Big IPO, Tiny Payout for Many Startup Workers (2015) | Hacker News Reader

Big IPO, Tiny Payout for Many Startup Workers (2015)

bloomberg.com

155 pointspatmcguire134 comments

Why give employees big payouts, when they'll work just as hard for mere unsubstantiated promises of such payouts?

The article shows how most employees are too occupied counting their imaginary fortunes to seek the most basic grasp of how their options really work.

The race for riches in early-stage startups has become a gold-rush, and now that we are clearly after the peak, most employees are chasing the dreams of yesterday's big-payoff exits, failing to look around and notice that these were rare even back in the day, and now they hardly ever happen at all.

Investors got savvy about protecting their investment, while employees are just as clueless as ever, so even when big IPOs do rarely happen, the employees see very little profit.

This works very well for the investors. The downside is the erosion of equity as an incentive, but even more so - any sense of working towards a common goal and shared success, which is what startups are supposed to be about.

This will hurt the entire industry. On an individual level, if you accept substantially lower pay, for a tiny unprotected bit of equity and someone's unsubstantiated promises that it will be "one day" earn you millions, then you are a fool.

Nothing will change, the industry won't suffer. There is a new crop of fools every May.

Do you say May in relation to the "eternal September" (+ 9 months to have a baby?)

https://en.wikipedia.org/wiki/Graduation

Sometimes I admire investment banks. They screw over anybody else who doesn't work at their company but within the company the pay seems really generous for everybody. Tech companies could easily pay much, much more and still make a lot of money for investors. Why are bankers so highly paid? Is it because they are asking for more money?

> Why are bankers so highly paid?

The skills acquired at their day jobs also enable them to be much more financially savvy than tech workers. Tech workers, I imagine, get better work computers for similar reasons.

That's a good point. I have been thinking along similar lines about the push to 401k instead of pensions and people having to do their own investing. There are people who can focus 100% of their time on finance whereas we have to be good at tech, which already is a complex full time job, but then we additionally have to be investment experts.

Excel is such a highly valued skill compared to machine learning in the mind of bankers, they think their job can't be replaced by AI as did the Luddites of the 18th century when industrial revolution took over.

Then explain why we've seen almost no automation of the workflow of investment bankers of the last 15 years even though it is a massive payroll expense in banks that are aggressively cutting headcount and automating back office functions.

It's not a job that is easily displaced by code.

who says the next 15 years won't see the automation of investment bankers? We've only recently started seeing the rise of deep learning to reach new heights like AlphaGo, put Picasso to shame, drive cars, replace managers in Japanese factories, mimic human voice, predict conversion and see patterns & deep links unclear to the human.

I don't see why we can't automate the workflow of coke snorting gordon gekko wannabe fuckboys on wall street in the next 15 years as will a large chunk of professional careers. To boot, we see lot of the floor trading becoming automated as a result of the innovation we had in the past 15 years.

Luddites of the 21st century will hit the mid to lower upper class hard, I'd love to work on such problems.

It's going to be one of the last jobs to be automated because it has a massive amount of client facing/relationship work and despite your disdain for it, the fact is that it is more complex and demanding than the vast majority of white collar jobs out there. It also is an extremely small industry in terms of actual headcount, probably 150K worldwide

We've had plenty of stuff like NLP for 10-Ks and management calls but the job has been relatively unchanged overtime save for the introduction of CapIQ, Bloomberg and Excel. Which isn't to say that it can't change, but that it probably won't happen anytime soon.

I have rarely worked somewhere (as a tech worker) where I received a better work computer than a manager. I consider myself an above-average negotiator (compared to my peers) and my comments fall on deaf ears.

The comp is standard across the industry with extremely limited room for negotiation. It isn't a function of them being 'savvy'.

> The comp is standard across the industry

GP's question was "Why is the industry standard high?"

Same reason the top paid executives aside from CEOs tend to be CFOs: they know what they are worth and know to ask for that and often refuse to settle for less.

> Why are bankers so highly paid?

Because a job candidate being told at an interview "we are looking for people who are motivated by things other than money" would walk out, and the banks know it.

That is my dream. I would love to share the wealth with my employees, nay that is in accurate, partners that show up 9-5pm who weather the ups and downs not funding some coke snorting gordon gekko wannabe fuckboy lifestyle who thinks $100,000 USD is pocket change.

I'd give my hard working employees a good chunk of the company over VC any fucking day. I'd love to see a PHP developer take home high six digit bonus checks, even after they leave if the stuff they build keeps making the company money, sort of like the million dollar royalty fees that were paid to developers of Tomb Raider II.

The jobs of bankers, lawyers and businessman is to negotiate and evaluate risks. They do that all day along.

The jobs of an engineer at a startup... oh wait is that a job? I thought they were just naive kid fucking around and making money for the board[1].

[1] Don't worry. You'll understand when you'll see your CEO negotiate £8 millions more shares while children are taking the job for less than 4k and they think it's a good deal. Best day ever! :D

You can't fix other people but you can choose whether you want to be a naive child or a business man.

