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How to Evaluate Startup Offers

209 points by mavelikara 5y ago

quadcore 5y ago
So, reading here what I understand is that startup stocks/options/whatever are worth nothing because this is a private company, an opaque box with many tools to screw you. Anyone with a different experience? If you had a positive experience/return, what was the cause, your negotiation or the founders/investors behaviour?
ludwigvan 5y ago
> As I was considering the switch, multiple people told me I was making a big mistake, losing out on both job stability and compensation. Those people had no idea what they were talking about. Maybe they had “some” idea? I guess time will tell and hope this sentence does not simply serve to cast one’s own fears about having made the wrong choice.
- danrocks 5y ago
  Author intends to present a rational, quantitative view of compensation yet begins by emotionally dismissing any advice contrary to his beliefs. Kind of defeats the purpose here.
  - acjohnson55 5y ago
    The whole point of the article is that while the money may not be everything, it is important to understand. He says right in there that FAANG money is probably going to be the best, if that's your priority.
  - hcta 5y ago
    What's emotional about it?
  - steve_adams_86 5y ago
    My interpretation is that he’s saying they’re right if the only priority is money, but otherwise they miss the point. He didn’t go to the new job for money. However, money isn’t totally irrelevant, so he wrote this article detailing what he knows about the process of assessing offers.
    - avyfain 5y ago
      Author here, that's exactly the case :) Left FAANG knowing that money would be better there. My new opportunity is (so far) a lot more fun, a I'm learning a lot more about the things I want to learn.
      - steve_adams_86 5y ago
        I’m glad I wasn’t way off the mark. I’m right in the middle of assessing opportunities so what you wrote is very timely and helpful. Thanks for taking the time to put this out in the world.
- hnbad 5y ago
  As I was considering dumping my savings into a video poker machine, multiple people told me I was making a big mistake, losing out both on a safe retirement and interest. World A: And they were wrong! I was able to turn those $100k into $5M. World B: And they were wrong! I may have lost all my savings but I still would have gotten a massive ROI if I had played my hand better.
- ptero 5y ago
  That is an awkward wording, but the author explains exactly what he means in the next sentence, agreeing that switching FAANG for a startup for financial reasons is stupid. If you switch, do it for other reasons.
danrocks 5y ago
Not joining one startup whose worth will be $0 in the long run is not enough. One needs to evaluate another type of exit that, in fact, is much more common that an IPO: acquisition by another company. In that scenario, you've worked hard for a number of years, the company will be sold for hundreds of millions of dollars, and you still probably will end up with nothing. The name of the game is "liquidation preference". I have been through one of these scenarios and it's incredibly taxing and stressful: all that work, company selling for a boatload, and all I got was a lousy T-shirt. https://marker.medium.com/my-company-sold-for-100-million-and-i-got-zilch-how-can-that-be-f7be0563f1f8 https://marker.medium.com/my-company-sold-for-100-million-an...
- deleted 5y ago
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- engmgrmgr 5y ago
  You should do your due diligence on the business and financing to avoid this situation, and unless you have a ton of equity, you should hedge your bet on multiple companies if you’re trying to make high ROI and you aren’t feeling confident that’ll happen in your current gig. “Start-up” is a bit of a disingenuous term when using to compare with FAANG, because one refers to a class of high performing public tech companies, and the other is a catch all for small businesses. I know chronically broke start up folks, faang millionaires, and a group of people who seem to to know how to play the startup game and are extremely wealthy, so YMMV.
  - cheriot 5y ago
    I’ve received offers from a bunch of startups over the years. None of them would disclose their cap table. Most of them even refused to tell me the total number of shares outstanding. Are people getting enough info for any kind of due diligence? Do people know how to play the game or did they get lucky?
    - tptacek 5y ago
      Don't work for companies that offer equity as a significant component of their compensation and won't tell you shares outstanding. That used to be somewhat common, but I can't remember the last time a friend of mine got an offer where that was the case. It's a red flag.
gffa 5y ago
Bluntly… TC or GTFO.
mkl95 5y ago
Some thoughts about small startups. If the company is not legally obligated to eventually give me what they are promising, I have a simple criteria. I don't even evaluate it. For instance, a usual shady tactic to hire talented developers -that would otherwise be recruited by a larger company- is to claim that they are on their way to receive some substantial investment in the near future, which will improve your working conditions overnight. The CEO will then discuss your future salary by giving you some figures. Beware that usually these claims are complete bollocks, and the company is not even close to entering a seed round. Startups are fun and a great learning opportunity, but make sure their promises are actually binding.
