10 ms·

As an individual negotiating compensation with a company, you are at a structural disadvantage: the company does this all the time, and (lacking a union to nego

As an individual negotiating compensation with a company, you are at a structural disadvantage: the company does this all the time, and (lacking a union to negotiate on your behalf) you do this rarely. Unless you are an elite negotiator (and if you can hire a lawyer you are elite already), the complexity of any compensation package works in the company's favor. For almost all of us, equity is a vehicle to get screwed over. Articles like this one only to serve to perpetuate startup mythology and inflate false hopes. Theoretically, a startup that actually wants to compete on compensation by sharing in good fortune could craft an equity package which is simple and standardized enough to be comprehensible by ordinary humans. But so long as employees keep snapping at the vaporous bait of deceptive equity packages, there's not much incentive to do so.

kelnos 6y ago
> an equity package which is simple and standardized enough to be comprehensible by ordinary humans > deceptive equity packages What do you mean by "deceptive"? The standard for pre-IPO seems to me to be N number of options, at a particular strike price, 10-year expiration (or 90 days if you leave the company). That doesn't seem all that complicated to me, or deceptive. What can get deceptive is if the company is trying to lowball you on salary and tell you that your equity will become worth millions some day as if it was a sure thing, which is of course a scummy practice. And the whole expiration after 90 days thing is garbage. But deceptive? Complicated? I don't think it is. I really don't see what's not simple or standardized about what I described above. Granted, the last time I joined a startup (which is not a startup anymore) was 9 years ago, but I haven't read anything to suggest that this has changed drastically.
- mehrdadn 6y ago
  Any thoughts on the AMT trap, and the potential inability to exercise (or go bankrupt with AMT) when you leave? It's not exactly written in red warning letters on offer packages, right?
  - eanzenberg 6y ago
    If you’re hitting ATM you’re doing extremely well for yourself and are privileged.
    - mehrdadn 6y ago
      You seem to be unfamiliar with the AMT trap? I would recommend Googling it. It impacts people who are not well-off prior to exercising their options by triggering AMT upon exercise.
      - eanzenberg 6y ago
        Right, but why exercise the option without next selling it? If you’re quitting, that’s a risk. And AMT is applied on the gains. So your strike is $1, valuation currently at $100 and you pay tax on the $99 gain. Unless it’s Theranos that valuation wont go back to $1, so yes, you’re privileged.
        mehrdadn 6y ago
        You need to read up on the issue. Links to get you started: - https://www.holloway.com/g/equity-compensation/sections/the-amt-trap https://www.holloway.com/g/equity-compensation/sections/the-... - https://thestartuplawblog.com/immediately-exercisable-isos-the-problems/ https://thestartuplawblog.com/immediately-exercisable-isos-t...
        eanzenberg 6y ago
        It’s a great problem to have. I’d love to have that problem. Give me that problem. You choose how much to purchase and wait for the wealth to materialize. I’m sure most people would love to have this kind of problem. Gimme. Gimme.
        mehrdadn 6y ago
        OK. You posted this unsubstantive comment 3 times...
- joshuamorton 6y ago
  90 days if you leave is deceptive and will lock you to the company unless you're independently wealthy. A less deceptive thing is a 7-10 year window if you leave, because that isn't "you forfeit your equity when you leave if you aren't already wealthy." Equity pricing is also nonsense for many private companies. I was offered 1 million dollars in equity in a company 4 years ago assuming a multi-billion dollar valuation. It's unclear if the company has even achieved that valuation now, four years on. And they're still private.
  - rpedela 6y ago
    90 days for ISOs is US law. They can be converted to NSOs to get a longer exercise term, but there are different tax implications too. Some companies are offering the conversion now.
    - est31 6y ago
      A link going into further details: https://carta.com/blog/pte-90-day-window/ https://carta.com/blog/pte-90-day-window/
- spearo77 6y ago
  I think dilution is something that makes the package deceptively complex. Subsequent rounds of funding diminish a previously healthy looking equity package. How should you factor that into your expectations for the future of your equity package? I think that's complicated. Does anyone ask for or receive a re-calculated salary based on the change in equity that results from dilution?
  - numlocked 6y ago
    Assuming an up round, dilution causes you to own less of a company on a percentage basis, but the actual dollar values of your shares will be worth more. If things are going well (which is admittedly rare, and the lightning you’re trying to bottle) dilution just makes your piece of the pie grow somewhat sub-linearly to the overall equity value creation, but certainly isn’t making it negative. I find it much easier to reason about equity comp on a per share basis rather than a percentage ownership basis (and frankly don’t understand the constant advice to try and think about it on a percentage basis - though will always happily share that with job candidates). Additional equity grants are what can make up for dilution, not additional cash comp. I also believe that cash and equity are fundamentally different types of compensation, given for different reasons, and are not particularly fungible. I always try to make equity as comprehensible as possible, but the reality is that it IS complicated - and worth spending time to actually understand because, while there are ways to get misled, it’s also the path to wealth creation.
    - nandhinianand 6y ago
      > reason about equity comp on a per share basis The one reason I find this highly skeptical, is that this is in some sense a made-up figure. In Options, It's an estimate of a per share once the company goes public. In other cases, it's something the founders have estimated based on market potential and other things.
    - michaelt 6y ago
      > Assuming an up round, dilution causes you to own less of a company on a percentage basis, but the actual dollar values of your shares will be worth more. If you're at a $10M company and you're thinking "I will own 0.1%, so in a few years I can look forward to a payday of $10,000" then you're right: getting diluted 10x to own 0.01% of a $100M company is the same value. But if your thinking is "I will own 0.1%, and if I owned that much of WhatsApp when it sold to Facebook I'd have made $16M" then a 10x dilution would reduce that to $1.6M Now, you might argue the second line of thinking is wrong and a fantasy valuation, but we all know no-one's getting hired away from FAANG by the promise of an uncertain, one-off $10k in a few years.
