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I get this trope of valuing equity at $0 because a lot of people have been burned, but it’s bad advice. The fastest way to wealth is through equity. Yes, it’s

I get this trope of valuing equity at $0 because a lot of people have been burned, but it’s bad advice. The fastest way to wealth is through equity. Yes, it’s hard to value but that value is not zero. Spending effort trying to value it is worth it, and picking companies where you think the equity will be valuable is worth it. Also worth considering the character of the founder and the other directors. There’s a lot of ways to get screwed out of equity, working with good people is important.

MattGaiser 6y ago
If you can determine company value and future with any reliability, you may as well just take those skills to the public markets and use your extra cash compensation to buy stocks/options. Far more information is available about those companies than any privately held ones.
- fossuser 6y ago
  Yeah I do do that, but you have to risk more and I disagree about it being easier to value from the outside. Public markets for non-dividend paying stocks are also betting more on what other people think the stock price will be rather than the company value itself - it’s a bit of a different game.
  - bradlys 6y ago
    > Yeah I do do that, but you have to risk more and I disagree about it being easier to value from the outside. I don't know. To me, wasting my time (AKA - my life) seems more risky than anything. On top of that - when you do exercise your options that you earn, you have to pay $$$ for them anyway. (Along with paying AMT - yay!) I'm pissing away a third of my net income on my options + tax right now. Who knows if I'll get jack shit. At least with the stock market I can usually get SOME of my money back unless you're doing something super risky like playing with options. IMO - playing the market is less risky than playing the startup game. Especially if you're joining early startups or ones that haven't just been straight up rockets.
    - fossuser 6y ago
      Well yeah don’t waste your life, equity should be one consideration among many when choosing a place to work.
    - datalus 6y ago
      Have you seen the bloodshed in the NASDAQ lately? It's wiped out quite a bit of wealth... although it was fairly overheated and tech was due for a major correction, but damn watching those gains come down was painful. :/
      - freewilly1040 6y ago
        Still not close to the very common experience of having equity you worked years for cash out to nothing!
        jefftk 6y ago
        Or less than nothing: I paid to exercise my options when I left my first start up, and they were eventually worth much less than I'd paid.
        freewilly1040 6y ago
        We have similar experiences. I might disagree with advice to college grads to not pursue a startup though. It can be more fun, and if you are going to be tempted by it it's good to take the hit in your 20's when (probably) it doesn't matter too much.
        bradlys 6y ago
        > We have similar experiences. I might disagree with advice to college grads to not pursue a startup though. It can be more fun, and if you are going to be tempted by it it's good to take the hit in your 20's when (probably) it doesn't matter too much. I'd take FAANG over most any startup and would've if they had given me an offer. I speak as someone who has been in 3 startups before they were 30 (seed stage to unicorn). I think startups (startups that have high chance of no exit - <$500 mil valuation, less than 100 employees, <50 engineers) are better suited for people who have significant experience. If you join a startup - it is frequently filled full to the brim of FAANG rejects, young people who don't realize what FAANG offers, and people from different industries trying to break into tech... which means it's almost always the blind leading the blind. You will not learn best practices, you will inevitably find it very hard to switch into a big company, and your resume will look like shit (meaning you will always get subpar offers/interviews) until that startup either becomes a rocket ship OR you join a big co. Risking your 20's in hopes you get ultra rich is a fools errand when you could reliably get $350K+/yr by 30 when joining FAANG when you're in your early 20's. No startup is going to give you an offer that will even be good anyway! There's no way you're going to join a startup as a entry level engineer and get an option package that will be worth anything.
- shajznnckfke 6y ago
  The lack of public information about startups means that the value is uncertain, and that’s a reason for a candidate with no special insight to discount the stock heavily. On the other hand, in the job seeking/networking process you may be able to find out important nonpublic information, which could provide an opportunity to legally “insider trade” by joining a company with a lot of upside that hasn’t yet been reflected in the valuation.
m00x 6y ago
> The fastest way to wealth is through equity. The fastest way to wealth is actually through winning the lottery. Equity is kind of a lottery, but with you having an influence in the odds. It's important and could definitely make you rich, but it shouldn't be counted on.
- fossuser 6y ago
  Counted on no, but you should try to value it and try to pick winners if you can. Just pretending it’s $0 is a mistake. I live in Palo Alto and I’ve seen many people get rich through equity, people who just read HN outside of startups don’t think it’s possible, but it is. I didn’t realize how possible until I moved out here. FAANG salaries have tempered that a bit since you can just get rich on that income, but even a lot of that comp is equity too (and most of the people I know got most of their wealth from that equity). I’m just telling people reading this in college to take equity value seriously and not dismiss it as worthless because people on HN say to do that all the time.
  - rectang 6y ago
    > I’m just telling people reading this in college to take equity value seriously and not dismiss it as worthless because people on HN say to do that all the time. The vast majority of those people who you are giving that advice to will be played for suckers. It is good advice only for a tiny fraction that have the capacity, the opportunity, and the resources to negotiate a non-exploitative equity package. It is terrible advice for all the rest.
    - bradlys 6y ago
      Maybe he only talks to people going to Stanford - he lives in Palo Alto after all. The people going to Stanford tend to have such incredible privilege that they might just be the right people for his advice.
    - opportune 6y ago
