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My experience with equity: $20K into a startup, which was sold to midrangeSoftwareCompany, which was in turn sold to Oracle. Wound up with 17 shares of Oracle,

by kabdib 12y ago

My experience with equity: $20K into a startup, which was sold to midrangeSoftwareCompany, which was in turn sold to Oracle. Wound up with 17 shares of Oracle, worth about $2000 at the time. Another experience: $2K of "hell, I'm leaving so why not buy the shares I vested in". Eight years later the company is wildly successful (public and valued at $1B). I call them up, and my shares are worthless through some stock shenanigans. A third: $5K investment turned into $21K. Yay. I guess I almost broke even on the Silly Valley slot machine. Lastly: I did much, MUCH better with options and other stock-related stuff at a couple of large companies, spread out over 16 years. It's not unreasonable to make a few million on these in the course of your career. Get a good salary. Don't trade a good salary for equity, because in general it's a bad deal and you're just going to get screwed. If you're good and you take a low salary for the "developer class" equity that I've seen, take a hard look and see if you're getting anything else worthwhile (an education in technologies you wouldn't be using otherwise, good contacts, a possibility you'd be identified as a principal "must have" in an acquisition, with incentives to match, etc). Otherwise you're being taken advantage of.

nhstanley 12y ago
I don't have as much personal experience (only one colossal flop, $4k invested + ~20% lower salary), but I've got enough experience in the industry to have come up with this hard and fast rule: If you didn't found the company and aren't getting 10%+, equity is meaningless. If they insist you take equity ("Don't you have faith that we'll be successful?"), you can offer to knock off 1% of what you would have expected in annual salary without it (even that is arguably too much). Otherwise it's absolutely not worth it. Companies love trying to get you to take a 5-40% pay cut because "It's a startup" and "we'll give you equity". Total BS. You will be better off spending an hour every week minding your money in other ways, with your appropriate salary.
- Firegarden 12y ago
  Actually you would be better off coding something yourself in your spare time and giving it away for free. As soon as you can get recognition or an audience you are building some intrinsic value that will pay itself out some day.
- kasey_junk 12y ago
  To be fair, I've talked to people in some companies that try this that quite simply do not understand how options work. It is ignorance, not malice, that causes their odd behaviors (not that the end result is any better). My usual bargaining gambit is to ask how much salary they will give me over the vesting period to buy back the options. If nothing else this puts a price floor on how much the options are worth to the company.
- greenyoda 12y ago
  "Don't you have faith that we'll be successful?" To which the answer is: "The success of this company will depend much more on management's strategies and the vagaries of the market than on the code that I write. Besides, you're not sharing your financials and other private business information with me, so I have no basis for guessing whether the company will be successful or what the value of the equity you're offering me will be. And in any case, I need to be able to pay my rent and other expenses regardless of whether the company is successful or not. So I'm expecting to receive a competitive salary."
  - kabdib 12y ago
    Likely response to that is "Not a team player." And you're better off not being there.
  - sneak 12y ago
    It blows my mind when friends accept offers and I ask "did you get any equity?" and they say "yeah" to which I reply "how much?" and they give some figure that is meaningless without a cap table, and when pressed further I learn that they have never seen the cap table.
- walshemj 12y ago
  A good rule of thumb is any start-up options has to potentially be 2-5x better than I would get at a FSTE 100 (DOW 30 in the USA) BTW British telecoms latest share save 5 years maxed out at £200 a month - just came out at £100k effectively tax free.
uahal 12y ago
A huge percentage of stock options expire worthless (one common assumption is that 90% of options bring no value to the holder). That's offset by the fact that a meaningful fraction of the 10% that have value to the holder can sometimes generate life changing wealth. To me, substitution of stock options for cash is a function of how much financial risk you want to take or can afford. If you have fewer financial obligations (eg. unmarried, no mortgage, no kids, no or low debt) and want to take a risk at a company by taking options in lieu of cash, do so. If, on the other hand, you have financial obligations (any of the Big Financial Four above), it's probably better to get a salary that keeps your nose above water, take the token sign on equity they offer and then earn more shares by being awesome. In any case, it's wise to objectively evaluate the value of your equity every six months or so. If it seems to you that it's got a lot of value, try to get more (ways to get more include being awesome and asking). If you think it's not worth much on two consecutive bi-annual reviews, see if there's another place where you could get a better deal. It's no one's job to manage your career but yours.