For one, they routinely work 80+ hours a week and are on call constantly.

Almost every day of their job is managing extremely time sensitive transactions that are often the most important single event in the lifecycle of any given company.

> Why give employees big payouts, when they'll work just as hard for mere unsubstantiated promises of such payouts?

That's why we should start teaching people that they won't get rich.

If you're in it for the big windfall, consider bootstrapping your own company.

It's hard, it's depressing, it's exciting, it's terrifying, and it's rewarding. Learn to set goals and execute, sell a product, deal with happy and angry customers, build partnerships, market, price, negotiate, and more.

You'll get much more out of it than working for someone else. When you work for someone else, someone else's dreams are the priority.

This. Don't expect your startup to make you rich.

Being the devil advocate, sometimes startups are the only place you can land that they're experimenting with a technology that interest you and you can use them to pay for your education. Adamant the pay is less than your peers, but you're trading it for career advancement.

After you get the required skills and knowledge jump ship and re-market yourself and get pay rise.

You make a valid point. Don't undervalue learning on someone else's dime.

Start your career in bigco, then when your growth stalls, jumpstart it at a startup.

Depending on the startup, you'll learn 10x what you would at a bigco.

In this sense, the lower pay is fair. You gain in other ways.

I kind of did it in reverse order.

Started with a start-up learnt a lot of customer support, full product stack development, web-tier systems, linux/windows, encryption, and POS systems.

This went on for two to three years about 50% bellow my peers wages. Moved into web development after a fall-out with the boss about relocation. After the fallout did a couple of interview with my peers and tippled my wages over-night in the new job.

Just saying if you're going into the startup field do a lot of hard thinking about it before you go in. Make a battle plan, and dear god have a clear idea what you're aiming for and level of professionalism you want to reach.

Would I do it again?! Maybe, just a word of advice don't court the bosses wife.

Now that we're past peak VC-backed startups I've noticed a trend on HN pushing the benefits of the bootstrap path.

There are many positives, true. But the negatives should not be understated. If you don't fail outright, the most common outcome from bootstrapping is often worse than raising VC or working for a VC-backed startup. That is, you'll work years and years and years with lower pay, work more hours, and endure a hell of a lot more stress only to fizzle out at the end (also without a big payout).

Try to go back to corporate after wasting the best years of your life bootstrapping your small-name, small-reputation startup for 5-10 years. And if you do go back to corporate, watch them lowball you on salary and position.

If you do succeed, yes the payout is greater. But chances of a big exit are rare in the VC-backed world as is, and imo, even rarer in the bootstrapped world.

This is the negative side of bootstrapping that is rarely mentioned. YMMV of course.

On the other hand if you land into the uncanny valley of revenue in the low millions, being bootstrapped is the far better choice. Ie there are a wide variety of outcomes which would be considered a success on the bootstrapped route, but will be considered a failure if you accept VC money.

This is true. But the chances of landing in that valley and being able to consistently produce those low millions of revenue year-in, year-out are about as rare as an exit in the VC world.

This is the part of the story that doesn't get presented in people's romanticized view of the bootstrap path.

This is absolutely not true. There are plenty of entrepreneurs we'll never hear about who built their company to 1-2 million/yr (I know a handful). Some of them are app/sass developers, some of them are basic Wordpress consultants, and plenty of them have nothing to do with tech.

The current VC/incubator oriented startup culture has largely convinced the software community that building a business is impossible without their help.

I'd bet every reader on HN could hit 1-2 million/yr bootstrapping their own company. I'm not saying it's easy — it took me almost 5 years to the point where I could hire my first employee (I moonlighted for the first 4 years). It takes someone open to learning new things, a little bit of software-dev talent (you don't need to be a superstar), and dogged-effing-persistence.

Given enough time, if you persist, you will get there.

PS: Remember that most bootstrappers have no real incentive in encouraging you to go that route, unless they're selling you a book. In my experience, bootstrappers care a lot for each other and stick together. Investors on the other hand ... they clearly have incentive.

I agree with the gist of your post, but:

> That is, you'll work years and years and years with lower pay, work more hours,

...

> And if you do go back to corporate, watch them lowball you on salary and position.

_You_ underpaid yourself for years and years, bootstrapping your startup. If you had succeeded, you'd end up with way more money than your peers who chose to stay in corporate jobs. If so, it is not fair to expect to have the _same_ salary and position as your corporate peers, when you come back vanquished. While you were learning skills to bootstrap your dream startup, your corporate peers were learning skills useful for the corporation - they get higher pay hence.

If any of the skills you learned during your bootstrapping days are useful in the corporate world - and it very often is - you'd surely get rewarded for it sooner than later. But don't expect to be rewarded for it the day you start back again at the new job.

