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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 si

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

wdewind 8y ago
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.
- rhizome 8y ago
  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. Do you have any support for this? I'd love to read (or whatever) if so. but sometimes expectations aren't properly set about how options work. Perverse incentives, moral hazard, etc.
  - wdewind 8y ago
    Sorry I don't have a source, but what I really meant by that was: when you hear the stories of engineers getting "screwed out of options" it always boils down to things like liquidation preferences and taxes and things like that that are built into the stock agreement. You also very rarely hear these stories in places that are doing super well, it's places that are failing and the company is being chopped up for scraps that things like liquidation preferences really even become a serious problem for employees anyway. The real problem is usually just that the business doesn't do well. I'm sure there are exceptions and places where people disagree about the terms of the actual agreement but by and large these stories are "a thing that felt really low chance happened and the stock agreement had a clause for that and that sucks for me." Truly shitty situations, but ones that you can factor into your risk model when deciding whether or not to accept the offer. Part of the deal of having ownership in the business is taking the responsibility of that risk on. Not everyone wants that which is why a higher salary at a more stable big company makes more sense for some people. Also, I think the perverse incentives thing is real, but again I want to reiterate: the cool thing about stock options is that they allow you to have a small (but often significant) amount of ownership in the means of production. But that also means increased responsibility, which includes the responsibility to understand the value of the options agreements you sign. If you need to hire a lawyer to explain the agreement, or you need more information on the business, cap table etc., in order to fairly value the options in the offer those are all fair questions to ask. Additionally the way companies respond to your request for such information will tell you everything you need to know about how they truly feel about employee ownership.
dunpeal 8y ago
To add to that: most engineers are completely clueless about how equity works. And the typical startup execs do everything they can to keep them that way. Most engineers I met in SV only knew their equity "will be worth X millions" because that's what the founder told them when they joined. They don't understand funding rounds, dilution, the power of the board and majority owners... Often they don't know what the cap table is.
- ikornaselur 8y ago
  As someone that doesn't really understand any of that, where should I begin to inform myself? I get the basics of equity, but don't really know how funding rounds affects it, dilution or even what a cap table is.
  - dunpeal 8y ago
    There's multiple resources if you good "equity guide engineers". Here's one: https://github.com/jlevy/og-equity-compensation https://github.com/jlevy/og-equity-compensation The bottom lines: 1. The valuation you will get from the founders before being hired ("your equity will be worth $X millions when we IPO") is unrealistically optimistic. Even on the remote chance your startup becomes a huge success, you'll see a small fraction of that at best. 2. Unless you have a lot of influence on the board and majority shareholders (you won't), you can't really protect yourself from losing all the value of your stock.
    - ikornaselur 8y ago
      Thank you for that link, it seems really informative! I'm going to give it a read, since this is something I've recently become interested in learning more about.
    - wdewind 8y ago
      > 1. The valuation you will get from the founders before being hired ("your equity will be worth $X millions when we IPO") is unrealistically optimistic. Even on the remote chance your startup becomes a huge success, you'll see a small fraction of that at best. If a founder is selling you on anything but a very sober view of the stock that's a great signal to not join the company. Even so, it is not too difficult to model a few reasonable dilution, acquisition etc. scenarios and get a feel for how you'd do in each. > 2. Unless you have a lot of influence on the board and majority shareholders (you won't), you can't really protect yourself from losing all the value of your stock. Sort of. The reason this doesn't really happen much in practice is that it destroys the company's talent pool and ability to hire in the future. Most companies that are succeeding don't tend to screw employees, it's only when they've entered the "squeezing blood from a stone" phase that these things start happening, and at that point the stock's not worth much anyway.
icedchai 8y ago
Yep. The one surefire way of becoming a startup millionaire as an engineer: save and invest consistently. I recommend that everyone read "The Millionaire Next Door" in their 20's, and actually follow it. In 20+ years in the industry, the only equity that ever paid off didn't even make up for the pay cut that I took to go there. We don't talk about all the losers.
- jonny_eh 8y ago
  So far I've made way more from my house than from any company equity in SV. Earn cash, buy a house. Benefit from prop 13 and the mortgage interest deduction.
  - icedchai 8y ago
    Yeah, makes sense. Getting a mortgage is one of the few ways a "normal" person can get a some leverage. I do believe in the value of early stage options... The potential is just very overstated and requires a lot of things to line up right.

