3 ms·

It’s like funding in the sense that you can get an engineer who demands (for example) $200k in comp for $100k cash and $100k in stock options, saving the startu

It’s like funding in the sense that you can get an engineer who demands (for example) $200k in comp for $100k cash and $100k in stock options, saving the startup lots of cash in the beginning.

robocat 5y ago
Sure. An aside as an engineer founder, I have always thought of accepting stock instead of wages is more like gambling. 1. You are concentrating your risk instead of diversifying. 2. As a minority shareholder in a private company you have virtually zero choice over any critical decisions, and the other shareholders have financial incentives to screw you. 3. You may influence technical outcomes, but even there you often realistically have limited financial incentive to improve profits. Unless you are an early employee, the amount of work you need to do to increase valuation by 10% is probably actually not worth the extra effort you put in for the $ you might get out. 4. Most people grossly misprice equity - ordinary shares are worth much less than the preferential shares an investor gets. Even though you are investing the equivalent of cash, you don’t get preferential shares. This is misrepresented everywhere, and certainly a startup has no financial interest in telling you the truth. 5. It is a high risk investment. That is fine for a VC which can spread their risk over many investments to get the industry average. It is a bad bet individually because even if you could invest your time in 10 startups, your variation in profit is still high. (Assuming one in ten startups is successful, which I highly doubt). Even VC funds are OK with ‘high’ variance because LPs are usually looking for diversification (especially non-correlated diversification with the rest of their portfolio), and the VC partners still get their tidy 2% even if the fund tanks. 6. Engineers usually seem to believe that they can pick a winner to join. VCs with decades of experience fail all the time, so the majority of engineers are just fooling themselves (or more truthfully, being fooled).
- ddorian43 5y ago
  Everyone that thinks taking equity for a lower salary needs to compare the difference with DCAing (dollar cost average) the extra salary into TQQQ,UPRO,SOXL. Might be higher profit and less risk.
- FredPret 5y ago
  All good points. Which is why the stock comp would have to be multiples of $100k to equal $100k in cash in my eyes. Of course, if the startup ever goes public, you'll make out like a bandit on that amount of stock! But more likely, as you say, you'll be left with only the cash component.

It’s like funding in the sense that you can get an engineer who demands (for example) $200k in comp for $100k cash and $100k in stock options, saving the startup lots of cash in the beginning.

robocat 5y ago

Sure. An aside as an engineer founder, I have always thought of accepting stock instead of wages is more like gambling. 1. You are concentrating your risk instead of diversifying. 2. As a minority shareholder in a private company you have virtually zero choice over any critical decisions, and the other shareholders have financial incentives to screw you. 3. You may influence technical outcomes, but even there you often realistically have limited financial incentive to improve profits. Unless you are an early employee, the amount of work you need to do to increase valuation by 10% is probably actually not worth the extra effort you put in for the $ you might get out. 4. Most people grossly misprice equity - ordinary shares are worth much less than the preferential shares an investor gets. Even though you are investing the equivalent of cash, you don’t get preferential shares. This is misrepresented everywhere, and certainly a startup has no financial interest in telling you the truth. 5. It is a high risk investment. That is fine for a VC which can spread their risk over many investments to get the industry average. It is a bad bet individually because even if you could invest your time in 10 startups, your variation in profit is still high. (Assuming one in ten startups is successful, which I highly doubt). Even VC funds are OK with ‘high’ variance because LPs are usually looking for diversification (especially non-correlated diversification with the rest of their portfolio), and the VC partners still get their tidy 2% even if the fund tanks. 6. Engineers usually seem to believe that they can pick a winner to join. VCs with decades of experience fail all the time, so the majority of engineers are just fooling themselves (or more truthfully, being fooled).

ddorian43 5y ago
Everyone that thinks taking equity for a lower salary needs to compare the difference with DCAing (dollar cost average) the extra salary into TQQQ,UPRO,SOXL. Might be higher profit and less risk.
FredPret 5y ago
All good points. Which is why the stock comp would have to be multiples of $100k to equal $100k in cash in my eyes. Of course, if the startup ever goes public, you'll make out like a bandit on that amount of stock! But more likely, as you say, you'll be left with only the cash component.