7 ms·

Employee Equity

58 points by yurisagalov 13y ago

michaelochurch 13y ago
Slide 11 puts the average equity for a software engineer at a 51-100 person company at 0.07%. That sounds correct-- I hesitate to use "right", here-- but that means that a person is getting about 1/20 of a proportional share. To me, that's absurd. Yes, founders and management and investors deserve their take, and 40-70% is reasonable. But not 95%. For those who'd argue, "0.07 percent is generous for someone who just joined, hasn't done anything yet, hasn't taken any risk" let me remind them that the 0.07 is vested over 4 years (as it should be). After 4 years of loyalty and good work, she probably deserves much more than 7 pennies. I think startup equity is toxic because it's designed to look like real business partnership, and it confuses the naive into thinking they're actual owners, but actually falls into the uncanny valley. I think it's better to be honest about the employer/employee relationship (in the way that Wall Street is, with its generous profit sharing) than to try to hide with it bullshit. Startup equity: people paid in penny stocks that couldn't be legally sold to them and that they can't possibly evaluate because they aren't even given the social access to understand the relationships (e.g. investors) involved-- because if they had that access, they'd go off and start their own companies. If you want to do the Cravath model and promote people to real partnership after 7 years, then do that. If you want to be like a hedge fund (which prefers generous cash bonuses over the increasing ownership complexity, and employees usually prefer that too) then do that. But the VC-istan "ownership" culture is (for engineers) a fucking lie. If we (as engineers) are going to own something, it'll be something we build ourselves and it won't happen in VC-istan.
- tptacek 13y ago
  An employee granted 7bp is presumably also making market cash comp. That seems to be the presumption both in this post and in the Wealthfront post. I have no doubt that there are cat-sharing companies trying to deploy single-digit basis points in lieu of 5-figure discounts to salary. In every market, there are abuses. As someone who hires pretty regularly in SFBA, it is not my perception that the typical candidate in this market is having the wool pulled over their eyes. Salary expectations in the valley are high. We don't do equity comp at all, but when we did, 7+ years ago, it was typically met with a gimlet attitude.
  - michaelochurch 13y ago
    An employee granted 7bp is presumably also making market cash comp. So are most founders (who don't take any real risk, because they benefit from a private welfare network/safety net; otherwise they aren't getting introduced to VCs) and investors. Most founders pay themselves market salaries post-A, and VCs never take a break from their $500k++ per year. Bootstrapping is a different conversation, but in VC-istan you take more risk as an engineer (who might be fired w/out severance and have his career ruined by a short-tempered 23-year-old founder) than as a founder (who might have to pay himself "only" an engineer salary for a few years).
    - tptacek 13y ago
      Is your argument about what fair comp for a developer is, or are you instead trying to poke holes in the mythologizing of company founders? If it's the latter, I disagree but don't care enough to argue. If it's the former, nothing you're saying makes any sense. What the owner of the company makes has nothing to do with what you should make. What you should make is a function of the market and nothing else. To see why, simply think of any well-run firm whose owner inherited the company. By your logic, every employee there should be better compensated than the owner. If you're here to relitigate all of capitalism, that's fine too; we won't agree, but I also won't waste my time debating.
      - alextingle 13y ago
        You seem to have something to say, but rather than saying it, you've taken the time to typed out a great screed full of gems like "I disagree but don't care enough to argue".
        tptacek 13y ago
        I care enough to argue about how to evaluate developer compensation because that is a practical issue, and one where misperceptions can harm employees and employers. I do not care enough about capitalism to litigate it on a message board.
    - 13y ago
- spamizbad 13y ago
  I can speculate on two reasons why things are the way they are: 1) Companies generally set aside a certain percentage of their common stock for employee compensation. I imagine much of this is allocated towards C-level hires, and anyone else is getting the scraps. I've also heard (but not confirmed firsthand so take with a grain of salt) that VCs don't like overly large employee stock pools. I have no clue why - VC stock is preferred and employee stock is common so it's not they're offering any competition. It might have something to do with founders getting discouraged by additional dilution, which in turn limits the kinds of deals that founder is willing to participate in. 2) Paying out more cash to engineers makes it more difficult for your company to achieve a positive (or break-even) EBITDA. Negative EBITDA makes you a much less attractive acquisition target unless you're either trendy or have some ungodly large number of "eyeballs" that haven't been monetized yet (They're paying for the upside). An entrepreneur contemplating offering market-clearing salaries could talk themselves out of it by concluding "I can probably just hire the same engineer for less if I just wait longer and work harder at screening" -- effectively trading time to save money. Not always a smart move, but not necessarily a stupid one either. Again, just speculation.