- twistedpair 5y ago
  Good point. I left my last startup for this reason. Kept telling the CEO "show me the money". After a half dozen times being told that the "funding is just around the corner" I left. Two months later they cut more than half the staff and becoming an IP bundle looking for a buyer.
nemo44x 5y ago
I’ve been using a discounted cash flow model to evaluate work opportunities for years and it’s great to see an article take that approach too. What I’ve found in my own analysis and with friends looking to join a new place is we tend to undervalue the established, current company and overvalue the startup. It’s difficult to calculate the odds of success at a startup and everyone has a different current arrangement with their existing company but in many cases I’ve calculated that the startup would have to be valued at many billions 7 or 8 years down the road to break even in total compensation. Especially so if your current role is at a post-IPO success story (that will add a lot of value over the next 8 years) where the RSU’s are fully charged, have great benefits (yay for matching 401k’s!) and a very good salary. It not getting there means fairly bad returns so you really need to be going for the “right reasons”. Seeing startup gold is not it. Of course the other side of it is the startup is a huge success in 8 years and your cumulative ISO’s are worth a fortune. And that dream is so alluring to people. And so unlikely.
- sokoloff 5y ago
  > great benefits (yay for matching 401k’s!) Indeed yay for matching 401(k)s, but that benefit is only a high-four figure sum per year for most people. In the scheme of SWE comp, that’s about a needle’s width on the gauge.
  - nemo44x 5y ago
    It’s a piece of the puzzle though. Consider you’ll be at the startup for 8 years before moving on, letting all your ISO’s vest after the IPO. In that time, the current company would have matched ~200k in funds when accounting for yearly appreciation of 8% in it. And of course the marginal tax savings you’ll have from a higher a salary over that time. So you add that to the formula plus assumed salary differences in that time and whatever income you’ll receive from RSU’s and the increase in the current company’s market cap over the time. You may even consider what your current salary allows you to invest after taxes and how that will compound and if the startups lower salary will still allow that or if you’d have to pause that. So add that all up and that is what you’re discounting. In essence the ISO’s from the startup need to at least equal that after 8 years (or however many you are assuming until exit. 8 is average) to break even. It’s possibly in the many millions for some people. It’s a hard calculation with a lot of variables and assumptions. But it’s helpful to see how much of a risk you may really be taking.
nbzso 5y ago
Even cofounder position cannot guarantee successful exit. It is all about the small font things in contracts, understanding of the reality of the situation and not taking anything at face value. It is not impossible outside the "luck factor", but in this point in time things are refined and well executed and this "get lucky" is usually propagandist in his nature. I am on different spectrum. I live in 'qualified personal' territory. Everything that I fight for is measured in Hourly Wage. Nothing more, nothing less.
- ptero 5y ago
  No one can guarantee a successful exit, but if it does happen a cofounder typically makes out very well, while engineers with options usually end up with a token amount.
  - nbzso 5y ago
    Young engineers need to grow up and learn from previous generations of professionals. The generational divide is funded by corporate and VC interests under HR classifications as "cultural fit". In reality we all are "just a cogs" in a somebody "value extraction" plan. And as such we must demand fair wages and clear career paths. P.S. Downvotes don't remove the reality of my statement.
    - a_t48 5y ago
      You’re saying they should just roll over and take what is offered?
      - nbzso 5y ago
        Not at all. This approach will make more effective salary or wage negotiations. As a side-effect this will lower the possibility of low payment for overtime work and will create more quality in the product pipeline etc.
matthewmacleod 5y ago
I don’t mean to be terribly cynical, but wouldn’t it be just as effective to simply ignore equity entirely when evaluating a startup offer? An offer from an established company has a fairly clear value - a chunk of cash and some relatively-well understood stock. A startup offer amounts to a chunk of cash and a box of lottery tickets. Given the wide variety of possible outcomes, it’s essentially impossible to assign any value to them - so they might as well not exist for the purposes of evaluation. I tend to think of this kind of choice as one that you’d make based on the company and work environment, rather than the compensation - so long as the startup can pay enough cash to maintain a standard of living you want. Then it’s a case of deciding if the work environment, team, product, mission etc. are something in which you’re interested enough to give up the stability and income from an established company. If it does work out and you get rewarded through an exit, then that’s great! But if you’re going in to it with the expectation of becoming wealthy, you’re almost certainly going to be disappointed. YMMV of course, I’m personally quite risk-averse!
