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Comment by kentonv | Hacker News Reader

As a former startup founder, I tend to agree that most startups are low-balling early employees. These employees over-value their stock by imagining what it would be worth if the company reaches $1B valuation. It really is a lottery ticket.

But in my opinion, the answer is more pay, not more equity.

Employees should get market comp, period. Doesn't matter how early-stage the startup is. If a founder can't afford employees at market rate, they shouldn't be hiring yet. They could perhaps offer to take people on as co-founders -- with an appropriately equal share.

People looking to join early-stage startups as employees should be extremely skeptical of equity. Obviously, you want to take some. But if a small chance of getting super-rich is your goal, you should start your own startup. If you are going to make bets, bet on yourself, not on someone else, because you know yourself much better than you know anyone else, and wise bets are all about having information no one else has. Yes, non-founding early-stage employees can have a big impact on a company, but they are still beholden to the founders -- if something goes wrong, they can fire you but you can't fire them. Making a big bet while letting someone else hold the cards is just too risky.

Instead, demand market comp. Do not join a startup that won't offer you market comp. It's not worth it.

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I don't quite understand. On the one hand you're saying that early employees should "demand market comp" and on the other you're saying that equity basically doesn't matter (and if you feel this way, it doesn't really make any sense to be joining a startup anyway). Are you conflating "compensation" with "salary"?

"Market comp" for a good engineer with several years of experience in the Bay Area is something like 250k - 350k at a Google or Facebook (with some variation in both directions here). It's not realistic, nor consistent with the market, for an early-stage startup to pay people this much in cash.

Early-stage companies should offer sufficient equity such that their employees should in expectation earn at least the same as they would at a public company. If their expected earnings are less than this, then more equity is absolutely a good solution.

> Early-stage companies should offer sufficient equity such that their employees should in expectation earn at least the same as they would at a public company.

That's the joke! Nobody comes remotely close to offering enough equity that their total comp is equivalent!

Imagine a company that just raised a $1M seed round on convertibles at a $6M valuation cap. Now say they offer an "extremely generous" 2% equity package to their first employee. What is that 2% worth?

Well, the investors think that preferred shares in that quantity would be worth $120k. Of course, equity vests over four years. So your equity comp is... $30k/year. If it were preferred shares. But it's not, it's common shares. So it's worth even less.

You'd need to offer more like 10% to claim you are matching the RSUs people are getting at Google or Facebook. But at that point, you might as well call the person a co-founder. And maybe that's in fact the answer: add co-founders, not employees.

But this isn't what people are doing today. Instead they're convincing employees to take sub-market pay and sub-market equity to take a stressful job with almost no benefits.

Yes, I mostly agree.

There's one nuance that I've been thinking about lately that I haven't seen anyone ever point out before, which is that high volatility will make options worth more than they are on paper.

Here's a thought experiment: imagine that there are two employers on the market. One will always pay 200k/yr guaranteed and you can choose to work for them at any time for this wage. The other pays 100k/yr plus one Coconut per year, and Coconuts are currently worth 100k each. So far these are equivalent monetarily. But now let's add the stipulation that after one year, the price of coconuts has a 50% chance of going to 0 and a 50% chance of going to 200k each. Which would you choose?

The expected value of each of these job offers is still equivalent (after 4 years of working at each, you'll have 800k in expectation). But you should definitely take the second one. Why? Because after one year, if coconuts drop to 0, you can just quit and join the first company. Then you have a 50% chance of 100 + 200 + 200 + 200 (coconuts to 0) and a 50% chance of 300 + 300 + 300 + 300 (coconuts to 200) which comes out to 950k, which is better than sticking with either company alone.

This thought experiment fascinates me because it clearly shows the extra value that up-front stock grants have. The point is that you have some protection from downsides in the form of switching jobs, but no similar cap on the upsides, and the higher the volatility of the stock the more value this provides.

I'm not sure what the numbers look like when you view them through this lens, but it does mean that an equity grant of 2% of a 6M company should trade off for more than 30k/yr.

I think that's a good point, but it's just unlikely to actually happen with startup options because of the typical 90-day exercise clause and limited information.

The 90-day exercise clause and options instead of shares effectively forces you to buy the coconut, meaning that instead of a 50/50 chance of 0/200, if you plan on leaving before the event that resolves 0/200, then if your strike price on a coconut is $50, it's more like 50/50 chance of -50/250 because you expect to have to exercise when you leave. You can play with the exercise cost, but it does change your math quite a bit regardless. Now if startups gave actual stock instead of options or if they don't place a 90-day time limit on exercising vested options, this wouldn't be an issue. But almost all startups do it this way.