      I mean it might be rude to say "if you're able to get hired at top startups of a certain kind the equity might be nonzero" but for the people that applies to, it's not terrible advice. Like, high school kids in general should not assume they can count on a career in the NBA, but if you're a 7' tall human male you have a >10% chance of playing in the NBA in your lifetime, so for them knowing that they have greater odds of success could be valuable information.
hinkley 6y ago
It’s not equity though. The investors get to revalue your common stock whenever they feel like it. They have equity. You have a good selection of table scraps. Except for a very small number of people who essentially exist to make the rest of us think that could be us soon.
jhatemyjob 6y ago
Thank you. I hate that trope because, yeah technically it's the right advice for most people, since it applies to 99% of companies. But there's that 1% that raised seed or series A from a16z or Founders Fund where your equity has a relatively high chance of a decent payout
- cortesoft 6y ago
  Even that 'relatively high chance' is really low. Even companies funded by the top VCs only have a success rate of about 7.5% (success means generating ANY positive return). This is according to Marc Andreessen himself: https://youtu.be/JYYsXzt1VDc https://youtu.be/JYYsXzt1VDc
  - est31 6y ago
    To add to that, even companies that "make it" like Skype can still royally screw their employees upon being acquired.
- woofie11 6y ago
  Well, no. Most of those companies have special terms which end up screwing most employees out of any upside. That goes anything from shares people can't exercise without a 10-year commitment to tiers of options, to simply offering 0.0000001% of the company, to many others. Equity is worth $0 unless the company is fully transparent on this stuff. I've never run into one which was.
- dleslie 6y ago
  > I hate that trope because, yeah technically it's the right advice for most people, since it applies to 99% of companies. But there's that 1% that raised seed or series A from a16z or Founders Fund where your equity has a relatively high chance of a decent payout Then it's _excellent_ advice. In Canada we have endless amounts of kids who bust their butts to get themselves into the NHL, and only a fraction of a fraction make it, and only a fraction of _those_ get a jaw-dropping contract. From your own admission, and from what seems to be generally accepted, this is also the case for winning the equity lottery in Tech Startups. For those trying to make a living, buy a house, and have a family then valuing your equity at $0 is the only rational option.
actuator 6y ago
I think the advice of valuing it as $0 in most cases makes sense, except if you happen to board the likes of Stripe, Spotify at a time point when they have fairly matured. Only few companies make it to the much vaunted IPO/acquisition stage. Even in acquisitions, esop holders can end up getting a raw deal. It is very hard for one to gauge companies which are going to succeed, I joined a newly Series B startup, a leader in its space with huge market opportunity with a very good product that went nowhere. While I love my initial days building stuff there, I do rue the missed opportunity of not just minting FAANG stocks. Also, even public company equity appreciates. Among the already big FAANG, equity price has increased between 3-6x in the last five years; that is very good considering the amount of equity you get.
smileysteve 6y ago
> The fastest way to wealth is through equity. That's a reason to value illiquid "equity" at $0. Because with a higher cash salary one can invest in "diversified" liquid equity that has a much higher future value than the uncertainties in many startups.
- fossuser 6y ago
  Yeah that’s some risk to price but it isn’t worth $0. Your $100k in diversified market returns (at best) won’t be much compared to a couple million in illiquid equity that becomes valuable.
  - joshuamorton 6y ago
    Who are you assuming is getting multi million dollar equity packages? To get that you either need to join really early stage or be relatively senior, the first is a lottery ticket, and the second is making your second million, which is much, much easier.
    - fossuser 6y ago
      The growth is what makes it worth millions. If you were at Amazon, Facebook, or Google for part of the last ten years and held your equity comp you probably did very well even though the grants at the time were “only” 100-150k or something. I started working in 2012, people I know that joined snap chat around then and the next year or so after made seven figures (some eight) easily in that IPO.
      - joshuamorton 6y ago
        I can't tell what your point is. A Google new grad employee who joined Google in 2012 would also have a decent chance of being a liquid millionare in 2017, and it was never illiquid). And snapchat is an extreme outlier. Even among unicorns it had a high valuation. There are currently 3 us software companies with similar pre ipo valuations: stripe, airbnb and palantir. Which is to say, if your company is the next snapchat, you're break even. Anything less, and a large tech company is a better investment. Betting that your company is the next snapchat, even if it's already a unicorn, is probably a losing proposition, and it's almost certainly losing of you're not already a unicorn.
2muchcoffeeman 6y ago
Even amongst a bunch of technical people. It’s hard to get them to make sensible financial decisions. At my previous company I made a mint from the shares awarded as part of compensation. By selling and reinvesting. But some people actually lost money.
staysaasy 6y ago
I agree and on a related note, I often see startup employees valuing their equity at either $0 or #retirementmoney. In reality the expected value is pretty much always in between those two, and really warrants critical attention. There's a takeaway for hiring managers in this as well – you need to do a lot of education and trust-building to hire well if equity is a meaningful part of the compensation story (and you need to really show integrity in the long run because people talk).
taneq 6y ago
> The fastest way to wealth is through equity. The fastest way to wealth might be through equity. Also equity in a startup is a far different proposition compared with equity in a profitable company.
nsxwolf 6y ago
I’ve been working for 25 years. I could wallpaper my home office with all my worthless options. I’ve never seen a penny and I never will. It’s just not going to happen.
deleted 6y ago
[deleted]
eanzenberg 6y ago
Absolutely agree. It’s a numbers game but the first 9 may not hit but the 10th makes you wealthy. So if you’re on your 6th then you will feel the equity value is worth $0
jariel 6y ago
"The fastest way to wealth is through equity." "The fastest way to wealth is a lottery ticket" It's reasonable to indicate big wealth only comes with the leverage of equity, but it has to be put in the context of the risks involved, and especially the opportunity cost of forgoing a lower salary otherwise.