- rajin444 5y ago
  That’s what I’m doing. Previously worked at a stable mid size company and I wanted to try a startup. The comp and other benefits were already pretty far above my stable company, so if I get anything from the equity it’s a bonus. I feel a little dumb for not digging harder but the offer was already a big improvement.
- stonecharioteer 5y ago
  Completely agree. I left Visa for an early stage startup and I didn't focus on the stock too much. Cash in hand matters more.
- dasil003 5y ago
  This is the right way to think about it because at the end of the day startup success is rare. That doesn’t mean you shouldn’t due your due diligence and get all the info you can before joining a startup. IMHO the most important thing is the character and financial savvy of the founders, because it’s one thing to fail but it’s another thing to essentially succeed but then get screwed because of investor shenanigans. The founders are your only hope against this scenario.
leroman 5y ago
One huge risk is people higher up change more often in startups in my experience, especially early ones, what usually follows is a domino restructuring and basically a different company. This happens a lot when a VC in a big round decides things are going too well, better put one of his own in charge to make sure its under his complete control going forward.
JCM9 5y ago
Too many people don’t do their research and understand how preferred status on the cap table works, minimum payouts, and other things that are typically (sadly intentionally) withheld from employees receiving these offers. People hear about startups selling or being acquired for millions or even billions but too often nearly all that money is just paying back the original investors with some modest returns so they can move on. There can be little, or even nothing, for employees holding options. If the company is acquired you might get a nice stash package to welcome you onboard with a t-shirt. Obviously there are other stories that see employees become fantastically wealthy, but that’s a rare exception not the norm. Equity comp at a publicly traded company (via RSUs) is very different than equity comp in a privately held venture. With RSUs you’re still at the mercy of the market but you know how much they’re worth literally second by second. At a startup as an employee you should generally assume those shares are worth nothing and be OK making what you’ll be making then. Anything above that is a nice windfall bonus.
- danrocks 5y ago
  Vast majority of startups will not disclose cap table, outstanding shares, liquidation preference, nothing. Try asking and see how it goes. The only one I've interviewed with that does disclose some of it was Stripe.
  - twistedpair 5y ago
    Also watch out for a clause giving the buyer the right to buy back the employee shares, possibly at par value. That means you could have executed those options 5 years ago (to prevent a windfall tax), and just get you money back at acquisition time. Zero interest five year loan. Thanks!
    - danrocks 5y ago
      What the hell, is that a thing? Does it have a name?
      - 0x456 5y ago
claudiusd 5y ago
As someone with experience as a startup employee and founder, having negotiated startup offers from both sides of the table and seen several unfavorable and favorable liquidity scenarios play out, here is the advice I give people: Treat stock options in an early stage startup as if they are worthless. Don't make salary/equity tradeoffs and instead, negotiate for both the "high salary" and "high equity". Stock options have a number of "gotchas" that may not be immediately obvious: 1. Exercise price and exercise window. It takes a lot longer for a startup to exit than than most people would like to think (if it exits at all). 10+ years is my experience. You're probably not going to stay with the company that long, so when you leave the company and want to keep your shares, you only have so much time to exercise them (this is the exercise window - typically 3 months). It could cost you many $thousands to exercise and there is no guarantee your stock will be worth anything. You are essentially now an investor in the company and you are afforded none of the protections that the company's venture investors received. 2. Liquidation preference. In a liquidity event, the company's venture investors get paid back some multiple of their original investment (typically 1-2x) before any common shareholders get paid (which includes options holders). If the company is not valued above a certain threshold at liquidity, then common shareholders get nothing. As the company takes on new investors, this liquidation preference starts to add up, and as an employee you are not going to be told what this amounts to. You could exercise your shares, pay the company money, have the company exit for an apparently attractive amount, and then get nothing because the liquidation preference threshold wasn't met. The company exits, and you lose money. 3. Tax treatment. Assuming the company exits while you are still an employee (i.e. you have not exercised your shares) or the company has an attractive exercise window (10 years is not uncommon nowadays), and the valuation is high enough not to trigger liquidation preference, then you will make some money. Unfortunately, the amount you earn will get taxed as income, not capital gains, and the difference is significant. To be taxed as capital gains, you have to exercise your options and hold on to the shares for at least a year before selling them. Some companies offer early exercise benefits, but if you do this then you could potentially lose money as I described above. RSU's on the other hand (essentially just plain stock like founders get) do not have to be exercised and are taxed as income on their value the moment they are vested (or on the value of the entire grant on the data of issue, assuming you file an 83(b) election with the IRS). These have value, and I would be comfortable with a salary/equity tradeoff for them. This is something you should ask about during negotiation. If RSUs are off the table, then you can try asking the company to pay the [early] exercise price for you as a signing bonus.
