Some thoughts on equity compensation
avc.com
avc.com
Sometimes, it's non-negotiable because there's no money to pay Google-style $300k salaries + benefits.
Fred doesn't make it clear whether he's talking about young startups with very little money in the bank or a mature 8-year old "startup" like Uber that raised $22 billion from investors with $6 billion in revenue. If it's a young 2-person startup that just got a modest $120k investment from YCombinator, a "3rd employee" will not be able to get a $300k salary. The only monetary recruitment tool left is equity.
Fred is also leaving out the game theory aspects of the equity as a deliberate filtering mechanism to attract employees aligned with the founder's vision. Yes, many workers are definitely cynical of startups' self-aggrandizing "we're going to change the world" so they only see one (and only one) way to compensate employees: pure 100% cash and fuck off with your options. An employee certainly has every right to stay rigid to that point of view. However, it still doesn't change the psychology of founders wanting to filter out the candidates with a "mercenary" mindset. They often have no money to pay the mercenaries anyway so they have no choice.
If the equity you offer is just about enough to make up for the employees loss of income if you get both a minimum $100million+ exit and no future dilution, then your offer isn’t going to be very enticing to jaded potential employees who have been round this particular block once or twice before.
I was offered a 40% drop of my current salary, no benefits, no equity and no options. I was also sternly warned during the interview that they were looking for someone highly engaged in making the company grow.
I cannot begin the understand the reasoning of the founders on that one.
That actually got annoyed when I laughed and questioned why I'd want to work for them.
Obviously, they are going to have to take more money and you are going to be diluted to nothing and you'll be lucky if the whole company exits for 10M. Equity seems only to have value as golden handcuffs, keeping early valuable employees at the company since they lose everything if they leave and can't afford to exercise 400K of options plus face the tax implications.
One startup I know of offered 0.1% to a potential employee No 2. I don’t think they took the offer.
I was once asked to join a company as employee number 13, and I would have been the first technical person to join the company. They offered me a salary of zero dollars and one percent, and the founder of the company said in every meeting before he was willing to reveal the numbers -- the stupidest game on the planet -- that he truly understood the value of engineers and was going to be offering very generous pay packages. Haha I actually laughed at the guys on Skype -- funny how they also tried to gang up on me to turn the screws, as it were! -- when they told me the numbers because I thought they were joking, and they weren't. I don't want to reveal too much about the company because they would be easy to identify based on this, but they had this one weird trick they were trying with shares in order to win investors and generate media buzz, which was actually just hilarious and ridiculous. I will say that they were going to issue billions (with a "B") of shares to begin with. They were so convinced they were going to become the next Google. Surprisingly, their website is still up, but all of my contacts from that company are now listed as working elsewhere on LinkedIn. Shocking, I know.
Needless to say, I didn't stay long.
I’ll keep my current salary, along with three tranches of RSUs vesting per year thanks!
a.k.a. "professionals"
I agree with your assessment that what it really comes down to in most cases is that companies don't have the money and so they are trying to hustle something on the cheap.
The other factor is that unless a startup happens to have some very talented technical co-founders (very rare, even though they all think they do) they aren't going to be able to identify or attract real talent anyway. If they were paying premium salaries the money would most likely be wasted.
Exactly. A salesman I used to work with said "Everyone is coin operated." You might be able to go 5-10% either way for intangibles like the stack being used or interest in the product, but at the end of the day everyone has to make the mortgage.
You're creating a circular contradiction about the money flow.
A founder has no money.
He gets interest from a VC like Sequoia Capital to invest $10 million. The standard and non negotiable terms of the deal means Sequoia gets "preferential shares" as a condition of writing a check for $10 million.
One of my potential employees (Yizahi) I'm trying to recruit insists on "no preferential shares!". Sequoia then says, "Ok, no $10 million deal then. Bye!"
As a result, both the founders and the employees have no working capital to build a more valuable company.
We can't just shout out "no preferential shares" and "no dilution" without understanding the full ramifications of what that actually means.
We say "no DRM on the Web!" Hollywood says "Okay, no cross-platform movies on the web then, either. Bye!"
If Sequoia is offering $10m at a $40m post money, how do you think that would change if they weren’t getting control and a guarantee they get paid first? Because without preference the founder incentive is a quick low risk liquidation at a price notably lower than $40m as soon as possible, because they’ve got 50% of the equity. This is another way in which financing valuations are an optimistic fiction.
