6 ms·

The next generation of startups is going to have to address some employee equity problems, I think. This notion that early hires are going to share a small pie

by alexose 12y ago

The next generation of startups is going to have to address some employee equity problems, I think. This notion that early hires are going to share a small piece of the 10% employee pool needs to stop. Being employee #1 of a startup can be one of the worst positions a young developer can ask for. Long hours, high stress, low job security, and for what? 0.5% of a company that, if it survives, will most likely dilute its shares? A startup could really set itself apart by advertising more progressive structure-- One where shares in the company aren't treated like a lottery ticket, but an actual piece of value that is worth growing. Too bad VCs don't see it that way.

tptacek 12y ago
Probably not, or that already would have happened. It hasn't. One problem is that a lot of people look at equity grants as a meritorious service award. But that's not at all what they are; they're compensation for risk. Developers look at risk compensation and say, "well, I undertook a lot of risk to work long hours for a lower wage". That's true, but the market prices that kind of risk, and the market cares a lot about substitutes, and the typical developer taking basis points for their participation is eminently replaceable by other developers. On the other hand, the market has no replacement for an entity legally authorized to trade $1MM for X% of the company, so that risk is priced highly. Similarly, the market has fewer substitutes for the people who actually start the company; or rather, those substitutes tend to react to the mispricing by simply starting their own companies, and thus aren't competing with the founders for equity. Pithier: * there's a lot of ground to be made up in how founders/operators promote startup jobs to developers! * there's probably some marginal ground to be made up for developer equity compensation * it probably won't dramatically alter the way startup cap tables look * developers who genuinely (in a market sense) are poorly served by how startups allocate equity should start their own companies * developers who can't start companies probably aren't being as screwed as we think they are by small grants --- or, if they are, they're being screwed by being persuaded to work at startups when they should instead work for larger companies that can pay them better wages.
- deleted 12y ago
  [deleted]
- applecore 12y ago
  If you model the entrepreneurial/tech ecosystem as a market, you'll find inefficiencies and mispricing of risk everywhere, not just in hiring at early-stage startups.
  - tptacek 12y ago
    How else would you model companies and their staffing?
    - Qworg 12y ago
      For new startups? A cult (of personality or of the religious persuasion)? A warparty? A pirate crew? All are good options.
      - stephencanon 12y ago
        > A pirate crew? I. Every man has a vote in affairs of moment; has equal title to the fresh provisions, or strong liquors, at any time seized, and may use them at pleasure, ... IX. No man to talk of breaking up their way of living, till each had shared one thousand pounds. If in order to this, any man should lose a limb, or become a cripple in their service, he was to have eight hundred dollars, out of the public stock, and for lesser hurts, proportionately. X. The Captain and Quartermaster to receive two shares of a prize: the master, boatswain, and gunner, one share and a half, and other officers one and quarter. Far more equitable than most startups.
        mooreds 12y ago
        Nice! For others, this is from an actual pirate code: http://en.m.wikipedia.org/wiki/Pirate_code http://en.m.wikipedia.org/wiki/Pirate_code
        12y ago
tanzania 12y ago
Yikes this hits close to home for me. I am employee #1 for a rapidly growing startup, been here nearly two years. It's my first developer position, I'm definitely underpaid (until our A-round apparently), but I have .5%. I feel like pretty soon it'll be apparent whether this is going to ~really~ take off (I honestly feel it will). Any advice on what steps I should take to prevent getting shafted?
- calcsam 12y ago
  Post your resume on Dice // reach out to recruiters. Get another offer. Wave in front of them as a bargaining tactic. I'd happily bet you $50 that your next offer will be 25% over your current one. my username at gmail if you'd like to take me up on it.
- jacalata 12y ago
  You say you think it will "really take off" - what's that mean, it's going to be a billion dollar company? Ok then, your 0.5% is going to make you 5 million dollars. That's a net win. But maybe you mean it's a 50 million dollar company - then, best case (no dilution, you stick it out until they IPO, let's say 5 years working there total) you could walk away with $250,000, or the equivalent of having been paid an extra $40k-$50k per year each year you worked there. That sounds like about break-even financially, with some great experience but shitty lifestyle for several years. Up to you if that was a good deal. Or maybe you mean it's a 10 million dollar company. Would you be at this job if you had no equity and an extra $10k or would you feel screwed?
  - tanzania 12y ago
    Thanks for the perspective - this has been really helpful. I think no matter what happens it will have been an amazing experience that I lucked in to.
    - debacle 12y ago
      > it will have been an amazing experience that I lucked in to. I'm not really sure why you feel that way. Are you underskilled? You make it sound as though you're underpaid but then call it an amazing experience.
NewHermes 12y ago
Completely agreed. I recently applied to YCombinator and one of the questions asks how you plan on sharing equity. Here was my response: Everything I have seen, read, watched and smelled has made it clear that it is much better to be over generous with equity than to be stingy. With that in mind I plan on following the Sam Altman model as follows: Founder(s): 10% First 10 employees: 10% Next 20 employees: 5% Next 50 employees: 5% Vesting would happen after 5 years with a 1 year cliff.(I chose 5 instead of the 4 in Altman’s model because of the growing trend of companies taking longer to reach liquidity) Not only would this model differentiate a startup from competitors to potential hires, like you mentioned, sharing the growth with those who put in the work is the right thing to do. Besides, what can the gal who owns 10% of Google do that the guy who owns 1% can't?
- jldugger 12y ago
  > Besides, what can the gal who owns 10% of Google do that the guy who owns 1% can't? Vote herself President of the Board.
acconrad 12y ago
As a former employee #1 I can attest that even 2-3% of a company at a paltry wage is unsustainable. I know when I start my own business someday it will closer model what was done at WotC - this really resonated with me.
shalmanese 12y ago
> Being employee #1 of a startup can be one of the worst positions a young developer can ask for. Long hours, high stress, low job security, and for what? 0.5% of a company that, if it survives, will most likely dilute its shares? One thing that's never really brought up in these discussions because it's extremely poorly understood is that startup employees are the only ones given options (in the financial sense) and options are always more valuable than the underlying asset with the degree of premium based on the volatility of the asset. Think of it this way, as a startup employee, your optimal strategy is to join a company, work for a year and then immediately quit if the company isn't 5x as valuable as when you joined. Over the course of an engineering career, this gives you approximately 20 shots on goal to hit on a hyper growth company. Once you've hit one, you essentially have to do enough work for the next 3 years that you won't get fired and you're vesting stock that's 10x - 1000x more valuable than what you negotiated. Nobody else is allowed to have the option of buying startup stock at 4 year old prices except employees and that's the extreme advantage. Unfortunately, engineers are not experts at options pricing (nor should they be) so they tend to devalue the equity portion when considering total compensation which leads to the overall dysfunction in the system.
- klochner 12y ago
  > options are always more valuable than the underlying asset How about this deal: for any publicly traded stock you're holding, I'll give you an option to buy an equivalent number of shares at current market price. If the price goes down, your option is worthless but I can still sell the underlying. If the price goes up, I can sell for market price, while you net [market-strike] < market. I enjoy startups. They can be great learning opportunities, but they're typically a losing bet financially. You have to choose wisely.
  - Ntrails 12y ago
    The difference is in the starting value. You might pay pounds for the underlying and pennies for the option. But no, 1 long option is never more valuable than 1 share.
- gibybo 12y ago