exdsq 5y ago
Not looking to get into a Cryptocurrency debate here, but one good thing about startups in that area is the share offering tends to be liquid from day 1 and the valuations can get very high. It feels a lot more likely to result in a payout than waiting for an acquisition or IPO.
morelandjs 5y ago
This is a great article! I would add to the general discussion here that some big tech companies will surprise you in terms of culture. I joined a small but rapidly growing team at Amazon and it feels very different from my previous corporate job. I’m wearing many hats, learning lots of different technologies, and in many cases driving initiatives in a way I didn’t expect. I was expecting a lot more red tape, meetings, silos and bureaucracy and thankfully that has not yet been the case. Even still, I’m not suggesting that the feeling of accomplishment would compare to building your own company. This article was informative to me should I ever go that route.
ndonnellan 5y ago
I like the structure of the article and it's a good procedure for evaluation compensation, but my nitpick would be it could be more helpful if it included more realistic numbers. Do 5% of startups actually reach 1B valuation in 4 years? No. Uber took 10 years to IPO. I don't know the average, but I would imagine based on a cursory search that it's closer to 7 or 8 years for highly valued companies in the past decade. And 5% seems extremely high for billion dollar IPOs. Also, only 2 startups are compared in the NPV calculation. What about joining a BigCo / FAANG? That would really put it into context. On the other hand, the math gets slightly better if you assume you leave after some amount of vesting. I thought danluu had a post about this, but can't find it. Staying in a startup until the bitter end is almost never the optimal choice, especially if you have inside knowledge of its progress. https://tldroptions.io/ https://tldroptions.io/ - This was posted a few years back, and while it doesn't give tell you the likelihood of a particular size of exit, it does help give an idea of the type of dilution and final equity value (with no discounting though).
- avyfain 5y ago
  Author here, thanks for the thoughts! > could be more helpful if it included more realistic numbers. Any ideas on where to find these? While there's a lot of info out there on valuations most datasets have the problem of hindsight bias, especially missing data at the pre-A round. > only 2 startups are compared in the NPV calculation. What about joining a BigCo / FAANG? My original model was actually a FAANG vs two startup model (I left Apple) but it gets too complex to try to explain it in a post that's aimed at the stock options 101 crowd. > the math gets slightly better if you assume you leave after some amount of vesting. 100%, although that's tough to model without just adding an arbitrary cutoff. > https://tldroptions.io/ https://tldroptions.io/ Thanks, I did not know about this tool!
  - ndonnellan 5y ago
    Thanks for the reply! Sorry I don't have any great sources off the top of my head. It makes sense that you'd want to restrict the scope of the article to make it more understandable. I've only been part of one startup, and it went nowhere, but it's very common (ubiquitous?) for prospective employees to be sold the "if we IPO for $1xB" line when that likelihood is laughably small; hence my suggestion to lower the expectations with some lower numbers. But props for getting this all down!
avyfain 5y ago
Author here - happy to answer any questions! I'm planning to write a more advanced version of this article in a few months, discussing tax implications, the "should I exercise my options" question, etc.
- lostdog 5y ago
  Omitting AMT's effect on exercising in a post about equity is pretty much blogging malpractice. Other than that, very good post.
sscarduzio 5y ago
Lol screw this stuff. Bootstrap a profitable company, grow it and either sell it or keep it forever. Zero bullshit.
plow-tycoon 5y ago
In addition to these things, make sure the company who's hiring you, if you're located in another country knows how to do so, before wasting too much of your energy with them. I was recently burned by this after receiving a good offer.
ssr2167 5y ago
It’s really amazing to view the comments section of Hacker News. Really finding a way to to find the problem about any situation. And when it comes to the idea of working at a startup that might be able to actually fix some of those said problems, instead of just taking money from big tech and chilling.…the comments flood in with negativity here as well. Gotta give the community credit, because the one thing they are is consistent.