MattGaiser 6y ago

If you can determine company value and future with any reliability, you may as well just take those skills to the public markets and use your extra cash compensation to buy stocks/options. Far more information is available about those companies than any privately held ones.

fossuser 6y ago
Yeah I do do that, but you have to risk more and I disagree about it being easier to value from the outside. Public markets for non-dividend paying stocks are also betting more on what other people think the stock price will be rather than the company value itself - it’s a bit of a different game.
- bradlys 6y ago
  > Yeah I do do that, but you have to risk more and I disagree about it being easier to value from the outside. I don't know. To me, wasting my time (AKA - my life) seems more risky than anything. On top of that - when you do exercise your options that you earn, you have to pay $$$ for them anyway. (Along with paying AMT - yay!) I'm pissing away a third of my net income on my options + tax right now. Who knows if I'll get jack shit. At least with the stock market I can usually get SOME of my money back unless you're doing something super risky like playing with options. IMO - playing the market is less risky than playing the startup game. Especially if you're joining early startups or ones that haven't just been straight up rockets.
  - fossuser 6y ago
    Well yeah don’t waste your life, equity should be one consideration among many when choosing a place to work.
  - datalus 6y ago
    Have you seen the bloodshed in the NASDAQ lately? It's wiped out quite a bit of wealth... although it was fairly overheated and tech was due for a major correction, but damn watching those gains come down was painful. :/
    - freewilly1040 6y ago
      Still not close to the very common experience of having equity you worked years for cash out to nothing!
      - jefftk 6y ago
        Or less than nothing: I paid to exercise my options when I left my first start up, and they were eventually worth much less than I'd paid.
        freewilly1040 6y ago
        We have similar experiences. I might disagree with advice to college grads to not pursue a startup though. It can be more fun, and if you are going to be tempted by it it's good to take the hit in your 20's when (probably) it doesn't matter too much.
        bradlys 6y ago
        > We have similar experiences. I might disagree with advice to college grads to not pursue a startup though. It can be more fun, and if you are going to be tempted by it it's good to take the hit in your 20's when (probably) it doesn't matter too much. I'd take FAANG over most any startup and would've if they had given me an offer. I speak as someone who has been in 3 startups before they were 30 (seed stage to unicorn). I think startups (startups that have high chance of no exit - <$500 mil valuation, less than 100 employees, <50 engineers) are better suited for people who have significant experience. If you join a startup - it is frequently filled full to the brim of FAANG rejects, young people who don't realize what FAANG offers, and people from different industries trying to break into tech... which means it's almost always the blind leading the blind. You will not learn best practices, you will inevitably find it very hard to switch into a big company, and your resume will look like shit (meaning you will always get subpar offers/interviews) until that startup either becomes a rocket ship OR you join a big co. Risking your 20's in hopes you get ultra rich is a fools errand when you could reliably get $350K+/yr by 30 when joining FAANG when you're in your early 20's. No startup is going to give you an offer that will even be good anyway! There's no way you're going to join a startup as a entry level engineer and get an option package that will be worth anything.
shajznnckfke 6y ago
The lack of public information about startups means that the value is uncertain, and that’s a reason for a candidate with no special insight to discount the stock heavily. On the other hand, in the job seeking/networking process you may be able to find out important nonpublic information, which could provide an opportunity to legally “insider trade” by joining a company with a lot of upside that hasn’t yet been reflected in the valuation.

