Hard Truths about Equity
whilewest.com
whilewest.com
Also, while it is nice to think of your particular startup succeeding, it probably won't. And even if it "does" it will likely not be worth >$1b.
One of my proudest moments was hearing from one of my early employees that even if the company tanked tomorrow that she would not regret it for a moment. I hope that for every person I work with, because while I cannot guarantee that the world won't collapse or something unforeseen to happen, I can work really hard to make sure that as we grow and succeed, our culture is one of making sure that everyone is learning and growing and going to excel in their careers and lives no matter what happens to this company. Side note: I am also committed to making sure that people here are compensated well when we succeed, if for some reason our initial compensation structure, which I think has been generous, has holes.
I didn't start working for a startup because of equity.
I started working for one, because it lets me work remote and I learn new things.
Even if the company goes down, I still have >1 year remote work experience...
This as noble as you can get in business: truly something to be proud of.
And even if it does succeed, and even if it does achieve a high valuation, you might not necessarily have a life-changing event.
I know it's buzzword-y to talk about liquidation preferences right now, but there are plenty of way investors and founders can benefit from an acquisition that don't trickle down to even early employees.
Employees 1-20: "never have to work again money" 20-200 (or so): "buy some nice stuff, live a great life, still have to work" >200: nice payday, buy a house, car, something, get back to work
And this is at a, now public, company where the founder had and has tons of control so got good terms for employees.
Here's the thing: if the founders came to me tomorrow and said "I'm starting a new company and I need developers", I'd probably join them.
Why? Because throughout the whole thing they acted absolutely properly. They kept us in the loop about the company's situation as it deteriorated and did everything they could to salvage the company and pivot into something new. And we trusted them enough that almost the entire staff stayed on until the end even though we were almost certain for a few months that the company was probably not going to survive.
When the investors declined to reinvest, the founders shut the doors with enough money left in the bank to pay a modest severance and keep a skeleton staff on for a few months to wind down the company and service customers during their notice period.
Some colleagues have told me stories of places they've worked where they didn't find out the company was broke until their paycheques started bouncing, the landlord started stopping into the office asking for the executives, and those executives were nowhere to be found.
What I learned from the experience is: when you consider joining a startup, it doesn't matter what products they are building, what market they are pursuing, etc. What matters is the people you will work with. I learned a lot about how to read people during the up-and-down time, about what people you can trust, both their abilities and their personalities. If my ex-colleagues start new companies and ask me to join, I will jump in for some people as long as I can get enough cash to cover the living expenses of my family, and politely decline for some others.
There are only three solid reasons to join a startup:
1) You are passionate about the mission - nothing is more rewarding than engaging passionately in something you strongly believe in and endorse. Start ups have license to pursue ideas that established companies simply cannot.
2) It will improve your skill set - There is only so much you can learn at school or online, some skills have to be practiced to be learned. Start ups can give you a role you want, even if your resume isn't a match. Which will get you over the chicken and egg problem of you don't have experience in the job you want to do to be hired in the job you want to do. That can get you into a job elsewhere where the "entry level" position requires previous experience.
3) You will work with someone you respect - Start ups are small, visible, and stressful. Ask anyone to name 10 people they worked with a BigCo and 10 people they worked with at a startup, the latter is much easier. Stress, higher highs, lower lows, creates stronger bonds. Those friendships will follow you through out your life, they will help when you're looking for advice or a job, and support when you are trying to pull off something really hard to do.
If you choose to join a startup for one of those three reasons it will always deliver.
How come? No, in all seriousness, mission is secondary to growth for startups, isn't it? If you are passionate about the mission, shouldn't you join a non-profit?
Great startups don't necessarily need an important problem to solve, such that solving it might be described as a mission.
However, do start a startup if you already have rich people who you know you can convince to bankroll you.
Saw this happen. Someone who read too much HN, decided they wanted to move to the Valley, scared the management they'd quit unless they bankroll their new startup. They didn't have a good idea, they just wanted to run a startup. So they came up with an idea, but it was kind of a forced and awkward exercise, like if you'd assign someone in high school homework : by tomorrow, come up with a start up idea. Hmm, let's see Uber for dogs ...nope, cats as a service nope,... think... oh I got it!.
The crazy thing, it kind of worked!
So if you find fools with money, go for it, start a startup and get their money.
The first company I worked for went IPO a year or two before I joined. The very first admin of that company got so rich from stock options that she bought a vineyard and retired in 1999. Lots of people bought houses with the money they made, including the first engineer who bought a house in prime PA.
I joined another startup just a few years ago, and they were extremely stingy with options. "Less-important" people (ie. anyone non-engineers, or non-management) were getting a few hundred or maybe a few thousand options, which I thought was a bummer. I think everyone contributes to the success of the company, and everyone should get a chance to do well if the company does well. But I've seen this case several times where the founders keep everything for themselves.