  - michaelochurch 13y ago
    These explanations make a lot of sense. For #1, the stated reason VCs discourage substantial employee equity is that they don't want the "equity-oriented culture". The real reason is greed in what they perceive as a zero-sum game (but it's not; different policies would create different companies!) #2 is probably quite accurate. It's sad, though, that paying well confuses Wall Street into thinking a business is ineptly run.
    - tptacek 13y ago
      Once again, you beg the question. You pretend to draw a conclusion about how VC works, but that conclusion is based on the unsupported premise that VC works the way you say it does. To the extent company boards are parsimonious about equity, it's probably in order to preserve optionality: a new chief operating officer, or a new high-profile engineer to lead a new product team, or a new CEO, all draw significantly from the pool of equity available to employees. Humans are loss averse, so a smaller up-front allocation is preferable to a larger allocation that subsequently has to be diluted down.
- fizx 13y ago
  0.07% seems around right for a high-growth company (twitter, pinterest, instagram, etc) in todays market multiples. All of those companies had the rocketship engines lit by employee #50. It took no effort to imagine any of those companies being worth a billion dollars, in which case your stock is worth $700k. The company hits $10B, which is less likely, and you start to encroach on FU money. If you are joining a consumer company at number #50 that isn't a rocketship, I hope you negotiated your salary well, because there's a vanishingly small chance of the options mattering.
  - isalmon 13y ago
    You also have to include the risk in your calculations. Let's say there's 5% (or whatever that is) chance for success, you have to divide $700K by 20 instantly. Nobody can guarantee you that any company with less than 100 employees is going to succeed and eventually be worth billions.
    - fizx 13y ago
      Those companies were >80% chance of success at employee 50. Any of them have/had more chance of being worth $10B than less than $500M. So you really have to integrate over the probability curve to get an expected value, but I don't think the naive estimate of $700k oversells things.
      - michaelochurch 13y ago
        Those companies were >80% chance of success at employee 50. I'm not sure I agree with that 80% figure and, even if, that's because the VCs have so much influence over the reputation of the company. (Indeed, that's why they have so much power over founders. They can turn off unrelated interest, which gives them extortive leverage.) Market manipulation at its finest. VCs are in the business of using their power over emerging, impossible-to-valuate companies' reputations to make millions for themselves. If Wall Street analysts did that shit, they'd be in jail.
        13y ago
- not_that_noob 13y ago
  The truth is that the rules of who gets how much are strictly a function of leverage. There is no such thing as an objectively fair system in divvying up equity. Money was the most scarce element, and thus thsee rules were set up to favor the money. Now, money is not the most important component as the cost of starting companies continues to drop. Founders and engineers have become more valuable than they used to be in the ecosystem. In some companies, especially newer ones that required fewer people to get to solid traction, this is already being reflected in the cap table. In time, I predict we will move to a new normal where employees get more.
Pro_bity 13y ago
Didn't we have the same conversation yesterday? https://news.ycombinator.com/item?id=6762562 https://news.ycombinator.com/item?id=6762562
- mik3y 13y ago
  If you read the post, he's responding to that article: "So I was excited to see that First Round Capital featured a blog post by Andy Rachleff on this topic yesterday.."
zallarak 13y ago
I like that this is being discussed more. Some related thoughts: - I personally find the numbers low; there is a glut of startups out there partially due to engineers realizing that they are more than often underpaid in terms of equity. - Employers and VCs should realize that a hyper-motivated engineer is worth N engineers. Not juts in terms of effort, but engineering quality, reduction in politics/a more meritocratic culture, morale, etc. - Heavily invested engineers will be retained; recruiting and skill-retention are huge resource consumers.

