9 ms·

Is the Valley Falling out of Love with Options?

38 points by transburgh 16y ago

gamble 16y ago
So startup employees are wising up to the fact that options won't make them rich, and they're demanding market salaries? I see that as a good thing.
- staunch 16y ago
  It'd be better if startups responded by giving out more equity to employees.
  - gamble 16y ago
    There's a pretty hard limit to how many people can own 10%+ of a company. With the average exit around $12 million these days, a smaller share than that isn't going to amount to much after dilution, preferences, and taxes.
    - staunch 16y ago
      A very quick check on CrunchBase of the (155) acquisitions (with known prices) since Jan 09 shows: average price $215M median price $80M. I think the average option pool is larger than 10% as well. In most cases there's plenty of money to go around when a company is successful. At least enough that the first dozen employees should make far more than they could have at a regular job.
      - arethuza 16y ago
        Say the option pool is worth $21.5 million for a $215 million exit (it'll presumably be worth less than this but assume that cancels out that the pool may be larger than 10%). Assume that half the pool is given to the first ten employees - so that's about $1 million each. I know people in the software field who have "regular jobs" and earn ~$200K and have been for many years. So I would perhaps disagree with the assertion that being an employee in a successful startup means that you will make "far more" than is possible in a "regular job". Now this isn't to say that the startup would be a much more interesting experience - but in purely financial terms the rewards of a high earning "regular job" are comparable (and that is ignoring the risk profile of startups).
        metageek 16y ago
        I know people in the software field who have "regular jobs" and earn ~$200K and have been for many years. Wow. Where, and in what branch of the industry?
        arethuza 16y ago
        Hint: it involves suits and traveling a lot.
        metageek 16y ago
        Oh. Right. Twitch.
grellas 16y ago
The focus of this piece is on VC-funded startups (and larger companies) in the Valley. In the earliest stage startups with which I work, it is overwhelmingly the norm for founders and others to work for equity and often for equity alone. Such early-stage equity can be valuable if the company succeeds and is to be sharply distinguished from the "one-tenth of one percent" option grants that come later, after funding. So, yes, at the early stages, the Valley remains enamored with "options" and perhaps more so than ever in the 25+ years I have been doing startups. Beyond the early stage, the lack of an IPO market has taken the luster away from the equity grants that used to excite so many in Silicon Valley and the article makes a good point that a noticeable change has occurred at that level.
- ghshephard 16y ago
  Interesting. I always wondered whether my Post-Series A option grant was typical. It was _precisely_ one-tenth of one percent. :-) And yes, I'm now starting to see (potentially) RSUs in bonus packages. (First time I've seen RSUs in 14 years)
- guelo 16y ago
  I can see how VCs and lawyers can make money from equity consistently by spreading their bets around but the reality for startup workers is very few people in the whole valley strike it big in a good year. An event like the creation of youtube or faceebok happens exceedingly rarely. It's a lottery, a ticket isn't worth very much.
  - wlievens 16y ago
    Genuine question: does that depend on what "striking it big" means? If you consider making, say, an amount that's a <10 multiple of what you would have made with an ordinary job in your league, does that consistute "striking it big"? It would for me, but do you include that measure?
    - aaronblohowiak 16y ago
      No, the risk-adjusted value of <10x return is worse.
acgourley 16y ago
Are there any practical and tested ways to tie company success to employee compensation? Could tie a bonus to a metric or give out a percent of revenues... but there is a much bigger tax burden there.
- lsc 16y ago
  I'm told "profit sharing" is the answer, but I haven't really done enough research, yet, to speak intelligently on the matter.
- borism 16y ago
  There are many, but nothing could match equity in terms of start-up employee motivation and responsibility.
danielnicollet 16y ago
Back in the days I worked at Netscape and Infoseek, two startups where early employees were raking millions in vested options sales. I just started working then and I got in a little too late into the game. My options never made me a dime there or at any of the 4 or 5 other companies that gave me options. So to the great disappointment of recruiters I started negotiating compensation at my next jobs by always asking to trade some of the options in the package for more cold hard salary cash. I wouldn't say no to options but unless you join a startup very early, they usually are a very risky bet to make up for, say, a pay cut from your previous position. It's served me well. I am not Cresus and I don't drive an expensive sports car but I do have enough in the bank for a few rainy days and I feel safe to be able to take the risks I now take as an entrepreneur myself. So never forget, short of being lucky, only business owners, stockholders (not option holders) are really poised to make the big bucks if a company makes it to the top. As an employee your options were always planned by the company CFO and its lawyers to be sufficient in numbers to just bring you the equivalent of a nice fat bonus if the company fares well. Not more. If you are an employee, freelancer, or contractor, try to get paid for what you do. Don't say no to options but make sure you don't rely on them to heavily.
- deleted 16y ago
  [deleted]
flomo 16y ago
And meanwhile every company outside of the Valley/Startup realm got sick of their employees leaving and developed their own bogus options package, even if they had zero intention of ever selling ownership. When your local urinal cake manufacturer is offering you options on a thousand shares, is there any wonder why the average candidate isn't interested?
rms 16y ago
>But lately, it seems like the Valley is falling out of love with options. That is weird, because people keep saying we’re in an early stage funding bubble. It's not weird, extra money for employees is an expected consequence of continued competitive overfunding for early stage companies.
terra_t 16y ago
Quote: "It’s a bubble based on too much early stage money throwing itself at too few good ideas." How bad is it going to have to get before investors discover the other 48 states in the U.S.?
- hga 16y ago
  Errr, don't you mean 49 states? And in reply, I'd ask "How long will it be before any of the other 49 states make non-competes unenforceable and forbid companies from laying claim to what you do with your own ideas on your own time and with your own resources?"
  - terra_t 16y ago
    There's a scene in N.Y.C. too. As an upstater I'm almost tempted to say that we ought to just scrap all our laws in New York and start all over again.
    - hga 16y ago
      And there's a scene in the Boston area as well, one that I watched and participated in from 1979 to 1991, which coincides with its decline and fall. I'm not watching it closely, but I've been told by reliable sources (plus read the usual stuff on HN) that there's been a significant revival, but as far as I can tell neither location can hold a candle to Silicon Valley. I've been trying to figure out why for some time (strong anti-recommendation: Regional Advantage, which gets way too many things dead wrong about the Boston scene (all too often in an "I was there" way...) and feels like a book that cites evidence to prove its thesis without paying any attention to counter-arguments, interpretations or facts). I can't help but notice that what I've cited is the only unique thing about SV (well, there's earthquakes, but I don't think any non-researcher move there for them), how it had to help the true silicon genesis part of its history (Shockley -> Fairchild -> many companies) and how I've seen the chilling effect that non-competes have on potential startups in the Boston and D.C. areas.
ohyes 16y ago
"But what about the employees? Instead many are finding themselves churning through a series of companies built to flip, never making much money themselves and just jumping between treadmills." This sounds remarkably like what happened to my dad in the late 80s/early 90s. VCs, founders make money, employees get fired and the company gets moved to (wherever-corporate-office). This is not a new trend; to make money in an acquisition, you must be one of the people with a large stake in the company. If you are Joe Programmer, that is probably not you... so ask for a salary. It may be true that the lottery/pigeon dance effect is kind of wearing off, as there hasn't been a huge IPO (like Google's) in a while. This would make normal employees less likely to bank on a huge IPO.