wdewind 8y ago

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.

rhizome 8y ago
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. Do you have any support for this? I'd love to read (or whatever) if so. but sometimes expectations aren't properly set about how options work. Perverse incentives, moral hazard, etc.
- wdewind 8y ago
  Sorry I don't have a source, but what I really meant by that was: when you hear the stories of engineers getting "screwed out of options" it always boils down to things like liquidation preferences and taxes and things like that that are built into the stock agreement. You also very rarely hear these stories in places that are doing super well, it's places that are failing and the company is being chopped up for scraps that things like liquidation preferences really even become a serious problem for employees anyway. The real problem is usually just that the business doesn't do well. I'm sure there are exceptions and places where people disagree about the terms of the actual agreement but by and large these stories are "a thing that felt really low chance happened and the stock agreement had a clause for that and that sucks for me." Truly shitty situations, but ones that you can factor into your risk model when deciding whether or not to accept the offer. Part of the deal of having ownership in the business is taking the responsibility of that risk on. Not everyone wants that which is why a higher salary at a more stable big company makes more sense for some people. Also, I think the perverse incentives thing is real, but again I want to reiterate: the cool thing about stock options is that they allow you to have a small (but often significant) amount of ownership in the means of production. But that also means increased responsibility, which includes the responsibility to understand the value of the options agreements you sign. If you need to hire a lawyer to explain the agreement, or you need more information on the business, cap table etc., in order to fairly value the options in the offer those are all fair questions to ask. Additionally the way companies respond to your request for such information will tell you everything you need to know about how they truly feel about employee ownership.

dunpeal 8y ago

To add to that: most engineers are completely clueless about how equity works. And the typical startup execs do everything they can to keep them that way. Most engineers I met in SV only knew their equity "will be worth X millions" because that's what the founder told them when they joined. They don't understand funding rounds, dilution, the power of the board and majority owners... Often they don't know what the cap table is.

ikornaselur 8y ago
As someone that doesn't really understand any of that, where should I begin to inform myself? I get the basics of equity, but don't really know how funding rounds affects it, dilution or even what a cap table is.
- dunpeal 8y ago
  There's multiple resources if you good "equity guide engineers". Here's one: https://github.com/jlevy/og-equity-compensation https://github.com/jlevy/og-equity-compensation The bottom lines: 1. The valuation you will get from the founders before being hired ("your equity will be worth $X millions when we IPO") is unrealistically optimistic. Even on the remote chance your startup becomes a huge success, you'll see a small fraction of that at best. 2. Unless you have a lot of influence on the board and majority shareholders (you won't), you can't really protect yourself from losing all the value of your stock.
  - ikornaselur 8y ago
    Thank you for that link, it seems really informative! I'm going to give it a read, since this is something I've recently become interested in learning more about.
  - wdewind 8y ago
    > 1. The valuation you will get from the founders before being hired ("your equity will be worth $X millions when we IPO") is unrealistically optimistic. Even on the remote chance your startup becomes a huge success, you'll see a small fraction of that at best. If a founder is selling you on anything but a very sober view of the stock that's a great signal to not join the company. Even so, it is not too difficult to model a few reasonable dilution, acquisition etc. scenarios and get a feel for how you'd do in each. > 2. Unless you have a lot of influence on the board and majority shareholders (you won't), you can't really protect yourself from losing all the value of your stock. Sort of. The reason this doesn't really happen much in practice is that it destroys the company's talent pool and ability to hire in the future. Most companies that are succeeding don't tend to screw employees, it's only when they've entered the "squeezing blood from a stone" phase that these things start happening, and at that point the stock's not worth much anyway.

icedchai 8y ago

Yep. The one surefire way of becoming a startup millionaire as an engineer: save and invest consistently. I recommend that everyone read "The Millionaire Next Door" in their 20's, and actually follow it. In 20+ years in the industry, the only equity that ever paid off didn't even make up for the pay cut that I took to go there. We don't talk about all the losers.

jonny_eh 8y ago
So far I've made way more from my house than from any company equity in SV. Earn cash, buy a house. Benefit from prop 13 and the mortgage interest deduction.
- icedchai 8y ago
  Yeah, makes sense. Getting a mortgage is one of the few ways a "normal" person can get a some leverage. I do believe in the value of early stage options... The potential is just very overstated and requires a lot of things to line up right.