m00x 6y ago

> The fastest way to wealth is through equity. The fastest way to wealth is actually through winning the lottery. Equity is kind of a lottery, but with you having an influence in the odds. It's important and could definitely make you rich, but it shouldn't be counted on.

fossuser 6y ago
Counted on no, but you should try to value it and try to pick winners if you can. Just pretending it’s $0 is a mistake. I live in Palo Alto and I’ve seen many people get rich through equity, people who just read HN outside of startups don’t think it’s possible, but it is. I didn’t realize how possible until I moved out here. FAANG salaries have tempered that a bit since you can just get rich on that income, but even a lot of that comp is equity too (and most of the people I know got most of their wealth from that equity). I’m just telling people reading this in college to take equity value seriously and not dismiss it as worthless because people on HN say to do that all the time.
- rectang 6y ago
  > I’m just telling people reading this in college to take equity value seriously and not dismiss it as worthless because people on HN say to do that all the time. The vast majority of those people who you are giving that advice to will be played for suckers. It is good advice only for a tiny fraction that have the capacity, the opportunity, and the resources to negotiate a non-exploitative equity package. It is terrible advice for all the rest.
  - bradlys 6y ago
    Maybe he only talks to people going to Stanford - he lives in Palo Alto after all. The people going to Stanford tend to have such incredible privilege that they might just be the right people for his advice.
  - opportune 6y ago
    I mean it might be rude to say "if you're able to get hired at top startups of a certain kind the equity might be nonzero" but for the people that applies to, it's not terrible advice. Like, high school kids in general should not assume they can count on a career in the NBA, but if you're a 7' tall human male you have a >10% chance of playing in the NBA in your lifetime, so for them knowing that they have greater odds of success could be valuable information.

hinkley 6y ago

It’s not equity though. The investors get to revalue your common stock whenever they feel like it. They have equity. You have a good selection of table scraps. Except for a very small number of people who essentially exist to make the rest of us think that could be us soon.

jhatemyjob 6y ago

Thank you. I hate that trope because, yeah technically it's the right advice for most people, since it applies to 99% of companies. But there's that 1% that raised seed or series A from a16z or Founders Fund where your equity has a relatively high chance of a decent payout