58 points by yurisagalov 13y ago

Slide 11 puts the average equity for a software engineer at a 51-100 person company at 0.07%. That sounds correct-- I hesitate to use "right", here-- but that means that a person is getting about 1/20 of a proportional share. To me, that's absurd. Yes, founders and management and investors deserve their take, and 40-70% is reasonable. But not 95%. For those who'd argue, "0.07 percent is generous for someone who just joined, hasn't done anything yet, hasn't taken any risk" let me remind them that the 0.07 is vested over 4 years (as it should be). After 4 years of loyalty and good work, she probably deserves much more than 7 pennies. I think startup equity is toxic because it's designed to look like real business partnership, and it confuses the naive into thinking they're actual owners, but actually falls into the uncanny valley. I think it's better to be honest about the employer/employee relationship (in the way that Wall Street is, with its generous profit sharing) than to try to hide with it bullshit. Startup equity: people paid in penny stocks that couldn't be legally sold to them and that they can't possibly evaluate because they aren't even given the social access to understand the relationships (e.g. investors) involved-- because if they had that access, they'd go off and start their own companies. If you want to do the Cravath model and promote people to real partnership after 7 years, then do that. If you want to be like a hedge fund (which prefers generous cash bonuses over the increasing ownership complexity, and employees usually prefer that too) then do that. But the VC-istan "ownership" culture is (for engineers) a fucking lie. If we (as engineers) are going to own something, it'll be something we build ourselves and it won't happen in VC-istan.