The second point is that the company often doesn't look dead until much later. You're just not going to be able to tell one year in, or two years in, or three years in. So you won't be in a good position to capitalize on volatility like you would on the public markets.

Then you have things like liquidation preferences that will skew your EV calculation, except they might happen after you join, but you may or may not ever find out that those gotchas are there.

As it stands, all of this just creates an incredibly inefficient market that requires employees to take badly informed, high risk bets, where they often don't have deep enough pockets to absorb the risk.

Both of these are good points. 90 day exercise windows are both unnecessary and terrible for employees and we should move to eliminate them as quickly as possible. I think the trend is slowly in that direction, but it really should just be a deal breaker for engineers.

The limited information is also a good point. Some level of saviness and understanding of your company and market can help with some parts of this but certainly not all.

If anything this may be a good argument for working at late stage private or smaller more volatile public companies. Then if you get lucky and get, say, Square from two years ago, whose stock has gone up 7x, you capture this upside (and if they do poorly, roll the dice again after a year, perhaps). This is quite mercenary and might not be the route that makes one happiest, though.

Yes!

Funnily enough, the fact that equity grants are "options" to purchase stock at a strike price less than the real share price is much less valuable than the optionality you describe of continuing working to earn the rest of a stock grant after more information is known.

Unfortunately I think it's very hard to pin a value on the optionality to continue working, and I haven't seen anyone mention it when considering joining a startup over a larger company.

But while FAANG equity has a 95% chance of still being worth hundreds per share in 5 years, the startup's equity has more like a 98% chance of being worth $0 in 5 years (based on startup survival rates). The expected value is essentially zero. That's why you can't make up for startup salary with startup equity.

this also requires one exercises the cocounut option at the end of every year. If you don't and they drop to zero in year 4...

For the purposes of this thought experiment we're assuming that there's no price movement after year 1. In the real world this probability of failure in the future should be priced in to the year 2 price and doesn't affect the expected value anyway.

When you offer 10% per employee, how many employees can you actually take on??

I believe it was Sam Altman who had proposed a good solution to this, which is that you start off with a high number like that for employee #1 with decreasing numbers as the employee count goes up. If you are Instagram and become worth $1B with only 6 employees then everyone should benefit massively. On the other hand, if it takes 1000 employees to get to a great outcome, then obviously the founders and first employees will have been diluted by the addition of all the future employees required to achieve scale or an exit.

Yes, that’s a good way to go about it… Any educated opinions of what form it should take (resricted stock, rsu, options, etc.) to be most employee friendly?

That was part of the comment: at that point it's more like a co-founder not an employee. So: very few obviously.

Perhaps more reasonable is 1-2% per for the first 5-10 hires, then 0.5-1% for the next batch, etc.

Also I really think these should be RSUs, not options. Employees are already invested in the startup by paying a premium in the form of reduced salary and opportunity cost.

If you give them Restricted Stock, though, they have to pay tax on whatever the 409(a) value is -- which is what the strike price would have been with options.

You can give them a signing bonus to cover the tax, but at this point it's easier and actually better for the employee to give them the cash separately and say "you can use it to exercise if you like".

Really the difference between options and Restricted Stock is measurable in dollars, so might as well just give people the dollars.

(Note that Restricted Stock is not quite the same thing as Restricted Stock Units (RSUs)... RSUs are for later stage companies. But the principles are similar.)

Sure; point being that employees ought not have to pay for their equity, because then it's not really compensation.

Yup, all the options for granting non-founder equity are absolutely awful from an employee POV.

Maybe YC could lobby for a sane way to grant equity to early employees without penalizing the employee?

250-350k is low for Google and FB. It's more like 400-500k if you are senior, 500-700k if you are staff. This is including RSUs

Indeed, and even well-funded startups can't afford to burn $400k on a single engineer.

They basically have to give out generous equity to compete, but they and the VCs would rather be greedy and dole out fractions of percents under the cynical misleading pitch that these scraps will be worth millions when the startup exits for billions.

To their credit, This scam did work for a while, shortly after a whole lot of early employees really did make millions on generous equity grants at early startups like Google.

Being an "early employee" means nothing now. You get the token 0.01% bottom-preference shares that will net you 0 in almost every imaginable scenario, and somehow this is supposed to cover the 200-300k/yr difference you'd get at a profitable established company.

I'm not really interested in arguing about these numbers, it's not really relevant to my point. I was basing this off of https://www.teamblind.com/article/google-engineer---total-co... where 250-350 includes the majority of L4 and L5 engineers. Based on this your numbers look off by one level or so, at least for Google. But again, I don't think this is very important for my point.