It's not really about expecting the same salary and position. My point was more about how corporations don't know how to rate / value / judge your bootstrapping experience and thus will, by default, likely "lowball" you. I agree that this is rational on their end. Note that this point applies more to non-technical roles. This will still happen with engineers, but less so since it's easier to quantify technical skills.

I can see how my point came across as entitled. That was not my intent.

opposite might be a true as well, bootstrapping founder might have unrealistic valuation of their experience and value it provides to the corporation. Most likely as always truth is somewhere in the middle.

> If you don't fail outright, the most common outcome from bootstrapping is often worse than raising VC or working for a VC-backed startup.

Anyone have stats on this?

Well, there is huge difference between options available to you as VC backed startup and as bootstrapped one.

Your warning about dangers are all very true, most people don't think about those.

On the positive side, your upside can be great, and since you didn't take VC money, you can be happy with much less then VC backed startup. You can make big company, small company, lifestyle business, you can get acquired if you desire so.

MRR of $100,000 USD from a bootstrapped business I think still beats the elusive payoff that everyone is gunning for-it tends to not happen (that's why there's relatively few compared to failures) and VC's really don't like to talk about it. They can afford it because the have the capital and it doesn't cost time so they get away with it but you can't.

The marginal returns diminish after around 70,000 USD / year, the only real winner is VC who will have their eggs in multiple baskets with only their capital at stake which won't break them. There's all sort of fancy ways to cover their ass, all at the expense of you, the founder and your employees who have traded the most valuable commodity, time.

It's clear who values their time more than the founder & employees. Bootstrapping means you control the destiny and a higher chance to pocket more than a C-Suite's salary combined. So you make 100k every month from your bootstrapped business but you never IPO, you can buy the world's smallest violin. Operating at break even to meet your VC's needs for a quick IPO is a fool's game, your life is now a financial speculation vehicle for the rich.

FUCK. THAT. SHIT.

> It's clear who values their time more than the founder & employees. Bootstrapping means you control the destiny and a higher chance to pocket more than a C-Suite's salary combined. So you make 100k every month from your bootstrapped business but you never IPO, you can buy the world's smallest violin.

As someone full-time bootstrapping, and who will launch having bootstrapped, my take-away is that I wish I took seed money to be able to pay a couple people to go on this journey with me. I'm a solo technical founder and while I found people willing to make (considerably) under their market value, engineering is well paid and good make-problems-disappear non-technical people are rare finds.

if they are hungry and believe in your vision they will take equity and run with it. Those are the people that should be involved early on.

I'm years out of college, so unfortunately, most of my network of "known entities" have financial obligations that need to be met.

If you put in 5-10 years bootstrapping and made a living, then:

1. You clearly built something of value and should have an exit coming (or already had one)

2. If you were the victim of some unfortunate circumstance that put you out of business, you probably have made friends or partners in the industry that would instantly recognize your value and bring you on board (I'd personally hire an old competitor in a second)

3. You've probably learned quite a bit that is applicable to engineering, sales, marketing — chances are you don't even identify as a software dev anymore. You might want to shoot for something c-level, exec-level, sales engineering, project management, etc.

4. At this point, you know how to negotiate and market yourself. You will not be victim to some piddling lowball offer unless you're desperate. After 5-10 years in the game, you probably won't be. If that's your only route, take the job and use it as a launchpad to something better like everyone else does.

If you bootstrap for 1-12 months and quit (like 90% of my peers have), then right, you'll probably have nothing to show for it.

> It's hard, it's depressing, it's exciting, it's terrifying, and it's rewarding.

Perfect, and yes.

Smaller bootstrapped companies would make tech much healthier. The focus on the big guys and VC creates a monoculture and destroys real innovation.

I was one of the first employees in a UK tech startup. I was given share options that I calculated represented about 0.5% of the value of the company. When the company was sold about 10 years later, making the founders multi-millionaires, I got about £30K. I was clueless and didn't realise the shares could and would be diluted many times.

Yea, and dilution is just one issue, its almost impossible to know as a employee what the stock options represent, you have no insight in to the corporate structure and what entity the stock options are given for.

Its just all a lottery ticket...

It is possible to know. In the UK it's easier to know than in other countries, private companies still have to disclose share ownership and file public accounts (which you can download from companies house).

It's just that this information is often not provided or explained. Why companies think it's ok to say "you'll get X shares" when X is a meaningless number without more information, is beyond me.

There can be all manner of agreements in place that mean that the mapping from the share ownership structure pre-IPO/acquisition might not be straightforward.

e.g. When the company I co-founded went public there was a ratchet agreement in place (amusingly, which we'd tried to get removed at the time of the first round of VC investment) that gave us large amounts of new share options that was much larger than the employee share option scheme. Things like liquidation preferences also can also have a huge impact and as an employee your are probably not going to get visibility of all of these and I'm pretty sure none of this will be in Companies House!

But the dilution happened because your company had to sell out a lot more of its equity in order to succeed. You were not cheated. You could argue that you should have been offered to buy into the additional financing rounds in order to retain your share, but in all honesty, would you have taken them up on such an offer?