- rectang 6y ago
  > What do you mean by "deceptive"? A package which appears to the novice to be worth N dollars, but where statistically speaking many employees end up in the hole because they mishandle the tax implications, or where statistically speaking many employees end up in difficulty attempting to sell their shares because they miss some deadline or fail to meet some other condition, etc. There is a need for simplification and standardization because the average employee offered options today does not have the qualifications to assess the value of an equity package — it's not like direct monetary compensation which is easy to understand. Or at least there's such a need for reform from the perspective of the employee. From the perspective of an employer, if statistically speaking many employees mishandle their complex options packages, then the company ends up money ahead, having driven down labor costs by offloading hidden risk onto their employees.
- kevinburke 6y ago
  Yeah, agreed, I don't really think the core premise is that deceptive. I will say though one trick I've seen (I should write about this) is multiplying your common stock through by the latest price of the preferred stock and presenting this as the "current value" of your equity offer. Your common stock is not worth as much as the preferred stock.
- m0zg 6y ago
  It's usually deceptive all the way throughout: 1. Not disclosing the valuation details 2. Not disclosing who owns what and with what liquidation preference (this alone means you don't know what you're getting even in the unlikely event the startup succeeds) 3. Creating unrealistic expectations about the value of your "equity" package ("0.5% is a lot of money, man, we'll be a unicorn"). Quoted because if it's not equity if you can't sell it or can't get a dividend from it. 4. Requiring that you sell your _exercised_ shares back to the company at the price of board's choosing if you left voluntarily or otherwise. This is called the "clawback" clause. 5. Requiring that you forfeit your _vested_ but unexercised shares if you were terminated "for a cause", in addition to #4. A "cause" can easily be manufactured shortly before acquisition. There are precedents. 6. Abusive terms in case of acquisition 7. No acceleration in case of acquisition 8. Super short exercise window if you leave on your own volition. With all of the above combined, you're at the complete mercy of the company in whether you get anything at all even if you work there for years. Do I need to continue? I had all of these at one point or another and I only evaluated offers from 2 startups so far. My lawyer extensively redlined both of them. In one case the board agreed to the revised offer. In another it did not, so I did not join. Such redlining only works if you're a very early employee and you're very senior. But regardless, I'd argue that if you're taking a pay cut, you should at least know what you're getting yourself into, and $500-700 for counsel is not too bad. If you don't like the underwater rocks your lawyer identified, demand more cash or walk away.
  - laumeeyen 6y ago
    how do you find a lawyer that does this sort of thing? how specific of a speciality should I be looking for if interested in finding one?
- munchbunny 6y ago
  What can get deceptive is if the company is trying to lowball you on salary and tell you that your equity will become worth millions some day as if it was a sure thing, which is of course a scummy practice. And the whole expiration after 90 days thing is garbage. But deceptive? Complicated? I don't think it is. For people fresh out of school or people who have spent many years in public companies and haven't had to think about how much the options are actually worth, there's likely to be a disconnect between what is written on paper and what is perceived. The equity clauses in the typical employment contract, for example, won't tell you about AMT taxes, liquidation preferences, how hard it actually is to decide to exercise 90 days after you leave (you'll mostly likely leave before the cash-out), or how unlikely that equity is to be worth much. Those things aren't said or written but are important to understand. The recruiter won't tell you that either because they want you to join. That last item is entirely about your ability to accurately assess the value of the company, which is usually a crapshoot even when you have complete information, which you don't. Plenty of people I know/knew, including a younger version of myself, think about it subjectively and don't have a cynical enough view on the chances of cashing out. It might not be deceptive, but it certainly is complex, and you're probably not being told the most important parts of the deal. The saying "caveat emptor" comes to mind, which is definitely about surprises showing up after you commit.
- lumost 6y ago
  How often is the strike price the fair market value of the employee equity pool? Most VCs carry preference stacks to either 1x or 2x of the current valuation, Leaving the options structurally underwater unless the company increases in value by 3x. To take home the strike price equivalent per option could require up to a 6x increase in valuation. This is a non-obvious way that employees are often screwed on options.
  - dbt00 6y ago
    The “at a valuation of” numbers you see thrown around in funding rounds are preferred shares and have a higher cost than employee equity. As a result, companies can use that risk factor to push down on employee strike price, aka 409(a) valuation of common shares, to keep buy in costs low until a liquidity event that equalizes risk preferences (or, if it’s a crappy exit, doesn’t). The company and employees have a common interest in keeping that price low.
    - lumost 6y ago
      Unfortunately the only options I've seen in 2 private companies were post-preference with a strike price tied to the valuation of the common equity. At the end of the day the company is acquired for a fixed price which goes to the preferenced shares first, leaving little on the table. Straight IPOs have become rare, and the few times I've been a part of one my grants per year increased following IPO as the value was clear. It's possible there was a mechanic at work that would have made the equity worth more at the ~6x valuation increase, however these companies were already worth ~200 million-1 billion. If the company wanted to incentivize extreme upside they should have increased the strike price, and increased the number of options granted. Spotify provides this option to employees where you can choose cash, RSUs, options, or "high-risk" options. You can get 8x options relative to RSUs with a strike price that's double the current stock price. If the company 4x'd in value over 4 years you'd make 4x on these compared to RSU's enabling a public company to offer "lottery" ticket equity packages. Ultimately if a startup is trying to offer a lottery ticket to employees to lure them from top-tier companies, then they'll need to make real lottery tickets with real payouts at the end. That means that a startup with an expected 100 million dollar exit in 5 years will need to grant 2% of the company at exit to a top-tier engineer in the average case ( with appropriate vesting ).
