to investors when raising money. Most of the time, employees just can't because the board won't let them. If we allow employees to sell their stocks after they are vested you reduce the amount of risk they take when accepting a lower salary for higher equity. It would also stop the mentality of considering equity as zero when evaluating offers and give more financial flexibility to employees. There is so much money circulating in private markets, but employees just can't access it. This seems pretty unfair to me.
  • alsocasey 8y ago
    > There is so much money circulating in private markets, but employees just can't access it. This seems pretty unfair to me. Isn't this almost certainly by design?
  • simonebrunozzi 8y ago
    Counter argument: more liquid equity -> less incentive for equity holders to put effort in the company's success (they can simply sell and then glide, versus hold and put effort in their job).
• aston 8y ago
  Another way to frame this is that it's easier to get rich via your investments than your direct labor. Working at a company that is willing to give you equity is a funny sort of investing: you're investing your time rather than your money. That the world pays off equity in a company orders of magnitude better than labor for a company is the real thing that will complicate a young person's worldview.
  • munchbunny 8y ago
    There's an important caveat to that though. If you pick an early startup to make your bet, there is a very real (and more likely than not) chance that it won't pan out despite your best efforts and the team's best efforts. And then, like with stocks and other investments, this comes down to your ability to pick the winners.
• drchiu 8y ago
  Think of equity like buying a call option for pennies and having them explode to dollars or tens of dollars per contract. It may (and likely will) expire worthless, or the leverage from it is so great that you exit with a great return. As the post alluded to, starting a startup has gone from extremely rare to rare. And the number of startups that succeed in a significant way are less than that.
• RestlessMind 8y ago
  > Another way to predict which startups will succeed is to look at where your peers are going. Have several of the smartest people in your graduating class ended up at the same startup? That's probably a company worth investigating. So which is the hot company these days where all the smart folks are going? Asking for a friend.
  • joeblau 8y ago
    Coinbase, Uber, AirBnb, Pinterest, Lyft are a few. Look at where the tech media is focused on right now. Sharing economy, Social Media, Ride Sharing, AR/VR, Cryptocurrencies, and companies working with machine learning. That's where you're going to find smart people flocking.
    • askafriend 8y ago
      To add to this list: Stripe, Nextdoor, Robinhood, Flexport, Thumbtack, Opendoor, etc
      • jiveturkey 8y ago
        yes but by the time they are newsworthy they aren’t option lottery ticket worthy. unless you are coming in as VP.
        • joeblau 8y ago
          I totally agree. That's really what makes picking extremely difficult. It takes a lot of due diligence when searching for an opportunity to figure out which one is going to be great for your financial future. You also have to want to work there for 4 years (typical vesting window) if you plan on collecting all of your equity.
        • atak1 8y ago
          Depends on how much the company's aiming to grow, and how many options they give. These companies have enough challenges and resources to make better offers than what you'd get at Google/Dropbox, if you believe in the growth potential. (disclosure: I work for one of the above companies listed)
• pjungwir 8y ago
  > If you go to work for a big established company, they won't give you part of it. On the contrary! Just yesterday I got an email from an Amazon recruiter that says: > We also offer: > - Stock Package, free shares given to you (no purchasing required) It seems like it's pretty normal for people to get equity from big companies. Not even just tech companies: people I know working at Nike get stock every year too. Also I question this: > The fifth employee will get much more than the hundredth. Maybe, but the thousandth will get "more" than the hundredth if you measure it in dollars times probability-of-cashing-it-out. VCs talk about how the size of the pie matters more than the percentage of your share, and I think that applies here too.
  • gberger 8y ago
    > It seems like it's pretty normal for people to get equity from big companies. Right, but equity at big, established companies generally isn't worth potentially $1M+. From what I've seen, it's around $20-50k/year and a calculated part of the compensation package.
    • bradlys 8y ago
      Wow. For a new grad, yes. For those later on it can be more than half your income. A $300k package from companies here can be 180/120 salary/stock split. $300k is not uncommon at all at big co. Some company will cap salary and then all future gains are in stock+bonus.
    • paxys 8y ago
      Disagree with that. In recent years you are way more likely to make $1M from stock grants from companies like Google, Facebook and Amazon than even the top startups.
    • david38 8y ago
      Not true, it's often easily worth $150k/year, on top of your $120-180k salary.
  • RestlessMind 8y ago
    Where would one* have higher expected value for the equity grant - at BigCo's like GAFAM or at Unicorns like Uber/Lyft/AirBnB/Pinterest/Slack/... or an even earlier stage startup? * would these values be different for a new grad vs a senior engineer?
• anonnel 8y ago
  The real truth is that equity is primarily used as a way for startups to pay lower salaries. 3 and 4 year vests further reduce the likelihood you will ever see the equity offered. Let alone that you will have usually a one month period to put up the purchase price of your options. So if you don’t have an extra 2-10 grand lying around (because you were given equity instead of salary, for instance) you will forfeit your equity. Founders and execs also get waay more equity than than the code monkeys, and exercise priority. I’m not saying don’t think about equity, but don’t let someone sell you a bill of goods either.