- kasey_junk 12y ago
  I don't suspect most people have any problem with worthless options. Quite the opposite, those are easy to deal with. What most people have a problem with is the requirement to exercise the options for real money when leaving a company before there is any proof that they are worth anything.
  - uahal 12y ago
    Seems to me that if a person is leaving a company for a different opportunity, they're making a clear comment on their perceived future value of the company. That is, who would leave Google in 2002? Dell in 1993? Facebook in 2006? In my opinion, the best stock exercises are cashless, one time events, paying full short term capital gains. Those trades represent almost no risk to the exerciser (exercisor?) and are pure financial upside.
- CJefferson 12y ago
  I wonder how options stack up against just getting a higher salary, gathering all the extra money and taking it to the casino for one big spin?
ryandrake 12y ago
Equity in the form of options is usually worthless. Even in the off chance that the company is wildly successful, your options will only be meaningful if you got them early enough to have a ton of them or a ridiculously low strike price. I've worked places where the total number of options offered to new employees (vesting over 5 years) were fewer than what the early employees and founders vested (and exercised) WEEKLY. RSUs tend to be better because, unless your company goes out of business, they're usually at least worth _something_ when they finally vest. One thing about stock, however, is that after they're all vested, you're effectively seeing a decrease in your overall compensation. An RSU package that fully vests after 4 years incentivizes you to start looking for a new job after 4 years. When I get an offer that contains options, I usually mentally value it at $0 and THEN consider whether the salary still seems competitive. EDIT: I generally value _options_ at zero. I also LOVE kasey_junk's strategy below of asking companies what they'd hypothetically offer in cash instead of equity. That's pretty much guaranteed to make the company get real about how they value their equity. I remember once negotiating ~$5K more in base salary to "give up" what OMG COULD TURN INTO MILLIONS OF DOLLARS IN OPTIONS!!!! The company eventually went bust and sold for pennies on the dollar.
- suhail 12y ago
  At any stage company? Valuing options at $0 at a seed company is a lot more reasonable than at a company actually making money or is growing rapidly.
  - ryandrake 12y ago
    It's a rule of thumb to keep my gambling addicted brain from getting carried away. Mentally treating options as $0 helps me focus on expected value and to ignore the tiny sliver of probability that would result in a huge jackpot.
- kmonsen 12y ago
  You usually get "refresh" RSU grants if you do well, so I don't think you should value it at zero. The "usually" part, and "if you do well" part means there is some risk but if companies like you they will make sure you have a lot of RSUs vesting years from now.
sliverstorm 12y ago
Wait, you bought $2K worth of shares, the company is successful, and the shares are worth nothing? How!? It's not directly relevant to me as I don't have options, but I suddenly feel like I don't understand stock again.
- maaku 12y ago
  I would like to hear the GP's story, but if you've seen The Social Network then you have a reference point for how this could happen (separate classes of stock, dilution protections, etc.).
- avn2109 12y ago
  Basically it works like this: If your options become very valuable, the people on the other side of the table are no longer the friendly technical founders that you know and love. Instead, they're replaced by calm, professional capitalists and attorneys, whose sole raison d'etre is to separate you from "your" claim to their assets by many convoluted and entirely legal tricks, all of which feel profoundly unjust to the common man. They are specialists; they do this all day, every day, and since you are just an unsophisticated code monkey, it's vaguely like playing one-on-one basketball with Lebron. So unless you have something their bosses really want (perhaps domain knowledge of the business) you almost invariably end up with pennies and fake smiles.
  - kabdib 12y ago
    That's exactly right. "Sorry, it's the red options that have worth, all of those blue options were devalued in [some arcane legal event] and are worthless now." I've thought about talking to a lawyer, but I'm guessing that what they did was totally legal, on the order of selling the company's assets to a company of the same name for a dollar in hand, or something like that, with some kind of structure to keep the major investors happy.
    - cheriot 12y ago
      There are laws requiring major shareholders to protect the interests of minority shareholders for this exact reason. It may be worth talking to that lawyer.
speby 12y ago
What were the specifics of the stock shenanigans?

