5 ms·

The best part about this is that it describes equity as what it should be: an incentive to do a great job. The problem that I see with most startups (especially

The best part about this is that it describes equity as what it should be: an incentive to do a great job. The problem that I see with most startups (especially in SF) is that they treat equity as a replacement for salary. Sorry, guys, but equity doesn't pay the bills. Furthermore, it's delayed and potential gratification. First, there's generally a 1 year cliff, which means I'm effectively taking a salary hit for 1 year for no good reason (unless you matched my original salary). So like I said, equity is not a replacement for salary. Second, your company may be valued at $400M, but my options are worthless until you get acquired, sell, or IPO. You're basically saying "I'll give you X salary and I'll also give you Y pieces of paper that will hopefully be worth Z dollars in the future, but I can't promise anything." IMO, equity should be treated as a benefit along the same lines as free lunches or vacation days. It should be a bonus. If you offer me X salary and Y equity, then X should be enough to pay my bills and Y should be enough to incentivize me work my ass off for you. My two cents, anyway.

nairteashop 13y ago
I agree with you that a well-funded company has no excuse for offering a below-market salary and make up the difference with equity. But for early stage startups that have no money, this is something that you don't have much control over. Back when our startup was like 2 people and barely ramen profitable, as much as we wanted to, there was no way we could pay market rate for some of our early hires without going out of business before we got any traction. Those hires made a risk vs. reward decision to take a temporary cut in salary in return for a larger amount of equity. Now that we are bigger and stabler, we have raised all their salaries to above market. Perhaps this is what you were saying as well, but I find that many people demonize any startup that offers below market salaries in return for higher equity. In many cases, it's not because they want to - it's because they have to.
- dllthomas 13y ago
  In principle, it seems like it would be nice to account for this as "we are paying you market rate, you are reinvesting some of that in exchange for equity". In practice, even leaving tax consequences out of it, that sounds like it might plausibly run you afoul of something... (though I am by no means confident that it would)
  - nairteashop 13y ago
    > "we are paying you market rate, you are reinvesting some of that in exchange for equity" We didn't represent it like that at all. We were very upfront that we just don't have the money to pay them today what they expect, but we believe that this is a good market and we have the right team to become successful. Also that we understand that this is a huge risk they're taking, and so we will reward that with much higher equity. Some people were ok with it, some weren't and passed on our offer, and we fully respected that.
    - dllthomas 13y ago
      Sure, just saying there's a sense in which that's what's happening.
- Jemaclus 13y ago
  Sure, I think that's a fair assessment. I've just gotten a few offers where they offer SIGNIFICANTLY below market rate and offer a lot of equity, and when I counter, they get upset. That's frustrating. I'd happily take a pay cut to work for a startup that I believed in, but there is a lower limit that I can feasibly accept before I'm living paycheck to paycheck again, and that's just a miserable place to be, imo.
  - nairteashop 13y ago
    Agreed. People have different appetite for risk and are at different stages in life, and it strikes me as very strange when folks - especially young, single founders with few living expenses - get upset when someone negotiates for higher compensation.
    - CodeMage 13y ago
      it strikes me as very strange when folks - especially young, single founders with few living expenses - get upset when someone negotiates for higher compensation. It shouldn't strike you as strange. You're expecting those young, single founders with few living expenses to empathize with people who aren't in their situation. What experience have they had that would allow them to do so?
  - judk 13y ago
    Any one who gets upset during salary negotiation is either trying to scam you or not emotionally mature enough to run a business. Either way, walk away.
    - Jemaclus 13y ago
      Agreed. That's exactly what I did. :)
- stephencanon 13y ago
  I think the real issue is that the “larger amount of equity” needs to be significantly larger than it usually is in practice in order to justify the below-market salary for a strong hire. (Not saying that you guys didn’t offer people enough equity, rather that I’ve seen many stories of startups not offering nearly enough to justify the risk and below-market salary.)
  - Jemaclus 13y ago