  • rco8786 8y ago
    2-10 grand is way low. I’ve bought out my equity from two startups and they were both over 15k despite only vesting a small portion of the overall grant.
    • anonnel 8y ago
      Good data point. Yes, very few folks have it available. Especially younger folks who get talked into equity comp. Sure, you can get a loan or something. But it’s a lot to ask for most people.
    • lutorm 8y ago
      Yes, especially if you wait a while and get hit with the massive ISO exercise AMT tax because the fair market value is now high. I've paid well over $100k in AMT because of this.
• equitylottery 8y ago
  Startup equity is like a shitty lottery ticket that you most likely won't be able to cash out even if you get lucky. I passed up on google to be one of the first employees at a promising startup that ended up raising high 8 figures and is now at nearly 100 employees. I took a pay cut for that equity and worked 12 hour days alongside the founders. With liquidation preferences and dilution I won't even be able to take a vacation with that equity if there's ever an exit. My college friends who picked Google are now making >$300K and have enough money in the bank to have a diversified portfolio and acquire the right type of equity. So unless you're a founder or an investor ignore the equity. You can still go for a startup but do it for the experience and potential to have a real impact on an organization.
  • deleted 8y ago
    [deleted]
  • throwaway84742 8y ago
    > So unless you're a founder or an investor ignore the equity 2 years ago I would have told you you’re full of shit, but I’ve since been through this myself, and I can confirm: this is 100% right. Even in the unlikely event the startup exits, and even more unlikely event that it exits at $100M+, typical non-founder stakes do not offset the partial loss of cash and RSU income, particularly when one factors dilution and liquidation preferences into account. Took me 2 years to snap out of it. Never again.
    • deanmoriarty 8y ago
      Hi, could you share a bit more the numbers on how you ended up with so little? In particular, what percentage did you initially have? What percentage did you have in the end? What was the liquidation factor? Was the business in general successful or did it have to accept compromises like raising with unfavorable conditions to survive? I am at the 5th year in a growing startup where I was employee < 10 with initially 1.5% which became ~0.8% after 3 rounds of funding (~60M$) all at liquidation preference 1. The startup is now 150 employees and valued ~200M. Equity has been painfully exercised so I can both leave if needed, as well as her long term capital gain one day (or should I say capital loss?) Thanks
• SanFranManDan 8y ago
  In order for equity to be worth it for employees at a Startup you need to be within the first 10 people and the company needs to be north of the $500,000,000 range. To illustrate, give the best odds. You join within the first 10 people, get 0.7%, after 6 years of dilution you might be down to ~0.2%. If a company runs a tender offer with a valuation of $200m, your stock is $400,000. Is that a lot? Well considering you probably make 50k-100k less per year in salary at a startup vs a "big company", for 6 years time and considering that you also get other compensation at a big company, that isn't really that rewarding. Now at $500m, your stock is worth $1m. Its now something worth 6 years of paycuts. But this is such a narrow window. You have to get lucky to be one of the first 10 and join a company that will be worth half a billion dollars. If you are not one of the first 10, you need the company to be worth ~$5billion to have your stock be worth it. How many of those are out there?
  • matchagaucho 8y ago
    $1M in stock sounds great... until you realize it's actually $600K after taxes. With a 4 year vest, that equity is worth $150K per year. About what a Top Engineer sacrifices in salary to go work at a start-up.
    • tptacek 8y ago
      Nitpick: that salary is also subject to taxes.
      • forgotmysn 8y ago
        as is the vested equity. not to mention the cost of exercising the shares
        • tptacek 8y ago
          Right, he started by pointing out the tax haircut of equity. But he moved the goalposts when he compared the nominal dollar cost of foregone salary to the after-tax value of the options. It's a nitpick. The underlying point stands.
• throwawayeq2 8y ago
  In support of the article, and in contrast to the “assume equity is worthless” HN conventional wisdom, at my current job I’m vesting seven figures of equity every year at our current valuation, and have been since the day I started. What worked for me in my latest job search was focusing on companies that had a very small headcount relative to their valuation, although there are other filters you can use like those Jessica mentioned. The nice thing about working for a company that has raised a bunch of money but is still quite small is that you don’t necessarily have to sacrifice salary either. When I joined I got a 50% raise from my previous base salary at a big 5 tech co without negotiating.
  • phamilton 8y ago
    Liquid equity?
    • throwawayeq2 8y ago
      Nope, illiquid, so it’s still something of a gamble (although in my opinion a much surer thing than the average startup). So the expected value is something less than the nominal figure, but still very large, with some variance. EDIT: I’ve also heard there’s a secondary market for private co equity that I could maybe use to liquidate early if necessary, but I don’t know where that stands legally and don’t even know who is talk to to figure out if that’s an option.
      • equitylottery 8y ago
        I'm also rich on paper.