by alexose 12y ago

tptacek 12y ago

Probably not, or that already would have happened. It hasn't. One problem is that a lot of people look at equity grants as a meritorious service award. But that's not at all what they are; they're compensation for risk. Developers look at risk compensation and say, "well, I undertook a lot of risk to work long hours for a lower wage". That's true, but the market prices that kind of risk, and the market cares a lot about substitutes, and the typical developer taking basis points for their participation is eminently replaceable by other developers. On the other hand, the market has no replacement for an entity legally authorized to trade $1MM for X% of the company, so that risk is priced highly. Similarly, the market has fewer substitutes for the people who actually start the company; or rather, those substitutes tend to react to the mispricing by simply starting their own companies, and thus aren't competing with the founders for equity. Pithier: * there's a lot of ground to be made up in how founders/operators promote startup jobs to developers! * there's probably some marginal ground to be made up for developer equity compensation * it probably won't dramatically alter the way startup cap tables look * developers who genuinely (in a market sense) are poorly served by how startups allocate equity should start their own companies * developers who can't start companies probably aren't being as screwed as we think they are by small grants --- or, if they are, they're being screwed by being persuaded to work at startups when they should instead work for larger companies that can pay them better wages.

deleted 12y ago
[deleted]
applecore 12y ago
If you model the entrepreneurial/tech ecosystem as a market, you'll find inefficiencies and mispricing of risk everywhere, not just in hiring at early-stage startups.
- tptacek 12y ago
  How else would you model companies and their staffing?
  - Qworg 12y ago
    For new startups? A cult (of personality or of the religious persuasion)? A warparty? A pirate crew? All are good options.
    - stephencanon 12y ago
      > A pirate crew? I. Every man has a vote in affairs of moment; has equal title to the fresh provisions, or strong liquors, at any time seized, and may use them at pleasure, ... IX. No man to talk of breaking up their way of living, till each had shared one thousand pounds. If in order to this, any man should lose a limb, or become a cripple in their service, he was to have eight hundred dollars, out of the public stock, and for lesser hurts, proportionately. X. The Captain and Quartermaster to receive two shares of a prize: the master, boatswain, and gunner, one share and a half, and other officers one and quarter. Far more equitable than most startups.
      - mooreds 12y ago
        Nice! For others, this is from an actual pirate code: http://en.m.wikipedia.org/wiki/Pirate_code http://en.m.wikipedia.org/wiki/Pirate_code
      - 12y ago