I think the issue is they probably offered lower than market pay and "half a percent of the company" but what he ended up with was lower pay and .00025% of the company. Sure it's all legal and his fault for not understanding the fine print but I understand why he would feel cheated.

The company could have shut down, and he would have gotten nothing. Would he have felt cheated then?

Instead they sold a part of the company (out of everybody's share) and with the money that brought in, they eventually succeeded. I don't see anything unfair in it.

But also, the company succeeded due to the people who worked there working for less than market rate. Obviously dilution and all of the (fairly numerous) ways your share can be reduced are a risk factor and need to be taken into account, but still valid to feel hard-done by. Just because it's fair doesn't mean it's an easy pill to swallow.

I think the moral of the story is rate equity like that as worthless and refuse to work at a discount for it. These contracts are complicated and as a programmer you likely won't completely understand them unless you get a lawyer involved.

Lots of companies don't have the cash to pay market rate, in the early stages. Our even the mid stages. In those cases, it's best to make sure you're advocating for your stake on the business. But you're not going to get much unless you're indispensable to the company's success.

From a perfectly rational standpoint, the companies that cannot pay market rates for those employees required for their success should either raise more capital from qualified investors or fail immediately.

Don't defecate where you eat; don't invest where you work.

One does not simply "raise more capital" to pay employees market wages in cash. That might very well be the morally superior approach, but it simply doesn't match reality. Most startups can't get that kind of capital at all, let alone on terms that would be worthwhile to the founders. Besides, the labor market is largely clearing, so you're not going to shame founders and investors to put more cash into comp. The much better bet is to educate employees so they can advocate for themselves.

> "Don't defecate where you eat; don't invest where you work."

That sounds pithy, but I don't see why that's good advice. If you work in a role where you can have a significant impact on the success of your employer, that can be a very advantageous situation compared to being a random investor in a venture you have no agency within. You also potentially have a lot more visibility than a silent investor. These are reasons one might choose to take equity over cash.

Had you argued that it might not be a universally great idea, from a portfolio management standpoint, to trade a lot of upfront cash for illiquid, volatile stock option, I'm with you.

In practice, the people that can have a significant impact on the success of their employer are officers, or at least upper management. And they will also be in a position to negotiate their equity compensation. They don't need to take sound-bite advice from the Internet.

If you don't have a contract (you are "at will"), don't invest in your employer, ever. If you do have a contract, but can be fired for any reason that is outside your control, don't make an investment that is not completely liquid. If you can make the stock price move unilaterally, perhaps you should consider shorting it, quitting, and airing all the dirty laundry in public? That would be a dick move, but so is diluting all your employees into oblivion so you get a bigger share of the payout.

If one cannot raise enough capital to execute on the business plan, I question the value of the investment. In any case, the market is not homogenous. If you can't afford the market wages in Silicon Valley, move your startup to the Rust Belt. If you can't afford those wages, hire remote from Britain, Australia, or India. If you can't afford that, try your hand at lowballing freelancers. Or maybe hire one 40+ developer at 120% median pay instead of two 25-year-olds at 80%. Tricking your employees into thinking you're paying them more than they're actually getting is not a viable way to conduct business in the long run. Believe it or not, there is value in not being a scumbag employer.

Tech workers need an organization to provide legal services, most people I know aren't empowered to have a lawyer review their employment terms. More accessible legal help would create pressure on employers to stop bad practices.

People on HN sometimes talk a big game about negotiating job offers, but in my experience, most software engineers are terrible at it, and are not equipped to go up against enormous companies with a lot of resources dedicated to paying them as little as possible.

In my experience, most software engineers simply don't ask.

Forget negotiation. Just saying "I want $XXX" when interviewing for a position is a simple thing to do. What's the worst thing they can do? Not hire you! What's the best thing they can do? Give you what you asked for.

Is it really that hard to say "I really like the position you're offering, but unless you can meet my salary requirements, it's a non-starter?"

How long has it been since someone linked 'patio11's guide to getting more money? If more than a week, too long, so:

http://www.kalzumeus.com/2012/01/23/salary-negotiation/

We should all read this once a year. Even if you can't take it all to heart, whatever you read will help, and getting your colleagues to negotiate better will raise your rate, too.

it shouldn't be hard to understand that being mislead about the actual value of your options is unfair. pointing out that things could have gone worse doesn't change that.

Really? How much of the founders share got sold? And how much of a say did he have in this happening?

I see nothing but unfairness in this.

> (out of everybody's share)

Except that every dilution I've witnessed has come with re-upping the people who really Matter. Current employees we want to keep, and people sitting the board room.

Not everyone takes an equal hit from dilution. Some don't get hit at all. Some can get hit but handle it. (A founder diluted from 10% to 5% still is sitting on a huge nest-egg. An employee diluted from 0.01% to 0.005% may see her 200K payout changed to 100K.)