Outsourcing production is hard with lower volume products that require modifications to meet customer needs (eg: they need M6 screws holes instead of 1/4-20 or want it in a particular metal). Contract manufacturers are generally interested in making 10k+ of the same item, not 100.
You're mixing up symptom with cause. The employee is the sucker at the table. (Most founders aren't far behind.)
If the original founders each hold 40%, and some employee holds 1%, after 50% dilution (common after the first couple rounds) the founders are down to 20% and the employee is down to 0.5%. It's possible to bump a star employee up by 0.5% to counter dilution. It is impossible to bump the founders up by 20% to get them back where they started.
The reason founders are OK with this is that they understand that 40% of a $1m company is worth less than 20% of a $10m company.
It seems like almost every startup funding system is predicated on early engineers being decieved about the value of their equity, and when someone tries to point it out on hn the response is "no venture capital firm will fund you if your employees aren't deceived about the value of their equity, idiot!"
That's not quite right - instead, he's implying that vc funds (correctly) think that the chance that this company's shares standing alone will suffice to return a multiple of the fund is low if they are of equal preference to the employees. That's not the same thing as "not very valuable", and the very counterintuitiveness of vc math should tell you that an asset a vc may not want (say, 5% of a company that sells for 75M after 3 years) may in fact be pretty valuable for the median employee.
>It seems like almost every startup funding system is predicated on early engineers being decieved about the value of their equity, and when someone tries to point it out on hn the response is "no venture capital firm will fund you if your employees aren't deceived about the value of their equity, idiot!"
Not at all - look, there are lots of good resources where you can learn more about how your equity works, and good founders will probably point you to them (e.g [0] and [1], although if you need a pointer to this instead of doing the 2-second google search yourself, you're probably not a great startup candidate anyway). Deception need not and should not enter into it. Not to say that there aren't scammy founders, but it's not best practice, and I don't believe Fred Wilson or most other reputable VCs would claim otherwise.
[0] https://blog.dweek.ly/introduction-to-stock-options-startup-... [1] https://foundersgrid.com/employee-equity/ ...
The idea that regular employees are somehow better served by shares that rational investors won't touch takes a lot of justification.
There's some misinformation there. Preferred shares do not have protection from "routine dilution". In fact, dilution is the very mechanism to sell more equity to subsequent investors at a higher price. (E.g. When Accel Partners invested $12 million for 15% equity of Facebook in 2005, they got diluted when Microsoft later invested $240 million to buy 1.6% equity in 2007.)
The "anti-dilution" provision that VCs get is not for "routine dilution". Instead, it's for a really bad event called a "down round"[1] where the next investor pays less than the current investor. We could ask The Universe why employees don't get the same anti-dilution protection but I think it's a moot point... If the company is getting devalued, employees are gonna worry way more about finding a better job somewhere else instead of staying employed on a sinking ship. In other words, a "down round anti-dilution" protection for employees is kind of mathematically pointless.
On the other hand, the type of favorable "anti dilution" for employees that most people are thinking about such as as a 1% grant at hire, and staying at 1% through all subsequent positive "up rounds", and finally at IPO -- is something even VCs don't get. Nobody has that type of dilution protection. Not the founders, nor angels, nor any investors. The closest approximation would be a provision for VCs to pay for more shares to keep their % ownership the same. That's more like "pay to play" rather than "anti dilution". In any case, people don't need that type of dilution protection because what matters is the #_of_shares_ multiplied by _price_.
[1] https://www.feld.com/archives/2005/03/term-sheet-anti-diluti...
I'm about 10 years on from learning this lesson, and I've refused offers since that try to plod the same trail. It's a red flag that doesn't appear until after you've been taken. I would say "scammed," but I do assume companies aren't just out to rip their employees off, they're just going with conventional (received) management wisdom.
(Most companies will be lucky to be acquired, never mind IPO. Unless you're talking listings on the pink sheets.)
But to say that
'you should take a reduced salary because you get this awesome stock grant that vests over four years'
then for four years say
'you should stay at this lower salary as you are diluted because we are giving you stock every year'
followed after four years by
'you got your stock and that's it so keep working at the lower salary and your now diluted worthless stock'
is not the same at all.
