This is an interesting way to flip the perspective, to ask why do startups think offers of options are enticing (as compared to just cash).
But for the potential employee, the advice remains the same; ignore the options when it comes to evaluating a compensation package (and only those who are informed enough to go "weeeeelll..." and have actual reasons for why in a ~particular~ instance they should do differently, should ever consider doing otherwise).
With some options (Warrants of investment trusts for example) you can sell those on the open market if they are in the money its also a way of leveraging your investments.
Strike price is estimated through 409a valuation, which is typically very conservative and considerably lower than the fair market value of the stock, which is frequently less than the evaluation made by investors.
i think options do a couple of things:
1) they let employees invest in startups using their time instead of their money, which is handy when you aren't rich and 2) they allow the company to have a legal framework around an IOU: take less salary now, bigger payout later maybe.
thought experiment: knowing everything you know about e.g. stripe right now, would you buy $100k worth of stripe back in ~2012? in 2012 it was a risky proposition to do so, but many people at the time understood why stripe was likely to be big and successful and invested money in it. i'd rather live in the world where there is a mechanism to invest in such a company besides being an accredited investor with access.
many people go wrong when thinking about options in that they don't try to consider the fundamentals of the investment. working at an early-stage startup isn't just a job, it is a way to do risky investments using your time.
all that said, what Dan proposes at the beginning makes a lot of sense: the startup should be willing to give you cash instead of options (provided they have the cash).
knowing everything you know about e.g. stripe right now, would you buy $100k worth of stripe back in ~2012?
sure but for every stripe there are 10 startups that either failed or didn't amount to a great payout.
I think the point this post is making that the value of options is statistically not greater than higher salary at a competitor, given the risk an employee takes since he can't diversify his time.
that said if you believe in an idea it is absolutely great to have the option to "go long" on that idea with your time
> sure but for every stripe there are 10 startups that either failed or didn't amount to a great payout.
yep. it's probably more like 100:1 don't go work at the other 99! :)
i agree that the value of options is statistically not greater than the compensation package at GOOGBOOK. that said, you don't get to live 1000 lives in parallel. so, either you have to think very carefully about this one (or ~5) investments you are going to make OR you can go work at a bigger company with higher salary if that isn't for you.
Given what you know about Bitcoin now, would you buy $100k worth of bitcoin in 2010? Of course you would.
Except...I didn't tell you that your investment would be held by Mt. Gox. You lost your investment.
There is always risk. Always. 97% of startups fail. They are extremely high risk. The earlier you buy in, the higher the potential payout, but the more likely you are to be backing one that will fail. Even the successful ones, after dilution, may or may not be worth more than the cash over how long it took to IPO/be bought out.
You say you get to make risky investments with time; yes...but that's even worse than money. Money is fungible. Time isn't. You have a set amount in life.
Having a 97% chance you're wasting it (actually, higher, since dilution + etc means even a 'success' may mean you made less than the equivalent cash over how long you worked at the place, the extra hours you put in compared to working on side projects, etc) are some pretty long odds.
> You say you get to make risky investments with time; yes...but that's even worse than money. Money is fungible. Time isn't. You have a set amount in life.
that isn't an argument against startups offering options. that only says that you value your time in such a way that precludes you from investing it in startups.
Sure, and I wasn't arguing against startups offering options. Just against startups valuing them over cash, and expecting employees to do the same.
Really, I'd say the whole thing is a red herring; either way you're working. Your time is being used. So the question is do you want to trade that time for a guaranteed amount of money, or a -possible- amount of money (but, high risk). The only way taking the options makes sense is if the salary is -still- high enough to not get in the way of what you want to do, and you could walk away having netted zero from your options and not feel cheated.
Sure, maybe 97% fail, but most have already failed before taking on an employee on equity.
A more appropriate number would be the number of startups that fail after that milestone.
For instance, I calculated the numbers for my country, 40% of startups that get accepted into an incubator succeed, 40% fail and close, and 20% stagnate (mine is currently in the 20%).
So, you're buying a 40% ticket, not a 3% ticket. Still losing odds, but not so much so, and if you're an early employee, you can really help tilt the odds (5%? 10%? I don't know).
this breaks down quickly because most employment offers at startups don't use option compensation, er, optionally. it is a mandatory substitution for base salary.
I started off once thinking "yay, X% means I get X% of the company!" and then I found out the shares can be diluted. Then I learned "non-dillutable".
Then I learned about vesting periods, windows for exercising options, and a whole slew of financial terms and devices; each one seemed to come with its own unique "gotcha" that, if you didn't know about, would cost you nearly everything.
Everyone I talk to about these always says "well, don't do that one thing, or if you do that one thing be sure you do it in this way and you're set". The cumulative knowledge you need becomes pretty high pretty quickly though, and the chances of me doing the right legal and financial incantation at the right moment becomes lower.
Nowadays I go with cash. I don't get 'golden handcuffs' that hold me to a job I don't like because it might pay off later. I can calculate the expected value and risks with cash without tons of research. I know my legal recourses if I get screwed out of cash.
Let's not forget the "asset only" acquisition where the company sells it's IP and employees but doesn't sell any shares. Been through one of these and this is what happened, screwing over former employees who had bought options and investors. I think the only people who profited were the bankers.
I've been on the other side of two of these and the explicit alternative in each case was bankruptcy. Also asset transfers are more expensive to the acquirer because you have to explicitly delineate the assets you're buying and what you're not buying. This makes for more lawyer time and pushes the transaction costs up significantly. The real reason to do it is because the team there at the time is more valuable as a group than they would each be on the open market individually. Anyone _not_ there doesn't add that kind of value to the deal.
You may want to argue that IP is also part of these deals and past employees created part of that. This is probably true for some deals, but it has been minimally true for the deals I've seen directly. Sample size of two isn't great, but keep in mind the value of startups is largely believed to be in execution, not ideas. A startup on the verge of bankruptcy probably doesn't have immensely valuable IP because it's 1) not producing present value obviously and 2) isn't obviously worth a lot in the future, otherwise someone would be willing to give you discounted cash today for an ownership percentage of its future value (aka an investment).
Nothing I love more than being bought and sold like cattle.
Out of curiosity, how do you keep the employees from walking after an asset only transfer? The vague promise to them about future riches has already been broken. And you will up changing business practices that ruffle feathers (I'm not sure how you could avoid it. This stuff is rarely written down). Hell, you'll probably assign them to a new project anyway. So how do you keep them from leaving in droves?
Payouts! They get some mix of salary (comparable to existing employees), stock (more generous than existing employees) and a cash payout that's fairly generous if they meet some goals laid out in advance.
And you didn't ask, but if not enough of the team accepts an offer, then it evaporates.
Not quite but I know of one high level exec at a company you're familiar with that was given a year after multiple warnings.
Effectively, he had no job but was still on the payroll for a year and maintained his equity. He came in and did virtually nothing for about 6 months and then stopped.
It's a cushy gig but by the time you get it it's a punishment not a reward.
>"yay, X% means I get X% of the company!" and then I found out the shares can be diluted.
There seems to be a common misunderstanding about dilution.
Dilution is not really the issue. In fact, dilution is a positive sign. It means more investors value the company and want to buy into the ownership.
How do current owners who collectively own 100% of the shares "sell" more shares to future owners?!? By way of dilution. That means everybody gets diluted including the founders, the angels, the VCs, and yes the employees too.
More important than dilution is the shares multiplied by price.
Professional investors generally get pro rata rights which allows them to buy more stock in later rounds. They do this because they want the ability to buy more shares in companies that are succeeding.
They don't get magic stock that magically doesn't get diluted.
They used to! Ask anyone who was involved in startups around 200-2002 about the full-ratchet anti-dilution provisions many investors demanded and received. Not fun for anyone else in a down round . . .
Down-rounds were huge back then, regardless weighted average was still the more common way of doing things, even in the early 2000s. Often times, these days, startups are putting pay to play provisions in, so even the weighted average ratchet requires them to keep investing in order to receive their anti-dilution.
Honestly, unless a startup has SERIOUS capital problems, an anti-dilution isn't going to make it's way into a share purchase, so the companies that are still seeing this (and the ones from the early 2000s) weren't in incredible shape to begin with.
Ratchets are a thing, far less common in the valley in the last decade than the decade before, particularly at earlier stages. Founders can put them in as well. Don't forget warrants as part of a deal too.
Why shouldn't employees also demand, and also be given, the right to buy more shares in subsequent funding rounds?
If I was going to work at a company for X% ownership, I'd sure expect to have the right to invest my own money to preserve my stake in a funding round and avoid dilution. Many employees might not exercise this privilege, since it would require putting (potentially a lot of) cash back into the company, but why aren't they given the choice? I also might expect to receive the same liquidation preference on any shares purchased in cash this way.
I'm not sure I could be comfortable working for a startup without pro rata rights and relatively full knowledge of the cap table and preferences. That's probably why I'm not working at a startup.
1) It would generally be a poor investment choice for an employee to invest their savings in a startup that they were actively working for. Startup employees are already over-invested in their company from a diversification perspective.
2) The majority of startup employees are unlikely to have the cash on hand to make that kind of investment.
Because of #1 and #2 this isn't something that most employees would care about so it's not part of any standard compensation package. It's possible that an employee could negotiate for such a provision though.
The fact that you would want a pro rata right to work at a startup does make you fairly unusual and I agree goes to explain why you have chosen other career options.
Price alone will not tell you everything. Let's not forget about different classes of stock: preferred vs common. There are often other rights associated with preferred / investor shares: liquidation preferences, warrants, etc. Rarely can the average employee get these details.
No they can't. I don't doubt that this has happened before and I'm sure someone can dig up an example or two.
However, what you describe is highly questionable and borderline illegal. It's certainly grounds for a lawsuit by other shareholders (including options holders).
Eh, this is exactly what happened to a friend of mine. The rationale later, was he had been promised X percent, but when the final deal went through, they diluted different pools of company stock to different percentages, and his values went down to 1/10 what he was expecting.
I know I'm missing a lot of info, and its just a second hand example, but it seems in line with grand parent post's idea that for each type of financial tool, there's at least one gotcha you need to be aware of.
Yes, they can. The board has discretion over the allocation of the options pool that will have been set aside as part of each round.
However to issue those to yourself would be like eating your seed stock, since that's the pool that you use for issuing options to new hires, and without that you can't give new employees any equity. For that reason I don't think it's likely.
I think what the grandparent comment is getting at is that you as an employee have little control over the delayed compensation strategy. If you're lucky, you have a honest founder and investors who make sure you're paid for your contribution at deal closing time. If you're not lucky, you have a board/CEO/founder that will take whatever they can get away with (e.g. your value add) and then point to the financial rules/contingencies and say, "Well, we tried to do all we could, but we had to do this to ensure the success of the company. We needed to compensate the administration because it's hard to find such good talent like ourselves. Your still getting something here..." Or some such line. And you end up with some minuscule share at the same time providing critical value to the business.
I hear this argument a lot. Mostly from people trying to sell the idea of a highly dilutive funding round.
Sure, further rounds are a sign the company is doing well. The important word being "sign," they don't actually make the company more valuable (what the company does with the money they raise does).
If you own a lot of stock, you probably already know if the company is doing well or not. In that respect, the round just puts a number on what you already know.
The math is simple. All things being equal, owning more % of a company == more money. To try to spin dilution in any other way is stretching the truth pretty far, and is rather manipulative IMHO.
Exactly! Thanks for pointing this out because everyone seems to miss it.
At the moment that an investment is made, a company should be worth just as much as it was before, but will have more liquid assets because it's traded equity for cash.
The question for employees and shareholders then becomes: "Do you believe management is capable of using the cash to build additional value, or will they waste it?"
Let's say today I own 200 out of 10,000 shares (2%) of a company. Someone comes in and says we want to own 25% of your company and are willing to pay $100M for it. At that point (before any transactions happen) I assume that my company is worth ~$400M, and my shares are worth ~$8M ($400M * 0.02).
So the majority shareholders agree to the deal and dilute stock accordingly. Now there are 13,333 shares. The new buyer get 3,333 (25%) and I still have my 200 (now 1.5%). The company is worth that original $400M value plus the new $100M that was invested, for a total of $500M. My shares are worth ~$7.5M ($500M * 0.015).
If the new people own 25% of the company, then the previous owners own 75%. That means that the new people should get one-third as many shares as previously existed (which you did correctly). But it also means that they should have to put up one-third as much money as the company was worth previously; that is, 133M, rather than the 100M you had them pay.
Your loss is your cut of the 33M loss that your company took by getting underpaid.
The $400M is a post-money valuation. The investor gave you a current valuation of $300M, and offered to add $100M for a post-money stake of 25%. Thus, 3333 new shares were created and sold to the investor for $100M.
Your slice of pie before the deal is (200/10000) * $300M = 6M
Your slice of pie after the deal is (200/13333) * $400M = 6M
Except that after the deal, your company has $100M more to spend, hopefully on investing in growing the business so that later on, you'll own 1.5% of much more than $400M.
This kind of thing is why management will sometimes try to steer employees away from discussions focused on percentages and toward ones focused on share prices. As an early employee who has been diluted a number of times, I certainly agree that it's more helpful to think in terms of my number of shares (which is unchanging) times a share price (announced at the time of the investment), rather than trying to compute my new percentage of the overall company value.
The new investor is willing to pay $100M for 25% of the company. That means they think the company will be worth $400M after they invest $100M. That means the current value of the company is ~$300M, not ~$400M.
No. What someone is willing to pay and what something intrinsically is worth is not the same thing. If the stated presumption is that the company was worth $400M before the $100M cash infusion, then it follows that it must be worth $500M after that.
It's zero net gain at the point of dilution. Owning 10% of 10 million or 1% of 100 million is the same money you simply have even less control.
Unfortunately, rational people may have very different risk tolerances. Founders often see it as I have a company and X money to work with. The next round means I have a company and X + Y money to work with. In that context having a 90% chance of 10 million is often better than a 80% chance of 20 million even if the expected value drops the difference between 0 and 10 million is vastly larger than 10 million vs 20 million. But, smaller stakeholders may not agree with this thinking.
The VC-backed company model isn't set up for employees. The model is so that (a) founders can take risks (b) using money from VCs (c) where if the company does well, the founders and VCs both become richer.