You may well be right and to be honest I don't really understand exactly what happened. But I do know I thought I'd get more than I did.

What was the company? We may be able to analyze what happened by looking at the documents published at beta.companieshouse.gov.uk

Seems like as a shareholder (well, I guess potential share holder, since they are options) you should have some say in that.. Is it okay to dilute my shares by x%, in order to continue functioning as an employee..

Of course that kind of insight would lead to employees jumping ship when there is trouble...

You do have some say in that as a shareholder -- most companies are goverend by shareholder vote. However, as a startup employee, your total number of shares is insignificant compared to the number of shares held by the founders and the investors.

You did not specify "multi" further, but 30k * 1/0.5% is around 6 million. So your assessment seems at least in the right ballpark?

It was a private sale to a US company. I believe it was for an amount many times that figure.

Indeed... it's likely that the board issued themselves new stock to prevent their dilution, but not yours.

As an extreme example, I watched a startup in a private sale issue new stock to those on the board such that all of the other early (0.1-0.5% stock ownership) employees were diluted to $0.01. The total valuation was in the $100M range. It was a good way to make a few enemies and retire at 30.

In the end the acquiring company ended up having to hire some of those employees back for consulting... I believe several of them received >$1k/hr. Most of those employees suspect that the acquiring company tacitly signed off on the issuance of new stock.

You bring up a good point though which is that if you stand to make millions and retire early, and it comes at the expense of your employees making a comparable amount, is it worth it to screw them over?

Unfortunately in this messed up world and rollercoaster economy the answer is often yes, it is better to put yourself first. Not that I would, but I can see how those who do justify it.

Ten years ago it was much harder to find information on all of this - and even if you went in knowing it, there was little or nothing you could do about it.

I knew enough then to discount options to 0, but I'm permanently jaundiced in retrospect by just how many outright lies I was told at interviews, and saw being told to my colleagues.

Diluting shares should be straight out illegal. There is no reason for it other than fucking over employees. You know, the people who have actually worked to make the company a success.

Dilution is way too easy to abuse, but there's a lot more to it than just "fucking over employees."

Really? Give me one example where it doesn't fuck over the employees?

And don't say "they get to keep their jobs", cause if that's all that's needed for benefit, we might as well devalue the options to 1 cent, cause after all, they still got to keep their job.

Shares need to come from someplace. Other people selling shares to the VC doesn't put any money into the company. The company needs to sell shares, and create shares if it doesn't have any left.

It's often abused, and easy to abuse, but you are making the story too pat by saying it exists only to screw over employees.

In egregious cases, you could probably sue the board and win. Another user here discussed an example where employees were diluted to a literal penny right before a sale.

If the employees didn't win in that case, then there's some fundamental, structural flaw in American laws.

This has been linked to a few times on HN.

http://danluu.com/startup-tradeoffs/

A quick summary: pay has gone up enough at top bigcos that simply working and accumulating money can exceed even very good outcomes at startups.

10 years at MS will make you a millionaire - in liquid assets

3 years at my startup now I have a million - on paper. Hopefully in the next three there is an event I can cash out on.

One path is 99% chance One path is a 1% chance

I'm having more fun at the startup than I did at MS

> I'm having more fun at the startup than I did at MS

And as long as you can make your nut (housing, food, savings, some vacations) I don't see a problem.

(edoceo I know you weren't claiming a problem -- I just wanted to reinforce your point).

This is a critical point I didn't address. If the startup business is profitable and employees and founders can take reasonable salary it is sweet. If no profits but you have outside funding for growth it's also pretty sweet.

When it doesn't work, no profits, lagging growth it's terrible. Really terrible. Major stress, so much waste. And the sad fact is that's the likely outcome of startup world.

You have to have two plans. One for the Best and one for the complete shit-storm of winding down a business.

To be a millionaire after 10 years you need to save $100K/year - which means you need at least $150K post taxes (assuming you are without children and super frugal) - so ~$200K-$250K salary.

Not impossible - but definitely far from common for MS employees unless I'm hopelessly misinformed.

MS means Microsoft (but it's true at other BigCo). Total annual compensation - including bonus and options can clear $300k USD for employees in the Seattle region.

Source: a dozen folks I've spoken to directly where the case is true.

I have no doubt it's true, I just wonder what percentage of MS employees, e.g. in the Seattle region, this applies to.

Oh, I don't doubt that at all. Are those standard "senior dev" salaries, though?

What's interesting to me about the startup-tradeoffs article (top link of this thread), though, is that you don't need to enter stratospheric levels of career advancement to hit these targets at bigco's anymore.

You can't be a lousy dev, but you don't have to be an amazing one or ascend into higher management levels. $250k a year is now a reachable salary for an employee of ordinary advancement (well, a SE or related). You get to senior level, and top out there, and your salary is now high enough that earnings start to rival very good exits from startup. No, not founder level or huge (and rare) IPO successes - those are still out of reach on the "work at a bigco and accumulate". But better than being an early employee at a startup that has a decent buyout or "exit".