209 points by mavelikara 5y ago

So, reading here what I understand is that startup stocks/options/whatever are worth nothing because this is a private company, an opaque box with many tools to screw you. Anyone with a different experience? If you had a positive experience/return, what was the cause, your negotiation or the founders/investors behaviour?

ludwigvan 5y ago

> As I was considering the switch, multiple people told me I was making a big mistake, losing out on both job stability and compensation. Those people had no idea what they were talking about. Maybe they had “some” idea? I guess time will tell and hope this sentence does not simply serve to cast one’s own fears about having made the wrong choice.

danrocks 5y ago
Author intends to present a rational, quantitative view of compensation yet begins by emotionally dismissing any advice contrary to his beliefs. Kind of defeats the purpose here.
- acjohnson55 5y ago
  The whole point of the article is that while the money may not be everything, it is important to understand. He says right in there that FAANG money is probably going to be the best, if that's your priority.
- hcta 5y ago
  What's emotional about it?
- steve_adams_86 5y ago
  My interpretation is that he’s saying they’re right if the only priority is money, but otherwise they miss the point. He didn’t go to the new job for money. However, money isn’t totally irrelevant, so he wrote this article detailing what he knows about the process of assessing offers.
  - avyfain 5y ago
    Author here, that's exactly the case :) Left FAANG knowing that money would be better there. My new opportunity is (so far) a lot more fun, a I'm learning a lot more about the things I want to learn.
    - steve_adams_86 5y ago
      I’m glad I wasn’t way off the mark. I’m right in the middle of assessing opportunities so what you wrote is very timely and helpful. Thanks for taking the time to put this out in the world.
hnbad 5y ago
As I was considering dumping my savings into a video poker machine, multiple people told me I was making a big mistake, losing out both on a safe retirement and interest. World A: And they were wrong! I was able to turn those $100k into $5M. World B: And they were wrong! I may have lost all my savings but I still would have gotten a massive ROI if I had played my hand better.
ptero 5y ago
That is an awkward wording, but the author explains exactly what he means in the next sentence, agreeing that switching FAANG for a startup for financial reasons is stupid. If you switch, do it for other reasons.

danrocks 5y ago

Not joining one startup whose worth will be $0 in the long run is not enough. One needs to evaluate another type of exit that, in fact, is much more common that an IPO: acquisition by another company. In that scenario, you've worked hard for a number of years, the company will be sold for hundreds of millions of dollars, and you still probably will end up with nothing. The name of the game is "liquidation preference". I have been through one of these scenarios and it's incredibly taxing and stressful: all that work, company selling for a boatload, and all I got was a lousy T-shirt. https://marker.medium.com/my-company-sold-for-100-million-and-i-got-zilch-how-can-that-be-f7be0563f1f8 https://marker.medium.com/my-company-sold-for-100-million-an...

deleted 5y ago
[deleted]
engmgrmgr 5y ago
You should do your due diligence on the business and financing to avoid this situation, and unless you have a ton of equity, you should hedge your bet on multiple companies if you’re trying to make high ROI and you aren’t feeling confident that’ll happen in your current gig. “Start-up” is a bit of a disingenuous term when using to compare with FAANG, because one refers to a class of high performing public tech companies, and the other is a catch all for small businesses. I know chronically broke start up folks, faang millionaires, and a group of people who seem to to know how to play the startup game and are extremely wealthy, so YMMV.
- cheriot 5y ago
  I’ve received offers from a bunch of startups over the years. None of them would disclose their cap table. Most of them even refused to tell me the total number of shares outstanding. Are people getting enough info for any kind of due diligence? Do people know how to play the game or did they get lucky?
  - tptacek 5y ago
    Don't work for companies that offer equity as a significant component of their compensation and won't tell you shares outstanding. That used to be somewhat common, but I can't remember the last time a friend of mine got an offer where that was the case. It's a red flag.

gffa 5y ago

Bluntly… TC or GTFO.

mkl95 5y ago

Some thoughts about small startups. If the company is not legally obligated to eventually give me what they are promising, I have a simple criteria. I don't even evaluate it. For instance, a usual shady tactic to hire talented developers -that would otherwise be recruited by a larger company- is to claim that they are on their way to receive some substantial investment in the near future, which will improve your working conditions overnight. The CEO will then discuss your future salary by giving you some figures. Beware that usually these claims are complete bollocks, and the company is not even close to entering a seed round. Startups are fun and a great learning opportunity, but make sure their promises are actually binding.