Everything else follows from that. The fact that employees get any shares at all is just a way to get better employees so that the company does well. Only employees of unicorns have any chance of getting wealthy from stock, and you're unlikely to be an early employee of a unicorn.
It's better to view the situation in absolute terms rather than relative terms. Instead of comparing the outcomes of founders/VCs vs employees, compare an employee of a startup to an employee of non-startups. At not-startups, the working environment is very different. Some people enjoy that, some prefer the opposite. Also, getting +$100k (or +$50k, or even just +$10k) is still nice, even if the founders and VCs get 800x more.
The only part I have serious concerns about is the fact that you can end up underwater when it comes time to exercise your options, i.e. your tax bill outweighs whatever profits you'd see. I don't know exactly how this situation arises, but it happened to a friend. It was something like: he could have exercised his shares and gotten several hundred thousand, but he would've needed to pay about $100k in taxes beforehand. Since he didn't have that money, he couldn't exercise the options.
I might be wrong about the specifics, but there are situations similar to that, and it's pretty unnerving knowing that you can jump into a situation where your +$100k somehow turns into -$50k.
> he could have exercised his shares and gotten several hundred thousand, but he would've needed to pay about $100k in taxes beforehand. Since he didn't have that money, he couldn't exercise the options.
I feel like at least a phone call to a bank would be in order at that point. If it's that simple, surely some sort of mutually agreeable loan could be worked out.
Couldn't you bootstrap it, get £5k on a credit card for the taxes to exercise some of the options, use the profit to pay the taxes on the rest (or a further bootstrap)?
But the Revenue consider you to have received value in that "piece of paper" that you can't liquidate? That just seems like perverse tax law - why is it that way?
Surely if they're private shares that can't be sold the extrinsic value is zero, the private share value for tax purposes is no greater than the value of the option?
> it's pretty unnerving knowing that you can jump into a situation where your +$100k somehow turns into -$50k.
But even your example wasn't that. Your examples was -100k and +300k (or more), but offset by time slightly. That's still a very large net positive, just gated by a period of net negative.
I suspect there are some details that you are missing as to the situation of your friend. I know little about investment vehicles, but I've filed taxes at one point and paid them at a later point many times. For income taxes the rules for this are clear, and the amount you pay in fees and interest is also very clear. For some investment vehicle, I would bet if there's some taxes that need to be paid prior they have automated processes set up to pay them for you and take the amount out of the later payout, for a fee. If not, I can't imagine getting a short term loan for that would be too hard, even if you have to use private money (a real investor, or even just a friend).
Yeah, I'm certain I got some of the details wrong. It sounded like a situation similar to https://news.ycombinator.com/item?id=14464184 where you can owe taxes on money you never saw.
> The VC-backed company model isn't set up for employees. The model is so that (a) founders can take risks (b) using money from VCs (c) where if the company does well, the founders and VCs both become richer.
Does this mean that stock options are not a measure of risk taken by the employee into the company?
You mean the stock options are just like cash? I didn't think so. The employee is invited to take risks but without the protections.
As someone who has been exactly there, this doesn't compensate for the lower salaries that are de rigeur in startups. Not to mention being an absolute insult compared to the employee's degree of contribution to the resulting event.
"Better than nothing, or being underwater" is pretty thin gruel in practice.
> Only employees of unicorns have any chance of getting wealthy from stock, and you're unlikely to be an early employee of a unicorn.
Define wealthy.
I have done quite well (not FU, 3-comma money, of course, but solidly 2-comma) from equity as an employee. In my current company, I joined a few months after the Series A (so nowhere near "early"), stayed through the IPO and many years of growth past that.
We were never a unicorn.
Amazon, Facebook, and Google are regularly turning SWEs into millionaires and a substantial part of that is from equity. Microsoft also had a good decade and a half of doing that. Netflix probably does as well. (OK, Facebook was a unicorn; the others probably weren't ever called that, though it may have fit.)
I'm not sure that's particularly relevant to this thread; there are plenty of decisions that materially affect the value of your equity that you have no say in. That's true both in a startup and at a large tech company like Google where a significant part of your comp is in RSUs.
The point in the GP post that I was expanding upon,
> It's zero net gain at the point of dilution.
is focussing on the wrong instant in time.
You should be calculating the effect of the dilution on your exit event, when your equity actually becomes exchangeable for money.
Which should have been clear to you when you joined the company and read and signed the employment and stock options agreements (you did read them, didn't you?). If that isn't to your liking, don't work for a startup.
You miss the point. I don't think they are acting shitty. They're acting according to what both you and they agreed to in advance. You knew (or should have known) what they were (and were not) going to give you in return for your effort. It's only shitty of them (and illegal) if they don't follow through on that agreement.
A bit like owning stocks on the stock market then I would guess. Which begs the question of whether to take a higher paying job with no options and invest the difference.
> What will happen in the best case:
- I had 1% of a 10M dollar company. They did well and now he has 1% of a 100M company (dilution in your face!).
You've meant to say "They did well and now he has 0.1% of a 100M company" I assume? Otherwise numbers don't add up. If all goes well the value of a smaller percentage after dilution should be higher than before the dilution, for example: 1% of 10M ($100k) -> 0.2% of 100M ($200k).
He didn't lose 9M. In his vision they did well and increased the worth of the company without outside investment. In reality, they didn't do well at all, because 10x dilution when the company grows 10x means the company has not actually created any value, it's just been given cash.
> [T]hey don't actually make the company more valuable (what the company does with the money they raise does).
Yes they do. In two senses. The obvious one is probably not what you meant to refute - the total value of the company post raise is, in the simple case, the value of the company before the raise plus the value of the new cash. The company is more valuable. What I think you meant to say was that your shares don't get more valuable.
That's more true, but they can be. If the raise was a good idea, the company's prospects are improved (and therefore the value of existing shares) by whatever uncertainty existed about its ability to raise that funding.
>All things being equal, owning more % of a company == more money.
The point is all things are not equal. To restate a sibling comment, dilution means you own a smaller % of a more valuable company.
If it helps, think of "dilution == sell_equity". Dilution is the perspective of the sellers' side (x% - y%). Equity purchased is perspective of the buyer's side (investor's ownership goes from 0% to y%).
>To try to spin dilution in any other way is stretching the truth pretty far, and is rather manipulative IMHO.
Dilution explanation doesn't require "spin" nor mental trickery. It is the natural side effect of how companies sell equity to grow.
E.g. Larry Page's ownership of Google Inc got diluted from 50% in 1998 down to 16% in 2004. That smaller 16% was worth ~$3 billion around the time of the IPO[1]. If Larry insisted on "no dilution", no VC would invest money to help the search engine grow and therefore, he would own 50% of a worthless company.
So all things not being equal:
50% of $0 = $0
16% of $20 billion = ~$3 billion.
Obviously $3 billion is more money than $0. Thinking that 50% is better than 16% doesn't make sense for companies that require outside investors to grow. Similar story for Bill Gates' dilution, Jeff Bezos' dilution, etc.
Let's imagine Larry Page had a different conversation with Sequoia Capital to match this misunderstood fixation over "anti dilution"
>1998: Larry owns 50% + Sergei owns 50% = 100%
>1999: Sequoia: "we'd like to buy 10% of Google Inc for $12.5 million"
>Larry responds: "Yes! Great! We need your $12.5 investment but keep in mind that both Sergei and I have anti-dilution clauses so our ownership both stays at 50%."
> Sequoia responds, "So you want me to buy 0% of the company for $12.5 million? Uh, you guys are idiots"
Somebody in that imaginary conversation doesn't understand "dilution" or "equity" or simple math.
Nothing so long as a small number of people own all the shares, they all agree to sell an equal portion, and the share price allows an equal portion from all owners.
Sure, but dilution without representation can be a big risk for a regular employee. You might get a smaller slice of a bigger pie, but it may also represents a smaller real-world valuation if you get diluted too far.
If you have no say over how much you're diluted (like most employees), you could be diluted away to nothing. You have no control. So you must calculate worth accordingly.
Is everyone to get diluted equally. No? Well then, calculate worth accordingly.
In addition, I thought the pie getting bigger was the WHOLE POINT OF HAVING THE SHARES TO BEGIN WITH.
>You might get a smaller slice of a bigger pie, but it may also represents a smaller real-world valuation if you get diluted too far.
Show example math of how someone could get "diluted too far" resulting in less total value (shares x price) after an investment round that prices the company higher than before. If the total value was truly less, it means it was "down round" which is a different beast.
>, you could be diluted away to nothing.
Show how it is mathematically possible to dilute employee's 1% ownership in to 0% without illegal tricks.
When Mark Zuckerberg tried to dilute Eduardo (without also diluting the other owners), he tried to hide the reduced % via a newly created company. He got sued for the financial deception and lost.
I'm somewhat new to this topic (and therefore might not understand correctly) but another user, 'oillio', made a response in a different thread [0] which could explain 'getting diluted away to nothing', for example, an investor invests money causing dilution, the company squanders the money or uses it on something that doesn't positively affect the company trajectory. You now own a smaller slice of a pie which is the same size as it was before.
Using his example, if you estimate the value of a company to be 100M and estimate 10 years until IPO, if the investment doesn't raise the value of the company at the time of the IPO in 10 years then the dilution is not good for the employee because the pie is the same size (100M) but his/her shares have been diluted.
Seems like it's pretty difficult to estimate the value of the company in 10 years or the IPO date though which is probably why people just use the amount invested to estimate the value of the company.
> Sure, but dilution without representation can be a big risk for a regular employee.
Well, it's a big risk to everyone that doesn't get voting rights, right? Not all investors get voting rights, do they?
In some way, an employee sits between a non-voting investor and a voting investor. They don't get to vote, but they do have some control over the outcome of the company (ranging from small to large, depending on the number of employees and responsibilities of the person in question).
Google example is a bad one as most startups fail in practice within few years. Most likely one works in one of those, not at the next business success.
In a typical startup a dilution means that the company run out of initial investments and has no way to get some form of a loan. So selling the ownership is the only way to continue. And if they succeeded with that it would not make the company more valuable. It just meant that owners were good at convincing investors. This is orthogonal to future value of the company.
I didn't say anything about anti-dilution.
There are complexities, but as you explain, if you take more money, you need to give the investors something.
If you look purely at the accounting, and ignoring voting rights and other complications, you are right. Dilution doesn't change anything.
IMHO this argument is a case of technically accurate, and completely useless.
It doesn't matter what the value of the company is at the moment of the dilutive event. It matters how that event affects the value of the company when the employee liquidates their stock.
The new round could be very good, but not necessarily. There is no guarantee a more well capitalized version of the company will end up growing faster or larger than the current cap table.
When the employee evaluated their original option grant they should have done an analysis of the business, its market, and future growth potential. Lets say the predicted value of the company is $100M in 10 years.
Lets look at two options:
Option 1 - The company is continuing on its original trajectory. It is running low on runway and needs a cash injection to continue gaining market share for its quest for profitability. The company still looks like a $100M company, if successful.
The new round may not be good for the employee. When you look forward to the eventual liquidity event, the employee now has a smaller piece of the same sized pie. Maybe the company could still reach its goal by tightening its belt a bit.
Option 2 - The company has identified a new market opportunity. They are raising capital to spin up a new project and capitalize the opportunity. If successful, the company now looks like a $10B company in 10 years.
The new round is potentially good for the employee. On liquidation, they will have a little bit smaller piece of a much bigger pie.
>IMHO this argument is a case of technically accurate, and completely useless.
Actually, your statement of "All things being equal, owning more % of a company == more money." ... is what's misleading.
People are cargo-culting the meme that "dilution is bad" and it has the perverse effect of making them think that awareness of it is "financial sophistication."
Your other statement, "Mostly from people trying to sell the idea of a highly dilutive funding round." ... is also misleading.
It's not the "dilutive" effect that's the core issue. It's whether the company needs the funds. If the company needs the investment, it needs the investment. The dilution is a side effect.
If the new investors want too high of a percentage-of-ownership, then yes, it's "highly dilutive" which is tautology. This may also appear like a dilution problem but it's not. It's a financial literacy problem.
The founders are supposed be smart and not sell too much of the company for too little a price! Therefore, I'm not talking about desperate situations of founders getting diluted down to 10% or less which then affects their motivation to run the company. In that case, the company is probably in financial trouble and the other option is to reject the investment which lets employees maintain a non-dilutive ownership of a bankrupt company.
>The new round could be very good, but not necessarily. There is no guarantee [...]
I agree but the backlash against dilution is about expectation of future events whereas your scenario is ex post facto judgement of past outcomes.
For a startup operating in the present moment, do the employees want the company to be able to raise equity financing to help navigate an unknowable future?!? If yes, it means everybody should expect some dilution in exchange for the outside investment.
>Lets look at two options: Option 1 [...] Option 2
Again, for both of your options, the easier and correct focus is shares multiplied by price. In the bad outcome of Option 1, the price went down. In the good outcome of Option 2, the price went up.
Focusing on dilution as some scary boogeyman is backwards since everybody else gets diluted (see Larry Page, Bill Gates, Mark Zuckerberg, etc)
Again, to reiterate the Larry Page example:
- Focus on the $3 billion vs $0. This is shares * price. The price is embedded in the "all other things being equal" part that you dismissed. The price is "not equal"!
- Don't focus on the dilution from 50% vs 16%. You can't play a mental game of "if Larry got 50% of $20 billion, that's $10 billion not $3 billion" because for him to keep 50% (dilution is bad), you have to replay history with him attempting to build Google with zero outside investment. It's more likely he'd have a bankrupt company instead of a $20B company since he can only buy a handful of servers by maxing out his credit-cards, and have no money to hire extra employees. This is the literal application of your "all things being equal". That's flawed ex post facto analysis which doesn't take into account the timeline and reasons people choose to dilute ownership / sell equity to capitalize the company at different stages.
If dilution is bad for the employee, then it is also bad for everyone else. If as you say, "the new round may not be good for the employee", then it also means it's not good for the founders and previous VCs. If the founders are not crooks, the intention for the investment round to help make the company better, not worse.
I still think the main source of outrage about dilution is that people think only the employees get diluted. They don't realize that every owner of the company including founders like Larry Page and VCs like Sequo...
> If the company needs the investment, it needs the investment.
Agreed, but it might not. The fact that it is taking the investment does not mean it is needed, or that it is good for all stakeholders. Investors, founders, and employees all have different goals, motivations, and risk profiles. It is also very possible for the board to make a mistake and take funding that is a net negative for the company as a whole.
