Startup Equity For Employees
payne.org
payne.org
That said, the most important concept in the entire article is "[i]f they won't tell you, go work somewhere else." Founders who are open with their employees up front are less likely to take advantage of them later.
Startups bring on employees for their expertise. You should be compensated appropriately for it...especially if you're facing as much uncertainty and risk as the founders without the potential for a big payout.
Also, when negotiating and judging a compensation package, remember that few startups have successful exits. Most of the time - statistically speaking - those options will end up being worthless. Salary (i.e. cash) has little risk associated with it.
I was offered to join the team for an early stage startup a few months ago and they offered 1% with salary upon funding. According to this article, all that risk and working for nothing for a few months until they got funding would have been a waste - I now have a few contract gigs that are paying me above market value (adjusted for sole proprietorship expenses like health &c...) for my work.
I basically work for a few months, then take a few off and do what I want - much more ideal than 9-to-5 and/or a high risk venture in which I'm not a founder...
'Sure fire' and 'startups' do not go together.
As a counter example, there are plenty of early Microsoft and Google people who were probably much better off with their options at those companies than doing their own thing. Sure, they're outliers, but lots of things about startups in general are kind of outliers...
In terms of a reasonable retirement plan, it can set you ahead by a decade.
There's also advantages to coming in as a non-founder. You significantly reduce the risk of failure by coming into a startup that's made it to the point where it's hiring and you can chop off a year to a year-and-a-half on the timing of an exit.
Employees, even at quickly growing startup, and having been hired on in the first year, may be lucky to own as much as 0.1% of the company.
Regardless, everything is a tradeoff in a startup - if you ever get to that point, your employees are probably either staying because they are getting equivalent salary to a non-startup position and enjoying the environment or they are expecting a massive payoff (0.1% of a $500M exit is still $500k).
If you've made it through a few rounds of dilution as an employee and don't hold a lot of stock, you should probably be weighing whether it's even worth staying.
There's a wide variety in how much capital various ideas take to get to fruition.
Elon Musk, a sole founder of one of the original companies, ended up with 10.7% in that sale:
In my experience, very few employees who get option grants will ask the right questions to understand what their equity piece really means. That is, they won't even ask about something as basic as how many shares a company has outstanding (much less about size of equity pool, liquidation preference held by the preferred classes, etc.). When they fail to get this information, they really are going into the employment with poor knowledge about what likely will wind up being the most piece of their overall compensation.
Why don't they ask? Sometimes they just don't know how it all works and proceed out of ignorance. More often, however, I think they feel intimidated about pushing a company to disclose what they think is company confidential information, especially when the company is a big-name company that is already VC-funded and the offer otherwise seems tempting.
Because of this, startups will sometimes play games in this area, arbitrarily inflating the size of the company's capitalization structure (e.g., splitting a 10M capitalization structure 3 or 4 for 1 to turn it into a 30M or 40M-share structure). This splitting lets the company make a 100K share offer to a key employee sound like a 200K share offer and hence make it appear better than competing offers from companies working from smaller capitalization structures.
It amazes me how many times employees will simply accept such offers thinking they got better deals than they would have from other companies, when in fact they may have passed up equal or better alternative offers. This is truly a case of flying blind but it happens a lot.
Yes. I feel your rage.
In fact, I've expressed it to the executives of those companies.
But, as long as things look good, the company is getting funding, and an IPO looks like a possible event in the future, most (all?) employees are usually afraid to make waves.
It's like PG often says - there really IS a difference between a founder/early-stage-startup employee, and employees of more established firms. I'm guessing 50% of the HN core would probably call BS and walk away from any company who refused to tell them how many outstanding shares they had, particularly after they were employees of that company.
Am I misunderstanding a crucial aspect of the system?
Company is worth $1MM. You own 10% of the company.
Company gets a $1MM cash investment. You get diluted to 5%. But the company is now instantly worth $2MM.
10% of $1MM = 5% of $2MM
This is not bullshit, it's math.
I.e. seed investors + founders + pre-seed employees (+ISO pool) share all the stock between themselves. Now they are all in the same boat: additional stock is going to be issued for Series A investment and if investment is too large, all of them get diluted too match, if it's not enough, company dies. If you are employee, you can't do much about it, but founders and angels are going to look after their own interest and protect you as well. In this sense the most important number for pre-seed employee is the ratio of his stock to the founders stock.
It's possible to issue additional stock and just grant it to some parties to dilute other party, it's quite hard to do because if diluted party is dissatisfied (and it usually is), it exposes company to litigation.
First, what you're given is a number of shares, not a fixed percentage of the company - if you're given 100,000 options at the start of the year, you still have 100,000 options at the end of the year.
Second, the dilution that occurs through the issuing of shares to investors should make the company more valuable, not less - because the company takes that money and grows with it. Your shares are a smaller percentage of the overall company but end up worth more in absolute dollar terms. (If that's not the case, the company is wasting other people's money - the value of your shares goes down, but this is deserved.)
In other words, if you go from a 1% stake to a 0.1% stake through dilution and then get $20K of a $20M sale, you haven't been ripped off, you just overestimated the company's ability to turn your initial 1% stake into something meaningful.
If you're being hired as a C-level executive, you might expect up to 2% - 3%. If you're being hired as an engineer, expect more like 0.25% - 0.5%. I'm sure it varies quite a bit, but that's what I've seen personally and heard from friends.
And, just a note - unless the strike price has increased significantly, or a lot of employees have been hired, I disagree with the premise of the author of the article that "Re-Up" aren't to maintain the same percentage of equity. In my experience, they are used to do precisely that.
The people who are diluted are those who've left the company. Sometimes very, very significantly - particularly if there is a reverse-split in the mix as well. Existing employees simply get grants to keep their stake the same.
Though it's different for each startup, anyone have any specific examples of fair compensation?
I have now learnt that I have 100 shares of preferred founder's stock in my own company which has 100 shares outstanding!
This is equally as useful for potential employees at a startup as those looking to recruit. I will certainly be referring back to this one when the time comes to talent hunt!
OK, technically I guess it's not a "share" if it's just 1.
But what if I offer 1 share for 1% and then sell myself a billion new shares, diluting that 1% down to practically nothing? I'm sure this would be regulated, but it seems if something like this needs to be regulated then it indicates a flaw with the system. Why can't we just give out percentages, and have that percentage stay constant?
I can't tell if this is rhetorical question or not. But I'll answer as if it was serious.
First of all, a company can do whatever it wants. So if you control a company, you can give out percentages. That's your prerogative. In reality, you wouldn't want to ever do that, because it would eliminate your ability to:
- Raise additional money.
- Hire new employees.
- File for an IPO.
- Merge with another company.
- Purchase another company.
However, if you want to start a company with a few friends, and never take additional money, and never expand beyond the founders, and never sell or merge, then you can certainly structure it in a way that each founder has a fixed percentage of shares. But that would be a very unusual business.
So, assume you hold 99 shares and your employee holds 1 share. If you sell yourself 1B shares for $100, you'd be obligated to offer your employee ~10M shares (10101010, I calculate) for $1. If he accepts, your employee would continue to own 1% of the business.
In the case of common shareholders, the opportunities for redress are substantially less.