I always feel like every developer on HN is making like $200k-$400K without blinking, maybe that's true. Just for a perspective on these numbers, the top 1% of income in CA is $450K - https://www.reddit.com/r/dataisbeautiful/comments/8qhh3x/ann...

How do you explain these numbers?

http://www.h1bdata.info/index.php?em=&job=Senior+Software+En...

Those are not Google and not Silicon Valley.

Try:

http://www.h1bdata.info/index.php?em=Google&job=Staff+Softwa...

And keep in mind that base salary (what's reported on that page) is usually about half of total compensation. (Bonus and stock being the other half.)

Also this appears to be the H1B database. I'm not sure how H1B salaries compare to the overall average.

> I'm not sure how H1B salaries compare to the overall average.

H1B salaries are typically lower than average. Why do you think companies spend millions lobbying for more H1Bs? To pay them more than average? :-)

Also, keep in mind Google only has to disclose base salaries for these H1Bs. For a staff engineer, most of the total comp would be in bonus pay and especially RSUs. They can easily be making $400k or more through those means.

Do you have evidence that people coming on an H1B visa get paid less than their non-H1B coworkers (at same level / same seniority / same office) at Google?

I would suggest that while new hires of H1B might not get paid less, the market dynamics of not having as many alternatives would invariably lead to less valuable retention efforts by the employer. i.e. fewer raises, fewer promotions, smaller bonuses, etc.

As I understand it, H1Bs aren't too bad (transferability is a thing here), but other forms of visas are brutal in this regard.

https://news.ycombinator.com/item?id=13579226 is one example. In addition to the article, HN is in near-unanimous agreement on this issue from the contribution of many H1B visa holders. I've seen it pop up many times.

> To pay them more than average?

No, to get a bigger talent pool.

H1b data doesn't include rsu or bonus. Many are getting 16-17% bonus and ~50-150k/year in rsu.

For a staff engineer, I'd say even $150k is very low. Even for an H1B, I'd guess $200k/year at least in additional pay beyond the base salary.

I work there and I'm surprised by the numbers you propose, they seem too high to me.

rough numbers on http://levels.fyi

> Early-stage companies should offer sufficient equity such that their employees should in expectation earn at least the same as they would at a public company.

This would still be underpaying people for a few reasons: expectations are not risk-adjusted, it also doesn't take into account the timeline you get paid on, i.e. the ROI you would get investing your Google salary in an index fund and taxes make getting paid a regular amount over time more valuable than getting a large startup check.

Maybe you were taking these factors into account, but most startup equity offers are massive low balls.

> in expectation earn at least the same as they would at a public company

No, it should be multiples. Otherwise why is the employee taking on that risk?

I don't see why this follows. I said "in expectation". So some % of the time it's going to be 0 or thereabouts and some % of the time will be much higher. The best case scenario needs to be multiples in order to make the average work out, but I don't see any reason the average case needs to be.

> If a founder can't afford employees at market rate, they shouldn't be hiring yet.

That's a little bit too strict, and as such is not a position founders are likely to accept. Sometimes they need employees before they can pay market rate, and market rate is pretty steep for a senior engineer in the Bay, for example, and most other areas startups are heavily recruiting.

It's reasonable to offer generous equity for early employees willing to take the risk. What does need to stop is the toxic culture of giving out 0.01% even to earliest employees (engineer number less than 10, often less the 5) with the cynical fake-stardust pitch that "this will be worth tens of millions since we're definitely exiting at $1bn+".

As you mentioned, this culture of deceit has become commonplace and it's poisoning the well of future employees. You can witness its corrosive effect throughout this comment thread.

Give out substantial equity to those early engineers who take risk. Give them a realistic estimate of the risk they're taking, and the value they can get. If they take it, it's their prerogative.

> Sometimes they need employees before they can pay market rate,

But you don't get to have something just because you need it. That's not how it works. You need to raise more money, so that you can afford to pay the employees. It's not fair to make the employees act as unofficial investors in your company, and then give them a deal that the real investors wouldn't accept.

> giving out 0.01% even to earliest employees

I hope that's an exaggeration and no one actually goes that low. (EDIT: Re-reading I think you actually meant 1%, not 0.01%?)

But if you go based on the valuation paid by the investors, then even 1% is a laughably low offer during the seed stage.

> It's not fair to make the employees act as unofficial investors in your company, and then give them a deal that the real investors wouldn't accept.

Which is why I'm saying they should be offered a deal that investors would accept.