- switch11 6y ago
  Your answer illustrates what he's talking about You are not even realizing what he's actually saying HE's not talking about lowballing on salary He is talking about what percentage of the company you are going to get, how soon you will get it, and other details * Most people won't get this. I will still try A) What percentage of the company are you getting? B) What dilution is going to happen? C) When can you sell your stake in the company? D) How soon and in what manner does it vest * People fixate on things like 1,000 options without considering what it really means Please consider what you wrote: The standard for pre-IPO seems to me to be N number of options, at a particular strike price, 10-year expiration (or 90 days if you leave the company). That doesn't seem all that complicated to me, or deceptive. NOWHERE in that is What value do I bring the company IN RETURN what percentage of the company am I getting AT WHAT RATE will I be given that share of the company
  - alonmower 6y ago
    You should absolutely ask about A) and be very suspicious if they refuse to tell you. No one can answer B) with any real confidence because they don’t have a crystal ball. C) is almost always going to be at IPO or when the company sells, though maybe if you’re extremely important they’ll let you negotiate to sell some at a later round, though given this complicates things in most cases they’ll likely not want to bother with it unless you have a ton of leverage. D) is almost always going to be one year cliff, then rest monthly over four years. That should also be extremely easy information to get.
    - est31 6y ago
      Regarding C, usually you need to wait a bit post IPO until the investors had opportunity to sell their stock. Only THEN it's your turn. It's called lock-up period and lasts usually 180 days (half a year). Just keep that in mind. Also during sale, investors might choose to execute their liquidation preferences, which means that your shares might become worthless. Employees who paid hundreds of thousands of USD annually in opportunity cost have no such clauses to get their money back.
      - 6y ago
jariel 6y ago
It doesn't matter if you have a 'great lawyer' - because any 'fine print' in other investors deals can very easily fundamentally change the value of the offer. Major investors could have 3x 'participating' in which case they get 3x their investment back before anyone else gets anything. There are debtors: if the company has big debt - money goes to them first. Sometimes the debt is convertible - which could mean major dilution. The number of outstanding options, not actually stocks, obviously makes a big difference. Major cash bonuses to execs, IP holders etc. upon sale. And that's the 'relatively normal stuff'. The contracts can literally say anything. Like 'Investor ABC who put in $1 gets first rights to the first $100M in valuation' or something insane like that. Now - that would be very bad actually for the company obviously, so it's not likely to happen ... but it could theoretically be there. So there's an immense amount of trust that has to be in place, which is why you need a very 'clean' situation, a credible team - and then of course a 'hot enough' company for it to even make sense. Equity is a legit form of comp. but everything just has to be 'just right' and often it's not. If there is any 'odour' at all in the situation, I would assume shenanigans, in which case, any form of equity is considerably more risky, and then probably not worth it.
- deleted 6y ago
  [deleted]
pointyfence 6y ago
"Theoretically, a startup that actually wants to compete on compensation by sharing in good fortune could craft an equity package which is simple and standardized enough to be comprehensible by ordinary humans." One time, I received an offer from a small, struggling startup. But because it's equity structure was so simple (struggling has a way of simplifying things), I counter-proposed taking less salary for more equity, and they agreed. With the typical equity opacity removed, I viewed the trade-off as more of a bet on myself: the impact that I could make and if I assessed the company correctly. The payoff when we were acquired was just the equivalent of a nice extra bonus. The real satisfaction was having more skin in the game, having the expected impact, being correct on the assessment, etc. But it wouldn't have happened if I felt lost in the complex equity structure and confidentiality barriers that seem to be present in many startups.
- kornish 6y ago
  What made the offer simple compared to typical modern SV startup offers?
  - pointyfence 6y ago
    Just one class of common shares for all the investor groups. New money didn't appear to be coming in. We were either going to go poof, or we were going to get sold. I'm a sucker for turnaround plays because a lot of BS gets beaten out of the organization, and they're more receptive to change.
- cabaalis 6y ago
  Having done this also, one point of care to take: Make sure your salary is right-sized post-acquisition. The buying company will likely have operating capital requirements based on existing PNL. Assuming you stay on, which key employees will likely have to, your low-salary position could be directly imported into the new position at the new company.
  - myblake 6y ago
    No one can require you to stay on though, you’ll either have sufficient equity or bonus potential to make up for the lower salary, a salary adjustment, or you’ll just walk for a market salary.
quickthrower2 6y ago
There is a structural disadvantage but it isn't that. It is a company hires people, whose job it is to make the company more efficient and profitable, and to do so, you need to set things up so no employee can be in a powerful position. For example tech choices so "Use Java and X Framework we can easily hire people", and such like. Keep it plug an play. To the point where it is seen as immoral to do things 'for job security', whilst the company itself might do this to it's customers. I think this affects things more than negotiation.
eru 6y ago
