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For startups or any companies who offer illiquid equity, the following is a good tactic I’ve been using that never fails.
Simply tell them (at the offer stage)
For startups or any companies who offer illiquid equity, the following is a good tactic I’ve been using that never fails.
Simply tell them (at the offer stage):
“Make me two offers, one with a higher cash compensation and the other with higher equity.”
Then, always take the position with higher cash to base your next negotiations. If it’s good enough, you might even take it outright.
This is a trick that exploits the fact that most startup founders and recruiters have an over-inflated “best case” view of how much their equity is actually worth, so it works in your favor when they use it as a benchmark against real money today. I’ve found they also fail to account how much it would be worth for you vs. them. Considering the risk is high you won’t make anything from those options even if you exercise them (& stay long enough), the cash position is nearly always better. If the company becomes some run-away success there will be opportunity to get more equity but getting a cash raise in 6 months is infinitely harder I’ve found. Promotions at startups often times have an additional equity award and by that time you’ll have more information as to the chance of success or not.
Generally, based on my experience, it’s a good way to immediately get an extra $10-20k, with little emotional effort and without the other side feeling as if they were strong-armed, or that they had to give up something, since they offered you the choice. (This is important because you don’t want to start your position there viewed as an “expensive new toy”). They still feel powerful and in control. They may even be happy you took the cash option and let them “keep more” of their precious company. When I started doing this I originally feared they would think I don’t have faith in them, but I’ve never had someone feel insulted I took the cash option.
As an engineer I actually enjoy the negotiation process, it’s the best type of problem: pure tactics.
I've always found it amusing how ham-fisted employers' tactics are when dealing with talented engineers. They know you're not stupid, but they try to swindle you anyway, knowing the only way you fall for it is if you have serious self-esteem or assertiveness issues.
That's why I tell every honest engineer I know how much I make and how the game works. It's disgusting.
Engineers are typically intelligent, but most of them know very little about negotiation, especially straight out of college - which is a huge percentage of new hires every year.
You may have graduated from MIT and done hard psets for 4 years, but the most you ever negotiated was that $50 desk you bought on Craigslist.
> the only way you fall for it is if you have serious self-esteem or assertiveness issues.
Which young engineers, being often introverted and nerdy, do tend to have...
Recruiters are basically sales people, so they're on the other end of the extroverted scale: extremely assertive, used to interact with, read, and manipulate others. Is it any wonder they try to push engineers around?
There is imposter syndrome though.
https://en.wikipedia.org/wiki/Impostor_syndrome https://en.wikipedia.org/wiki/Impostor_syndrome
A founder valuing their equity more than its actual worth is a classic example of the endowment effect [1].
[1] https://en.wikipedia.org/wiki/Endowment_effect https://en.wikipedia.org/wiki/Endowment_effect
I agree with nearly everything you said except this:
> If the company becomes some run-away success there will be opportunity to get more equity but getting a cash raise in 6 months is infinitely harder I’ve found.
The size of grants you get after a company is deemed a "run away" success (or even just "not going to die in the next year") are literally 3-4 orders of magnitude smaller than the grants you get before then (ie pre 10 employee number).
Based on this I tend to optimize more for equity (I'm young and not super risk averse), and another thing I've done is agree to take a pay cut until after another round is raised, with a pre-negotiated salary adjustment in order to min-max more towards equity.
But I think you've touched on something super important which is that using the ambiguity of the value of the options is a great way to put the ball back in their court.
True, but honestly if you aren’t already a co-founder, friends with the investors, or very close to the founders, or have A LOT of experience on the business side of tech startups, I’m afraid to say the chances of you getting screwed are extremely high.
As an engineer, you won’t be privy to much if any of the business side, investor meetings, etc. I’m talking about personal relationships. Most engineers I know don’t even have access to or know what the cap table is. The only companies where I’ve made any money from the equity have been ones where the founders are already rich and happen to be nice, altruistic people. It’s unfortunatley how the sausage is made in SV. Most engineers (>90%) make $0 from any equity, no matter how well they have played their game. The era of massage therapists startup millionaires is over. The cat has been out of the bag for awhile now, people know there is money to be made in these companies so they are structuring them to do that.
I’m pretty sure engineers often get screwed as this has something to do with the fact they just don’t have face time with investors or access to the business side and spend their lives “heads down” building the product.
A sad anachronism but very true. Or maybe I'm just old and bitter? lol
Kind of depends on your definition of "getting screwed." The venn overlap of companies that are very successful and also screw early employees out of stock options is very small, but sometimes expectations aren't properly set about how options work.
