Any stories of employees with equity successfully taking home over $1m? $500k?
Equity for employees is commonly part of an employment package, but:
1. It's rare for startups to succeed 2. It's rare for non-owning employees to be able to exercise shares/receive money when the company sells due to the structure of VC-backing/ownership and the resulting order of who gets paid/when
We all hear stories about when employee equity does not work out. Are there any examples of when it DOES work out well for an employee with equity?
206 comments
[ 3.1 ms ] story [ 235 ms ] threadOne issue is when you want to hire people and you want to feel confident that you are offering them a "real chance" for financial success, even if it is a slim chance. I mean if you know that it is very likely that even when "you" have a win (whatever your goal is) and your investors have a win, still your employees don't benefit significantly, that will be a sad story.
"As for me, while I wasn’t a “founder” financially, David was generous with my employee stock options back in the day. I won’t make yacht-and-helicopter money from the acquisition, and I won’t be switching to dedicated day and night iPhones. But as long as I manage investments properly and don’t spend recklessly, Tumblr has given my family a strong safety net and given me the freedom to work on whatever I want. And that’s exactly what I plan to do."
http://www.marco.org/2013/05/20/one-person-product
http://techcrunch.com/2011/10/11/linkedin-buys-real-time-hos...
Ah, the American dream. So attainable.
Take Stripe, valued at $3.5b[1]. $1m / $3.5 b ~= 0.029%, so any employee who vested at least 0.029% (after dilution) is a paper millionaire, and chances are their early employees have more than 0.029% equity vested.
[1]http://www.bloomberg.com/news/articles/2014-12-02/apple-pay-...
My equity came out to about $300k. Which I know does not hit the thresholds that you put in the post, but clearly many of my coworkers who came in earlier and were more senior -- but still not founders nor part of the founding team -- did a lot better.
EDIT: I should point out $300k was more or less actual. If I had been really good at selling at the top of the market, it would've been more like $400k. I suppose that overall it might end up being more or less, I still have a few tens of thousands in stock, but most of it ended up being the down payment on my house. The $300k was after buying into the stock (since I wasn't a super-early employee, many of my options cost like 10-25% of the then-market-value to buy), and after some taxes? But not all? AMT and prepayment of some taxes and stuff and my overall lack of financial discipline made it really hard for me to figure out how much tax I owed specifically on the stock.
Another EDIT: Something else to point out was that at NetSuite, this was NOT principally from my initial grant at hire. NetSuite gave new grants of stock every year with ones yearly review, and those grants were pretty generous. Everything was on the same five year vest with a one-year cliff, so I got my entire year 1 and year 2 grants and then fractions of my remaining years. The year 1 grant was at the lowest rate to buy in, but that wasn't hugely important. I would guess that about 1/3rd of the stock that I eventually realized came from my year 1 grant. I've never been sure if that's common practice or not with other companies, and if someone could shed some light on that, it'd be awesome.
However, what they won't tell you is if the company has gone through any recent rounds of financing, you as a common stock shareholder have been diluted, and getting a refresh often times only brings you back to your original ownership percentage, if that, so getting a refresh is really only bringing you back to square one in a lot of cases.
In your case, it sounds like your additional grants were substantially more than refresh level (5-20%) which worked out pretty great. In my (limited) experience at 2 larger SV companies - 1 public, 1 private - they both "awarded" refreshes, and I would be surprised if most companies didn't. It's a win/win for the company - they can continue to raise cash through financing and use the cash to fund operations vs. paying out employees, and they can also "incent" their employees to work harder and faster with the promise of future riches.
I definitely had at least one dilution event. Could that have been concurrent with the actual IPO? I want to say that I lost like 1/3rd of the ownership share of my stock, but honestly that could be total fabrication at this point, please don't bank on it.
Large money comes from ownership and the inherent risk. No one will ever give you enough money to go away completely as an employee. Can you make a little scratch? Of course. This industry pays very well. But if you want 500k and up in lump sums? Being an employee is never going to make it happen imho.