Demanding everyone pay market rate is just unrealistic. Never going to happen. I'm proposing a realistic, possible change.

> I hope that's an exaggeration and no one actually goes that low.

First ad I clicked on from Angel List front page:

https://angel.co/everlane/jobs

$130k salary and 0.01% equity. But that's OK, I'm sure their CEO will be happy to tell you about their surefire $Xbn exit.

Last I checked Angel List, 0.01% equity was quite common, even for early engineers at very early stage startups. It almost always goes hand in hand with blatant lies about the certain $Xbn exit.

> Which is why I'm saying they should be offered a deal that investors would accept.

> Demanding everyone pay market rate is just unrealistic.

But they're the same thing! If investors would accept it, then you could just as easily have the investors buy the equity, and then pay the employee with it.

So if it's totally unrealistic that founders would actually pay market, how could it be realistic that they'd offer equivalent equity?

> First ad I clicked on from Angel List front page:

> https://angel.co/everlane/jobs

> $130k salary and 0.01% equity.

That's not an early-stage startup, that's a company with >200 employees and a valuation in the hundreds of millions.

> But they're the same thing! If investors would accept it, then you could just as easily have the investors buy the equity, and then pay the employee with it.

See my [response to inimino](https://news.ycombinator.com/item?id=17291045). It's absolutely not the case that if I have $100m worth of stock according to some valuation, I can just go out and sell any amount of that for what you'd expect based on the valuation.

VCs are the only ones who are generally ready to buy this sort of equity, and raising money from them is a long difficult process, and I can't just decide I'm going to sell 0.5%, get $500k, and pay that to a new employee.

Finding a non-VC to buy your equity is very difficult too.

> That's not an early-stage startup, that's a company with >200 employees and a valuation in the hundreds of millions.

Like I said, it's the first random ad I clicked. Last I looked at Angel List, there were tons of startups offering 0.01-0.05% equity.

Also, notice they're offering this 0.01% with a maximum salary of 130k in SF who is skilled with "Python, Java, Scala, Ruby on Rails, React.js":

https://angel.co/everlane/jobs/306986-software-engineer

That's way below market.

> That's not an early-stage startup, that's a company with >200 employees and a valuation in the hundreds of millions.

Do you have any idea how many startups were worth >100m at one point or another on paper, and ended up with an exit where nobody but the VCs made any money due to stock preference? One down round is enough to effectively wipe out most of the rank-and-file equity in these scenarios.

> See my [response to inimino](https://news.ycombinator.com/item?id=17291045).

Yes I responded there.

> That's way below market.

I agree the salary looks lame but none of this conversation is about companies at that stage.

Equity packages in percentage terms are obviously going to be much smaller for later-stage companies, since there is much less risk baked into them. 0.01% of a company valued at $200m is equivalent to 1% of a company valued at $2m.

>> giving out 0.01% even to earliest employees

>I hope that's an exaggeration and no one actually goes that low. (EDIT: Re-reading I think you actually meant 1%, not 0.01%?)

What I witnessed as guidance from a top-tier VC to its portfolio companies: 1% for employee #1, then ramp downwards for each employee: .07%, .05% etc and very quickly you reach .01%

"You dont get something just because you need it"

Huge applause.

"You need to raise more money"

Crowd falls silent.

How about trying to sell something and generate revenue. I long ago stopped subscribing to Startup Porn but I remain baffled as to how seemingly smart people are so intoxicated by it that the notion of building an actual business is an afterthought.

Well yes. But the premise here was that in order to generate that revenue you need the employee. If you don't need the employee then by all means don't hire the employee (and don't raise money to hire them).

My view is that business owners hire too early. Nothing kills a business faster than hiring people.

> Give them a realistic estimate of the risk they're taking, and the value they can get.

Herein lies the problem. Founders are uniquely well-placed to evaluate the risk, and uniquely psychologically motivated to evaluate optimistically.

Because of that, founders sell equity dear.

If the generous equity offer is reasonable, then would be reasonable to make two offers, one with only cash and one with generous equity, in an "I cut, you choose" scenario. If a company has taken funding and isn't willing to do this, then employees are being asked to take risks that the financial backers are not willing to take themselves.

[Edit: removed something about a typo]

Again, you make it seem very cut and dry. It's not.

Suppose my startup is current worth $100m. According to you, I should be able to sell 0.5% of it for $500k and give that to the employee, or offer them that 0.5% directly, right?

Well, no. I can definitely offer them that 0.5% since I control the equity, but I can't just go to a VC and tell them "hey, here's 0.5% of my shares, now give me their fair value worth of $500k".