My problem is with this argument from your original post:
> In fact, dilution is a positive sign.
These are complex situations. Boiling them down to dilution is good, vs dilution is bad just leads to misunderstanding. Which, in my experience, can be the goal of the person making the argument.
I never said dilution is bad. My original comment was in response to your blanket statement that dilution should be assumed to be good.
I am just saying, "Hold on. It isn't so simple."
In the end, I think we are in violent agreement. People should not get hung up on dilution, it a natural part of the startup lifecycle. It is a factor in the equation, but only a factor. As I alluded to originally, it is much more important what the company is planning on doing with the funds.
Personally, I think the outrage about dilution is due to the fact that many new employees don't take the time to fully understand how it all works when they are hired. The single most important thing employees need to understand about dilution is that, if they join an early startup, it will probably happen at some point. Options for 1% of the company doesn't mean you will own 1% at the end.
> Lets look at two options: Option 1 - The company is continuing on its original trajectory. It is running low on runway and needs a cash injection to continue gaining market share for its quest for profitability. The company still looks like a $100M company, if successful.
>The new round may not be good for the employee. When you look forward to the eventual liquidity event, the employee now has a smaller piece of the same sized pie. Maybe the company could still reach its goal by tightening its belt a bit.
Sure, but not taking the extra round is also bad for the employee, right? If you don't take the round, and the company now looks like a $50M company, then you have the same piece, of a much smaller pie.
Sure, dilution can be a good thing, but that doesn't change the fact that it can also be a gotcha.
> The point is all things are not equal. To restate a sibling comment, dilution means you own a smaller % of a more valuable company.
Right but if you aquired your shares under the assumption that you would own the same percent of a more valuable company, you are still being taken advantage of.
>but if you aquired your shares under the assumption that you would own the same percent of a more valuable company,
The employee shouldn't have that assumption. The correct default assumption is that the employees are diluted just like the founders when new equity is sold.
If the founders mislead the employees into thinking they got 1% -- and it would always stay 1% all the way to IPO, that's an issue with the ethics of the founder and not an issue with dilution. Dilution wasn't the problem. It's the dishonest entrepreneur that's the problem.
Put another way, if a founder told me I would be awarded 1% in stock and it would have anti-dilution protection for all subsequent rounds, I would not think to myself "wow, that's great!". Instead, that would be a signal that the founder is either 1) incompetent with math or 2) a crook.
Right, but if you read the post that you originally started arguing with:
> I started off once thinking "yay, X% means I get X% of the company!" and then I found out the shares can be diluted. Then I learned "non-dillutable".
Then I learned about vesting periods, windows for exercising options, and a whole slew of financial terms and devices; each one seemed to come with its own unique "gotcha" that, if you didn't know about, would cost you nearly everything.
Everyone I talk to about these always says "well, don't do that one thing, or if you do that one thing be sure you do it in this way and you're set". The cumulative knowledge you need becomes pretty high pretty quickly though, and the chances of me doing the right legal and financial incantation at the right moment becomes lower.
Nowadays I go with cash. I don't get 'golden handcuffs' that hold me to a job I don't like because it might pay off later. I can calculate the expected value and risks with cash without tons of research. I know my legal recourses if I get screwed out of cash.
>The cumulative knowledge you need becomes pretty high pretty quickly though,
Yes, I agree that we all go through an early period of ignorance and then we get more financially savvy as we learn more information. We don't know what we don't know.
However, when OP writes, "then I learned "non-dillutable", he/she is misinforming people with expectations that employees can get fixed-percentage ownership that stays at that fixed amount through subsequent investment rounds. The implication is that employees who didn't get such "non-dilutable shares" are getting screwed. This is not the case.[1] The normal situation is for _all_ ownership to dilute. It's not a nefarious trick on the employees.
If people think they are more "financially sophisticated" with knowledge of "no dilution" shares, they are wrong. Instead, if candidates try to negotiate "non-dilutable shares" with a founder as a condition of employment, they will look like clueless idiots. (Reading about mythical "non-dilutable employee shares" on HN made them dumber, not smarter.)
The expected mathematical mechanism for employees to get richer is for the share price to increase instead of the ownership % not to dilute.
Isn't it amazing that every day, Apple offers new options, diluting everyone else who owns stock? Crazy anyone would work there, or want any Apple stock given that fact.
Sometimes. But if this were simply a case of ignorance-correction, certain preferred investors would never ask for pro-rata, or everyone would be offered pro-rata.
> Dilution is not really the issue. In fact, dilution is a positive sign. It means more investors value the company and want to buy into the ownership.
This doesn't just apply to company shares (a topic which causes people to not think rationally, for some reason).
It applies to a market. Sun's CEO MacNeilly famously said that he liked open systems (in the case of BSD Unix) because "it increases the pie. Our slice gets smaller but all these participants grow the overall pie faster, so our revenues go up."
What fascinated me at the time was how the business press was puzzled by his statement -- they had a more zero sum view of markets in the late 80s/early 90s. Nowadays people understand that the existence of Lyft helps Uber, and vice versa.
And the same is true with people who want to buy your shares.
> More important than dilution is the shares multiplied by price.
But even with an "up round", where ownership percentage is diluted but your n-shares * price goes up, liquidation preferences can reduce or eliminate your value.*
As the GP said, there's always that "one more thing" that can wipe out your value.
Do you know of a good resource that could bring a lay IT person up to speed on these kinds of nuanced details? To me it just seems lots of us just dont know about this stuff. I count myself lucky to have a paralegal SO who does it everyday and walks me through it, but most people don't have that.
Just looking through the replies to your comment makes me throw up my hands in confusion and frustration. You say one thing, the next person argues against one point, then someone counter-argues, and so on. It's all a confusing mess. It's like you need a financial rep to be with you at job interviews to understand all this stuff.
Just say no to options, and demand market level salary. I interviewed at an early stage start up in the mid west. The CEO lamented "People here just don't understand stock options" and as the first technical employee I'd be "by far the highest paid person in the company". I said "People do understand stock options, they're a gamble" and declined the offer. I don't want to be the highest paid person at any company.
While I agree generally w/ this advice, in my experience, companies try to make that impossible or very difficult for employees. For example, most hiring offers are exploding: I've been given exploding offers over a weekend, over holidays: try getting a lawyer when you're not at home. Further, again in my experience, getting a lawyer is actually significantly challenging to someone who hasn't done it: you need a lawyer in the relevant area of law, and you need to know their price, and these two critical pieces of information seem generally to be the things left off the website.
You can argue that an employee should try to negotiate for adequate time, and maybe they should, but not all will. Those too timid to do so are effectively being taken advantage of; thus I find most companies' positions morally reprehensible.
Only one data point, but my experience at several companies has been that annual follow-on/refresher grants more than make up for dilution from new rounds. A company which only gives you a single grant upon start of employment and then lets it coast for 4 years is doing it wrong.
Paying with options is equivalent to the start up selling stock to investors, paying employee with cash, and then having employee invest the money back into the company. As the article points out.
But there are differences. Avoiding income tax. Deferral of compensation to drive retention. Giving employees a better deal than the investors. Letting employees invest into an asset class the government normally prohibits them from investing into. Those are some of the big ones.
> Paying with options is equivalent to the start up selling stock to investors, paying employee with cash, and then having employee invest the money back into the company. As the article points out
No that's not the same, options are basically the right to invest at current valuation. What you described is more like RSU.
"...compensation package has a higher expected value..."
Expected value is a good measure when you're summing over lots of instances, e.g. if you're a VC fund investing in lots of startups.
As an employee, where you're working for a single startup at a time, robust statistics[1] suggests that the median is a better measure of what you'll expect to make: you have a 50/50 chance of making more/less than the median.
More than half of startups either fail, or don't succeed wildly enough for options to be worth more than the equivalent salary.
(If you work for 5 startups in your career, the best measure might be "sample 5 startups and sum the options payout to produce a value; repeat that many times and take the median of the result." But that's a lot harder to intuit, and is no doubt closer to the median than the expected value.)
Why take the median? For me personally all I need is one year where I make a couple million bucks. What I really care about for my personal financial position is either the sum or mean, because that's what hits my bank account.
Some lotteries that accumulate when there are no winners have weeks with better-than-even odds. By this logic, you should wait until the odds are sufficiently in your favor and then dump your entire savings account into lotto tickets, for an immediate gain.
Of course, even if you can pick up a 20% gain in EV, that small chance you end up a billionaire won't save you from the 99.99..% of cases when you're eating cat food in retirement.
I know 100+ people from a dozen companies who've made $1mm+ on equity. None of my friends would write a post like this.
That said, valuing equity is complicated:
- most offers include a healthy mix of cash and equity and benefits. Evaluate the whole package.
- unless you can pre-exercise via 83(b), I generally avoid options. RSUs are fine and many companies are offering them. Clever hack: counter the offer with a demand that the company pay 2% of the cost of exercising for each month you're employed, grossed up for taxes.
- watch out for illiquidity: whales often delay IPO which locks up employees. This compounds the exercise issue. Clever hack: counter the offer with a requirement that the company offer to buy back the equity at the most recent preferred share price, if the company accepts investment at a valuation exceeding $100mm.
That last idea about how to deal with illiquidity is very interesting. Never seen that suggestion before. Will definitely keep that in mind moving forward (both as an offer taker and an offer maker). Thanks!
Are you really going to be able to negotiate terms like that with a company that's at the stage where they are offering RSUs (I.e Airbnb)? I can imagine negotiating terms on options at earlyier stage companies.
Wouldn't you have to be going for a job in senior management to have a shot at doing something like this? Genuinely curious to hear if you have ever successfully done something like this?
Unless you are a sought-after C-level executive, hardly any legitimate companies are going to even consider your "clever hacks."
The first one blows up 409a (requires optionholder to pay fair market value for the shares). As to the second, very, very few investors are going to allow "their" money to be used for a common stock repurchase (at the same per share price) instead of going toward's the company's operations/development/whatever.
Yes, but that's just another asymmetry in the market. Some (many, actually, as far as I can tell) of these "legitimate companies" care very deeply about lower status employees thinking highly of their "clever hacks" regarding equity as part of a compensation package.
$X salary plus y% options at a startup should almost always be viewed as a having a value of $X and no more than that, but these "legitimate companies" want employees to view it as $X + $Million(s) in a future (all but guaranteed!) windfall. There are exceptions, but these are rare.
I wouldn't take issue with these companies trying to pass their crappy "equity compensation" packages off as "legitimate" if there was more openness and honesty about its value and the status of the employees with respect to the company.
The only time anybody should value equity at > $0 is when it's part of a regular grant or purchase of shares with true, market recognized value (e.g. RSU grants, ESP plans in a public company).
> counter the offer with a requirement that the company offer to buy back the equity at the most recent preferred share price, if the company accepts investment at a valuation exceeding $100mm.
As a founder I wouldn't ever agree to that term as written. For starters, your options are common stock whereas investors have preferred. That just means you have to apply a discount though.
More importantly, I've seen first hand the change in team dynamics that happens when some "early" employees get a windfall. Not so much jealousy as this weird sense of complacency which permeates the entire co.
The truth is that at $100mm (heck, even at $1B valuation) the company hasn't "made" it yet. There is still tremendous risk on the table.
I think your idea is interesting, but I might add some step functions. At $100MM the co offers to buy back 1% of your shares, at $500MM up to 5% of your shares, at $1B up to 10% of your shares, and so on.
Realistically what happens is that in large, very late-stage rounds, the company gives employees the chance to sell some of their shares to the new investors at a discount (because of the common vs preferred situation).
> I know 100+ people from a dozen companies who've made $1mm+ on equity. None of my friends would write a post like this.
This is addressed in the post:
> Another common objection is something like “I know lots of people who’ve made $1m from startups”. Me too, but I also know lots of people who’ve made much more than that working at public companies. This post is about the relative value of compensation packages, not the absolute value.
How different are startup salaries vs public company salaries? Is that $1m at Public Company the total salary over a certain period, or is it extra salary on top of the potential salary at Startup Company? The quote seems to say it is extra (relative).
If I am supposed to make $1m more at Public Company over -- say -- a 10 year period, then that means my salary at Public Company would have to be $100k more per year than at Startup Company. Is the difference between startup and public really that big?
Yes. Assume $300k total comp at Facebook/Google/Netflix for a Senior Engineer. Getting $200k at a non unicorn startup is very rare for a Senior Engineer. $180k is more often the cap and $160k is the norm.
And while $300k assumes fairly high performance at a top public company, it's certainly not the upper bound.
TIL. Those numbers are definitively higher than I would expect. Here in Norway the average for someone with a technical or scientific degree and 5-9 years of experience in private sector is 690 000 NOK [1], or about 80 000 USD. The 90th percentile for 10 years experience is 915 000 NOK or 107 000 USD. So for me the idea of making another 100 000 USD more at another company is quite foreign.
Throw in stock growth for companies like Google back in the day and FB more recently. FB stock has doubled in ~2 years increasing the liquid value of employee stock compensation by nearly the same amount.
While that's true, I could invest my own funds in Google or Facebook stock and reap similar growth (depending on my access to funds to invest).
Also, some companies will have target compensation bands (I know Yahoo did) where an increase in stock price will actually result in a smaller additional grant each year.
A senior high performer[0] at a public BigCo can relatively easily make (in total comp) 2x-3x the cash compensation of someone working for a startup.
So if you’re the sort if person who’s likely to work hard at a BigCO long enough for most of your rolling RSU grants to vest, then yes, the comp difference is that big.
[0] note that MANY senior people at BigCos are NOT high performers. So beware of comparing to things like Glassdoor comp figures, which are highly likely to be coming from non-high-performers.
This is true, though I would also add "high performer" does not just refer to your primary job function, but also the secondary job of playing BigCO's internal political games.
small companies have internal politics as well. It's not like working with people disappears. I've worked at both big and small companies, I don't really have a preference but in a big company, you can move around and keep all the good stuff if it gets a little hot under the collar. With a small company lots of times you have to leave to get a new manager or role or move up or just get a change of pace.
The continuity of a big co. can be very helpful from a salary perspective.