twistedpair 5y ago
Good point. I left my last startup for this reason. Kept telling the CEO "show me the money". After a half dozen times being told that the "funding is just around the corner" I left. Two months later they cut more than half the staff and becoming an IP bundle looking for a buyer.

nemo44x 5y ago

I’ve been using a discounted cash flow model to evaluate work opportunities for years and it’s great to see an article take that approach too. What I’ve found in my own analysis and with friends looking to join a new place is we tend to undervalue the established, current company and overvalue the startup. It’s difficult to calculate the odds of success at a startup and everyone has a different current arrangement with their existing company but in many cases I’ve calculated that the startup would have to be valued at many billions 7 or 8 years down the road to break even in total compensation. Especially so if your current role is at a post-IPO success story (that will add a lot of value over the next 8 years) where the RSU’s are fully charged, have great benefits (yay for matching 401k’s!) and a very good salary. It not getting there means fairly bad returns so you really need to be going for the “right reasons”. Seeing startup gold is not it. Of course the other side of it is the startup is a huge success in 8 years and your cumulative ISO’s are worth a fortune. And that dream is so alluring to people. And so unlikely.

sokoloff 5y ago
> great benefits (yay for matching 401k’s!) Indeed yay for matching 401(k)s, but that benefit is only a high-four figure sum per year for most people. In the scheme of SWE comp, that’s about a needle’s width on the gauge.
- nemo44x 5y ago
  It’s a piece of the puzzle though. Consider you’ll be at the startup for 8 years before moving on, letting all your ISO’s vest after the IPO. In that time, the current company would have matched ~200k in funds when accounting for yearly appreciation of 8% in it. And of course the marginal tax savings you’ll have from a higher a salary over that time. So you add that to the formula plus assumed salary differences in that time and whatever income you’ll receive from RSU’s and the increase in the current company’s market cap over the time. You may even consider what your current salary allows you to invest after taxes and how that will compound and if the startups lower salary will still allow that or if you’d have to pause that. So add that all up and that is what you’re discounting. In essence the ISO’s from the startup need to at least equal that after 8 years (or however many you are assuming until exit. 8 is average) to break even. It’s possibly in the many millions for some people. It’s a hard calculation with a lot of variables and assumptions. But it’s helpful to see how much of a risk you may really be taking.

nbzso 5y ago

Even cofounder position cannot guarantee successful exit. It is all about the small font things in contracts, understanding of the reality of the situation and not taking anything at face value. It is not impossible outside the "luck factor", but in this point in time things are refined and well executed and this "get lucky" is usually propagandist in his nature. I am on different spectrum. I live in 'qualified personal' territory. Everything that I fight for is measured in Hourly Wage. Nothing more, nothing less.

ptero 5y ago
No one can guarantee a successful exit, but if it does happen a cofounder typically makes out very well, while engineers with options usually end up with a token amount.
- nbzso 5y ago
  Young engineers need to grow up and learn from previous generations of professionals. The generational divide is funded by corporate and VC interests under HR classifications as "cultural fit". In reality we all are "just a cogs" in a somebody "value extraction" plan. And as such we must demand fair wages and clear career paths. P.S. Downvotes don't remove the reality of my statement.
  - a_t48 5y ago
    You’re saying they should just roll over and take what is offered?
    - nbzso 5y ago
      Not at all. This approach will make more effective salary or wage negotiations. As a side-effect this will lower the possibility of low payment for overtime work and will create more quality in the product pipeline etc.

matthewmacleod 5y ago

I don’t mean to be terribly cynical, but wouldn’t it be just as effective to simply ignore equity entirely when evaluating a startup offer? An offer from an established company has a fairly clear value - a chunk of cash and some relatively-well understood stock. A startup offer amounts to a chunk of cash and a box of lottery tickets. Given the wide variety of possible outcomes, it’s essentially impossible to assign any value to them - so they might as well not exist for the purposes of evaluation. I tend to think of this kind of choice as one that you’d make based on the company and work environment, rather than the compensation - so long as the startup can pay enough cash to maintain a standard of living you want. Then it’s a case of deciding if the work environment, team, product, mission etc. are something in which you’re interested enough to give up the stability and income from an established company. If it does work out and you get rewarded through an exit, then that’s great! But if you’re going in to it with the expectation of becoming wealthy, you’re almost certainly going to be disappointed. YMMV of course, I’m personally quite risk-averse!