What does make sense is to have a risk conversation with these early people, and be willing to give up enough equity to have that make sense to them. So, if your target is to give them 0.5% "at exit", you're going to be giving them, say, 1-2% initially. And do this in the best way, tax-wise, for them in your jurisdiction.
Check out ICOs... They are a bit scammy but deal with liquidity and resell. Second I would say is allow share purchase at a discount... This is better than options and filters out employees who don't care.
Finally ... As many companies go bankrupt - cash is king. I've worked for companies who try to pay in shares just before going bankrupt...
I didn't know it was a thing that anybody should be hired from YC seed. I thought it was just to support the existing team.
I don't often like Fred Wilson's compensation writing, but here I think he has the problem basically nailed down: employees (rationally) don't prize equity, and giving it to every employee is in the long run extremely expensive.
Two thoughts:
You don't have to give shares to every employee to give it to some of them. The first shares I ever got that were worth much (Secure Networks, back in 1998) were shares I had to opt in to, at the cost of some salary. I had coworkers who chose not to do that. We were all generally happy with the outcome.
People on this thread are making comparisons to 300k/yr Google salaries. For journeyman developers in SFBA, this is probably a reasonable comparison? (I mean, the median SFBA developer isn't making that, but you could argue that's because they're being underpriced in the market by the practice of issuing shares that will never be worth anything). But for employers, it's a pretty silly comparison. If you're a startup paying 300k/yr to someone who does work a CS graduate out of school can even theoretically do, you're doing it very wrong. You might have to adjust your hiring filters to get your cash compensation down to a reasonable numbers, but you should do that anyways, because filters that keep you stuck in the "competing with 300k/yr salaries" zone are, for almost every startup, a vanity.
I think this is a fair way to approach the situation.
> People on this thread are making comparisons to 300k/yr Google salaries. ... But for employers, it's a pretty silly comparison.
Why though? You're competing with them, whether you like it or not. AmaGooFaceAppleSoft hired 45% (including those going on to grad school, etc) of my graduating class, and I didn't go to Stanford. No joke, it was really 45%. These companies are vacuuming up everyone, and some of them are shockingly easy to get an offer from.
Sure, they didn't get paid 300k/yr to start. But with how much the equity has appreciated since then, it's probably not that far off.
So that leaves you with the remaining 25% who didn't get hired/didn't want to work at at one of those companies/didn't go to grad school, and you're competing with every other startup for them - including the larger, more established ones who can reasonably say they won't disappear tomorrow (e.g. AirBnB).
But, in fact, a mutt developer you rescue from the dev pound catches a ball just as well, and may in fact be more healthy than the purebreds that Google is hiring.
You know this has to be true, because outside of AmaGooBookSoft (actually: pretty much just GooBook), nobody makes those wages anyways. Even accounting for the (wildly optimistic) company projections for equity value.
I think that is a very outdated view of those companies. IME at least, you've described Google's hiring process pretty accurately but are fairly incorrect about the rest.
In particular, Amazon is hiring like crazy [1]. Even back when I graduated, Amazon was known for being a place that was easy to get into if you were willing to stomach the sometimes-insane workload (which still pales in comparison to some startup sweatshop horror stories).
Again, I didn't graduate from a program with much name recognition and AmaGooAppleFaceSoft still snatched up 45% of my graduating class.
> (actually: pretty much just GooBook)
I'm not sure why you're only including those two.
Amazon share prices have quintupled over the last 5 years. If you were compensated with RSUs you've done very well for yourself.
I know several MS software engineers who were (very recently) paid roughly $150K + $100K in equity each of their first four years (admittedly after attaining their Master's, though I'm not sure how much it helped).
1: https://www.amazon.jobs/en/search?offset=0&result_limit=10&s...
Sorry, but I have first hand experience on multiple occasions in the bay area that say otherwise. I'll take my anecdata and disprove your anecdata.
As a long time HN'r myself, I really appreciate the comments you add to discussions, but telling people "you are not X" will make it difficult to get your point across. Not to mention, you don't even live/work here. How are you so comfortable postulating on something you don't have direct experience with?
Small companies get people who couldn't go to Google or who are ignorant about compensation and perks.
Eventually, people grow up and learn, then they flee to the big 4 if they can.
I could have gone to the "big four" a long time ago, and I turned them down. I've never regretted my decision. I've done incredibly fulfilling work here and couldn't imagine working with a more talented group.