I see that no one points this out: Dan Luu and others in this post are using 'Public Company' to refer to only a small high-growth subset of all public companies, namely Google, FB, Netflix, etc. (and perhaps Apple and Microsoft). Most other public companies: track S&P 500 or you joined at a time when your company's growth slowed down to S&P 500 or if you work at a place like IBM that underperforms S&P 500. In these cases, you aren't necessarily assured millions.
The biggest difference may be the tax status of the way those two millions are earned. If you're earning $1m from a public company, you're likely finding yourself in a near-top tax bracket and running into AMT in most years. If you get that same $1m from options, you can be paying taxes like a rich person. If you've handled it right, you can mostly avoid AMT and pay the long-term cap gains rate.
Another difference could depend on the nature of the individual earning that money. If that individual is disciplined and reasonably good at investing their money, taking the corporate job, living frugally and investing everything that's left might make them come out ahead. But if they're like most people, earning more will make them spend more and they'll come out behind the start-up employee who will usually immediately invest most of the windfall (either in a home or the market).
Neither route is obviously better, but it's probably worthwhile to look at the post-tax, post-spending bank balances of both sets of employees to see who comes out ahead since it's not a simple as comparing $1m to $1m.
I'm not sure post-spending is the right thing to look at. One of the many reasons working at a startup is an awkward sell is that it means giving up money during your lowest-earning years in hope of getting more in your higher-earning years. That's the opposite of the smoothing function a rational person would prefer. That extra spending may well have provided a large amount of extra utility.
As far as taxes, a big difference you didn't mention is that startups most frequently exit in a single liquidity event that can't be deferred (i.e. acquisition). Getting that $1MM in one tax year is much worse than spreading it out over even 3-5. At least in my locality, the difference between taxes on a $1mm windfall in one tax year vs. a senior dev salary at a place like Google is ~5%.
> Getting that $1MM in one tax year is much worse than spreading it out over even 3-5
Not if it's long-term capital gains. The year that I banked most of my gains from my company's acquisition (sub-$1m, but just), my tax rate was substantially lower than in previous years. Paying taxes like a rich person has distinct advantages since the game is rigged in their favor.
If you are "good" and do well in reviews, a company like Microsoft or Apple (from direct experience), or Facebook/Google/Adobe (I'm assuming, with a little data from people who have gone to these places) will do well by you, to the tune of millions.
Moving upward a little: Several of my ex cow-orkers at MS are now partners, and will be able to retire early and never have to work again, and they're in their late 30s and early 40s. Nice gig if you can get it; it's not always a meritocracy, but getting better.
If you want to make a million dollars from stock over 5 years (in addition to a competitive salary) it's easier to do this at a big company than it is at a startup.
Another option that I successfully negotiated for is purchasing shares outright at fair market value using a 51% recourse promissory note due in 10 years at the IRS minimum interest rate.
This avoids the exercise window and acquisition concerns, is pretty tax favorable, and largely aligns your treatment with the founders. It is a bit riskier even if the company agrees to offset the loan with bonuses over time, but at lower valuations I think it is worth considering.
In any case, it's worth it to have a good lawyer look over all your options paperwork to make sure you are getting a fair deal.
Instead of paying for the shares with cash now, I agree to pay for them in 10 years, paying interest at the minimum rate the IRS will allow (~2%). The 51% recourse means that the shares themselves are the only collateral for 49% of the loan amount (to limit my risk if the company goes bankrupt and a creditor tries to actually collect on the note).
The problem I see with this particular line is how disproportionate it is. If you had said 100+ people from 50+ companies, that might have been more convincing than 100+ people from a select 12 companies.
The problem here is that it's 12 companies, and not every company can be one of those 12. That's like me saying I know 20+ people from 2+ companies that made $1mm+ but those 2+ companies included FB/Twitter/etc.
There is so much conflation in that first paragraph I couldn't get past it. The way I think about it is that options are how you earn money for doing a (/if you do a) good job. Much like doing a good job of picking a house in a neighborhood that you believe will appreciate, doing the right amount of renovation and renting it out while waiting, if you did this well you could make money on the appreciating assets. In a startup, your two main assets are time and people. Salary is how a company compensates you for the FACT that you're doing a good job. Bonuses are how the company compensates you for going above and beyond. In our company we have standard compensation packages based on tenure, within the structure, there is no way for anyone to make any more than anyone else outside of just being at the company for a long time. When you're betting on a startup you're betting on the founders and the team, not the VC, if you want a proper salary go work for a business that is already built, don't work on building one. Hedge funds and banks pay really well.
If you're having to debate in your head "options vs cash", then the answer is definitely cash. Because if the options were worth something, that thought wouldn't even come up. Also, companies where options are of actual value generally do not give you such a choice, they give you plenty of both (provided you are worth it), the objective is to retain you because you are valuable, not to pay you the minimum possible value by presenting tricky choices of "options or cash".
Working at a startup as an employee with the expectation your gonna get rich is a fools game.
Negotiate for the best deal on options you can get (I.e quantity, terms like early excercise etc) but treat them as a lottery ticket.
A startup is a good way to learn rapidly so focus more on the quality of the people you will be working with, technologies used, what your role will be, vcs backing it etc.
In the long run the network and experience you build from doing this will probably have a greater impact on your networth. Especially if you yourself want to start a startup.
I'm a founder at a high-growth startup in Mountain View. I always tell potential hires, "options are worth nothing until they're worth something. And, they may never be worth anything."
I think that's the opposite of the unrealistic optimism job candidates get. But I think it also helps set the stage for a culture of transparency and honesty very early. Even before that person becomes an employee.
I'm curios to know what HN'ers think of that explanation vs hearing only the optimistic case. Does it make you second guess the company prospects?
Personally, I would appreciate that level of candor (and that's how I view my options anyway). I've heard far too many pitches from desperate recruiters about how an options package is worth $$$$$$.
I work in the DevOps/sys admin field, so I'm use to always looking at what could go wrong. I think this is a toss up depending on the persons experience with startups. I've been in mostly small sub 20 person startups for 15 years now so I've seen almost all of it.
You have the people who are new to startups, who think its a ticket to financial freedom in 4 years when they have fully vested and the company sells for 1+ billion. Those people might be scared away.
You have the people who have been through a few startups and have worked at a failed company or a company that the investors took all the money and left the common stock holders with nothing or little to nothing. I'm in this group and that would be a breath of fresh air to hear that. During interviews, if I hear only great things and nothing is wrong then that is a red flag to me.
> Does it make you second guess the company prospects?
Far from it, honest is one of the absolutely critical metrics I use to evaluate any prospective employer. Bravo.
I don't mind someone stating why they believe their start up will have a better chance of success than the average: it is a positive to believe in the product. But don't sell it as a sure thing.
I agree with the other folks commenting on your reply. I'd view it in a positive light. I'm always suspicious of founders that oversell startup equity.
The younger naive folks who walk away because you were too real will probably remember your candor in a positively Later on once they have some more life experience.
It strikes me as an honest statement and if you were pitching me I would give you honesty points :-)
But the problem you are dealing with is the problem in many questions here: these are complex financial instruments and most people don't understand them. Some people will hold false beliefs about these things. Some people will be afraid of the unknowns.
Also the problem is compounded because the word option has different meanings and if you wrongly believe that these employee stock options on private equity are the same thing as listed equity options you're in for a big surprise.
Generally when analyzing a compensation package if you have to do extensive scenario analysis to evaluate the package I think it is worse for most people than a simple package.
Also, the number of scenarios where the founder or investors can make decisions that render the option package worthless is fairly large. This creates a dynamic where if the employee takes an options heavy package they either were foolish / duped, or they are pledging their utmost trust and loyalty in the management team. It's a lot to ask.
Many of us will take less money for remote options or more say in product development.
At my last company I left a few months before they sold. Been wondering if I made a mistake not buying my options. I was finally able to get the final selling price. It was half price per stock than the options were valued at. Looking back I made the right choice even thought it feels like I missed an opportunity.
> Negotiate for the best deal on options you can get (I.e quantity, terms like early excercise etc) but treat them as a lottery ticket.
Sure, you can ask for a 100% non-dilutable share, but you're not going to get it. In order to negotiate meaningfully, you need to have a valuation of the things you're negotiating on, so you can decide what tradeoffs are good and which are bad.
It's entirely possible to negotiate option excercise dates. Asking for 5-10 years to decide if you want to buy is within the realms of possibility for software engineers at early stage startups (pre b round).
Sure. But since this is a negotiation, you probably have to make some choices. Should you press on exercise dates, or on number of shares? If both of these are worth zero in your calculus, you have no means to assess.
This is what I don't understand... Why can't developers get non-dilutable shares?
If someone helps you invent something, and they are willing to put their own skin in the game in exchange for an ownership stake, then shouldn't they become wealthy along with you if it is successful?
This whole notion that developers are expendable and disposable and that it is acceptable to give them dilutable stock options is fundamentally immoral and needs to go away.
Working at a startup as an employee with the expectation your gonna get rich is the game.
Think about the percentage of their investments that VCs expect will pay off. You could work for 15+ years at startups and never be at the successful one.
Startups say that but I think in many cases applicants go to startups because they can't get a job at a bigco that will pay them more. This especially true for new grads who didn't go to a shiny
University.
Now this isn't a bad thing as one of the best reasons to go to a startup is to sharpen or learn new skills to become more employable. It's basically what I did till I could swap to a bigco.
> ...applicants go to startups because they can't get a job at a bigco that will pay them more...
I can't speak for others, but I can certainly speak for myself and say that this isn't true. I had my internships at larger companies. Sure, they're not the big 5, but big enough that they're household names. I used them as resume boosters and now _prefer_ startups over large companies.
I was also fortunate enough to grow up without a lot of money, so my lifestyle is fairly affordable and I never had the luxuries that could be difficult to transition to a lifestyle without them. Because of that, and my interest in working on bleeding-edge-and-could-fail tech, I don't mind the risks that startups offer.
I'm confident enough in my skill set that I know I can go after many of those high paying jobs with at least a modicum level of success _somewhere_, but I like the challenges and pace of the startup space instead. I've even rejected offers that offered a larger salary in exchange for a lower salary at a more exciting (and even earlier stage) startup. Does that make me naive/crazy? I don't know, maybe. It's just what excites me more and the tradeoff is worth it for me.
I'd agree with a lot of what you said. The only thing I'd challenge is the implied notion that startups are inherently doing more cutting edge stuff than bigco's.
Right now I'm doing a lot of consulting/contracting at startups. Most of the companies I see on my travels are not really doing anything that falls into the category bleeding-edge-and-could-fail. Most are pretty boring and derivative. Especially compared to some of the stuff I saw worked on at Facebook.
I would argue that a lot of the cutting edge stuff that's being worked on these days is happening at bigco's (Google/Amazon/MSFT/Facebook).
Now their are some big exceptions to this but in general that's what I'm seeing while traveling around SV.
I would say that I prefer working with smaller companies for the sense of camaraderie and the relative lack of politics. That and the ability for my work to have a massive impact.
I disagree. I've been part of multiple startups; Only with the first two did I actually expect to make more money than I would at BigCo. Not because the later startups were worse, but because I was less naive.
The reason that I joined those other startups -- and the reason that I more often work for startups than big companies -- is not about money. It's about pace of career development.
Everything on my resume that is interesting or exciting was done at a startup. Every big jump in skill and in compensation has been a result of that startup mentality. Who's fixing this? Me, I'm the only one here. Who's going to deal with the fallout of my poor architecture? Me, I'm the only one here. Who learned a hard lesson? Me.
I can only speak to the cogs side of the house (I'm devops or whatever they're calling us this week).
Man I wish I knew more about options before I joined a pre IPO company. Kind of like how I wish I knew about salary negotiation before my first job out of college. It's like companies exist to scam us.
Options are a complex topic, this article gets a lot wrong.
1. The base offer. Many startups pay competitive or close to competitive salaries + equity.
2. The value of the options depends on your ability to pick the right startup and you believe that you can make a difference to the company. I have a friend who picked the right startup 4 times in a row.
3. Stock options are typically priced at 25% of the last round. The reason this is possible via 409a valuations has to do with the differences between common stock and preferred.
4. Issues with investors right impacting the value of your stock options are more problematic with later stage startups. Warning signs are companies that raised a lot of capital but didn't live up to their expectations. Those companies will often be under pressure to accept terms in later stage financing that could destroy founder and stock option pool upside.
5. Venture Deals by Brad Feld is a great read to understand different investment terms.
6. Yes you get more equity if you create your own company. Doing so is extremely risky, stressful and hard though. I'd guess that even with the extra equity, on average, you'll make more money working for one of the big companies.
7. So in a nutshell, starting companies, joining early stage companies. It really depends on your ability to pick the right company and perhaps more importantly your ability to make a difference.
I don't think I have ever seen a startup offer a competitive salary/equity package here in the Bay Area for a software engineer. I have found that the best I could do is trade compensation for a good work-life balance since salary is not competitive and stock is so volatile for a startup, whereas at big companies salary often is much more in line with the market and stock has actual liquid value.
2. If you're that good at picking startups, become a VC.
3. Common shares are priced less than preferred because they're worth less than preferred.
4. Startups at every stage give liquidation preferences. Startups under pressure will give more significant preferences, sure, but they're relevant to basically every startup.
> Options are a complex topic, this article gets a lot wrong.
...so what did this article get wrong?
> The base offer.
For high level engineers the disparity between what Facebook/Google will pay you and what you'd make at startups can get pretty high. In my personal experience the salaries aren't actually competitive unless you start personally valuing the equity at a significant level. It seems Dan has the same experience.
> The value of the options depends on your ability to pick the right startup
I think his article does a better job of answering the question "how do you value the options provided by the startup assuming X level of success" than you do here. "I have a friend who picked the right startup 4 times in a row" doesn't really help people figure out if they've picked the right startup. "It's possible! People have made money on the stock market!" << This is not reason to play the stock market.
> Stock options are typically priced at 25% of the last round.
I'm assuming you're talking about the section where he calls valuations bogus. Your statement here doesn't invalidate the writing: "First, the valuation is updated relatively infrequently" << this remains true. And the round valuation is still a complex number that's mostly investor speculation and not representative of what your shares will net you -- which is the argument here -- that you might be better off offering cash than some hard to quantify thing.
> So in a nutshell, starting companies, joining early stage companies. It really depends on your ability to pick the right company and perhaps more importantly your ability to make a difference.