You are too pessimistic. Negotiations ain't so hard. It's mostly down to BATNA, ie best alternative to negotiated agreement. Why would you want a union? Do your homework to figure out how much your skills are worth on the market; get multiple companies into the offer stage; then more or less just let them know your demands and let them know that you are more than prepared to walk away if they don't agree. That's it. If they decide to call your bluff, then you really just walk away. That's why you want to have multiple companies in the offer stage at the same time, and also want to start interviewing before your old job becomes unbearable.
- ThrowMeAwayOkay 6y ago
  This is the best answer I’ve read. Cold hard cash beats pie-in-the-sky stocks.
  - eru 6y ago
    Oh, whether you want cash or stocks is up to you. For comparison, I usually convert everything into a common metric. So eg I might say that 3 dollars of sign-on bonus are worth as much as 1 dollar of base salary to me. Or that I value the stock options at X dollars each (taking into account that they are risky and not liquid). But that's independent of the technique I outlined in the other comment.
- GeneralMayhem 6y ago
  >Why would you want a union? Same reason anyone wants a union: to reduce structural asymmetry. In this case, the asymmetry in question is information. Think of the hypothetical union as you and your coworkers all pitching in to get a really good lawyer to review your employment contracts and vesting terms. >figure out how much your skills are worth on the market The problem is that there isn't a public orderline for compensation. Observing even a single bid takes significant effort, so figuring out where the fair price is with any degree of precision is hard. And it's fundamentally harder for workers than it is for employers. More importantly, because of the issues with equity, even those scarce observations are fuzzy. Comparing two equity packages from non-public companies is hard, and it's ridiculous (or, depending on your interpretation, cunningly malicious) to put that burden on every single employee individually. You're paid to be an expert in software engineering and a partial domain expert in whatever the company does; having to also be an expert in finance and obscure tax law to even know how much you're getting paid is unreasonable.
causality0 6y ago
Indeed. Personally I just write equity offers off as zero-value advertising. I don't have enough spare time or mental willpower to deal with that crap. I don't have a degree in finance. I do the work you want done and you give me money. Just calculating the value of the benefits package is irritating enough by itself.
ultrarunner 6y ago
Isn't an overly complex equity package just lesser compensation? If someone feels like they're disadvantaged by the company right off the bat, they shouldn't take the job. Or they should negotiate a higher salary to make up for the (unusable?) equity compensation.
baxtr 6y ago
I wonder: is there a model where a Specialized lawyer negotiates for you, and is paid on a success basis depending on how much he’ll get for you?
- michaelt 6y ago
  Nobody can negotiate for you unless they still get paid if you walk away
eloisant 6y ago
There is an easy fix: consider equity as some free lottery tickets, and don't accept a lower salary that you would want just because you have equity. If you want to make money from a sale or an IPO, you need to be a co-founder or investor. As an employee of a startup your remuneration is your salary, and equity is a lottery ticket that maybe, if you're lucky, will end up in a nice one time bonus in the future. Don't believe the stories of the employee raking in millions when the startup exits. It maybe happened for some employees at a few companies like Google but it's not happening to you.
- VBprogrammer 6y ago
  Honestly, I was freaked out by the ordering in the article (equity, benefits, salary, something else). That is completely opposite how I'd normally view an offer. Maybe I'm just not Silicon Valley enough but equity doesn't pay rent.
madeofpalk 6y ago
> For almost all of us, equity is a vehicle to get screwed over. It's really not all that difficult, but it just needs to get drummed into people's head that equity is not compensation! At best, it's like a free gym membership that you'll never use.
ilammy 6y ago
> As an individual negotiating compensation with a company, you are at a structural disadvantage: the company does this all the time, and (lacking a union to negotiate on your behalf) you do this rarely. This is exactly why a common advice on compensation negotiation is: don't stop interviewing once you get a job.
roenxi 6y ago
> As an individual negotiating compensation with a company, you are at a structural disadvantage I may be worlds worst negotiator; I'm not very good at representing myself and I tend to nod and smile a lot. I think my salary has tended between 1.2 and 1.5 times the male full-time median over my career. So sure, there is a structural disadvantage there. If I were a great negotiator maybe I could be working with 1.4 to 1.7x. But that structural advantage is all about fiddling at the margins, and a union won't change that. Neither unions or companies can resist the underlying market that sets the bounds on what is possible. I'm much more worried about that, and I don't think a union would help. If anything, it is likely to hinder. If times get tough, I want a low-paid job, not no job. Conversationally, I don't want my peers telling me what to do, it is bad enough when the boss does. If people want to share salaries that sounds helpful.
- pnutjam 6y ago
  Unions don't tell you what to do, they tell you what not to do. Like hey, your job description doesn't include moving furniture, or you're not required to get coffee for everyone at a meeting.
Shivetya 6y ago
No, the union would only insure you obtain what is contractually spelled out by the agreement they have with the employer for your job classification. there is no negotiating here. the good from this is you know you won't be cheated of anything but the bad is your progression will not be the same in a company not bound to strict rules of progression. So you choose, there is no negative to entering into such an environment but realize the employer's hands are tied too to be honest, if the pay and rewards of such value you really should pay for a few hours of a lawyers advice to review the contracts offered you. if the prospective employer does not permit that then that should be a signal as clear as day what to do. only you can state what level of compensation is worth the money spend on a lawyer to read it over for you and you should weigh the time you spend doing the research against someone who knows contract law.
naveen99 6y ago
What’s an elite negotiator ? All you need to be elite is to credibly be able to walk away from the deal.