    Agreed! The other thing to consider here is that for a lot of people in the startup world, we already have equity. I already have equity in my current company. And not only that, but my current equity has started to vest! I'm actively making money from my equity right now. If you offer me X equity that's (theoretically) worth slightly more than my current equity but doesn't pay out for a year, you need to do something to incentivize me to give up my remaining, currently vesting equity to join your company. I.e., if my current salary is 100K and I have 50K in equity vesting between now and next November, and you offer me 90K and 250K in total equity, then I have to decide whether it's worth taking a 10K salary cut AND giving up 50K over the next year. The fact that you're offering me 250K in equity is actually going to wind up being equal to what I'm making now (250K - 50K = 200K, 200K / 4 = 50K/year), and the salary is actually lower! It's a net loss for me! So unless I really believe in your company and I really want to leave my current job, it's just probably not enough. And it's your job to either convince me that it's worth the loss or offer me more. And that's assuming your equity is actually worth anything. Given the number of startups that fail, it's a huge risk to take for something that's only theoretically equal to what I currently actually earn. So like I said, equity should be a bonus, not a replacement for salary. But to be fair, like nairteashop said, some people have different appetite for risk and are at different stages in life, so maybe the excitement of moving to a new company is enough to justify that. Anyway, I agree. You either need to beat my salary or beat the equity, but you can't offer me a lower salary and then offer equity and call it comparable, because you're not only offering me something, but you're asking me to give up stuff I already earned. You're asking me to walk away from free money. It's your job to convince me to do that, not to tell me I'm a moron for doing something completely logical.
    - 13y ago
fleitz 13y ago
Yes, equity should be calculated as EV. Since the EV of most startup equity is zero they should be treated as such. Doing a good job is irrelevant to the EV of your equity.
- onedev 13y ago
  How would you deal with equity in an offer from a company such as Dropbox or Square who clearly aren't going to disappear soon, and have a lot of momentum as a mid-sized, well-funded company?
  - fleitz 13y ago
    I think this is probably the most difficult situation as it's extremely hard to predict if the stock will become liquid. At this point one should be looking either at solid financials or a twitter like ability to command a great valuation. I think Square and Dropbox both have solid rev models and valuations, my guess is that both would experience a liquidity event in the next 5 years.
  - judk 13y ago
    Sharespost. SecondMarket.
enra 13y ago
I'm not sure how often this happens anymore and why is it even a problem. When ever I've talked with a startup, they always talk about salary and equity, they're both part of the negotiation. They offer you a salary of X and equity of Y, and then you can say that you hoped more for Z for salary. Of course a startup with a million or two in a bank can't pay you like Facebook or Google could but they can give more equity than any of them. If your needs and the startups offer don't match, don't work there. (I guess it's mostly this even a possible problem in SF since most companies in other places or parts of the world, don't really give out equity for employees.)
- Jemaclus 13y ago
  In the last six months, I've gotten offers from four different startups in SF, each of which offered me a MUCH lower salary than what I make now with roughly the same equity. At least one of them got pissed off when I countered in the manner you suggested. Instead, they told me how dumb I was for not taking equity into account. Which of course I did, but when your equity is the same as the equity I already have, I don't really need to consider it, especially when, as other posters have pointed out, the EV of the equity is zero. And you're right: their needs and my needs didn't match, so I declined. That's just business. Nothing personal. :)
georgemcbay 13y ago
"Furthermore, it's delayed and potential gratification." Agreed with your post entirely, though potential is a very optimistic word to use there... "unlikely" might be better. "Second, your company may be valued at $400M, but my options are worthless until you get acquired, sell, or IPO." Assuming we are talking about common stock options they might even be worthless after any of those 3 things happens, depending upon factors outside of your control like dilution.
- Jemaclus 13y ago
  Exactly! (I'm trying to be optimistic here :P)
prostoalex 13y ago
It kinda works well by design. In the early days of the company you want to attract senior developers and thought leaders, since they will define the direction of the company. Those guys typically have a good nest egg already, which makes larger equity / smaller salary package reasonable, and has a side effect of telling VCs a story of how low burn-rate (and therefore efficient) your startup is. As the company grows, so does the need for implementers, who are motivated by salary as well as chance at equity, but mainly by salary.
ckeck 13y ago
> and Y should be enough to incentivize me work my ass off for you. So for you the salary component has no impact on whether you work hard for your employer or not? That's simply the cost of doing business from your perspective?