AppAmaGooFaceSoft hires internationally too, of course, but they tend to go for graduates of top Chinese, Indian, and Taiwanese universities, and less for the self-taught kid who has a computer, an analytical mindset, and a lot of free time.
I did this upthread. The thing is, it doesn't matter that this is overblown. The average startup is so unlikely to actually pay out that those odds are what dominate whether taking equity in compensation for salary is rational.
It maybe makes sense for huge, publicly traded companies like Apple (who could easily afford to just pay their employees enough to offset the equity loss and then some), but of course there's the whole idea that equity compensation aligns incentives for employees and the business.
> “You people in tech are crazy. I pay my employees handsomely in cash and I keep all of the equity for myself.”
This would be catastrophic for the startup industry:
* Why would I ever work for a company that has huge downsides (chance of failure, lack of resources, etc.) when I don't get to enjoy any of the potential upside
* How many startups can afford to pay their employees "handsomely" (relative to what they could be earning elsewhere)?
The only way I imagine a 0-equity world working is one where VCs cough up a ton more money to compensate startup employees handsomely. And to be fair to Fred, maybe that's what he's suggesting (spending more money now to retain more equity later). But I didn't see that stated anywhere.
Why would you work for money instead of equity at a high risk venture? Because paying in equity pushes the risk onto the employee. Paying in cash takes the risk out. You are paid in full up front for your work. You'd take the job because it is paying you.
Startups pay in equity because they don't have cash.
Since then the lottery ticket aspect had taken grip with the labor market. However those people who view options as lottery tickets I find are subpar. Trend followers mostly. Those chasing Klondike gold.
Sorry to be snippy, but: Come on man, do I really need to explain this one? Sudden loss of employment is incredibly disruptive at best, and for many it's a significant financial hardship.
> You'd take the job because it is paying you.
So is Amazon. And they're offering Amazon equity, which is killing it recently. So, again, why would I take a job at a high risk venture if there's no potential lottery ticket?
> Startups pay in equity because they don't have cash.
Yeah, exactly. Startups can't afford to compete with Amazon on salary.
> Those chasing Klondike gold.
Come on, as opposed to most startup founders? Anyone who has taken even a seed round is chasing klondike gold as well.
It's a standard meme here that if you quit/are fired/company shuts down, you send a few emails and walk into a new job the following Monday. Good for you but that's just not the norm for most people in most roles.
If you're getting paid handsomely in cash, you should be able to weather that interruption.
> So is Amazon. And they're offering Amazon equity, which is killing it recently. So, again, why would I take a job at a high risk venture if there's no potential lottery ticket?
Amazon equity is publicly traded; you can buy as much of it as you want with any salary.
Two glaring issues:
1) What people should do and what they actually do are two different things. People should eat sensible portions of healthful food. And yet, we have an obesity epidemic.
Saying people (even among those with high salaries) should be able to weather an interruption isn't very helpful when in practice many can't [1].
2) Which startups can afford to pay people handsomely in cash? (early) Startups offer equity to employees in large part because they can't afford to compete on salary.
> Amazon equity is publicly traded; you can buy as much of it as you want with any salary.
It's on top of Amazon's fairly generous salaries. The comparison was between being given Amazon equity, which is obviously worth something, vs. a private company's equity which is almost always worthless.
Which non-unicorn startup is offering $250K+ a year in salary and bonus for a plain old software engineer?
There is risk at companies of all sizes. Also, the idea of a single career in your lifetime isn’t a reality, so the “risk” of a losing a job is really the risk of losing it without notice. Compensation for that risk would be something like one month of pay, not illiquid certificates that might or might not become cash someday.
Employees can also change jobs voluntarily. But the idea that their employer should get a percent of their future earnings as compensation for that risk would be ridiculous.
I believe equity comp is because employees have two jobs: 1) execute on their day job, 2) build the systems, processes, culture, and institutional norms of the company. Basically, the equity component is added to the cash component because building a company takes long-term thinking and because it’s a ton of work.
I’m curious to know if others think about equity comp having a purpose other than to offset risk. Thanks!
As an individual your work may be totally optimal and yet the equity may be worthless for a thousand reasons that have nothing to do with your work. Consequently, a rational person will not see equity as being much of an incentive.