And just for the record equity is not ownership. Go read up about all the maneuvers businesses can and will take to screw you out of your shares and you'll open your eyes. Businessmen don't give away anything they don't have to. Just a reality. If you can navigate that minefield you may one day be the outlier and get rich. But more likely you'll be fighting in court for years only to learn that well, you should've read the fine print.
Don't get duped out here guys. Don't do this to get rich. Do this because you want to do it and everything else, with hard work, will fall into place.
If you want to know exactly what rights your shares have (and don't have), this is the book.
You can restate this via all sorts of dilution and complex shareholder classes and endless paperwork and HN blogposts, but that's what it boils down to.
Chances are you're in a no-growth or modest-growth company so none of this matters and you should read a basic business book from the 1960s instead, serve your customers well, and charge a reasonable fee for the goods and services you deliver.
If it's all a bunch of VC backed fluff, well then good luck. At that point it's just a game of selling these virtual units to others wheeling and dealing in similar pumped up virtual fluff. There are lots of ways the 'options' holders get diluted and made irrelevant and are in effect just pawns that can be made to work for less cash based on the, mostly, pipe dream that these options will be worth something some day. One needs to be very careful if you're in this bucket.
I would be curious if that paradigm changes in 10 years, not that I will remember to ask you :D
I also have a family and they eat today, so my appetite for risk has been lower. At 22, my decisions might have been different.
A dead sibling comment claims that $0 is $0, which might be a relevant thing to say if I had not vested any shares yet.
It happens, you just need a team that understands how to manage an equity plan through fundraising, growth phases, org evolution and is motivated to create value for everyone involved.
I know several people who took home much more from employee roles (albeit in larger acquisitions) in the recent past.
A lot of it has to do with who you work with. In every case I can think of, windfall money for employees came from founders with a track record of accomplishing that (or, in my case, a founder who would soon develop that track record, and was, in the company I was at, extremely committed to making sure his team was well compensated at liquidity).
This is one of the reasons I don't love Paul Graham's hacker startup thesis, about working very hard for 5-10 years so you can take it easy for the rest of your life. There are a lot of problems with that idea, but one of them is that it generates a lot of loss aversion instinct for founders.
His advice does, however, benefit every venture capitalist.
I'm pretty sure they're wrong about a couple things --- particularly the stuff that comes from some of the earlier PG essays. That's not the same as being corrupted. I'm wrong about a lot of stuff too.
YC can have founder interests at heart and still give out VC biased advice because of the type of startup they encourage. The two aren't mutually exclusive.
Historically YC has given more power to entrepreneurs vs the VCs. JL & co. founded YC mainly because VCs sucked even more at the time. Given what YC has accomplished, I'm sure a lot of people can say that they've made things better.
Can the current VC environment be improved? Yes. Has it gotten much better ever since YC's influence has grown? Yes. Will Sam change one of YC's core missions of giving founders more equal footing? It's possible but I really I doubt it.
They have the best interests of founders in mind only insofar as their pocketbooks and reputation benefit from it. That's at best an intersection that doesn't contain all the elements in both sets.
Disclaimer: I'm a pretty cynical and skeptical person by nature. I'm especially suspicious when people with a lot of money at risk say, well, just about anything. My experiences have lead me to believe that it is an extremely rare individual who will not go to great lengths to protect and accumulate his wealth, even to an extent that many would consider sociopathic, and further that this trait is amplified geometrically as wealth is accumulated.
Have a read over this [1], one of countless studies which supports the original commenter's assertion that wealth and status accumulation tend to the be prime directive of every individual who has even a modicum of either asset.
If PG and YC truly cared about entrepreneurship in spite of their own best interests, they would be working tirelessly for a worldwide basic income which frees talented individuals from the whims of VCs, incubators, and employers alike and allows said entrepreneurs to fully focus their energies on bootstrapping their ideas with maximum freedom over their time, equity, and strategic decisions.