        • throwawayeq2 8y ago
          Based on the details provided in your sibling comment, sounds like you aren’t? I don’t think our situations are the same.
          • 8y ago
• jv22222 8y ago
  I’ll just say this. There are a lot more stories of equity not working out than there are of equity making folks rich... so be sure to do deep research about this subject and also on the co. you are getting involved with.
  • tlb 8y ago
    And there are several billion stories of wages not making people rich. Beware the availability bias here. Nobody tells their story of working for salary all their life and not getting rich because that's not newsworthy. It is news when people work at a promising startup for equity, but it fails. So people fall victim to the bias of thinking there's more of a problem with equity than wages, because that's the failure case they hear about more often. The risk of not getting rich from wages is 99.9% (number of 9s depending on your definition of rich). The risk of not getting rich from equity in a series of promising startups over a career, can be less than 50%.
    • Hydraulix989 8y ago
      It's a bit of an unfair comparison. Usually the certain kind of people that have what it takes (however likely it may be) to "get rich" from their sweat equity are also likely to command very high salaries at top companies (in tech or investment banking). The former is a much riskier proposition, of course, and the end result might have looked similar when you take in account dilution and the like. As a founder, that dynamic completely changes, of course.
    • jv22222 8y ago
      > can be less than 50%. I'm not normally a pedant... but... it can be also more than 99% and it can also be less than 1%... So I'm not really sure what that brings to the discussion! :)
• zitterbewegung 8y ago
  How to think about equity for me: either believe in what you are doing as a founder or get market rates while getting equity anytime else. Unless you are a founder you probably will be outmanuvered on your ability to exercise your option .
• rabidrat 8y ago
  I exercised my options for $500 when I left a startup in 2005. They finally got bought by a large company this year. The amount that I'll be getting: 48 cents. Total. Early investment is virtually worthless without subsequent investment. Dilution means the last shark gets the spoils. If you're still there when the shark has done eating you might get some scraps.
• bitL 8y ago
  Be extremely careful if somebody offers you a share in LLC first, but later presses to convert to C-Corp, giving you Class B/non-voting/non-privileged shares. Even with the same % as you had with LLC, it's a highway robbery for multitude of reasons. Some large companies, loved over here, are surprisingly doing this with their spin-offs, threatening non-compliant employees with legal action if they don't sign the transfer. Stories I was told...
  • david38 8y ago
    Tell us more
  • eldavido 8y ago
    Dude seriously what the hell are you talking about? Almost anyone who gets employee-level equity in a standard DE C corp will receive such a small piece that the voting rights are largely irrelevant. I was a sub-1% shareholder in a recent M&A transaction where a place I'd worked was getting acquired. I didn't like the terms. Too bad it mattered exactly zero what I thought. The real question is why a company that's taking a bunch of capital is incorporated as an LLC? That's a rookie mistake no founder associated with any reasonable incubator or investors would make.
    • bitL 8y ago
      Sometimes you get >= 1%. That's when the fun, or "Game of Thrones" starts, once vesting period nears its end. You'd be surprised how many "decent" management people turn into monsters once they sense more equity for themselves by tricking you (i.e. getting preferred stock for themselves, giving you a type with the lowest liquidation preference etc.). LLCs are often used for early stage private companies with a single investor (e.g. a large, well-known company), not those that want to go public.
• eldavido 8y ago
  I have a slightly different take on this. While I agree with the general idea that there are more ways than wages to earn wealth, I think the advice is more general: focus on ownership. Figure out how to buy or create an asset and work on improving its value through your labor, capital, or other real (non-financial) forms of investment: time, attention, promotion, whatever. This advice is surprisingly general and has made a lot of fortunes. Think in terms of the business being an economic machine, and you as its tuner (devs will be surprisingly used to this view of things). House flippers focus on ownership by buying a house, improving it, and then selling it. Private equity acquires companies, "fixes" them, and then sells them, often back to the public markets. Venture capital acquires promising stakes in young companies. They put in a lot of sweat equity in board meetings, advice, introductions, and follow-on fundraising to make their portfolios worth more. Anyone who owns a house gets rich if their house appreciates. Especially if they use leverage. You can do this all sorts of ways. Build vs. buy is an important dimension. Where I disagree with JL is the general idea that investing heavily into a single company with high uncertainty and little control rights is a great idea. The main reason YC took off is largely Jessica in my opinion, marketing the program exceptionally well to talented people who knew no other way than to work for wages at a company. It worked great for them (the YC partners) because they became investors in 1000+ companies, so it's virtually certain that, given the caliber of people they're able to convince to apply, that they'll have a few billion dollar "hits". The situation of an individual employee with only one company's (startup's) stock is quite different, and in my opinion, much worse. So maybe not such great advice at face value.
• jiveturkey 8y ago
  I think this article is wrong wrong wrong. because it’s putting equity first. options are a lottery. do what most inspires you. it will give you the most satisfaction and also the most skill (doing what you love and being really good at it go hand in hand). Then figure out if a startup is right for you for all other reasons.