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Equity has no intrinsic value and I'm glad you recognize you can't pay rent with it. Founders who try to claim otherwise are being deceptive and I wouldn't work for them either. Much worse if you get insulted and called an idiot for trying to negotiate.

However, equity is a significant form of compensation, not just at startups, but at large companies as well. You're missing out if you don't take some time to understand it in early stage startups.

I understand it. Obviously, I want more equity. But it doesn't act as a replacement for salary, like some people seem to think. It's a bonus, like free snacks and ping pong tables. It might pay out, but it probably won't, and you shouldn't base your life around it.

This seems a clearer statement of your position. Absolutely, don't base 100% of your life on a 5% shot at an exit. That is indeed a common failure mode. But your reaction to this observation seems too extreme. It is possible to work these things out probabilistically. Treat your career as a portfolio, spend 80% say of it in relatively safe places, spend the remaining 20% in multiple places, don't stay too long if you stop believing in a place. Do all that, and the 5% probabilities add up. 5% here, 5% there can add up to real money.

It seems sub-optimal to assume that probabilistic money isn't money, it'll close you off to lots of opportunities for wealth.

I'm not disagreeing, but you can't just look at the odds of a successful exit when it comes to figuring out the probability that your equity will someday become valuable. There are several other factors that can effectively leave common employees' equity worthless, some of which the article describes. Rarely do companies seem to be willing to provide the information needed to weigh the risks.

Yes, absolutely. My % examples were sort of assuming that preliminary analysis. You have to do it for yourself and be comfortable with the conclusion. And avoid like the plague companies that won't give you enough information. Usually if I have to ask more than once that starts to seem like a red flag. I might lose interest really quickly at that point.

In your experience, how often do startups try to play these sorts of equity games? My feeling is that it's overwhelmingly common, but this is based only on interview experiences with 2 startups and on previous HN discussions.

Yeah that's hard to say since nobody has a global view and new companies hang a shingle everyday. The best places tend to know what they're doing, so this makes a good signal for startup quality. Even if it causes you to miss out on a good company it's unlikely you would have had much upside with them anyway. Life's too short, lots of fish in the sea.

On a related note, what is the legality around sharing liquidation preferences with (non-founder) employees?

Much equity does have intrinsic value. I think the lifelong work of both Benjamin Graham and Warren Buffet have been focused on acquiring equity (and other assets) with intrinsic value.

A lot of equity, especially with startups, lacks intrinsic value or it's hard to do accurate fundamental analysis on the total intrinsic value. (Berkshire does not buy high tech for this reason.) Moreover the utility value of the equity to you or the limitations on your ability to sell or transfer may make any existent intrinsic value negligible to you as an employee.

"because the options are effectively worthless until there is a qualifying event"

That's like saying a lottery ticket is effectively worthless until after the draw. It's not true. The expected value (weighted average of all possible future outcomes) might be low. The chance of the long term value being non-zero might be 1% or less. But, that doesn't mean the equity has no value.

Yes, people on both sides fail to do to the right calculations, or don't have access to the data or tools to do those calculations, but that just means the value is difficult to measure, not that the value doesn't exist at the time.

If the equity part of your compensation is effectively worthless (to you) then I'll happily buy you a beer today, in exchange for rights to all future cash flows from those shares/options.

It makes sense to be conservative in valuing equity, but if you think it's never worth anything, you shouldn't be considering startups in your job search.

(Your criticism still partially stands; it's common for founders to over-value the equity they offer employees. Way past the last funding round, for example. It's invariably a short-sighted decision. Used wisely, equity can be a great motivator.)

I didn't say it's never worth anything. I said it's not worth anything until a qualifying event has occurred. It doesn't matter how much your equity is valued if I can't cash it out.

Good luck getting equity in a 'startup' after a qualifying event like an IPO.

Nothing wrong in wanting certainty. But certainty on the downside matches certainty on the upside. If you don't care about the upside then why would you join a startup?

> If you don't care about the upside then why would you join a startup?

For some people, money is what allows them to take a job they desire for other reasons (since, you know, you have to pay for necessities somehow), without financial considerations being the sole motivation for choosing one place of work over another.

That's fair, dragonwriter. I saw your comment above as well. In the context of this thread I'm only thinking about things from a harsh economic perspective, but if you loosen that constraint of course you gain a lot more options.

Are you asserting that stock options are the only reason to join a startup? Because that's fallacious at the very least. (And by the way, this "Why would you join a startup?" question is exactly what that founder said to me when I tried to negotiate on salary. Not exactly a great way to win people over.)

There are plenty of companies that have IPO'd that offer stock as compensation, by the way. I've worked for a few. That stock directly translates into cash once it vests. (Well, assuming the stock price goes up -- but at least cashing out is an option!)

You also seem to be asserting that I'm rejecting equity completely. As I've said in my parent comments, I'm certainly not. I'm simply placing a premium on salary (cash) over stock options (not likely to become cash). Of course I want equity. I don't not want it. But it doesn't replace salary, and I can't pay my rent with options.

The whole point of equity from a startup's perspective is to save on cash when you're small, so why would you get equity if it won't replace salary?

Yes I'm aware of things like restricted stock units. But you shouldn't really think of them as the same thing as private startup stock. Just like small-cap stocks need different strategies from large-cap, or stocks from bonds. You don't want to assess one category by the standards of another.

Salary and stock are separate categories, sure, but choosing an employer is nothing but an exercise in comparing apples and oranges anyway. You have to decide how much liquid cash you need for rent or a down-payment on a house. Once you account for such scenarios the rest is just an investment riding into the future one way or another. Past that point things get fungible.

It sounds like the bad experience you had may not have had enough cash to cover liquidity needs. The founder should have just expressed regret that they can't afford the salary a larger place can. It's another common mistake startups make: assuming (in the course of a hard sell) that there is one rational choice for everyone regardless of their circumstances.

> It makes sense to be conservative in valuing equity, but if you think it's never worth anything, you shouldn't be considering startups in your job search.

I somewhat disagree. Valuing startup equity at $0 doesn't mean that other aspects of startup environment (or the environment of particular startups) -- such as the working environment, and kind of problems you get to work on -- can't be valued sufficiently to make the non-equity portion of compensation sufficient.

Equity paid for my house, gave me enough money to have a substantial retirement buffer and will pay for my kids to go through school.

Yes, more often than not its been worth "nothing" (negative if you took a lower salary to get it), but when it's worth something, it's worth something...

Selling hot air (or stock options) is a big business.

Of course RSU grant from publicly traded company is a sign of respect and appreciation from both sides.

I agree with your general sentiment and I too pretty much ignore equity when considering a new position.

However equity becomes very important upon leaving a company. I think extending the exercise window to 10 years is an excellent idea as it reduces the amount of gambling that a former employee needs to engage in.

No arguments here!

Rich people are allowed to borrow against their equity options. Why can't we?

They have better judgement.

I'm sure you can, at a discount. You probably won't find many/any banks willing to do that, but I imagine you can find private parties who are willing to give you $0.05 on the dollar for some options.

I imagine the reason that "rich people" can borrow against their options is because they aren't common share options, or they have some sort of control over the destiny of those shares. For common shares there are several ways for them to become worthless, some of which people on this thread have mentioned (dilution & preference are the two big ones).

If you're holding on-paper $100k worth of stock options, you probably couldn't get $10k for them except in very rare cases. If you were an early member of Uber, you can probably find institutions that want to buy shares, so maybe you can get money from them. But remember, that on-paper $100k has tax implications along with it when you buy them/sell them, so don't forget to set aside enough money to pay that.