4 ms·

Equity clearly has some value though, based on the fact that in any successful startup investors pay a lot of money for it. If you are considering taking equit

by birken 12y ago

Equity clearly has some value though, based on the fact that in any successful startup investors pay a lot of money for it. If you are considering taking equity, you should treat it like a potential investor would. Ask hard questions. Look at the balance sheet. Look at the company deck. Look at the previous funding rounds. Research the backgrounds of your potential coworkers. (If the company wont share this information with you... don't work there). Now even with this, you might say that a person would be terrible at evaluating that equity, and that is probably right. But investors are terrible at evaluating equity as well (considering that most funded startups also fail). But you do the best you can. Of course you need to decide whether you are interested in having a high-risk investment as part of your income, because if not you should not work at an early stage startup anyways. But don't ignore it completely.

scrozier 12y ago
Yes, but investors spread their risk, as an essential part of their strategy. Employees have no such opportunity.
silverlake 12y ago
Aren't common shares far down on the equity totem pole? Investors get preferred shares w/ liquidation preferences. Employees get diluted to nothing.
- deleted 12y ago
  [deleted]
- mason55 12y ago
  I think you're confusing some concepts here. Dilution happens when new shares are issued causing your percentage ownership to go down. In general it's not a bad thing - when there's a new funding round the new cash will increase the value of the company to balance out the dilution and you end up with your equity being the same value. The thing people forget about when they talk about dilution from new rounds is that the cash added to the balance sheet increases the value of the company, probably even more than 1:1. Liquidation preference is what happens when the preferred shares have a clause that says they are guaranteed 2x or 3x what they put in on any liquidity event. So if you take $10mm at 3x liquidation preference then that means any exit has an immediate $30mm taken off the table. A $30mm exit now becomes a $0 exit for the employees. Remember that generally the founders are holding common shares.
imrank1 12y ago
In my experience companies won't share what the percentage is of the stock you are getting. They just say you are getting X number of shares and won't tell you anything else. How do you verify what they are saying is correct?
- dreese 12y ago
  Telling you total outstanding number of shares is required before you can have any idea what level of equity you are receiving. If they can't tell you that, then you have one problem. If they won't tell you, then you have another. Either way, I would be concerned.
- mh- 12y ago
  I've never experienced that; I wouldn't stick around in any negotiation where that occurred. to me, that's a red flag on multiple levels.
cgriswald 12y ago
Okay, so let's look at it as an investment. Take an established company. If you invest in this company and it has problems, not only could your investment vanish, but you may also be out of a job. There's a lot of risk there for you as an employee that isn't there for the average investor. To me it seems the thing to do is accept the options but cash them as soon as possible while still being smart about it. Take a startup. You have the same problem as above, but the startup is much, much more likely to fail and those failures are likely to be more catastrophic. If you're not comfortable with that level of risk you just shouldn't do it at all. If you are, then I think you have to take the same approach as with the established company: sell as soon as you are able to sell. And this is, in fact, what my ex and I did. She worked for a startup. She received options when she started and as bonuses. We were given a few liquidation opportunities (stocks sold to private investors through the company) but otherwise were not allowed to sell while she still worked there. During those opportunities we sold the maximum we were allowed to sell (which was always some percentage of our holdings). This got our money out of the high risk investment and doing other things. In the long run, the company ended up going public and we could have done much better by holding out, but we still did quite well and reducing our risk at the time was the smart move. I am not a financial advisor, this is not advice, blah blah blah...
tomp 12y ago
The risk profiles and the investment profiles of most investors are completely different from those of most employees, so there is no way that equity has (proportionally) the same value for employees and investors. Besides what other comments already mentioned (liquidation preferences and portfolio diversification), one must also take into account that (1) investor's equity is safe, while the employee's isn't (if you're fired before the vesting begins), and (2) investors have much more say at influencing the company's future (via more board seats and more voting rights). Also, most employees have much less capital than investors, so the monetary equivalent of the NPV of equity would be much more meaningful to them than to the investors (given that most people are risk-averse). All in all, as an employee, I would value equity between 4-10 times less than the investors would.
btilly 12y ago
The difference between an employee and an investor is that the investor puts their eggs in many baskets, and an employee puts all of their eggs in one basket. So investors get diversification of risk while employees do not. Therefore consistently accepting low probability but potentially high return choices on average works out well for investors and not for employees. And in fact investors push this way - their incentive is always to "swing for the fences" because their business model is based on the one or two investments that work out which pay for the failures. If you are considering working for a startup, the value of your equity should not be a primary consideration. Instead you should be so deciding because you enjoy the fact that the organization is small, you can have an impact, competence can result in rapid promotion, you have the opportunity to learn many skills. If you want to be in it for THOSE reasons, then seriously consider it. When you are in any negotiation you should make all decisions about equity from the point of view of never expecting it to be worth a dime - because it probably won't be - but be ready to trade salary in excess of your actual needs for it because you recognize that the person on the other side is trying to reward you, and rewarding people like you with money makes the company less likely to succeed. If you work from those principles, then you are likely to choose a job which is a good fit and where you have a good impact. If you instead work from everything as a straightforward economic transaction then startups can't consistently reward you like an established company will. But I can see you jumping up and down about the potential payoff from equity. If you are a person whose day to day life can be motivated by that, then go off and read http://www.bothsidesofthetable.com/2009/11/04/is-it-time-for-you-to-earn-or-to-learn/ http://www.bothsidesofthetable.com/2009/11/04/is-it-time-for... and decide whether you are ready to start your own company now, or want to gain skills before doing it in a bit. Seriously, the difference between "last founder" and "first employee" is so huge that people who can derive their day to day motivation from equity should be founders. (Obligatory disclaimer: I have worked for a number of startups, been paid out non-life changing amounts more than once, and have never tried being a founder.)
- dreese 12y ago
  'Seriously, the difference between "last founder" and "first employee" is so huge that people who can derive their day to day motivation from equity should be founders.' I think this is spot-on.