1. https://news.ycombinator.com/item?id=9226268
So can a "big picture" view: a 90% probability of failure might not seem nearly so bad to someone who can hedge by investing (not necessarily just $) in hundreds of companies. Expectation maximization is much more appealing when you have enough trials to get one of them off the ground. Whereas a founder "starting from 0" might reasonably prefer a ~maximin approach. Neither objective is wrong or corrupt, but advice that suits one and not the other might as well be.
PG and everyone in YC know this and I'm sure they all make honest efforts to work around the tension, but we should be realistic about the fact that tension exists.
Also, what if some companies held out. So now 80% of the YC companies are in this hedge fund. Wouldn't the most successful companies disproportionately come from the 20%--the ones who had enough confidence to reject the deal? Would the smart people in the 80% then defect as well, bringing the cabal down to 60%?
http://fi.co/
But the characteristic we're looking for here is employee aligned. Founders can make out like bandits whilst the employees find out the hardway what their contracts really mean.
Across all VC-funded startups which received first-round funding between 1985 and 2009, 55% were terminated at a loss, and only 6% returned more than 5 times the original investment. But this 6% group generated more than 50% of the gross return across all ventures.
At a "single large and successful" (but, for obvious reasons, anonymous) VC firm which invested about 1 billion over the last decade, about 5% of the total money invested generated a return of 10x or more; almost 60% of the money was invested into companies that terminated at loss.
Source for both assertions: Kerr et al., 2014 (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2473226)
You may also want to take a look at Figure 2 in Hall and Woodward (2008), which shows the distribution of exit values over 22,000 VC-backed startups founded between 1987 and 2008. About 5% of these startups had exit values of $50 million or more. (http://www.nber.org/papers/w14219)
Quite contrary, the opposite is true: the "1 out of every 10" companies you hear about are the companies where founders resisted opportunities to sell early, which grew to a size where millionaires continued to be minted even after the IPO.
Some VCs have even refused to permit early sales that would have made the founders comfortable (i.e., 1-5mm per founder): while top-tier VCs _won't_ do that (that would make founders who have their pick of VCs be reluctant about accepting their funding), it's probably not the best idea in the world to take substantial amount of VC funding without even considering the possibility of building a public company.
There's a lot that one can accuse pg of, but pushing founders to take long odds to make VCs rich is not one of them.
Why? If the odds really are 1 in 10 (I suspect they are lower than this) and you only have a couple of chances to do a start-up in your life then why risk it all on the chance of getting big? The hedonistic value of money has a pretty steep fall.
It would be nice if people on Hacker News would not use phrases like this.
How'd you handle this sort of thing at Matasano?
I think a lot of successful founders are successful once, and only plan on being successful once, and --- especially if it's their first company --- that changes the dynamics.
(My favorite pg essay, mostly because the bit about measurement and leverage is wildly instrumentally useful even if you agree with no other conclusion of the essay.)
http://paulgraham.com/swan.html
What's the contradiction between the PG startup thesis and your experience with employee equity?
This.
I am the founder of OpenFeint which was acquired a few years ago for ~$100M. Many of my early employees there got into the range you mentioned. But I also had to work incredibly hard to make sure that every one of the 60 people at the company got compensated at some level. It's very easy for people at the table during a transaction to focus on themselves... most people do.
A good founder will constantly fight for his/her team.
There exist some less famous answers I could give here but they would be socially embarrassing to friends/colleagues. Let's put it this way: IPOs are public, right? Each of them allocates 10%ish of the market cap to employees. If you guessed employees 1 to 100 split half of that you wouldn't be insanely off base. If 5% of market cap is $100 million...
Another thing you could do, if you're interested, is look up the Angels participating in an early round in a recent startup and check out their LinkedIn profiles. Most have an obvious tuple of (Company, Start Date) which itself explains accredited investor status.
How many % is allocated to employees is a very complicated process depending on how much dilution happens and if any down-rounds have happened, or funding needed to be done in a rush (look at say Box ...)