nairteashop 13y ago

I agree with you that a well-funded company has no excuse for offering a below-market salary and make up the difference with equity. But for early stage startups that have no money, this is something that you don't have much control over. Back when our startup was like 2 people and barely ramen profitable, as much as we wanted to, there was no way we could pay market rate for some of our early hires without going out of business before we got any traction. Those hires made a risk vs. reward decision to take a temporary cut in salary in return for a larger amount of equity. Now that we are bigger and stabler, we have raised all their salaries to above market. Perhaps this is what you were saying as well, but I find that many people demonize any startup that offers below market salaries in return for higher equity. In many cases, it's not because they want to - it's because they have to.

dllthomas 13y ago
In principle, it seems like it would be nice to account for this as "we are paying you market rate, you are reinvesting some of that in exchange for equity". In practice, even leaving tax consequences out of it, that sounds like it might plausibly run you afoul of something... (though I am by no means confident that it would)
- nairteashop 13y ago
  > "we are paying you market rate, you are reinvesting some of that in exchange for equity" We didn't represent it like that at all. We were very upfront that we just don't have the money to pay them today what they expect, but we believe that this is a good market and we have the right team to become successful. Also that we understand that this is a huge risk they're taking, and so we will reward that with much higher equity. Some people were ok with it, some weren't and passed on our offer, and we fully respected that.
  - dllthomas 13y ago
    Sure, just saying there's a sense in which that's what's happening.
Jemaclus 13y ago
Sure, I think that's a fair assessment. I've just gotten a few offers where they offer SIGNIFICANTLY below market rate and offer a lot of equity, and when I counter, they get upset. That's frustrating. I'd happily take a pay cut to work for a startup that I believed in, but there is a lower limit that I can feasibly accept before I'm living paycheck to paycheck again, and that's just a miserable place to be, imo.
- nairteashop 13y ago
  Agreed. People have different appetite for risk and are at different stages in life, and it strikes me as very strange when folks - especially young, single founders with few living expenses - get upset when someone negotiates for higher compensation.
  - CodeMage 13y ago
    it strikes me as very strange when folks - especially young, single founders with few living expenses - get upset when someone negotiates for higher compensation. It shouldn't strike you as strange. You're expecting those young, single founders with few living expenses to empathize with people who aren't in their situation. What experience have they had that would allow them to do so?
- judk 13y ago
  Any one who gets upset during salary negotiation is either trying to scam you or not emotionally mature enough to run a business. Either way, walk away.
  - Jemaclus 13y ago
    Agreed. That's exactly what I did. :)
stephencanon 13y ago
I think the real issue is that the “larger amount of equity” needs to be significantly larger than it usually is in practice in order to justify the below-market salary for a strong hire. (Not saying that you guys didn’t offer people enough equity, rather that I’ve seen many stories of startups not offering nearly enough to justify the risk and below-market salary.)
- Jemaclus 13y ago
  Agreed! The other thing to consider here is that for a lot of people in the startup world, we already have equity. I already have equity in my current company. And not only that, but my current equity has started to vest! I'm actively making money from my equity right now. If you offer me X equity that's (theoretically) worth slightly more than my current equity but doesn't pay out for a year, you need to do something to incentivize me to give up my remaining, currently vesting equity to join your company. I.e., if my current salary is 100K and I have 50K in equity vesting between now and next November, and you offer me 90K and 250K in total equity, then I have to decide whether it's worth taking a 10K salary cut AND giving up 50K over the next year. The fact that you're offering me 250K in equity is actually going to wind up being equal to what I'm making now (250K - 50K = 200K, 200K / 4 = 50K/year), and the salary is actually lower! It's a net loss for me! So unless I really believe in your company and I really want to leave my current job, it's just probably not enough. And it's your job to either convince me that it's worth the loss or offer me more. And that's assuming your equity is actually worth anything. Given the number of startups that fail, it's a huge risk to take for something that's only theoretically equal to what I currently actually earn. So like I said, equity should be a bonus, not a replacement for salary. But to be fair, like nairteashop said, some people have different appetite for risk and are at different stages in life, so maybe the excitement of moving to a new company is enough to justify that. Anyway, I agree. You either need to beat my salary or beat the equity, but you can't offer me a lower salary and then offer equity and call it comparable, because you're not only offering me something, but you're asking me to give up stuff I already earned. You're asking me to walk away from free money. It's your job to convince me to do that, not to tell me I'm a moron for doing something completely logical.
  - 13y ago