by birken 12y ago

scrozier 12y ago

Yes, but investors spread their risk, as an essential part of their strategy. Employees have no such opportunity.

silverlake 12y ago

Aren't common shares far down on the equity totem pole? Investors get preferred shares w/ liquidation preferences. Employees get diluted to nothing.

deleted 12y ago
[deleted]
mason55 12y ago
I think you're confusing some concepts here. Dilution happens when new shares are issued causing your percentage ownership to go down. In general it's not a bad thing - when there's a new funding round the new cash will increase the value of the company to balance out the dilution and you end up with your equity being the same value. The thing people forget about when they talk about dilution from new rounds is that the cash added to the balance sheet increases the value of the company, probably even more than 1:1. Liquidation preference is what happens when the preferred shares have a clause that says they are guaranteed 2x or 3x what they put in on any liquidity event. So if you take $10mm at 3x liquidation preference then that means any exit has an immediate $30mm taken off the table. A $30mm exit now becomes a $0 exit for the employees. Remember that generally the founders are holding common shares.

imrank1 12y ago

In my experience companies won't share what the percentage is of the stock you are getting. They just say you are getting X number of shares and won't tell you anything else. How do you verify what they are saying is correct?

dreese 12y ago
Telling you total outstanding number of shares is required before you can have any idea what level of equity you are receiving. If they can't tell you that, then you have one problem. If they won't tell you, then you have another. Either way, I would be concerned.
mh- 12y ago
I've never experienced that; I wouldn't stick around in any negotiation where that occurred. to me, that's a red flag on multiple levels.

cgriswald 12y ago

Okay, so let's look at it as an investment. Take an established company. If you invest in this company and it has problems, not only could your investment vanish, but you may also be out of a job. There's a lot of risk there for you as an employee that isn't there for the average investor. To me it seems the thing to do is accept the options but cash them as soon as possible while still being smart about it. Take a startup. You have the same problem as above, but the startup is much, much more likely to fail and those failures are likely to be more catastrophic. If you're not comfortable with that level of risk you just shouldn't do it at all. If you are, then I think you have to take the same approach as with the established company: sell as soon as you are able to sell. And this is, in fact, what my ex and I did. She worked for a startup. She received options when she started and as bonuses. We were given a few liquidation opportunities (stocks sold to private investors through the company) but otherwise were not allowed to sell while she still worked there. During those opportunities we sold the maximum we were allowed to sell (which was always some percentage of our holdings). This got our money out of the high risk investment and doing other things. In the long run, the company ended up going public and we could have done much better by holding out, but we still did quite well and reducing our risk at the time was the smart move. I am not a financial advisor, this is not advice, blah blah blah...

tomp 12y ago

The risk profiles and the investment profiles of most investors are completely different from those of most employees, so there is no way that equity has (proportionally) the same value for employees and investors. Besides what other comments already mentioned (liquidation preferences and portfolio diversification), one must also take into account that (1) investor's equity is safe, while the employee's isn't (if you're fired before the vesting begins), and (2) investors have much more say at influencing the company's future (via more board seats and more voting rights). Also, most employees have much less capital than investors, so the monetary equivalent of the NPV of equity would be much more meaningful to them than to the investors (given that most people are risk-averse). All in all, as an employee, I would value equity between 4-10 times less than the investors would.

btilly 12y ago

The difference between an employee and an investor is that the investor puts their eggs in many baskets, and an employee puts all of their eggs in one basket. So investors get diversification of risk while employees do not. Therefore consistently accepting low probability but potentially high return choices on average works out well for investors and not for employees. And in fact investors push this way - their incentive is always to "swing for the fences" because their business model is based on the one or two investments that work out which pay for the failures. If you are considering working for a startup, the value of your equity should not be a primary consideration. Instead you should be so deciding because you enjoy the fact that the organization is small, you can have an impact, competence can result in rapid promotion, you have the opportunity to learn many skills. If you want to be in it for THOSE reasons, then seriously consider it. When you are in any negotiation you should make all decisions about equity from the point of view of never expecting it to be worth a dime - because it probably won't be - but be ready to trade salary in excess of your actual needs for it because you recognize that the person on the other side is trying to reward you, and rewarding people like you with money makes the company less likely to succeed. If you work from those principles, then you are likely to choose a job which is a good fit and where you have a good impact. If you instead work from everything as a straightforward economic transaction then startups can't consistently reward you like an established company will. But I can see you jumping up and down about the potential payoff from equity. If you are a person whose day to day life can be motivated by that, then go off and read http://www.bothsidesofthetable.com/2009/11/04/is-it-time-for-you-to-earn-or-to-learn/ http://www.bothsidesofthetable.com/2009/11/04/is-it-time-for... and decide whether you are ready to start your own company now, or want to gain skills before doing it in a bit. Seriously, the difference between "last founder" and "first employee" is so huge that people who can derive their day to day motivation from equity should be founders. (Obligatory disclaimer: I have worked for a number of startups, been paid out non-life changing amounts more than once, and have never tried being a founder.)

dreese 12y ago
'Seriously, the difference between "last founder" and "first employee" is so huge that people who can derive their day to day motivation from equity should be founders.' I think this is spot-on.