I believe VC's generally want an options pool for non-founders/early employees of around 15-25% but every company is going to be a bit different.
edit: If vested. But after so short, only 25% vested. Congrats! Sounds like there's more upside for you!
I for one support the uncovering attempts. I'm attempting to do that myself on all the stories as well.
Granted at 1995 it wasn't a start-up any more, but it is an easy counter illustration to the myth that "only founders make money." Granted, half or 3 of the 6 managers I had at Sun are actually quite well off with two being VC partners these days and one enjoying their post work life.
http://en.wikipedia.org/wiki/Ronald_Wayne
"He sold his share of the new company for US$800, and later accepted US$1,500 to forfeit any claims against Apple."...
"Had Wayne kept his 10% stock until then, it would have been worth approximately $60 billion."
$60 billion is incomprehensible to most people. It's money so big that it is not money anymore, it's the power to make society-level decisions. In a sense it is so big that it becomes an obligation--see Bill Gates and Warren Buffett.
Steve Jobs himself was not nearly that rich because he made decisions for reasons other than money--like selling all his Apple shares out of spite when he got fired. And sinking huge amounts of his personal wealth into NeXT to design the computer he thought should exist (but which never sold well).
In a macro sense it is good that it is so hard to make large sums of money. It ensures that the people who make that money will at least have some ideas about what to do with it. Contrast with the typical fate of lottery winners. Most self-destruct in pretty short order.
Add to that that not everyone wants to live in a fishbowl. Some do of course, but there is something to be said to having enough money to have a nice life, and some toys, and homes, and be able to do what you want when you want, but not be on everyone's radar and a potential target because of notoriety and wealth.
I don't know which it is myself, so my presented theory is just as speculative as yours, but -- and I know this might be a big surprise to some here -- you can live a very comfortable, happy life without ever being a legitimate early-retirement-capable dozens-of-millionaire.
Or when Bitcoin was cheap and CPU-capable and I started a 64-core mining setup but figured I'd only make a few hundred BTC a month and turned the system off cause a hundred bucks a month wasn't worthwhile (even though I wasn't paying for the hardware/electricity). Including throwing away whatever I had mined so far (a block or two?). Oops.
Or another settlement, that's under NDA.
Or not taking this prototype software I had (that's actually now powering the tech support of voice division of a public telco) and turning it into a commercial offering because I figured the tech was too easy. Then finding a similar solution with 1/100th the performance sold for around $21M.
I prefer to try to view these as inspirations, that opportunities are around and even random "nobodies" can end up in the right place by moving at the right time.
The message is very much that getting "rich" doesn't really matter if you're the founder or a later employee, and its pretty random with respect to "skill". If you happened to be at Sun in the 80's and you sold your stock in the late 90's you made a lot, if you kept it until Oracle bought the remains, you made much less. Same stock different value. (and yes I had a wee bit of stock left when Oracle bought them)
What I learned from that was that making money in the stock market was about targeting a gain and capturing it. So when Facebook went public I bought some at $18 and told my financial advisor to sell it if it ever hit $36 (which it did of course). So for that part of my portfolio I made a bit more than a 100% annual rate of return for that one stock. Its up to $81 today, at some point it will likely be worthless. But for me, it took some of my money and doubled it in less than a year. Good enough for me.
But the Ask HN post is about whether or not equity compensation is "worth it" and the answer in the Bay Area has always been "yes". How much, or how little, extra it is, varies but as long as you wait to exercise and make a profit (yes you pay a bigger tax burden but its always a positive amount of money) it is just "extra" money that you got in addition to your pay. It it worth to work for stock instead of pay? That is a much riskier deal and probably not if you can't afford to pay your own bills independently. And do you have to work at a "startup" to get a big boost out of equity value? Absolutely not.
When I was in my early twenties I scraped together about $5K which I was planning to invest in the Google IPO and instead used it to buy my wife her engagement ring. Today that stock might have been worth $50K or more.