38 points by transburgh 16y ago

So startup employees are wising up to the fact that options won't make them rich, and they're demanding market salaries? I see that as a good thing.

staunch 16y ago
It'd be better if startups responded by giving out more equity to employees.
- gamble 16y ago
  There's a pretty hard limit to how many people can own 10%+ of a company. With the average exit around $12 million these days, a smaller share than that isn't going to amount to much after dilution, preferences, and taxes.
  - staunch 16y ago
    A very quick check on CrunchBase of the (155) acquisitions (with known prices) since Jan 09 shows: average price $215M median price $80M. I think the average option pool is larger than 10% as well. In most cases there's plenty of money to go around when a company is successful. At least enough that the first dozen employees should make far more than they could have at a regular job.
    - arethuza 16y ago
      Say the option pool is worth $21.5 million for a $215 million exit (it'll presumably be worth less than this but assume that cancels out that the pool may be larger than 10%). Assume that half the pool is given to the first ten employees - so that's about $1 million each. I know people in the software field who have "regular jobs" and earn ~$200K and have been for many years. So I would perhaps disagree with the assertion that being an employee in a successful startup means that you will make "far more" than is possible in a "regular job". Now this isn't to say that the startup would be a much more interesting experience - but in purely financial terms the rewards of a high earning "regular job" are comparable (and that is ignoring the risk profile of startups).
      - metageek 16y ago
        I know people in the software field who have "regular jobs" and earn ~$200K and have been for many years. Wow. Where, and in what branch of the industry?
        arethuza 16y ago
        Hint: it involves suits and traveling a lot.
        metageek 16y ago
        Oh. Right. Twitch.

grellas 16y ago

The focus of this piece is on VC-funded startups (and larger companies) in the Valley. In the earliest stage startups with which I work, it is overwhelmingly the norm for founders and others to work for equity and often for equity alone. Such early-stage equity can be valuable if the company succeeds and is to be sharply distinguished from the "one-tenth of one percent" option grants that come later, after funding. So, yes, at the early stages, the Valley remains enamored with "options" and perhaps more so than ever in the 25+ years I have been doing startups. Beyond the early stage, the lack of an IPO market has taken the luster away from the equity grants that used to excite so many in Silicon Valley and the article makes a good point that a noticeable change has occurred at that level.