I'm treating my options like a free lottery ticket with not decent odds. That's it. They don't exist when I plan my finances.
I doubt this is optimal, as options can be evaluated to some extent and risk can be appropriately brought on and managed. But it works for me when trying to do math about my present and future opportunities.
What strikes me as odd given the USA's reputation as the home of the self made millionaire that the taxation of employee options is so broken.
Treating options on shares as Income when they are not is just stupid options are a high risk instrument that well be worth nothing as opposed to a higher sallery.
Why is there not a PAC made up of tech industry employees lobbying for reform of Federal and state laws and arguable tech employers should be doing this.
And I should point out that politicaly I am on the left here compared to 95% f the average HN reader.
Granting and vesting of ISO's are not taxable events. Exercise of ISO's is taxable under the AMT rules, but only if you are above the AMT threshold (admittedly, this is true for a lot of people)
If you're not hitting the AMT threshold, then you only pay tax when you sell the resulting shares.
If you are arguing that grants of options shouldn't be taxed -- they are not.
If you are arguing that the eventual income from ISO's shouldn't be taxed -- that would be a very odd position, since pretty much every form of income out there in the world is taxed, even illegal income. I can't think of any other income category that is un-taxed under USA tax laws, with the exception of government bonds.
Exercising of options is taxed, which is what I interpreted the OP to be talking about. From the employee's perspective, it seems ridiculous: I'm exercising an option in hopes of future payout, but right now, it's worth literally $0 — I can't convert it to cash — but the government taxes it at >$0 nonetheless.
Options are not taxed until you exercise them. At that point they become an asset that contains "value" but until you exercise the option to purchase stock it is simply only the right but not the obligation to purchase stock at a particular price. When issued options you don't have to exercise them and if you don't you do not pay taxes until you decide to.
Often companies offer the ability to "early exercise" options which means you buy them before they have vested and file with the IRS that you have done this. The reason you might do this is because the strike price of your options will likely be the same as "fair market value" of the stock. This means that when you buy them you do not pay any taxes since the difference is 0.
If you wait and exercise your options then you pay tax on the difference between the "fair market value" and your option strike price. This is taxed as a short term capital gain. However, you now hold the equity and if you sell it 1 year or later you pay a long term capital gain which is generally advantageous. This gain is the price you sell minus the value at the time you purchased.
Often, for people issued options they will exercise and sell immediately when/if the company goes public and they can sell. You keep the difference between what you sold them and what your strike is and you pay taxes on that profit.
The biggest issues are when you want to leave a company but have not bought your options. These are golden handcuffs and it's a decision you need to make if you want to buy them. For a company that is looking good you can often get a loan to buy them. But now you're invested in an illiquid investment of which you can't possibly know the real value. That's a big risk with potentially a large payout.
>Options are not taxed until you exercise them. At that point they become an asset that contains "value"...
The assertion that they then contain value is the contentious point. To the IRS it is defined to have value. To me, it has no more value than the option, because there's no more market for those shares than there is for the options themselves. "Fair market value" is weird when there's no market.
What we need is a way to pool employee stock options across startup companies to diversify risk. Surely there's a financial engineer somewhere who can create such a thing.
Have you been in the industry a long time? No one is "bitching" about options. Did you read the article? Its not crap, its maddening amounts of information completely irrelevant to the fields of Computer Science and software engineering. Yet, its a reality most of us must face, since there are a lot more job openings for startups than any other sized business. And since its in the business' interests to provide monopoly money instead of real money, this problem doesnt seem to ever go away. If you ever get into freelancing, its unlikely you will never be met with such offers. Its also likely your contract will dissolve into said monopoly money at some point too.
If anything, we're "bitching" about wanting actual money for compensation, not a raffle to a lottery that is highly likely to have no prize at all, and just as likely to be worth far less than the typical compensation in cash.
You don't have to over-complicate the analysis. The fact that they give you the options instead of cash is proof the options are worth less than the cash. This is Econ 101: bad currency drives out good as good currency gets horded.
When a company gives you options instead of cash, they are making a bet with you that they can make a better return on the cash than you can. They are hoping they can convince you that cash_in_your_hand_now < value_of_shares_in_the_future, but in order for them to even consider making the bet, they have to expect that value_of_shares_in_the_future < cash_in_their_hand_now.
This is too simplistic. There is another reason - options incentivise people in a different way from cash. Say I have an option which is struck at the fair market value of the company on the day I join. When I exercise that option, the value will be the appreciation in the value of the company up to that point (ie the value I have had a role in creating). So options (when the plan is set up well) incentivise employees to maximise the value of the company for shareholders. More broadly you could say that options tend to incentivise long-term value creation ("dividend-seeking") over short-term value extraction ("rent-seeking") behaviours.
Secondly, options incentivise people to stay around (until their options vest). The company also gets to cancel unvested options if a person leaves and even claw back vested but unexercised options in the case of misconduct by the employee. These are all things that are valuable for the company and more difficult to achieve using cash.
Thirdly, there is a big difference to most startups between "value" and "cash". I may well want to pay someone in a cash-equivalent that has equal value to cash (or even greater) because I want to manage my cashflow. After all, I can pay my employees (some of their comp) in options but I have to pay my bills in actual cash, which may be hard to come by until I hit net positive cashflow. In the case of an option, when you exercise and sell, you turn your option into cash, but the cash doesn't come from the company, it comes from whoever buys. This may be more efficient for the company than raising the equivalent cash and paying people directly in cash (because of transaction costs around fundraising).
Oh look, the thing I should have read before joining a startup.
I left [large corporation], who had been paying me very well, to go try out the startup world. I found a cool local company doing something that sounded neat. I looked at the pay (better on a per-paycheck basis) and the options (better than the stock I was getting in the corporate world) and said "this is a great idea! If the startup succeeds, the options will be worth a lot!".
It's a great company with great people and I don't regret that, but the financial implications of the change are starting to sink in. I'm getting a bit more per paycheck, but on the whole I suspect my tax returns over the next few years will add up to less than I was making before, even if the startup succeeds.
> I'm getting a bit more per paycheck, but on the whole I suspect my tax returns over the next few years will add up to less than I was making before, even if the startup succeeds.
That sounds counter-intuitive -- why would that be? Did you have some expense you could claim at [large corporation] that you can no longer claim?
Most of the big post-IPO companies hand out stock on a regular basis as a bonus or a top-up to the actual pay.
The corp in question for me was Amazon. Around 1/3 of my pay (more some years) was in the form of AMZN stock that vested every six months. Stock, not Stock Options. No paying for it, no decisions, just boom, you now own X more stocks and how would you like to pay the income tax on that?
What's worth more? A $200K lump sum in 20 years or $10K every year for the next 10?
The answer depends on how much interest you can earn on the $10K/year. At around ~7% the $10K/year is worth more than the $200K in 20 years.
Your stock grants from Amazon are equivalent to the $10K/year, the options, if you get them, are equivalent to the $200K. The actual weighting is impossible to get precisely but the way you approach it can give you better accuracy than just comparing apples to oranges.
Good news, even if it's horrible, ~2 years is the typical employee tenure so you probably wont be there long. If you are and it's going to be successful you'll be able to renegotiate based on foregone comp at Amazon.
Possibly total comp. Statups are stingy with health insurance, while larger corps are more likely to pick up more of the tab (and occasionally, they'll pay your monthly premiums in full). This can easily add an additional $12k-24k to your total annual comp if you have a family.
I'm in Canada, so health insurance isn't very expensive (government covers most of it). The biggest thing for me was stock bonuses vs stock option bonuses.
The way I read it, his take-home pay is higher, but either he mis-valued his options as being worth more than his BigCo stock package, or (as is usually the case) the value of the options is virtual until there's a liquidity event ...
His old comp was paycheck + stock vesting (which doesn't appear in paychecks), his new comp is paycheck + (non-exerciseable options) = paycheck
Can't they just tell you the current share price and your strike price? The share price minus the strike price times the number of options is the value of the package when vested, no?
At offer stage, strike price = share price, which is estimated by an independent third party at least once per year.
It used to be the case that strike price is significantly lower than share price, making options much more valuable than they are today. But that was deemed a tax loophole by IRA and became disallowed some while ago.
If I do the math of taking the cash each time, do I end up close to what diluted options would provide, or more?
How many people do I know where options translated to sizeable cash, even after dilution?
Which statistic will I be a part of, where options have actionable worth, or little/nothing?
The questions above we're proposed to me by a founder who had taken funding and was diluted to the point where he realized his worth as a consultant/freelancer/contractor may have ended up ahead.
Stock options are for kids too stupid to do the math, and young enough to make bad financial mistakes. Right around the time you hit 35 you need to remember Joe Pesci in Goodfellas.
In startups your risk is that 95% of the value of your labor goes into a pool of options whose underlying security (startup stock) never achieves any liquidity event. Also, you do have to factor into your analysis the fact that the tech giants also have options, which are likely not to expire worthless, and also have some upside as well, since they are listed on public exchanges. If startups thought more like Buffett "preferred holding period is forever" they would counterintuitively actually compensate employees with cash more competitively once they achieved positive cash flow (this actually seems to be occurring in a few companies, there are just too few positive cash flow startup examples for quality analysis on this front). More startup employees I know are actually just enjoying their work and salary instead of making a giant sacrifice on a longshot bet in exchange for work they don't think is sustainable. That being said I think what Bezos wrote about amazon's work ethic will always hold true "you can choose to work harder, longer, or smarter but in our case you can't choose 2 out of 3" - paraphrased from memory. Ultimately startups and big companies are trying to design compensation packages that create maximum productivity and the best description I've heard of this is to "take the issue of money off the table". Hard to do that with under market salaries and iffy stock options.
https://www.amazon.com/p/feature/z6o9g6sysxur57t "It’s not easy to work here (when I interview people I tell them, “You can work long, hard, or smart, but at Amazon.com you can’t choose two out of three”)"
I don't understand this quote. Does he mean that you have to choose ONE of the three? Or that you have to do all three (which means his "or" is misplaced)? Or that Amazon.com chooses for you, rather than you choosing yourself?
His "or" isn't misplaced, because it's a play on an existing phrase: "better, faster, cheaper - you only get to choose two." Meaning you cannot optimize on all 3 dimensions.
Here he is saying that Amazon expects you to excel at all 3, by providing a contrast to a known idiom that says you cannot.
I actually thought the same thing reading this quote. But the convention is present three, choose two. His example is an appeal to one's sense of what I can only describe as "drama". The "dramatic" realization being of course that Amazon is different; you have to choose three out of three instead of the conventional choose two out of three. Choosing one out of three is less dramatic and therefore must be eliminated. Not logical I know.
"Sorry we cant actually fulfill the contractural obligations we are (sort of) legally bound to fulfill, and cant pay you like we promised. So will you take a much smaller amount of money and a bunch of worthless stock options instead? By the way our stock options are going to be worth millions in a few months, so this is actually a better deal for you."
Its like some weird pathogen has infected the whole industry with this!
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[ 4.0 ms ] story [ 291 ms ] threadBut for the potential employee, the advice remains the same; ignore the options when it comes to evaluating a compensation package (and only those who are informed enough to go "weeeeelll..." and have actual reasons for why in a ~particular~ instance they should do differently, should ever consider doing otherwise).
Of course this is no where near the sum of the strike price for the options.
thought experiment: knowing everything you know about e.g. stripe right now, would you buy $100k worth of stripe back in ~2012? in 2012 it was a risky proposition to do so, but many people at the time understood why stripe was likely to be big and successful and invested money in it. i'd rather live in the world where there is a mechanism to invest in such a company besides being an accredited investor with access.
many people go wrong when thinking about options in that they don't try to consider the fundamentals of the investment. working at an early-stage startup isn't just a job, it is a way to do risky investments using your time.
all that said, what Dan proposes at the beginning makes a lot of sense: the startup should be willing to give you cash instead of options (provided they have the cash).
sure but for every stripe there are 10 startups that either failed or didn't amount to a great payout.
I think the point this post is making that the value of options is statistically not greater than higher salary at a competitor, given the risk an employee takes since he can't diversify his time.
that said if you believe in an idea it is absolutely great to have the option to "go long" on that idea with your time
"10" is an understatement.
yep. it's probably more like 100:1 don't go work at the other 99! :)
i agree that the value of options is statistically not greater than the compensation package at GOOGBOOK. that said, you don't get to live 1000 lives in parallel. so, either you have to think very carefully about this one (or ~5) investments you are going to make OR you can go work at a bigger company with higher salary if that isn't for you.
Except...I didn't tell you that your investment would be held by Mt. Gox. You lost your investment.
There is always risk. Always. 97% of startups fail. They are extremely high risk. The earlier you buy in, the higher the potential payout, but the more likely you are to be backing one that will fail. Even the successful ones, after dilution, may or may not be worth more than the cash over how long it took to IPO/be bought out.
You say you get to make risky investments with time; yes...but that's even worse than money. Money is fungible. Time isn't. You have a set amount in life.
Having a 97% chance you're wasting it (actually, higher, since dilution + etc means even a 'success' may mean you made less than the equivalent cash over how long you worked at the place, the extra hours you put in compared to working on side projects, etc) are some pretty long odds.
that isn't an argument against startups offering options. that only says that you value your time in such a way that precludes you from investing it in startups.
Really, I'd say the whole thing is a red herring; either way you're working. Your time is being used. So the question is do you want to trade that time for a guaranteed amount of money, or a -possible- amount of money (but, high risk). The only way taking the options makes sense is if the salary is -still- high enough to not get in the way of what you want to do, and you could walk away having netted zero from your options and not feel cheated.
Sure, maybe 97% fail, but most have already failed before taking on an employee on equity.
A more appropriate number would be the number of startups that fail after that milestone.
For instance, I calculated the numbers for my country, 40% of startups that get accepted into an incubator succeed, 40% fail and close, and 20% stagnate (mine is currently in the 20%).
So, you're buying a 40% ticket, not a 3% ticket. Still losing odds, but not so much so, and if you're an early employee, you can really help tilt the odds (5%? 10%? I don't know).
Then I learned about vesting periods, windows for exercising options, and a whole slew of financial terms and devices; each one seemed to come with its own unique "gotcha" that, if you didn't know about, would cost you nearly everything.
Everyone I talk to about these always says "well, don't do that one thing, or if you do that one thing be sure you do it in this way and you're set". The cumulative knowledge you need becomes pretty high pretty quickly though, and the chances of me doing the right legal and financial incantation at the right moment becomes lower.