I'm not sure what changed, but it's probably reflective of how greedy and self-centered SV is getting. It feels like it's more like Wall Street and less about classic Silicon Valley, which is a shame. Go watch "Triumph of the Nerds", the classic tv special during the dotcom boom and see if you can reconcile the difference of those companies and the ones today.
Today startups are considered to be glamorous. They have access to a lot more investment and potential employees. The whole country seems to be making a beeline to pony up for the high rents because the salaries more than compensate for it. There's no longer much risk of lost earnings. Is it any surprise that the equity has gone lower? Arguably the valley as a whole has taken the deal suggested in OP: more salary, less equity.
Only if you're at the top of the income bracket (for engineers in SF specifically, not overall for the industry or area). The average SF developer would be better off with an average salary in an area with reasonable real estate prices and state income taxes.
Autodesk was established with $60K put in by the founders. There was no additional funding prior to the IPO. There was only one class of stock. Autodesk sold AutoCAD for cash, and that generated enough money that they were able to grow based on real profits.
At one point VC funding was considered. That's an important story, and it's fully documented.[2] Here's part of why it was turned down: "In particular, our ability to grant stock options to new employees was severely constrained by limits on the number available, by forcing the option exercise price to above the price paid by the investor (who received much better terms on his preferred than the employee would on his common stock), by retiring from the pool any options granted to an employee who subsequently left the company, and by imposing a four-year vesting period on all options, which the founders of the company felt transformed the options from their original purpose of allowing employees to share in the company's success to a kind of twentieth century indentured servitude which compelled employees to stay with the company or face forfeiture of their financial gains."
That's what it was like before the era of hyped dot-coms, when companies built real products which people bought.
[1] https://www.fourmilab.ch/autofile/www/autofile.html [2] https://www.fourmilab.ch/autofile/www/chapter2_32.html
The more things change, the more they stay the same :-)
So this pushes more people to do it, more companies, more investors ... and so over time "stuff gets figured out" and optimized and here's where we end up.
For instance, pretend you have a water leak and call 5 plumbers...how many of them charge basically the same (high) price ...
I too had an experience like you ... company IPO'd in 2001 and many initial engineers got $5+M including someone who started as the admin ... turning $2m into $1BN with no addiitional funding or down-rounds will do that :)
This, I think, is a good point. It's much easier to scale a startup these days, and scaling is one of your major headaches as a founder with a good product.
You have to respect risk. And ideally research it, quantify it, and manage it. The one thing you cannot do is ignore it.
Joining a startup is risky. Founding a startup is even more risky. Taking stock options instead of salary shifts more of that risk onto you, as an employee. You need to be aware of this risk, and in that regard, all of these articles about employee equity are performing a very valuable service.
But you also have to view them in the context of the whole other portfolio of risks you are taking in your life. The article, for example, says that the chance of rain on the 1st and 15th is 100%. This is flatly untrue, as any former employee of DEC, Sun, IBM, HP, Yahoo, Tandem, Stratus, Symbolics, or other formerly-highflying tech companies can attest. It is a guarantee that you will get screwed over sometime in your working life, and the best response to that is to learn from it and minimize the chance of it happening in the future, or at least maximize the returns from when you don't get screwed over to buffer your total returns.
I can relate to the one year cliff and the economic incentive behind terminating employees - Thankfully, the founders I worked for in my last startup were fundamentally good people. I wouldn't hesitate to work with them again.
As an employee, you are always at the mercy of the founders - So you'd better study them carefully. I think the best sign of a good founder is that they're usually easy to talk to - They're genuine people and they always talk to you on the same level as any two human beings would, not as a mere employee.
Also, good founders are humble; I had no idea that the CEO of my previous startup could read and write code until about 6 months in - He never said so. I knew the founders were smart when I joined, but I didn't appreciate the full extent until about one year later.
The fact is, the time I spent in a non-startup was nowhere near as exciting and fun as the years I spent in various startups, even the failed ones. And the successful ones were lucrative enough for me (none of which I was even in the first 50 employees) to affect some life decisions. Just one person's anecdata here but I started my engineering career 15 years ago and I read the overly cynical, bitter postings with a sense of amazement. My experience doesn't support any of it.
I know it's fun to say it that way, but it's wrong. If you work at a startup try going to your boss and saying "I'll give up all my equity for a $100/year raise." They will say yes (modulo a conversation with you about how that's a really bad idea for you).
It would be fair to say that a lot of people overestimate the value of equity a lot of the time. But that's not the same thing as what the author says.
> suggest to trade the equity portion of the offer for the cash value of the options (in addition to the advertised salary). Good luck.