kelnos 6y ago

> an equity package which is simple and standardized enough to be comprehensible by ordinary humans > deceptive equity packages What do you mean by "deceptive"? The standard for pre-IPO seems to me to be N number of options, at a particular strike price, 10-year expiration (or 90 days if you leave the company). That doesn't seem all that complicated to me, or deceptive. What can get deceptive is if the company is trying to lowball you on salary and tell you that your equity will become worth millions some day as if it was a sure thing, which is of course a scummy practice. And the whole expiration after 90 days thing is garbage. But deceptive? Complicated? I don't think it is. I really don't see what's not simple or standardized about what I described above. Granted, the last time I joined a startup (which is not a startup anymore) was 9 years ago, but I haven't read anything to suggest that this has changed drastically.

mehrdadn 6y ago
Any thoughts on the AMT trap, and the potential inability to exercise (or go bankrupt with AMT) when you leave? It's not exactly written in red warning letters on offer packages, right?
- eanzenberg 6y ago
  If you’re hitting ATM you’re doing extremely well for yourself and are privileged.
  - mehrdadn 6y ago
    You seem to be unfamiliar with the AMT trap? I would recommend Googling it. It impacts people who are not well-off prior to exercising their options by triggering AMT upon exercise.
    - eanzenberg 6y ago
      Right, but why exercise the option without next selling it? If you’re quitting, that’s a risk. And AMT is applied on the gains. So your strike is $1, valuation currently at $100 and you pay tax on the $99 gain. Unless it’s Theranos that valuation wont go back to $1, so yes, you’re privileged.
      - mehrdadn 6y ago
        You need to read up on the issue. Links to get you started: - https://www.holloway.com/g/equity-compensation/sections/the-amt-trap https://www.holloway.com/g/equity-compensation/sections/the-... - https://thestartuplawblog.com/immediately-exercisable-isos-the-problems/ https://thestartuplawblog.com/immediately-exercisable-isos-t...
        eanzenberg 6y ago
        It’s a great problem to have. I’d love to have that problem. Give me that problem. You choose how much to purchase and wait for the wealth to materialize. I’m sure most people would love to have this kind of problem. Gimme. Gimme.
        mehrdadn 6y ago
        OK. You posted this unsubstantive comment 3 times...
joshuamorton 6y ago
90 days if you leave is deceptive and will lock you to the company unless you're independently wealthy. A less deceptive thing is a 7-10 year window if you leave, because that isn't "you forfeit your equity when you leave if you aren't already wealthy." Equity pricing is also nonsense for many private companies. I was offered 1 million dollars in equity in a company 4 years ago assuming a multi-billion dollar valuation. It's unclear if the company has even achieved that valuation now, four years on. And they're still private.
- rpedela 6y ago
  90 days for ISOs is US law. They can be converted to NSOs to get a longer exercise term, but there are different tax implications too. Some companies are offering the conversion now.
  - est31 6y ago
    A link going into further details: https://carta.com/blog/pte-90-day-window/ https://carta.com/blog/pte-90-day-window/
spearo77 6y ago
I think dilution is something that makes the package deceptively complex. Subsequent rounds of funding diminish a previously healthy looking equity package. How should you factor that into your expectations for the future of your equity package? I think that's complicated. Does anyone ask for or receive a re-calculated salary based on the change in equity that results from dilution?
- numlocked 6y ago
  Assuming an up round, dilution causes you to own less of a company on a percentage basis, but the actual dollar values of your shares will be worth more. If things are going well (which is admittedly rare, and the lightning you’re trying to bottle) dilution just makes your piece of the pie grow somewhat sub-linearly to the overall equity value creation, but certainly isn’t making it negative. I find it much easier to reason about equity comp on a per share basis rather than a percentage ownership basis (and frankly don’t understand the constant advice to try and think about it on a percentage basis - though will always happily share that with job candidates). Additional equity grants are what can make up for dilution, not additional cash comp. I also believe that cash and equity are fundamentally different types of compensation, given for different reasons, and are not particularly fungible. I always try to make equity as comprehensible as possible, but the reality is that it IS complicated - and worth spending time to actually understand because, while there are ways to get misled, it’s also the path to wealth creation.
  - nandhinianand 6y ago
    > reason about equity comp on a per share basis The one reason I find this highly skeptical, is that this is in some sense a made-up figure. In Options, It's an estimate of a per share once the company goes public. In other cases, it's something the founders have estimated based on market potential and other things.
  - michaelt 6y ago
    > Assuming an up round, dilution causes you to own less of a company on a percentage basis, but the actual dollar values of your shares will be worth more. If you're at a $10M company and you're thinking "I will own 0.1%, so in a few years I can look forward to a payday of $10,000" then you're right: getting diluted 10x to own 0.01% of a $100M company is the same value. But if your thinking is "I will own 0.1%, and if I owned that much of WhatsApp when it sold to Facebook I'd have made $16M" then a 10x dilution would reduce that to $1.6M Now, you might argue the second line of thinking is wrong and a fantasy valuation, but we all know no-one's getting hired away from FAANG by the promise of an uncertain, one-off $10k in a few years.
rectang 6y ago
> What do you mean by "deceptive"? A package which appears to the novice to be worth N dollars, but where statistically speaking many employees end up in the hole because they mishandle the tax implications, or where statistically speaking many employees end up in difficulty attempting to sell their shares because they miss some deadline or fail to meet some other condition, etc. There is a need for simplification and standardization because the average employee offered options today does not have the qualifications to assess the value of an equity package — it's not like direct monetary compensation which is easy to understand. Or at least there's such a need for reform from the perspective of the employee. From the perspective of an employer, if statistically speaking many employees mishandle their complex options packages, then the company ends up money ahead, having driven down labor costs by offloading hidden risk onto their employees.
kevinburke 6y ago
Yeah, agreed, I don't really think the core premise is that deceptive. I will say though one trick I've seen (I should write about this) is multiplying your common stock through by the latest price of the preferred stock and presenting this as the "current value" of your equity offer. Your common stock is not worth as much as the preferred stock.
m0zg 6y ago