rajin444 5y ago
That’s what I’m doing. Previously worked at a stable mid size company and I wanted to try a startup. The comp and other benefits were already pretty far above my stable company, so if I get anything from the equity it’s a bonus. I feel a little dumb for not digging harder but the offer was already a big improvement.
stonecharioteer 5y ago
Completely agree. I left Visa for an early stage startup and I didn't focus on the stock too much. Cash in hand matters more.
dasil003 5y ago
This is the right way to think about it because at the end of the day startup success is rare. That doesn’t mean you shouldn’t due your due diligence and get all the info you can before joining a startup. IMHO the most important thing is the character and financial savvy of the founders, because it’s one thing to fail but it’s another thing to essentially succeed but then get screwed because of investor shenanigans. The founders are your only hope against this scenario.

leroman 5y ago

One huge risk is people higher up change more often in startups in my experience, especially early ones, what usually follows is a domino restructuring and basically a different company. This happens a lot when a VC in a big round decides things are going too well, better put one of his own in charge to make sure its under his complete control going forward.

JCM9 5y ago

Too many people don’t do their research and understand how preferred status on the cap table works, minimum payouts, and other things that are typically (sadly intentionally) withheld from employees receiving these offers. People hear about startups selling or being acquired for millions or even billions but too often nearly all that money is just paying back the original investors with some modest returns so they can move on. There can be little, or even nothing, for employees holding options. If the company is acquired you might get a nice stash package to welcome you onboard with a t-shirt. Obviously there are other stories that see employees become fantastically wealthy, but that’s a rare exception not the norm. Equity comp at a publicly traded company (via RSUs) is very different than equity comp in a privately held venture. With RSUs you’re still at the mercy of the market but you know how much they’re worth literally second by second. At a startup as an employee you should generally assume those shares are worth nothing and be OK making what you’ll be making then. Anything above that is a nice windfall bonus.

danrocks 5y ago
Vast majority of startups will not disclose cap table, outstanding shares, liquidation preference, nothing. Try asking and see how it goes. The only one I've interviewed with that does disclose some of it was Stripe.
- twistedpair 5y ago
  Also watch out for a clause giving the buyer the right to buy back the employee shares, possibly at par value. That means you could have executed those options 5 years ago (to prevent a windfall tax), and just get you money back at acquisition time. Zero interest five year loan. Thanks!
  - danrocks 5y ago
    What the hell, is that a thing? Does it have a name?
    - 0x456 5y ago

claudiusd 5y ago

As someone with experience as a startup employee and founder, having negotiated startup offers from both sides of the table and seen several unfavorable and favorable liquidity scenarios play out, here is the advice I give people: Treat stock options in an early stage startup as if they are worthless. Don't make salary/equity tradeoffs and instead, negotiate for both the "high salary" and "high equity". Stock options have a number of "gotchas" that may not be immediately obvious: 1. Exercise price and exercise window. It takes a lot longer for a startup to exit than than most people would like to think (if it exits at all). 10+ years is my experience. You're probably not going to stay with the company that long, so when you leave the company and want to keep your shares, you only have so much time to exercise them (this is the exercise window - typically 3 months). It could cost you many $thousands to exercise and there is no guarantee your stock will be worth anything. You are essentially now an investor in the company and you are afforded none of the protections that the company's venture investors received. 2. Liquidation preference. In a liquidity event, the company's venture investors get paid back some multiple of their original investment (typically 1-2x) before any common shareholders get paid (which includes options holders). If the company is not valued above a certain threshold at liquidity, then common shareholders get nothing. As the company takes on new investors, this liquidation preference starts to add up, and as an employee you are not going to be told what this amounts to. You could exercise your shares, pay the company money, have the company exit for an apparently attractive amount, and then get nothing because the liquidation preference threshold wasn't met. The company exits, and you lose money. 3. Tax treatment. Assuming the company exits while you are still an employee (i.e. you have not exercised your shares) or the company has an attractive exercise window (10 years is not uncommon nowadays), and the valuation is high enough not to trigger liquidation preference, then you will make some money. Unfortunately, the amount you earn will get taxed as income, not capital gains, and the difference is significant. To be taxed as capital gains, you have to exercise your options and hold on to the shares for at least a year before selling them. Some companies offer early exercise benefits, but if you do this then you could potentially lose money as I described above. RSU's on the other hand (essentially just plain stock like founders get) do not have to be exercised and are taxed as income on their value the moment they are vested (or on the value of the entire grant on the data of issue, assuming you file an 83(b) election with the IRS). These have value, and I would be comfortable with a salary/equity tradeoff for them. This is something you should ask about during negotiation. If RSUs are off the table, then you can try asking the company to pay the [early] exercise price for you as a signing bonus.