It is difficult to make money as an engineer via early stock options, but it is not impossible and the problems of a. understanding what you're being offered and b. making sure you don't get screwed are fairly tractable imo. The hard part is building a company that makes these things matter. Survivorship bias, n of 1 etc. of course, though.
The main problem with startups is joining as employee 10-500ish/public. That's where you aren't getting good stock offers, no one has heard of your company yet and your salary sucks. The upside is this is a great place to learn as a junior both about engineering and about stock options.
You are right that you need to have a lot of business experience to really understand this stuff too. Dabbling in startups is a good way to spin your tires and get screwed, but if you commit to the industry and go through enough deals you can learn enough to protect yourself.
If anyone is currently considering an offer that includes equity and wants some help thinking about how to value it my contact info is in profile, feel free to reach out.
I've gone through this exact scenario, where the founder used this trick on me.
I've found these articles helpful for circumventing that exploit:
"How to answer the dreaded salary question" – https://fearlesssalarynegotiation.com/the-dreaded-salary-question/ https://fearlesssalarynegotiation.com/the-dreaded-salary-que...
"Can you trust your recruiter?" – https://fearlesssalarynegotiation.com/recruiter-business-model/ https://fearlesssalarynegotiation.com/recruiter-business-mod...
I understand Palantir offers high- and low-equity options to fit with employees' varied needs.
Ditto. I always ask for the higher cash position. This is guaranteed to carry forward (and in most cases can be used to help negotiate future salaries at new companies if this one fails). I've always ended up with opportunity for large equity positions at some point anyway.
> Hmmm...I think the part that is maybe missing from your model is that the value is not hypothetical and made up, you need to price the certainty into the value itself when negotiating the offer. If you are given very little information, the value is low. But it's not "high value low certainty" it's simply low value.
The context for this argument is that joining a profitable business carries less risk of being deceived / manipulated and waking up after 4+ years to a reality that is totally different than what you were repeatedly lectured to expect.
Your response doesn't really refute or address that argument. You are claiming that in the theoretical case that you are given 100% valid information and 0% hype, you should be able to to get a more accurate profit expectation. That's, of course, true.
The reality still is that you will not get 100% facts and 0% hype in the vast majority of startups. The entire industry has been operating for some time on bringing in clueless fresh grads, telling them they're all "rockstars", and that if they'll just work 14hr/day for 4 years, they'll also be multi-millionaires.
So while in theory (as you correctly point out) there can still be room for verification and realistic assessment of upside in startups, in practice the startup model has more loopholes, and these are universally exploited, such that the industry is generally quite deceptive.
It's just like how in theory, given perfect information, a used car can be priced almost as accurately as a new one. In practice, since there's so much room for deception and manipulation, that's not the case, and the industry has a well-deserved reputation of being shady and untrustworthy.
Now, imagine profitable businesses offered you a deal like this: "You start working at half your usual market salary. After 4 years, if you're still with us and we really like you, we'll pay you a huge one time bonus. We won't tell you exactly how much it will be, because frankly we don't know (and there's a tiny chance we won't be able to pay it anyway), but it will almost certainly be over $10 million and you'll get sooo rich, bro!".
Most people would laugh at that, because the normal full-time employment isn't so exploitable. But the startup model is, and that's the deal most startup employees agree to.
> Skype equity that allows you to be fired and have it bought back at strike price is not "high value low certainty" it's simply low value. Engineers overvalued their equity going into it. They were not misled, and this was something that could've been reasoned about going in easily. They should've read what they were signing.
As before, you are correct in theory, but in practice this is extremely shady. There's a pretty standard set of terms for equity in startups, and clawbacks are definitely not part of it. In fact, they go pretty much directly against it, and against the meaning of what option plans aim to be and achieve.
It's not unreasonable for an inexperienced engineer to assume the standard terms will be followed in his case as well. A fresh grad won't spend a substantial portion of his signing bonus on a lawyer to read his contract, and the clause was obscure and vaguely phrased that even a lawyer might miss it.
What Skype (technically, SLP) did was obviously legal, but extremely shady, and a good example of a savvy business tricking naive engineers. This wasn't innocent: these options that could (and eventually did) amount to millions of dollars were dangled in front of the employees noses since they were mere candidates. And all this time, they were actually worthless.
Legal? Probably. Shady and deceptive? Definitely.
> Some employers will give you enough information to make an informed decision (cap table, current revenue, projections, etc.). Most will not. Most are not worth working for, or at least their options are not worth valuing above $0. Some are, though.
Now I'm curious: which are these employers, in your opinion?
> The context for this argument is that joining a profitable business carries less risk of being deceived / manipulated and waking up after 4+ years to a reality that is totally different than what you were repeatedly lectured to expect.