Ever been close to a startup raising money from VCs? It simply doesn't work that way. VC investment is a big, complex package deal. They're not just going to accept whatever shares you give them, and pay you. They have their own idea of how much equity they want, how much they're willing to pay for it, how much besides equity they want (control of the company, seats at the board, various forms of preferred stock and other guarantees, etc).

Also, fixed the typo, thanks.

> Suppose my startup is current worth $100m.

Then you're way beyond the stage any of this conversation is about... But let's say you said a smaller number.

> Well, no. I can definitely offer them that 0.5% since I control the equity,

... no you can't. You can grant equity out of the option pool, which you defined in collaboration with your investors. If you want to grow the pool you're going to have to talk to them first. You don't have free reign to dilute the investors away at will.

> but I can't just go to a VC and tell them "hey, here's 0.5% of my shares, now give me their fair value worth of $500k".

Well sure, not on a daily basis. You have to raise a round of funding, obviously. Hopefully you don't do that too often, but when you do, you make sure to raise enough to pay your employees a fair salary until the next round.

If you can't raise a round of funding, then your stock is worth nothing and the employee should consider it to be worth nothing.

> Ever been close to a startup raising money from VCs?

I have raised money from VCs.

> You can grant equity out of the option pool, which you defined in collaboration with your investors.

Obviously I'm simplifying here, but overall yes, it's far easier for a startup to give equity than cash, for the reasons I mentioned.

Especially if I'm an early stage startup, maybe after a small seed round, I will surely have enough options in the pool, or investors lenient enough to let me issue these extra stock in the unlikely case I'll need them.

> I have raised money from VCs.

So you know how unrealistic it is to raise VC rounds just to support salaries for a handful of new engineering hires.

> I will surely have enough options in the pool,

At a $6M seed stage valuation, 1% in equity (vesting over four years) is worth the same as $15k in salary.*

Which is harder for a founder to authorize, 1% in equity or $15k in base salary? Honestly $15k salary sounds a whole lot easier and cheaper to me.

$105k in salary converts to 7% in equity. So if you want to hire than $400k Googler you're going to be paying them $200k salary and 14% equity.

An entire option pool is typically 20% or less.

The only reason giving away equity seems so much easier than cash is because you can trick people into taking far less of it.

* Disregarding the fact that the valuation is based on preferred shares while the equity grant is common shares, which only makes the equity grant even more worthless.

> So you know how unrealistic it is to raise VC rounds just to support salaries for a handful of new engineering hires.

That's literally the entire point of raising a VC round?

Yes, I'm eliding a lot of complexity, in that you can't just take the equity and sell it to the bank or to your VCs. However, you as a founder have some control over how much you raise and at what valuation. So the fact that you can't make that decision at the time of hiring is certainly true, but you are making those decisions when you decide to raise a round (or not).

That's why I restricted my final remark to companies that have taken funding. Of course there are a lot more moving parts than I let on, but if a company has taken funding and would rather keep their funding than their equity, then it makes sense to think carefully about why that is before buying that equity with, potentially, years of your irreplaceable life.

If its worth 100 million it isnt a startup.

Hm? Plenty of startups have current valuation over $100m.

However, I just chose this number because it is nice and round so the math is obvious.

Then I would argue that they aren't startups, they are fully formed businesses.

Frankly, the early employees often build more of the company and its success than the founders do.

They should be rewarded proportionate to the growth they create and catalyze.

> If a founder can't afford employees at market rate, they shouldn't be hiring yet. They could perhaps offer to take people on as co-founders -- with an appropriately equal share.

Brother, I have worked with both startup & MNC's and i can understand what you are trying to say but it is a bit harsh to say that if a founder can't afford employees at market rate, they shouldn't be hiring. Some part of me says you are right but other part says that some employee should have some faith. If I look from employees perspective its safer/more rewarding/less riskier to join as co-founder then getting market rate. I believe somewhere faith also counts :)

I would say the 'market rate' for the big tech cos cannot be applied to the financial analysis of hiring in startups because most startups have cash burn, and big tech is profitable. If you somehow negotiate a startup to pay you a google like salary you probably won't have much fun because you will be viewed as an even riskier hire than you were to begin with. There will be even more pressure to perform than there already was.

Faith is cool. But it needs to flow both ways. If you have faith in the person, make them a co-founder and give correspondingly respectable equity.

Not sure how you're viewing getting paid less as safer and less risky. Also, the parent is saying the issue is when an early employee is not considered a founder and isn't getting paid market rate. That's the downside of each of those points - no/little equity and no/little pay

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