cortesoft 6y ago
Even that 'relatively high chance' is really low. Even companies funded by the top VCs only have a success rate of about 7.5% (success means generating ANY positive return). This is according to Marc Andreessen himself: https://youtu.be/JYYsXzt1VDc https://youtu.be/JYYsXzt1VDc
- est31 6y ago
  To add to that, even companies that "make it" like Skype can still royally screw their employees upon being acquired.
woofie11 6y ago
Well, no. Most of those companies have special terms which end up screwing most employees out of any upside. That goes anything from shares people can't exercise without a 10-year commitment to tiers of options, to simply offering 0.0000001% of the company, to many others. Equity is worth $0 unless the company is fully transparent on this stuff. I've never run into one which was.
dleslie 6y ago
> I hate that trope because, yeah technically it's the right advice for most people, since it applies to 99% of companies. But there's that 1% that raised seed or series A from a16z or Founders Fund where your equity has a relatively high chance of a decent payout Then it's _excellent_ advice. In Canada we have endless amounts of kids who bust their butts to get themselves into the NHL, and only a fraction of a fraction make it, and only a fraction of _those_ get a jaw-dropping contract. From your own admission, and from what seems to be generally accepted, this is also the case for winning the equity lottery in Tech Startups. For those trying to make a living, buy a house, and have a family then valuing your equity at $0 is the only rational option.

actuator 6y ago

I think the advice of valuing it as $0 in most cases makes sense, except if you happen to board the likes of Stripe, Spotify at a time point when they have fairly matured. Only few companies make it to the much vaunted IPO/acquisition stage. Even in acquisitions, esop holders can end up getting a raw deal. It is very hard for one to gauge companies which are going to succeed, I joined a newly Series B startup, a leader in its space with huge market opportunity with a very good product that went nowhere. While I love my initial days building stuff there, I do rue the missed opportunity of not just minting FAANG stocks. Also, even public company equity appreciates. Among the already big FAANG, equity price has increased between 3-6x in the last five years; that is very good considering the amount of equity you get.

smileysteve 6y ago

> The fastest way to wealth is through equity. That's a reason to value illiquid "equity" at $0. Because with a higher cash salary one can invest in "diversified" liquid equity that has a much higher future value than the uncertainties in many startups.

fossuser 6y ago
Yeah that’s some risk to price but it isn’t worth $0. Your $100k in diversified market returns (at best) won’t be much compared to a couple million in illiquid equity that becomes valuable.
- joshuamorton 6y ago
  Who are you assuming is getting multi million dollar equity packages? To get that you either need to join really early stage or be relatively senior, the first is a lottery ticket, and the second is making your second million, which is much, much easier.
  - fossuser 6y ago
    The growth is what makes it worth millions. If you were at Amazon, Facebook, or Google for part of the last ten years and held your equity comp you probably did very well even though the grants at the time were “only” 100-150k or something. I started working in 2012, people I know that joined snap chat around then and the next year or so after made seven figures (some eight) easily in that IPO.
    - joshuamorton 6y ago
      I can't tell what your point is. A Google new grad employee who joined Google in 2012 would also have a decent chance of being a liquid millionare in 2017, and it was never illiquid). And snapchat is an extreme outlier. Even among unicorns it had a high valuation. There are currently 3 us software companies with similar pre ipo valuations: stripe, airbnb and palantir. Which is to say, if your company is the next snapchat, you're break even. Anything less, and a large tech company is a better investment. Betting that your company is the next snapchat, even if it's already a unicorn, is probably a losing proposition, and it's almost certainly losing of you're not already a unicorn.

2muchcoffeeman 6y ago

Even amongst a bunch of technical people. It’s hard to get them to make sensible financial decisions. At my previous company I made a mint from the shares awarded as part of compensation. By selling and reinvesting. But some people actually lost money.

staysaasy 6y ago

I agree and on a related note, I often see startup employees valuing their equity at either $0 or #retirementmoney. In reality the expected value is pretty much always in between those two, and really warrants critical attention. There's a takeaway for hiring managers in this as well – you need to do a lot of education and trust-building to hire well if equity is a meaningful part of the compensation story (and you need to really show integrity in the long run because people talk).

taneq 6y ago

> The fastest way to wealth is through equity. The fastest way to wealth might be through equity. Also equity in a startup is a far different proposition compared with equity in a profitable company.

nsxwolf 6y ago

I’ve been working for 25 years. I could wallpaper my home office with all my worthless options. I’ve never seen a penny and I never will. It’s just not going to happen.

deleted 6y ago

[deleted]

eanzenberg 6y ago

Absolutely agree. It’s a numbers game but the first 9 may not hit but the 10th makes you wealthy. So if you’re on your 6th then you will feel the equity value is worth $0

jariel 6y ago

"The fastest way to wealth is through equity." "The fastest way to wealth is a lottery ticket" It's reasonable to indicate big wealth only comes with the leverage of equity, but it has to be put in the context of the risks involved, and especially the opportunity cost of forgoing a lower salary otherwise.