ghshephard 16y ago
Interesting. I always wondered whether my Post-Series A option grant was typical. It was _precisely_ one-tenth of one percent. :-) And yes, I'm now starting to see (potentially) RSUs in bonus packages. (First time I've seen RSUs in 14 years)
guelo 16y ago
I can see how VCs and lawyers can make money from equity consistently by spreading their bets around but the reality for startup workers is very few people in the whole valley strike it big in a good year. An event like the creation of youtube or faceebok happens exceedingly rarely. It's a lottery, a ticket isn't worth very much.
- wlievens 16y ago
  Genuine question: does that depend on what "striking it big" means? If you consider making, say, an amount that's a <10 multiple of what you would have made with an ordinary job in your league, does that consistute "striking it big"? It would for me, but do you include that measure?
  - aaronblohowiak 16y ago
    No, the risk-adjusted value of <10x return is worse.

acgourley 16y ago

Are there any practical and tested ways to tie company success to employee compensation? Could tie a bonus to a metric or give out a percent of revenues... but there is a much bigger tax burden there.

lsc 16y ago
I'm told "profit sharing" is the answer, but I haven't really done enough research, yet, to speak intelligently on the matter.
borism 16y ago
There are many, but nothing could match equity in terms of start-up employee motivation and responsibility.

danielnicollet 16y ago

Back in the days I worked at Netscape and Infoseek, two startups where early employees were raking millions in vested options sales. I just started working then and I got in a little too late into the game. My options never made me a dime there or at any of the 4 or 5 other companies that gave me options. So to the great disappointment of recruiters I started negotiating compensation at my next jobs by always asking to trade some of the options in the package for more cold hard salary cash. I wouldn't say no to options but unless you join a startup very early, they usually are a very risky bet to make up for, say, a pay cut from your previous position. It's served me well. I am not Cresus and I don't drive an expensive sports car but I do have enough in the bank for a few rainy days and I feel safe to be able to take the risks I now take as an entrepreneur myself. So never forget, short of being lucky, only business owners, stockholders (not option holders) are really poised to make the big bucks if a company makes it to the top. As an employee your options were always planned by the company CFO and its lawyers to be sufficient in numbers to just bring you the equivalent of a nice fat bonus if the company fares well. Not more. If you are an employee, freelancer, or contractor, try to get paid for what you do. Don't say no to options but make sure you don't rely on them to heavily.

deleted 16y ago
[deleted]

flomo 16y ago

And meanwhile every company outside of the Valley/Startup realm got sick of their employees leaving and developed their own bogus options package, even if they had zero intention of ever selling ownership. When your local urinal cake manufacturer is offering you options on a thousand shares, is there any wonder why the average candidate isn't interested?

rms 16y ago

>But lately, it seems like the Valley is falling out of love with options. That is weird, because people keep saying we’re in an early stage funding bubble. It's not weird, extra money for employees is an expected consequence of continued competitive overfunding for early stage companies.

terra_t 16y ago

Quote: "It’s a bubble based on too much early stage money throwing itself at too few good ideas." How bad is it going to have to get before investors discover the other 48 states in the U.S.?

hga 16y ago
Errr, don't you mean 49 states? And in reply, I'd ask "How long will it be before any of the other 49 states make non-competes unenforceable and forbid companies from laying claim to what you do with your own ideas on your own time and with your own resources?"
- terra_t 16y ago
  There's a scene in N.Y.C. too. As an upstater I'm almost tempted to say that we ought to just scrap all our laws in New York and start all over again.
  - hga 16y ago
    And there's a scene in the Boston area as well, one that I watched and participated in from 1979 to 1991, which coincides with its decline and fall. I'm not watching it closely, but I've been told by reliable sources (plus read the usual stuff on HN) that there's been a significant revival, but as far as I can tell neither location can hold a candle to Silicon Valley. I've been trying to figure out why for some time (strong anti-recommendation: Regional Advantage, which gets way too many things dead wrong about the Boston scene (all too often in an "I was there" way...) and feels like a book that cites evidence to prove its thesis without paying any attention to counter-arguments, interpretations or facts). I can't help but notice that what I've cited is the only unique thing about SV (well, there's earthquakes, but I don't think any non-researcher move there for them), how it had to help the true silicon genesis part of its history (Shockley -> Fairchild -> many companies) and how I've seen the chilling effect that non-competes have on potential startups in the Boston and D.C. areas.

ohyes 16y ago

"But what about the employees? Instead many are finding themselves churning through a series of companies built to flip, never making much money themselves and just jumping between treadmills." This sounds remarkably like what happened to my dad in the late 80s/early 90s. VCs, founders make money, employees get fired and the company gets moved to (wherever-corporate-office). This is not a new trend; to make money in an acquisition, you must be one of the people with a large stake in the company. If you are Joe Programmer, that is probably not you... so ask for a salary. It may be true that the lottery/pigeon dance effect is kind of wearing off, as there hasn't been a huge IPO (like Google's) in a while. This would make normal employees less likely to bank on a huge IPO.