by kabdib 12y ago

nhstanley 12y ago

I don't have as much personal experience (only one colossal flop, $4k invested + ~20% lower salary), but I've got enough experience in the industry to have come up with this hard and fast rule: If you didn't found the company and aren't getting 10%+, equity is meaningless. If they insist you take equity ("Don't you have faith that we'll be successful?"), you can offer to knock off 1% of what you would have expected in annual salary without it (even that is arguably too much). Otherwise it's absolutely not worth it. Companies love trying to get you to take a 5-40% pay cut because "It's a startup" and "we'll give you equity". Total BS. You will be better off spending an hour every week minding your money in other ways, with your appropriate salary.

Firegarden 12y ago
Actually you would be better off coding something yourself in your spare time and giving it away for free. As soon as you can get recognition or an audience you are building some intrinsic value that will pay itself out some day.
kasey_junk 12y ago
To be fair, I've talked to people in some companies that try this that quite simply do not understand how options work. It is ignorance, not malice, that causes their odd behaviors (not that the end result is any better). My usual bargaining gambit is to ask how much salary they will give me over the vesting period to buy back the options. If nothing else this puts a price floor on how much the options are worth to the company.
greenyoda 12y ago
"Don't you have faith that we'll be successful?" To which the answer is: "The success of this company will depend much more on management's strategies and the vagaries of the market than on the code that I write. Besides, you're not sharing your financials and other private business information with me, so I have no basis for guessing whether the company will be successful or what the value of the equity you're offering me will be. And in any case, I need to be able to pay my rent and other expenses regardless of whether the company is successful or not. So I'm expecting to receive a competitive salary."
- kabdib 12y ago
  Likely response to that is "Not a team player." And you're better off not being there.
- sneak 12y ago
  It blows my mind when friends accept offers and I ask "did you get any equity?" and they say "yeah" to which I reply "how much?" and they give some figure that is meaningless without a cap table, and when pressed further I learn that they have never seen the cap table.
walshemj 12y ago
A good rule of thumb is any start-up options has to potentially be 2-5x better than I would get at a FSTE 100 (DOW 30 in the USA) BTW British telecoms latest share save 5 years maxed out at £200 a month - just came out at £100k effectively tax free.

uahal 12y ago

A huge percentage of stock options expire worthless (one common assumption is that 90% of options bring no value to the holder). That's offset by the fact that a meaningful fraction of the 10% that have value to the holder can sometimes generate life changing wealth. To me, substitution of stock options for cash is a function of how much financial risk you want to take or can afford. If you have fewer financial obligations (eg. unmarried, no mortgage, no kids, no or low debt) and want to take a risk at a company by taking options in lieu of cash, do so. If, on the other hand, you have financial obligations (any of the Big Financial Four above), it's probably better to get a salary that keeps your nose above water, take the token sign on equity they offer and then earn more shares by being awesome. In any case, it's wise to objectively evaluate the value of your equity every six months or so. If it seems to you that it's got a lot of value, try to get more (ways to get more include being awesome and asking). If you think it's not worth much on two consecutive bi-annual reviews, see if there's another place where you could get a better deal. It's no one's job to manage your career but yours.