So while some may see it as lost opportunity, I've enjoyed a wonderful marriage for 10 years as a result of that decision, and I don't regret it one bit.
EDIT: If anyone's curious about selling pre-IPO stock, I have an email address in my profile and would be happy to share some knowledge. Seems like there's not much out in the open about it.
I've been told that there are so many loopholes that equity in the range of half a percent or so is mostly worthless after dilution and taxes. But it seems there are folks here saying they had equity in that range which was worth a lot.
Some categories inherently need more capital (hardware, network-based) so chances are maybe higher that you will have more dilution but hopefully the pie gets bigger each time so that may not be the worst thing.
Even though "making money" seems so passe these days, the startups I've experience with that were not viciously focused on revenue and at least break-even are dead and the other two still exist so not a big-enough "N" for a sample but ....
Picking at the Founder+epsilon stage is not easy -- if you are doing that, pick serial-winners.
Walking away with $750k after 5 years might sound fantastic, but in some cases the person might actually be worse off relative to someone (say a senior role at an established firm) that had a package of higher salary, sizeable annual cash bonus and other perks often not found at startups. One needs to study the whole picture, not just some cash out amount at a liquidity event.
For the sake of argument, let's say that you have two positions which will pay the same total cash compensation. BigCorp's job will pay it out in equal amounts over 5 years, whereas NewCo's job will pay out 10% each year for 4 years, and then 60% in year 5.
BigCorp will almost certainly result in a lower overall tax bill because much of each year's income is taxed at lower rates. NewCo will result in a lower tax bill for 4 years due to the lower income, but year 5 will probably put a large amount of compensation in the top marginal tax bracket.
Also, the BigCorp job will afford more opportunities for outside investing (stock market, real estate, whatever) and possibly more free time to do it in. So with BigCo you'll have had four years of compounding investment growth before NewCo really gets started on it.
And I honestly don't mean this to be dismissive of a "typical lottery winner." The social environment you live in is a huge deal. Being in the SV community is going to lead you down a path of investments that typical lottery winners don't have immediate access to. If you win the lottery and Warren Buffet is a family friend you're much more likely to do well than if you win the lottery and your mother was receiving food stamps when you were in elementary school. Business people will answer your email, almost anyone's email, I'm not a big deal by any stretch of the imagination but I've chatted with Gary V and exchanged emails with Paul Graham. If lightning struck and I had a suddenly had a bunch of money to invest I could ask for powerful, connected help and there's a good chance I would get it from someone because no one cares how you made the money in your bank account. But at the very least I know where to look for that help, random lottery player guy doesn't necessarily have that and that's just his environment not anything inherent about him. Startup employee who cashed out is probably a lot more like me than typical lottery winner.
In some ways, yes. Certainly there are difference, but people are people. How many college grads get their first job that pays real money and immediately throw themselves into debt for new cars and nice condos? How many people cash out of a startup and plow the proceeds into another one, effectively doubling down on that particular lottery?
Clearly there are differences between the groups, so the average outcomes could definitely be different. But I don't think it's obviously true.
It would be interesting to see a longitudinal study of people who cashed out significant amounts from startups. I'm sure they do better than the average lottery winner - but then they were probably doing better before the windfall as well. The interesting question would be whether the windfall changed their trajectory, or was just a blip.
One saying "I've been here for long, I cannot remember of anybody" another one saying, "of course I know plenty of people who made a lot of money".
I think it means, as all other aspects of life, there are distinct clusters of people in this field, with little cross cluster exchange. Either you are in that group in which all of you make money or you are in the group that you and your friends none make much money.
Overall - it depends when you get in, and its valuation potential at exit. Companies with 10B-100B+ exits can create hundreds to thousands of millionaires. Companies that exit at 200-500M, much less, obviously!
Big companies routinely pay equity packages in the $200k-$1m range for senior people. Some just pay you in cash, and let you make the choice on how much equity you're up for.
I've been in 3 liquidity events, one which was a nice bonus for 4 years, one which I didn't get anything, and the last which has worked out very well for me.