Nowadays I go with cash. I don't get 'golden handcuffs' that hold me to a job I don't like because it might pay off later. I can calculate the expected value and risks with cash without tons of research. I know my legal recourses if I get screwed out of cash.
You may want to argue that IP is also part of these deals and past employees created part of that. This is probably true for some deals, but it has been minimally true for the deals I've seen directly. Sample size of two isn't great, but keep in mind the value of startups is largely believed to be in execution, not ideas. A startup on the verge of bankruptcy probably doesn't have immensely valuable IP because it's 1) not producing present value obviously and 2) isn't obviously worth a lot in the future, otherwise someone would be willing to give you discounted cash today for an ownership percentage of its future value (aka an investment).
Out of curiosity, how do you keep the employees from walking after an asset only transfer? The vague promise to them about future riches has already been broken. And you will up changing business practices that ruffle feathers (I'm not sure how you could avoid it. This stuff is rarely written down). Hell, you'll probably assign them to a new project anyway. So how do you keep them from leaving in droves?
And you didn't ask, but if not enough of the team accepts an offer, then it evaporates.
Effectively, he had no job but was still on the payroll for a year and maintained his equity. He came in and did virtually nothing for about 6 months and then stopped.
It's a cushy gig but by the time you get it it's a punishment not a reward.
Their compensation at the new company will have a vesting schedule over some period of time, similar to a stock grant.
There seems to be a common misunderstanding about dilution.
Dilution is not really the issue. In fact, dilution is a positive sign. It means more investors value the company and want to buy into the ownership.
How do current owners who collectively own 100% of the shares "sell" more shares to future owners?!? By way of dilution. That means everybody gets diluted including the founders, the angels, the VCs, and yes the employees too.
More important than dilution is the shares multiplied by price.
They don't get magic stock that magically doesn't get diluted.
Honestly, unless a startup has SERIOUS capital problems, an anti-dilution isn't going to make it's way into a share purchase, so the companies that are still seeing this (and the ones from the early 2000s) weren't in incredible shape to begin with.
If I was going to work at a company for X% ownership, I'd sure expect to have the right to invest my own money to preserve my stake in a funding round and avoid dilution. Many employees might not exercise this privilege, since it would require putting (potentially a lot of) cash back into the company, but why aren't they given the choice? I also might expect to receive the same liquidation preference on any shares purchased in cash this way.
I'm not sure I could be comfortable working for a startup without pro rata rights and relatively full knowledge of the cap table and preferences. That's probably why I'm not working at a startup.
2) The majority of startup employees are unlikely to have the cash on hand to make that kind of investment.
Because of #1 and #2 this isn't something that most employees would care about so it's not part of any standard compensation package. It's possible that an employee could negotiate for such a provision though.
The fact that you would want a pro rata right to work at a startup does make you fairly unusual and I agree goes to explain why you have chosen other career options.
founders, angels, and early round VCs can simply issue themselves more stock from the pool of unissued shares to counteract dilution.
However, what you describe is highly questionable and borderline illegal. It's certainly grounds for a lawsuit by other shareholders (including options holders).
I know I'm missing a lot of info, and its just a second hand example, but it seems in line with grand parent post's idea that for each type of financial tool, there's at least one gotcha you need to be aware of.
However to issue those to yourself would be like eating your seed stock, since that's the pool that you use for issuing options to new hires, and without that you can't give new employees any equity. For that reason I don't think it's likely.
Can you explain why they can't? I was under the impression that this actually does happen.
Sure, further rounds are a sign the company is doing well. The important word being "sign," they don't actually make the company more valuable (what the company does with the money they raise does). If you own a lot of stock, you probably already know if the company is doing well or not. In that respect, the round just puts a number on what you already know.
The math is simple. All things being equal, owning more % of a company == more money. To try to spin dilution in any other way is stretching the truth pretty far, and is rather manipulative IMHO.
But I suppose the idea is that a bigger pie is able to expand larger and faster than it would have been otherwise.
At the moment that an investment is made, a company should be worth just as much as it was before, but will have more liquid assets because it's traded equity for cash.
The question for employees and shareholders then becomes: "Do you believe management is capable of using the cash to build additional value, or will they waste it?"
"You own 1% of the company" vs "You own 1% of the angel round stock pool."
I think it's clear(er) what the second sentence means.
Let's say today I own 200 out of 10,000 shares (2%) of a company. Someone comes in and says we want to own 25% of your company and are willing to pay $100M for it. At that point (before any transactions happen) I assume that my company is worth ~$400M, and my shares are worth ~$8M ($400M * 0.02).
So the majority shareholders agree to the deal and dilute stock accordingly. Now there are 13,333 shares. The new buyer get 3,333 (25%) and I still have my 200 (now 1.5%). The company is worth that original $400M value plus the new $100M that was invested, for a total of $500M. My shares are worth ~$7.5M ($500M * 0.015).
Where did my half a million dollars of pie go?
If the new people own 25% of the company, then the previous owners own 75%. That means that the new people should get one-third as many shares as previously existed (which you did correctly). But it also means that they should have to put up one-third as much money as the company was worth previously; that is, 133M, rather than the 100M you had them pay.
Your loss is your cut of the 33M loss that your company took by getting underpaid.
Your slice of pie before the deal is (200/10000) * $300M = 6M
Your slice of pie after the deal is (200/13333) * $400M = 6M
Except that after the deal, your company has $100M more to spend, hopefully on investing in growing the business so that later on, you'll own 1.5% of much more than $400M.
This kind of thing is why management will sometimes try to steer employees away from discussions focused on percentages and toward ones focused on share prices. As an early employee who has been diluted a number of times, I certainly agree that it's more helpful to think in terms of my number of shares (which is unchanging) times a share price (announced at the time of the investment), rather than trying to compute my new percentage of the overall company value.
It was "pre-money $400M", "new investment $100M", "new investment gets 25%". Those can't all be held true.
You can change exactly one of them to remove the conflict, so it's either "pre money $300M", "new investment $133.33M", or "new investment gets 20%"
Unfortunately, rational people may have very different risk tolerances. Founders often see it as I have a company and X money to work with. The next round means I have a company and X + Y money to work with. In that context having a 90% chance of 10 million is often better than a 80% chance of 20 million even if the expected value drops the difference between 0 and 10 million is vastly larger than 10 million vs 20 million. But, smaller stakeholders may not agree with this thinking.
Everything else follows from that. The fact that employees get any shares at all is just a way to get better employees so that the company does well. Only employees of unicorns have any chance of getting wealthy from stock, and you're unlikely to be an early employee of a unicorn.
It's better to view the situation in absolute terms rather than relative terms. Instead of comparing the outcomes of founders/VCs vs employees, compare an employee of a startup to an employee of non-startups. At not-startups, the working environment is very different. Some people enjoy that, some prefer the opposite. Also, getting +$100k (or +$50k, or even just +$10k) is still nice, even if the founders and VCs get 800x more.
The only part I have serious concerns about is the fact that you can end up underwater when it comes time to exercise your options, i.e. your tax bill outweighs whatever profits you'd see. I don't know exactly how this situation arises, but it happened to a friend. It was something like: he could have exercised his shares and gotten several hundred thousand, but he would've needed to pay about $100k in taxes beforehand. Since he didn't have that money, he couldn't exercise the options.
I might be wrong about the specifics, but there are situations similar to that, and it's pretty unnerving knowing that you can jump into a situation where your +$100k somehow turns into -$50k.
I feel like at least a phone call to a bank would be in order at that point. If it's that simple, surely some sort of mutually agreeable loan could be worked out.
Surely if they're private shares that can't be sold the extrinsic value is zero, the private share value for tax purposes is no greater than the value of the option?
But even your example wasn't that. Your examples was -100k and +300k (or more), but offset by time slightly. That's still a very large net positive, just gated by a period of net negative.
I suspect there are some details that you are missing as to the situation of your friend. I know little about investment vehicles, but I've filed taxes at one point and paid them at a later point many times. For income taxes the rules for this are clear, and the amount you pay in fees and interest is also very clear. For some investment vehicle, I would bet if there's some taxes that need to be paid prior they have automated processes set up to pay them for you and take the amount out of the later payout, for a fee. If not, I can't imagine getting a short term loan for that would be too hard, even if you have to use private money (a real investor, or even just a friend).
Does this mean that stock options are not a measure of risk taken by the employee into the company?
You mean the stock options are just like cash? I didn't think so. The employee is invited to take risks but without the protections.
As someone who has been exactly there, this doesn't compensate for the lower salaries that are de rigeur in startups. Not to mention being an absolute insult compared to the employee's degree of contribution to the resulting event.
"Better than nothing, or being underwater" is pretty thin gruel in practice.
Define wealthy.
I have done quite well (not FU, 3-comma money, of course, but solidly 2-comma) from equity as an employee. In my current company, I joined a few months after the Series A (so nowhere near "early"), stayed through the IPO and many years of growth past that.
We were never a unicorn.
Amazon, Facebook, and Google are regularly turning SWEs into millionaires and a substantial part of that is from equity. Microsoft also had a good decade and a half of doing that. Netflix probably does as well. (OK, Facebook was a unicorn; the others probably weren't ever called that, though it may have fit.)
The point in the GP post that I was expanding upon,
> It's zero net gain at the point of dilution.
is focussing on the wrong instant in time.
You should be calculating the effect of the dilution on your exit event, when your equity actually becomes exchangeable for money.
What a typical employee thought:
- I have 1% of a 10M dollar company. We'll do well and in 2 years I will have 1% of a 100M dollar company.
What will happen in the best case:
- I had 1% of a 10M dollar company. They did well and now he has 1% of a 100M company (dilution in your face!).
He just lost 9M. They were actually never on the table, even thought the hiring department didn't hesitate to pretend they were.
You've meant to say "They did well and now he has 0.1% of a 100M company" I assume? Otherwise numbers don't add up. If all goes well the value of a smaller percentage after dilution should be higher than before the dilution, for example: 1% of 10M ($100k) -> 0.2% of 100M ($200k).
Yes they do. In two senses. The obvious one is probably not what you meant to refute - the total value of the company post raise is, in the simple case, the value of the company before the raise plus the value of the new cash. The company is more valuable. What I think you meant to say was that your shares don't get more valuable.
That's more true, but they can be. If the raise was a good idea, the company's prospects are improved (and therefore the value of existing shares) by whatever uncertainty existed about its ability to raise that funding.
The point is all things are not equal. To restate a sibling comment, dilution means you own a smaller % of a more valuable company.
If it helps, think of "dilution == sell_equity". Dilution is the perspective of the sellers' side (x% - y%). Equity purchased is perspective of the buyer's side (investor's ownership goes from 0% to y%).
>To try to spin dilution in any other way is stretching the truth pretty far, and is rather manipulative IMHO.
Dilution explanation doesn't require "spin" nor mental trickery. It is the natural side effect of how companies sell equity to grow.
E.g. Larry Page's ownership of Google Inc got diluted from 50% in 1998 down to 16% in 2004. That smaller 16% was worth ~$3 billion around the time of the IPO[1]. If Larry insisted on "no dilution", no VC would invest money to help the search engine grow and therefore, he would own 50% of a worthless company.
So all things not being equal:
Obviously $3 billion is more money than $0. Thinking that 50% is better than 16% doesn't make sense for companies that require outside investors to grow. Similar story for Bill Gates' dilution, Jeff Bezos' dilution, etc.Let's imagine Larry Page had a different conversation with Sequoia Capital to match this misunderstood fixation over "anti dilution"
>1998: Larry owns 50% + Sergei owns 50% = 100%
>1999: Sequoia: "we'd like to buy 10% of Google Inc for $12.5 million"
>Larry responds: "Yes! Great! We need your $12.5 investment but keep in mind that both Sergei and I have anti-dilution clauses so our ownership both stays at 50%."
> Sequoia responds, "So you want me to buy 0% of the company for $12.5 million? Uh, you guys are idiots"
Somebody in that imaginary conversation doesn't understand "dilution" or "equity" or simple math.
[1] http://www.nbcnews.com/id/5033780/ns/business-stocks_and_eco...
What is the difference between each selling _existing_ shares they own up to the $12.5M valuation and 'diluting' the existing shares?
Dilution makes all this simpler.
If you have no say over how much you're diluted (like most employees), you could be diluted away to nothing. You have no control. So you must calculate worth accordingly.
Is everyone to get diluted equally. No? Well then, calculate worth accordingly.
In addition, I thought the pie getting bigger was the WHOLE POINT OF HAVING THE SHARES TO BEGIN WITH.
Show example math of how someone could get "diluted too far" resulting in less total value (shares x price) after an investment round that prices the company higher than before. If the total value was truly less, it means it was "down round" which is a different beast.
>, you could be diluted away to nothing.
Show how it is mathematically possible to dilute employee's 1% ownership in to 0% without illegal tricks.
When Mark Zuckerberg tried to dilute Eduardo (without also diluting the other owners), he tried to hide the reduced % via a newly created company. He got sued for the financial deception and lost.
Using his example, if you estimate the value of a company to be 100M and estimate 10 years until IPO, if the investment doesn't raise the value of the company at the time of the IPO in 10 years then the dilution is not good for the employee because the pie is the same size (100M) but his/her shares have been diluted.
Seems like it's pretty difficult to estimate the value of the company in 10 years or the IPO date though which is probably why people just use the amount invested to estimate the value of the company.
[0] https://news.ycombinator.com/item?id=14510483
Well, it's a big risk to everyone that doesn't get voting rights, right? Not all investors get voting rights, do they?
In some way, an employee sits between a non-voting investor and a voting investor. They don't get to vote, but they do have some control over the outcome of the company (ranging from small to large, depending on the number of employees and responsibilities of the person in question).
In a typical startup a dilution means that the company run out of initial investments and has no way to get some form of a loan. So selling the ownership is the only way to continue. And if they succeeded with that it would not make the company more valuable. It just meant that owners were good at convincing investors. This is orthogonal to future value of the company.
If you look purely at the accounting, and ignoring voting rights and other complications, you are right. Dilution doesn't change anything.
IMHO this argument is a case of technically accurate, and completely useless.
It doesn't matter what the value of the company is at the moment of the dilutive event. It matters how that event affects the value of the company when the employee liquidates their stock.