tanzania 12y ago

Yikes this hits close to home for me. I am employee #1 for a rapidly growing startup, been here nearly two years. It's my first developer position, I'm definitely underpaid (until our A-round apparently), but I have .5%. I feel like pretty soon it'll be apparent whether this is going to ~really~ take off (I honestly feel it will). Any advice on what steps I should take to prevent getting shafted?

calcsam 12y ago
Post your resume on Dice // reach out to recruiters. Get another offer. Wave in front of them as a bargaining tactic. I'd happily bet you $50 that your next offer will be 25% over your current one. my username at gmail if you'd like to take me up on it.
jacalata 12y ago
You say you think it will "really take off" - what's that mean, it's going to be a billion dollar company? Ok then, your 0.5% is going to make you 5 million dollars. That's a net win. But maybe you mean it's a 50 million dollar company - then, best case (no dilution, you stick it out until they IPO, let's say 5 years working there total) you could walk away with $250,000, or the equivalent of having been paid an extra $40k-$50k per year each year you worked there. That sounds like about break-even financially, with some great experience but shitty lifestyle for several years. Up to you if that was a good deal. Or maybe you mean it's a 10 million dollar company. Would you be at this job if you had no equity and an extra $10k or would you feel screwed?
- tanzania 12y ago
  Thanks for the perspective - this has been really helpful. I think no matter what happens it will have been an amazing experience that I lucked in to.
  - debacle 12y ago
    > it will have been an amazing experience that I lucked in to. I'm not really sure why you feel that way. Are you underskilled? You make it sound as though you're underpaid but then call it an amazing experience.

NewHermes 12y ago

Completely agreed. I recently applied to YCombinator and one of the questions asks how you plan on sharing equity. Here was my response: Everything I have seen, read, watched and smelled has made it clear that it is much better to be over generous with equity than to be stingy. With that in mind I plan on following the Sam Altman model as follows: Founder(s): 10% First 10 employees: 10% Next 20 employees: 5% Next 50 employees: 5% Vesting would happen after 5 years with a 1 year cliff.(I chose 5 instead of the 4 in Altman’s model because of the growing trend of companies taking longer to reach liquidity) Not only would this model differentiate a startup from competitors to potential hires, like you mentioned, sharing the growth with those who put in the work is the right thing to do. Besides, what can the gal who owns 10% of Google do that the guy who owns 1% can't?

jldugger 12y ago
> Besides, what can the gal who owns 10% of Google do that the guy who owns 1% can't? Vote herself President of the Board.

acconrad 12y ago

As a former employee #1 I can attest that even 2-3% of a company at a paltry wage is unsustainable. I know when I start my own business someday it will closer model what was done at WotC - this really resonated with me.

shalmanese 12y ago

> Being employee #1 of a startup can be one of the worst positions a young developer can ask for. Long hours, high stress, low job security, and for what? 0.5% of a company that, if it survives, will most likely dilute its shares? One thing that's never really brought up in these discussions because it's extremely poorly understood is that startup employees are the only ones given options (in the financial sense) and options are always more valuable than the underlying asset with the degree of premium based on the volatility of the asset. Think of it this way, as a startup employee, your optimal strategy is to join a company, work for a year and then immediately quit if the company isn't 5x as valuable as when you joined. Over the course of an engineering career, this gives you approximately 20 shots on goal to hit on a hyper growth company. Once you've hit one, you essentially have to do enough work for the next 3 years that you won't get fired and you're vesting stock that's 10x - 1000x more valuable than what you negotiated. Nobody else is allowed to have the option of buying startup stock at 4 year old prices except employees and that's the extreme advantage. Unfortunately, engineers are not experts at options pricing (nor should they be) so they tend to devalue the equity portion when considering total compensation which leads to the overall dysfunction in the system.

klochner 12y ago
> options are always more valuable than the underlying asset How about this deal: for any publicly traded stock you're holding, I'll give you an option to buy an equivalent number of shares at current market price. If the price goes down, your option is worthless but I can still sell the underlying. If the price goes up, I can sell for market price, while you net [market-strike] < market. I enjoy startups. They can be great learning opportunities, but they're typically a losing bet financially. You have to choose wisely.
- Ntrails 12y ago
  The difference is in the starting value. You might pay pounds for the underlying and pennies for the option. But no, 1 long option is never more valuable than 1 share.
gibybo 12y ago