It's usually deceptive all the way throughout: 1. Not disclosing the valuation details 2. Not disclosing who owns what and with what liquidation preference (this alone means you don't know what you're getting even in the unlikely event the startup succeeds) 3. Creating unrealistic expectations about the value of your "equity" package ("0.5% is a lot of money, man, we'll be a unicorn"). Quoted because if it's not equity if you can't sell it or can't get a dividend from it. 4. Requiring that you sell your _exercised_ shares back to the company at the price of board's choosing if you left voluntarily or otherwise. This is called the "clawback" clause. 5. Requiring that you forfeit your _vested_ but unexercised shares if you were terminated "for a cause", in addition to #4. A "cause" can easily be manufactured shortly before acquisition. There are precedents. 6. Abusive terms in case of acquisition 7. No acceleration in case of acquisition 8. Super short exercise window if you leave on your own volition. With all of the above combined, you're at the complete mercy of the company in whether you get anything at all even if you work there for years. Do I need to continue? I had all of these at one point or another and I only evaluated offers from 2 startups so far. My lawyer extensively redlined both of them. In one case the board agreed to the revised offer. In another it did not, so I did not join. Such redlining only works if you're a very early employee and you're very senior. But regardless, I'd argue that if you're taking a pay cut, you should at least know what you're getting yourself into, and $500-700 for counsel is not too bad. If you don't like the underwater rocks your lawyer identified, demand more cash or walk away.
- laumeeyen 6y ago
  how do you find a lawyer that does this sort of thing? how specific of a speciality should I be looking for if interested in finding one?
munchbunny 6y ago
What can get deceptive is if the company is trying to lowball you on salary and tell you that your equity will become worth millions some day as if it was a sure thing, which is of course a scummy practice. And the whole expiration after 90 days thing is garbage. But deceptive? Complicated? I don't think it is. For people fresh out of school or people who have spent many years in public companies and haven't had to think about how much the options are actually worth, there's likely to be a disconnect between what is written on paper and what is perceived. The equity clauses in the typical employment contract, for example, won't tell you about AMT taxes, liquidation preferences, how hard it actually is to decide to exercise 90 days after you leave (you'll mostly likely leave before the cash-out), or how unlikely that equity is to be worth much. Those things aren't said or written but are important to understand. The recruiter won't tell you that either because they want you to join. That last item is entirely about your ability to accurately assess the value of the company, which is usually a crapshoot even when you have complete information, which you don't. Plenty of people I know/knew, including a younger version of myself, think about it subjectively and don't have a cynical enough view on the chances of cashing out. It might not be deceptive, but it certainly is complex, and you're probably not being told the most important parts of the deal. The saying "caveat emptor" comes to mind, which is definitely about surprises showing up after you commit.
lumost 6y ago
How often is the strike price the fair market value of the employee equity pool? Most VCs carry preference stacks to either 1x or 2x of the current valuation, Leaving the options structurally underwater unless the company increases in value by 3x. To take home the strike price equivalent per option could require up to a 6x increase in valuation. This is a non-obvious way that employees are often screwed on options.
- dbt00 6y ago
  The “at a valuation of” numbers you see thrown around in funding rounds are preferred shares and have a higher cost than employee equity. As a result, companies can use that risk factor to push down on employee strike price, aka 409(a) valuation of common shares, to keep buy in costs low until a liquidity event that equalizes risk preferences (or, if it’s a crappy exit, doesn’t). The company and employees have a common interest in keeping that price low.
  - lumost 6y ago
    Unfortunately the only options I've seen in 2 private companies were post-preference with a strike price tied to the valuation of the common equity. At the end of the day the company is acquired for a fixed price which goes to the preferenced shares first, leaving little on the table. Straight IPOs have become rare, and the few times I've been a part of one my grants per year increased following IPO as the value was clear. It's possible there was a mechanic at work that would have made the equity worth more at the ~6x valuation increase, however these companies were already worth ~200 million-1 billion. If the company wanted to incentivize extreme upside they should have increased the strike price, and increased the number of options granted. Spotify provides this option to employees where you can choose cash, RSUs, options, or "high-risk" options. You can get 8x options relative to RSUs with a strike price that's double the current stock price. If the company 4x'd in value over 4 years you'd make 4x on these compared to RSU's enabling a public company to offer "lottery" ticket equity packages. Ultimately if a startup is trying to offer a lottery ticket to employees to lure them from top-tier companies, then they'll need to make real lottery tickets with real payouts at the end. That means that a startup with an expected 100 million dollar exit in 5 years will need to grant 2% of the company at exit to a top-tier engineer in the average case ( with appropriate vesting ).
switch11 6y ago
Your answer illustrates what he's talking about You are not even realizing what he's actually saying HE's not talking about lowballing on salary He is talking about what percentage of the company you are going to get, how soon you will get it, and other details * Most people won't get this. I will still try A) What percentage of the company are you getting? B) What dilution is going to happen? C) When can you sell your stake in the company? D) How soon and in what manner does it vest * People fixate on things like 1,000 options without considering what it really means Please consider what you wrote: The standard for pre-IPO seems to me to be N number of options, at a particular strike price, 10-year expiration (or 90 days if you leave the company). That doesn't seem all that complicated to me, or deceptive. NOWHERE in that is What value do I bring the company IN RETURN what percentage of the company am I getting AT WHAT RATE will I be given that share of the company
- alonmower 6y ago
  You should absolutely ask about A) and be very suspicious if they refuse to tell you. No one can answer B) with any real confidence because they don’t have a crystal ball. C) is almost always going to be at IPO or when the company sells, though maybe if you’re extremely important they’ll let you negotiate to sell some at a later round, though given this complicates things in most cases they’ll likely not want to bother with it unless you have a ton of leverage. D) is almost always going to be one year cliff, then rest monthly over four years. That should also be extremely easy information to get.
  - est31 6y ago
    Regarding C, usually you need to wait a bit post IPO until the investors had opportunity to sell their stock. Only THEN it's your turn. It's called lock-up period and lasts usually 180 days (half a year). Just keep that in mind. Also during sale, investors might choose to execute their liquidation preferences, which means that your shares might become worthless. Employees who paid hundreds of thousands of USD annually in opportunity cost have no such clauses to get their money back.
    - 6y ago