And remember to factor things such as pension, healthcare, working hours.

Forget about free food for a minute and you may soon realize that startups are terrible all over the board.

Don't do startup for the potential payout. If you are not going to be happy and content with the salary don't do it. Most won't have any exit. Any exit that leaves one with $350k windfall beats many that leaves people with $0 and jobless. Negotiate hard on the salary. Assume the shares are worthless.

The thing about this advice is, it basically reduces to "don't work for startups". Because paying below-market salaries in exchange for equity is pretty much universal. It's not even malice, most startups just don't have the cash on hand to pay competitive wages.

> Negotiate hard on the salary.

Recent CS grads (who are the most common startup workers) don't really have the leverage to the do this. And experienced (or, ugh, "10x") developers can probably always get a better deal at a big company.

I feel like "working for a startup is almost never economically rational" is the elephant in the room that everyone is trying not to talk about. (As for me, I do take my own advice and deliberately work for BigCorp, but when I've tentatively brought this up to others I'm usually met with hostility so I don't do it in person anymore)

I could understand the hostility if you approach the subject with unsubstantiated statements like "almost never economically rational".

It would be easier to support the claim that most startup employees earn less over their career than those who only ever work for BigCorp.. Though I've never personally seen data suggesting that's necessarily true. You have to consider length of career, job and city mobility, career mobility, etc.

"Economically rational" does not mean BigCorp > Startup career pay.. it means it's not rational to accept startup career pay. That's a much harder statement to defend (honestly, I don't think it's the case).

OP and article's point is that startups are sort of like a crapshoot. You can have the best product, the best team, do everything you read on HN and elsewhere and still fail. That's the type of environment-high risk but not necessarily high reward. It's not like speculating on financial markets because startup costs a chunk of your life. I've toiled for years trying to be a startup and what I realized is, people are so focused on startup they forget that it's just a business at the end of the day with checks and balances to answer to. Early stage VC funding is fuelling this aggressive style which only works in the favor of VC's not necessarily the founders and their employees.

You are just a naked call option for these VCs-unlimited upward potential, limited capital loss. It make sense for VC's to spray and pray to see what sticks.

I don't want my life to be a fucking call option for somebody to fulfill their ephemeral desires for more wealth with diminishing returns and benefit to society.

The start-ups could do the very hard work to make sure that employees can trust the stock options.

I've seen all sorts of games. One of the most common, which is surely a violation of fiduciary duty but no one cares to do anything about it, is when the VCs with 3 of 5 seats on the corporate board negotiate a sell-out that matches, down to the dollar, the amount of money needed to make the VCs represented by those 3 seats 100% whole, and not one dollar more.

In order for options to pay out, there are bunch of hurdles that all need to be cleared in a row, with no mess-ups in between, and many of them are not in your control at all.

Working for a startup is worth it when you are looking for experience or something you couldn't do at a big company. Everybody should work for an early startup at least once just to see what it's like.

Startup compensation, however, is a roulette table you have to work to sit at.

I read that as "most startups should fail before trying to hire skilled employees".

If you don't have the cash on hand to pay competitive wages, you should not be hiring the employees.

I would never again work at a startup for the unilaterally renegotiable lottery tickets they are somehow allowed to call "options", instead of salary. If they really, really needed to compensate me with something other than cash, maybe I'd do it for actual stock and retained copyrights in my code. Maybe I'd do it for bonds with a coupon rate 10% above t-bills. But they would definitely also have to do something to polish my resume in case the company fails early. Overblown job title. Gratuitous supervisory authority over someone not needing supervision. Authority to do a side project using a rising-star tech stack.

If you can't give me cash, you have to give me something of equivalent value. If, in the long run and in aggregate, people who have ever been startup employees are earning less than those who were always employees of established companies, the startups are simply not compensating appropriately. And in that case, "don't work for startups" is the correct advice.

So if you're not going to do it for the payout, which was the main reason to do it, then why do it? Why put yourself through the crap and the unpaid overtime and the stress and the subpar pay for the chance to make someone else rich?

The whole point of OPs remark was the payout is not the reason to work for a startup. (precisely because most startups never end in a payout)

There are many other reasons why a startup would be attractive to some people. Professional autonomy, personal growth and learning, different work culture to name a few. For many people, once you're earning "enough" to cover your expenses the pay difference between employers is worth the trade off.

In the end, unless you're founding the company yourself you're always working "to make someone else rich". That's completely irrelevant to your personal choice of employer.

One possibility is that, if you get in earlier, as the company grows you're more likely to be promoted to more senior positions, which might be good for professional development. Relatedly, you're more likely to work on a larger variety of things since there isn't enough manpower to let you specialize, which can help develop a larger skillset.

Whether they balance unpaid overtime/stress, however, can be iffy. If you can get in without the bad parts, though, it can be good (but that's less start-up and more small company).