exdsq 5y ago

Not looking to get into a Cryptocurrency debate here, but one good thing about startups in that area is the share offering tends to be liquid from day 1 and the valuations can get very high. It feels a lot more likely to result in a payout than waiting for an acquisition or IPO.

morelandjs 5y ago

This is a great article! I would add to the general discussion here that some big tech companies will surprise you in terms of culture. I joined a small but rapidly growing team at Amazon and it feels very different from my previous corporate job. I’m wearing many hats, learning lots of different technologies, and in many cases driving initiatives in a way I didn’t expect. I was expecting a lot more red tape, meetings, silos and bureaucracy and thankfully that has not yet been the case. Even still, I’m not suggesting that the feeling of accomplishment would compare to building your own company. This article was informative to me should I ever go that route.

ndonnellan 5y ago

I like the structure of the article and it's a good procedure for evaluation compensation, but my nitpick would be it could be more helpful if it included more realistic numbers. Do 5% of startups actually reach 1B valuation in 4 years? No. Uber took 10 years to IPO. I don't know the average, but I would imagine based on a cursory search that it's closer to 7 or 8 years for highly valued companies in the past decade. And 5% seems extremely high for billion dollar IPOs. Also, only 2 startups are compared in the NPV calculation. What about joining a BigCo / FAANG? That would really put it into context. On the other hand, the math gets slightly better if you assume you leave after some amount of vesting. I thought danluu had a post about this, but can't find it. Staying in a startup until the bitter end is almost never the optimal choice, especially if you have inside knowledge of its progress. https://tldroptions.io/ https://tldroptions.io/ - This was posted a few years back, and while it doesn't give tell you the likelihood of a particular size of exit, it does help give an idea of the type of dilution and final equity value (with no discounting though).

avyfain 5y ago
Author here, thanks for the thoughts! > could be more helpful if it included more realistic numbers. Any ideas on where to find these? While there's a lot of info out there on valuations most datasets have the problem of hindsight bias, especially missing data at the pre-A round. > only 2 startups are compared in the NPV calculation. What about joining a BigCo / FAANG? My original model was actually a FAANG vs two startup model (I left Apple) but it gets too complex to try to explain it in a post that's aimed at the stock options 101 crowd. > the math gets slightly better if you assume you leave after some amount of vesting. 100%, although that's tough to model without just adding an arbitrary cutoff. > https://tldroptions.io/ https://tldroptions.io/ Thanks, I did not know about this tool!
- ndonnellan 5y ago
  Thanks for the reply! Sorry I don't have any great sources off the top of my head. It makes sense that you'd want to restrict the scope of the article to make it more understandable. I've only been part of one startup, and it went nowhere, but it's very common (ubiquitous?) for prospective employees to be sold the "if we IPO for $1xB" line when that likelihood is laughably small; hence my suggestion to lower the expectations with some lower numbers. But props for getting this all down!

avyfain 5y ago

Author here - happy to answer any questions! I'm planning to write a more advanced version of this article in a few months, discussing tax implications, the "should I exercise my options" question, etc.

lostdog 5y ago
Omitting AMT's effect on exercising in a post about equity is pretty much blogging malpractice. Other than that, very good post.

sscarduzio 5y ago

Lol screw this stuff. Bootstrap a profitable company, grow it and either sell it or keep it forever. Zero bullshit.

plow-tycoon 5y ago

In addition to these things, make sure the company who's hiring you, if you're located in another country knows how to do so, before wasting too much of your energy with them. I was recently burned by this after receiving a good offer.

ssr2167 5y ago

It’s really amazing to view the comments section of Hacker News. Really finding a way to to find the problem about any situation. And when it comes to the idea of working at a startup that might be able to actually fix some of those said problems, instead of just taking money from big tech and chilling.…the comments flood in with negativity here as well. Gotta give the community credit, because the one thing they are is consistent.