kasey_junk 12y ago
I don't suspect most people have any problem with worthless options. Quite the opposite, those are easy to deal with. What most people have a problem with is the requirement to exercise the options for real money when leaving a company before there is any proof that they are worth anything.
- uahal 12y ago
  Seems to me that if a person is leaving a company for a different opportunity, they're making a clear comment on their perceived future value of the company. That is, who would leave Google in 2002? Dell in 1993? Facebook in 2006? In my opinion, the best stock exercises are cashless, one time events, paying full short term capital gains. Those trades represent almost no risk to the exerciser (exercisor?) and are pure financial upside.
CJefferson 12y ago
I wonder how options stack up against just getting a higher salary, gathering all the extra money and taking it to the casino for one big spin?

ryandrake 12y ago

Equity in the form of options is usually worthless. Even in the off chance that the company is wildly successful, your options will only be meaningful if you got them early enough to have a ton of them or a ridiculously low strike price. I've worked places where the total number of options offered to new employees (vesting over 5 years) were fewer than what the early employees and founders vested (and exercised) WEEKLY. RSUs tend to be better because, unless your company goes out of business, they're usually at least worth _something_ when they finally vest. One thing about stock, however, is that after they're all vested, you're effectively seeing a decrease in your overall compensation. An RSU package that fully vests after 4 years incentivizes you to start looking for a new job after 4 years. When I get an offer that contains options, I usually mentally value it at $0 and THEN consider whether the salary still seems competitive. EDIT: I generally value _options_ at zero. I also LOVE kasey_junk's strategy below of asking companies what they'd hypothetically offer in cash instead of equity. That's pretty much guaranteed to make the company get real about how they value their equity. I remember once negotiating ~$5K more in base salary to "give up" what OMG COULD TURN INTO MILLIONS OF DOLLARS IN OPTIONS!!!! The company eventually went bust and sold for pennies on the dollar.

suhail 12y ago
At any stage company? Valuing options at $0 at a seed company is a lot more reasonable than at a company actually making money or is growing rapidly.
- ryandrake 12y ago
  It's a rule of thumb to keep my gambling addicted brain from getting carried away. Mentally treating options as $0 helps me focus on expected value and to ignore the tiny sliver of probability that would result in a huge jackpot.
kmonsen 12y ago
You usually get "refresh" RSU grants if you do well, so I don't think you should value it at zero. The "usually" part, and "if you do well" part means there is some risk but if companies like you they will make sure you have a lot of RSUs vesting years from now.

sliverstorm 12y ago

Wait, you bought $2K worth of shares, the company is successful, and the shares are worth nothing? How!? It's not directly relevant to me as I don't have options, but I suddenly feel like I don't understand stock again.

maaku 12y ago
I would like to hear the GP's story, but if you've seen The Social Network then you have a reference point for how this could happen (separate classes of stock, dilution protections, etc.).
avn2109 12y ago
Basically it works like this: If your options become very valuable, the people on the other side of the table are no longer the friendly technical founders that you know and love. Instead, they're replaced by calm, professional capitalists and attorneys, whose sole raison d'etre is to separate you from "your" claim to their assets by many convoluted and entirely legal tricks, all of which feel profoundly unjust to the common man. They are specialists; they do this all day, every day, and since you are just an unsophisticated code monkey, it's vaguely like playing one-on-one basketball with Lebron. So unless you have something their bosses really want (perhaps domain knowledge of the business) you almost invariably end up with pennies and fake smiles.
- kabdib 12y ago
  That's exactly right. "Sorry, it's the red options that have worth, all of those blue options were devalued in [some arcane legal event] and are worthless now." I've thought about talking to a lawyer, but I'm guessing that what they did was totally legal, on the order of selling the company's assets to a company of the same name for a dollar in hand, or something like that, with some kind of structure to keep the major investors happy.
  - cheriot 12y ago
    There are laws requiring major shareholders to protect the interests of minority shareholders for this exact reason. It may be worth talking to that lawyer.

speby 12y ago

What were the specifics of the stock shenanigans?