I was explicitly given that choice (in three packages, high/med/low options count in exchange for offsetting increase in starting salary). Being "smart", I took the salary and low options and that was a poor choice in retrospect, given that we IPO'd 2.5 years later and my salary now would surely be the same regardless of the initial choice.
I don't know how common it is, but it's absolutely doable and done. (I suppose you could argue whether the company I joined was early-stage or not.)
I wouldn't be so sure unless you've never gotten a percentage-based raise.
If you can get a $100/year raise just for the asking, and you can also get a $100/year raise in exchange for equity, then simple arithmetic indicates that the equity has zero value.
At that point, you could say "I'll give up all my equity for another $100", at which point the boss would jump to agree.
Not because $100 is too much, but because you've annoyed her by asking too many times. $100 is still trivial in value to the business.
The point was just a thought experiment to show that equity has more than 0 value.
OK, equity is worth five cents an hour. I admit it! Let's all negotiate with that in mind.
It's quite something that you apparently couldn't tell the difference between those two things.
If I offer my Embarcadero penthouse in exchange for a $100/year raise, does that mean the apartment has 0 value?
The article clearly wanted you to ask for a raise at at least the granularity of real negotiations. Try getting a $10K raise in exchange for giving up equity.
This will be possible (for people operating in the eng compensation band) at almost any startup you might want to work for. If you ask for this, and they don't at least discuss it with you, it's a pretty strong sign that you don't want to work there.
You don't generally want to work somewhere the company leadership doesn't value the future of the company.
The problem is not equity, the problem is picking the right startup.
Everyone I know that has got rich has done so via equity.
So how many have you actually worked for? "2 for 2 [out of the experiences I cherry-picked to rationalize my bias]" really doesn't support your claim that the author is overly cynical.
> The problem is not equity, the problem is picking the right startup.
If only we could predict the outcome of the lottery, we wouldn't even need startups.
My point is that equity is great and it does everything it is supposed to do (align motivation / create a great team spirit / reward risk takers). The problem is people think that equity is magical and you don't have to worry about the people giving it to you. They are the weak link - not the equity itself.
Start-ups should lose its label as a cash cow - but it can still be:
- a well-paying job - high impact - more freedom - good career capital - a lottery ticket
Working in a startup is much, much more fun that working at a big corporation. I took a paycut several times to go work at startups just because working at a big company where you work on a single API of one of their products gets boring really fast, regardless of the pay.
4 or 5 years, slaving away at a startup, weekends, nights. And at the end of the party, you basically have zero say. Congratulations, hope you're best friends with the CTO.
Wait, what?
I'm not sure if it's common, but it's definitely not unheard of.
Anecdotally from conversations I've had with founders some are very, very keen on cycling options back into the pool as much as possible. More importantly I've heard some ideas on how to do this that made my skin crawl.
I would be interested in hearing these, as I'm sure many others would be as well.
One big takeaway I've had from these conversations is how many founders do not see equity as compensation earned, but as some sort of gift to be granted to the virtuous and loyal.
It's a little depressing that the frank answer to "why not vest quarterly" has been "because if they leave we don't get as many options back". It's interesting that we never think about cash compensation that way but do for equity compensation.
I like that quote. It really illustrates the problem well.
Or the idea that you'd offer them to get the salary bump based on options value.
At the end of the day it is a gamble, a promise that _if_ the company gets big, you _might_ get a big payout. The hope and dreams account for so much. People will spend sleepless nights, working for 50% reduced salaries for some hope. That is a nice opportunity for the founders -- sell a dream.
Sell it to investors.
Sell it to customers.
Sell it to employees.
Sell it to themselves.
The last is key, you have to believe your own lies to start really be convincing to others.
Minor nitpick, please remove the number from the title.
If I recall, in 2000, not only had valuations gone ridiculous, but there were also a couple of big triggers for tech spending to drop -- phone networks globally (big spenders) had overbid on 3G licenses and wanted to keep their other capital spending down, and other businesses had just come through Y2K spending. And the public imagination had lost rationality (press talking about the new economy and price-to-earnings ratios not mattering, etc...)
This time around there's a cultural bubble among engineers (everyone wants to do a start-up), some irrational unicorn-hunting, and a window where governments are weak to VC demands for the sake of an innovation agenda, (eg, Uber's making more headway on taxi regulations than would normally be the case). But little sign that tech spending globally is likely to drop any time soon.
There is also a slightly sad split in that some of the biggest unicorns are technologically not very innovative (Uber, Slack) while innovation & high tech spinouts from research continue to be a less spectacular slog.
But that seems a less worrying bubble for engineers (the number of engineering jobs should still continue to rise, as more and more of companies business models are defined by the tech they use, and so if they want to differentiate their business they need to differentiate their tech)
I've since left but of course early employee equity was one of my top considerations.
To join an early stage startup that you do not think will succeed and become "big" should rarely be worth your time.