The new round could be very good, but not necessarily. There is no guarantee a more well capitalized version of the company will end up growing faster or larger than the current cap table.
When the employee evaluated their original option grant they should have done an analysis of the business, its market, and future growth potential. Lets say the predicted value of the company is $100M in 10 years.
Lets look at two options: Option 1 - The company is continuing on its original trajectory. It is running low on runway and needs a cash injection to continue gaining market share for its quest for profitability. The company still looks like a $100M company, if successful.
The new round may not be good for the employee. When you look forward to the eventual liquidity event, the employee now has a smaller piece of the same sized pie. Maybe the company could still reach its goal by tightening its belt a bit.
Option 2 - The company has identified a new market opportunity. They are raising capital to spin up a new project and capitalize the opportunity. If successful, the company now looks like a $10B company in 10 years.
The new round is potentially good for the employee. On liquidation, they will have a little bit smaller piece of a much bigger pie.
Actually, your statement of "All things being equal, owning more % of a company == more money." ... is what's misleading.
People are cargo-culting the meme that "dilution is bad" and it has the perverse effect of making them think that awareness of it is "financial sophistication."
Your other statement, "Mostly from people trying to sell the idea of a highly dilutive funding round." ... is also misleading.
It's not the "dilutive" effect that's the core issue. It's whether the company needs the funds. If the company needs the investment, it needs the investment. The dilution is a side effect.
If the new investors want too high of a percentage-of-ownership, then yes, it's "highly dilutive" which is tautology. This may also appear like a dilution problem but it's not. It's a financial literacy problem. The founders are supposed be smart and not sell too much of the company for too little a price! Therefore, I'm not talking about desperate situations of founders getting diluted down to 10% or less which then affects their motivation to run the company. In that case, the company is probably in financial trouble and the other option is to reject the investment which lets employees maintain a non-dilutive ownership of a bankrupt company.
>The new round could be very good, but not necessarily. There is no guarantee [...]
I agree but the backlash against dilution is about expectation of future events whereas your scenario is ex post facto judgement of past outcomes.
For a startup operating in the present moment, do the employees want the company to be able to raise equity financing to help navigate an unknowable future?!? If yes, it means everybody should expect some dilution in exchange for the outside investment.
>Lets look at two options: Option 1 [...] Option 2
Again, for both of your options, the easier and correct focus is shares multiplied by price. In the bad outcome of Option 1, the price went down. In the good outcome of Option 2, the price went up.
Focusing on dilution as some scary boogeyman is backwards since everybody else gets diluted (see Larry Page, Bill Gates, Mark Zuckerberg, etc)
Again, to reiterate the Larry Page example:
- Focus on the $3 billion vs $0. This is shares * price. The price is embedded in the "all other things being equal" part that you dismissed. The price is "not equal"!
- Don't focus on the dilution from 50% vs 16%. You can't play a mental game of "if Larry got 50% of $20 billion, that's $10 billion not $3 billion" because for him to keep 50% (dilution is bad), you have to replay history with him attempting to build Google with zero outside investment. It's more likely he'd have a bankrupt company instead of a $20B company since he can only buy a handful of servers by maxing out his credit-cards, and have no money to hire extra employees. This is the literal application of your "all things being equal". That's flawed ex post facto analysis which doesn't take into account the timeline and reasons people choose to dilute ownership / sell equity to capitalize the company at different stages.
If dilution is bad for the employee, then it is also bad for everyone else. If as you say, "the new round may not be good for the employee", then it also means it's not good for the founders and previous VCs. If the founders are not crooks, the intention for the investment round to help make the company better, not worse.
I still think the main source of outrage about dilution is that people think only the employees get diluted. They don't realize that every owner of the company including founders like Larry Page and VCs like Sequo...
Agreed, but it might not. The fact that it is taking the investment does not mean it is needed, or that it is good for all stakeholders. Investors, founders, and employees all have different goals, motivations, and risk profiles. It is also very possible for the board to make a mistake and take funding that is a net negative for the company as a whole.
My problem is with this argument from your original post:
> In fact, dilution is a positive sign.
These are complex situations. Boiling them down to dilution is good, vs dilution is bad just leads to misunderstanding. Which, in my experience, can be the goal of the person making the argument.
I never said dilution is bad. My original comment was in response to your blanket statement that dilution should be assumed to be good.
I am just saying, "Hold on. It isn't so simple."
In the end, I think we are in violent agreement. People should not get hung up on dilution, it a natural part of the startup lifecycle. It is a factor in the equation, but only a factor. As I alluded to originally, it is much more important what the company is planning on doing with the funds.
Personally, I think the outrage about dilution is due to the fact that many new employees don't take the time to fully understand how it all works when they are hired. The single most important thing employees need to understand about dilution is that, if they join an early startup, it will probably happen at some point. Options for 1% of the company doesn't mean you will own 1% at the end.
>The new round may not be good for the employee. When you look forward to the eventual liquidity event, the employee now has a smaller piece of the same sized pie. Maybe the company could still reach its goal by tightening its belt a bit.
Sure, but not taking the extra round is also bad for the employee, right? If you don't take the round, and the company now looks like a $50M company, then you have the same piece, of a much smaller pie.
> The point is all things are not equal. To restate a sibling comment, dilution means you own a smaller % of a more valuable company.
Right but if you aquired your shares under the assumption that you would own the same percent of a more valuable company, you are still being taken advantage of.
The employee shouldn't have that assumption. The correct default assumption is that the employees are diluted just like the founders when new equity is sold.
If the founders mislead the employees into thinking they got 1% -- and it would always stay 1% all the way to IPO, that's an issue with the ethics of the founder and not an issue with dilution. Dilution wasn't the problem. It's the dishonest entrepreneur that's the problem.
Put another way, if a founder told me I would be awarded 1% in stock and it would have anti-dilution protection for all subsequent rounds, I would not think to myself "wow, that's great!". Instead, that would be a signal that the founder is either 1) incompetent with math or 2) a crook.
> I started off once thinking "yay, X% means I get X% of the company!" and then I found out the shares can be diluted. Then I learned "non-dillutable".
Then I learned about vesting periods, windows for exercising options, and a whole slew of financial terms and devices; each one seemed to come with its own unique "gotcha" that, if you didn't know about, would cost you nearly everything.
Everyone I talk to about these always says "well, don't do that one thing, or if you do that one thing be sure you do it in this way and you're set". The cumulative knowledge you need becomes pretty high pretty quickly though, and the chances of me doing the right legal and financial incantation at the right moment becomes lower.
Nowadays I go with cash. I don't get 'golden handcuffs' that hold me to a job I don't like because it might pay off later. I can calculate the expected value and risks with cash without tons of research. I know my legal recourses if I get screwed out of cash.
You'll see that it was right all along.
Yes, I agree that we all go through an early period of ignorance and then we get more financially savvy as we learn more information. We don't know what we don't know.
However, when OP writes, "then I learned "non-dillutable", he/she is misinforming people with expectations that employees can get fixed-percentage ownership that stays at that fixed amount through subsequent investment rounds. The implication is that employees who didn't get such "non-dilutable shares" are getting screwed. This is not the case.[1] The normal situation is for _all_ ownership to dilute. It's not a nefarious trick on the employees.
If people think they are more "financially sophisticated" with knowledge of "no dilution" shares, they are wrong. Instead, if candidates try to negotiate "non-dilutable shares" with a founder as a condition of employment, they will look like clueless idiots. (Reading about mythical "non-dilutable employee shares" on HN made them dumber, not smarter.)
The expected mathematical mechanism for employees to get richer is for the share price to increase instead of the ownership % not to dilute.
[1] "Non-dilutable stock is impractical and unfair, and in some cases impossible.[...]" : https://www.quora.com/I-was-offered-non-dilutable-equity-by-...
Sometimes. But if this were simply a case of ignorance-correction, certain preferred investors would never ask for pro-rata, or everyone would be offered pro-rata.
This doesn't just apply to company shares (a topic which causes people to not think rationally, for some reason).
It applies to a market. Sun's CEO MacNeilly famously said that he liked open systems (in the case of BSD Unix) because "it increases the pie. Our slice gets smaller but all these participants grow the overall pie faster, so our revenues go up."
What fascinated me at the time was how the business press was puzzled by his statement -- they had a more zero sum view of markets in the late 80s/early 90s. Nowadays people understand that the existence of Lyft helps Uber, and vice versa.
And the same is true with people who want to buy your shares.
But even with an "up round", where ownership percentage is diluted but your n-shares * price goes up, liquidation preferences can reduce or eliminate your value.*
As the GP said, there's always that "one more thing" that can wipe out your value.
(*citation: personal experience)
You can argue that an employee should try to negotiate for adequate time, and maybe they should, but not all will. Those too timid to do so are effectively being taken advantage of; thus I find most companies' positions morally reprehensible.
But there are differences. Avoiding income tax. Deferral of compensation to drive retention. Giving employees a better deal than the investors. Letting employees invest into an asset class the government normally prohibits them from investing into. Those are some of the big ones.
No that's not the same, options are basically the right to invest at current valuation. What you described is more like RSU.
Expected value is a good measure when you're summing over lots of instances, e.g. if you're a VC fund investing in lots of startups.
As an employee, where you're working for a single startup at a time, robust statistics[1] suggests that the median is a better measure of what you'll expect to make: you have a 50/50 chance of making more/less than the median.
More than half of startups either fail, or don't succeed wildly enough for options to be worth more than the equivalent salary.
(If you work for 5 startups in your career, the best measure might be "sample 5 startups and sum the options payout to produce a value; repeat that many times and take the median of the result." But that's a lot harder to intuit, and is no doubt closer to the median than the expected value.)
[1] https://en.wikipedia.org/wiki/Robust_statistics
Of course, even if you can pick up a 20% gain in EV, that small chance you end up a billionaire won't save you from the 99.99..% of cases when you're eating cat food in retirement.
That said, valuing equity is complicated:
- most offers include a healthy mix of cash and equity and benefits. Evaluate the whole package.
- unless you can pre-exercise via 83(b), I generally avoid options. RSUs are fine and many companies are offering them. Clever hack: counter the offer with a demand that the company pay 2% of the cost of exercising for each month you're employed, grossed up for taxes.
- watch out for illiquidity: whales often delay IPO which locks up employees. This compounds the exercise issue. Clever hack: counter the offer with a requirement that the company offer to buy back the equity at the most recent preferred share price, if the company accepts investment at a valuation exceeding $100mm.
Stay positive!
Wouldn't you have to be going for a job in senior management to have a shot at doing something like this? Genuinely curious to hear if you have ever successfully done something like this?
The first one blows up 409a (requires optionholder to pay fair market value for the shares). As to the second, very, very few investors are going to allow "their" money to be used for a common stock repurchase (at the same per share price) instead of going toward's the company's operations/development/whatever.
$X salary plus y% options at a startup should almost always be viewed as a having a value of $X and no more than that, but these "legitimate companies" want employees to view it as $X + $Million(s) in a future (all but guaranteed!) windfall. There are exceptions, but these are rare.
I wouldn't take issue with these companies trying to pass their crappy "equity compensation" packages off as "legitimate" if there was more openness and honesty about its value and the status of the employees with respect to the company.
The only time anybody should value equity at > $0 is when it's part of a regular grant or purchase of shares with true, market recognized value (e.g. RSU grants, ESP plans in a public company).
As a founder I wouldn't ever agree to that term as written. For starters, your options are common stock whereas investors have preferred. That just means you have to apply a discount though.
More importantly, I've seen first hand the change in team dynamics that happens when some "early" employees get a windfall. Not so much jealousy as this weird sense of complacency which permeates the entire co.
The truth is that at $100mm (heck, even at $1B valuation) the company hasn't "made" it yet. There is still tremendous risk on the table.
I think your idea is interesting, but I might add some step functions. At $100MM the co offers to buy back 1% of your shares, at $500MM up to 5% of your shares, at $1B up to 10% of your shares, and so on.
Realistically what happens is that in large, very late-stage rounds, the company gives employees the chance to sell some of their shares to the new investors at a discount (because of the common vs preferred situation).
This is addressed in the post:
> Another common objection is something like “I know lots of people who’ve made $1m from startups”. Me too, but I also know lots of people who’ve made much more than that working at public companies. This post is about the relative value of compensation packages, not the absolute value.
If I am supposed to make $1m more at Public Company over -- say -- a 10 year period, then that means my salary at Public Company would have to be $100k more per year than at Startup Company. Is the difference between startup and public really that big?
And while $300k assumes fairly high performance at a top public company, it's certainly not the upper bound.
[1] https://www.tekna.no/en/salary-and-negotiations/salary-stati...
Possibly even a little low for the Facebook / Netflix / etc tier.
Also, some companies will have target compensation bands (I know Yahoo did) where an increase in stock price will actually result in a smaller additional grant each year.
https://danluu.com/startup-tradeoffs/
So if you’re the sort if person who’s likely to work hard at a BigCO long enough for most of your rolling RSU grants to vest, then yes, the comp difference is that big.
[0] note that MANY senior people at BigCos are NOT high performers. So beware of comparing to things like Glassdoor comp figures, which are highly likely to be coming from non-high-performers.
The continuity of a big co. can be very helpful from a salary perspective.
Another difference could depend on the nature of the individual earning that money. If that individual is disciplined and reasonably good at investing their money, taking the corporate job, living frugally and investing everything that's left might make them come out ahead. But if they're like most people, earning more will make them spend more and they'll come out behind the start-up employee who will usually immediately invest most of the windfall (either in a home or the market).
Neither route is obviously better, but it's probably worthwhile to look at the post-tax, post-spending bank balances of both sets of employees to see who comes out ahead since it's not a simple as comparing $1m to $1m.
As far as taxes, a big difference you didn't mention is that startups most frequently exit in a single liquidity event that can't be deferred (i.e. acquisition). Getting that $1MM in one tax year is much worse than spreading it out over even 3-5. At least in my locality, the difference between taxes on a $1mm windfall in one tax year vs. a senior dev salary at a place like Google is ~5%.
Not if it's long-term capital gains. The year that I banked most of my gains from my company's acquisition (sub-$1m, but just), my tax rate was substantially lower than in previous years. Paying taxes like a rich person has distinct advantages since the game is rigged in their favor.