jariel 6y ago

It doesn't matter if you have a 'great lawyer' - because any 'fine print' in other investors deals can very easily fundamentally change the value of the offer. Major investors could have 3x 'participating' in which case they get 3x their investment back before anyone else gets anything. There are debtors: if the company has big debt - money goes to them first. Sometimes the debt is convertible - which could mean major dilution. The number of outstanding options, not actually stocks, obviously makes a big difference. Major cash bonuses to execs, IP holders etc. upon sale. And that's the 'relatively normal stuff'. The contracts can literally say anything. Like 'Investor ABC who put in $1 gets first rights to the first $100M in valuation' or something insane like that. Now - that would be very bad actually for the company obviously, so it's not likely to happen ... but it could theoretically be there. So there's an immense amount of trust that has to be in place, which is why you need a very 'clean' situation, a credible team - and then of course a 'hot enough' company for it to even make sense. Equity is a legit form of comp. but everything just has to be 'just right' and often it's not. If there is any 'odour' at all in the situation, I would assume shenanigans, in which case, any form of equity is considerably more risky, and then probably not worth it.

deleted 6y ago
[deleted]

pointyfence 6y ago

"Theoretically, a startup that actually wants to compete on compensation by sharing in good fortune could craft an equity package which is simple and standardized enough to be comprehensible by ordinary humans." One time, I received an offer from a small, struggling startup. But because it's equity structure was so simple (struggling has a way of simplifying things), I counter-proposed taking less salary for more equity, and they agreed. With the typical equity opacity removed, I viewed the trade-off as more of a bet on myself: the impact that I could make and if I assessed the company correctly. The payoff when we were acquired was just the equivalent of a nice extra bonus. The real satisfaction was having more skin in the game, having the expected impact, being correct on the assessment, etc. But it wouldn't have happened if I felt lost in the complex equity structure and confidentiality barriers that seem to be present in many startups.

kornish 6y ago
What made the offer simple compared to typical modern SV startup offers?
- pointyfence 6y ago
  Just one class of common shares for all the investor groups. New money didn't appear to be coming in. We were either going to go poof, or we were going to get sold. I'm a sucker for turnaround plays because a lot of BS gets beaten out of the organization, and they're more receptive to change.
cabaalis 6y ago
Having done this also, one point of care to take: Make sure your salary is right-sized post-acquisition. The buying company will likely have operating capital requirements based on existing PNL. Assuming you stay on, which key employees will likely have to, your low-salary position could be directly imported into the new position at the new company.
- myblake 6y ago
  No one can require you to stay on though, you’ll either have sufficient equity or bonus potential to make up for the lower salary, a salary adjustment, or you’ll just walk for a market salary.

quickthrower2 6y ago

There is a structural disadvantage but it isn't that. It is a company hires people, whose job it is to make the company more efficient and profitable, and to do so, you need to set things up so no employee can be in a powerful position. For example tech choices so "Use Java and X Framework we can easily hire people", and such like. Keep it plug an play. To the point where it is seen as immoral to do things 'for job security', whilst the company itself might do this to it's customers. I think this affects things more than negotiation.

eru 6y ago

You are too pessimistic. Negotiations ain't so hard. It's mostly down to BATNA, ie best alternative to negotiated agreement. Why would you want a union? Do your homework to figure out how much your skills are worth on the market; get multiple companies into the offer stage; then more or less just let them know your demands and let them know that you are more than prepared to walk away if they don't agree. That's it. If they decide to call your bluff, then you really just walk away. That's why you want to have multiple companies in the offer stage at the same time, and also want to start interviewing before your old job becomes unbearable.