Not all startups are like that. The one I work at (in San Diego, not SV) has a better work-life balance than a lot of non-startups I know. I very rarely work past 5pm.

I took a 1/3 pay cut to work at a startup because I believe in what the company is trying to do. That's the only reason I keep doing what I do, because the long term goal for the company is in line with my beliefs. Even though I commute for 2+ hours each way, work long hours, and am on call 24/7 for the last 3 years. At some point it may become too much, or another offer might be more interesting, but at the moment, I believe very much in what the company is trying to do.

fun, interesting idea and tech, might be more fun to work for a company pushing the edge of machine learning, or working in VR or that would let you use haskell or rust. The startup might be started by a group of friends/colleagues that you love working with, it might be 2 miles from your house. They might be the only one willing to hire you and take a chance at you. You are willing to GAMBLE and accept that it might fail and all you will have is the pay you got while employed. There are tons of valid reasons for working for a startup, and what else is wrong with making someone else rich? Not everyone is an eagle, some people are little birds that must find an eagle's back to climb upon so they can soar higher than they ever can on their own.

Be careful what one wishes for. I know some cases of people who eschewed stock options for a larger salary. When the payday came, and they got none of it while their buddies did, they were very bitter. This held true even when the payday was relatively small.

If we take that attitude, we will be pretty miserable, at least for most of us. We all know people who have hit it big for various reasons. They moved to SV, NYC, they learned poker, they bought a lottery ticket, they took stock options in a non name startup, they applied to an unknown startup, they decided to learn ML when it wasn't hip, They played sports when I didn't and went pro, they wanted to sing and now I hear them on the radio, whatever the reason, they did something and it worked out for them. At the end of the day, it's taking chances. Don't take chances blindly.

Took the following from https://medium.com/positiveslope/dont-get-trampled-the-puzzl...

"Another interesting idea to reduce complexity for employees came from Brian Neider at Lead Edge Capital, who suggested a single question for employees to ask management: “Can you please let me know how much money I’d make from my options if the company were to sell or IPO for $100m, 200m, 300m, 400m, etc?” Of course, the answers will inevitably have some disclaimers and dependencies, but the answers will expose the potential impact of terms from late-stage financings."

As others have pointed out, this is impossible to determine without knowing the dilution between today and the sell date.

True, but this should be a straightforward calculation every time the cap table updates. It can be very difficult to work out the implications of preferences, ratchets, etc, but it's still just a math problem.

This should be a standard report off of cap table management software. Every time the cap table changes, all current equity holders get a report showing their stake and expected payout for various liquidity events.

Well, except it's not straightforward, almost ever.

New investment rounds dilute the common share equivalent ownership, but also add preferences and sometimes other economic rights. Also, banker fees, earnouts, etc etc.

I don't disagree that it would be helpful and is a step in the right direction. But it would have to come with tons of disclaimers.

And, even the best cap table management software is rather poor, and its calcs get duplicated or discarded in favor of spreadsheets done by lawyers.

If you IPO at substantially lower prices than you thought you were valued at, or you IPO at a fine price and then shortly post-IPO, the stock value drops considerably, then it wasn't a big IPO.

Not to dismiss issues of employees being at the "back of the line" for equity payout. That is certainly a thing. But this article lists a bunch of examples of employees getting somewhat disappointing payouts when the ultimate valuation of the company was somewhat disappointing, while presenting it as employees getting somewhat disappointing payouts from "big IPOs."

A lot of people seem to have a problem with understanding that you can't just look at absolute numbers for a company's value. If your company raised a lot of money with the expectation that they would be a $4B company, and then they were a $750M company, well, $750M is a lot of money, but sorry, you had a disappointing IPO and preference is going to eat up a lot of the company's value -- maybe all of it.

Employees usually have no visibility into preference, even when explicitly asking about it.

Sure. And I'm not saying that's not a problem, but here's the basic thing you need to know about preference:

If your real valuation turns out to be lower than what you raised money at, preference will eat a bunch or all of your valuation.

And this shouldn't really surprise anyone. It's like some people at HN heard the old joke "How do you make a million in publishing? Start with ten million," and thought:

a. Yes, that seems valid.

b. Where's my share of the resulting million?

"You only lose to preference in case of a lowered valuation" is true only for 1x preferences. For 2x preferences, employees can lose out even if the valuation goes up, just by not as much as needed.

Dude earns $750K in 4 years what must have been probably very long hours but with : No health risk. Not being confronted to violence in any way. No legal risk tied to his profession.

Complains that he hoped he did enough work for a lifetime and that he could retire, but that he actually still has to work.

This is not how this works. This is not how any of this works.

Ironically $750k is more than enough to retire if you're willing to move outside the first world.

Lots of places in the first world too. At a 4% withdrawal rate (the rate many people believe is safe to do indefinitely) that's 30k a year which is about 40th percentile in the US. That's not living like a King, but it's totally doable.

Yeah, buy a house, work for 5 more years, sell house at 5x, then retire.