If you take that a step further you are giving up equity in your company but all of the smart people are valuing it at zero when they are assessing your comp offers so you are giving it away for nothing in return. Since this employee equity didn't create any value for the company it is only rational that if your company becomes successful you make sure the employees don't really get anything out of it, which is usually what happens.
I treat options as another piece in my overall "compensation". I assign it a value of 0$. If there's the option to swap options for cash in a contract I take it with three hands.
To be honest though, it's a pretty weak effect with the amount of equity granted. The equity grant gives an outsized amount of narrativium for its dollar value.
I mean, as long as the employees are there, they are getting paid the same amount they started with, which has some non-zero discount due to that initial equity grant, so they are technically 'paying' by continuing at the old salary. Why wouldn't an early employee compensation package include being issued shares in each round to maintain their undiluted amount, in return for continuing to work there at a discounted salary?
Not everyone contributes with cash, and cash is not special these days.
The other thing is that options suck. Options have so many conditions, vesting schedules, cliffs, expiry dates, negative tax repercussions... options are not equity. Options don't feel like ownership. Options are lottery tickets that might pay out, maybe. If you agree to be a wage slave for long enough, to give away all the value you create, see the big sales land and the annual recurring revenue build up, you might, one day, own a small slice of that cash stream. Maybe.
If you work as a freelancer or partner in a small agency that does software development for non-technical clients, then keeping ownership and reselling your work is often possible. You can negotiate to sell the client a non-exclusive license.
But it's not realistically possible for an individual contributor at a medium to large tech company. There are too many people involved with each project or product, and no part of it is individually useful. You can't resell a git patch that fixes a bug in an existing codebase.
This isn't an act of creation, usually. I'm thinking more around creating UI components, or developing libraries that add whole new facets of functionality, or enable new ways of working with data. Things that could be reused elsewhere, or enable higher-level programming of application features.
But it's not realistically possible for an individual contributor at a medium to large tech company
I wouldn't agree to being an individual contributor on a wage-only basis, at this point, without major compensation. A possible exception would be something vocational: going back to working on developer tools, perhaps.
Startup equity is likely worth nothing, but there’s a small chance it’s worth an extraordinary amount. That’s not “worthless.”
By contrast, I don’t know any Facebook millionaires. Nor do lots & lots of other people, even within the Tech industry.
You can't generalise from your personal experience to the "average" experience - 'Facebook millionaires' are not randomly distributed, but clustered together: social graphs are not randomised.
It's sort of like talking about "the housing market" vs. the Houston market, Chicago market, SF market, etc.
There is no "average experience" just like there's no "average housing market". That level of aggregation is just meaningless. It's much better to consider one's circumstances and think about people in your situation, their odds, vs. some meaningless aggregate.
No, literally an outlier by definition. How many people do imagine are joining startups world wide? In your case it sounds like it's even worse than I had imagined: do you really just know a dozen early Facebook employees? I had assumed that you lived near a startup hub and knew a dozen people who happened to have made it.
>it would be impossible for me to know multiple people that are rich as a result.
Not if you e.g. go to a "lottery winners" cruise. But seriously, the company is the lottery ticket. If the company wins then, sure, plenty of other people in that company will win and it's possible for you to hang out with lots of them.
But what you're forgetting about is companies that were of similiar size that don't exist anymore. There have still been so few billion dollar startups that most people on this site can probably name them all.
>The odds aren’t good but it’s by no means a lottery, either.
Of course it is. How many startups are there, right now, world wide? How many startups make early employees rich per year? Now compare the odds of finding such a startup with just buying a lottery ticket and I suspect you'll find the lottery ticket a bargain.
>Startup equity is likely worth nothing, but there’s a small chance it’s worth an extraordinary amount. That’s not “worthless.”
But this is the falacy of the lottery ticket itself: I could just spend $20 and it might pay out $100 million. But if you apply the Kelly criterion you'll find that it's a bad EV play, every time.
And, as I mentioned, the lottery ticket is quite a deal compared to a startup: I'm just out $20 or so. With a startup I'm thowing away potentially years of better earnings for something with a ridiculously low probability of actually happening. And keep in mind that your future salary is generally related to your current one so discounting your value by 40-60% is something you'll very likely never entirely recover from. And this is ignoring any career growth opportunities that were also lost.