Moving upward a little: Several of my ex cow-orkers at MS are now partners, and will be able to retire early and never have to work again, and they're in their late 30s and early 40s. Nice gig if you can get it; it's not always a meritocracy, but getting better.
If you want to make a million dollars from stock over 5 years (in addition to a competitive salary) it's easier to do this at a big company than it is at a startup.
This avoids the exercise window and acquisition concerns, is pretty tax favorable, and largely aligns your treatment with the founders. It is a bit riskier even if the company agrees to offset the loan with bonuses over time, but at lower valuations I think it is worth considering.
In any case, it's worth it to have a good lawyer look over all your options paperwork to make sure you are getting a fair deal.
The problem I see with this particular line is how disproportionate it is. If you had said 100+ people from 50+ companies, that might have been more convincing than 100+ people from a select 12 companies.
The problem here is that it's 12 companies, and not every company can be one of those 12. That's like me saying I know 20+ people from 2+ companies that made $1mm+ but those 2+ companies included FB/Twitter/etc.
Negotiate for the best deal on options you can get (I.e quantity, terms like early excercise etc) but treat them as a lottery ticket.
A startup is a good way to learn rapidly so focus more on the quality of the people you will be working with, technologies used, what your role will be, vcs backing it etc.
In the long run the network and experience you build from doing this will probably have a greater impact on your networth. Especially if you yourself want to start a startup.
I think that's the opposite of the unrealistic optimism job candidates get. But I think it also helps set the stage for a culture of transparency and honesty very early. Even before that person becomes an employee.
I'm curios to know what HN'ers think of that explanation vs hearing only the optimistic case. Does it make you second guess the company prospects?
You have the people who are new to startups, who think its a ticket to financial freedom in 4 years when they have fully vested and the company sells for 1+ billion. Those people might be scared away.
You have the people who have been through a few startups and have worked at a failed company or a company that the investors took all the money and left the common stock holders with nothing or little to nothing. I'm in this group and that would be a breath of fresh air to hear that. During interviews, if I hear only great things and nothing is wrong then that is a red flag to me.
Far from it, honest is one of the absolutely critical metrics I use to evaluate any prospective employer. Bravo.
I don't mind someone stating why they believe their start up will have a better chance of success than the average: it is a positive to believe in the product. But don't sell it as a sure thing.
The younger naive folks who walk away because you were too real will probably remember your candor in a positively Later on once they have some more life experience.
But the problem you are dealing with is the problem in many questions here: these are complex financial instruments and most people don't understand them. Some people will hold false beliefs about these things. Some people will be afraid of the unknowns.
Also the problem is compounded because the word option has different meanings and if you wrongly believe that these employee stock options on private equity are the same thing as listed equity options you're in for a big surprise.
Generally when analyzing a compensation package if you have to do extensive scenario analysis to evaluate the package I think it is worse for most people than a simple package.
Also, the number of scenarios where the founder or investors can make decisions that render the option package worthless is fairly large. This creates a dynamic where if the employee takes an options heavy package they either were foolish / duped, or they are pledging their utmost trust and loyalty in the management team. It's a lot to ask.
Many of us will take less money for remote options or more say in product development.
At my last company I left a few months before they sold. Been wondering if I made a mistake not buying my options. I was finally able to get the final selling price. It was half price per stock than the options were valued at. Looking back I made the right choice even thought it feels like I missed an opportunity.
Sure, you can ask for a 100% non-dilutable share, but you're not going to get it. In order to negotiate meaningfully, you need to have a valuation of the things you're negotiating on, so you can decide what tradeoffs are good and which are bad.
Same with early excercise.
If someone helps you invent something, and they are willing to put their own skin in the game in exchange for an ownership stake, then shouldn't they become wealthy along with you if it is successful?
This whole notion that developers are expendable and disposable and that it is acceptable to give them dilutable stock options is fundamentally immoral and needs to go away.
It's nothing more than greed and exploitation.
Think about the percentage of their investments that VCs expect will pay off. You could work for 15+ years at startups and never be at the successful one.
Now this isn't a bad thing as one of the best reasons to go to a startup is to sharpen or learn new skills to become more employable. It's basically what I did till I could swap to a bigco.
I can't speak for others, but I can certainly speak for myself and say that this isn't true. I had my internships at larger companies. Sure, they're not the big 5, but big enough that they're household names. I used them as resume boosters and now _prefer_ startups over large companies.
I was also fortunate enough to grow up without a lot of money, so my lifestyle is fairly affordable and I never had the luxuries that could be difficult to transition to a lifestyle without them. Because of that, and my interest in working on bleeding-edge-and-could-fail tech, I don't mind the risks that startups offer.
I'm confident enough in my skill set that I know I can go after many of those high paying jobs with at least a modicum level of success _somewhere_, but I like the challenges and pace of the startup space instead. I've even rejected offers that offered a larger salary in exchange for a lower salary at a more exciting (and even earlier stage) startup. Does that make me naive/crazy? I don't know, maybe. It's just what excites me more and the tradeoff is worth it for me.
Right now I'm doing a lot of consulting/contracting at startups. Most of the companies I see on my travels are not really doing anything that falls into the category bleeding-edge-and-could-fail. Most are pretty boring and derivative. Especially compared to some of the stuff I saw worked on at Facebook.
I would argue that a lot of the cutting edge stuff that's being worked on these days is happening at bigco's (Google/Amazon/MSFT/Facebook).
Now their are some big exceptions to this but in general that's what I'm seeing while traveling around SV.
I would say that I prefer working with smaller companies for the sense of camaraderie and the relative lack of politics. That and the ability for my work to have a massive impact.
This is also true, sorry for implying that all the work is some sort of bleeding edge.
The reason that I joined those other startups -- and the reason that I more often work for startups than big companies -- is not about money. It's about pace of career development.
Everything on my resume that is interesting or exciting was done at a startup. Every big jump in skill and in compensation has been a result of that startup mentality. Who's fixing this? Me, I'm the only one here. Who's going to deal with the fallout of my poor architecture? Me, I'm the only one here. Who learned a hard lesson? Me.
I can only speak to the cogs side of the house (I'm devops or whatever they're calling us this week).
1. The base offer. Many startups pay competitive or close to competitive salaries + equity. 2. The value of the options depends on your ability to pick the right startup and you believe that you can make a difference to the company. I have a friend who picked the right startup 4 times in a row. 3. Stock options are typically priced at 25% of the last round. The reason this is possible via 409a valuations has to do with the differences between common stock and preferred. 4. Issues with investors right impacting the value of your stock options are more problematic with later stage startups. Warning signs are companies that raised a lot of capital but didn't live up to their expectations. Those companies will often be under pressure to accept terms in later stage financing that could destroy founder and stock option pool upside. 5. Venture Deals by Brad Feld is a great read to understand different investment terms. 6. Yes you get more equity if you create your own company. Doing so is extremely risky, stressful and hard though. I'd guess that even with the extra equity, on average, you'll make more money working for one of the big companies. 7. So in a nutshell, starting companies, joining early stage companies. It really depends on your ability to pick the right company and perhaps more importantly your ability to make a difference.
Well that, and a bit of luck :)
2. If you're that good at picking startups, become a VC.
3. Common shares are priced less than preferred because they're worth less than preferred.
4. Startups at every stage give liquidation preferences. Startups under pressure will give more significant preferences, sure, but they're relevant to basically every startup.
...so what did this article get wrong?
> The base offer.
For high level engineers the disparity between what Facebook/Google will pay you and what you'd make at startups can get pretty high. In my personal experience the salaries aren't actually competitive unless you start personally valuing the equity at a significant level. It seems Dan has the same experience.
> The value of the options depends on your ability to pick the right startup
I think his article does a better job of answering the question "how do you value the options provided by the startup assuming X level of success" than you do here. "I have a friend who picked the right startup 4 times in a row" doesn't really help people figure out if they've picked the right startup. "It's possible! People have made money on the stock market!" << This is not reason to play the stock market.
> Stock options are typically priced at 25% of the last round.
I'm assuming you're talking about the section where he calls valuations bogus. Your statement here doesn't invalidate the writing: "First, the valuation is updated relatively infrequently" << this remains true. And the round valuation is still a complex number that's mostly investor speculation and not representative of what your shares will net you -- which is the argument here -- that you might be better off offering cash than some hard to quantify thing.
> So in a nutshell, starting companies, joining early stage companies. It really depends on your ability to pick the right company and perhaps more importantly your ability to make a difference.
Thanks for the inactionable advice.
I doubt this is optimal, as options can be evaluated to some extent and risk can be appropriately brought on and managed. But it works for me when trying to do math about my present and future opportunities.
Treating options on shares as Income when they are not is just stupid options are a high risk instrument that well be worth nothing as opposed to a higher sallery.
Why is there not a PAC made up of tech industry employees lobbying for reform of Federal and state laws and arguable tech employers should be doing this.
And I should point out that politicaly I am on the left here compared to 95% f the average HN reader.
What tax CGT or Income and in the UK an approved scheme is tax fee in effect - this is to encourage employees share ownership
Granting and vesting of ISO's are not taxable events. Exercise of ISO's is taxable under the AMT rules, but only if you are above the AMT threshold (admittedly, this is true for a lot of people)
If you're not hitting the AMT threshold, then you only pay tax when you sell the resulting shares.
If you are arguing that the eventual income from ISO's shouldn't be taxed -- that would be a very odd position, since pretty much every form of income out there in the world is taxed, even illegal income. I can't think of any other income category that is un-taxed under USA tax laws, with the exception of government bonds.
Source: http://www.taxpolicycenter.org/briefing-book/how-are-capital...
Often companies offer the ability to "early exercise" options which means you buy them before they have vested and file with the IRS that you have done this. The reason you might do this is because the strike price of your options will likely be the same as "fair market value" of the stock. This means that when you buy them you do not pay any taxes since the difference is 0.
If you wait and exercise your options then you pay tax on the difference between the "fair market value" and your option strike price. This is taxed as a short term capital gain. However, you now hold the equity and if you sell it 1 year or later you pay a long term capital gain which is generally advantageous. This gain is the price you sell minus the value at the time you purchased.
Often, for people issued options they will exercise and sell immediately when/if the company goes public and they can sell. You keep the difference between what you sold them and what your strike is and you pay taxes on that profit.
The biggest issues are when you want to leave a company but have not bought your options. These are golden handcuffs and it's a decision you need to make if you want to buy them. For a company that is looking good you can often get a loan to buy them. But now you're invested in an illiquid investment of which you can't possibly know the real value. That's a big risk with potentially a large payout.
The assertion that they then contain value is the contentious point. To the IRS it is defined to have value. To me, it has no more value than the option, because there's no more market for those shares than there is for the options themselves. "Fair market value" is weird when there's no market.
Rambling about options is a bunch of distracting noise.
Either that or find something that people need and build it (rather than bitching about options/vesting crap).
If anything, we're "bitching" about wanting actual money for compensation, not a raffle to a lottery that is highly likely to have no prize at all, and just as likely to be worth far less than the typical compensation in cash.
Secondly, options incentivise people to stay around (until their options vest). The company also gets to cancel unvested options if a person leaves and even claw back vested but unexercised options in the case of misconduct by the employee. These are all things that are valuable for the company and more difficult to achieve using cash.
Thirdly, there is a big difference to most startups between "value" and "cash". I may well want to pay someone in a cash-equivalent that has equal value to cash (or even greater) because I want to manage my cashflow. After all, I can pay my employees (some of their comp) in options but I have to pay my bills in actual cash, which may be hard to come by until I hit net positive cashflow. In the case of an option, when you exercise and sell, you turn your option into cash, but the cash doesn't come from the company, it comes from whoever buys. This may be more efficient for the company than raising the equivalent cash and paying people directly in cash (because of transaction costs around fundraising).
I left [large corporation], who had been paying me very well, to go try out the startup world. I found a cool local company doing something that sounded neat. I looked at the pay (better on a per-paycheck basis) and the options (better than the stock I was getting in the corporate world) and said "this is a great idea! If the startup succeeds, the options will be worth a lot!".
It's a great company with great people and I don't regret that, but the financial implications of the change are starting to sink in. I'm getting a bit more per paycheck, but on the whole I suspect my tax returns over the next few years will add up to less than I was making before, even if the startup succeeds.
That sounds counter-intuitive -- why would that be? Did you have some expense you could claim at [large corporation] that you can no longer claim?
The corp in question for me was Amazon. Around 1/3 of my pay (more some years) was in the form of AMZN stock that vested every six months. Stock, not Stock Options. No paying for it, no decisions, just boom, you now own X more stocks and how would you like to pay the income tax on that?
The answer depends on how much interest you can earn on the $10K/year. At around ~7% the $10K/year is worth more than the $200K in 20 years.
Your stock grants from Amazon are equivalent to the $10K/year, the options, if you get them, are equivalent to the $200K. The actual weighting is impossible to get precisely but the way you approach it can give you better accuracy than just comparing apples to oranges.
Good news, even if it's horrible, ~2 years is the typical employee tenure so you probably wont be there long. If you are and it's going to be successful you'll be able to renegotiate based on foregone comp at Amazon.
Edit: US centric advice
His old comp was paycheck + stock vesting (which doesn't appear in paychecks), his new comp is paycheck + (non-exerciseable options) = paycheck
It used to be the case that strike price is significantly lower than share price, making options much more valuable than they are today. But that was deemed a tax loophole by IRA and became disallowed some while ago.
If I do the math of taking the cash each time, do I end up close to what diluted options would provide, or more?
How many people do I know where options translated to sizeable cash, even after dilution?
Which statistic will I be a part of, where options have actionable worth, or little/nothing?
The questions above we're proposed to me by a founder who had taken funding and was diluted to the point where he realized his worth as a consultant/freelancer/contractor may have ended up ahead.
Fuck you, pay me.
It would be good to get some context on what he said.
His "or" isn't misplaced, because it's a play on an existing phrase: "better, faster, cheaper - you only get to choose two." Meaning you cannot optimize on all 3 dimensions.
Here he is saying that Amazon expects you to excel at all 3, by providing a contrast to a known idiom that says you cannot.
"Sorry we cant actually fulfill the contractural obligations we are (sort of) legally bound to fulfill, and cant pay you like we promised. So will you take a much smaller amount of money and a bunch of worthless stock options instead? By the way our stock options are going to be worth millions in a few months, so this is actually a better deal for you."
Its like some weird pathogen has infected the whole industry with this!