fleitz 13y ago

Yes, equity should be calculated as EV. Since the EV of most startup equity is zero they should be treated as such. Doing a good job is irrelevant to the EV of your equity.

onedev 13y ago
How would you deal with equity in an offer from a company such as Dropbox or Square who clearly aren't going to disappear soon, and have a lot of momentum as a mid-sized, well-funded company?
- fleitz 13y ago
  I think this is probably the most difficult situation as it's extremely hard to predict if the stock will become liquid. At this point one should be looking either at solid financials or a twitter like ability to command a great valuation. I think Square and Dropbox both have solid rev models and valuations, my guess is that both would experience a liquidity event in the next 5 years.
- judk 13y ago
  Sharespost. SecondMarket.

enra 13y ago

I'm not sure how often this happens anymore and why is it even a problem. When ever I've talked with a startup, they always talk about salary and equity, they're both part of the negotiation. They offer you a salary of X and equity of Y, and then you can say that you hoped more for Z for salary. Of course a startup with a million or two in a bank can't pay you like Facebook or Google could but they can give more equity than any of them. If your needs and the startups offer don't match, don't work there. (I guess it's mostly this even a possible problem in SF since most companies in other places or parts of the world, don't really give out equity for employees.)

Jemaclus 13y ago
In the last six months, I've gotten offers from four different startups in SF, each of which offered me a MUCH lower salary than what I make now with roughly the same equity. At least one of them got pissed off when I countered in the manner you suggested. Instead, they told me how dumb I was for not taking equity into account. Which of course I did, but when your equity is the same as the equity I already have, I don't really need to consider it, especially when, as other posters have pointed out, the EV of the equity is zero. And you're right: their needs and my needs didn't match, so I declined. That's just business. Nothing personal. :)

georgemcbay 13y ago

"Furthermore, it's delayed and potential gratification." Agreed with your post entirely, though potential is a very optimistic word to use there... "unlikely" might be better. "Second, your company may be valued at $400M, but my options are worthless until you get acquired, sell, or IPO." Assuming we are talking about common stock options they might even be worthless after any of those 3 things happens, depending upon factors outside of your control like dilution.

Jemaclus 13y ago
Exactly! (I'm trying to be optimistic here :P)

prostoalex 13y ago

It kinda works well by design. In the early days of the company you want to attract senior developers and thought leaders, since they will define the direction of the company. Those guys typically have a good nest egg already, which makes larger equity / smaller salary package reasonable, and has a side effect of telling VCs a story of how low burn-rate (and therefore efficient) your startup is. As the company grows, so does the need for implementers, who are motivated by salary as well as chance at equity, but mainly by salary.

ckeck 13y ago

> and Y should be enough to incentivize me work my ass off for you. So for you the salary component has no impact on whether you work hard for your employer or not? That's simply the cost of doing business from your perspective?