> Your response doesn't really refute or address that argument. You are claiming that in the theoretical case that you are given 100% valid information and 0% hype, you should be able to to get a more accurate profit expectation. That's, of course, true.
You need to put yourself in a position where being deceived is fraud. If they show you fake revenue numbers that's fraud. If you don't understand that the real revenue numbers they are giving you aren't good enough, that's not fraud. If they don't tell you every single thing about the business that's not fraud. If they tell you they expect the business to do really well and it doesn't, that's not fraud. Ask the questions you need to get a feel for if the risk is worth it to you and take an educated risk. If they don't give you enough information run.
How much the employer hypes the position doesn't even come into the equation. I don't really understand why you think it's an important thing. Hype is not part of the deal. The numbers and the structure of the agreement are. Of course the CEO is excited about his company why else would he be risking so much to start it? Stop paying attention to emotions and start paying attention to the documents you are signing and the deals you are making.
> What Skype (technically, SLP) did was obviously legal, but extremely shady, and a good example of a savvy business tricking naive engineers. This wasn't innocent: these options that could (and eventually did) amount to millions of dollars were dangled in front of the employees noses since they were mere candidates. And all this time, they were actually worthless.
Again, why are you letting these engineers off the hook for not reading or understanding documents they signed that said in really big letters SIGN HERE IF YOU UNDERSTAND THIS. I can't imagine anything less misleading than spelling out your exact intent in legalese and then following through with it. Engineers chose to pay attention to the cheer leaders instead of the lawyers to their detriment. Why would employees expect Skype lawyers and managers to be on their team?
> Now I'm curious: which are these employers, in your opinion?
Cap table access is rare though I've gotten it a few times, and high level numbers about the cap table are not (# shares, %owned be investors etc.), revenue numbers are widely available, projections are widely available, I dunno man these aren't huge things for early stage employees to ask for, I think most people just usually don't.
> You need to put yourself in a position where being deceived is fraud.
>
> How much the employer hypes the position doesn't even come into the equation. I don't really understand why you think it's an important thing. Hype is not part of the deal. The numbers and the structure of the agreement are.
Again, what you're arguing here is like "The used car industry isn't shady at all. All you have to do is spend a couple of months learning to evaluate used cars, maybe a couple more to learn the relevant law and know what the salesperson can't legally lie about, then you'll probably be almost as good at detecting the real value of the used car as the people whose full time job is to hide and inflate it!".
Yes, in theory if all fresh grads took a full semester of financial literacy, startup equity models, and US securities law, they'd stand a chance against the savvy business folk greeting them at the door. In practice, it's not happening, so it's simply unrealistic to expect that, level of knowledge from a fresh grad. What's actually happening is that they do get manipulated (yes, not illegally so, typically) and then a few years later, they find out, and become bitter and come to post at HN about it.
> Again, why are you letting these engineers off the hook for not reading or understanding documents they signed that said in really big letters SIGN HERE IF YOU UNDERSTAND THIS.
I'm judging them by realistic standards, you're judging them by unrealistic standards. From what I recall of reading that clause at the time, it was near incomprehensible unless you knew both legalese and exactly how equity works. If they got a decent lawyer to review the contract for them, he'd probably catch it, but how many fresh grads spend the time and money to find a good lawyer for their first job?
I think you're being too demanding of naive fresh grads, and surprisingly forgiving of savvy businesses that are out to manipulate them with fine print in what would normally be a standard contract.
> I dunno man these aren't huge things for early stage employees to ask for, I think most people just usually don't.
Right, that's the reality I'm talking about, in which most employees are naive fresh grads. They hear some really attractive numbers from the founders, and they don't know anything about equity and how it works, legally or financially.
That's the reality we're dealing with here. Yes, I agree, these engineers could do more to protect themselves. Reality is, though, they don't. It's not completely crazy that they don't - learning all this stuff takes time and effort, and engineers aren't primarily interested in finance or US security law.
This general lack of knowledge also creates an environment in which more savvy people are at a disadvantage. For example, I obviously know to ask for the necessary data to evaluate my equity. Typical scenario I encountered, including in the last time I interviewed with startups:
They don't tell you anything you need to know. "You'll get X shares, which we estimate to be worth roughly a gazillion dollars when we exit, since we'll be taking over a bajillion dollar market."
That really is all you'll typically hear in the pitch talks. Seems like the vast majority of engineers never ask. So now when I ask for more information, I'm the odd one out. I got weird stares just for asking about the total size of the equity pool (!).
It's not pretty, and theoretically wrong, yet that's how the industry operates. It's been over a decade now, and these practices have become standard: giving employees no information, systematically hyping them with unrealistic valuations, and when it all blows up, their inflated fantasies collapse, but by then, they've served their purpose, so nobody cares.