So "worthless" is the wrong term for startup equity. Strongly EV negative is much more accurate.
b. You don’t have to be a billion dollar company for it to be a great exit
It's worth less than founders think it is... like $10K of options isn't worth giving up $10K of salary. Is it worth $2K? Maybe. It depends...
The expected value is very low at an early stage company, but with a very high upside. It is closer to a lottery ticket although with far better odds - betting on horse racing maybe.
At a later stage unicorn (Uber, AirBNB, etc) that has switched to RSUs, the expected value isn’t likely to go to 0 unless common gets entirely wiped out. There’s still upside but it is more modest (Uber isn’t going to 10x).
And at a public company, there’s still a range given the typical 4 year vesting window.
Somehow, though, I don’t think Fred’s companies are going to be willing to pay me what I can demonstrate is my current income (via IRS filings if necessary) without equity being a component of the compensation, in fact without it being the majority of the overall package. I’m okay with that, because I only work for companies where I strongly believe in the product and the team.
This may all sound fairly entitled, but if you’re as lucky in your career as I’ve been, your job has an opportunity cost that is measured in things like spending less time on my own projects, my family, and general self-improvement —- and this opportunity cost is pretty high.
I _am_ considering startups for the future, but the options I’m thinking about will be things I need to see exist in the world. I’m direly concerned about climate change, and I’ve come to the conclusion that carbon capture is the only thing that is going to save us from species suicide. Current carbon capture technology doesn’t scale up very well, and with only one exception that I’ve found, only works when you put it in a power plant. I’m spending a lot of spare time right now investigating alternative approaches and what skills I need to pick up to do something meaningful here.
That’s a good way to ensure you’re only hiring millionaires. Accredited investors must have a million dollars in net assets, or income over $200,000 ($300,000 married) per year.
We live in a world which skews towards wealth - if you don't have wealth you're slowly falling behind those who do. So why the hell do I want to take my hard-earned skills to generate wealth for someone who doesn't want to share some of it?
What if the company goes down and my equity is worth 0? Well that's life, at least I threw in my lot someone I chose to back.
PS offering < 1% to a "senior" hire does not constitute sharing.
The cash, at the end of the day, is a tool - if the bargain you're going for is a step backward in your quality of life, that seems like a poor decision unless you truly are drinking the Kool-Aid.
That being said, I left before any of mine vested, so I just had a pay cut and no real benefit from it other than the experience.
The ONE good thing Trump & congress could have done this year was eliminate AMT, and they didn't.
For the average Joe equity isn't much better than a lottery ticket. Equity is a LIE. Give me $$$$$$$
Sorry, but that's all this boils down to.
Ha, yeah, I'll bet!
It's certainly not easy or risk free to deal with equity, but to me, some kind of stake in the company is the only morally justifiable way - if people help to build the business, they should share in the success, and even generous salary will never reflect that - you'll never get rich on a salary.
Actually, if you get a nice salary and live below it, you can take the extra money and invest in an index fund. That will get you rich much, much faster than chasing lotto tickets. Especially since startups usually have salaries so awful you can't possible do a start up and invest in sensible investments.
Having that single company investment also be the company you work for... and taking a lower salary to be able to make this awful bet... well, you deserve to lose big for behaving so financially irrational.
If everyone could do it, we'd have a lot more millionaire-next-door types.
I think we're going to start seeing fewer (and worse) options schemes in tech, but I don't think it's going to be anything to do with how attractive or not they are to potential employees. It's going to be because founders and investors find them less attractive to give out (for reasons like the above).
Going from founding to an IPO takes what, 8-10 years? Even assuming things go that well if your equity doesn’t have terms like early excercise or a long time to decide if you want to exercise it’s not a good deal. It’s easy to get locked into working with below market compensation in scenarios like that.
Also very few companies allow for things like secondary markets.
It’s going to be interesting to see how or rather if this gets addressed in the coming years.
probably, but an IPO is not the only event that triggers an equity payout. Getting sold/acquired will also trigger an equity payout, and those are much more common events than an IPO.
Which is why anyone who offers to pay me in equity instead of salary gets a polite fuck you, and I would only accept partial equity compensation if the salary part is sufficient to meet all my living expenses and then some.
I could then divide by 4 (vesting), and know this is an upper-cap on their worth (because preferred vs common, dilution, strike price, liquidation preferences, lockout period).