ThrowMeAwayOkay 6y ago
This is the best answer I’ve read. Cold hard cash beats pie-in-the-sky stocks.
- eru 6y ago
  Oh, whether you want cash or stocks is up to you. For comparison, I usually convert everything into a common metric. So eg I might say that 3 dollars of sign-on bonus are worth as much as 1 dollar of base salary to me. Or that I value the stock options at X dollars each (taking into account that they are risky and not liquid). But that's independent of the technique I outlined in the other comment.
GeneralMayhem 6y ago
>Why would you want a union? Same reason anyone wants a union: to reduce structural asymmetry. In this case, the asymmetry in question is information. Think of the hypothetical union as you and your coworkers all pitching in to get a really good lawyer to review your employment contracts and vesting terms. >figure out how much your skills are worth on the market The problem is that there isn't a public orderline for compensation. Observing even a single bid takes significant effort, so figuring out where the fair price is with any degree of precision is hard. And it's fundamentally harder for workers than it is for employers. More importantly, because of the issues with equity, even those scarce observations are fuzzy. Comparing two equity packages from non-public companies is hard, and it's ridiculous (or, depending on your interpretation, cunningly malicious) to put that burden on every single employee individually. You're paid to be an expert in software engineering and a partial domain expert in whatever the company does; having to also be an expert in finance and obscure tax law to even know how much you're getting paid is unreasonable.

causality0 6y ago

Indeed. Personally I just write equity offers off as zero-value advertising. I don't have enough spare time or mental willpower to deal with that crap. I don't have a degree in finance. I do the work you want done and you give me money. Just calculating the value of the benefits package is irritating enough by itself.

ultrarunner 6y ago

Isn't an overly complex equity package just lesser compensation? If someone feels like they're disadvantaged by the company right off the bat, they shouldn't take the job. Or they should negotiate a higher salary to make up for the (unusable?) equity compensation.

baxtr 6y ago

I wonder: is there a model where a Specialized lawyer negotiates for you, and is paid on a success basis depending on how much he’ll get for you?

michaelt 6y ago
Nobody can negotiate for you unless they still get paid if you walk away

eloisant 6y ago

There is an easy fix: consider equity as some free lottery tickets, and don't accept a lower salary that you would want just because you have equity. If you want to make money from a sale or an IPO, you need to be a co-founder or investor. As an employee of a startup your remuneration is your salary, and equity is a lottery ticket that maybe, if you're lucky, will end up in a nice one time bonus in the future. Don't believe the stories of the employee raking in millions when the startup exits. It maybe happened for some employees at a few companies like Google but it's not happening to you.

VBprogrammer 6y ago
Honestly, I was freaked out by the ordering in the article (equity, benefits, salary, something else). That is completely opposite how I'd normally view an offer. Maybe I'm just not Silicon Valley enough but equity doesn't pay rent.

madeofpalk 6y ago

> For almost all of us, equity is a vehicle to get screwed over. It's really not all that difficult, but it just needs to get drummed into people's head that equity is not compensation! At best, it's like a free gym membership that you'll never use.

ilammy 6y ago

> As an individual negotiating compensation with a company, you are at a structural disadvantage: the company does this all the time, and (lacking a union to negotiate on your behalf) you do this rarely. This is exactly why a common advice on compensation negotiation is: don't stop interviewing once you get a job.

roenxi 6y ago

> As an individual negotiating compensation with a company, you are at a structural disadvantage I may be worlds worst negotiator; I'm not very good at representing myself and I tend to nod and smile a lot. I think my salary has tended between 1.2 and 1.5 times the male full-time median over my career. So sure, there is a structural disadvantage there. If I were a great negotiator maybe I could be working with 1.4 to 1.7x. But that structural advantage is all about fiddling at the margins, and a union won't change that. Neither unions or companies can resist the underlying market that sets the bounds on what is possible. I'm much more worried about that, and I don't think a union would help. If anything, it is likely to hinder. If times get tough, I want a low-paid job, not no job. Conversationally, I don't want my peers telling me what to do, it is bad enough when the boss does. If people want to share salaries that sounds helpful.

pnutjam 6y ago
Unions don't tell you what to do, they tell you what not to do. Like hey, your job description doesn't include moving furniture, or you're not required to get coffee for everyone at a meeting.

Shivetya 6y ago

No, the union would only insure you obtain what is contractually spelled out by the agreement they have with the employer for your job classification. there is no negotiating here. the good from this is you know you won't be cheated of anything but the bad is your progression will not be the same in a company not bound to strict rules of progression. So you choose, there is no negative to entering into such an environment but realize the employer's hands are tied too to be honest, if the pay and rewards of such value you really should pay for a few hours of a lawyers advice to review the contracts offered you. if the prospective employer does not permit that then that should be a signal as clear as day what to do. only you can state what level of compensation is worth the money spend on a lawyer to read it over for you and you should weigh the time you spend doing the research against someone who knows contract law.

naveen99 6y ago

What’s an elite negotiator ? All you need to be elite is to credibly be able to walk away from the deal.