I don't understand the down-votes.. property in the Bay area seems to be the magic ticket. The IPO gets you the down payment..

$350K, not $750K

> Let’s be clear: Sutton knows it worked out just fine. He made about $350,000 before taxes on his Box stock

Plus his salary, which one assumes was at least $100k/year.

Remove taxes, maybe half of it.

Remove the local costs of living which is only the highest of anywhere on the planet.

There is still some money left, but nothing impressive. You're sure not going to a 2 tier city ready to buy a big house in cash.

Clearly there needs to be some sort of transparency about how many shares are outstanding, what terms are for new investors, etc.

If people are misjudging their packets by 10x it would suggest they are being underpaid, because they think they're negotiating for a lot more than they are.

As someone who worked in options I can tell you there's a lot of depth to how to price an option. If you don't know how Black-Scholes works along with more esoteric subjects under option theory, you should heavily discount whatever you're being told.

The exception is firms which have already gone public, where you can just look up what the market thinks your shares/options are worth.

You can't use Black-Scholes on private company options.

But you can use some of the considerations that BS theory talks about.

People don't use BS theory for any other options either.

Yes they do. There's enough option pricing that is at least partly based on BS.

Yes, partly based on, using the lessons from, slight modifications of, and so on.

But I've never seen anyone try to claim that the BS formula was enough to give you the right price.

And I've traded on more than one derivs desk.

According to what I remember reading in https://mitpress.mit.edu/books/engine-not-camera before the Black-Scholes formula started being applied by traders, the market prices did not correspond to the prices predicted by the model, because there was no other mathematical model to price options, most of the trading was done based on heuristics, and the market was highly inefficient. For at least the first few years when the Black-Scholes formula first started being used by traders the market converged on the predicted prices. As speculation and arbitrage opportunities were identified, the prices of options diverged from the result of the Black-Scholes formula, and other models were developed, based on the Black-Scholes equation.

As far as I can see you can't use anything very effectively for early stage private companies, the information is low and the variance is high.

Even with perfect transparency for very early employees, predictions are pretty worthless. The only realistic thing you can do is make sure the shareholders agreement doesn't have any tricks in it and have a feel for the domain you are working in.

To put this in perspective some one who was in last years 5 Year share save at British telecom made about half that tax free.

And this is the share options scheme for every one even the lowliest call centre worker and not a senior role.

Even more perspective. Let's say hypothetically the salary difference came down to being able to afford to buy a starter home in London versus renting for that period. The tax free property appreciation would dwarf the return on the options.

Don't think £200 a month would make that much of a difference

financial literacy is a huge issue in society and especially startup land, many folks don't learn about the pros/cons of 83(b) elections and how to properly calculate the value of your options... also negotiation skills aren't really taught so many people don't negotiate for a better deal

I found this repo on GitHub to be the best resource on startup equity, highly recommend it: https://github.com/jlevy/og-equity-compensation

Hell, many years ago, before some of our HN readers were born, I co-founded a start-up that had trouble recruiting people because we only created 200,000 shares at founding, and other companies were giving away millions of options. How could we compete only offering hundreds of options?

I don't know if the candidates were playing stupid, or really that dumb, or trying to angle for something better, or just didn't like the company and were trying to back out politely, but it got damn frustrating.

Lots of people just want to be lied to. You know why employers spew bullshit to candidates? Because candidates eat it up.

Adapt to your audience.

If you want not idiots employees, or if you want to do training for real, you can explain it to them, then they're free to take a decision.

Is an employee good enough if he can't listen for 3 minutes and perform a quick check on IPOverflow.com to confirm it's the other company that's a bad deal.

Not to detract from its message, but this article is from 2015.

Anecdotally, the expectation I had for my shares at my last startup ended up being 10x (as the article stated) what they were worth after acquisition.

Did you figure out the breakdown of what ate into your expectations? Mostly investor preferences or solution or an even mix of both?

My expectations were based on forecasts given to me by the manager at the time of recruitment, and those forecasts were far higher than reality. I believed those forecasts mostly due to ignorance.

I like that this article places a portion of the blame on the founders or recruiters who try to hire new employees. In order to attract the best talent, it is easy for these people to say everything is going awesome and the options will be worth a million dollars. I think the blame for missed expectations and dilution is often placed on VCs. But in reality, it's the founders and the board who decide whether or not to take VC funding and who should communicate clearly and realistically with employees to keep expectations in check.

Most people joining companies don't even get the entire capital structure disclosed to them. There is no way to know exactly how much your options are worth. You're trusting the company you're joining blindly, which can be a very dangerous thing.

Companies should be more transparent about options they give to employees.

I was once offered with X shares of options from a well-funded startup. X seems like a relatively large number. But the company didn't want to disclose neither of the following to me but just selling me `this is a good offer`,

1. percentage offered 2. FMV per share 3. strike price

The company is OK and the job is interesting. But this opaque destroyed trust between two parties. This is a completely a joke and I turned down the offer.

(2015)

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