So to repeat, if you consider it a problem that engineers don't value options, perhaps give them all the relevant information they need to value those shares.
Given the minisicule number of startups that make it, I think this is a much more sensible option for engineers. Especially ones who want to start their own companies - as they save much more in the process.
> I don’t have any specific recommendations to make on this topic except that Boards should be thinking way more deeply and creatively about this issue than we are.
Equity compensation came about as a way of paying employees when cash was tight. It also tends to (arguably) align incentives between the company and the employee in the long term.
Now equity compensation exists largely because the likes of FAAMG pay senior engineers $300k+ in total comp and, again, smaller startups just can't afford that kind of cash outlay.
So what "creative" way is going to "solve" that problem (from a VC's perspective)?
Consider if you had 50 engineers that you pay $100k + equity to and these are 60% of your costs. Your burn rate is just north of $8M/year. Now if those engineers were paid $300k/year instead and your other costs didn't change, your burn rate is now north of $18M/year.
Equity compensation is your way of lowering expenses and reducing your burn rate. That extra $10M/year will mean you'll need bigger funding rounds more often and then you end up diluting your stock to investors rather than employees. Is this better? How?
Another point: when it comes to mature companies (ie publicly listed), equity is a pretty tax effective way to pay someone.
Say an engineer joins an FAAMG company for $170k base salary, target bonus of $30k and $400k in RSUs (4 year vest, 1 year cliff). That's notional total comp of $300k. More when you consider annual refresh grants. Assuming $100k refresh grants, total comp is pushing $400k by year 4.
But there is risk attached to that, namely that the stock could go down in value. If that didn't interest you, that same engineer could go work for Netflix and just get a $300-350k salary with no equity (which is fine).
But if that stock goes up 20% before the cliff, you've made an extra $80k over 4 years without doing anything.
If you approach the problem from the other way, imagine you wanted to make a $400k investment in an FAAMG company. You have some options that include:
1. $400k in after-tax money invested
2. $150k after-tax plus $250k on margin
3. $400k in pre-tax money in a 401k
(1) is expensive, (2) is less expensive but riskier (ie margin calls) and (3) is really putting a lot of eggs in one basket plus you'd need a substantial amount of retirement savings even to consider that option.
I bring this up because in the all-cash case (eg Netflix), if you do want to invest in your employer's stock this way, it's really expensive to do. Those who say you can just take the cash and buy shares miss or gloss over the leverage you can obtain from an initial stock grant. If you plot even modest stock growth, you'll quickly find the $400k grant with $300k total comp will quickly outpace the guy whose earning $300k (or even $350k) per year as they have to pay taxes on that money then invest it.
Suppose you get paid $100k in RSUs. If the value declines by half to $50k, you can try to job-hop to another place where you get a different RSU grant that's worth $100k again. If the value doubles instead to $200k, you can park your butt and vest the whole balance of RSUs instead.
This is true even with selling your employer's shares immediately on vesting (which you absolutely should do).
Brightside is that if the trend continues then perhaps it will force the entire startup/VC ecosystem to rethink options and/or create more guarantees around liquidity that isn't so completely up in the air.
Let's say (VERY F'ING HYPOTHETICALLY) that I could walk into a $300k Google job. You as a startup can offer me $150k+equity, and let's say there's a 4 year vesting period on those options. Straight out of the gate we can see that the bare minimum those options have to be worth to make that transaction worthwhile is $600k (ignoring tax, 'cos I'm not looking that up). Time value of money increases that to, let's say, $666k.
So far, so good. Now, what are the odds of getting that payout? If you went round that cycle 10 times, how many times would it pay out? 1? 2? Let's be very, extremely, remarkably, and irrationally charitable and say that every other startup lasts 4 years and pays out, and the rest go pop. That means we need to double our baseline to $1.3M to compensate.
For going into any of these deals to be rational, to balance the risk each one needs to be credibly offering to make you a millionaire.
I'm not saying that anyone's wrong for choosing to work for a startup. I'm just saying that it might not be rational. We're human, so that's fine. We're allowed to have non-economic value systems. But anyone walking into a job where options are part of the compensation ought to understand how the company views what it is offering.
Perhaps your comment came with an implied "assuming no preference in firm size". That's fine, but a large number of people don't fall into that category, and so they will need to rationally modify the analysis.