tptacek 13y ago
An employee granted 7bp is presumably also making market cash comp. That seems to be the presumption both in this post and in the Wealthfront post. I have no doubt that there are cat-sharing companies trying to deploy single-digit basis points in lieu of 5-figure discounts to salary. In every market, there are abuses. As someone who hires pretty regularly in SFBA, it is not my perception that the typical candidate in this market is having the wool pulled over their eyes. Salary expectations in the valley are high. We don't do equity comp at all, but when we did, 7+ years ago, it was typically met with a gimlet attitude.
- michaelochurch 13y ago
  An employee granted 7bp is presumably also making market cash comp. So are most founders (who don't take any real risk, because they benefit from a private welfare network/safety net; otherwise they aren't getting introduced to VCs) and investors. Most founders pay themselves market salaries post-A, and VCs never take a break from their $500k++ per year. Bootstrapping is a different conversation, but in VC-istan you take more risk as an engineer (who might be fired w/out severance and have his career ruined by a short-tempered 23-year-old founder) than as a founder (who might have to pay himself "only" an engineer salary for a few years).
  - tptacek 13y ago
    Is your argument about what fair comp for a developer is, or are you instead trying to poke holes in the mythologizing of company founders? If it's the latter, I disagree but don't care enough to argue. If it's the former, nothing you're saying makes any sense. What the owner of the company makes has nothing to do with what you should make. What you should make is a function of the market and nothing else. To see why, simply think of any well-run firm whose owner inherited the company. By your logic, every employee there should be better compensated than the owner. If you're here to relitigate all of capitalism, that's fine too; we won't agree, but I also won't waste my time debating.
    - alextingle 13y ago
      You seem to have something to say, but rather than saying it, you've taken the time to typed out a great screed full of gems like "I disagree but don't care enough to argue".
      - tptacek 13y ago
        I care enough to argue about how to evaluate developer compensation because that is a practical issue, and one where misperceptions can harm employees and employers. I do not care enough about capitalism to litigate it on a message board.
  - 13y ago
spamizbad 13y ago
I can speculate on two reasons why things are the way they are: 1) Companies generally set aside a certain percentage of their common stock for employee compensation. I imagine much of this is allocated towards C-level hires, and anyone else is getting the scraps. I've also heard (but not confirmed firsthand so take with a grain of salt) that VCs don't like overly large employee stock pools. I have no clue why - VC stock is preferred and employee stock is common so it's not they're offering any competition. It might have something to do with founders getting discouraged by additional dilution, which in turn limits the kinds of deals that founder is willing to participate in. 2) Paying out more cash to engineers makes it more difficult for your company to achieve a positive (or break-even) EBITDA. Negative EBITDA makes you a much less attractive acquisition target unless you're either trendy or have some ungodly large number of "eyeballs" that haven't been monetized yet (They're paying for the upside). An entrepreneur contemplating offering market-clearing salaries could talk themselves out of it by concluding "I can probably just hire the same engineer for less if I just wait longer and work harder at screening" -- effectively trading time to save money. Not always a smart move, but not necessarily a stupid one either. Again, just speculation.
- michaelochurch 13y ago
  These explanations make a lot of sense. For #1, the stated reason VCs discourage substantial employee equity is that they don't want the "equity-oriented culture". The real reason is greed in what they perceive as a zero-sum game (but it's not; different policies would create different companies!) #2 is probably quite accurate. It's sad, though, that paying well confuses Wall Street into thinking a business is ineptly run.
  - tptacek 13y ago
    Once again, you beg the question. You pretend to draw a conclusion about how VC works, but that conclusion is based on the unsupported premise that VC works the way you say it does. To the extent company boards are parsimonious about equity, it's probably in order to preserve optionality: a new chief operating officer, or a new high-profile engineer to lead a new product team, or a new CEO, all draw significantly from the pool of equity available to employees. Humans are loss averse, so a smaller up-front allocation is preferable to a larger allocation that subsequently has to be diluted down.
fizx 13y ago
0.07% seems around right for a high-growth company (twitter, pinterest, instagram, etc) in todays market multiples. All of those companies had the rocketship engines lit by employee #50. It took no effort to imagine any of those companies being worth a billion dollars, in which case your stock is worth $700k. The company hits $10B, which is less likely, and you start to encroach on FU money. If you are joining a consumer company at number #50 that isn't a rocketship, I hope you negotiated your salary well, because there's a vanishingly small chance of the options mattering.
- isalmon 13y ago
  You also have to include the risk in your calculations. Let's say there's 5% (or whatever that is) chance for success, you have to divide $700K by 20 instantly. Nobody can guarantee you that any company with less than 100 employees is going to succeed and eventually be worth billions.
  - fizx 13y ago
    Those companies were >80% chance of success at employee 50. Any of them have/had more chance of being worth $10B than less than $500M. So you really have to integrate over the probability curve to get an expected value, but I don't think the naive estimate of $700k oversells things.
    - michaelochurch 13y ago
      Those companies were >80% chance of success at employee 50. I'm not sure I agree with that 80% figure and, even if, that's because the VCs have so much influence over the reputation of the company. (Indeed, that's why they have so much power over founders. They can turn off unrelated interest, which gives them extortive leverage.) Market manipulation at its finest. VCs are in the business of using their power over emerging, impossible-to-valuate companies' reputations to make millions for themselves. If Wall Street analysts did that shit, they'd be in jail.
      - 13y ago
not_that_noob 13y ago
The truth is that the rules of who gets how much are strictly a function of leverage. There is no such thing as an objectively fair system in divvying up equity. Money was the most scarce element, and thus thsee rules were set up to favor the money. Now, money is not the most important component as the cost of starting companies continues to drop. Founders and engineers have become more valuable than they used to be in the ecosystem. In some companies, especially newer ones that required fewer people to get to solid traction, this is already being reflected in the cap table. In time, I predict we will move to a new normal where employees get more.

Pro_bity 13y ago

Didn't we have the same conversation yesterday? https://news.ycombinator.com/item?id=6762562 https://news.ycombinator.com/item?id=6762562

mik3y 13y ago
If you read the post, he's responding to that article: "So I was excited to see that First Round Capital featured a blog post by Andy Rachleff on this topic yesterday.."

zallarak 13y ago

I like that this is being discussed more. Some related thoughts: - I personally find the numbers low; there is a glut of startups out there partially due to engineers realizing that they are more than often underpaid in terms of equity. - Employers and VCs should realize that a hyper-motivated engineer is worth N engineers. Not juts in terms of effort, but engineering quality, reduction in politics/a more meritocratic culture, morale, etc. - Heavily invested engineers will be retained; recruiting and skill-retention are huge resource consumers.